-----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, PmS0xjCbIYQok0C//2fWiaS0r+AxwsPQwJ5hf/nt31zVDNNC8UCVuNiNO017Uylf kfl0Pu19IYVfDH7bmYiVBg== 0000936392-98-000844.txt : 19980519 0000936392-98-000844.hdr.sgml : 19980519 ACCESSION NUMBER: 0000936392-98-000844 CONFORMED SUBMISSION TYPE: S-1 PUBLIC DOCUMENT COUNT: 57 FILED AS OF DATE: 19980515 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: SIGNAL PHARMACEUTICALS INC CENTRAL INDEX KEY: 0001029201 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 943174286 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-1 SEC ACT: SEC FILE NUMBER: 333-52901 FILM NUMBER: 98626729 BUSINESS ADDRESS: STREET 1: 5555 OBERLIN DR CITY: SAN DIEGO STATE: CA ZIP: 92121 BUSINESS PHONE: 6195587500 MAIL ADDRESS: STREET 1: 5555 OBERLIN DRIVE CITY: SAN DIEGO STATE: CA ZIP: 92121 S-1 1 FORM S-1 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 15, 1998 REGISTRATION NO. 333- ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------------------ FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------------------------------ SIGNAL PHARMACEUTICALS, INC. (Exact name of registrant as specified in its charter) CALIFORNIA 8731 94-3174286 (Prior to reincorporation) (Primary Standard Industrial (I.R.S. Employer DELAWARE Classification Code Number) Identification No.) (After reincorporation) (State or jurisdiction of incorporation or organization)
5555 OBERLIN DRIVE SAN DIEGO, CALIFORNIA 92121 (619) 558-7500 (Address, including zip code, and telephone number, including area code, of registrant's principal executive offices) ------------------------------------ ALAN J. LEWIS, PH.D. PRESIDENT AND CHIEF EXECUTIVE OFFICER SIGNAL PHARMACEUTICALS, INC. 5555 OBERLIN DRIVE SAN DIEGO, CALIFORNIA 92121 (619) 558-7500 (Name, address, including zip code, and telephone number, including area code, of agent for service) ------------------------------------ Copies to: FREDERICK T. MUTO, ESQ. J. STEPHAN DOLEZALEK, ESQ. MICHAEL A. NEWMAN, ESQ. TIMOTHY R. CURRY, ESQ. COOLEY GODWARD LLP BROBECK, PHLEGER & HARRISON LLP 4365 EXECUTIVE DRIVE TWO EMBARCADERO PLACE SUITE 1100 2200 GENG ROAD SAN DIEGO, CA 92121 PALO ALTO, CA 94303 (619) 550-6000 (650) 424-0160
------------------------------------ APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after the Registration Statement becomes effective. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, 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 of 1933, 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 TITLE OF EACH CLASS AMOUNT TO BE OFFERING PRICE AGGREGATE OF SECURITIES TO BE REGISTERED REGISTERED(1) PER SHARE OFFERING PRICE(2) - ---------------------------------------------------------------------------------------------------------------- Common Stock, $.001 par value.............. 2,875,000 $13.00 $37,375,000 ================================================================================================================
- ------------------------------------------------------------------- TITLE OF EACH CLASS AMOUNT OF OF SECURITIES TO BE REGISTERED REGISTRATION FEE - --------------------------------------------------------------------------------------- Common Stock, $.001 par value.............. $11,026 - ----------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------
(1) Includes 375,000 shares that the Underwriters have the option to purchase solely to cover over-allotments, if any. (2) Estimated solely for the purpose of calculating the amount of the registration fee in accordance with Rule 457(a) under the Securities Act of 1933. ------------------------------------ THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT THAT SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID 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 MAY 15, 1998 PROSPECTUS 2,500,000 SHARES LOGO COMMON STOCK All of the 2,500,000 shares of Common Stock offered hereby are being sold by 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 of the Common Stock will be between $11.00 and $13.00 per share. See "Underwriting" for a discussion of the factors to be considered in determining the initial public offering price. The Company has applied to have the Common Stock approved for quotation on the Nasdaq National Market under the symbol SGNL. The DuPont Merck Pharmaceutical Company ("DuPont Merck") has entered into a collaborative agreement with the Company. As part of such collaboration, DuPont Merck has agreed to purchase $2.0 million of the Company's Common Stock in a private transaction concurrent with the closing of this offering at a price per share equal to the initial public offering price per share. See "Business-- Research and Development Partners." ------------------ THE SHARES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK. SEE "RISK FACTORS" COMMENCING ON PAGE 6. ------------------ THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. ============================================================================================================= PRICE TO UNDERWRITING PROCEEDS TO PUBLIC DISCOUNT(1) COMPANY(2) - ------------------------------------------------------------------------------------------------------------- Per Share........................ $ $ $ - ------------------------------------------------------------------------------------------------------------- Total(3)......................... $ $ $ =============================================================================================================
(1) See "Underwriting" for indemnification arrangements with the several Underwriters. (2) Before deducting expenses payable by the Company estimated at $600,000. (3) The Company has granted to the Underwriters a 30-day option to purchase up to 375,000 additional shares of Common Stock solely to cover over-allotments, if any. If all such shares are purchased, the total Price to Public, Underwriting Discount and Proceeds to Company will be $ , $ and $ , respectively. See "Underwriting." ------------------ The shares of Common Stock are offered by the several Underwriters subject to prior sale, receipt and acceptance by them and subject to the right of the Underwriters to reject any order in whole or in part and certain other conditions. It is expected that certificates for such shares will be available for delivery on or about , 1998, at the office of the agent of Hambrecht & Quist LLC in New York, New York. HAMBRECHT & QUIST BANCAMERICA ROBERTSON STEPHENS LEHMAN BROTHERS , 1998 3 [Graphic depicting the integrated discovery of gene regulating targets and drugs and the gene regulating drug discovery programs of the Company. The left side of the graphic depicts the progression from target discovery to drug discovery to drug commercialization. The right side of the graphic depicts the progression of cellular models of disease from identification and validation of gene regulating targets to high throughput screening to combinatorial, computational and structural chemistry to gene regulating drugs. The base of the graphic elucidates the Company's gene regulating drug discovery programs: autoimmunity, inflammation, bone metabolism, neurology, cardiovascular, cancer and virology.] CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK, INCLUDING BY ENTERING STABILIZING BIDS, EFFECTING SYNDICATE COVERING TRANSACTIONS OR OVER-ALLOTMENTS OR IMPOSING PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING." Signal Pharmaceuticals(TM) and the Company's stylized logo are trademarks of the Company. All other trade names or trademarks appearing in this Prospectus are the property of their respective owners. 2 4 PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and the Financial Statements and Notes thereto appearing elsewhere in this Prospectus. The Common Stock offered hereby involves a high degree of risk. See "Risk Factors." THE COMPANY Signal Pharmaceuticals, Inc. ("Signal" or the "Company") is an integrated target and drug discovery company focused on identifying new classes of small molecule drugs that regulate genes and the production of disease-causing proteins. The Company applies advanced cellular, molecular and genomic technologies to map gene regulating pathways in cells and to identify proprietary molecular targets that activate or deactivate genes and result in disease. Signal is advancing the application of genomics beyond identifying and elucidating the functions of genes to designing novel classes of disease-modifying drugs that selectively regulate the activation of disease-causing genes. The Company conducts its target and drug discovery programs both independently and with its five collaborative partners: Ares Trading S.A. ("Ares-Serono"), an affiliate of Ares-Serono S.A.; the Roche Bioscience division ("Roche Bioscience") of Syntex (U.S.A.) Inc., a member of the Roche Group of Companies; Nippon Kayaku Co., Ltd. ("Nippon Kayaku"); N.V. Organon ("Organon"), a business unit of Akzo Nobel N.V.; and The DuPont Merck Pharmaceutical Company ("DuPont Merck"). Signal's target and drug discovery programs are focused on intracellular gene regulating pathways that play a fundamental role in controlling cell proliferation, cell metabolism and cell death, as well as the replication of viral pathogens. These pathways provide important new targets for treating autoimmune and inflammatory diseases, diseases associated with bone metabolism, neurological and cardiovascular diseases, cancer and viral infections. Pathways targeted by Signal include the Nuclear Factor-kB ("NF-kB") pathway, the jun N-terminal kinase ("JNK") and p38 mitogen-activated protein kinase ("MAP kinase") pathways, an estrogen-regulated gene ("ERG") pathway and five viral pathways. These pathways provide multiple drug targets for therapeutic intervention, many of which regulate the activation of multiple genes involved in disease. The Company pursues patent exclusivity for its drug targets and related drug leads, and has five issued U.S. patents relating principally to MAP kinase pathways, 21 pending U.S. patents and 43 pending foreign patents. Signal has developed an integrated target and drug discovery platform that enables the Company to proceed rapidly from target identification and validation through lead discovery and optimization. Signal's target discovery capabilities combine proprietary human cell lines with molecular biology and functional genomic and proteomic technologies to identify key gene regulating pathways and associated drug targets. To date, Signal has built a portfolio of 18 clinically important drug targets, including IkB kinases ("IKKs"), JNKs and p38-2 (a subtype of p38). The Company's drug discovery capabilities include proprietary biochemical and cell-based screening assays and high throughput screening systems for rapid, target-directed screening of diverse compound libraries. The Company develops drug leads by integrating combinatorial and computational chemistry with structure-based drug design technologies to optimize the activity of drug leads on gene regulating targets. Applying its expertise in gene regulating kinase targets, Signal has developed a kinase array screening technology ("KAST") and a signaling kinase inhibitor library ("SKIL") to enhance the speed and quality of Signal's drug discovery activities. The Company has initiated screening in 16 drug discovery assays and has demonstrated efficacy of certain of its drug leads in animal models of arthritis and osteoporosis. Signal's business objective is to develop and commercialize a broad pipeline of clinically important drug targets and drug candidates, initially in collaboration with pharmaceutical partners and academic institutions. These collaborations facilitate the discovery of targets and drug leads in multiple therapeutic fields, significantly expanding the Company's commercial opportunities and diversifying Signal's scientific risk. Pharmaceutical partners also provide Signal with multiple sources of revenue, as well as substantial development, manufacturing and marketing resources, which reduce the Company's financial risk. In addition to its five current pharmaceutical partners, Signal has target 3 5 discovery collaborations with researchers at 24 academic institutions. The Company's strategy is to retain U.S. co-commercialization rights in certain of its pharmaceutical collaborations. To date, Signal has secured U.S. co-commercialization rights in its collaboration with Ares-Serono and worldwide co-commercialization rights (excluding Japan) in its drug development collaboration with Nippon Kayaku. On a select basis, Signal plans to independently develop and commercialize drugs for specialty clinical markets in the U.S., principally in the fields of oncology and inflammation. To date, Signal has entered into collaborative discovery agreements with five pharmaceutical partners: Ares-Serono for the discovery and development of small molecule modulators of the NF-kB pathway to treat autoimmune, cardiovascular and neurodegenerative diseases and cancer; Roche Bioscience for the development of human neuronal cell lines for use in discovering new classes of drugs for the treatment of pain and other disorders of the peripheral nervous systems ("PNS"); Nippon Kayaku for the optimization of drug leads for the treatment of PNS disorders, including neuropathies resulting from diabetes and cancer chemotherapy; Organon for the identification of genomic targets and the development of screening assays for neurological, cardiovascular, gynecological and other diseases; and DuPont Merck for the identification of new classes of anti-viral drugs that inhibit gene regulating targets of the hepatitis C virus ("HCV") and the human immunodeficiency virus ("HIV"). Signal also has licensed worldwide rights for a drug lead discovered by the Company to a sixth partner, Tanabe Seiyaku Co., Ltd. ("Tanabe"), for the treatment of autoimmune, inflammatory and other diseases. The Company has multiple additional partnering opportunities in its other drug discovery programs. The Company was incorporated in California in July 1992 and intends to reincorporate in Delaware prior to the completion of this offering. Unless the context otherwise requires, references in this Prospectus to "Signal" and the "Company" refer to Signal Pharmaceuticals, Inc., a Delaware corporation, and, where applicable, to its California predecessor. The Company's offices are located at 5555 Oberlin Drive, San Diego, California 92121, and its telephone number is (619) 558-7500. THE OFFERING Common Stock offered by the Company............................. 2,500,000 shares Common Stock to be outstanding after the offering................ 9,433,929 shares(1) Use of proceeds..................... For research and development, including internal discovery programs and joint research and development with corporate and academic collaborators, the acquisition of research and development technologoies, compound screening libraries and product rights, capital investments and working capital and general corporate purposes Proposed Nasdaq National Market Symbol.............................. SGNL 4 6 SUMMARY FINANCIAL INFORMATION (IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED YEAR ENDED DECEMBER 31, MARCH 31, ----------------------------------------------- ----------------- 1993 1994 1995 1996 1997 1997 1998 ------- ------- ------- ------- ------- ------- ------- STATEMENT OF OPERATIONS DATA: Revenue......................... $--..... $ 22 $ 299 $ 3,933 $ 7,579 $ 1,549 $ 4,644 Expenses: Research and development... 682 3,799 5,173 7,724 10,337 2,459 3,288 General and administrative........... 603 1,288 1,937 2,471 2,791 671 1,203 ------- ------- ------- ------- ------- ------- ------- Total expenses............. 1,285 5,087 7,110 10,195 13,128 3,130 4,491 ------- ------- ------- ------- ------- ------- ------- Income (loss) from operations... (1,285) (5,065) (6,811) (6,262) (5,549) (1,582) 153 Interest income (expense), net........................... (45) 161 329 53 (192) (92) 182 ------- ------- ------- ------- ------- ------- ------- Net income (loss)............... $(1,330) $(4,904) $(6,482) $(6,209) $(5,740) $(1,673) $ 335 ======= ======= ======= ======= ======= ======= ======= Pro forma net income (loss) per share, basic and diluted...... $ (1.20) $ 0.05 ======= ======= Shares used in computing pro forma net income (loss) per share(2): Basic...................... 4,776 6,628 Diluted.................... 4,776 6,875
MARCH 31, 1998 ------------------------ ACTUAL AS ADJUSTED(3) ------- -------------- BALANCE SHEET DATA: Cash, cash equivalents and short-term investments........... $20,671 $49,971 Working capital............................................. 14,635 43,935 Total assets................................................ 24,755 54,055 Long-term obligations, less current portion................. 1,344 1,344 Accumulated deficit......................................... (24,410) (24,410) Total stockholders' equity.................................. 15,649 44,949
- ------------------------------ (1) Based on the number of shares outstanding at March 31, 1998. Includes the sale of 166,666 shares of Common Stock to DuPont Merck in a private transaction concurrent with the closing of this offering at an assumed initial public offering price of $12.00 per share. Excludes 1,581,097 shares of Common Stock reserved for issuance under the Company's stock option plans, of which 662,676 shares were subject to outstanding options as of March 31, 1998 at a weighted average exercise price of $0.87 per share. Subsequent to March 31, 1998, the Company granted options to purchase an aggregate of 221,525 shares of Common Stock at a weighted average exercise price of $2.00 per share. Also excludes 62,500 shares of Common Stock reserved for issuance upon exercise of outstanding warrants as of March 31, 1998 at an exercise price of $8.40 per share. See "Capitalization," "Management--Equity Incentive Plan" and Note 5 of Notes to Financial Statements. (2) Computed on the basis described in Note 1 of Notes to Financial Statements. (3) As adjusted to reflect the receipt of $1,999,992 from DuPont Merck in exchange for 166,666 shares of Common Stock to be issued in a private transaction concurrent with the closing of this offering and the sale of 2,500,000 shares of Common Stock offered hereby at an assumed initial public offering price of $12.00 per share and the receipt of the estimated proceeds therefrom. See "Use of Proceeds" and "Capitalization." ------------------------------ Except as otherwise noted, all information in this Prospectus assumes: (i) no exercise of the Underwriters' over-allotment option, (ii) a 4-for-1 reverse split of the Common Stock and the Company's reincorporation in Delaware, both to be effected prior to the completion of this offering, and (iii) the conversion of all outstanding shares of Series A, B, C, C-1, D, E and F Preferred Stock (collectively, the "Preferred Stock") into shares of Common Stock, which will occur upon the closing of the offering. See "Description of Capital Stock," "Underwriting" and Notes to Financial Statements. 5 7 RISK FACTORS This Prospectus contains forward-looking statements that involve risks and uncertainties. Actual results could differ materially from those discussed in the forward-looking statements as a result of certain factors, including those set forth below and elsewhere in this Prospectus. The following risk factors should be considered carefully in addition to other information in this Prospectus before purchasing the shares of Common Stock offered hereby. See "Special Note Regarding Forward-Looking Statements" on page 17 of this Prospectus. Limited Operating History; Early Stage of Development. The Company was formed in 1992, has a limited operating history and is at an early stage of development. All of the Company's active compounds are in the research stage, and there can be no assurance that any such compounds will enter clinical trials, be commercialized or will generate revenue in the future. The Company has experienced significant operating losses since inception and, as of March 31, 1998, had an accumulated deficit of approximately $24.4 million. The Company expects to continue to incur significant operating losses for the foreseeable future as it continues to incur increasing costs of research and development, acquisition of technologies, compound libraries and product rights, expansion of its operations and initiation of clinical trials. The Company has completed less than six years of operations, and its business is subject to all of the risks inherent in the establishment of a new business enterprise, including all of the problems, expenses and delays frequently encountered in connection with the development of pharmaceutical products, the utilization of unproven technology and the competitive environment in which the Company operates. Accordingly, the extent of future losses and the time required to achieve profitability, if ever, is highly uncertain. Payments, if any, from corporate collaborators, interest income, and academic and governmental grants are expected to be the Company's only sources of revenue for the foreseeable future. The Company has not yet received any milestone payments under its collaborative agreements. Royalties or other revenue from commercial sales of products based upon any target or compound identified by the Company are not expected for a number of years, if at all, and are dependent on the Company's ability, alone or with others, to successfully research, develop, obtain regulatory approval for, manufacture and market its products under development. See "--Dependence on Pharmaceutical and Biopharmaceutical Collaborations and Milestone Payments," "Selected Financial Data," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business--Research and Development Partners." Technological Uncertainty. Target and drug discovery and development methods directed toward intracellular signaling pathways and gene regulation are relatively new. The Company is working on a number of costly long-term discovery and development projects which involve experimental and unproven methods and which may ultimately prove unsuccessful. There is limited scientific understanding relating to the role of genes in most diseases, and relatively few products based on gene discoveries have been developed and commercialized. In addition, the Company is not aware of any drugs that have been developed and commercialized that were designed specifically to target intracellular signaling pathways. There can be no assurance that the Company's techniques for elucidating intracellular signaling pathways and identifying drug targets will lead to the discovery or development of commercial pharmaceutical products. Moreover, as the technology of the Company and its competitors continues to evolve, the Company will need to continue to develop novel and innovative technologies, enter into relationships with additional corporate collaborators and aggressively pursue patent and other protection for the Company's proprietary rights. The Company's failure to properly address the changing technological landscape, enter into collaborations to pursue development of its technologies or develop additional competitive technologies could have a material adverse effect on the Company's business, financial condition and results of operations. Uncertainties Associated with Product Development. The development of new pharmaceutical products is highly uncertain and subject to a number of significant risks. Lead compounds and drug candidates that appear to be promising at early stages of development may not advance to and through clinical trials and reach the market for a number of reasons. Such reasons include the possibilities that the drug candidates will be found ineffective or cause harmful side effects during preclinical testing or 6 8 clinical trials, fail to receive necessary regulatory approvals, be difficult to manufacture on a large scale, be uneconomical, fail to generate market demand or be precluded from commercialization by proprietary rights of third parties. To date, none of the compounds generated by the Company or through its collaborations has been approved for clinical testing, and there can be no assurance that any of such current or proposed compounds will be submitted for clinical testing. In addition, the safety and efficacy of compounds generated by the Company or through its collaborations has not been conclusively demonstrated in animal models or humans. If any potential products are identified by the Company, either independently or through its collaborations, such products will require significant additional development, extensive preclinical and clinical testing, regulatory approval and additional investment in manufacturing scale-up and sales and marketing prior to their commercialization, and there can be no assurance that any of these efforts will be successful. No assurance can be given that any of the Company's discovery and development programs will be successfully completed, any investigational new drug application ("IND") will be accepted by the United States Food and Drug Administration (the "FDA") or other applicable regulatory authorities, clinical trials will commence or be completed as planned, required regulatory approvals will be obtained on a timely basis, if at all, or any products for which approval is obtained will be commercially successful. If any of the Company's or its collaborators' development programs are not successfully completed, required regulatory approvals are not obtained or products for which approvals are obtained are not commercially successful, the Company's business, financial condition and results of operation could be materially adversely affected. Dependence on Pharmaceutical and Biopharmaceutical Collaborations and Milestone Payments. The Company's strategy for the discovery, development and commercialization of new gene regulating targets and drugs involves the formation of multiple collaborations in addition to focused internal development efforts. To date, substantially all revenue received by the Company has been from its collaborations, and the Company expects that substantially all revenue for the foreseeable future will be generated by collaborations. The Company has not yet entered into collaborations for a number of its existing or prospective programs. The Company's ability to continue to fund its research and development programs, maintain adequate capital reserves and, ultimately, achieve profitability will be dependent upon the ability of the Company to achieve certain milestones under existing collaborations with Ares-Serono, Roche Bioscience, Nippon Kayaku, Organon and DuPont Merck, and under an existing license agreement with Tanabe, and its ability to enter into additional collaborations. Because pharmaceutical and biopharmaceutical companies engaged in drug discovery activities have historically conducted target and drug discovery through their own internal research departments, these companies must be convinced that the Company's technologies and research discoveries justify entering into collaborative agreements with the Company. The Company also must compete with other companies for the limited number of existing opportunities to enter into such collaborative arrangements with pharmaceutical and biopharmaceutical companies. There can be no assurance that the Company will be able to negotiate additional collaborative agreements in the future on acceptable terms, if at all, that current or future collaborative agreements will be successful, or that current or future collaborators will not pursue or develop alternative technologies either on their own or in collaboration with others, including the Company's competitors, as a means for identifying targets or lead compounds. To the extent the Company chooses not to or is unable to enter into such agreements, it will require substantially greater capital to undertake the research, development, clinical testing, manufacturing, sales and marketing of products at its own expense. In the absence of such collaborative agreements, the Company may be required to delay or curtail its research and development activities to a significant extent. The Company has not received any milestone payments from its corporate collaborators to date. The Company's future revenue will depend in part on its ability to realize milestone payments and royalties triggered by the development and commercialization of drugs identified through the use of the Company's technologies. The Company's research and development efforts may result in developed and commercialized pharmaceutical products generating milestone payments and royalties only after lengthy and costly preclinical and clinical development efforts, the receipt of requisite regulatory 7 9 approvals, the development and integration of manufacturing capabilities, the receipt of patents and successful marketing efforts. The Company's collaborators are not obligated to develop or commercialize potential products identified through the use of the Company's technologies. Development and commercialization of potential products will therefore depend not only on the achievement of research and development objectives by the Company and its collaborators, which cannot be assured, but also on each collaborator's own financial, technical, competitive, marketing and strategic considerations, all of which are outside the Company's control. Such strategic considerations may include the relative advantages of alternative products being marketed or developed by the Company's collaborators and others, including relevant patent and proprietary positions. There can be no assurance that the interests and motivations of the Company's collaborators are, or will remain, aligned with those of the Company, that current or future collaborators will not pursue alternative technologies or potential products in preference to those of the Company or that such collaborators will successfully perform their development, regulatory, compliance, manufacturing or marketing and sales functions. In general, should the Company or a collaborator fail to develop or commercialize a potential product identified through the use of the Company's or its collaborators' technologies, or should such a potential product be determined to be unsafe, of no therapeutic benefit, uneconomical, or not sufficiently superior to competing products, the Company may not receive any future milestone payments or royalties associated with such potential products, and the Company may have only limited or no rights to independently develop and commercialize such potential products. There can be no assurance that any potential product will be developed and commercialized as a result of such collaborations, that any such development or commercialization would be successful or that disputes will not arise over the application of payment provisions to such potential products. Modification or termination of the Company's existing or future collaborative agreements, or the failure to enter into a sufficient number of additional collaborative agreements on favorable terms, could result in loss of anticipated revenue as well as potential delay or curtailment of ongoing research and development activities and have a material adverse effect on the Company's business, financial condition and results of operations. The Company's collaborations may generally be terminated upon a breach by either party. Moreover, certain of the Company's collaborations may be terminated by its collaborators if Signal fails to achieve certain research and development milestones. The Company has in the past encountered, and may in the future encounter, difficulty in satisfying certain milestones under its collaboration agreements due to the early stage of development of the Company's technology, the inherent uncertainties associated with product development and the aggressive discovery and developmental timetables presented by certain milestones. Accordingly, the Company has in the past renegotiated, and may in the future need to renegotiate, its collaboration agreements to modify the timing and requirements of certain milestones. There can be no assurance that the Company would be able to renegotiate any milestone requirements in the future, and any failure to do so could have a material adverse effect on the Company's business, financial condition and results of operations. Moreover, regardless of whether Signal satisfies future milestone obligations, beginning in August 1998, Roche Bioscience can terminate its collaboration agreement with the Company at its discretion upon ninety days' written notice. Additionally Organon may terminate its funding of certain Signal research effective January 1999 if the Company does not meet specified milestones by October 1998. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business--Research and Development Partners." Future Capital Requirements; Uncertainty of Additional Funding. The Company has expended and will continue to expend substantial funds to continue the research, development and testing of its potential products. The Company's future capital requirements will depend on, and could increase substantially as a result of, many factors, including progress in its research and development programs; the scope, prioritization and number of programs; the acquisition and development of enabling technologies; the expansion or initiation of academic licensing arrangements; the acquisition of potential products; the progress of preclinical and clinical testing; the Company's ability to enter into additional collaborations; the receipt of milestone, royalty and other payments from its collaborations; the modification or termination of any of the Company's current corporate collaborations or any 8 10 future collaborations; the time and costs involved in obtaining regulatory approvals; the costs involved in preparing, filing, prosecuting, maintaining, enforcing and defending patent claims; competing technological and market developments; the costs of establishing manufacturing facilities for clinical or commercial production; and the costs inherent in retaining and developing commercialization rights for certain compounds. The Company currently depends on its corporate collaborators for substantially all of its research and development funding. As of March 31, 1998, the Company had received approximately $20.8 million from its collaborators. There can be no assurance that the Company will continue to receive funding under its existing collaborative agreements or that the Company's existing or potential future collaborative arrangements will be adequate to fund the Company's operations. The Company also may seek alternative sources of financing or financing structures in the future to efficiently discover and develop its potential products, and there can be no assurance that such alternative financing arrangements will be available, and if available, will lead to the successful development of potential products. The Company believes that the net proceeds of this offering, together with its existing capital resources, committed revenue from its existing collaborations and interest income should be sufficient to fund its anticipated operating expenses and capital requirements through the end of the year 2000. The Company intends to raise additional funds through additional equity or debt financings, research and development financings, collaborative relationships or other joint venture relationships and may seek to finance certain of its programs through other financing mechanisms. Because of its long-term capital requirements, the Company may seek to access the public or private equity markets whenever it deems conditions to be favorable, even if it does not have an immediate need for additional capital at that time. There can be no assurance that any such funding will be available to the Company, or, if available, that it will be available on acceptable terms. If additional funds are raised by issuing equity securities, further dilution to stockholders may result, and debt financing, if available, may involve restrictive covenants. If adequate funds are not available, the Company may be required to delay, reduce the scope of or eliminate one or more of its research, development or clinical programs which would materially adversely affect the Company's business, financial condition and results of operations. The Company also may be required to seek funds through arrangements with collaborative partners or others that require the Company to relinquish rights to certain of its technologies, potential products, products or marketing territories that the Company would otherwise seek to retain, develop or commercialize itself. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." Dependence on Patents and Proprietary Rights. The Company's success will depend in part on its ability to obtain and retain patent protection for its proprietary technologies, targets and potential products, effectively preserve its trade secrets and to operate without infringing the proprietary rights of third parties. Because of the substantial length of time and expense associated with bringing potential products through the development and regulatory approval processes to reach the marketplace, the pharmaceutical industry places considerable importance on obtaining patent and trade secret protection for new technologies, products and processes. Accordingly, the Company seeks patent protection for its proprietary technology, targets and potential products. However, there can be no assurance that the Company or its collaborators have developed or will continue to develop potential products or processes that are patentable or that patents will issue from any of the Company's pending applications, including patent applications that have been allowed. There also can be no assurance that the Company's or its collaborators' current patents, or patents that issue on pending applications, will not be challenged, invalidated or circumvented, or that the rights granted thereunder will provide proprietary protection or competitive advantages to the Company. Patent applications in the United States are maintained in secrecy until patents issue, patent applications are not generally published until many months or years after they are filed and publication of technological developments in the scientific and patent literature often occurs long after the date of such developments. Accordingly, the Company cannot be certain that it or one of its collaborators was the first to invent the subject matter covered by the patent applications or that it or one of its collaborators was the first to file patent applications for such inventions. Further, there can be no assurance as to the 9 11 success or timeliness in obtaining any patents, that the breadth of claims obtained, if any, will provide adequate protection of the Company's proprietary technology, targets or potential products, or that the Company or its licensors will be able to or will in fact adequately enforce any such claims to protect its proprietary technology, targets or potential products. Patent law relating to the scope and enforceability of claims in the fields in which the Company operates is still evolving. The patent positions of biopharmaceutical and pharmaceutical companies, including the Company, are highly uncertain and involve complex legal and technical questions for which legal principles are not firmly established. The degree of future protection for the Company's proprietary rights, therefore, is highly uncertain. In this regard, there can be no assurance that independent patents will issue from the Company's and its licensors' patent applications, which include many interrelated applications directed to common or related subject matter. Further, there may be issued patents and pending applications owned by others directed to technologies relevant to the Company's, its licensors' or its collaborators' research, development and commercialization efforts. There can be no assurance that the Company's or its collaborators' technology can be developed and commercialized without a license to such patents or that such patent applications will not be granted priority over patent applications filed by the Company, its licensors or one of its collaborators. Furthermore, there can be no assurance that third parties will not independently develop similar or alternative technologies to those of the Company, its licensors or any of its collaborators, duplicate any of the Company's, its licensors' or its collaborators' technologies or design around the patented technologies developed by the Company, its licensors or its collaborators, any of which may have a material adverse effect on the Company. The commercial success of the Company depends significantly on its ability to operate without infringing the patents and proprietary rights of third parties, and there can be no assurance that the Company's, its licensors' and its collaborators' technologies do not and will not infringe the patents or proprietary rights of others. A number of pharmaceutical companies, biopharmaceutical companies, independent researchers, universities and research institutions may have filed patent applications or may have been granted patents that cover technologies similar to the technologies owned, optioned by or licensed to the Company or its collaborators. For instance, a number of patents may have issued and may issue in the future on certain targets or their use in screening assays that could prevent the Company and its collaborators from developing screens using such targets, compounds relating to such targets or relate to certain other aspects of technology utilized or expected to be utilized by the Company. In addition, the Company is unable to determine all of the patents or patent applications that may materially affect the Company's or its collaborators' ability to make, use or sell any potential products. The Company is aware of one allowed U.S. patent application relating to certain methods for transcriptional modulation. The Company believes that it has not infringed, and is not currently infringing, the claims of the allowed application. Nonetheless, the Company may in the future be required to obtain a license to such allowed patent, and there can be no assurance that such a license will be available on commercially reasonable terms, if at all. In addition, the Company is aware of an issued U.S. patent claim for certain human MAP kinases, including MAP kinases in the p38 pathway, which may be useful as targets for drug discovery. The Company is negotiating a license to patent rights covering such MAP kinase targets that may be useful in the Company's research programs, although there can be no assurance that such a license will be available on commercially reasonable terms, if at all. Any conflicts resulting from third-party patent applications and patents could significantly reduce the coverage of the patents owned, optioned by or licensed to the Company or its collaborators and limit the ability of the Company or its collaborators to obtain meaningful patent protection. If patents are issued to third parties that contain competitive or conflicting claims, the Company, its licensors or its collaborators may be enjoined from pursuing research, development or commercialization of potential products or be required to obtain licenses to these patents or to develop or obtain alternative technology. There can be no assurance that the Company or its collaborators will not be so enjoined or will be able to obtain any license to the patents and technologies of third parties on acceptable terms, if at all, or be able to obtain or develop alternative technologies. If the Company or any of its collaborators is enjoined from pursuing its research, 10 12 development or commercialization activities or if any such license is or alternative technologies are not obtained or developed, the Company or such collaborator may be delayed or prevented from commercializing its potential products, which would result in a material adverse effect on the Company. The drug discovery industry has a history of patent litigation and there will likely continue to be numerous patent litigation suits concerning drug discovery technologies and potential products. The patent positions of pharmaceutical, biopharmaceutical and drug discovery companies, including the Company, generally are uncertain and involve complex legal and factual questions. Litigation to establish the validity of patents, to defend against patent infringement claims of others and to assert infringement claims against others can be expensive and time consuming, even if the outcome is favorable. An outcome of any patent prosecution or litigation that is unfavorable to the Company or one of its licensors or collaborators may have a material adverse effect on the Company. In particular, litigation may be necessary to enforce any patents issued or licensed to the Company, its licensors or its collaborators, to protect trade secrets or know-how of the Company, its licensors or its collaborators, or to determine the scope and validity of a third party's proprietary rights. The Company could incur substantial costs if litigation is required to defend itself in patent suits brought by third parties, if the Company participates in patent suits brought against or initiated by its licensors or collaborators or if the Company initiates such suits, and there can be no assurance that funds or resources would be available to the Company in the event of such litigation. Additionally, there can be no assurance that the Company, its licensors or its collaborators would prevail in any such action. An adverse outcome in litigation or an interference to determine priority or other proceeding in a court or patent office could subject the Company to significant liabilities, require disputed rights to be licensed from or to other parties or require the Company, its licensors, or its collaborators to cease using certain technology, any of which may have a material adverse effect on the Company. In addition to patent protection, the Company also relies on copyright protection, trade secrets, know-how, continuing technological innovation and licensing opportunities. In an effort to maintain the confidentiality and ownership of trade secrets and proprietary information, the Company requires employees, consultants and certain collaborators to execute confidentiality and invention assignment agreements upon commencement of a relationship with the Company. These agreements generally provide that all confidential information developed or made known to the individual by the Company during the course of the individual's relationship with the Company will be kept confidential and not disclosed to third parties except in specific circumstances. The agreements also generally provide that all inventions conceived by the individual in the course of rendering services to the Company shall be the exclusive property of the Company. There can be no assurance, however, that these agreements will provide meaningful protection for the Company's trade secrets, confidential information or inventions in the event of unauthorized use or disclosure of such information or that adequate remedies would exist in the event of such unauthorized use or disclosure. The loss or exposure of trade secrets possessed by the Company could materially adversely affect its business. Like many high technology companies, the Company may from time to time hire scientific personnel formerly employed by other companies involved in one or more areas similar to the activities conducted by the Company. Although the Company requires its employees to maintain the confidentiality of all confidential information of previous employers, there can be no assurance that the Company or these individuals will not be subject to allegations of trade secret misappropriation or other similar claims as a result of their prior affiliations. See "Business--Patents and Proprietary Rights." Substantial Competition. Competition among pharmaceutical and biopharmaceutical companies to identify drug targets and drug candidates for development is intense and is expected to increase. In the pharmaceutical industry, the Company competes with the research and development departments of pharmaceutical and biopharmaceutical companies and other commercial enterprises, as well as numerous academic and research institutions and governmental agencies. In addition, the pharmaceutical and biopharmaceutical industries are subject to rapid and substantial technological change. Pharmaceutical and biopharmaceutical companies and others are conducting research in various areas 11 13 which overlap with the Company's technology platform, either on their own or in collaboration with others. There can be no assurance that pharmaceutical and biopharmaceutical companies which compete with the Company in specific areas will not merge or enter into collaborations or joint ventures or other alliances with one or more other such companies or academic and research institutions and become substantial competitors or that the Company's collaborators will not initiate or expand their own internal target and drug discovery and development efforts. At the present time, the Company has not conducted any clinical trials and has no commercial manufacturing capability, sales or marketing force. Many of the Company's competitors and potential competitors have substantially greater capital resources, research and development resources, manufacturing, sales and marketing experience and production facilities than does the Company. Additionally, many of these competitors have significantly greater experience than does the Company in undertaking target and drug discovery, preclinical product development and testing and clinical trials of new pharmaceutical products and obtaining FDA and other regulatory approvals. Smaller companies also may prove to be significant competitors, particularly through proprietary research discoveries and collaborative arrangements with large pharmaceutical and established biopharmaceutical companies. Many of these competitors have significant products that have been approved or are in development and operate large, well funded research and development programs. Academic institutions, governmental agencies and other public and private research organizations also conduct research, seek patent protection and establish collaborative arrangements for the discovery, development and commercialization of potential products. In addition, these companies and institutions compete with the Company in recruiting and retaining highly qualified scientific and management personnel. There can be no assurance that the Company's competitors will not discover lead compounds, develop more effective, safer, more affordable or more easily administered potential products or achieve patent protection or commercialize potential products sooner than the Company. Failure to compete effectively could 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," "Business--Signal's Drug Discovery Programs" and "--Competition." Attraction and Retention of Key Employees and Consultants. The Company's success is highly dependent on the principal members of its scientific and management staff, as well as its scientific advisors and consultants. The loss of one or more of these individuals could have a material adverse effect on the Company's business, financial condition and results of operations. The Company does not maintain "key person" insurance on any of its employees. The Company's future success also will depend in part on its ability to identify, recruit and retain additional qualified personnel. There is intense competition for such 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 personnel with the advanced technical qualifications 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--Scientific Advisory Board" and "Management." Government Regulation; No Assurance of Regulatory Approvals. The Company's and its collaborators' research, preclinical testing and clinical trials of their respective potential products, if any, and the manufacturing and marketing of their potential products, will be subject to extensive and rigorous regulation by numerous government authorities in the United States and in other countries where the Company and its collaborators intend to test, manufacture and market their potential products. Prior to marketing any product developed by the Company, the Company or its collaborators, as applicable, must undergo an extensive regulatory approval process. This regulatory process, which includes preclinical testing and clinical trials of each potential product to establish its safety and efficacy, will take many years and require the expenditure of substantial resources, and also may include post-marketing surveillance. Data obtained from preclinical testing and clinical trials are susceptible to varying interpretations which could delay, limit or prevent regulatory approval. In addition, delays or rejection may be encountered based upon changes in FDA policy for drug approval during the period 12 14 of product development and FDA regulatory review of each submitted new drug application ("NDA") or product license application ("PLA"). Similar delays or rejection also may be encountered in foreign countries. There can be no assurance that regulatory approval will be obtained for any potential products developed by the Company or its collaborators. Moreover, regulatory approval may entail limitations on the indicated uses of a drug. Further, even if regulatory approval is obtained, a marketed drug and its manufacturer are subject to continuing review, and discovery of previously unknown problems with a drug or manufacturer can result in the withdrawal of a drug from the market or a significant decrease in market demand, which would have an adverse effect on the Company's business, financial condition and results of operations. Violations of regulatory requirements at any stage, including preclinical testing and clinical trials, the approval process or post-approval, may result in various adverse consequences including a delay by the FDA or other applicable regulatory authority in approving or its refusal to approve a potential product, withdrawal of an approved drug from the market and the imposition of criminal penalties against the manufacturer and NDA or PLA holder. Neither the Company nor its collaborators has submitted any IND applications for any potential product of the Company, and none has been approved for commercialization in the United States or internationally. No assurance can be given that the Company or its collaborators will be able to obtain FDA or other applicable regulatory authority approval for any potential products. Failure to obtain requisite regulatory approvals or failure to obtain approvals of the scope requested will delay or preclude the Company or its collaborators from marketing the Company's or its collaborators' products or limit the commercial use of the potential products and would have material adverse effect on the Company's business, financial condition and results of operations. See "Business--Government Regulation." Expansion of Operations; Management of Growth. The Company will need to expand and effectively manage its operations and facilities in order to successfully complete its existing corporate collaborative agreements, facilitate additional pharmaceutical and biopharmaceutical collaborations and pursue future internal research, development and commercialization efforts. There can be no assurance that the Company will be able to manage its growth, to meet the staffing requirements of current or additional collaborative relationships or internal programs or to successfully assimilate, train and manage its new employees. In addition, the Company will be required to expand its management capabilities, enhance its operating and financial systems and expand its facilities to manage its growth effectively. If the Company continues to grow, there can be no assurance that the management or scientific skills, systems and facilities currently in place will be adequate or that the Company will be able to manage any additional growth effectively. Failure to achieve any of these goals could have a material adverse effect on the Company's business, financial condition and results of operations. No Manufacturing Experience; Reliance on Third-Party Manufacturing. To date, the Company has not manufactured any products for preclinical, clinical or commercial purposes and does not have any manufacturing facilities. The Company intends to utilize third-party contract manufacturers or its corporate collaborators for the production of material for use in preclinical and clinical trials and for the manufacture of future products for commercialization. In the event that the Company is unable to secure such outside manufacturing capabilities, it will not be able to conduct preclinical product development, clinical trials or commercialize its potential products as planned. Even if the Company were able to establish its own internal manufacturing capability, doing so would require the expenditure of significant resources which could have a material adverse effect on the Company's business, financial condition and results of operations. There can be no assurance that the Company or any outside manufacturers can produce potential products of suitable quality in sufficient quantity in a cost-effective manner, if at all. The manufacture of the Company's potential products for preclinical and clinical trials and commercial purposes is subject to current Good Manufacturing Practices ("cGMP") regulations promulgated by the FDA and other applicable domestic and foreign regulations. No assurance can be given that in the future the Company or any outside manufacturers can maintain full compliance with cGMP regulations or other applicable regulations. See "Business--Research and Development Partners" and "--Manufacturing." 13 15 Possible Volatility of Stock Price. The market prices for securities of comparable companies have been highly volatile, and the market in general has experienced significant price and volume fluctuations that often are unrelated to the operating performance of particular companies. Announcements of technological innovations, collaborations or new products by the Company or its competitors, disputes or other developments concerning proprietary rights, including patents and litigation matters, publicity regarding actual or potential results with respect to technologies, collaborations or products under development by the Company, its collaborators or its competitors, changes in the terms or status of the Company's collaborations, regulatory developments in both the United States and foreign countries, public concern as to the feasibility of new technologies, changes in recommendations of securities analysts, general market conditions, as well as quarterly fluctuations in the Company's revenues and financial results and other factors, may have a significant impact on, and may cause significant fluctuation in, the market price and liquidity of the Common Stock. In particular, the realization of any of the risks described in these "Risk Factors" could have a dramatic and materially adverse impact on such market price. Hazardous Materials. The research and development processes of the Company involve the controlled use of hazardous materials, including microbial organisms and other biological materials, chemicals and various radioactive compounds. 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. 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. 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. Uncertainty of Pharmaceutical Pricing and Reimbursement. The Company's business and the availability of capital in the future may be materially adversely affected by the continuing efforts of government and third-party payors to contain or reduce the costs of health care through various means. For example, in certain foreign markets, pricing or profitability of prescription pharmaceuticals is 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 government control on pricing or profitability of prescription pharmaceuticals in such jurisdictions. In addition, an increasing emphasis on managed care in the United States has put, and will continue to put, pressure on pharmaceutical pricing and product demand. Such initiatives and proposals, if adopted, could decrease the demand or the price that the Company receives for any products it or its collaborators may develop and sell in the future, and thereby have a material adverse effect on the Company's business, financial condition and results of operations. Further, to the extent that such proposals or initiatives have a material adverse effect on other pharmaceutical companies that are collaborators or prospective collaborators for certain of the Company's potential products, the Company's ability to commercialize its potential products may be materially adversely affected. The ability of the Company and its collaborators to commercialize products may depend in part on the extent to which reimbursement for the costs of such products and related treatments will be available from government health administration authorities, private health insurers and other third-party payors. Significant uncertainty exists as to the reimbursement status of newly approved health care products, and third-party payors are increasingly challenging the prices charged for medical products and services. There can be no assurance that any third-party insurance coverage will be available to patients for any products developed by the Company or its collaborators. Government and other third-party payors are increasingly attempting to contain health care costs by limiting both coverage and the level of reimbursement for new therapeutic products, and by refusing, in some cases, to provide coverage for uses of approved products for disease indications for which the FDA or other applicable regulatory authorities have not granted marketing approval. If adequate coverage and reimbursement levels are not provided by government and third-party payors for the Company's or its 14 16 collaborators' products, the market acceptance of these products would be materially adversely affected. Potential Product Liability Exposure and Limited Insurance Coverage. The use of any of the Company's or its collaborators' drug candidates in clinical trials, and the sale of any approved products, may expose the Company to liability claims resulting from the use of its products. These claims might be made directly by consumers, consumer groups, health care providers, pharmaceutical companies, governmental agencies or others selling such products. The Company intends to obtain limited product liability insurance coverage for clinical trials and plans to expand any such insurance coverage to include the sale of commercial products if marketing approval is obtained for any products in development and intends to receive certain indemnities from its collaborators. However, insurance coverage is becoming increasingly expensive and difficult to obtain, and no assurance can be given that the Company will be able to maintain insurance coverage at a reasonable cost or in sufficient amounts to protect the Company against losses due to liability. A successful product liability claim or series of claims brought against the Company could have a material adverse effect on its business, financial condition and results of operations. Control By Management and Existing Stockholders. Upon completion of this offering, the Company's principal stockholders, executive officers, directors and affiliated individuals and entities together will beneficially own approximately 55.5% of the outstanding shares of Common Stock (53.4% if the Underwriters' over-allotment option is exercised in full). As a result, these stockholders, acting together, will be able to influence significantly and possibly control most matters requiring approval by the stockholders of the Company, including approvals of amendments to the Company's Certificate of Incorporation, mergers, a sale of all or substantially all of the assets of the Company, going private transactions and other fundamental transactions. In addition, the Company's Certificate of Incorporation, as it is proposed to be amended and restated concurrently with the closing of this offering (the "Restated Certificate"), does not provide for cumulative voting with respect to the election of directors. Consequently, the present directors and executive officers of the Company, together with the Company's principal stockholders, will be able to control the election of the members of the Board of Directors of the Company. Such a concentration of ownership could have an adverse effect on the price of the Common Stock, and may have the effect of delaying or preventing a change in control of the Company, including transactions in which stockholders might otherwise receive a premium for their shares over then current market prices. See "Management" and "Principal Stockholders." No Prior Public Market for Common Stock. Prior to this offering, there has been no public market for the Common Stock, and there can be no assurance that an active trading market will develop or be sustained after this offering. The initial public offering price will be determined by negotiations between the Company and the representatives of the Underwriters and may not be indicative of the market price at which the Common Stock of the Company will trade after this offering. See "Underwriting" for a discussion of the factors considered in determining the initial public offering price. Availability of Preferred Stock for Issuance; Anti-Takeover Provisions. The Restated Certificate authorizes the Board of Directors of the Company, without stockholder approval, to issue additional shares of Common Stock and to fix the rights, preferences and privileges of and issue up to 5,000,000 shares of Preferred Stock with voting, conversion, dividend and other rights and preferences that could adversely affect the voting power or other rights of the holders of Common Stock. The issuance of Preferred Stock, rights to purchase Preferred Stock or additional shares of Common Stock may have the effect of delaying or preventing a change in control of the Company. In addition, the possible issuance of Preferred Stock or additional shares of Common 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 for shares of the Company's Common Stock. Further, the Restated Certificate provides that any action required or permitted to be taken by stockholders of the Company must be effected at a duly called annual or special meeting of stockholders and may not be effected by written consent. Special meetings of the stockholders of the Company may be called only 15 17 by the Chairman of the Board of Directors, the Chief Executive Officer of the Company, by the Board of Directors pursuant to a resolution adopted by a majority of the total number of authorized directors or by the holders of 10% of the outstanding voting stock of the Company. The Restated Certificate also provides for staggered terms for the members of the Board of Directors. These and other provisions contained in the Restated Certificate and the Company's Bylaws, as well as certain provisions of Delaware law, could delay or make more difficult certain types of transactions involving an actual or potential change in control of the Company or its management (including transactions in which stockholders might otherwise receive a premium for their shares over then current market prices) and may limit the ability of stockholders to remove current management of the Company or approve transactions that stockholders may deem to be in their best interests and, therefore, could adversely affect the price of the Company's Common Stock. See "Description of Capital Stock--Preferred Stock" and "--Delaware Anti-Takeover Law and Certain Charter Provisions." Shares Eligible for Future Sale and Potential Adverse Effect on Market Price. Sales of Common Stock in the public market following this offering could adversely affect the market price of the Common Stock. Upon completion of this offering, the Company will have 9,433,929 shares of Common Stock outstanding, assuming no exercise of currently outstanding options or warrants. Of these shares, the 2,500,000 shares sold in this offering (plus any additional shares sold upon exercise of the Underwriters' over-allotment 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. The remaining 6,933,929 shares of Common Stock held by existing stockholders are restricted securities as that term is defined in Rule 144 under the Securities Act (the "Restricted Shares"). Restricted Shares may be sold in the public market only if registered or if they qualify for an exemption from registration under Rules 144 or 701 under the Securities Act. As a result of agreements limiting the resale of such shares (the "Lock-up Agreements") and the provisions of Rules 144 and 701, additional shares will be available in the public market as follows: (i) no Restricted Shares will be eligible for immediate sale on the effective date of this offering; (ii) 6,677,325 Restricted Shares (plus 623,687 shares of Common Stock issuable upon exercise of vested stock options) will be eligible for sale upon expiration of Lock-up Agreements 180 days after the date of this Prospectus; and (iii) the remainder of the Restricted Shares will be eligible for sale from time to time thereafter upon expiration of their respective one-year holding periods, and could be sold earlier if the holders exercise any available registration rights. The holders of 6,058,449 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 beginning at the end of the 180-day lock-up period. 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 a registration statement on Form S-8 registering shares of Common Stock subject to outstanding stock options or reserved for issuance under the Company's stock option plans. Such registration statement is expected to be filed and to become effective as soon as practicable after the effective date of this offering. Shares registered under such registration statement will, subject to Rule 144 volume limitations applicable to affiliates, be available for sale in the open market, unless such shares are subject to vesting restrictions with the Company or the lock-up agreements described above. See "Management," "Description of Capital Stock--Registration Rights," "Shares Eligible for Future Sale" and "Underwriting." Immediate and Substantial Dilution. Purchasers of the shares of Common Stock offered hereby will experience immediate and substantial dilution in the net tangible book value of their investment from the initial public offering price. Additional dilution will occur upon exercise of outstanding options and outstanding warrants. See "Dilution" and "Shares Eligible for Future Sale." 16 18 Broad Discretion in Application of Net Proceeds. The net proceeds to the Company from the sale of the shares of Common Stock offered hereby plus the sale of shares of Common Stock to DuPont Merck to be issued in a private transaction concurrent with the closing of this offering at an assumed initial public offering price of $12.00 per share are estimated to be approximately $29.3 million ($33.5 million if the Underwriters' over-allotment option is exercised in full). The Company intends to use the net proceeds from this offering principally for research and development, including internal discovery programs and joint research and development with corporate and academic collaborators, the acquisition of research and development technologies, compound screening libraries and product rights, capital investments and working capital and general corporate purposes. The Company's management and Board of Directors have broad discretion with respect to the application of such proceeds, and the amounts actually expended by the Company for working capital purposes may vary significantly depending on a number of factors, including the amount and timing of revenues from the Company's current or future collaborators, including any amendments of the terms of such collaborative arrangements, the expense incurred in pursuing the Company's research and development programs and the amount of cash, if any, generated by the Company's operations. See "Use of Proceeds." Year 2000 Compliance Some older computer programs were written using two digits rather than four to define the applicable year. As a result, those computer programs have time-sensitive software that recognize a date using "00" as the year 1900 rather than 2000. This failure to use four digits to define the applicable year has created what is commonly referred to as the "Year 2000 Issue" and could cause a system failure or miscalculations causing disruption of operations, including a temporary inability to process transactions or engage in similar normal business activities. The Company recognizes the need to ensure that its operations will not be adversely impacted by the Year 2000 Issue. The Company does not believe that it has material exposure to the Year 2000 Issue with respect to its own information systems since its existing systems correctly define the Year 2000. Any required expenditures will be expensed as incurred. The Company intends to assess its position regarding the Year 2000 Issue with respect to external information systems by the end of 1998. This process will entail communications with significant business partners, customers, suppliers, financial institutions, insurance companies and other parties that provide significant services to the Company. There can be no assurance that any of such third parties are using systems that are Year 2000 compliant or will address any Year 2000 issues in a timely fashion, or at all. Any Year 2000 compliance problems of either the Company or the third parties with whom the Company does business or from whom it receives services, could have a material adverse effect on the Company's business, operating results and financial condition. SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS Certain statements contained or incorporated by reference in this Prospectus, including without limitation, statements containing the words "believes," "anticipates," "expects" and words of similar import, constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995 (the "Reform Act"). Such forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of the Company, or industry results, to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. These forward-looking statements include, but are not limited to, statements concerning the Company's plans to continue development of its current potential products; conduct clinical trials with respect to potential products; evaluate potential products under development for subsequent clinical development; utilize the Company's capital resources and the net proceeds from this offering and the time periods related thereto; seek regulatory approvals; engage third-party contract manufacturers to supply its clinical trials and commercial requirements; and establish a marketing and distribution 17 19 capability. These forward-looking statements may be found in the "Prospectus Summary," "Risk Factors," "Use of Proceeds," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business." Forward-looking statements not specifically set forth above may also be found in these and other sections of this Prospectus. The Company disclaims any obligation to update any such factors or to publicly announce the result of any revisions to any of the forward-looking statements contained herein to reflect future events or developments. 18 20 USE OF PROCEEDS The net proceeds to the Company from the sale of the 2,500,000 shares of Common Stock offered by the Company hereby and the sale of shares of Common Stock to DuPont Merck to be issued in a private transaction concurrent with the closing of this offering at an assumed initial public offering price of $12.00 per share are estimated to be approximately $29.3 million ($33.5 million if the Underwriters' over-allotment option is exercised in full) after deducting the underwriting discount and estimated offering expenses payable by the Company. The Company intends to use the net proceeds from this offering primarily for research and development, including internal discovery programs and joint research and development with corporate and academic collaborators, the acquisition of research and development technologies, compound screening libraries and product rights, capital investments and working capital and general corporate purposes. The amounts actually expended by the Company for working capital purposes will vary significantly depending on a number of factors, primarily the amount and timing of revenues from the Company's current or future collaborators, including amendments of the terms of such collaborative arrangements. The Company's management will retain broad discretion in the allocation of the net proceeds of this offering. The Company also may use a portion of the net proceeds to fund acquisitions of complementary technologies, products or businesses, although the Company has no current agreements or commitments for any such acquisition. Pending such uses, the Company intends to invest the net proceeds of this offering in interest-bearing, investment-grade securities. The Company believes that the net proceeds of this offering, together with its existing capital resources, interest income and committed revenue from its existing collaborations should be sufficient to fund its anticipated operating expenses and capital requirements at least through the end of the year 2000. DIVIDEND POLICY The Company has never declared nor paid any cash dividends on its Common Stock. The Company currently intends to retain any earnings for funding growth and, therefore, does not intend to pay any cash dividends on its Common Stock in the foreseeable future. In addition, the Company is prohibited from paying any dividends and making any distributions, and also is limited in its ability to repurchase stock, pursuant to the terms of a secured loan to the Company by MMC/GATX Partnership No. 1. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources." 19 21 CAPITALIZATION The following table sets forth the capitalization of the Company as of March 31, 1998 (i) on an actual basis and (ii) as adjusted to reflect the automatic conversion of all shares of Preferred Stock, the receipt of $1,999,992 from DuPont Merck for the purchase of 166,666 shares of Common Stock to be issued in a private transaction concurrent with the closing of this offering at an assumed initial public offering price of $12.00 per share, and the sale by the Company of the 2,500,000 shares of Common Stock offered hereby at an assumed initial public offering price of $12.00 per share and the application of the estimated net proceeds therefrom. This table should be read in conjunction with the Financial Statements and Notes thereto included elsewhere in this Prospectus.
MARCH 31, 1998 ----------------------- ACTUAL AS ADJUSTED -------- ----------- (IN THOUSANDS) Long-term obligations, less current portion(1).............. $ 1,344 $ 1,344 -------- -------- Stockholders' equity: Convertible Preferred Stock, $.001 par value; 6,113,485 shares authorized and 6,050,949 shares issued and outstanding, actual; 5,000,000 shares authorized and no shares issued or outstanding, as adjusted.......... 6 -- Common Stock, $.001 par value; 8,750,000 shares authorized and 716,314 shares issued and outstanding, actual; 25,000,000 shares authorized and 9,433,929 shares issued and outstanding, as adjusted(2)......... 1 9 Additional paid-in capital............................. 41,433 70,731 Deferred compensation.................................. (1,387) (1,387) Accumulated other comprehensive income................. 6 6 Accumulated deficit.................................... (24,410) (24,410) -------- -------- Total stockholders' equity........................ 15,649 44,949 -------- -------- Total capitalization......................... $ 16,993 $ 46,293 ======== ========
- ------------------------------ (1) See Note 3 of Notes to Financial Statements for a description of the Company's long-term obligations. (2) Excludes 1,581,097 shares of Common Stock reserved for issuance under the Company's stock option plans, of which 662,676 shares were subject to outstanding options as of March 31, 1998 at a weighted average exercise price of $0.87 per share. Also excludes 62,500 shares of Common Stock reserved for issuance upon exercise of outstanding warrants as of March 31, 1998 at an exercise price of $8.40 per share. Subsequent to March 31, 1998, the Company granted options to purchase an aggregate of 221,525 shares of Common Stock at a weighted average exercise price of $2.00 per share. See "Management-- Equity Incentive Plan," "Description of Capital Stock" and Note 5 of Notes to Financial Statements. 20 22 DILUTION As of March 31, 1998, the pro forma net tangible book value was $15,649,014 or $2.31 per share. Pro forma net tangible book value per share represents the amount of total tangible assets less total liabilities divided by 6,767,263 shares of Common Stock outstanding after giving effect to the conversion of all outstanding shares of Preferred Stock into Common Stock. Pro forma net tangible book value dilution per share represents the difference between the amount per share paid by purchasers of shares of Common Stock in the offering and the pro forma net tangible book value per share of Common Stock immediately after completion of this offering. After giving effect to the sale of the 2,500,000 shares of Common Stock offered by the Company hereby at an assumed initial public offering price of $12.00 per share and the application of the net proceeds therefrom and the receipt of $1,999,992 from DuPont Merck for the purchase of 166,666 shares of Common Stock to be issued in a private transaction concurrent with the closing of this offering at an assumed initial public offering price of $12.00 per share, the Company's pro forma net tangible book value at March 31, 1998 would have been $44,949,006, or $4.76 per share. This represents an immediate increase in pro forma net tangible book value of $2.45 per share to existing stockholders and an immediate dilution in pro forma net tangible book value of $7.24 per share to new investors. The following table illustrates this per share dilution: Assumed initial public offering price per share............. $12.00 Pro forma net tangible book value per share as of March 31, 1998............................................... $2.31 Increase per share attributable to new investors.......... 2.45 ----- Pro forma net tangible book value per share after this offering.................................................. 4.76 ------ Net tangible book value dilution per share to new investors.............................................. $ 7.24 ======
The following table summarizes, on a pro forma basis as of March 31, 1998, the differences between existing stockholders and the new investors with respect to the number of shares of Common Stock purchased from the Company, the total consideration paid and the average price per share paid:
SHARES PURCHASED TOTAL CONSIDERATION ------------------- --------------------- AVERAGE PRICE NUMBER PERCENT AMOUNT PERCENT PER SHARE --------- ------- ----------- ------- ------------- Existing stockholders.... 6,767,263 71.7% $41,038,247 56.2% $ 6.06 New investors............ 2,666,666 28.3 31,999,992 43.8 12.00 --------- ----- ----------- ----- Total.......... 9,433,929 100.0% $73,038,239 100.0% ========= ===== =========== =====
Other than as noted above, the foregoing computations assume the exercise of no stock options or warrants after March 31, 1998. As of March 31, 1998, options to purchase 662,676 shares of Common Stock were outstanding, with a weighted average exercise price of $0.87, and warrants to purchase 62,500 shares of Common Stock were outstanding, with an exercise price of $8.40 per share. Subsequent to March 31, 1998, the Company granted options to purchase an aggregate of 221,525 shares of Common Stock at a weighted average exercise price of $2.00 per share. To the extent these options and warrants are exercised, there will be further dilution to new investors. See "Risk Factors -- Immediate and Substantial Dilution," "Capitalization," "Management," "Description of Capital Stock" and Note 5 of Notes to Financial Statements. 21 23 SELECTED FINANCIAL DATA The selected financial data set forth below with respect to the Company's statements of operations for the years ended December 31, 1995, 1996 and 1997 and with respect to the Company's balance sheet at December 31, 1996 and 1997, are derived from the financial statements of the Company that have been audited by Ernst & Young LLP, independent auditors, which are included elsewhere herein and are qualified by reference to such financial statements. The Company's statement of operations data for the years ended December 31, 1993 and 1994 and the balance sheet data at December 31, 1993, 1994 and 1995 have been derived from the financial statements audited by Ernst & Young LLP, independent auditors, which are not included herein. The statement of operations data for the three-months ended March 31, 1997 and 1998 and the balance sheet data at March 31, 1998 have been derived from unaudited financial statements also appearing herein which, in the opinion of the management, include all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the financial position and results of operations for the unaudited interim periods. The operating results for the three months ended March 31, 1998 are not indicative of the results that may be expected for the full fiscal year ending December 31, 1998 or for any subsequent period. 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.
THREE MONTHS YEAR ENDED DECEMBER 31, ENDED MARCH 31, ----------------------------------------------- ----------------- 1993 1994 1995 1996 1997 1997 1998 ------- ------- ------- ------- ------- ------- ------- (IN THOUSANDS, EXCEPT PER SHARE DATA) STATEMENT OF OPERATIONS DATA: Revenue: Collaborative agreements: Related party................... $ -- $ -- $ -- $ -- $ 250 $ -- $ 750 Unrelated parties............... -- -- -- 3,586 7,065 1,476 3,794 Grant income......................... -- 22 299 347 264 72 100 ------- ------- ------- ------- ------- ------- ------- -- 22 299 3,933 7,579 1,548 4,644 Expenses: Research and development............. 682 3,799 5,173 7,724 10,337 2,459 3,288 General and administrative........... 603 1,288 1,937 2,471 2,791 671 1,203 Income (loss) from operations........... (1,285) (5,065) (6,811) (6,262) (5,549) (1,582) 153 ------- ------- ------- ------- ------- ------- ------- 1,285 5,087 7,110 10,195 13,128 3,130 4,491 ------- ------- ------- ------- ------- ------- ------- Interest income......................... 8 237 453 187 326 60 283 Interest expense........................ (53) (76) (124) (134) (517) (152) (101) ------- ------- ------- ------- ------- ------- ------- Net income (loss)....................... $(1,330) $(4,904) $(6,482) $(6,209) $(5,740) $(1,674) $ 335 ======= ======= ======= ======= ======= ======= ======= Pro forma net income (loss) per share, $ (1.20) $ 0.05 basic and diluted(1)................. ------- ------- Number of shares used in computing pro forma net income (loss) per share(1): Basic.............................. 4,776 6,628 Diluted............................ 4,776 6,875
DECEMBER 31, ---------------------------------------------------- MARCH 31, 1993 1994 1995 1996 1997 1998 -------- -------- -------- -------- -------- --------- (IN THOUSANDS) BALANCE SHEET DATA: Cash, cash equivalents and short-term $ 614 $ 11,384 $ 4,211 $ 5,460 $ 20,866 $ 20,671 investments............................ Working capital........................... 259 10,294 3,616 2,606 15,379 14,635 Total assets.............................. 1,756 13,669 6,866 9,047 23,838 24,755 Long-term obligations, less current 212 488 513 2,746 1,548 1,344 portion................................ Accumulated deficit....................... (1,410) (6,314) (12,796) (19,005) (24,745) (24,410) Total stockholders' equity................ 1,188 12,065 5,574 1,512 15,164 15,649
- ------------------------------ (1) Computed on the basis described in Note 1 of Notes to Financial Statements. 22 24 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis should be read in conjunction with "Selected Financial Data" and the Financial Statements and Notes thereto included elsewhere in this Prospectus. Except for the historical information contained herein, the discussion in this Prospectus contains certain forward-looking statements that involve risks and uncertainties, such as statements of the Company's plans, objectives, expectations and intentions. The cautionary statements made in this Prospectus should be read as being applicable to all related forward-looking statements wherever they appear in this Prospectus. The Company's actual results could differ materially from those discussed here. Factors that could cause or contribute to such differences include those discussed in "Risk Factors," as well as those discussed elsewhere herein. See "Special Note Regarding Forward-Looking Statements" on page 17 of this Prospectus. OVERVIEW The Company was incorporated in July 1992 and has devoted substantially all of its resources since that time to research and development in order to identify proprietary drug targets and discover novel small molecule drugs that regulate genes and the production of disease-causing proteins. Signal, through both internally funded programs and in collaboration with its pharmaceutical and biopharmaceutical partners, is working to identify gene regulating drug targets and potential products for treating autoimmune and inflammatory diseases, diseases associated with bone metabolism, neurological and cardiovascular diseases, cancer and viral infections. The Company has incurred significant losses since inception, with an accumulated deficit of $24.4 million as of March 31, 1998, due primarily to ongoing expenditures related to its research programs. The Company expects to continue to incur a substantial increase in expenditures and operating losses for at least the next several years as it expands its target and drug discovery and development efforts. Such expansion will result in increases in research and development expenses, general and administrative expenses and related capital expenditures. The Company's results of operations have fluctuated from period to period and likely will continue to fluctuate substantially in the future based upon the timing and composition of funding under various collaborative agreements, the initiation and expansion of research and development programs, the acquisition of technologies, compound libraries and product rights as well as the progress of its research and development programs. Results of operations for any period may be unrelated to results of operations for any other period. In addition, historical results should not be viewed as indicative of future operating results. See "Risk Factors--Limited Operating History; Early Stage of Development," "--Technological Uncertainty," "--Uncertainties Associated with Product Development," "--Dependence on Pharmaceutical and Biopharmaceutical Collaborations and Milestone Payments," "--Future Capital Requirements; Uncertainty of Additional Funding" and "--Governmental Regulation; No Assurance of Regulatory Approvals." A key element of the Company's strategy is to enter into collaborations with pharmaceutical and biopharmaceutical companies in order to enhance certain of its target and drug discovery programs and to fund its capital requirements. The Company's principal sources of revenue for the next several years are expected to consist of license fees and upfront payments, research funding and milestone payments under such collaborations, payments from future collaborations, licensing arrangements, government grants, if any, and interest income. To date, the Company's revenue has been attributable primarily to collaborative arrangements with the following partners: Tanabe, which was entered into in March 1996 and concluded in March 1998; Organon, which was entered into in July 1996; Roche Bioscience, which was entered into in August 1996; Ares-Serono, which was entered into in November 1997; DuPont Merck, which was entered into in December 1997; and Nippon Kayaku, which was entered into in February 1998. Under these collaborative arrangements, the Company has received payments of $20.8 million to date, of which $15.4 million has been recognized as revenue. See "Risk Factors--Dependence on Pharmaceutical and Biopharmaceutical Collaborations and Milestone Payments" and "Business--Research and Development Partners." 23 25 RESULTS OF OPERATIONS COMPARISON OF THREE MONTHS ENDED MARCH 31, 1998 AND 1997 Revenue. Since its inception, Signal has received revenue principally from its corporate collaborators, as well as from government research grants, and has received no revenue from product sales. Revenue for the three months ended March 31, 1998 increased to $4.6 million from $1.5 million for the three months ended March 31, 1997. The increase was attributable primarily to (i) the additional collaborative agreements that were in place during 1998, which resulted in the Company's recognition of additional revenue from license fees and research funding; (ii) the Amendment to the Collaborative Development and Licensing Agreement with Tanabe which resulted in the one-time recognition of additional research funding; and (iii) increased research funding from Tanabe, Organon and Roche Bioscience as a result of increased staffing under their respective research programs. Timing and amount of revenues from corporate collaborations is expected to vary on a quarterly basis. Research and Development Expenses. The Company's research and development expenses for the three months ended March 31, 1998 increased to $3.3 million from $2.5 million for the three months ended March 31, 1997. The increase was due largely to the hiring of additional personnel, increased travel expenses, equipment depreciation expenses, facility expansion, patent-related activities, the initiation of additional academic research collaborations and amortization of deferred compensation. The Company expects research and development expenses to increase significantly in the future. General and Administrative Expenses. General and administrative expenses for the three months ended March 31, 1998 increased to $1.2 million from $671,000 for the three months ended March 31, 1997. The increase was due primarily to the hiring of additional personnel, equipment depreciation expenses, legal fees, fees associated with new business development activities and amortization of deferred compensation. The Company expects general and administrative expenses to increase in the future to support the expansion of its research and business development activities and increased expenses associated with being a public company. Interest Income (Expense), Net. Net interest income for the three months ended March 31, 1998 increased to $182,000 from a net interest expense of $92,000 for the three months ended March 31, 1997. The increase was due primarily to increased income as a result of higher average cash balances and lower interest expense as a result of lower average capital lease and debt obligations. Net Income (Loss). Net income for the three months ended March 31, 1998 increased to $335,000 from a net loss of $1.7 million for the three months ended March 31, 1997. The Company's profitability during the three months ended March 31, 1998 was due largely to the one-time recognition of additional research funding resulting from the amended agreement with Tanabe. The Company does not expect continued profitability in the near future. COMPARISON OF YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 Revenue. Revenue for the year ended December 31, 1997 increased to $7.6 million from $3.9 million and $299,000 for the years ended December 31, 1996 and 1995, respectively. The increase in 1997 from 1996 was attributable primarily to the Company's recognition of an aggregate of $7.3 million in revenue from license fees and research funding from Ares-Serono, Tanabe, Roche Bioscience and Organon during 1997, a 104% increase over the $3.6 million recognized during 1996. Revenue for 1995 was comprised solely of a research grant from the National Institutes of Health (the "NIH"). Research and Development Expenses. The Company's research and development expenses for the year ended December 31, 1997 increased to $10.3 million from $7.7 million and $5.2 million for the years ended December 31, 1996 and 1995, respectively. These increases were due primarily to the hiring of additional personnel, facility expansion, equipment depreciation expenses, increased patent-related activities, acquisition of compound libraries, the purchase of research materials and laboratory 24 26 supplies for expansion of the Company's research programs and the initiation of additional academic research collaborations. General and Administrative Expenses. The Company's general and administrative expenses for the year ended December 31, 1997 increased to $2.8 million from $2.5 million and $1.9 million for the years ended December 31, 1996 and 1995, respectively. These expenses increased primarily as a result of increased compensation paid to executive management, the hiring of additional personnel, facility expansion and related amortization expenses. Interest Income (Expense), Net. Net interest income (expense) for the years ended December 31, 1997, 1996 and 1995 was $(191,000), $53,000 and $329,000, respectively. The decrease in net interest income from 1996 to 1997 was primarily due to an increase in interest expense attributable to a $3.0 million secured promissory note used for general corporate purposes and working capital during 1997. The decrease in net interest income from 1995 to 1996 resulted primarily from lower average cash balances during 1996. Net Income (Loss). Net loss for the years ended December 31, 1997, 1996 and 1995 was $5.7 million, $6.2 million and $6.5 million, respectively. Income Taxes. At December 31, 1997, the Company had federal and state net operating loss carryforwards of approximately $23.3 million and $4.8 million, respectively. The federal and state tax loss carryforwards will begin expiring in 2007 and 1998, respectively, unless previously utilized. Future utilization of these carryforwards may be limited in any one fiscal year pursuant to the Internal Revenue Code and similar state provisions; however, the annual limitation will not prevent the entire amount of the carryforwards from being used during the carryforward period. Therefore, the Company does not believe any such limitation will have a material effect upon the utilization of these carryforwards. LIQUIDITY AND CAPITAL RESOURCES Since inception, the Company has financed its operations primarily through private placements of Preferred Stock, funds provided under the Ares-Serono, Roche Bioscience, Nippon Kayaku, Organon, DuPont Merck and Tanabe collaborative agreements, and, to a lesser extent, through debt and equipment financings, government research grant revenue and interest income. As of March 31, 1998, the Company had received $39.6 million in net proceeds from the sales of equity securities, $20.8 million under its collaborative agreements, $5.3 million in debt and equipment financings, $1.0 million in research grants from the NIH and $1.5 million in interest income. As of March 31, 1998, the Company had approximately $20.7 million in cash, cash equivalents and short-term investments. Net cash used in operations was $2.3 million, $2.4 million and $6.7 million in 1997, 1996 and 1995, respectively. Net cash used in operations after 1995 declined due primarily to initial license payments and research funding under the Company's collaborative agreements, coupled with a lower net loss during 1997. As of March 31, 1998, the Company had invested $5.4 million in property and equipment, primarily for facility improvements and laboratory and office equipment. The Company has financed substantially all of its equipment through capital leases and equipment note obligations. At March 31, 1998, the Company had outstanding long-term debt of $2.1 million under its Secured Promissory Note held by MMC/GATX Partnership No. 1 issued on December 2, 1996 (the "Secured Promissory Note"). The principal amount of the Secured Promissory Note is payable in monthly installments of $88,334, with the final monthly payment scheduled for May 31, 2000. The Secured Promissory Note is secured by substantially all of the Company's assets except for the Company's intellectual property. The terms of the loan limit the Company's ability to incur additional debt, repurchase its stock and pay dividends. The Company was in compliance with all covenants under the arrangement as of March 31, 1998. 25 27 The Company believes the net proceeds of this offering, together with its existing capital resources, committed revenue from its existing collaborations and interest income should be sufficient to fund its anticipated operating expenses and capital requirements at least through the end of the year 2000. These funding requirements include continued and increased expenditures for research and development activities, as well as expenditures related to leasehold improvements, the purchase of additional laboratory and other equipment, the purchase of technology, compound libraries and product rights and the repayment of debt. The Company has not entered into any formal commitments to use the proceeds from the offering for increased personnel, capital expenditures or any other purpose. There can be no assurance that changes in the Company's research and development plans and collaborations, the acquisition of additional technology, compound libraries and product rights, or other changes affecting the Company's operating expenses will not result in the expenditure of available resources before such time, and in any event, the Company will need to raise substantial additional capital to fund its operations in future periods. The Company intends to seek additional funding through collaborative arrangements, public or private equity or debt financings, equipment financings or other financing sources that may be available. If additional funds are raised through the sale of equity securities, substantial dilution to existing stockholders may result, and debt financing, if available, may involve restrictive covenants. Further, there can be no assurance that additional financing will be available on acceptable terms, if at all. If adequate funds are not available, the Company may be required to delay, or reduce the scope of, or eliminate one or more of its research or development programs or to obtain funds through strategic collaborations that are on unfavorable terms or that may require the Company to relinquish rights to certain of its technologies, product candidates, products or marketing territories that the Company would otherwise seek to retain. The failure of the Company to raise capital when needed could have a material adverse effect on the Company's business, financial condition and results of operations. See "Risk Factors -- Future Capital Requirements; Uncertainty of Additional Funding." IMPACT OF YEAR 2000 Some older computer programs were written using two digits rather than four to define the applicable year. As a result, those computer programs have time-sensitive software that recognize a date using "00" as the year 1900 rather than 2000. This failure to use four digits to define the applicable year has created what is commonly referred to as the "Year 2000 Issue" and could cause a system failure or miscalculations causing disruption of operations, including a temporary inability to process transactions or engage in similar normal business activities. The Company recognizes the need to ensure that its operations will not be adversely impacted by the Year 2000 Issue. The Company does not believe that it has material exposure to the Year 2000 Issue with respect to its own information systems since its existing systems correctly define the Year 2000. Any required expenditures will be expensed as incurred. The Company intends to assess its position regarding the Year 2000 Issue with respect to external information systems by the end of 1998. This process will entail communications with significant business partners, customers, suppliers, financial institutions, insurance companies and other parties that provide significant services to the Company. The Company is currently unable to predict the extent the Year 2000 Issue will affect these parties or the extent to which the Company would be vulnerable to any such party's failure to remediate any Year 2000 Issue on a timely basis. 26 28 BUSINESS Signal Pharmaceuticals, Inc. ("Signal" or the "Company") is an integrated target and drug discovery company focused on identifying new classes of small molecule drugs that regulate genes and the production of disease-causing proteins. The Company applies advanced cellular, molecular and genomic technologies to map gene regulating pathways in cells and to identify proprietary molecular targets that activate or deactivate genes and result in disease. Signal is advancing the application of genomics beyond identifying and elucidating the functions of genes to designing novel classes of disease-modifying drugs that selectively regulate the activation of disease-causing genes. The Company conducts its target and drug discovery programs both independently and with its five collaborative partners, Ares-Serono, Roche Bioscience, Nippon Kayaku, Organon, and DuPont Merck. BACKGROUND THE ROLE OF GENES IN HEALTH AND DISEASE Genes control all cellular functions responsible for maintaining human health by serving as blueprints for the production of proteins in cells. When activated, usually in response to specific stimuli, a gene is expressed and produces a protein. Proteins, including receptors, enzymes, cytokines and hormones, initiate and carry out biochemical reactions that direct a cell's normal biological functions. These functions include cell growth and differentiation, cell activation and cell death. Recent advances in cellular and molecular biology have shown that malfunctions in gene expression either cause or predispose humans to most diseases. Such malfunctions cause cells to produce inappropriate amounts or types of proteins. For example, the uncontrolled proliferation of cells characteristic of inflammatory diseases and cancer is the result of over-activation of specific genes and the subsequent over-production of proteins, such as cytokines and regulatory enzymes. Conversely, under-expression of critical genes and their protein products, such as tumor suppressors and growth factors, also may give rise to disease, including cancer and neurological disorders. THE ROLE OF INTRACELLULAR SIGNALING IN GENE REGULATION Genes are selectively activated and suppressed when molecules such as neurotransmitters, hormones or growth factors bind to, and activate, cell surface receptors. This event initiates a cascade of biochemical reactions within a cell, termed "intracellular signaling," in which distinct sets of gene regulating enzymes (typically, kinases and phosphatases) are activated serially to relay information from surface receptors to proteins in the nucleus. These cascades of biochemical reactions culminate in the activation or deactivation of specialized nuclear proteins, known as "transcription factors," that act as molecular switches by binding to the regulatory regions of specific genes to control the level and duration of gene activation and protein production. Together, these cascades of gene regulating enzymes and transcription factors comprise gene regulating, or intracellular signaling, pathways. Recent advances in molecular biology and genomics are facilitating the identification of new gene regulating pathways and specific molecules in these pathways that may serve as novel targets for drug discovery. 27 29 INTRACELLULAR SIGNALING AND GENE REGULATION PATHWAYS [Graphic depicting intracellular signaling and gene regulation pathways. Text down the right side of the graphic identifies the location in the pathways where receptors are stimulated, gene regulating enzymes are activated, transcription factors activate genes, gene expression are initiated, and normal and disease-associated proteins are produced.] Many transcription factors maintain normal expression of essential genes. In response to certain stimuli, transcription factors are activated or "induced" by gene regulating enzymes to increase the level, duration and sets of genes expressed. Gene regulation is a highly coordinated process in which the estimated 100,000 genes that comprise the human genome are switched on and off in specific tissues. The pathways which regulate these genes enable cells to respond to combinations of stimuli by integrating signals from multiple receptors to regulate distinct sets of genes. These pathways are highly interlinked and, when correctly controlled, maintain the body's essential functions. The activity of these pathways varies depending on cell type, permitting the activation of only those subsets of genes that are relevant to a specific cell or tissue type. Normally functioning pathways precisely modulate the level and duration of gene expression, ensuring that cells respond to extracellular stimuli in the appropriate manner. However, when activation of a gene regulating pathway triggers either an under-or over-production of certain proteins, a broad range of diseases can result. LIMITATIONS OF CONVENTIONAL TARGET AND DRUG DISCOVERY Conventional drug discovery efforts principally are focused on identifying compounds that modulate readily accessible extracellular targets, such as cell surface receptors and secreted proteins. Drugs directed toward these extracellular targets have a number of potential limitations in treating complex diseases where molecular mechanisms are located within cells. Therefore, such complex diseases may not be effectively treated using receptor activators or inhibitors. Many diseases, such as inflammatory, neurological and cardiovascular diseases and cancer, continue to represent large unmet medical needs due to difficulties in identifying and targeting the underlying intracellular mechanisms of these diseases. Recent advances in genomics have the potential to significantly improve drug discovery. While initial genomics efforts were directed principally toward the mapping and sequencing of genes, current initiatives also are focused on discerning the functions of specific genes in health and disease. However, there remains a gap between the generation of genomic information and its effective application to drug discovery. An increased understanding of the pathways that regulate the expression of disease-related genes has paved the way for a new drug discovery process. In this process, individual genes and their regulatory pathways may be targeted to prevent the onset and progression of disease. The ability to 28 30 identify proprietary drug targets in gene regulating pathways provides a method for applying genomic information to disease therapy. Drugs designed to intervene at pivotal points in a gene regulating pathway can have a major impact on the downstream production of proteins which cause disease. This approach provides the opportunity to design novel classes of disease-modifying drugs that can alter the course of a disease by targeting underlying mechanisms of disease rather than providing only symptomatic relief. Additionally, drugs can be designed that selectively target gene regulating pathways responsible for abnormal gene expression and disease without affecting healthy cells. SIGNAL'S APPROACH: GENE REGULATING DRUGS Signal is a leader in identifying and elucidating gene regulating pathways and specific targets in these pathways for use in drug discovery. The Company's drug discovery efforts are focused on identifying new classes of small molecule drugs designed to regulate genes through their intracellular signaling pathways. These potential drugs may have wide-ranging clinical application by modulating abnormal expression of genes which cause disease. Several leading pharmaceuticals are now known to function as regulators of gene expression, including cyclosporine for organ transplantation, tamoxifen for cancer therapy and estrogen for osteoporosis. A fundamental advantage of Signal's approach is the ability to target pivotal junctures in specific gene regulating pathways, following the integration of signals from multiple cellular receptors and prior to the production of abnormal levels of proteins. Signal has developed an integrated target and drug discovery platform to identify gene regulating pathways, targets and drug candidates with several important features: Multiple Targets for Therapeutic Intervention. Signal's target discovery efforts are focused on identifying cascades of gene regulating enzymes that activate or suppress genes in a broad range of cell types and disease states. Each of these pathways contains multiple potential drug targets for therapeutic intervention. The Company believes that identifying multiple targets in each of its therapeutic programs increases the likelihood of successfully discovering novel drugs. For example, Signal and its collaborators have identified four gene regulating enzymes in the NF-kB pathway (IKK1, IKK2, NF-kB inducing kinase ("NIK") and inhibitor of kB ("IkB") ligases) which are current or planned targets for the Company's autoimmunity and inflammation, cardiovascular disease and cancer programs. Individual Targets Modulate Multiple Disease-Related Genes. Signal is designing drugs that may be effective in treating diseases where a single target regulates the activation of multiple genes involved in disease. For instance, by targeting a pivotal molecule in a signaling cascade, such as JNK in its autoimmunity and inflammation disease program, the Company is screening for compounds which block the production of a broad set of pathogenic levels of proteins, such as interleukin-2, gamma interferon and tissue-destructive enzymes. In addition, Signal has identified and licensed to Tanabe a lead compound that has demonstrated, in vitro and in animal models, the ability to modulate multiple genes regulated by the AP-1 and NF-kB signaling pathways. Targets Selective for Specific Cell Types. While most gene regulating enzymes, along with the genes they control, are present in each cell of the body, many subtypes of these enzymes and genes function only in specific cell types. Signal is using several approaches to identify drug targets, their specific subtypes and corresponding drug leads which function in a cell-specific manner. For example, Signal researchers and collaborators have shown that JNK3 principally is expressed in brain tissue. When activated, JNK3 has been shown to play a key role in neuronal cell death and in animal models of epilepsy. Targets Selectively Regulate Abnormal Gene Expression. Signal's drug discovery programs principally target inducible gene regulating pathways that may cause abnormal gene expression and give rise to disease. These discovery initiatives focus on regulating genes functioning in an over- or under- activated state, without interfering with normal levels of gene expression required to maintain essential cellular functions. For example, Signal's autoimmunity and inflammation disease program 29 31 focuses on MAP kinase gene regulating pathways that are selectively induced by cytokines and other stress molecules in response to tissue injury. SIGNAL'S STRATEGY The Company's goal is to be a leader in the discovery of small molecule drugs that target gene regulating pathways fundamental to disease processes. To accomplish this goal, the Company pursues the following technology and business strategies: Integrate Advanced Target and Drug Discovery Technologies. Signal integrates an extensive set of target and drug discovery technologies to expedite the application of genomics to the discovery of important new classes of drugs. These technologies include proprietary human cell lines, functional genomics and proteomics, high throughput biochemical and cell-based screening and combinatorial and computational chemistry. Signal believes this extensive set of discovery and preclinical development capabilities provides the Company and its partners with a distinct combination of tools and technologies for target and drug discovery. Applying these capabilities, the Company has successfully elucidated the structure and functions of several clinically important gene regulating pathways, including the NF-kB, AP-1 and p38 pathways, developed a portfolio of 18 drug targets and demonstrated efficacy of its drug leads in animal models of arthritis and osteoporosis. Leverage Targets Across Multiple Diseases. Signal seeks to identify multiple targets within each gene regulating pathway and to select for drug discovery those targets which can be validated in multiple clinical indications. In addition to enhancing the clinical potential of each pathway, this strategy also serves to limit the Company's scientific risk in any one gene regulating pathway or drug target. For example, Signal and its collaborators have demonstrated the role of specific JNK subtypes in mediating key cellular events that give rise to, or exacerbate, autoimmune, inflammatory and neurological diseases and cancer. Build Partner-Funded Business. Signal aggressively pursues collaborations with pharmaceutical partners to fully develop and exploit its pipeline of targets and lead compounds, as well as its discovery technologies. These collaborations provide Signal with multiple potential sources of revenue, enable the Company to diversify scientific and financial risk, and provide access to its collaborators' substantial development, manufacturing and marketing resources. By focusing its efforts on drug discovery and utilizing corporate collaborations to fund the progression of programs from discovery into the clinic, the Company intends to maintain a sustainable level of net cash flow. As these programs mature or any additional corporate collaborations are initiated, the Company may increase its funding of research and development programs. To date, Signal has collaborative agreements with five pharmaceutical partners, has licensed worldwide rights for a drug lead to a sixth partner and has several additional target and drug discovery programs available for future corporate collaborations. Retain Significant Product Commercialization Rights. The Company has retained certain commercialization rights in two of its existing corporate collaborations. These include co-commercialization rights in the U.S. in the Company's collaboration with Ares-Serono and joint worldwide commercial rights, excluding Japan, with Nippon Kayaku. The Company expects to seek to retain certain additional commercialization rights in future corporate collaborations. SIGNAL'S TARGET AND DRUG DISCOVERY TECHNOLOGIES Signal has developed complementary technology platforms designed to identify proprietary drug targets and discover novel drugs active on these targets. The Company believes that, together, these integrated target and drug discovery capabilities enable it to proceed rapidly from target identification to compound screening and lead optimization. To date, the Company and its collaborators have identified 18 drug targets, are working to identify seven additional targets and are continuing to elucidate new gene regulating pathways and their targets. The Company has developed and initiated screening in 16 drug discovery assays and is optimizing drug leads in three therapeutic areas. 30 32 Signal's integrated discovery capabilities are depicted below: INTEGRATED PLATFORM FOR THE DISCOVERY OF GENE REGULATING TARGETS AND DRUGS [Graphic depicting Signal's integrated platform for the discovery of gene regulating targets and drugs. The graphic is a flowchart depicting Signal capabilities in (1) target discovery as proprietary human cell lines, functional genomics and proteomics, gene regulating target discovery and target validation, and (2) drug discovery as asset development and compound libraries, lead discovery, lead optimization, gene regulating drug candidates.] DISCOVERY PLATFORM FOR GENE REGULATING TARGETS Signal is developing and applying advanced cellular, molecular and genomic technologies to discover clinically important targets that are the focus of the Company's drug discovery programs and corporate collaborations. These discovery technologies include: Proprietary Human Cell Lines. The Company has developed a proprietary technology to immortalize and perpetualize human cells. Signal uses these human cell lines to identify and validate novel gene regulating pathways and drug targets, and in screening assays for drug discovery. These cell lines are designed to include the full set of functional genes and related pathways involved in both normal and pathogenic cellular functions. Signal uses proprietary human cell lines to develop in vitro models of important disease processes, including neurodegeneration, bone formation and resorption and 31 33 vascular disease. Signal's proprietary human bone cell co-culture system closely mimics the natural environment of bone metabolism, and is used by Signal for target identification and validation, as well as for testing drug leads prior to preclinical evaluation in animal models. Functional Genomics and Proteomics. In many of its corporate collaborations, Signal utilizes functional genomics and proteomics to elucidate the role genes and their protein products play in health and disease. Signal has implemented advanced genomic technologies to expedite the identification and prioritization of disease-associated gene targets. These include proprietary methods for differential gene display, subtraction hybridization and gene chip arrays. To decipher the gene regulating pathways involved in specific diseases, Signal is developing highly sensitive protein microanalysis capabilities that integrate peptide chromatography, microfluidics and mass spectrometry for identification of potential drug targets that regulate specific disease pathways. Signal utilizes these gene and protein discovery tools, in combination with the Company's proprietary cell lines, to generate a more comprehensive profile of signaling pathways involved in diseases and to facilitate the rapid identification of novel and specific therapeutic targets. For example, Signal is applying functional genomics technologies to identify and characterize the role of certain genomic targets and their regulatory pathways in neuronal, cardiovascular and gynecological disease therapy. Target Discovery and Validation. The Company applies cellular and molecular biology techniques to elucidate the regulatory pathways of disease-related genes. An initial step in this process involves mapping the regulatory regions of disease-related genes to identify which transcription factors selectively activate or inhibit each gene's expression. Signal then utilizes genomics and proteomics to identify and characterize specific enzyme targets in a pathway that regulate the activation of these transcription factors. When novel gene regulating enzymes are identified, the Company applies bioinformatic tools to search proprietary and public gene databases and to identify subtypes of these targets with distinct therapeutic applications and specificity for different tissues. After a potential target has been identified, the Company utilizes antisense, mutant enzymes, gene knockout models, antibodies and other techniques to validate the role of the target in specific disease processes and its utility for drug discovery. Such target validation is a critical step before committing resources to assay development and screening for target-specific drug leads. DISCOVERY PLATFORM FOR GENE REGULATING DRUGS Signal develops and integrates several advanced technologies for lead discovery and optimization. The Company's lead discovery platform permits rapid, target-directed screening of diverse compound libraries in a broad range of high throughput assays. The Company optimizes drug leads by integrating combinatorial and computational chemistry with technologies for profiling the effects of drug leads on specific targets in cellular pathways. This facilitates the design of drugs that properly regulate gene expression and protein production. These drug discovery activities are coordinated using an integrated cheminformatics and bioinformatics data management system to facilitate library design, primary and secondary screening and the subsequent design and synthesis of optimized drug candidates. Assay Development. Signal develops and utilizes proprietary biochemical and cell-based assays to screen for compounds that regulate gene expression in a target- and cell-specific manner. Signal researchers have designed modular systems for developing biochemical and cell-based assays, enabling the Company to substitute different drug targets into standardized assay formats for use in various discovery programs. Signal develops and uses biochemical assays to screen compounds for activity on specific drug targets. These biochemical assays are designed to mimic the functional activity of a drug target in its native cellular environment. The Company's cell-based assays facilitate the identification of compounds that modulate gene transcription through distinct intracellular pathways and in specific cell types. Active compounds identified in these primary assays are rapidly qualified in a series of secondary pharmacological assays which provide further information regarding a compound's clinical potential. These secondary assays measure the effects of potential drug leads on disease-related genes and proteins, including inhibition of specific gene regulating enzymes, inhibition of abnormal protein 32 34 production, cytotoxicity, potency and target selectivity. Signal has developed and initiated screening in 16 drug discovery assays and also is developing additional new high throughput screening assays. High Throughput Screening and Compound Library. Signal utilizes robotics-based high throughput screening systems for rapid, target-specific screening of diverse compound libraries. These automated systems enhance the precision, reproducibility and integration of chemical and biological data. The Company's screening library currently consists of approximately 350,000 diverse compounds, which include small molecule, natural product and combinatorial compounds. For example, Signal currently screens more than 60,000 compounds per month on four kinase targets and plans to significantly increase its screening throughput and drug targets. To expedite lead identification, Signal researchers have developed a KAST that enables the Company to screen on multiple kinase targets in parallel. The KAST system provides activity and specificity data across multiple kinase targets for a given screening library. Lead Optimization: Combinatorial, Computational and Structural Technologies. Combinatorial chemistry involves the rapid synthesis of large and diverse compound libraries by sequentially adding different molecular building blocks to a core chemical structure. Signal has developed a proprietary SKIL based on structures of both known kinase inhibitors and data generated by its internal screening programs. The SKIL is being applied in these programs with the goal of rapidly identifying more selective and potent inhibitors of gene regulating kinases. The Company uses combinatorial chemistry techniques principally to expedite the optimization of lead compounds and also to build target-based combinatorial libraries for subsequent screening. Signal's combinatorial chemistry capabilities also may help strengthen the Company's patent position in a particular chemical series by generating a relatively large analog library around an active compound. To expedite the lead optimization process, Signal also uses computational chemistry to guide the design and synthesis of new compounds. Computational chemistry involves the use of computer-based algorithms to model the structure of an active compound and its interaction with a drug target to generate directed libraries for screening. Alternatively, computational chemistry can be used to construct "virtual libraries" around core chemical structures, providing a method for examining large numbers of potential analogs prior to synthesizing representative compounds for screening. Signal researchers have designed a computer-generated three-dimensional model of the JNK enzyme's structure and its active site. Using computer-based simulation, a chemical database of more than 700,000 compounds has been "virtually" screened to identify potential JNK inhibitors. Signal plans to use this technology to develop other target-directed libraries. These structure-based drug design efforts are intended to further enhance a lead compound's potency, selectivity, bioavailability and safety. SIGNAL'S GENE REGULATING PATHWAYS The Company is conducting target and drug discovery programs directed toward five mammalian gene regulating pathways. Many of these pathways regulate the activation of multiple disease-related genes and have multiple drug targets, allowing the Company to pursue a diverse number of therapeutic programs for each pathway. The Company expects that ongoing efforts to map and sequence the human genome, including Signal's internal genomics initiatives, will lead to an expansion in the number of known disease-related genes and further enhance the Company's ability to identify additional gene regulating pathways and drug targets. In addition, the Company is conducting target and drug discovery programs directed toward five viral gene regulating pathways. 33 35 SELECTED HUMAN GENE REGULATING PATHWAYS TARGETED BY SIGNAL [Graphic depicting selected human gene regulating pathways targeted by Signal, specifically the NF-kB pathway, MAP kinase pathways and estrogen-regulated gene pathway. The graphic depicts a flow chart for each pathway showing the stimuli, intracellular signaling, gene activation and protein production.] NF-KB GENE REGULATING PATHWAY NF-kB plays a pivotal role in autoimmune, inflammatory and cardiovascular disease processes by regulating cytokine genes, such as TNF-a, IL-1, IL-2, IL-6, IL-8, along with genes which code for cell adhesion molecules and the COX-2 and iNOS enzymes. In addition, studies published in Science link NF-kB to increased cancer cell resistance to radiation and chemotherapies and demonstrate the ability of NF-kB inhibitors to enhance the sensitivity of cancerous cells to these therapies. NF-kB is a family of transcription factors held in the cytoplasm of cells by IkB. In response to extracellular stimuli, IkB is degraded, allowing NF-kB to migrate into the nucleus and activate select genes which elicit important immunological and proliferative responses. Signal researchers and collaborators have identified three proprietary drug targets which regulate NF-kB activation by processing IkB prior to its degradation: (i) two IkB kinases which Signal terms "IKK1" and "IKK2" and (ii) an IkB ligase, which Signal currently is cloning and characterizing. The discovery of IKK1 and IKK2 by Signal researchers and collaborators was reported in 1997 in the journals Science, Nature and Cell. In addition, as part of its collaboration with Ares-Serono, the Company has obtained rights to a fourth novel target in the NF-kB pathway, NIK. The Company believes that drugs which inhibit IKK1 and IKK2, NIK and IkB ligases will prevent NF-kB activation and the subsequent expression of select disease-associated genes. Signal has filed patent applications for the IKK1 and IKK2 and an IkB ligase, and Ares-Serono's research 34 36 collaborator, the Weizmann Institute, has filed patent applications for the NIK gene regulating enzyme. MAP KINASE GENE REGULATING PATHWAYS Signal has established a leading position in the discovery of proprietary drug targets in mitogen-activated protein kinase, or MAP kinase, pathways. MAP kinase pathways consist of distinct cascades of regulatory enzymes that serially activate one another to control the expression of specific sets of genes in response to growth factors, cytokines, tumor promoters and other biological stimuli. These pathways control cell proliferation and metabolism and cell survival in response to tissue injury, infection, malignancy and other diseases. MAP kinase gene regulating pathways provide novel targets for drug discovery in a wide range of disease processes, including autoimmune and inflammatory diseases, diseases associated with bone metabolism, neurological and cardiovascular diseases and cancer. Signal's researchers, scientific founders and academic collaborators have identified nine proprietary targets in MAP kinase pathways, including targets in the JNK and p38 MAP kinase pathways. JNK Gene Regulating Pathway Activation of the JNK gene regulating pathway increases the expression of a set of autoimmune and inflammatory genes, including IL-2 and gamma interferon. There are multiple subtypes of the JNK regulatory enzyme, each of which induces the expression of genes in a cell- and stimulus-specific manner. In 1993, Dr. Michael Karin at the University of California, San Diego, a scientific founder of the Company, and Dr. Roger Davis at the University of Massachusetts, a Scientific Advisor of the Company, discovered two novel kinases in the JNK pathway. These regulatory enzymes (termed "JNK1" and "JNK2") are pivotal activators of c-Jun, a component of AP-1 and other transcription factors, and genes under c-Jun's control. Signal researchers subsequently have cloned and sequenced the upstream activator of the JNK regulatory enzymes, termed JNKK, which also may serve as a target for drug discovery. The over-activation of JNK causes numerous diseases, including autoimmune, inflammatory and neurological diseases and proliferative cancers. Drugs which inhibit JNK activation are expected to selectively block the over-activation of inducible genes, and not affect normal cellular functions, since JNKs do not regulate normal gene expression. One of the Company's collaborators, Dr. Roger Davis, reported in 1997 in the journal Nature that mice engineered to be deficient in the brain-specific JNK subtype, JNK3, are resistant to experimentally induced seizure and associated neuronal cell death. JNK3 inhibitors therefore may have therapeutic value for treating epilepsy, as well as neurodegeneration associated with Alzheimer's disease, Parkinson's disease, stroke and head trauma. The Company has exclusively licensed certain rights to three issued U.S. patents and related patent applications with regard to JNK and its use in drug discovery. p38 Gene Regulating Pathway Activation of the p38 gene regulating pathway causes the expression of multiple cytokine genes, including IL-1, IL-6, IL-8 and TNF-a, which regulate the development and proliferation of cells in response to disease and tissue injury. To date, the Company and its academic collaborators have identified three proprietary drug targets in the p38 pathway. One such target is p38-2, a subtype of p38, which is highly expressed in heart and skeletal muscle and which is activated by stress-inducing stimuli and proinflammatory cytokines. The second target discovered in the p38 pathway is MEK6, a novel MAP kinase which activates p38 in vivo and which is highly expressed in skeletal muscle. Signal researchers have validated the role of MEK6 in regulating the production of IL-1 and TNF-alpha cytokines. The third target in the p38 pathway, MKK3, specifically activates p38 and p38-2 in response to stress stimuli and pro-inflammatory cytokines. When defective, the p38 pathway is believed to play an important role in diseases arising from abnormal production of cytokines, including autoimmune and inflammatory diseases, diseases associated with bone metabolism and neurological and cardiovascular diseases. The Company has licensed exclusive worldwide rights covering MKK3 use in drug discovery and has filed patent applications for p38-2 and MEK6. 35 37 c-Fox Gene Regulating Pathway The transcription factor c-Fox controls the development and activation of certain bone-resorbing cells, termed osteoclasts. These cells continually remove older bone material so that new bone can be deposited in its place. Mice lacking c-Fox demonstrate reduced bone resorption, thereby validating c-Fos as a drug target. Signal researchers have developed a proprietary human bone cell co-culture system to further validate the role of c-Fox in bone metabolism and to evaluate c-Fox inhibitors identified in its screens. The Company believes that drugs which inhibit the expression or activation of c-Fox will slow the overactive bone resorption associated with osteoporosis. Signal is working to map the c-Fox signaling pathway and identify key molecular targets that regulate increased c-Fox expression. In addition to regulating bone metabolism, c-Fox also plays a critical role in tumor formation and cancer metastasis by regulating several properties of malignancy, including the activation of matrix metalloproteinase ("MMP") genes which cause tumors to metastasize. This role of c-Fox has been validated, in part, by animal studies in which tumors induced in mice lacking c-Fox did not metastasize. Conversely, over-expression of c-Fox in mice resulted in the proliferation and spread of highly aggressive forms of cancers. Based on these findings, the Company believes that inhibitors of c-Fox expression and activation may represent an important new class of drugs for cancer therapy. OTHER GENE REGULATING PATHWAYS Estrogen-Regulated Gene Pathway Signal researchers have discovered a novel estrogen-regulated gene pathway by which estrogen inhibits production of IL-6, a cytokine that causes bone resorption. Signal has validated the role of IL-6 in the activation of bone resorption using a proprietary human bone cell co-culture system and in animal models of osteoporosis. This validation is consistent with published studies demonstrating that bone loss can be prevented in mice where the IL-6 gene was deleted. The Company believes that drugs which inhibit IL-6 will slow overactive bone resorption associated with osteoporosis. Viral Gene Regulating Pathways Viral infections occur when viruses insert their genetic material into a host cell and then use the infected cell's biochemical machinery to express viral proteins and produce new viruses. Viral transcription and translation events regulate the production of these viral proteins. Signal and its collaborators have determined the molecular mechanisms of action of key viral transcription factors responsible for replication of HCV, HIV, human papillomavirus ("HPV"), cytomegalovirus ("CMV") and herpes simplex virus ("HSV"). The Company has validated these viral gene regulation factors as drug targets by using genetically modified viruses and antisense oligonucleotides which block viral infections in cells. Signal and its collaborators also have determined the mechanism of action of translational regulation of a key HCV protein and have cloned and expressed another important regulatory enzyme responsible for HCV replication. In addition, one of Signal's academic collaborators has identified a novel function for a key HIV target which may facilitate the discovery of novel HIV inhibitors. 36 38 SIGNAL'S DRUG DISCOVERY PROGRAMS Signal's drug discovery programs are directed toward autoimmunity and inflammation, bone metabolism, neurological disease, cardiovascular disease, cancer and viral infections, and are summarized in the following table:
PROGRAM/TARGET CURRENT INDICATIONS(1) STATUS(2) COMMERCIAL RIGHTS(3) - ---------------------- ------------------------------- ------------------ -------------------- AUTOIMMUNITY AND INFLAMMATION AP-1 / NF-kB........ Lead Optimization Tanabe JNK1 and 2.......... Rheumatoid Arthritis Lead Optimization Signal IKK1 and 2.......... Osteoarthritis Screening Signal, Ares-Serono p38-2............... Allergy Screening Signal NIK................. Asthma Assay Development Signal, Ares-Serono MEK6................ Inflammatory Bowel Disease Assay Development Signal MKK3................ Psoriasis Assay Development Signal JNKK1 and 2......... Transplant Rejection Assay Development Signal IkB Ligases......... Target Discovery Signal, Ares-Serono BONE METABOLISM IL-6................ Osteoporosis Lead Optimization Signal c-Fos............... Paget's Disease Assay Development Signal Bone Mitogenesis.... Bone Repair Target Discovery Signal NEUROLOGY PNS................. Peripheral Neuropathies Lead Optimization Signal, Nippon Kayaku JNK1 and 2.......... Neurodegeneration Screening Signal JNK3................ Neurodegeneration Assay Development Signal CNS Cell Lines...... Neurodegeneration, Stroke, Head Assay Development Trauma Target Discovery Signal PNS Cell Lines...... Assay Development/ Pain, Incontinence Target Discovery Roche Bioscience CNS Genomic Neurodegeneration, Targets............... Psychiatric Diseases Target Discovery Organon CARDIOVASCULAR JNK1 and 2.......... Ischemia Lead Optimization Signal IKK1 and 2.......... Atherosclerosis Screening Signal, Ares-Serono p38-2............... Ischemia Screening Signal NIK................. Atherosclerosis Assay Development Signal, Ares-Serono JNK3................ Ischemia Assay Development Signal MEK6................ Ischemia Assay Development Signal IkB Ligases......... Atherosclerosis Target Discovery Signal, Ares-Serono Vascular Genomic Targets............... Atherosclerosis, Ischemia Target Discovery Organon CANCER JNK1 and 2.......... Lead Optimization Signal IL-6................ Lung Cancer Lead Optimization Signal IKK1 and 2.......... Breast Cancer Screening Signal, Ares-Serono NIK................. Ovarian Cancer Assay Development Signal, Ares-Serono JNKK1 and 2......... Myeloma Assay Development Signal c-Fos............... Leukemia Assay Development Signal IkB Ligases......... Target Discovery Signal, Ares-Serono VIROLOGY Various............. Hepatitis C Virus Assay Development Signal, DuPont Merck Various............. Human Immunodeficiency Virus Assay Development Signal, DuPont Merck ICP4................ Herpes Simplex Virus (Types 1, 2) Screening Signal IE86................ Cytomegalovirus Screening Signal E2.................. Human Papillomavirus Screening Signal
- ------------------------------ (1) All diseases referenced by brackets are potential clinical indications for each target listed in the respective therapeutic program. (2) LEAD OPTIMIZATION indicates that Signal and/or its pharmaceutical partners are applying combinatorial and computational chemistry, as well as structure-based drug design, to enhance the potency, selectivity, bioavailability, safety and other pharmaceutical properties of active compounds. SCREENING indicates that Signal is testing libraries of organic small molecules and natural products in biochemical and/or cell-based assays to identify compounds which either inhibit or induce activation of a drug target. ASSAY DEVELOPMENT indicates that Signal is creating biochemical and/or cell-based in vitro assays which incorporate a specific drug target and are used to identify compounds which regulate the drug target. TARGET DISCOVERY indicates that Signal is identifying new disease-related genes and their protein products, cloning and characterizing novel enzymes and other proteins which regulate activation of disease-related genes and is validating the utility of these regulatory proteins as drug targets. (3) See "--Research and Development Partners." 37 39 AUTOIMMUNE AND INFLAMMATORY DISEASE PROGRAM The human immune system is comprised of cells and biochemical mediators which protect the body from infectious organisms, physical injury and abnormal cellular events such as cancer. Key components of the immune system, such as white blood cells, mount a localized protective or inflammatory response at sites of injury and disease. Autoimmune and inflammatory diseases arise from the over-activation of the immune system resulting in the over-production of immune cells, inflammatory cytokines and tissue-destructive enzymes. These cells and proteins attack and destroy healthy tissue, giving rise to a number of diseases such as rheumatoid arthritis, osteoarthritis, allergies, asthma, inflammatory bowel disease and psoriasis, as well as transplant rejection. In 1996, the U.S. market for anti-inflammatory and immunosuppressive drugs used to treat these diseases totaled approximately $2.0 billion. Many current drugs are relatively non-selective and have dose-limiting side effects. More importantly, although these current drugs alleviate many symptoms of disease, they generally do not target the underlying mechanisms and therefore do not actually modify disease processes. Signal is identifying and cloning drug targets in key gene regulating pathways and screening for new classes of small molecule drugs which regulate autoimmune and inflammatory diseases at the level of gene function. The Company currently is screening for inhibitors of regulatory enzymes in three distinct pathways, NF-kB, JNK and p38. In November 1997, Signal initiated a three-year collaborative development and license agreement with Ares-Serono to discover novel anti-inflammatory, immunosuppressive and certain other drugs that regulate targets in the NF-kB gene regulating pathway. Additionally, in March 1998, the Company licensed to Tanabe worldwide rights to a dual AP-1/NF-kB drug lead with demonstrated oral efficacy in an animal model of arthritis. See "--Research and Development Partners." NF-kB Inhibitor Program NF-kB regulates the activation of multiple cytokine, adhesion molecule and other pro-inflammatory genes. Signal has developed and initiated high throughput screens for inhibitors of NF-kB using proprietary IKK1 and IKK2 biochemical assays and cell-based NF-kB screening assays. The Company also is developing secondary assays which profile the effects of active compounds on a number of other immune-inflammatory genes and proteins. The Company has identified several compounds active on the IKK1 and IKK2 targets. Signal plans to apply combinatorial, computational and structure-based drug design to develop NF-kB inhibitors with enhanced potency, specificity and bioavailability. Signal also is working with collaborators to develop high throughput screens for the NIK drug target and to clone and express the genes for IkB ligases as novel targets for drug discovery. MAP Kinase Inhibitor Program JNK and p38 pathways control the activation of cytokine and other pro-inflammatory genes during an inflammatory response. Company researchers have developed and initiated high throughput screening for JNK1, JNK2, JNK3 and p38 inhibitors using proprietary biochemical and whole cell gene transcription assays. Signal has identified several compounds which inhibit JNK activation with a high level of specificity. The Company is utilizing its SKIL library and a proprietary computer-generated homology model of JNK to design analog compounds with enhanced potency and selectivity. Additionally, Signal is working to validate the role of upstream activators of JNK, JNKK1 and JNKK2, which also may be valid targets for drug discovery. In the p38 pathway, the Company is developing biochemical high throughput screening assays for MEK6 and MKK3 drug discovery, and has initiated screening on its p38-2 target. Dual AP-1/NF-kB Inhibitor Program Signal researchers have identified a new class of compounds that inhibit genes regulated by both the AP-1 and NF-kB transcription factors. In vitro assays and in vivo animal studies indicate this series of compounds is highly selective for T-cells and has potent anti-inflammatory and immunosuppressive activity. Signal's most advanced lead compound has demonstrated efficacy, safety and oral bioavailability in an animal model of arthritis, and the Company has filed patent applications covering the molecule's structure. In March 1998, the Company licensed to Tanabe worldwide rights to this drug lead for autoimmune, inflammatory and other diseases. 38 40 BONE METABOLISM DISEASE PROGRAM Bone disease results from an imbalance in the bone remodeling process, causing either inadequate bone formation or excess bone loss. Diseases involving abnormal bone remodeling include osteoporosis, Paget's disease, hyperthyroidism and periodontal disease. Osteoporosis, which occurs primarily in post-menopausal women due to loss of estrogen, is an age-related disease characterized by persistent loss of bone mass. According to the National Osteoporosis Foundation, in 1997 this disease afflicted more than 28 million people in the United States and over 200 million people worldwide. In 1995, sales of therapeutics to treat osteoporosis totaled more than $6.5 billion. Most current osteoporosis treatments are intended to slow bone resorption. While estrogen replacement therapy remains the primary treatment for most women at risk for osteoporosis, it is associated with risks including cancer and heart disease, endometriosis and abnormal blood clotting. Presently, there are no FDA-approved therapies that increase bone formation. Signal has initiated a broad, multi-target approach to regulating both bone resorption and formation for the treatment of osteoporosis, bone fractures, periodontal disease and other disorders of bone metabolism. The Company is working to develop new classes of drugs that potently and selectively control the mechanisms of bone disease at the level of gene function. Signal has established a target and drug discovery program focused on identifying novel classes of drugs for treating osteoporosis that target the IL-6, c-Fos and certain novel gene regulating targets for inducing bone formation. See "--Research and Development Partners." IL-6 Inhibitor Program The cytokine IL-6 plays a fundamental role in the differentiation and activation of bone-resorbing osteoclasts in women following menopause. Signal has initiated a program to discover drugs that selectively inhibit the production of IL-6 in bone cells through a novel estrogen-regulated gene pathway. This new class of drugs is being designed to inhibit transcription factors responsible for inducing IL-6 gene expression and resulting bone resorption. These drugs, if successfully developed, would provide clinicians with an alternative, non-estrogen treatment for osteoporosis which may minimize some of the adverse side effects of traditional estrogen therapy and which may be used to treat both women and men. Signal has identified novel classes of compounds that inhibit IL-6 production in bone cells. These compounds have demonstrated biological activity in an animal model of osteoporosis and currently are undergoing further optimization. To expedite lead optimization, Signal has developed a series of secondary assays to examine the selectivity and potential side-effects of lead compounds by profiling the compounds' effects on gene and protein expression. c-Fos Inhibitor Program Utilizing its detailed understanding of the AP-1 and other MAP kinase signaling pathways, the Company is pursuing the discovery of drugs to prevent or treat osteoporosis through a c-Fos signaling mechanism. Recent studies have demonstrated that targeted knockout of the c-Fos transcription factor gene results in excess bone resorption and osteoporosis. These academic studies, along with data generated by Signal's in vitro bone co-culture model, establish that the development and activation of bone-resorbing osteoclasts is highly dependent on the presence of the c-Fos transcription factor. Based on these recent findings, the Company is developing a high throughput screening assay to identify novel, non-estrogenic compounds that inhibit c-Fos production and the subsequent over-activation of osteoclasts which cause excess bone loss. Bone Formation Program Signal also has initiated an osteogenic program to identify drugs that induce bone formation. Researchers at Signal have cloned key bone regulating factors and are applying their expertise in MAP kinase signaling to characterize novel pathways in osteoblasts that regulate genes involved in bone growth. To facilitate this process, the Company uses proprietary human bone cell lines to rapidly validate and evaluate drug targets and leads. This system can precisely measure the effects of new targets and leads on each stage of osteoblast cell development, including bone formation. Company 39 41 researchers presently are focused on isolating regulatory mechanisms in these pathways that would serve as targets for drug discovery. Small molecule drugs that regulate these potential targets would complement anti-resorptive therapies and have potentially broader application in treating multiple forms of osteoporosis, including post-menopausal, drug-induced and age-related forms of the disease. To date, no orally active drugs which induce bone formation are available for the treatment of bone diseases and disorders. NEUROLOGICAL DISEASE PROGRAM The human nervous system consists of two distinct components: the central nervous system ("CNS"), which includes the brain and spinal cord, and the PNS, which includes all nerves outside the CNS. Within the PNS, neurons transmit information such as pain to the CNS, and motor pathways transmit commands from the CNS to muscles. Defects or damage in the CNS can lead to Parkinson's disease, Alzheimer's disease, stroke or epilepsy, as well as psychiatric disorders such as depression and schizophrenia. PNS disorders can lead to acute and chronic pain, and peripheral neuropathies caused by diabetes and chemotherapy can cause chronic motor or sensory defects. In 1996, annual worldwide sales of neuropharmaceuticals totaled $8.5 billion, including pharmaceuticals such as anti-depressants, analgesics, psychotropics, anxiolytics and anti-epileptics. Many current CNS and PNS drugs exhibit undesirable side effects. There also are disorders such as chronic pain and Alzheimer's disease for which there are no effective treatments due to a limited understanding of neurological disease processes at the molecular and genomic levels. Signal researchers and collaborators have developed a proprietary cell immortalization technology for producing cloned human neuronal cells that are homogenous, stable and fully functional in vitro for use in target discovery and validation, and in drug screening. This technology is designed to overcome many current limitations of neuropharmaceutical research. Cell lines developed by Signal express the receptors, ion channels and cytochemical markers required to produce functional, morphologically mature human neurons. Signal's cell line technology also can be used to "lock in" human neuronal cells to a specific stage of maturation, providing a stable cell-based assay system for drug screening. To date, the Company has developed human neuronal and glial cell lines of the CNS and, it believes, the first human sensory neuronal cell lines of the PNS. Signal's human CNS cell lines can be differentiated into a variety of cell types, including neurons and astrocytes, and also can be induced to undergo cell death, in vitro, in model systems characteristic of stroke, traumatic head injury and neurological diseases. The Company plans to continue to develop proprietary CNS and PNS cell lines with corporate collaborators to identify and functionally validate specific genes and their regulatory pathways involved in neurological diseases. Signal believes genomic information obtained from these cell lines may provide a foundation for identifying novel drugs that regulate CNS genes involved in neurological diseases (Alzheimer's and Parkinson's disease, head trauma and stroke) and psychiatric diseases (anxiety, depression and psychosis), and that target disorders of the PNS (pain, incontinence and peripheral neuropathies). Applying the Company's functional genomics capabilities, researchers at Signal have generated a library of differentially expressed genes from an in vitro model of Alzheimer's disease. Signal also has developed a proprietary CNS whole cell screening assay for inhibitors of neurodegeneration induced by cytokines and growth factor withdrawal. Further, the Company is investigating the role of MAP kinase targets, including JNK and p38, in neurodegeneration. One such target, JNK3, has been validated in animal models and is being formatted in a high throughput screening assay for drug discovery. As part of its neurogenomics initiative, Signal is collaborating with Organon to discover genomic drug targets involved in neurological diseases. In September 1996, Signal commenced a three-year research collaboration with Roche Bioscience to develop human PNS cell lines for use in target and drug discovery directed toward the treatment of pain and incontinence. Signal subsequently developed and transferred to Roche Bioscience certain PNS cell lines for potential use in Roche Bioscience's target and drug discovery programs. Signal retains the right to use the PNS cell lines in other therapeutic areas, such as peripheral neuropathies. 40 42 In February 1998, Signal entered into a two-year research collaboration with Nippon Kayaku to optimize a lead compound discovered by Nippon Kayaku for use in treating diabetic and chemotherapy-induced peripheral neuropathies. See "--Research and Development Partners." CARDIOVASCULAR DISEASE PROGRAM Cardiovascular disease, including congestive heart failure, myocardial infarction and stroke, largely results from restricted blood flow caused by atherosclerosis and hypertension. Cardiovascular disease is the leading cause of death in the United States and Europe and results in an estimated 12 million annual deaths worldwide according to the World Health Organization. In the United States, approximately 58 million people are afflicted with cardiovascular disease, leading to an estimated 960,000 deaths each year. In 1998, pharmaceutical sales of cardiovascular drugs will exceed $14.8 billion in the United States, according to the American Heart Association. Several classes of cardiovascular drugs have been developed to prevent and treat chronic cardiovascular disease, including beta blockers, calcium channel blockers and ACE inhibitors designed to maintain proper blood vessel dilation and normal blood flow. While these drugs reduce disease morbidity and mortality, they also cause a number of adverse side effects such as depression, headaches and fatigue. None of these classes of cardiovascular drugs acts on the molecular mechanisms of cardiovascular disease which damage vessel walls and impair blood flow. Abnormalities in the expression of endothelial and smooth muscle genes in vascular tissue play a fundamental role in cardiovascular disease. When endothelial cells are activated by injury or trauma, these cells frequently overproduce such proteins as cell adhesion molecules, growth factors and cytokines, leading to the formation of lesions that block normal blood flow and cause vasculitis and atherosclerosis. Many of these proteins are controlled by the NF-kB, JNK and p38 gene regulating pathways. Activated or damaged endothelial cells also can induce genes in vascular smooth muscle cells. These genes cause the proliferation of smooth muscle cells, leading to vessel-wall thickening and impaired blood flow. NF-kB and MAP kinase pathways have been demonstrated to be over-activated in animal models of angioplasty-induced restenosis. The Company currently is using its KAST system to identify selective inhibitors of its IKK1 and IKK2, JNK and p38-2 targets. The Company has identified inhibitors of these targets in its biochemical screens, and certain of these compounds are undergoing lead optimization. Signal plans to evaluate active compounds in secondary assays which use proprietary human vascular cell lines to assess their cardioprotective effects. In July 1996, the Company entered into a three-year collaboration with Organon, amended in January 1998, to discover genomic drug targets in cardiovascular disease. In November 1997, the Company entered into a three-year collaboration with Ares-Serono to develop inhibitors of NF-kB for potential treatment of cardiovascular diseases. See "--Research and Development Partners." CANCER PROGRAM Cancer is characterized by uncontrolled growth, proliferation and migration of cells. Malignancies result from abnormalities in the expression of genes that regulate cell proliferation, migration and cell death. In 1997, cancer was the second leading cause of death in the United States with 560,000 deaths and an estimated 1.2 million new cancer cases. According to the American Cancer Society, the oncolytic drug market totaled approximately $1.6 billion in the United States and $4.7 billion worldwide in 1996. Signal is elucidating several gene regulating pathways which play a fundamental role in tumor growth and metastasis, including the JNK and c-Fos pathways, the NF-kB pathway regulated by IKK1 and IKK2, NIK and the IkB ligases, as well as the ERG pathway that controls IL-6 production. These pathways control the expression of specific sets of genes involved in cancer, including: (i) cytokines and growth factors which promote the growth of cancer cells, (ii) cell adhesion molecules and tissue-destructive enzymes which enable tumors to spread to distant sites in the body and invade normal 41 43 tissues and organs, (iii) angiogenic growth factors that vascularize and thereby facilitate the growth of newly established tumors, and (iv) certain other factors which make cancer cells resistant to chemotherapy and radiation therapy. Signal is designing new classes of drugs that target abnormalities in inducible gene regulating pathways to inhibit the transformation, growth and spread of cancer without affecting other essential gene regulating pathways. Applying its high throughput screening capabilities, the Company has identified a novel class of IL-6 inhibitors which demonstrate anti-proliferative activity in vitro in human breast cancer cells. The Company currently is optimizing small molecule inhibitors of IL-6, in addition to leads identified in Signal's screens for NF-kB and JNK pathway inhibitors. Additionally, Signal and its collaborators are developing a high throughput screening assay for c-Fos and are working to identify IkB ligase drug targets. Signal plans to evaluate active compounds in secondary assays that use tumor cell lines to assess anti-cancer effects. The Company believes that drugs which selectively inhibit these targets may be useful in treating several cancers, including lung, breast and ovarian carcinomas, myelomas and leukemias, and may cause fewer dose-limiting side effects than current chemotherapies. In November 1997, the Company initiated a three-year collaboration with Ares-Serono to develop drugs that target the NF-kB pathway for the potential treatment of certain cancers. See " --Research and Development Partners." VIROLOGY PROGRAM Viruses are pathogenic microorganisms that infect cells and subsequently use the biochemical machinery of their host cells to produce new viruses. An estimated 30 million people are infected with HIV and 50 million people are infected with HCV throughout the industrialized world. Other viral pathogens being transmitted at epidemic rates include the herpes simplex-2 virus and HPV, both of which cause chronic, lifelong genital infections, and afflict an estimated 31 million and six million people in the United States, respectively. Despite the high incidence of chronic viral infections, only a limited number of antiviral drugs have been approved to date. New classes of antivirals are needed which act on novel, virus-specific targets while overcoming problems of toxicity and viral resistance. Signal is applying its expertise in gene regulation to the discovery of small molecule antiviral drugs that selectively inhibit viral genes. The Company believes that gene regulating antivirals may provide more potent and selective therapy due to three factors: (i) viral gene regulating targets are structurally different from human factors and, therefore, potentially may be used to inhibit viral replication without interfering with normal human cellular functions, (ii) each virus possesses distinct transcription factors that distinguish it from other viruses, facilitating the design of virus-specific therapeutics, and (iii) drugs which target these mechanisms will be useful in the treatment of viruses resistant to current therapies. Signal's viral infection program is directed toward six viral gene regulating targets: two regulatory proteins for HCV, a transcription factor for HIV, the E2 transcription factor for HPV, the ICP4 transcription factor for HSV and the IE86 transcription factor for CMV. The Company and its collaborators have validated each of these targets in vitro. Signal has developed proprietary viral infection assays for identifying novel inhibitors of HPV, HSV and CMV gene activation. The Company is developing target-specific screening assays for small molecule HCV and HIV inhibitors as part of its three-year collaboration with DuPont Merck initiated in December 1997. Active compounds have been identified in the Company's HSV and CMV screens. See "--Research and Development Partners." RESEARCH AND DEVELOPMENT PARTNERS Partnerships with pharmaceutical and biopharmaceutical companies are an integral part of Signal's business strategy. To date, Signal has established a number of collaborative agreements and has received payments of $20.8 million thereunder. Signal's principal collaborative agreements are with Ares-Serono, Roche Bioscience, Nippon Kayaku, Organon and DuPont Merck. In addition, the 42 44 Company has licensed worldwide rights for a drug lead to Tanabe. There can be no assurance that the Company will maintain its existing collaborative or licensing arrangements or establish any additional arrangements or that its current or future relationships, if established, will result in receipt by the Company of milestone payments, the development of marketable pharmaceutical products or receipt by the Company of significant royalties on sales of such products. ARES-SERONO In November 1997, Signal entered into a collaborative agreement with Ares-Serono, under which Ares-Serono agreed to fund certain research for an initial three-year period, which term will automatically be extended for additional three-year periods unless earlier terminated as described below. The Ares-Serono collaboration is focused on identifying compounds that modulate NF-kB gene regulating pathways to which Ares-Serono has rights for all clinical indications in all countries of the world excluding Asia. Ares-Serono S.A. has purchased approximately $10.0 million of Signal's Series E and Series F Preferred Stock. Ares-Serono also has agreed to provide Signal with annual research and development support for Signal's cost of this program at a percentage level approximating Ares-Serono's relative share of worldwide marketing rights. In addition, Ares-Serono is obligated to make payments to Signal based on the achievement of certain research and development milestones and to pay Signal royalties on any future product sales arising from the collaboration. Pursuant to an exclusive license granted by Signal, Ares-Serono will be solely responsible for preclinical and clinical development of drug candidates and the development and commercialization of any drugs arising from the collaboration in all countries of the world excluding Asia. Signal has co- commercialization rights for all products marketed in the United States, exercisable at any time during the term of the agreement and up to 30 days following receipt of notice from Ares-Serono of the filing of an NDA or equivalent regulatory application, with respect to products arising from the collaboration. In the event that Signal exercises co-commercialization rights, Signal will forego royalties in exchange for a share of product revenue, and a portion of revenue will be payable to Ares-Serono as reimbursement for development costs. Unless, at least six months prior to the expiration of the initial three-year term, Ares-Serono gives Signal notice of its decision to terminate the research being conducted pursuant to the collaboration agreement, such research and Ares-Serono's research support obligation will continue for an additional three-year period, subject to each party's early termination rights. Ares-Serono may terminate the agreement upon six months' notice any time after the end of the initial three-year term. ROCHE BIOSCIENCE In August 1996, Signal entered into a three-year collaborative agreement with Roche Bioscience. Under the agreement, Signal is applying its proprietary cell line development technology toward the development of human PNS cell lines for use by Roche Bioscience in target and drug discovery. Pursuant to an exclusive, worldwide, royalty-free license granted by Signal, Roche Bioscience may utilize these PNS cells to discover and commercialize drugs for treating pain, incontinence and peripheral vascular disease. Under the agreement, Signal retains the right to use the PNS cell lines for its internal target and drug discovery programs in other therapeutic fields. Roche Bioscience has paid Signal a license fee and has agreed to pay annual research and development support at a level approximating Signal's cost of the PNS cell line program. To date, Signal has developed and transferred to Roche Bioscience clonal human PNS cell lines as specified in the collaborative agreement. Roche Bioscience may terminate the agreement beginning in August 1998 at its discretion upon 90 days' written notice. If the collaboration agreement is terminated for any reason, the licenses granted to Roche Bioscience by Signal shall survive for as long as Roche Bioscience continues to pay annual license maintenance fees to Signal. As long as Roche Bioscience pays these annual license maintenance fees, Signal may not enter into any other collaborations with respect to cloned immortalized PNS cell lines in the covered fields of pain, incontinence and peripheral vascular disease. 43 45 NIPPON KAYAKU In February 1998, Signal entered into a collaborative agreement with Nippon Kayaku under which Nippon Kayaku agreed to fund certain research at Signal for two years. Under the agreement, Signal and Nippon Kayaku will develop and commercialize products based on or derived from a compound supplied by Nippon Kayaku for the treatment and prevention of diseases and disorders of the CNS and PNS. Signal will perform combinatorial chemistry and use its proprietary human neuronal cell lines to further optimize the compound and characterize its mechanism of action prior to the start of clinical studies. Nippon Kayaku has agreed to provide Signal with annual research and development support at a level approximating Signal's cost of the program. Each party also is obligated to pay the other royalties on future product sales arising from the collaboration. Pursuant to a commercialization agreement to be concluded by Signal and Nippon Kayaku following the initial research phase of the collaboration, Nippon Kayaku will be solely responsible for the development and commercialization of products in Japan for the treatment or prevention of diseases and disorders of the PNS and will receive co-commercialization rights in Japan with respect to products for the treatment and prevention of CNS diseases and disorders. Under such future commercialization agreement, development and commercialization rights for products outside Japan for the treatment or prevention of both PNS and CNS diseases and disorders will be agreed upon by the parties on a product-by-product basis, with Nippon Kayaku not guaranteed any minimum level of co-commercialization rights. Signal and Nippon Kayaku also have granted each other co-exclusive commercialization rights outside the field with respect to each analog compound arising from the collaboration which is developed and commercialized by one or both of the parties. ORGANON In July 1996, Signal entered into a collaborative agreement with Organon for the discovery of new genomic targets, under which Organon agreed to fund certain research at Signal for three years. Such agreement may be extended for up to two additional years by mutual consent of the parties. Pursuant to an amendment dated January 1998, Organon may terminate the research, effective in either January 1999 or July 1999, for failure to meet certain milestones by either October 1998 or January 1999, respectively. Initially, Signal will utilize its cellular, molecular and genomic technologies to identify and validate novel genes in certain target tissues. Signal will then develop high throughput screening assays for use by Organon in identifying small molecule drugs to treat cardiovascular, neurological, gynecological and certain other diseases. Pursuant to this collaboration, Organon has received rights for, and will be solely responsible for, the worldwide development and commercialization of any drugs arising from the collaboration. To date, Organon has paid Signal a license fee and annual research and development support payments at a level approximating Signal's cost of this program. In addition, Organon is obligated to make payments to Signal based on the achievement of certain research and development milestones, and Organon must pay Signal royalties on any future product sales arising from the collaboration. DUPONT MERCK In December 1997, Signal entered into a collaborative agreement with DuPont Merck, under which DuPont Merck agreed to fund certain research at Signal for three years. The agreement may be extended for up to three additional years at DuPont Merck's option. The DuPont Merck collaboration is focused on identifying compounds for the treatment or prevention of HCV and HIV infections. Signal also has granted DuPont Merck an option, exercisable through August 1998, to expand the collaboration to include the identification of compounds directed toward an additional viral target. Pursuant to this collaboration, Signal and Dupont Merck will be responsible for developing target specific screening assays and will be jointly responsible for identifying lead compounds. DuPont Merck will be solely responsible for lead optimization and the worldwide development and commercialization of any drugs arising from the collaboration. 44 46 DuPont Merck has paid Signal a license fee and has agreed to provide Signal with annual research and development support at a level approximating Signal's cost of these programs. DuPont Merck also is obligated to make payments to Signal and to purchase its Common Stock upon the achievement of certain research and development milestones, and to pay Signal royalties on any future product sales arising from the collaboration. In addition, DuPont Merck has agreed to purchase $2.0 million of Common Stock of Signal in a private transaction concurrent with the closing of this offering at a price per share equal to the initial public offering price. TANABE From March 1996 to March 1998, Signal and Tanabe were engaged in a collaborative program under which Tanabe funded certain research by Signal in target and drug discovery in the fields of inflammatory disease and osteoporosis. In connection with the collaboration, Tanabe paid Signal a license fee and reimbursed Signal for research and development costs. Tanabe also purchased shares of Signal's Series D Preferred Stock. In March 1998, Signal and Tanabe mutually agreed to conclude their research collaboration and Tanabe licensed from Signal a lead compound that was discovered during the collaboration. This compound has been validated in animal models of arthritis, and may have application for the treatment of autoimmune, inflammatory and certain other diseases. Signal retained all other intellectual property rights, including rights to all other drug targets and drug leads, created before or during the collaboration. Tanabe paid an additional license fee to Signal for the exclusive worldwide license to the lead compound and is obligated to make payments to Signal based on the achievement of certain research and development milestones and to pay Signal royalties on any future product sales. LICENSE AGREEMENTS Signal has established a number of license agreements with academic institutions. Signal's principal license agreements are: THE REGENTS OF THE UNIVERSITY OF CALIFORNIA In October 1993, Signal entered into a license agreement with The Regents of the University of California ("The Regents"), as amended in June 1997 and February 1998, pursuant to which Signal obtained a worldwide exclusive license for the JNK signaling enzyme based on the research of Dr. Michael Karin, a scientific founder and advisor of the Company. The license also covers methods for the production and screening of neuroblasts. In addition, Signal has secured from The Regents exclusive worldwide license rights to certain patents filed by Dr. Karin relating to specified NF-kB signaling molecules, IKK1 and IKK2. Under the license agreement, Signal has paid initial license fees, certain extension payments and issued Common Stock to The Regents, and is obligated to make certain royalty and milestone payments. The term of the license remains in effect for the life of the last-to-expire patent covered under the agreement. THE UNIVERSITY OF MASSACHUSETTS In October 1996 and 1997, Signal entered into worldwide exclusive license agreements with the University of Massachusetts ("U Mass"). Pursuant to the license agreements, Signal has exclusive rights under a certain patent application and nonexclusive worldwide rights under certain unpatented know-how to develop drugs targeting JNK and two intracellular signaling proteins in the p38 pathway, MKK3 and MKK4, based on the research of Dr. Roger J. Davis, a scientific advisor of the Company. Upon entering into both of the license agreements, Signal paid a license fee and issued shares of Common Stock to U Mass and is obligated to make certain royalty and milestone payments. The term of the licenses remains in effect for the longer of 10 years or the life of the last-to-expire patent under the agreements. 45 47 PATENTS AND PROPRIETARY RIGHTS The Company's success will depend in part on its ability to obtain and retain patent protection for its proprietary technologies, targets and potential products, effectively preserve its trade secrets and to operate without infringing the proprietary rights of third parties. Because of the substantial length of time and expense associated with bringing potential products through the development and regulatory approval processes to reach the marketplace, the pharmaceutical industry places considerable importance on obtaining patent and trade secret protection for new technologies, products and processes. Accordingly, the Company seeks patent protection for its proprietary technology, targets and potential products. As of April 30, 1998, the Company owned or had licensed five issued U.S. patents, 15 notices of allowance from the U.S. Patent and Trademark Office, no corresponding issued foreign patents, 21 pending U.S. patent applications, as well as seven corresponding international filings under the Patent Cooperation Treaty, and 43 pending foreign national patent applications. However, there can be no assurance that the Company or its collaborators have developed or will continue to develop potential products or processes that are patentable or that patents will issue from any of the Company's pending applications, including patent applications that have been allowed. There also can be no assurance that the Company's or its collaborators' current patents, or patents that issue on pending applications, will not be challenged, invalidated or circumvented, or that the rights granted thereunder will provide proprietary protection or competitive advantages to the Company. Patent applications in the U.S. are maintained in secrecy until patents issue, patent applications are not generally published until many months or years after they are filed and publication of technological developments in the scientific and patent literature often occurs long after the date of such developments. Accordingly, the Company cannot be certain that it or one of its collaborators was the first to invent the subject matter covered by the patent applications or that it or one of its collaborators was the first to file patent applications for such inventions. Further, there can be no assurance as to the success or timeliness in obtaining any patents, that the breadth of claims obtained, if any, will provide adequate protection of the Company's proprietary technology, targets or products, or that the Company or its licensors will be able to or will in fact adequately enforce any such claims to protect its proprietary technology, targets or potential products. Patent law relating to the scope and enforceability of claims in the fields in which the Company operates is still evolving. The patent positions of biopharmaceutical and pharmaceutical companies, including the Company, are highly uncertain and involve complex legal and technical questions for which legal principles are not firmly established. The degree of future protection for the Company's proprietary rights, therefore, is highly uncertain. In this regard, there can be no assurance that independent patents will issue from the Company's and its licensors' patent applications, which include many interrelated applications directed to common or related subject matter. Further, there may be issued patents and pending applications owned by others directed to technologies relevant to the Company's, its licensors' or its collaborators' research, development and commercialization efforts. There can be no assurance that the Company's or its collaborators' technology can be developed and commercialized without a license to such patents or that such patent applications will not be granted priority over patent applications filed by the Company, its licensors or one of its collaborators. Furthermore, there can be no assurance that third parties will not independently develop similar or alternative technologies to those of the Company, its licensors or any of its collaborators, duplicate any of the Company's, its licensors' or its collaborators' technologies or design around the patented technologies developed by the Company, its licensors or its collaborators, any of which may have a material adverse effect on the Company. The commercial success of the Company depends significantly on its ability to operate without infringing the patents and proprietary rights of third parties, and there can be no assurance that the Company's, its licensors' and its collaborators' technologies do not and will not infringe the patents or proprietary rights of others. A number of pharmaceutical companies, biopharmaceutical companies, independent researchers, universities and research institutions may have filed patent applications or may have been granted patents that cover technologies similar to the technologies owned, optioned by 46 48 or licensed to the Company or its corporate collaborators. For instance, a number of patents may have issued and may issue in the future on certain targets or their use in screening assays that could prevent the Company and its collaborators from developing screens using such targets, compounds relating to such targets or relate to certain other aspects of technology utilized or expected to be utilized by the Company. In addition, the Company is unable to determine all of the patents or patent applications that may materially affect the Company's or its corporate collaborators' ability to make, use or sell any potential products. The Company is aware of one allowed U.S. patent application relating to certain methods for transcriptional modulation. Signal believes that it has not infringed, and is not currently infringing, the claims of the allowed application. Nonetheless, the Company may in the future be required to obtain a license to such allowed patent, and there can be no assurance that such a license will be available on commercially reasonable terms, if at all. In addition, the Company is aware of an issued U.S. patent claim for certain human MAP kinases, including MAP kinases in the p38 pathway, which may be useful as targets for drug discovery. The Company is negotiating a license to patent rights covering such MAP kinase targets that may be useful in the Company's research programs, although there can be no assurance that such a license will be available on commercially reasonable terms, if at all. Any conflicts resulting from third-party patent applications and patents could significantly reduce the coverage of the patents owned, optioned by or licensed to the Company or its collaborators and limit the ability of the Company or its collaborators to obtain meaningful patent protection. If patents are issued to third parties that contain competitive or conflicting claims, the Company, its licensors or its collaborators may be enjoined from pursuing research, development or commercialization of potential products or be required to obtain licenses to these patents or to develop or obtain alternative technology. There can be no assurance that the Company or its collaborators will not be so enjoined or will be able to obtain any license to the patents and technologies of third parties on acceptable terms, if at all, or be able to obtain or develop alternative technologies. If the Company or any of its collaborators is enjoined from pursuing its research, development or commercialization activities or if any such license is or alternative technologies are not obtained or developed, the Company or such collaborator may be delayed or prevented from commercializing its potential products, which would result in a material adverse effect on the Company. The drug discovery industry has a history of patent litigation and there will likely continue to be numerous patent litigation suits concerning drug discovery technologies and potential products. The patent positions of pharmaceutical, biopharmaceutical and drug discovery companies, including the Company, generally are uncertain and involve complex legal and factual questions. Litigation to establish the validity of patents, to defend against patent infringement claims of others and to assert infringement claims against others can be expensive and time consuming, even if the outcome is favorable. An outcome of any patent prosecution or litigation that is unfavorable to the Company or one of its licensors or collaborators may have a material adverse effect on the Company. In particular, litigation may be necessary to enforce any patents issued or licensed to the Company, its licensors, or its collaborators, to protect trade secrets or know-how of the Company, its licensors or its collaborators or to determine the scope and validity of a third party's proprietary rights. The Company could incur substantial costs if litigation is required to defend itself in patent suits brought by third parties, if the Company participates in patent suits brought against or initiated by its licensors or collaborators or if the Company initiates such suits, and there can be no assurance that funds or resources would be available to the Company in the event of such litigation. Additionally, there can be no assurance that the Company, its licensors or its collaborators would prevail in any such action. An adverse outcome in litigation or an interference to determine priority or other proceeding in a court or patent office could subject the Company to significant liabilities, require disputed rights to be licensed from or to other parties or require the Company, its licensors or its collaborators to cease using certain technology, any of which may have a material adverse effect on the Company. In addition to patent protection, the Company also relies on copyright protection, trade secrets, know-how, continuing technological innovation and licensing opportunities. In an effort to maintain the confidentiality and ownership of trade secrets and proprietary information, the Company requires 47 49 employees, consultants and certain collaborators to execute confidentiality and invention assignment agreements upon commencement of a relationship with the Company. These agreements generally provide that all confidential information developed or made known to the individual by the Company during the course of the individual's relationship with the Company will be kept confidential and not disclosed to third parties except in specific circumstances. The agreements also generally provide that all inventions conceived by the individual in the course of rendering services to the Company shall be the exclusive property of the Company. There can be no assurance, however, that these agreements will provide meaningful protection for the Company's trade secrets, confidential information or inventions in the event of unauthorized use or disclosure of such information or that adequate remedies would exist in the event of such unauthorized use or disclosure. The loss or exposure of trade secrets possessed by the Company could adversely affect its business. Like many high technology companies, the Company may from time to time hire scientific personnel formerly employed by other companies involved in one or more areas similar to the activities conducted by the Company. Although the Company requires its employees to maintain the confidentiality of all confidential information of previous employers, there can be no assurance that the Company or these individuals will not be subject to allegations of trade secret misappropriation or other similar claims as a result of their prior affiliations. COMPETITION Competition among pharmaceutical and biopharmaceutical companies to identify drug targets and drug candidates for development is intense and is expected to increase. In the pharmaceutical industry, the Company competes with the research and development departments of pharmaceutical and biopharmaceutical companies and other commercial enterprises, as well as numerous academic and research institutions and governmental agencies. In addition, the pharmaceutical and biopharmaceutical industries are subject to rapid and substantial technological change. Pharmaceutical and biopharmaceutical companies and others are conducting research in various areas which overlap with the Company's technology platform, either on their own or in collaboration with others. There can be no assurance that pharmaceutical and biopharmaceutical companies which compete with the Company in specific areas will not merge or enter into collaborations or joint ventures or other alliances with one or more other such companies or academic and research institutions and become substantial competitors or that the Company's collaborators will not initiate or expand their own internal target and drug discovery and development efforts. At the present time, the Company has not conducted any clinical trials and has no commercial manufacturing capability, sales or marketing force. Many of the Company's competitors and potential competitors have substantially greater capital resources, research and development resources, manufacturing, sales and marketing experience and production facilities than does the Company. Additionally, many of these competitors have significantly greater experience than does the Company in undertaking target and drug discovery, preclinical product development and testing and clinical trials of potential pharmaceutical products and obtaining FDA and other regulatory approvals. Smaller companies also may prove to be significant competitors, particularly through proprietary research discoveries and collaborative arrangements with large pharmaceutical and established biopharmaceutical companies. Many of these competitors have significant products that have been approved or are in development and operate large, well funded research and development programs. Academic institutions, governmental agencies and other public and private research organizations also conduct research, seek patent protection and establish collaborative arrangements for the discovery, development and commercialization of new pharmaceutical products. In addition, these companies and institutions compete with the Company in recruiting and retaining highly qualified scientific and management personnel. There can be no assurance that the Company's competitors will not discover lead compounds, develop more effective, safer, more affordable or more easily administered potential products or achieve patent protection or commercialize potential products sooner than the Company. Failure to compete effectively could have a material adverse effect on the Company's business, financial condition and results of operations. 48 50 GOVERNMENT REGULATION The Company's and its collaborators' research, preclinical testing and clinical trials of their respective potential products, if any, and the manufacturing and marketing of their potential products, will be subject to extensive and rigorous regulation by numerous government authorities in the United States and in other countries where the Company and its collaborators intend to test, manufacture and market their potential products. Prior to marketing any product developed by the Company, the Company or its collaborators, as applicable, must undergo an extensive regulatory approval process. This regulatory process, which includes preclinical testing and clinical trials of each potential product to establish its safety and efficacy, will take many years and require the expenditure of substantial resources, and also may include post-marketing surveillance. Data obtained from preclinical testing and clinical trials are susceptible to varying interpretations which could delay, limit or prevent regulatory approval. In addition, delays or rejection may be encountered based upon changes in FDA policy for drug approval during the period of product development and FDA regulatory review of each submitted new drug application ("NDA") or product license application ("PLA"). Similar delays or rejection also may be encountered in foreign countries. There can be no assurance that regulatory approval will be obtained for any potential products developed by the Company or its collaborators. Moreover, regulatory approval may entail limitations on the indicated uses of a drug. Further, even if regulatory approval is obtained, a marketed drug and its manufacturer are subject to continuing review, and discovery of previously unknown problems with a drug or manufacturer can result in the withdrawal of a drug from the market or a significant decrease in market demand, which would have an adverse effect on the Company's business, financial condition and results of operations. Violations of regulatory requirements at any stage, including preclinical testing and clinical trials, the approval process or post-approval, may result in various adverse consequences including a delay by the FDA or other applicable regulatory authority in approving or its refusal to approve a potential product, withdrawal of an approved drug from the market and the imposition of criminal penalties against the manufacturer and NDA or PLA holder. Neither the Company nor its collaborators has submitted any IND applications for any potential product of the Company, and none has been approved for commercialization in the United States or internationally. No assurance can be given that the Company or its collaborators will be able to obtain FDA or other applicable regulatory authority approval for any potential products. Failure to obtain requisite regulatory approvals or failure to obtain approvals of the scope requested will delay or preclude the Company or its collaborators from marketing the Company's or its collaborators' products or limit the commercial use of the potential products and would have material adverse effect on the Company's business, financial condition and results of operations. MANUFACTURING To date, the Company has not manufactured any products for preclinical, clinical or commercial purposes and does not have any manufacturing facilities. The Company intends to utilize third-party contract manufacturers or its corporate collaborators for the production of material for use in preclinical and clinical trials and for the manufacture of future products for commercialization. In the event that the Company is unable to secure such outside manufacturing capabilities, it will not be able to conduct preclinical product development, clinical trials or commercialize its potential products as planned. Even if the Company were able to establish its own internal manufacturing capability, doing so would require the expenditure of significant resources which could have a material adverse effect on the Company's business, financial condition and results of operations. There can be no assurance that the Company or any outside manufacturers can produce potential products of suitable quality in sufficient quantity in a cost-effective manner, if at all. The manufacture of the Company's potential products for preclinical and clinical trials and commercial purposes is subject to current Good Manufacturing Practices ("cGMP") regulations promulgated by the FDA and other applicable domestic and foreign regulations. No assurance can be given that in the future the Company or any outside manufacturers can maintain full compliance with cGMP regulations or other applicable regulations. 49 51 EMPLOYEES As of April 30, 1998 the Company had 82 full-time employees, including 39 with Ph.D. degrees. Of the Company's workforce, 66 employees are engaged in discovery research and 16 are engaged in business development, finance and administration. The Company has assembled a group of experienced scientists and managers skilled in each phase of target and drug discovery, including cell line development, functional genomics, molecular biology, assay development, automated high throughput screening and medicinal chemistry. The Company also retains outside consultants. None of the Company's employees are covered by collective bargaining arrangements, and management considers its relationships with its employees to be good. FACILITIES Signal currently leases 23,000 square feet of laboratory and office space at 5555 Oberlin Drive, San Diego, California. The Company's lease for such facility expires on January 31, 2001, with an option to renew the lease for two additional periods of one year each. Signal also leases 11,000 square feet of laboratory and office space at 5626 Oberlin Drive, San Diego, California. The Company's lease for such facility expires on December 31, 2003. The Company believes that its existing facilities are adequate to meet its business requirements for the near-term and that additional space will be available on commercially reasonable terms, if required. LEGAL PROCEEDINGS The Company is not a party to any legal proceedings at this time. SCIENTIFIC ADVISORY BOARD The Company's Scientific Advisory Board consists of its five scientific founders, as well as other individuals with expertise in the fields of immunology, cytokine biology, virology and synthetic chemistry. The Scientific Advisory Board generally advises the Company concerning long-term scientific planning, research and development, and also evaluates the Company's research programs, recommends personnel to the Company and advises the Company on specific scientific and technical issues. The Scientific Advisory Board meets at least two times per year, and certain individual scientific advisors consult with and meet informally with the Company on a more frequent basis. Certain scientific advisors own shares of Common Stock of the Company, and the Company has entered into consulting agreements with all of its scientific advisors. None of the scientific advisors is employed by the Company, and any or all of such advisors may have commitments to or consulting or advisory contracts with their employers or other entities that may conflict or compete with their obligations to Signal. Accordingly, such persons are expected to devote only a small portion of their time to Signal. The members of Signal's Scientific Advisory Board are: SCIENTIFIC FOUNDERS Fred H. Gage, Ph.D., is a Professor in the Laboratory of Genetics of the Salk Institute for Biological Studies. He is an internationally respected innovator in the fields of neurological diseases and transplantation. Dr. Gage has won the IPSEN Prize, the Ameritec Prize, the Metropolitan Award, the Chancellor's Associate Award and the Allied Signal Award. Stephen F. Heinemann, Ph.D., is Professor and Director of the Molecular Neurobiology Laboratory at The Salk Institute and an external member of the Max Planck Institute. He is considered one of the foremost experts in the field of receptor neurobiology and is a member of the National Academy of Sciences. Tony Hunter, Ph.D., is a Professor at The Salk Institute, an American Cancer Society Research Professor. Dr. Hunter is a world-renowned expert in the field of gene regulating kinases and 50 52 established their roles in the regulation of cellular growth and tumor development. Dr. Hunter was elected a fellow of the Royal Society of London and has received several awards for his research, including a 1994 Gairdner Foundation International Award. Michael Karin, Ph.D., is a Professor in the Department of Pharmacology, University of California, San Diego. He is an internationally recognized expert in the field of transcriptional regulation and has made fundamental contributions to the understanding of a variety of gene regulating pathways, including JNK, FRK and NF-k B. Inder Verma, Ph.D., is Chairman of Signal's Scientific Advisory Board. Dr. Verma is an American Cancer Society Professor of Molecular Biology and Co-Director of the Laboratory of Genetics at The Salk Institute, and is a member of the National Academy of Sciences. Dr. Verma is internationally recognized for his work in the field of NF-k B gene regulation. OTHER SCIENTIFIC ADVISORY BOARD MEMBERS Elliot J. Androphy, M.D., is the Associate Chairman of the Department of Dermatology at the New England Medical Center and Tufts University School of Medicine, as well as a practicing physician. He is considered to be a world expert in the field of HPV, where he has made seminal contributions. Melanie Cobb, Ph.D., is a Professor in the Department of Pharmacology at the University of Texas Southwestern Medical Center in Dallas. Dr. Cobb is internationally renowned for her research on MAP kinase gene regulating pathways. Roger J. Davis, Ph.D., is a Professor in Molecular Medicine and the Department of Biochemistry & Molecular Biology at the University of Massachusetts Medical Center, and an Associate Investigator at the Howard Hughes Medical Institute. Dr. Davis is regarded as one of the leading researchers worldwide in the field of signal transduction. Dr. Davis is a principal or co-discoverer of several important gene regulating kinases, including molecular mechanisms of the JNK and p38 signaling pathways. Neal A. DeLuca, Ph.D., is an Associate Professor in the Department of Molecular Genetics and Biochemistry at the University of Pittsburgh School of Medicine. Dr. DeLuca is an internationally recognized researcher in the field of herpes virology. Charles Dinarello, M.D., is Professor of Medicine at the University of Colorado School of Medicine in Denver. Dr. Dinarello is an internationally respected expert in the field of cytokines and their role in immunological and infectious diseases. Anjana Rao, Ph.D., is an Associate Professor of Pathology at the Harvard Medical School. Dr. Rao has conducted seminal research on signal transduction mechanisms of the human immune system, including the NF-ATp and NF-k B transcription factors. Dr. Rao is a recipient of the Leukemia Society of America Scholar Award. K. Barry Sharpless, Ph.D., is the William M. Keck Professor of Chemistry in the Department of Chemistry at The Scripps Research Institute. He is an internationally renowned synthetic chemist relating to his work in asymmetric chemical synthesis and has received numerous honors for his work including the King Faisal International Prize for Science. Dr. Sharpless is a fellow of the American Academy of Arts and Sciences and the National Academy of Sciences, and is a Guggenheim Fellow. 51 53 MANAGEMENT EXECUTIVE OFFICERS, DIRECTORS AND KEY EMPLOYEES The following table sets forth certain information regarding the Company's executive officers, directors and key employees as of May 15, 1998:
NAME AGE POSITION ---- --- -------- Alan J. Lewis, Ph.D. ..................... 52 President, Chief Executive Officer and Director Carl F. Bobkoski.......................... 45 Executive Vice President David W. Anderson, Ph.D. ................. 46 Senior Vice President, Drug Development Bradley B. Gordon......................... 44 Vice President Finance, Chief Financial Officer and Corporate Secretary Douglas E. Richards....................... 35 Vice President, Corporate Development Miguel S. Barbosa, Ph.D. ................. 40 Senior Director of Experimental Therapeutics and Virology Anthony M. Manning, Ph.D. ................ 36 Director of Inflammation and Immunology Shripad S. Bhagwat, Ph.D. ................ 42 Director of Medicinal Chemistry Mark J. Suto, Ph.D. ...................... 42 Director of Technology Management John P. Walker............................ 49 Chairman of the Board Brook H. Byers(1)......................... 52 Director Luke B. Evnin, Ph.D.(1)................... 34 Director Harry F. Hixson, Ph.D.(2)................. 59 Director Patrick F. Latterell(1)(2)................ 39 Director Arnold Oronsky, Ph.D.(2).................. 57 Director
- ------------------------------ (1) Member of the Audit Committee (2) Member of the Compensation Committee Alan J. Lewis, Ph.D. has served the Company as Chief Executive Officer and director since 1996 and as President of the Company since 1994. Prior to joining the Company, Dr. Lewis worked for 15 years at the Wyeth-Ayerst Research division of American Home Products Corporation ("Wyeth-Ayerst"), a pharmaceutical company, where he served as Vice President of Research from 1990 to 1994. At Wyeth-Ayerst, Dr. Lewis was responsible for research efforts in CNS, cardiovascular, inflammatory, allergy and bone metabolism diseases. Dr. Lewis currently serves as a director of Allergan Specialty Therapeutics, Inc., a pharmaceutical company. He holds a Ph.D. in Pharmacology from the University of Wales in Cardiff and completed his post-doctoral training at Yale University. Carl F. Bobkoski has served the Company as Executive Vice President since 1995. Before joining Signal, from 1990 to 1995, Mr. Bobkoski was Executive Vice President and a director at Gensia, Inc. ("Gensia"), a biopharmaceutical company, where he was responsible for directing all commercialization activities for proprietary products, overseeing the operations of Gensia Laboratories, Ltd., a wholly-owned subsidiary of Gensia, and supervising product development, finance, management information systems and corporate development. Mr. Bobkoski received an M.B.A. from The University of Chicago. David W. Anderson, Ph.D. has served as Senior Vice President, Drug Development since May 1998 and served as Vice President, Drug Discovery and Preclinical Development of the Company from 1994 to May 1998. Prior to joining Signal, Dr. Anderson spent six years at Johnson & Johnson, a medical product and pharmaceutical company, most recently as Director, Drug Discovery at the R.W. Johnson Pharmaceutical Research Institute. He holds a Ph.D. in Medical Microbiology and Immunology from the University of Missouri-Columbia and completed his post-doctoral training at The University of Colorado Health Science Center. 52 54 Bradley B. Gordon has served the Company as Vice President Finance, Chief Financial Officer and Corporate Secretary since 1994. For the seven years prior to joining Signal, Mr. Gordon served in various management positions with Viagene, Inc., a biopharmaceutical company acquired by Chiron Corp. in 1995, including Corporate Vice President, Vice President Corporate Development and Vice President, Finance. Mr. Gordon received an M.B.A. from the University of Southern California. Douglas E. Richards has served the Company as Vice President, Corporate Development since May 1998. Before joining Signal, from 1995 to 1998, Mr. Richards served most recently as Director of Biotechnology Licensing at Bristol-Myers Squibb, Inc., a public pharmaceutical company. Between 1992 and 1995, Mr. Richards served as Manager of Technology Licensing at Gensia, where he was responsible for partnering and technology licensing activities. Mr. Richards received an M.B.A. from The University of Chicago and an M.S. in Molecular Biology from the University of Wisconsin. Miguel S. Barbosa, Ph.D. has served the Company as Senior Director of Experimental Therapeutics and Virology since 1994. Prior to joining the Company, from 1990 to 1994, Dr. Barbosa was an Assistant Professor of Microbiology at the University of Texas Southwestern Medical Center, where he elucidated the interaction between HPV oncoproteins and cellular tumor suppressor proteins that results in human cervical cancer. Dr. Barbosa obtained his Ph.D. in the department of Microbiology and Immunology at the University of California, Los Angeles School of Medicine. Anthony M. Manning, Ph.D. has served the Company as Director of Inflammation and Immunology since 1996. Prior to joining Signal, from 1992 to 1996, Dr. Manning was Senior Research Scientist and NF-k B Drug Discovery Program Team Leader at Pharmacia & Upjohn, Inc., a pharmaceutical company. Dr. Manning received his Ph.D. in Biochemistry from the University of Otago, New Zealand and pursued post-graduate studies in the Department of Pediatrics, University of Otago and in the Institute for Molecular Genetics, Baylor College of Medicine, where he was also an Assistant Professor in the Department of Pediatrics. Shripad S. Bhagwat, Ph.D. has served as Director of Medicinal Chemistry at Signal since May 1998. Between 1994 and 1998, Dr. Bhagwat was Senior Group Leader, Neuroscience Research at Abbott Laboratories, a pharmaceutical company, with responsibility for managing the medicinal chemistry activities for two lead optimization programs, including one drug candidate currently in clinical development. From 1985 through 1994, Dr. Bhagwat was a staff scientist with Ciba-Geigy Corp., a pharmaceutical company, where he managed several medicinal chemistry programs in the fields of cardiology and virology. Dr. Bhagwat received his Ph.D. in Organic Chemistry from the State University of New York at Stony Brook and conducted post-doctoral research at Columbia University. Mark J. Suto, Ph.D. has served the Company as Director of Technology Management since January 1998. During the period from 1994 through 1997, Dr. Suto was Director of Medicinal Chemistry at the Company. Prior to joining Signal, from 1993 to 1994, Dr. Suto was Senior Director of Medicinal Chemistry at Trega Biosciences, Inc. (formerly Houghten Pharmaceuticals, Inc.) ("Trega"), a biopharmaceutical company. Prior to joining Trega, from 1982 to 1993, Dr. Suto was a Senior Research Associate at Parke-Davis Pharmaceutical Research Division, Warner-Lambert Company. Dr. Suto received his Ph.D. in Medicinal Chemistry from the State University of New York at Buffalo. John P. Walker has served as Chairman of the Board of the Company since 1996. Mr. Walker is currently Chairman, Chief Executive Officer and a director of AxyS Pharmaceuticals, Inc., a public biopharmaceutical company ("AxyS"). From 1993 to 1997, he was President and Chief Executive Officer of Arris Pharmaceutical Corporation ("Arris"), a predecessor corporation to AxyS. From 1991 to 1993, he was a venture capitalist at Alpha Venture Partners. In addition, Mr. Walker was the Chairman and Chief Executive Officer of Vitaphore Corporation, a biomaterials company which was sold to Union Carbide Corporation in 1990, and for a period of 15 years was an executive with American Hospital Supply Corporation. Mr. Walker also serves on the board of directors of Microcide Corporation and Geron Corporation. He conducted graduate business studies at Northwestern University Institute for Management. 53 55 Brook H. Byers has served as a director of the Company since 1993. Mr. Byers is a general partner of Kleiner Perkins Caufield & Byers, a private venture capital firm, which he joined in 1977. He has been the founding president and chairman of four life sciences companies: Hybritech Incorporated, IDEC Pharmaceuticals Corporation, Ligand Pharmaceuticals, Inc. and InSite Vision, Inc. Mr. Byers currently serves as a director of AxyS. He also serves as a director of a number of privately held technology companies and sits on the University of California, San Francisco Foundation Board of Directors. Mr. Byers received his M.B.A. from Stanford Graduate School of Business. Luke B. Evnin, Ph.D. has served as a director of the Company since 1993. He has been a Managing Director at MPM Asset Management LLC, a venture capital firm, since March 1998 and from 1994 to 1998 served as a General Partner at Accel Partners, a venture capital firm. He has been involved in healthcare investing since 1990 and currently serves on the boards of several privately held companies and one public company, EPIX Medical, Inc. Dr. Evnin received his Ph.D. from the Department of Biochemistry at the University of California, San Francisco. Harry F. Hixson, Ph.D. has served as a director of the Company since 1993. Dr. Hixson was employed by Amgen Inc. from 1985 to 1991, where he last served as President and Chief Operations Officer. From 1991 to present, Dr. Hixson has been a private investor specializing in biotechnology start-up companies. From 1991 until its merger with Somatix Therapy Corporation in 1992, Dr. Hixson served as President and Chief Executive Officer of GeneSys Therapeutics, Inc., a biotechnology company. Dr. Hixson presently is a director of Neurocrine Biosciences, Inc. Dr. Hixson holds a Ph.D. in Physical Biochemistry from Purdue University and an M.B.A. from The University of Chicago. Patrick F. Latterell has served the Company as a director since 1993, as Chairman of the Board from 1993 to 1996, and as Chief Executive Officer from 1994 to 1996. Mr. Latterell is a General Partner of Venrock Associates, a venture capital investment group, which he joined in 1989. Mr. Latterell currently is a Director of Pharmacyclics, Inc., Vical, Inc. and several private biomedical companies. Mr. Latterell holds an M.B.A. from Stanford Graduate School of Business. Arnold Oronsky, Ph.D. has served as a director of the Company since 1994. Since 1994, Dr. Oronsky has been a general partner at InterWest Partners, a private venture capital firm. From 1995 to 1996, Dr. Oronsky served as President and Chief Executive Officer of Coulter Pharmaceutical, Inc., a biopharmaceutical company. From 1984 to 1994, Dr. Oronsky served as Vice President for Discovery Research at Lederle Laboratories, a pharmaceutical division of American Cyanamid, Inc., where he was responsible for the research of new drugs. Since 1988, Dr. Oronsky has served as a senior lecturer in the Department of Medicine at Johns Hopkins Medical School. Dr. Oronsky received his Ph.D. in Physiology and Biochemistry from Columbia University College of Physicians and Surgeons. Under the terms of the Restated Certificate, the Company's Board of Directors is divided into three classes, serving staggered terms of three years, and any vacancies that occur during the year may be filled by the Company's Board of Directors for the remainder of the full term. Dr. Lewis and Mr. Walker serve as Class I directors, whose term will expire at the first annual meeting of stockholders following the closing of this offering. Dr. Evnin and Dr. Oronsky serve as Class II directors, whose term will expire at the second annual meeting of stockholders following the closing of this offering. Mr. Byers, Dr. Hixson and Mr. Latterell serve as Class III directors, whose term will expire at the third annual meeting of stockholders following the closing of this offering. Officers serve at the discretion of the Board of Directors. There are no family relationships between any directors or executive officers of the Company. COMMITTEES OF THE BOARD OF DIRECTORS The Compensation Committee consists of Mr. Latterell, Dr. Oronsky and Dr. Hixson. The Compensation Committee makes recommendations regarding the Company's 1998 Equity Incentive Plan, Non-Employee Directors' Stock Option Plan and Employee Stock Purchase Plan, as well as prior stock option plans, and makes decisions concerning salaries and incentive compensation for employees and consultants of the Company. 54 56 The Audit Committee consists of Dr. Evnin, Mr. Latterell and Mr. Byers. The Audit Committee makes recommendations to the Board of Directors regarding the selection of independent auditors, reviews the results and scope of the audit and other services provided by the Company's independent auditors and reviews and evaluates the Company's audit and control functions. DIRECTOR COMPENSATION The Company's directors currently do not receive any cash compensation for services on the Board of Directors or any committee thereof, but directors may be reimbursed for certain expenses in connection with attendance at Board and committee meetings. Notwithstanding the foregoing, John P. Walker, the Chairman of the Board of Directors, currently receives $1,000 compensation for each meeting of the Board of Directors that he attends pursuant to a consulting agreement dated April 1, 1996. In 1997, each non-employee director also received options to purchase 12,500 shares of Common Stock of the Company. All directors are eligible to participate in the Company's 1998 Equity Incentive Plan. Non-employee directors receive automatic grants of options under the Company's Non-Employee Directors' Stock Option Plan as described below. See "Management--Equity Incentive Plan" and "--Non-Employee Directors' Stock Option Plan." COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION No executive officer of the Company serves as a member of the board of directors or compensation committee of any entity that has one or more executive officers serving as a member of the Company's Board of Directors or Compensation Committee. See "Certain Transactions" for a description of transactions between the Company and entities affiliated with members of the Compensation Committee. EXECUTIVE COMPENSATION The following table sets forth summary information concerning compensation awarded to, earned by, or accrued for services rendered to, the Company in all capacities during the fiscal year ended December 31, 1997 by (i) the Company's Chief Executive Officer and (ii) the Company's three other most highly compensated executive officers whose salary and bonus for each year were in excess of $100,000 (together, the "Named Officers"). SUMMARY COMPENSATION TABLE
ANNUAL LONG-TERM COMPENSATION(1) COMPENSATION AWARDS -------------------- SECURITIES UNDERLYING NAME AND PRINCIPAL POSITION SALARY($) BONUS($) OPTIONS (#) --------------------------- --------- -------- --------------------- Alan J. Lewis, Ph.D., President, Chief Executive Officer and Director.......................... $266,815 $36,544 18,750 Carl F. Bobkoski, Executive Vice President...... 192,346 27,179 -- David W. Anderson, Ph.D., Senior Vice President, Drug Development.............................. 198,129 27,368 25,000 Bradley B. Gordon, Vice President Finance, Chief Financial Officer............................. 145,564 20,536 20,000
- ------------------------------ (1) In accordance with the rules of the Securities and Exchange Commission (the "Commission"), the compensation described in this table does not include medical, group life insurance or other benefits which are available generally to all salaried employees of the Company and certain perquisites and other personal benefits received which do not exceed the lesser of $50,000 or 10% of any officer's salary and bonus disclosed in this table. 55 57 EMPLOYMENT AGREEMENTS The Company entered into an employment letter agreement with Alan J. Lewis, dated December 8, 1993, providing for an annual salary of $225,000, a signing bonus of $50,000, additional bonuses and options subject to certain performance milestones, assistance with home financing, and an opportunity to acquire 112,500 shares of Common Stock of the Company pursuant to the Company's stock option plan. The term of the employment letter agreement was for one year, renewable annually. See "Certain Transactions." The Company entered into an employment letter agreement with David W. Anderson, dated March 4, 1994, providing for an annual salary of $165,000, subject to adjustment from time to time, and an opportunity to acquire 50,000 shares of Common Stock of the Company pursuant to the Company's stock option plan. The employment letter agreement indicates that Dr. Anderson's employment is terminable at will by either party. The Company entered into an employment letter agreement with Bradley B. Gordon, dated August 18, 1994, providing for an annual salary of $130,000, subject to adjustment from time to time, certain severance arrangements, and an opportunity to acquire 37,500 shares of Common Stock of the Company pursuant to the Company's stock option plan. The employment letter agreement indicates that Mr. Gordon's employment is terminable at will by either party. The Company entered into an employment letter agreement with Carl F. Bobkoski, dated June 13, 1995, providing for an annual salary of $175,000, subject to adjustment from time to time, plus bonuses and options subject to certain performance and corporate-partnering milestones. The employment letter agreement indicates that Mr. Bobkoski's employment is terminable at will by either party. 1998 EQUITY INCENTIVE PLAN The Company adopted its 1993 Stock Option Plan, 1993 Founders' Stock Option Plan and 1997 Stock Option Plan (collectively, the "Prior Plans") and amended, restated and retitled them in February 1998 as the 1998 Equity Incentive Plan (as amended, restated and retitled, the "1998 Plan"). Outstanding options will continue to be governed by the original terms of those grants. An aggregate of 2,016,667 shares of the Company's Common Stock have been reserved for issuance pursuant to the exercise of stock awards granted to employees, directors and consultants under the 1998 Plan. The 1998 Plan will terminate in April 2008, unless sooner terminated by the Board. The 1998 Plan permits the granting of options intended to qualify as incentive stock options ("Incentive Stock Options") within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"), to employees (including officers and employee directors), and options that do not so qualify ("Nonstatutory Stock Options," and, together with Incentive Stock Options, the "Options") to employees (including officers and employee directors), directors and consultants (including non-employee directors). In addition, the 1998 Plan permits the granting of stock appreciation rights ("SARs") appurtenant to or independently of Options, as well as stock bonuses and rights to purchase restricted stock (Options, SARs, stock bonuses and rights to purchase restricted stock are hereinafter referred to as "Stock Awards"). No person is eligible to be granted Options and SARs covering more than 750,000 shares of the Company's Common Stock in any calendar year. The 1998 Plan is administered by the Board or a committee appointed by the Board. Subject to the limitations set forth in the 1998 Plan, the Board has the authority to select the persons to whom grants are to be made, to designate the number of shares to be covered by each Stock Award, to determine whether an Option is to be an Incentive Stock Option or a Nonstatutory Stock Option, to establish vesting schedules, to specify the Option exercise price and the type of consideration to be paid to the Company upon exercise and, subject to certain restrictions, to specify other terms of Stock Awards. The maximum term of Options granted under the 1998 Plan is 10 years. The aggregate fair market value, determined at the time of grant, of the shares of Common Stock with respect to which Incentive Stock Options are exercisable for the first time by an optionee during any calendar year (under all 56 58 such plans of the Company and its affiliates) may not exceed $100,000, or the Options or portion thereof which exceed such limit (according to the order in which they are granted) shall be treated as Nonstatutory Stock Options. Options granted under the 1998 Plan generally are non-transferable and expire three months after the termination of an optionee's service to the Company. In general, if an optionee is permanently disabled or dies during his or her service to the Company, such person's Options may be exercised up to 12 months following such disability and following such death. The exercise price of Options granted under the 1998 Plan is determined by the Board of Directors in accordance with the guidelines set forth in the 1998 Plan. The exercise price of an Incentive Stock Option cannot be less than 100% of the fair market value of the Common Stock on the date of the grant. The exercise price of a Nonstatutory Stock Option cannot be less than 85% of the fair market value of the Common Stock on the date of grant. Options granted under the 1998 Plan vest at the rate specified in the option agreement. The exercise price of Incentive Stock Options granted to any person who at the time of grant owns stock representing more than 10% of the total combined voting power of all classes of the Company's capital stock must be at least 110% of the fair market value of such stock on the date of grant and the term of such Incentive Stock Options cannot exceed five years. Any stock bonuses or restricted stock purchase awards granted under the 1998 Plan shall be in such form and will contain such terms and conditions as the Board deems appropriate. The purchase price under any restricted stock purchase agreement will not be less than 85% of the fair market value of the Company's Common Stock on the date of grant. Stock bonuses and restricted stock purchase agreements awarded under the 1998 Plan are generally non-transferable. Pursuant to the 1998 Plan, shares subject to Stock Awards that have expired or otherwise terminated without having been exercised in full again become available for grant, but shares subject to exercised stock appreciation rights will not again become available for grant. The Board of Directors has the authority to reprice outstanding Options and SARs and to offer optionees and holders of SARs the opportunity to replace outstanding options and SARs with new options or SARs for the same or a different number of shares. Upon certain changes in control of the Company, all outstanding Stock Awards under the 1998 Plan must either be assumed or substituted by the surviving entity. In the event the surviving entity does not assume or substitute such Stock Awards, such Stock Awards will be terminated to the extent not exercised prior to such change in control. As of March 31, 1998, the Company had issued 435,570 shares of Common Stock pursuant to the exercise of Options granted under the Prior Plans, and had granted Options to purchase an aggregate of 1,103,444 shares of Common Stock. As of March 31, 1998, 414,254 shares of Common Stock remained available for future grants under the Prior Plans. 57 59 The following tables set forth information for 1997 concerning individual grants of stock options to Named Officers, the exercise of stock options by Named Officers and aggregate stock options held by the Named Officers at year-end: OPTION GRANTS IN YEAR ENDED DECEMBER 31, 1997
POTENTIAL REALIZABLE VALUE AT ASSUMED PERCENT OF ANNUAL RATES OF NUMBER OF TOTAL STOCK PRICE SECURITIES OPTIONS APPRECIATION FOR UNDERLYING GRANTED TO OPTION TERM(2) OPTIONS EMPLOYEES IN EXERCISE PRICE EXPIRATION ------------------ NAME GRANTED(1) 1997 PER SHARE DATE 5% 10% ---- ---------- ------------ -------------- ---------- ------- ------- Alan J. Lewis........ 18,750 10.8% $ 1.12 6/3/07 $34,207 $54,469 Carl F. Bobkoski..... -- -- -- -- -- -- David W. Anderson.... 8,750 5.0 0.56 2/19/07 7,982 12,709 16,250 9.4 1.12 6/3/07 29,645 47,206 Bradley B. Gordon.... 20,000 11.5 1.12 4/17/07 36,487 58,100
- ------------------------------ (1) Twenty-five percent of such options vest on the first anniversary of the grant date and the remaining options vest thereafter in 36 equal installments. The Board of Directors of the Company has the right to accelerate the vesting of such options. The term of the options is 10 years. (2) The potential realizable value is calculated based on the term of the option and is calculated by assuming that the fair market value of Common Stock on the date of the grant as determined by the Board appreciates at the indicated annual rate compounded annually for the entire term of the option and that the option is exercised and the Common Stock received therefore is sold on the last day of the term of the option for the appreciated price. The 5% and 10% rates of appreciation are derived from the rules of the Securities and Exchange Commission. The actual value realized may be greater than or less than the potential realizable values set forth in the table. AGGREGATED 1997 OPTION EXERCISES AND YEAR-END OPTION VALUES
NUMBER OF SECURITIES VALUE OF UNEXERCISED UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS SHARES OPTIONS AT YEAR END AT YEAR END($)(1) ACQUIRED ON VALUE ------------------------------ --------------------------- NAME EXERCISE(#) REALIZED($) EXERCISABLE(2) UNEXERCISABLE EXERCISABLE UNEXERCISABLE ---- ----------- ----------- -------------- ------------- ----------- ------------- Alan J. Lewis......... -- -- 106,250 -- $1,213,000 -- Carl F. Bobkoski...... 73,750(3) $ 0 -- -- -- -- David W. Anderson..... -- -- 25,000 -- 276,900 -- Bradley B. Gordon..... -- -- 57,500 -- 646,600 --
- ------------------------------ (1) Based on an assumed initial public offering price of $12.00 per share minus the per share exercise price multiplied by the number of shares. (2) All stock options granted by the Company are immediately exercisable for shares of restricted common stock, subject to a right of repurchase by the Company pursuant to a vesting schedule. At year-end, Alan J. Lewis held 70,000 exercisable options remaining subject to a vesting schedule; David W. Anderson held 25,000 exercisable options remaining subject to a vesting schedule; and Bradley B. Gordon held 32,500 exercisable options remaining subject to a vesting schedule. (3) Includes 36,876 shares of Common Stock subject to a right of repurchase by the Company pursuant to a vesting schedule. NON-EMPLOYEE DIRECTORS' STOCK OPTION PLAN In February 1998, the Company adopted its Non-Employee Directors' Stock Option Plan (the "Directors' Plan") to provide for the automatic grant of options to purchase shares of Common Stock to non-employee directors of the Company. The Directors' Plan is administered by the Board, unless the Board delegates administration to a committee of at least two disinterested directors. 58 60 The maximum number of shares of Common Stock that may be issued pursuant to options granted under the Directors' Plan is 200,000. Pursuant to the terms of the Directors' Plan: (i) each person who, after the effective date of this offering, for the first time becomes a Non-Employee Director automatically will be granted, upon the date of his or her initial appointment or election to be a Non-Employee Director, a one-time option to purchase 20,000 shares of Common Stock; and (ii) on the date of each annual meeting of the stockholders of the Company after the effective date of this offering (other than any such annual meeting held in 1998), each person who is elected at such annual meeting to serve as a Non-Employee Director (who was also a Non-Employee Director prior to such annual meeting) automatically will be granted an option to purchase 5,000 shares of Common Stock. No options granted under the Directors' Plan may be exercised after the expiration of ten years from the date it was granted. Options granted under the Directors' Plan vest monthly over a three-year period. The exercise price of options under the Directors' Plan will equal 100% of the fair market value of the Common Stock on the date of grant. Options granted under the Directors' Plan are generally non-transferable. Unless otherwise terminated by the Board of Directors, the Directors' Plan automatically terminates on the tenth anniversary of the date of this offering. As of the date hereof, no options to purchase shares of Common Stock have been granted under the Directors' Plan. Options granted under the Directors' Plan vest in full upon certain changes in ownership or control of the Company, unless assumed or replaced with similar options by the entity gaining such ownership or control of the Company. EMPLOYEE STOCK PURCHASE PLAN In February 1998, the Company adopted the Employee Stock Purchase Plan (the "Purchase Plan") covering an aggregate of 200,000 shares of Common Stock. The Purchase Plan is intended to qualify as an employee stock purchase plan within the meaning of Section 423 of the Code. Under the Purchase Plan, the Board may authorize participation by eligible employees, including officers, in periodic offerings following the commencement of the Purchase Plan. The initial offering under the Purchase Plan will commence on the effective date of this offering and terminate on July 31, 2000. Unless otherwise determined by the Board, employees are eligible to participate in the Purchase Plan only if they are employed by the Company or a subsidiary of the Company designated by the Board for at least 20 hours per week and are customarily employed by the Company or a subsidiary of the Company designated by the Board for at least five months per calendar year. Employees who participate in an offering may have up to 15% of their earnings withheld pursuant to the Purchase Plan. The amount withheld is then used to purchase shares of the Common Stock on specified dates determined by the Board. The price of Common Stock purchased under the Purchase Plan will be equal to 85% of the lower of the fair market value of the Common Stock at the commencement date of each offering period or the relevant purchase date. Employees may end their participation in the offering at any time during the offering period, and participation ends automatically on termination of employment with the Company. In the event of a merger, reorganization, consolidation or liquidation involving the Company, the Board has discretion to provide that each right to purchase Common Stock will be assumed or an equivalent right substituted by the successor corporation, or the Board may shorten the offering period and provide for all sums collected by payroll deductions to be applied to purchase stock immediately prior to such merger or other transaction. The Board has the authority to amend or terminate the Purchase Plan, provided, however, that no such action may adversely affect any outstanding rights to purchase Common Stock. 401(K) PLAN Effective September 15, 1994, the Company adopted the Signal Pharmaceuticals, Inc. Employees Retirement Investment Plan & Trust which was amended and restated by the MFS Fund Distributors, Inc. 401(k) Profit Sharing Plan and Trust, effective January 1, 1998 (the "401(k) Plan"), covering the 59 61 Company's employees. Pursuant to the 401(k) Plan, eligible employees may elect to reduce their current compensation by up to the statutorily prescribed annual limit ($10,000 in 1998) and have the amount of such reduction contributed to the 401(k) Plan. In addition, eligible employees may make roll-over contributions to the 401(k) Plan from a tax-qualified retirement plan. The 401(k) Plan allows for the Company to make discretionary matching and additional profit sharing contributions, each as determined by a committee of the Board of Directors. No discretionary or profit sharing contributions were made by the Company in 1997 and the Company has no intention of making such contributions in the near future. Company contributions, if any, become 20% vested after two years of service, with an additional 20% becoming vested for each year of service thereafter. The 401(k) Plan is intended to qualify under Section 401 of the Code, so that contributions by employees and the Company to the 401(k) Plan, and income earned on the 401(k) Plan contributions, are not taxable to employees until withdrawn from the 401(k) Plan, and so that contributions by the Company, if any, will be deductible by the Company when made. The trustees under the 401(k) Plan, at the direction of each participant, invest the 401(k) Plan employee salary deferrals in selected investment options. LIMITATIONS ON DIRECTORS' AND EXECUTIVE OFFICERS' LIABILITY AND INDEMNIFICATION The Company's Bylaws provide that the Company shall indemnify its directors and executive officers and may indemnify its other officers, employees and other agents to the fullest extent permitted by Delaware law, except with respect to certain proceedings initiated by such persons. The Company is also empowered under its Bylaws to enter into indemnification contracts with its directors and executive officers and to purchase insurance on behalf of any person it is required or permitted to indemnify. Pursuant to this provision, the Company has entered into indemnification agreements with each of its directors and executive officers. In addition, the Company's Restated Certificate provides that a director of the Company will not be personally liable to the Company or its stockholders for monetary damages for any 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 which involve intentional misconduct or a knowing violation of law, (iii) under Section 174 of the Delaware General Corporation Law or (iv) for any transaction from which the director derives an improper personal benefit. The Restated Certificate also provides that if the Delaware General Corporation Law is amended after the approval by the Company's stockholders of the Restated Certificate to authorize corporate action further eliminating or limiting the personal liability of directors, then the liability of the Company's directors shall be eliminated or limited to the fullest extent permitted by the Delaware General Corporation Law, as so amended. The provision does not affect a director's responsibilities under any other law, such as the federal securities laws or state or federal environmental laws. 60 62 CERTAIN TRANSACTIONS The following is a description of transactions since January 1, 1995, to which the Company has been a party, in which the amount involved in the transaction exceeds $60,000 and in which any director, executive officer or holder of more than five percent of the capital stock of the Company had or will have a direct or indirect material interest, other than compensation arrangements that are otherwise required to be described under "Management." In December 1997, the Company sold in a private placement 680,628 shares of Series F Preferred Stock to Ares-Serono, a five percent holder of capital stock of the Company, in exchange for an aggregate purchase price of $8,200,001, pursuant to a Series F Preferred Stock Purchase Agreement dated November 25, 1997 (the "Series F Agreement"). Upon the closing of this offering, each share of Series F Preferred Stock will automatically convert into one share of Common Stock. See Note 5 of Notes to Financial Statements for a description of the Series F Preferred Stock. In addition, on November 25, 1997, the Company entered into a Research Development and License Agreement with Ares-Serono focused on the identification of compounds that modulate NF-k B gene regulating pathways. Ares-Serono has paid Signal a license fee and is obligated to provide Signal with annual research and development support, make payments to Signal based on the achievement of certain research and development milestones, and to pay Signal royalties on any future product sales arising from the collaboration. See "Business--Research and Development Partners." In September 1997, the Company sold in a private placement 1,613,865 shares of Series E Preferred Stock in exchange for an aggregate purchase price of $11,999,997, pursuant to a Series E Preferred Stock Purchase Agreement dated September 9, 1997 (the "Series E Agreement"). Upon the closing of this offering, each share of Series E Preferred Stock will automatically convert into one share of Common Stock. See Note 5 of Notes to Financial Statements for a description of the Series E Preferred Stock. The following directors and beneficial owners of more than five percent of the Company's Common Stock (assuming the conversion of all shares of Preferred Stock into Common Stock) acquired beneficial ownership of Series E Preferred Stock pursuant to the Series E Agreement:
NO. OF DIRECTORS/5% STOCKHOLDERS SHARES ------------------------- ------- Patrick F. Latterell/Venrock Associates..................... 25,273 Luke B. Evnin/Accel Partners................................ 25,273 Brook H. Byers/Kleiner Perkins Caufield & Byers............. 25,273 Arnold Oronsky/InterWest Partners........................... 19,826 Oxford Bioscience Partners.................................. 13,217 U.S. Venture Partners....................................... 13,217 Ares-Serono S.A............................................. 246,575 Lombard Odier Immunology Fund............................... 392,670
The Company has entered into certain other agreements in connection with the Series E and Series F Agreements. Pursuant to one such agreement, certain stockholders acquired registration rights. See "Description of Capital Stock--Registration Rights." Further, the Company and its stockholders agreed to certain restrictions on the issuance and transfer of shares of the Company's capital stock, and to certain voting rights relating to the election of directors, all of which restrictions and voting rights are not applicable to and shall terminate upon the closing of this offering. In June 1994, the Company loaned $250,000 to Alan J. Lewis, the Company's President and Chief Executive Officer and a director of the Company, to assist with the purchase of a residence in connection with Dr. Lewis' relocation to San Diego, California. Pursuant to the terms of a Promissory Note dated June 14, 1994, the principal amount of the loan plus accrued interest shall be amortized over a period of five years following June 14, 1999, with monthly payments commencing in July 1999. The principal amount of the loan will be interest-free for five years from the date of the Promissory Note, and thereafter will accrue interest at the per annum rate of 7.52%, compounded annually. 61 63 Interest will also begin to accrue at the same rate in the event that Dr. Lewis' employment is terminated for any reason. The parties also entered into a Security Agreement on the same date whereby Dr. Lewis pledged all present and future shares of Common Stock of the Company held by him (plus all cash and stock dividends attributable to such shares) as security for the loan. In May 1998, the Company loaned $62,000 to Alan J. Lewis in connection with the exercise of options to purchase 106,250 shares of Common Stock of the Company. Pursuant to the terms of a Promissory Note delivered to the Company by Dr. Lewis, dated May 8, 1998, the principal amount of the loan plus accrued interest at a per annum rate equal to 5.69%, compounded annually, shall be due and payable five years from the date of the loan. Pursuant to a Stock Pledge Agreement entered into on the same date, Dr. Lewis, pledged all present and future shares of Common Stock of the Company held by him (plus all cash and stock dividends attributable to such shares) as security for the loan. The Company has entered into employment letter agreements with Alan J. Lewis, its President and Chief Executive Officer, Carl F. Bobkoski, its Executive Vice President, David W. Anderson, its Senior Vice President, Drug Development, and Bradley B. Gordon, its Vice President Finance, Chief Financial Officer and Corporate Secretary. See "Management--Employment Agreements." The Company has granted options to certain of its directors and executive officers. The Company has also entered into an indemnification agreement with each of its directors and executive officers. See "Management--Limitations on Directors' and Executive Officers' Liability and Indemnification." 62 64 PRINCIPAL STOCKHOLDERS The following table sets forth certain information regarding to the beneficial ownership of the Company's Common Stock as of March 31, 1998, and as adjusted to reflect the sale of the shares of Common Stock offered hereby, by (i) each holder of more than five percent of the Company's Common Stock, (ii) each of the Named Executive Officers, (iii) each of the Company's directors, and (iv) all current directors and executive officers as a group.
PERCENTAGE OF SHARES BENEFICIALLY OWNED(1) SHARES ------------------- 5% STOCKHOLDERS, DIRECTORS BENEFICIALLY BEFORE AFTER AND NAMED EXECUTIVE OFFICERS OWNED(1) OFFERING OFFERING ---------------------------- ------------ -------- -------- Ares-Serono S.A.......................................... 927,203 13.7% 9.8% 15bis Chemin des Mines 1202 Geneva, Switzerland Luke B. Evnin, Ph.D(2)................................... 745,653 11.0 7.9 Accel Partners One Embarcadero Center, Suite 3820 San Francisco, California 94111 Patrick F. Latterell(3).................................. 743,031 11.0 7.9 Venrock Associates 755 Page Mill Road, Suite A230 Palo Alto, California 94304 Brook H. Byers(4)........................................ 720,663 10.6 7.6 Kleiner Perkins Caufield & Byers 2750 Sand Hill Road Menlo Park, California 94025 Arnold Oronsky, Ph.D.(5)................................. 568,040 8.4 6.0 InterWest Partners 3000 Sand Hill Road Building 3, Suite 255 Menlo Park, California 94025 Lombard Odier & Cie...................................... 392,670 5.8 4.2 11, rue de la Corraterie 1204 Geneva, Switzerland Oxford Bioscience Partners(6)............................ 370,358 5.5 3.9 650 Town Center Drive, Suite 180 Costa Mesa, California 92626 U.S. Venture Partners(7)................................. 370,358 5.5 3.9 2180 Sand Hill Road, Suite 300 Menlo Park, California 94025 Alan J. Lewis, Ph.D.(8).................................. 187,500 2.8 2.0 Harry F. Hixson, Ph.D.(9)................................ 99,880 1.5 1.1 Carl F. Bobkoski(10)..................................... 98,750 1.5 1.0 David W. Anderson, Ph.D.(11)............................. 85,000 1.3 * Bradley B. Gordon(12).................................... 70,000 1.0 * John P. Walker(13)....................................... 37,500 * * All directors and executive officers as a group (10 persons)(14)........................................... 3,356,017 48.0 34.8
- ------------------------------ * Represents beneficial ownership of less than one percent. 63 65 (1) Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission and generally includes voting or investment power with respect to securities. Except as indicated by footnote, and subject to community property laws where applicable, the persons named in the table above have sole voting and investment power with respect to all shares of Common Stock shown as beneficially owned by them. Percentage of beneficial ownership is based on 6,767,263 shares of Common Stock outstanding as of March 31, 1998 (after giving effect to the conversion of all outstanding shares of Preferred Stock into 6,050,949 Common Stock) and 9,433,929 shares of Common Stock outstanding after completion of this offering. (2) Includes 613,658 shares held by Accel IV L.P., 27,124 shares held by Accel Investors '93 L.P., 13,195 shares held by Accel Keiretsu L.P., 58,652 shares held by Accel Japan L.P., 16,127 shares held by Ellmore C. Patterson Partners and 4,397 shares held by Prosper Partners, affiliated entities for which Dr. Evnin is a General Partner or officer of some. Dr. Evnin disclaims beneficial ownership of all such shares, except to the extent of his pecuniary or pro rata interest in such shares. Also includes 12,500 shares subject to options exercisable within 60 days of March 31, 1998. (3) Includes 497,472 shares held by Venrock Associates and 233,059 shares held by Venrock Associates II, L.P., entities for which Mr. Latterell is a general partner. Mr. Latterell disclaims beneficial ownership of all such shares, except to the extent of his pecuniary or pro rata interest in such shares. Also includes 12,500 shares subject to options exercisable within 60 days of March 31, 1998. (4) Includes 708,163 shares held by Kleiner Perkins Caufield & Byers VI, an entity for which Mr. Byers is a partner. Mr. Byers disclaims beneficial ownership of all such shares, except to the extent of his pecuniary or pro rata interest in such shares. Also includes 12,500 shares subject to options exercisable within 60 days of March 31, 1998. (5) Includes 552,068 shares held by InterWest Partners V and 3,472 shares held by InterWest Investors V, which are affiliated entities. Dr. Oronsky is a general partner of InterWest Partners V. Dr. Oronsky disclaims beneficial ownership of all such shares, except to the extent of his pecuniary or pro rata interest in such shares. Also includes 12,500 shares subject to options exercisable within 60 days of March 31, 1998. (6) Includes 231,942 shares held by Oxford Bioscience Partners L.P., 74,071 shares held by Oxford Bioscience Partners (Adjunct) L.P. and 64,345 shares held by Oxford Bioscience Partners (Bermuda) Limited Partnership. (7) Includes 320,361 shares held by U.S. Venture Partners IV, L.P., 38,887 shares held by Second Ventures II, L.P. and 11,110 shares held by USVP Entrepreneur Partners II, L.P. (8) Includes 18,750 shares subject to options exercisable within 60 days of March 31, 1998. (9) Includes 79,880 shares held by the Harry F. Hixson, Jr. Separate Property Trust Dated December 15, 1995, of which Dr. Hixson is the sole trustee. Also includes 12,500 shares subject to options exercisable within 60 days of March 31, 1998. (10) Includes 25,000 shares subject to options exercisable within 60 days of March 31, 1998. (11) Includes 35,000 shares subject to options exercisable within 60 days of March 31, 1998. (12) Includes 70,000 shares subject to options exercisable within 60 days of March 31, 1998. (13) Includes 37,500 shares held by the Walker Living Trust Dated March 3, 1995, of which Mr. Walker is the sole trustee. (14) Includes 211,250 shares subject to options exercisable within 60 days of March 31, 1998. 64 66 DESCRIPTION OF CAPITAL STOCK Effective upon the closing of this offering, the authorized capital stock of the Company will consist of 25,000,000 shares of Common Stock, $.001 par value per share, and 5,000,000 shares of preferred stock, $.001 par value per share. COMMON STOCK As of March 31, 1998, there were 6,767,263 shares of Common Stock outstanding, after giving effect to the conversion of all outstanding shares of Preferred Stock into 6,050,949 shares of Common Stock. The holders of Common Stock are entitled to one vote per share on all matters to be voted on by 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 of Directors out of funds legally available therefor. In the event of a liquidation, dissolution or winding up of the Company, holders of Common Stock are entitled to share ratably in all assets remaining after payment of liabilities and the liquidation preferences of any outstanding shares of Preferred Stock. Holders of Common Stock have no preemptive, conversion, subscription or other rights. There are no redemption or sinking fund provisions applicable to the Common Stock. All outstanding shares of Common Stock are, and all shares of Common Stock to be outstanding upon completion of this offering will be, fully paid and nonassessable. PREFERRED STOCK Upon the closing of this offering, all outstanding shares of Preferred Stock will be converted into 6,050,949 shares of Common Stock. See Note 5 of Notes to Financial Statements for a description of the currently outstanding Preferred Stock. Following the conversion, the Company's Certificate of Incorporation will be amended and restated to delete all references to such shares of Preferred Stock. Under the Restated Certificate, the Board has the authority, without further action by stockholders, to issue up to 5,000,000 shares of preferred stock in one or more series and to fix or alter the rights, preferences, privileges, qualifications and restrictions granted to or imposed upon any wholly unissued series of preferred stock, and to establish from time to time the number of shares constituting any such series or any of them; and to increase or decrease the number of shares of any series subsequent to the issuance of shares of that series, but not below the number of shares of such series then outstanding. The issuance of preferred stock could adversely affect the voting power of holders of Common Stock and reduce the likelihood that such holders will receive dividend payments and payments upon liquidation. Such issuance could have the effect of decreasing the market price of the Common Stock. The issuance of preferred stock could have the effect of delaying, deterring or preventing a change in control of the Company. The Company has no present plans to issue any shares of preferred stock. WARRANTS As of March 31, 1998, there were warrants outstanding to purchase an aggregate of 62,500 shares of Series C-1 Preferred Stock at an exercise price of $8.40 per share, which will convert into warrants to purchase Common Stock upon the closing of this offering. REGISTRATION RIGHTS After this offering, the holders of 6,050,949 shares of Common Stock will be entitled to certain rights with respect to the registration of such shares under the Securities Act, pursuant to that certain Amended and Restated Investor Rights Agreement dated September 9, 1997, as amended on November 25, 1997 (the "Investors' Rights Agreement"). Under the terms of the Investors' Rights Agreement, if the Company proposes to register any of its securities under the Securities Act, either for its own account or for the account of other security holders exercising registration rights, such holders are entitled to notice of such registration and are entitled, subject to certain limitations, to include shares therein. Commencing with the date that is 180 days after this offering, the holders may also require the 65 67 Company to file a registration statement under the Securities Act with respect to their shares, and the Company is required to use its best efforts to effect to such registration. Furthermore, the holders may require the Company to register their shares on a registration statement on Form S-3 when such form becomes available to the Company. Such registration rights terminate on the seventh anniversary of the effective date of this offering. The holder of a warrant to purchase 62,500 shares of Series C-1 Preferred Stock of the Company, granted November 23, 1996, will be entitled, upon exercise of such warrant, to notice whenever the Company proposes to register any of its securities under the Securities Act, either for its own account or for the account of other security holders exercising registration rights. The holder of such warrant is entitled to include in any such registration the shares of Common Stock into which the Series C-1 Preferred Stock underlying the warrant may be converted. Such registration rights terminate on the seventh anniversary of the effective date of this offering. After this offering, a holder of 11,093 shares of Common Stock purchased pursuant to two certain Restricted Stock Purchase Agreements dated October 26, 1993 and February 18, 1998, respectively, will be entitled, if the Company proposes to register any of its securities under the Securities Act, either for its own account or for the account of other security holders exercising registration rights, to notice of such registration and, subject to certain limitations, to include such shares therein. In addition, such holder may obtain an additional 23,750 shares of Common Stock pursuant to the attainment of certain regulatory milestones whereby such additional shares would be entitled to the same registration rights as the 11,093 shares currently held. After this offering, a holder of 7,500 shares of Common Stock purchased pursuant to two certain Restricted Stock Purchase Agreements dated October 31, 1996 and December 7, 1997, respectively, will be entitled, if the Company proposes to register any of its securities under the Securities Act, either for its own account or for the account of other security holders exercising registration rights, to notice of such registration and, subject to certain limitations, to include such shares therein. In addition, such holder may obtain an additional 5,625 shares of Common Stock pursuant to the attainment of certain regulatory milestones whereby such additional shares would be entitled to the same registration rights as the 7,500 shares currently held. Generally, the Company is required to bear all registration and selling expenses incurred in connection with any of the registrations described above. The registration rights are also subject to certain conditions and limitations, among them the right of the underwriters of a public offering to limit the number of shares included in the registration statement filed in connection therewith. DELAWARE ANTI-TAKEOVER LAW AND CERTAIN CHARTER PROVISIONS The Company is governed by the provisions of Section 203 of the Delaware General Corporation Law ("Section 203"). In general, Section 203 prohibits a public Delaware corporation from engaging in a "business combination" with an "interested stockholder" for a period of three years after the date of the transaction in which the person became an interested stockholder, unless the business combination is approved in a prescribed manner. A "business combination" includes mergers, asset sales or other transactions resulting in a financial benefit to the stockholder. An "interested stockholder" is a person who, together with affiliates and associates, owns (or within three years, did own) 15% or more of the corporation's outstanding voting stock. This provision could delay, discourage or prohibit transactions not approved in advance by the Board of Directors, such as takeover attempts that might result in a premium over the market price of the Common Stock. The Company's Restated Certificate provides that the Board of Directors will be divided into three classes of directors, with each class serving a staggered three-year term. The classification system of electing directors may tend to discourage a third party from making a tender offer or otherwise attempting to obtain control of the Company and may maintain the composition of the Board of Directors, as the classification of the Board of Directors generally increases the difficulty of replacing a majority of directors. The Company's Restated Certificate provides that any action required or 66 68 permitted to be taken by stockholders of the Company must be effected at a duly called annual or special meeting of stockholders and may not be effected by any consent in writing. In addition, the Company's Bylaws provide that special meetings of the stockholders of the Company may be called only by the Chairman of the Board of Directors, the Chief Executive Officer of the Company, by the Board of Directors pursuant to a resolution adopted by a majority of the total number of authorized directors, or by the holders of 10% of the outstanding voting stock of the Company. The Company's Restated Certificate also specifies that the authorized number of directors may be changed only by resolution of the Board of Directors and does not include a provision for cumulative voting for directors. Under cumulative voting, a minority stockholder holding a sufficient percentage of a class of shares may be able to ensure the election of one or more directors. These and other provisions contained in the Restated Certificate and the Company's Bylaws could delay or discourage certain types of transactions involving an actual or potential change in control of the Company or its management (including transactions in which stockholders might otherwise receive a premium for their shares over then current prices) and may limit the ability of stockholders to remove current management of the Company or approve transactions that stockholders may deem to be in their best interests and, therefore, could adversely affect the price of the Company's Common Stock. TRANSFER AGENT AND REGISTRAR The transfer agent and registrar for the Company's Common Stock is ChaseMellon Shareholder Services, L.L.C. 67 69 SHARES ELIGIBLE FOR FUTURE SALE Prior to this offering, there has been no public market for the Common Stock. Future sales of substantial amounts of Common Stock in the public market could adversely affect prevailing market prices. Furthermore, since only a limited number of shares will be available for sale shortly after the offering because of certain contractual and legal restrictions on resale described below, sales of substantial amounts of Common Stock in the public market after the restrictions lapse could adversely affect the prevailing market price and the ability of the Company to raise equity capital in the future. Upon completion of this offering, the Company will have 9,433,929 shares of Common Stock outstanding, assuming no exercise of currently outstanding options or warrants. Of these shares, the 2,500,000 shares sold in this offering (plus any additional shares sold upon exercise of the Underwriters' over-allotment option) will be freely transferable without restriction under the Securities Act, unless they are held by "affiliates" of the Company as that term is used under the Securities Act and the rules and regulations promulgated thereunder. The remaining 6,933,929 shares of Common Stock held by existing stockholders are Restricted Shares. Restricted Shares may be sold in the public market only if registered or of they qualify for an exemption from registration under Rules 144 or 701 promulgated under the Securities Act, which rules are summarized below. As a result of Lock-up Agreements and the provisions of Rules 144 and 701, additional shares will be available for sale in the public market as follows: (i) no Restricted Shares will be eligible for immediate sale on the effective date of this offering; (ii) 6,677,325 Restricted Shares (plus approximately 623,687 shares of Common Stock issuable upon exercise of vested stock options) will be eligible for sale upon expiration of the Lock-up Agreements 180 days after the date of this Prospectus; and (iii) the remainder of the Restricted Shares will be eligible for sale from time to time thereafter upon expiration of their respective one-year holding periods and could be sold earlier if the holders exercise any available registration rights. The holders of 6,058,449 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 beginning 180 days from the effective date of this offering. 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 a registration statement on Form S-8 registering shares of Common Stock subject to outstanding stock options or reserved for issuance under the Company's stock option plans. Such registration statement is expected to be filed and to become effective as soon as practicable after the effective date of this offering. Shares registered under such registration statement will, subject to Rule 144 volume limitations applicable to Affiliates, be available for sale in the open market, unless such shares are subject to vesting restrictions with the Company or the lock-up agreements described above. In general, under Rule 144 as in effect on the date of this Prospectus, beginning 90 days after the effective date of this offering, an Affiliate of the Company, or a person (or persons whose shares are aggregated) who has beneficially owned Restricted Shares (as defined under Rule 144) for at least one year is entitled to sell within any three-month period a number of shares that does not exceed greater of (i) one percent of the then outstanding shares of the Company's Common Stock or (ii) the average weekly trading volume of the Company's Common Stock in The Nasdaq National Market during the four calendar weeks immediately preceding the date on which notice of the sale is filed with the Commission. Sales pursuant to Rule 144 are subject to certain requirements relating to the manner of sale, notice, and the availability of current public information about the Company. A person (or persons whose shares are aggregated) who was not an Affiliate of the Company at any time during the 90 days immediately preceding the sale and who has beneficially owned Restricted Shares for at least two years is entitled to sell such shares under Rule 144(k) without regard to the limitations described above. 68 70 An employee, officer or director of or consultant to the Company who purchased or was awarded shares or options to purchase shares pursuant to a written compensatory plan or contract is entitled to rely on the resale provisions of Rule 701 under the Securities Act, which permits Affiliates and non-Affiliates to sell their Rule 701 shares without having to comply with the Rule 144 holding period restrictions, in each case commencing 90 days after the effective date of this offering. In addition, non-Affiliates may sell Rule 701 shares without complying with the public information, volume and notice provisions of Rule 144. 69 71 UNDERWRITING Subject to the terms and conditions of the Underwriting Agreement, the Underwriters named below, through their representatives, Hambrecht & Quist LLC, BancAmerica Robertson Stephens and Lehman Brothers Inc. (the "Representatives") have severally agreed to purchase from the Company the following respective numbers of shares of Common Stock:
NUMBER NAME OF SHARES ---- --------- Hambrecht & Quist LLC....................................... BancAmerica Robertson Stephens.............................. Lehman Brothers Inc......................................... --------- Total............................................. 2,500,000 =========
The Underwriting Agreement provides that the obligations of the Underwriters are subject to certain conditions precedent, including the absence of any material adverse change in the Company's business and the receipt of certain certificates, opinions and letters from the Company, its counsel and independent auditors. The nature of the Underwriters' obligation is such that they are committed to purchase all shares of Common Stock offered hereby if any of such shares are purchased. The Underwriters propose to offer the shares of Common Stock directly 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 not in excess of $ per share. The Underwriters may allow and such dealers may reallow a concession not in excess of $ per share to certain other dealers. After the initial public offering of the shares, the offering price and other selling terms may be changed by the Representatives of the Underwriters. The Representatives have advised the Company that the Underwriters do not intend to confirm discretionary sales in excess of five percent of the shares of Common Stock offered hereby. The Company has granted to the Underwriters an option, exercisable no later than 30 days after the date of this Prospectus, to purchase up to 375,000 additional shares of Common Stock at the initial public offering price, less the underwriting discount, set forth on the cover page of this Prospectus. To the extent that the Underwriters exercise this option, each of the Underwriters will have a firm commitment to purchase approximately the same percentage thereof which the number of shares of Common Stock to be purchased by it shown in the above table bears to the total number of shares of Common Stock offered hereby. The Company will be obligated, pursuant to the option, to sell shares to the Underwriters to the extent the option is exercised. The Underwriters may exercise such option only to cover over-allotments made in connection with the sale of Common Stock offered hereby. Certain persons participating in this offering may overallot or effect transactions which stabilize, maintain or otherwise affect the market price of the Common Stock at levels above those which might otherwise prevail in the open market, including by entering stabilizing bids, effecting syndicate covering transactions or imposing penalty bids. A stabilizing bid means the placing of any bid or effecting of any purchase, for the purpose of pegging, fixing or maintaining the price of the Common Stock. A syndicate covering transaction means the placing of any bid on behalf of the underwriting syndicate or the effecting of any purchase to reduce a short position created in connection with the offering. A penalty bid means an arrangement that permits the Underwriters to reclaim a selling 70 72 concession from a syndicate member in connection with the offering when shares of Common Stock sold by the syndicate member are purchased in syndicate covering transactions. Such transactions may be effected on the Nasdaq National Market, in the over-the-counter market, or otherwise. Such stabilizing, if commenced, may be discontinued at any time. The offering of the shares is made for delivery when, as and if accepted by the Underwriters and subject to prior sale and to withdrawal, cancellation or modification of the offering without notice. The Underwriters reserve the right to reject an order for the purchase of shares in whole or in part. The Company has agreed to indemnify the Underwriters against certain liabilities, including liabilities under the Securities Act, and to contribute to payments the Underwriters may be required to make in respect thereof. Stockholders of the Company, including the executive officers and directors, who hold in the aggregate 6,933,929 shares of Common Stock after the offering, have agreed that they will not, without the prior written consent of Hambrecht & Quist LLC, offer, sell or otherwise dispose of any shares of Common Stock, options or warrants to acquire shares of Common Stock or securities exchangeable for or convertible into shares of Common Stock owned by them during the 180-day period following the date of this Prospectus. The Company has agreed that it will not, without the prior written consent of Hambrecht & Quist LLC, offer, sell or otherwise dispose of any shares of Common Stock, options or warrants to acquire shares of Common Stock or securities exchangeable for or convertible into shares of Common Stock during the 180-day period following the date of this Prospectus, except that the Company may issue shares to DuPont Merck in accordance with its stock purchase agreement and under agreements that may be entered into with collaborators in the future. In addition, the Company may issue shares upon the exercise of options granted prior to the date hereof and may grant additional options and issue stock under its 1998 Equity Incentive Plan, and Employee Stock Purchase Plan (and will cause any person to whom such options are granted or shares are issued to enter into an agreement restricting the transfer of any securities of the Company held by such person during the 180-day period following the date of this Prospectus without the prior written consent of Hambrecht & Quist LLC). See "Shares Eligible for Future Sale." Prior to the offering, there has been no public market for the Common Stock. The initial public offering price for the Common Stock will be determined by negotiation among the Company and the Representatives. Among the factors to be considered in determining the initial public offering price are the prevailing market and economic conditions, revenue and earnings of the Company, market valuations of other companies engaged in activities similar to the Company, estimates of the business potential and prospects of the Company, the present state of the Company's business operations, the Company's management and other factors deemed relevant. The estimated initial public offering price range set forth on the cover of this Prospectus is subject to change as a result of market conditions and other factors. LEGAL MATTERS The validity of the shares of Common Stock offered hereby will be passed upon for the Company by Cooley Godward LLP, San Diego, California. Certain legal matters will be passed upon for the Underwriters by Brobeck, Phleger & Harrison LLP, Palo Alto, California. EXPERTS The financial statements of Signal Pharmaceuticals, Inc. as of December 31, 1996 and 1997, and for each of the three years in the period ended December 31, 1997, appearing in this Prospectus and 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. 71 73 ADDITIONAL INFORMATION The Company has filed with the Securities and Exchange Commission (the "Commission") a Registration Statement on Form S-1 (the "Registration Statement") under the Securities Act with respect to the Common Stock offered hereby. As permitted by the rules and regulations of the Commission, this Prospectus, which is a part of the Registration Statement, omits certain information, exhibits, schedules and undertakings set forth in the Registration Statement. For further information pertaining to the Company and the Common Stock offered hereby, reference is made to the Registration Statement and the exhibits and schedules thereto. Statements contained in this Prospectus as to the contents or provisions of any contract or other document referred to herein are not necessarily complete, and in each instance reference is made to the copy of such contract or other document filed as an exhibit to the Registration Statement, each such statement being qualified in all respects by such reference. A copy of the Registration Statement may be inspected without charge at the office of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, and at the Commission's regional offices located at the Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661 and Seven World Trade Center, 13th Floor, New York, New York 10048. Copies of all or any part of the Registration Statement may be obtained from such offices upon the payment of the fees prescribed by the Commission. In addition, registration statements and certain other filings made with the Commission through its Electronic Data Gathering, Analysis and Retrieval ("EDGAR") system are publicly available through the Commission's web site on the Internet at http://www.sec.gov. The Registration Statement, including all exhibits thereto and amendments thereof, has been filed with the Commission through EDGAR. 72 74 INDEX TO FINANCIAL STATEMENTS
PAGE ---- SIGNAL PHARMACEUTICALS, INC. Report of Ernst & Young LLP, Independent Auditors........... F-2 Balance Sheets as of December 31, 1996 and 1997 and March 31, 1998 (unaudited)...................................... F-3 Statements of Operations for each of the three years in the period ended December 31, 1997 and the three months ended March 31, 1997 (unaudited) and 1998 (unaudited)........... F-4 Statements of Stockholders' Equity for each of the three years in the period ended December 31, 1997 and the three months ended March 31, 1998 (unaudited)................... F-5 Statements of Cash Flows for each of the three years in the period ended December 31, 1997 and the three months ended March 31, 1997 (unaudited) and 1998 (unaudited)........... F-6 Notes to Financial Statements............................... F-7
F-1 75 REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS The Board of Directors and Stockholders Signal Pharmaceuticals, Inc. We have audited the accompanying balance sheets of Signal Pharmaceuticals, Inc. as of December 31, 1996 and 1997, and the related statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 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 Signal Pharmaceuticals, Inc. at December 31, 1996 and 1997, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. San Diego, California January 16, 1998, except for Note 7, as to which the date is May 5, 1998 - -------------------------------------------------------------------------------- THE FOREGOING REPORT IS IN THE FORM THAT WILL BE SIGNED UPON THE COMPLETION OF THE CHANGES IN CAPITALIZATION DESCRIBED IN NOTE 7 TO THE FINANCIAL STATEMENTS. ERNST & YOUNG LLP San Diego, California May 5, 1998 F-2 76 SIGNAL PHARMACEUTICALS, INC. BALANCE SHEETS
PRO FORMA STOCKHOLDERS' DECEMBER 31, EQUITY AT --------------------------- MARCH 31, MARCH 31, 1996 1997 1998 1998 ------------ ------------ ------------ ------------- (UNAUDITED) (UNAUDITED) ASSETS Current assets: Cash and cash equivalents....................... $ 5,459,696 $ 8,736,469 $ 12,916,238 Short-term investments.......................... -- 12,129,506 7,754,955 Grant revenue receivable........................ 308,062 90,449 99,931 Other current assets............................ 218,750 189,366 502,383 ------------ ------------ ------------ Total current assets.............................. 5,986,508 21,145,790 21,273,507 ------------ ------------ ------------ Property and equipment, net....................... 2,280,168 2,252,568 2,776,621 Deposits and other assets......................... 530,476 189,438 455,114 Note receivable from officer...................... 250,000 250,000 250,000 ------------ ------------ ------------ $ 9,047,152 $ 23,837,796 $ 24,755,242 ============ ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable................................ $ 426,718 $ 268,714 $ 538,702 Accrued liabilities............................. 312,599 1,207,719 591,355 Current portion of promissory note.............. 583,380 1,000,080 1,000,080 Current portion of obligations under capital 395,780 205,911 209,151 leases and equipment notes payable............ Current portion of deferred revenue under 1,662,497 3,083,956 4,298,743 collaborative agreements...................... ------------ ------------ ------------ Total current liabilities......................... 3,380,974 5,766,380 6,638,031 ------------ ------------ ------------ Promissory note, net of current portion........... 2,255,549 1,302,612 1,064,377 Obligations under capital leases and equipment 490,849 245,669 279,324 notes payable, net of current portion........... Deferred revenue under collaborative agreements, 1,339,579 1,281,254 1,016,675 net of current portion.......................... Deferred rent..................................... 67,851 78,167 107,821 Commitments Stockholders' equity: Convertible Preferred Stock, $.001 par value; 3,698 6,051 6,051 $ -- 6,113,485 shares authorized; 3,698,306, 6,050,949 and 6,050,949 shares issued and outstanding at December 31, 1996, 1997 and March 31, 1998, respectively; liquidation preference -- $40,909,587 at December 31, 1997 and March 31, 1998 (5,000,000 shares authorized, no shares issued and outstanding pro forma).................................... Common Stock, $.001 par value; 8,750,000 shares 522 664 716 6,767 authorized; 522,424, 664,602 and 716,314 shares issued and outstanding at December 31, 1996, 1997 and March 31, 1998, respectively, (25,000,000 shares authorized, 6,767,263 shares issued and outstanding pro forma)...... Additional paid-in capital...................... 20,513,608 40,365,615 41,433,814 41,433,814 Deferred compensation........................... -- (511,510) (1,387,318) (1,387,318) Accumulated other comprehensive income.......... -- 48,341 6,015 6,015 Accumulated deficit............................. (19,005,478) (24,745,447) (24,410,264) (24,410,264) ------------ ------------ ------------ ------------ Total stockholders' equity........................ 1,512,350 15,163,714 15,649,014 $ 15,649,014 ------------ ------------ ------------ ============ $ 9,047,152 $ 23,837,796 $ 24,755,242 ============ ============ ============
See accompanying notes. F-3 77 SIGNAL PHARMACEUTICALS, INC. STATEMENTS OF OPERATIONS
YEAR ENDED THREE MONTHS ENDED DECEMBER 31, MARCH 31, ---------------------------------------- ------------------------- 1995 1996 1997 1997 1998 ----------- ------------ ----------- ----------- ----------- (UNAUDITED) Revenue under collaborative agreements: Related party.................................... $ -- $ -- $ 250,000 $ -- $ 750,000 Unrelated parties................................ -- 3,585,414 7,065,356 1,476,565 3,793,696 Grant income....................................... 299,152 347,198 264,257 72,261 99,932 ----------- ----------- ----------- ----------- ---------- 299,152 3,932,612 7,579,613 1,548,826 4,643,628 Expenses: Research and development......................... 5,172,992 7,724,178 10,337,318 2,458,817 3,287,649 General and administrative....................... 1,937,226 2,470,910 2,791,084 671,325 1,203,118 ----------- ----------- ----------- ----------- ---------- 7,110,218 10,195,088 13,128,402 3,130,142 4,490,767 ----------- ----------- ----------- ----------- ---------- Income (loss) from operations...................... (6,811,066) (6,262,476) (5,548,789) (1,581,316) 152,861 Interest income.................................... 452,609 187,488 325,529 59,859 282,863 Interest expense................................... (123,730) (134,019) (516,709) (152,274) (100,541) ----------- ----------- ----------- ----------- ---------- Net income (loss).................................. $(6,482,187) $(6,209,007) $(5,739,969) $(1,673,731) $ 335,183 =========== =========== =========== =========== ========== Pro forma net income (loss) per share, basic and diluted.......................................... $ (1.20) $ 0.05 =========== ========== Number of shares used in computing pro forma net income (loss) per share: Basic.......................................... 4,775,952 6,628,046 =========== ========== Diluted........................................ 4,775,952 6,875,100 =========== ==========
See accompanying notes. F-4 78 SIGNAL PHARMACEUTICALS, INC. STATEMENTS OF STOCKHOLDERS' EQUITY FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1997 AND THE THREE MONTHS ENDED MARCH 31, 1998 (UNAUDITED)
CONVERTIBLE ACCUMULATED PREFERRED STOCK COMMON STOCK ADDITIONAL OTHER ------------------ ---------------- PAID-IN DEFERRED COMPREHENSIVE ACCUMULATED SHARES AMOUNT SHARES AMOUNT CAPITAL COMPENSATION INCOME (LOSS) DEFICIT --------- ------ ------- ------ ----------- ------------ ------------- ------------ Balance at December 31, 1994........................ 3,573,306 $3,573 497,357 $497 $18,375,335 $ -- $ -- $(6,314,284) Issuance of Common Stock, net of repurchases...... -- -- 3,875 4 315 -- -- -- Offering costs related to issuance of Series C Preferred Stock......... -- -- -- -- (9,547) -- -- -- Net loss.................. -- -- -- -- -- -- -- (6,482,187) --------- ------ ------- ---- ----------- ----------- -------- ------------ Balance at December 31, 1995........................ 3,573,306 3,573 501,232 501 18,366,103 -- -- (12,796,471) Issuance of Series D Preferred Stock......... 125,000 125 -- -- 1,974,875 -- -- -- Issuance of warrants...... -- -- -- -- 165,000 -- -- -- Issuance of Common Stock, net of repurchases...... -- -- 21,192 21 7,630 -- -- -- Net loss.................. -- -- -- -- -- -- -- (6,209,007) --------- ------ ------- ---- ----------- ----------- -------- ------------ Balance at December 31, 1996........................ 3,698,306 3,698 522,424 522 20,513,608 -- -- (19,005,478) Issuance of Series D Preferred Stock......... 58,150 58 -- -- (58) -- -- -- Issuance of Series E Preferred Stock......... 1,613,865 1,614 -- -- 10,975,517 -- -- -- Issuance of Series F Preferred Stock......... 680,628 681 -- -- 8,161,399 -- -- -- Issuance of Common Stock, net of repurchases...... -- -- 141,774 142 99,294 -- -- -- Unrealized gain on available for sale securities.............. -- -- -- -- -- -- 48,341 -- Deferred compensation..... -- -- -- -- 615,855 (615,855) -- -- Amortization of deferred compensation............ -- -- -- -- -- 104,345 -- -- Net loss.................. -- -- -- -- -- -- -- (5,739,969) --------- ------ ------- ---- ----------- ----------- -------- ------------ Balance at December 31, 1997........................ 6,050,949 6,051 664,198 664 40,365,615 (511,510) 48,341 (24,745,447) Issuance of Common Stock, net of repurchases (unaudited)............. -- -- 52,116 52 49,029 -- -- -- Unrealized loss on available for sale securities (unaudited)............. -- -- -- -- -- -- (42,326) -- Deferred compensation (unaudited)............. -- -- -- -- 1,019,170 (1,019,170) -- -- Amortization of deferred compensation (unaudited)............. -- -- -- -- -- 143,362 -- -- Net income (unaudited).... -- -- -- -- -- -- -- 335,183 --------- ------ ------- ---- ----------- ----------- -------- ------------ Balance at March 31, 1998 (unaudited)................. 6,050,949 $6,051 716,314 $716 $41,433,814 $(1,387,318) $ 6,015 $(24,410,264) ========= ====== ======= ==== =========== =========== ======== ============ TOTAL STOCKHOLDERS' EQUITY ------------- Balance at December 31, 1994........................ $12,065,121 Issuance of Common Stock, net of repurchases...... 319 Offering costs related to issuance of Series C Preferred Stock......... (9,547) Net loss.................. (6,482,187) ----------- Balance at December 31, 1995........................ 5,573,706 Issuance of Series D Preferred Stock......... 1,975,000 Issuance of warrants...... 165,000 Issuance of Common Stock, net of repurchases...... 7,651 Net loss.................. (6,209,007) ----------- Balance at December 31, 1996........................ 1,512,350 Issuance of Series D Preferred Stock......... -- Issuance of Series E Preferred Stock......... 10,977,131 Issuance of Series F Preferred Stock......... 8,162,080 Issuance of Common Stock, net of repurchases...... 99,436 Unrealized gain on available for sale securities.............. 48,341 Deferred compensation..... -- Amortization of deferred compensation............ 104,345 Net loss.................. (5,739,969) ----------- Balance at December 31, 1997........................ 15,163,714 Issuance of Common Stock, net of repurchases (unaudited)............. 49,081 Unrealized loss on available for sale securities (unaudited)............. (42,326) Deferred compensation (unaudited)............. -- Amortization of deferred compensation (unaudited)............. 143,362 Net income (unaudited).... 335,183 ----------- Balance at March 31, 1998 (unaudited)................. $15,649,014 ===========
See accompanying notes. F-5 79 SIGNAL PHARMACEUTICALS, INC. STATEMENTS OF CASH FLOWS
THREE MONTHS YEAR ENDED DECEMBER 31, ENDED MARCH 31, ---------------------------------------- ------------------------- 1995 1996 1997 1997 1998 ----------- ----------- ------------ ----------- ----------- (UNAUDITED) CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss)............................... $(6,482,187) $(6,209,007) $ (5,739,969) $(1,673,731) $ 335,183 Adjustments to reconcile net income (loss) to net cash provided by (used for) operating activities: Depreciation and amortization............... 518,014 633,797 879,327 205,314 258,551 Amortization of warrants.................... -- 3,929 47,142 11,785 11,785 Amortization of deferred compensation....... -- -- 104,345 -- 143,362 Common stock issued for technology and services.................................. -- -- 14,600 -- 8,400 Deferred revenue under collaborative agreements................................ -- 3,002,076 1,363,134 (893,746) 950,208 Deferred rent............................... -- -- 10,316 (8,398) 29,654 Changes in operating assets and liabilities: Other current assets.................... (158,072) (342,271) 246,997 150,967 (322,499) Accounts payable........................ (546,392) 337,027 (158,004) 44,061 269,988 Accrued liabilities and other........... 14,824 188,550 895,120 139,629 (616,364) ----------- ----------- ------------ ----------- ----------- Net cash provided by (used for) operating activities.................................... (6,653,813) (2,385,899) (2,336,992) (2,024,119) 1,068,268 CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of short-term investments............. (1,560,728) -- (12,081,165) -- -- Sales or maturities of short-term investments... -- 1,560,728 -- -- 4,332,225 Purchase of property and equipment.............. (1,009,941) (874,175) (630,220) (155,059) (695,502) (Increase) decrease in deposits and other assets........................................ 279,930 (349,074) 341,038 3,240 (265,676) ----------- ----------- ------------ ----------- ----------- Net cash provided by (used for) investing activities.................................... (2,290,739) 337,479 (12,370,347) (151,819) 3,371,047 CASH FLOWS FROM FINANCING ACTIVITIES: Principal payments on obligations under capital leases, equipment notes payable and promissory note.......................................... (426,737) (503,506) (1,239,935) (144,562) (300,227) Proceeds from issuance of promissory note....... -- 3,000,000 -- -- -- Proceeds from issuance of equipment notes payable....................................... 646,810 379,064 -- -- -- Issuance of Preferred Stock, net................ (9,547) 1,975,000 19,139,211 -- -- Issuance of Common Stock, net................... 319 7,651 84,836 42,889 40,681 ----------- ----------- ------------ ----------- ----------- Net cash provided by (used for) financing activities.................................... 210,845 4,858,209 17,984,112 (101,673) (259,546) ----------- ----------- ------------ ----------- ----------- Increase (decrease) in cash and cash equivalents................................... (8,733,707) 2,809,789 3,276,773 (2,277,611) 4,179,769 Cash and cash equivalents at beginning of period........................................ 11,383,614 2,649,907 5,459,696 5,459,696 8,736,469 ----------- ----------- ------------ ----------- ----------- Cash and cash equivalents at end of period...... $ 2,649,907 $ 5,459,696 $ 8,736,469 $ 3,182,085 $12,916,238 =========== =========== ============ =========== =========== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Interest paid................................... $ 123,730 $ 128,337 $ 469,565 $ 152,274 $ 100,541 =========== =========== ============ =========== =========== SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES: Capital lease obligations entered into for equipment..................................... $ -- $ -- $ 221,507 $ 221,507 $ 87,102 =========== =========== ============ =========== =========== Warrant issued in conjunction with promissory note.......................................... $ -- $ 165,000 $ -- $ -- $ -- =========== =========== ============ =========== =========== Unrealized gain (loss) on investments........... $ -- $ -- $ 48,341 $ -- $ (42,326) =========== =========== ============ =========== ===========
See accompanying notes. F-6 80 SIGNAL PHARMACEUTICALS, INC. NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1997 (Information subsequent to December 31, 1997, except for Note 7, and pertaining to March 31, 1998 and the three months ended March 31, 1997 and 1998 is unaudited) 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ORGANIZATION AND BUSINESS ACTIVITY Signal Pharmaceuticals, Inc. ("Signal" or the "Company") was incorporated in California in July 1992. The Company is an integrated target and drug discovery company focused on identifying new classes of small molecule drugs that regulate genes and the production of disease-causing proteins. The Company applies advanced cellular, molecular and genomic technologies to map gene regulating pathways in cells and to identify proprietary molecular targets that activate or deactivate genes and result in disease. Signal is advancing the application of genomics beyond identifying and elucidating the functions of genes to designing novel classes of disease-modifying drugs that selectively regulate the activation of disease-causing genes. 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 related disclosures at the date of the financial statements, and the amounts of revenues and expenses reported during the period. Actual results could differ from those estimates. CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS The Company considers instruments purchased with an original maturity of three months or less, principally a money market account and U.S. government and corporate debt securities, to be cash equivalents. All investment securities are classified as available-for-sale, and are carried at fair value. Unrealized gains and losses, if any, are reported in a separate component of stockholders' equity. The cost of debt securities is adjusted for amortization of premiums and accretion of discounts to maturity. The amortization, along with realized gains and losses, is included in interest income. The cost of securities sold is based on the specific identification method. FINANCIAL INSTRUMENTS The fair values of the financial instruments approximate their carrying value except as otherwise disclosed in the financial statements. CONCENTRATION OF CREDIT RISK Cash, cash equivalents and short-term investments are financial instruments which potentially subject the Company to concentration of credit risk. The Company invests its excess cash primarily in U.S. government securities and marketable debt securities of financial institutions and corporations. PROPERTY AND EQUIPMENT Property and equipment are stated at cost and depreciated over the estimated useful lives of the assets (three to five years) using the straight-line method. Leasehold improvements are stated at cost F-7 81 SIGNAL PHARMACEUTICALS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1997 (Information subsequent to December 31, 1997, except for Note 7, and pertaining to March 31, 1998 and the three months ended March 31, 1997 and 1998 is unaudited) 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) and amortized on a straight-line basis over the shorter of the estimated useful life of the assets or the lease term. IMPAIRMENT OF LONG-LIVED ASSETS Statement of Financial Accounting Standards ("SFAS") 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, 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 121 also addresses the accounting for long-lived assets that are expected to be disposed of. To date, the Company has not identified any indicators of impairment nor recorded any impairment losses. with strong credit ratings. The Company also has established guidelines relative to diversification and maturities to maintain safety and liquidity. These guidelines are reviewed periodically and may be modified to take advantage of trends in yields and interest rates. Due to Company policy, the Company has historically held the financial instruments to maturity and has not experienced any significant losses. However, the Company has the ability to sell these investments before maturity. DEFERRED RENT Rent expense is recognized on a straight-line basis over the term of the lease. Accordingly, rent expense incurred in excess of rent paid is accrued and recorded as deferred rent in the accompanying balance sheets. REVENUE RECOGNITION Contract and grant revenue are recognized ratably over the period during which the research is conducted. Up-front license fees received under these agreements are recorded as deferred revenue and recognized ratably over the initial term of the contract. Continuation of certain contracts and grants are dependent upon the Company achieving specific contractual milestones. The Company's revenues are concentrated among a small number of customers, as follows:
THREE MONTHS ENDED YEAR ENDED DECEMBER 31, MARCH 31, ------------------------ ------------------ 1995 1996 1997 1997 1998 ---- ---- ---- ---- ---- (UNAUDITED) Dupont Merck........................... -- -- -- -- * Ares-Serono............................ -- -- * -- 16% Roche Bioscience....................... -- 11% 21% 22% * Organon................................ -- 19% 34% 35% 15% Nippon Kayaku.......................... -- -- -- -- * Tanabe................................. -- 62% 39% 38% 40%
- --------------- * Amount earned represents less than 10% of revenues for the period. F-8 82 SIGNAL PHARMACEUTICALS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1997 (Information subsequent to December 31, 1997, except for Note 7, and pertaining to March 31, 1998 and the three months ended March 31, 1997 and 1998 is unaudited) 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) RESEARCH AND DEVELOPMENT COSTS Research and development costs are expensed as incurred. STOCK-BASED COMPENSATION As permitted by SFAS 123, the Company has elected to follow Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and related Interpretations ("APB 25") in accounting for its employee stock options. Under APB 25, when the exercise price of the Company's employee stock options equals the fair value of the underlying stock on the date of grant, no compensation expense is recognized. NET INCOME (LOSS) PER SHARE Historical basic net income (loss) per share is computed using the weighted average number of common shares outstanding during the periods presented. Common equivalent shares resulting from Convertible Preferred Stock, options to purchase Common Stock and warrants to purchase Convertible Preferred Stock are excluded from the computation. Historical diluted net income per share has been computed as described above and also gives effect to the common equivalent shares resulting from Convertible Preferred Stock, options to purchase Common Stock, and warrants to purchase Convertible Preferred and Common Stock. Historical net income (loss) per share information is as follows:
THREE MONTHS ENDED YEAR ENDED DECEMBER 31, MARCH 31, ------------------------------ --------------------- 1995 1996 1997 1997 1998 -------- -------- -------- -------- ---------- Basic and diluted net loss per share............................... $ (18.25) $ (14.57) $ (11.29) $ (3.53) ======== ======== ======== ======== Shares used in computing basic and diluted net loss per share.......... 355,273 426,213 508,485 473,857 ======== ======== ======== ======== Basic net income per share............ $ 0.58 ========== Diluted net income per share.......... $ 0.05 ========== Shares used in computing basic net income per share.................... 577,097 ========== Shares used in computing diluted net income per share.................... 6,875,100 ==========
Pro Forma Net Income (Loss) Per Share Pro forma basic net income (loss) per share has been computed as described above for historical basic net income (loss) per share and also gives effect to the conversion of the 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. Pro forma diluted net income per share has been computed as described above for historical diluted net income per share. F-9 83 SIGNAL PHARMACEUTICALS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1997 (Information subsequent to December 31, 1997, except for Note 7, and pertaining to March 31, 1998 and the three months ended March 31, 1997 and 1998 is unaudited) 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) NEW ACCOUNTING STANDARDS Effective January 1, 1998, the Company adopted SFAS 130, Reporting Comprehensive Income and SFAS 131, Disclosures about Segments of an Enterprise and Related Information. The Company believes it operates in one business segment, and therefore the adoption of SFAS 131 had no effect on the Company's financial statements. YEAR 2000 (UNAUDITED) The Company currently has computer software and hardware which it believes to be year 2000 compliant. The Company is working with its vendors and customers to ensure their year 2000 compliance. Any necessary changes would be done in the normal course of business during 1998 and 1999 at minimal incremental cost. Therefore, the Company does not expect the year 2000 issue to have a significant impact on its operations. 2. BALANCE SHEET INFORMATION INVESTMENTS The following is a summary of the Company's cash, cash equivalents and short-term investments:
DECEMBER 31, 1996 DECEMBER 31, 1997 ------------------------------------ -------------------------------------- GROSS GROSS UNREALIZED UNREALIZED GAINS ESTIMATED GAINS ESTIMATED COST (LOSSES) FAIR VALUE COST (LOSSES) FAIR VALUE ---------- ---------- ---------- ----------- ---------- ----------- Cash...................... $3,446,901 $-- $3,446,901 $ 5,512,634 $ -- $5,512,634 Corporate debt securities.............. 2,012,795 -- 2,012,795 15,305,000 48,341 15,353,341 ---------- -- ---------- ----------- ------- ----------- $5,459,696 $-- $5,459,696 $20,817,634 $48,341 $20,865,975 ========== == ========== =========== ======= =========== MARCH 31, 1998 --------------------------------------- GROSS UNREALIZED GAINS ESTIMATED COST (LOSSES) FAIR VALUE ----------- ----------- ----------- (UNAUDITED) Cash...................... $13,165,178 $ -- $13,165,178 Corporate debt securities.............. 7,500,000 6,015 7,506,015 ----------- ------ ----------- $20,665,178 $6,015 $20,671,193 =========== ====== ===========
There were no gross realized gains or losses on sales of available-for-sale securities for the years ended December 31, 1996 or 1997 or the three months ended March 31, 1998. The gross unrealized gains of $48,341 and $6,015 at December 31, 1997 and March 31, 1998, respectively, are reflected as separate components of stockholders' equity. The cost and estimated fair values of cash, cash equivalents and short-term investments at December 31, 1996 and 1997 and March 31, 1998, by contractual maturity, are shown below:
DECEMBER 31, 1996 DECEMBER 31, 1997 MARCH 31, 1998 ----------------------- ------------------------- ------------------------- ESTIMATED ESTIMATED ESTIMATED COST FAIR VALUE COST FAIR VALUE COST FAIR VALUE ---------- ---------- ----------- ----------- ----------- ----------- (UNAUDITED) Due in one year or less....... $5,459,696 $5,459,696 $19,817,634 $19,824,100 $19,665,178 $19,668,068 Due in one year through two years....................... -- -- 1,000,000 1,041,875 1,000,000 1,003,125 ---------- ---------- ----------- ----------- ----------- ----------- $5,459,696 $5,459,696 $20,817,634 $20,865,975 $20,665,178 $20,671,193 ========== ========== =========== =========== =========== ===========
F-10 84 SIGNAL PHARMACEUTICALS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1997 (Information subsequent to December 31, 1997, except for Note 7, and pertaining to March 31, 1998 and the three months ended March 31, 1997 and 1998 is unaudited) 2. BALANCE SHEET INFORMATION (CONTINUED) PROPERTY AND EQUIPMENT Property and equipment consist of the following:
DECEMBER 31, ----------------------- MARCH 31, 1996 1997 1998 ---------- ---------- ---------- (UNAUDITED) Machinery and equipment............................ $2,334,021 $2,665,205 $2,826,308 Office furniture and equipment..................... 763,379 1,043,110 1,119,973 Leasehold improvements............................. 639,692 880,504 1,425,142 ---------- ---------- ---------- 3,737,092 4,588,819 5,371,423 Less accumulated depreciation and amortization..... (1,456,924) (2,336,251) (2,594,802) ---------- ---------- ---------- $2,280,168 $2,252,568 $2,776,621 ========== ========== ==========
DEPOSITS AND OTHER ASSETS Deposits and other assets consist of the following:
DECEMBER 31, ------------------- MARCH 31, 1996 1997 1998 -------- -------- --------- (UNAUDITED) Restricted cash....................................... $495,000 $150,000 $150,000 Other deposits........................................ 29,450 37,243 303,650 Organization costs, net............................... 6,026 2,195 1,464 -------- -------- -------- $530,476 $189,438 $455,114 ======== ======== ========
3. COMMITMENTS LEASES The Company leases its office and research facilities under two operating lease agreements. The minimum annual rents are subject to specified annual rental increases. The Company also reimburses the lessor for taxes, insurance and operating costs associated with the leases. Under the terms of the leases, the Company has an outstanding letter of credit for $150,000 in favor of the lessor, fully collateralized by cash. In January 1998, the Company entered into a six-year operating lease for additional office space. The minimum annual rents are subject to specified increases and are included in the future minimum lease payments. In addition, the Company leases certain machinery, equipment and office furniture under capital leases with three-year terms with options to extend the lease term to five years. In January 1998, the Company entered into a $2.0 million equipment lease line to finance capital equipment and improvements. F-11 85 SIGNAL PHARMACEUTICALS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1997 (Information subsequent to December 31, 1997, except for Note 7, and pertaining to March 31, 1998 and the three months ended March 31, 1997 and 1998 is unaudited) 3. COMMITMENTS (CONTINUED) LONG-TERM DEBT In November 1996, the Company issued a secured promissory note for $3,000,000. The proceeds of the note payable were used for general corporate purposes and working capital. The note payable accrues interest at a rate of 14%, is due May 22, 2000, and is secured by certain assets of the Company. The principal payments due on the promissory note are $1.0 million, $1.0 million and $416,460 for 1998, 1999 and 2000, respectively. In conjunction with the issuance of the promissory note, the Company issued the creditor a warrant to purchase 62,500 shares of Series C-1 Preferred Stock at a price of $8.40 per share. The warrant expires at the earliest of ten years from the date of grant or five years from the date of an initial public offering. The warrant is valued at $165,000, which has been recorded as a discount on the related debt. The value of the warrant is being amortized as interest expense over the period of the debt. In April 1995, the Company entered into a note payable to equip its expanded research facility. The remaining balance on the note at December 31, 1996 was $377,270. The note was repaid in full in August 1997. Annual future minimum lease and equipment note payments as of December 31, 1997, including the office lease signed in January 1998, are as follows:
OBLIGATIONS UNDER CAPITAL LEASES AND EQUIPMENT OPERATING NOTES YEAR ENDED DECEMBER 31, LEASES PAYABLE ----------------------- ---------- ------------- 1998...................................................... $ 760,530 $228,525 1999...................................................... 793,867 221,239 2000...................................................... 792,337 34,521 2001...................................................... 283,526 -- 2002...................................................... 280,910 -- Thereafter................................................ 287,443 -- ---------- -------- Total minimum lease and equipment note payments........... $3,198,613 484,285 ========== Less amount representing interest......................... 32,705 -------- Present value of remaining minimum capital lease and equipment note payments................................. 451,580 Less amount due in one year............................... 205,911 -------- Long-term portion of obligations under capital leases and equipment notes payable................................. $245,669 ========
F-12 86 SIGNAL PHARMACEUTICALS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1997 (Information subsequent to December 31, 1997, except for Note 7, and pertaining to March 31, 1998 and the three months ended March 31, 1997 and 1998 is unaudited) 3. COMMITMENTS (CONTINUED) Rent expense for equipment and facility leases was $293,719, $406,453, $784,337, $124,377 and $267,860 for the years ended December 31, 1995, 1996, 1997 and the three months ended March 31, 1997 (unaudited) and 1998 (unaudited), respectively. Cost and accumulated depreciation of equipment under capital leases and equipment notes payable were as follows:
ACCUMULATED COST DEPRECIATION ---------- ------------ December 31, 1996.......................................... $1,978,010 $952,884 December 31, 1997.......................................... 671,482 240,087 March 31, 1998 (unaudited)................................. 759,392 285,586
4. SPONSORED RESEARCH AND LICENSE AGREEMENTS In connection with certain license agreements, the Company paid fees of $244,631, $602,007, $205,600, $40,000 and $38,000 for the years ended December 31, 1995, 1996, 1997 and the three months ended March 31, 1997 and 1998, respectively, which were charged to research and development, and has future commitments of up to $4.6 million which could be payable based on the achievement of certain milestones, as well as royalties upon commercial sales, if any, of certain products. Such milestone commitments may also involve the issuance of 15,000 shares of Common Stock. DUPONT MERCK In December 1997, Signal entered into a collaborative agreement with The DuPont Merck Pharmaceutical Company ("DuPont Merck"), under which DuPont Merck agreed to fund certain research at Signal for three years. The agreement may be extended for up to three additional years at DuPont Merck's option. The DuPont Merck collaboration is focused on identifying compounds for the treatment or prevention of HCV and HIV infections. Signal also has granted DuPont Merck an option, exercisable through August 1998, to expand the collaboration to include the identification of compounds directed toward an additional viral target. Pursuant to this collaboration, Signal and Dupont Merck will be responsible for developing target specific screening assays and will be jointly responsible for identifying lead compounds. DuPont Merck will be solely responsible for lead optimization and the worldwide development and commercialization of any drugs arising from the collaboration. DuPont Merck has paid Signal a $1.0 million license fee and has agreed to provide Signal with annual research and development support at a level approximating Signal's cost of these programs. DuPont Merck also is obligated to make payments to Signal and to purchase $1.0 million of its stock based on the achievement of certain research and development milestones and to pay Signal royalties on any future product sales arising from the collaboration. In addition, DuPont Merck has agreed to purchase $2.0 million of Common Stock of Signal in a private transaction to be completed concurrent with the closing of this offering at a price per share equal to the initial public offering price. F-13 87 SIGNAL PHARMACEUTICALS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1997 (Information subsequent to December 31, 1997, except for Note 7, and pertaining to March 31, 1998 and the three months ended March 31, 1997 and 1998 is unaudited) 4. SPONSORED RESEARCH AND LICENSE AGREEMENTS (CONTINUED) ARES-SERONO In November 1997, Signal entered into a collaborative agreement with Ares Trading S.A. (Ares-Serono), an affiliate of Ares-Serono S.A., under which Ares-Serono agreed to fund certain research for an initial three-year period, which term will automatically be extended for additional three-year periods unless terminated at least six months prior to the end of the initial three-year term. Ares-Serono may terminate the agreement upon six months' notice any time after the end of the initial three-year term. The Ares-Serono collaboration is focused on identifying compounds that modulate NF-kB gene regulating pathways to which Ares-Serono has rights for all clinical indications in all countries of the world excluding Asia. Ares-Serono S.A. has purchased approximately $10.0 million of Signal's Series E and Series F Preferred Stock. Ares-Serono also has agreed to provide Signal with annual research and development support for Signal's cost of this program at a percentage level approximating Ares-Serono's relative share of worldwide marketing rights. In addition, Ares-Serono is obligated to make payments to Signal based on the achievement of certain research and development milestones and to pay Signal royalties on any future product sales arising from the collaboration. ROCHE ROCHE BIOSCIENCE In August 1996, Signal entered into a three-year collaborative agreement with the Roche Bioscience division ("Roche Bioscience") of Syntex (USA) Inc., a member of the Roche Group of Companies. Under the agreement, Signal is applying its proprietary cell line development technology toward the development of human PNS cell lines for use by Roche Bioscience in target and drug discovery. Pursuant to an exclusive, worldwide, royalty-free license granted by Signal, Roche Bioscience may utilize these PNS cells to discover and commercialize drugs for treating pain, incontinence and peripheral vascular disease. Under the agreement, Signal retains the right to use the PNS cell lines for its internal target and drug discovery programs in other therapeutic fields. Roche Bioscience has paid Signal a license fee of $500,000 and has agreed to pay annual research and development support at a level approximating Signal's cost of the PNS cell line program. To date, Signal has developed and transferred to Roche Bioscience clonal human PNS cell lines as specified in the collaborative agreement. Roche Bioscience may terminate the agreement beginning in August 1998 at its discretion upon 90 days' written notice. If the collaboration agreement is terminated for any reason, the licenses granted to Roche Bioscience by Signal shall survive for as long as Roche Bioscience continues to pay annual license maintenance fees to Signal. As long as Roche Bioscience pays these annual license maintenance fees, Signal may not enter into any other collaborations with respect to cloned immortalized PNS cell lines in the covered fields of pain, incontinence and peripheral vascular disease. ORGANON In July 1996, Signal entered into a collaborative agreement with N.V. Organon ("Organon"), a business unit of Akzo Nobel N.V., for the discovery of new genomic targets, under which Organon agreed to fund certain research at Signal for three years. Such agreement may be extended for up to two additional years by mutual consent of the parties. Pursuant to an amendment dated January 1998, F-14 88 SIGNAL PHARMACEUTICALS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1997 (Information subsequent to December 31, 1997, except for Note 7, and pertaining to March 31, 1998 and the three months ended March 31, 1997 and 1998 is unaudited) 4. SPONSORED RESEARCH AND LICENSE AGREEMENTS (CONTINUED) Organon may terminate the research, effective in either January 1999 or July 1999, for failure to meet certain milestones by October 1998 or January 1999, respectively. Initially, Signal will utilize its cellular, molecular and genomic technologies to identify and validate novel genes in certain target tissues. Signal will then develop high throughput screening assays for use by Organon in identifying small molecule drugs to treat cardiovascular, neurological, gynecological and certain other diseases. Pursuant to this collaboration, Organon has received rights for, and will be solely responsible for, the worldwide development and commercialization of any drugs arising from the collaboration. To date, Organon has paid Signal an initial $1.0 million non-refundable license fee and annual research and development support payments at a level approximating Signal's cost of this program. In addition, Organon is obligated to make payments to Signal based on the achievement of certain research and development milestones, and Organon must pay Signal royalties on any future product sales arising from the collaboration. TANABE From March 1996 to March 1998, Signal and Tanabe were engaged in a collaborative program under which Tanabe funded certain research by Signal in target and drug discovery in the fields of inflammatory disease and osteoporosis. In connection with the collaboration, Tanabe paid Signal an initial $1.0 million non-refundable license fee and reimbursed Signal for research and development costs. Tanabe also purchased 125,000 shares of Signal's Series D Preferred Stock at $16.00 per share. Pursuant to certain anti-dilution provisions of the Series D agreement, the Company issued an additional 58,150 shares of Series D Preferred Stock to Tanabe during 1997. In conjunction with the collaboration and stock purchase agreement entered into in 1996, the Company issued Tanabe a warrant for the purchase of $2,000,000 of Common Stock, which is only exercisable in connection with the filing of an initial public offering by the Company, at the public offering price per common share. In March 1998, Signal and Tanabe mutually agreed to conclude their collaboration and Tanabe licensed from Signal a lead compound that was discovered during the collaboration. This lead has been validated in animal models of arthritis, for the treatment of autoimmune, inflammatory and certain other diseases. Signal retained all other intellectual property rights, including rights to all other drug targets and drug leads, created before or during the collaboration. Tanabe paid an additional license fee to Signal for the exclusive worldwide license to the lead compound and is obligated to make F-15 89 SIGNAL PHARMACEUTICALS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1997 (Information subsequent to December 31, 1997, except for Note 7, and pertaining to March 31, 1998 and the three months ended March 31, 1997 and 1998 is unaudited) 4. SPONSORED RESEARCH AND LICENSE AGREEMENTS (CONTINUED) payments to Signal based on the achievement of certain research and development milestones and to pay Signal royalties on any future product sales. 5. STOCKHOLDERS' EQUITY CONVERTIBLE PREFERRED STOCK A summary of the Convertible Preferred Stock of the Company at December 31, 1997 and March 31, 1998 is as follows:
SHARES ISSUED AND OUTSTANDING -------------------------- PREFERENCE IN DECEMBER 31, MARCH 31, LIQUIDATION 1997 1998 ------------- ------------ ----------- (UNAUDITED) Series A....................................... $ 2,626,892 656,710 656,710 Series B....................................... 3,450,000 718,745 718,745 Series C....................................... 12,308,005 2,197,851 2,197,851 Series D....................................... 2,000,000 183,150 183,150 Series E....................................... 12,329,929 1,613,865 1,613,865 Series F....................................... 8,194,761 680,628 680,628 ----------- --------- --------- $40,909,587 6,050,949 6,050,949 =========== ========= =========
Each of the Series A, B, C, D, E and F Preferred Stock is convertible on a one-for-one basis, at the option of the holder, into shares of the Company's Common Stock, which have been reserved for issuance upon conversion of the Preferred Stock, subject to certain anti-dilution adjustments. The Preferred Stock will convert automatically upon the closing of an underwritten public offering of the Company's Common Stock with proceeds to the Company of at least $15.0 million and at a price not less than $5.00 per share after adjustment for any stock splits. The holders of the Series A, B, C, E and F Preferred Stock are entitled to elect four directors to the Board of Directors, and in all other matters the holder of each share of preferred stock is entitled to one vote for each share of Common Stock into which it would convert. Annual dividends of $0.32, $0.38, $0.45, $1.28, $0.61 and $0.96 per share of Series A, B, C, D, E and F Preferred Stock, respectively, are payable whenever funds are legally available and when and as declared by the Board of Directors. COMMON STOCK In connection with certain stock purchase agreements, the Company has the option to repurchase, at the original issue price, unvested shares in the event of termination of employment or engagement. Shares issued under these agreements generally vest over four to five years. At December 31, 1997 and March 31, 1998, 99,567 and 126,754 shares, respectively, were subject to repurchase by the Company. F-16 90 SIGNAL PHARMACEUTICALS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1997 (Information subsequent to December 31, 1997, except for Note 7, and pertaining to March 31, 1998 and the three months ended March 31, 1997 and 1998 is unaudited) 5. STOCKHOLDERS' EQUITY (CONTINUED) STOCK OPTION PLANS In June 1993, the Company adopted its 1993 Founders' Stock Option Plan (the "Founders' Plan"), under which 137,500 shares of Common Stock were reserved for issuance upon exercise of options granted by the Company. The Founders' Plan provides for the grant of incentive and nonstatutory options. The exercise price of incentive stock options must equal at least the fair value on the date of grant, and the exercise price of nonstatutory stock options may be no less than 85% of the fair value on the date of grant. The maximum term of options granted under the Founders' Plan is ten years. Options generally are immediately exercisable. Common Stock or options issued under the Founders' Plan generally vest over five years. Unvested shares issued pursuant to the exercise of options are subject to repurchase in the event of termination of employment or engagement. In November 1993, the Company adopted its 1993 Stock Option Plan, under which 112,500 shares of the Company's Common Stock were reserved for issuance upon exercise of options granted by the Company under provisions similar to the Founders' Plan. In 1995 and 1996, the Company authorized an additional 250,000 and 262,500 shares, respectively, of the Company's Common Stock be reserved for issuance upon exercise of options granted by the Company under the 1993 Stock Option Plan. In June 1997, the Company adopted its 1997 Stock Option Plan, under which 250,000 shares of Common Stock were reserved for issuance upon exercise of options granted by the Company. In February 1998, the Company authorized an additional 500,000 shares of the Company's Common Stock be reserved for issuance upon exercise of options granted by the Company under the 1997 Stock Option Plan. The options contain similar provisions to those options issued under the 1993 Founders' Stock Option Plan and the 1993 Stock Option Plan. The Company recorded $615,855 and $1,019,170 of deferred compensation for options granted during the year ended December 31, 1997 and the three months ended March 31, 1998, respectively, representing the difference between the option exercise price and the estimated fair value for financial statement presentation purposes. The Company is amortizing the deferred compensation over the vesting period of the options. The Company recorded $104,345 and $143,362 of compensation expense during the year ended December 31, 1997 and the three months ended March 31, 1998, respectively. A summary of the Company's stock option activity and related information follows:
YEAR ENDED DECEMBER 31, THREE ---------------------------------------------------------------- MONTHS ENDED 1995 1996 1997 MARCH 31, 1998 ------- ------- -------- ------------------- WEIGHTED WEIGHTED WEIGHTED WEIGHTED AVERAGE AVERAGE AVERAGE AVERAGE EXERCISE EXERCISE EXERCISE EXERCISE OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE ------- --------- ------- --------- -------- --------- ------- --------- (UNAUDITED) Outstanding at beginning of period......................... 192,624 $0.44 286,874 $0.48 407,324 $0.51 542,115 $0.80 Granted...................... 102,625 $0.56 146,987 $0.56 299,162 $1.10 166,050 $1.12 Exercised.................... (3,875) $0.56 (16,924) $0.48 (138,519) $0.61 (44,618) $0.99 Cancelled.................... (4,500) $0.56 (9,613) $0.56 (25,852) $0.64 (871) $0.69 ------- ------- -------- ------- Outstanding at end of period..... 286,874 $0.48 407,324 $0.51 542,115 $0.80 662,676 $0.87 ------- ------- -------- ------- Vested options at end of period......................... 171,467 $0.40 283,172 $0.45 421,842 $0.45 454,525 $0.46 ------- ------- -------- -------
F-17 91 SIGNAL PHARMACEUTICALS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1997 (Information subsequent to December 31, 1997, except for Note 7, and pertaining to March 31, 1998 and the three months ended March 31, 1997 and 1998 is unaudited) 5. STOCKHOLDERS' EQUITY (CONTINUED) Exercise prices for options outstanding as of March 31, 1998 ranged from $0.08 to $1.12. The weighted average remaining contractual life of those options is 8.4 years. The weighted average fair value of the options granted in 1995, 1996 and 1997 are $0.16, $0.16 and $0.28, respectively. As of December 31, 1997, options for 79,433 common shares were available for future grant. As of March 31, 1998, options for 414,254 common shares were available for future grant. Adjusted pro forma information regarding net loss is required to be disclosed by SFAS 123, and has been determined as if the Company had accounted for its employee stock options under the fair value method prescribed in that Statement. The fair value of options was estimated at the date of grant using the minimum value pricing model with the following weighted average assumptions for 1995, 1996 and 1997: risk-free interest rate of 6.0%, dividend yield of 0%; and an expected life of five years. The minimum value pricing model is similar to the Black-Scholes option valuation model which was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable, except that it excludes the factor for volatility. In addition, option valuation models require the input of highly subjective assumptions. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. For purposes of adjusted pro forma disclosures, the estimated fair value of the options is amortized to expense over the vesting period of the related options. The effects of applying SFAS 123 for adjusted pro forma disclosure purposes are not likely to be representative of the effects on adjusted pro forma net loss in future years because it does not take into consideration adjusted pro forma compensation expense related to grants made prior to 1995. The Company's adjusted pro forma information follows:
YEAR ENDED DECEMBER 31, --------------------------------------- 1995 1996 1997 ----------- ----------- ----------- Adjusted pro forma net loss...................... $(6,483,838) $(6,214,581) $(5,757,845) Adjusted pro forma basic net loss per share...... $ (18.25) $ (14.58) $ (11.32)
F-18 92 SIGNAL PHARMACEUTICALS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1997 (Information subsequent to December 31, 1997, except for Note 7, and pertaining to March 31, 1998 and the three months ended March 31, 1997 and 1998 is unaudited) 6. INCOME TAXES Significant components of the Company's deferred tax assets as of December 31, 1996 and 1997 are shown below. A valuation allowance of $10,477,000, of which $2,278,000 is related to 1997, has been recognized as of December 31, 1997 to offset the deferred tax assets as realization of such assets is uncertain.
DECEMBER 31, -------------------------- 1996 1997 ----------- ----------- Deferred tax assets: Capitalized research expenses.......................... $ 825,000 $ 861,000 Net operating loss carryforwards....................... 6,576,000 8,422,000 Research and development credits....................... 825,000 1,163,000 Other, net............................................. 118,000 104,000 ----------- ----------- Total deferred tax assets................................... 8,344,000 10,550,000 Deferred tax liability: Depreciation........................................... (145,000) (73,000) ----------- ----------- Net deferred tax assets..................................... 8,199,000 10,477,000 Valuation allowance for deferred tax assets................. (8,199,000) (10,477,000) ----------- ----------- Net deferred taxes.......................................... $ -- $ -- =========== ===========
At December 31, 1997, the Company has federal and California net operating loss carryforwards of approximately $23,276,000 and $4,789,000, respectively. The difference between the federal and California tax loss carryforwards is attributable to the capitalization of research and development expenses for California tax purposes and the fifty percent limitation on California loss carryforwards. The federal and California tax loss carryforwards will begin expiring in 2007 and 1998, respectively, unless previously utilized. The Company also has federal and California research and development tax credit carryforwards of approximately $857,000 and $470,000, respectively, which will begin expiring in 2008 unless previously utilized. Pursuant to Sections 382 and 383 of the Internal Revenue Code, future utilization of these carryforwards may be limited in any one fiscal year pursuant to the Internal Revenue Code and similar state provisions; however, the annual limitation will not prevent the entire amount of the carryforwards from being used during the carryforward period. Therefore, the Company does not believe any such limitation will have a material effect upon the utilization of these carryforwards. 7. SUBSEQUENT EVENTS DEFERRED COMPENSATION The Company granted an additional 221,525 options and recorded $1,267,123 of additional deferred compensation in May 1998, representing the difference between the option exercise price and the estimated fair value of the Common Stock for financial statement presentation purposes at the date of such grant. F-19 93 SIGNAL PHARMACEUTICALS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1997 (Information subsequent to December 31, 1997, except for Note 7, and pertaining to March 31, 1998 and the three months ended March 31, 1997 and 1998 is unaudited) 7. SUBSEQUENT EVENTS (CONTINUED) CHANGES IN CAPITALIZATION On May 5, 1998, the Company's 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 and approved (subject to shareholder ratification) that, prior to the effective date of the Offering contemplated by this Prospectus, the Company will change the authorized shares of Preferred Stock from 6,113,482 to 5,000,000; authorized shares of Common Stock from 8,750,000 to 25,000,000 and reincorporate the Company in Delaware and effect a 4-for-1 reverse split of the Common Stock. The financial statements and accompanying notes have been retroactively restated to reflect the effect of the reverse split and reincorporation in Delaware. AMENDMENT AND CONCLUSION OF COLLABORATIVE AGREEMENT On March 31, 1998, Signal and Tanabe Seiyaku Co., Ltd. ("Tanabe") mutually agreed to conclude the research and development collaboration component of their Collaborative Development and Licensing Agreement and Tanabe subsequently licensed from Signal a lead compound discovered during the collaboration, and validated in animal models of arthritis, for the treatment of autoimmune, inflammatory and other diseases. Signal retained all other intellectual property rights, including rights to all other drug targets and drug leads, discovered before or during the collaboration. Tanabe paid an additional $2.0 million license fee to Signal for the exclusive worldwide license to the lead compound and is obligated to make further payments to Signal based on the achievement of certain research and development milestones and to pay Signal royalties on any future product sales. NEW COLLABORATIVE RESEARCH AGREEMENT In February 1998, Signal entered into a collaborative agreement with Nippon Kayaku Co., Ltd. ("Nippon Kayaku") under which Nippon Kayaku agreed to fund certain research at Signal, totally $4,000,000, for two years. Under the agreement, Signal and Nippon Kayaku will develop and commercialize products based on or derived from a compound supplied by Nippon Kayaku for the treatment and prevention of diseases and disorders of the CNS and PNS. Signal will perform combinatorial chemistry and use its proprietary human neuronal cell lines to further optimize the compound and characterize its mechanism of action prior to the start of clinical studies. Nippon Kayaku has agreed to provide Signal with annual research and development support at a level approximating Signal's cost of the program. Each party also is obligated to pay the other royalties on future product sales arising from the collaboration. Pursuant to a commercialization agreement to be concluded by Signal and Nippon Kayaku following the initial research phase of the collaboration, Nippon Kayaku will be solely responsible for the development and commercialization of products in Japan for the treatment or prevention of diseases and disorders of the PNS and will receive co-commercialization rights in Japan with respect to products for the treatment and prevention of CNS diseases and disorders. Under such future commercialization agreement, development and commercialization rights for products outside Japan for the treatment or prevention of both PNS and CNS diseases and disorders will be agreed upon by the parties on a product-by-product basis, with Nippon Kayaku not guaranteed any minimum level of co-commercialization rights. Signal and Nippon Kayaku also have granted each other co-exclusive commercialization rights outside the field with respect to each analog compound arising from the collaboration which is developed and commercialized by one or both of the parties. F-20 94 [Graphic depicting logos or unstylized names of Signal's corporate collaborators, including Ares-Serono, Roche Bioscience, Nippon Kayaku, Organon, and DuPont Merck. Below each logo are disease programs addressed by the collaboration. These logos or names surround the Signal logo centered on the page.] (inside back cover) 95 ============================================================ NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS 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 THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY TO ANY PERSON IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION WOULD BE UNLAWFUL OR TO ANY PERSON TO WHOM IT IS UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY OFFER OR SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF. ------------------- TABLE OF CONTENTS
PAGE ---- Prospectus Summary....................... 3 Risk Factors............................. 6 Use of Proceeds.......................... 19 Dividend Policy.......................... 19 Capitalization........................... 20 Dilution................................. 21 Selected Financial Data.................. 22 Management's Discussion and Analysis of Financial Condition and Results of Operations............................. 23 Business................................. 27 Management............................... 52 Certain Transactions..................... 61 Principal Stockholders................... 63 Description of Capital Stock............. 65 Shares Eligible for Future Sale.......... 68 Underwriting............................. 70 Legal Matters............................ 71 Experts.................................. 71 Additional Information................... 72 Index to Consolidated Financial Statements............................. F-1
------------------ UNTIL , 1998 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATIONS OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS. ============================================================ ============================================================ 2,500,000 SHARES LOGO COMMON STOCK ------------------------ PROSPECTUS ------------------------ HAMBRECHT & QUIST BANCAMERICA ROBERTSON STEPHENS LEHMAN BROTHERS , 1998 ============================================================ 96 PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION. The following table sets forth all expenses payable by the Registrant in connection with the sale of the Common Stock being registered. All the amounts shown are estimates except for the SEC registration fee, the NASD filing fee and the Nasdaq listing fee. SEC Registration fee........................................ $ 11,026 NASD filing fee............................................. 4,238 Nasdaq Stock Market Listing Application fee................. Blue sky qualification fees and expenses.................... Printing and engraving expenses............................. Legal fees and expenses..................................... Accounting fees and expenses................................ Transfer agent and registrar fees........................... Miscellaneous............................................... -------- Total.................................................. $600,000 ========
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS. Under Section 145 of the Delaware General Corporation Law, the Registrant has broad powers to indemnify its directors and officers against liabilities they may incur in such capacities, including liabilities under the Securities Act. The Registrant's Amended and Restated Certificate of Incorporation and Bylaws include provisions to (i) eliminate the personal liability of its directors for monetary damages resulting from breaches of their fiduciary duty to the extent permitted by Section 102(b)(7) of the General Corporation Law of Delaware (the "Delaware Law") and (ii) require the Registrant to indemnify its directors and executive officers to the fullest extent permitted by Section 145 of the Delaware Law, including circumstances in which indemnification is otherwise discretionary. Pursuant to Section 145 of the Delaware Law, a corporation generally has the power to indemnify its present and former directors, officers, employees and agents against expenses incurred by them in connection with any suit to which they are or are threatened to be made, a party by reason of their serving in such positions so long as they acted in good faith and in a manner they reasonably believed to be in or not opposed to, the best interests of the corporation and with respect to any criminal action, they had no reasonable cause to believe their conduct was unlawful. The Registrant believes that these provisions are necessary to attract and retain qualified persons as directors and officers. These provisions do not eliminate the directors' duty of care, and, in appropriate circumstances, equitable remedies such as injunctive or other forms of non-monetary relief will remain available under Delaware Law. In addition, each director will continue to be subject to liability for breach of the director's duty of loyalty to the Registrant, for acts or omissions not in good faith or involving intentional misconduct, for knowing violations of law, for acts or omissions that the director believes to be contrary to the best interests of the Registrant or its stockholders, for any transaction from which the director derived an improper personal benefit, for acts or omissions involving a reckless disregard for the director's duty to the Registrant or its stockholders when the director was aware or should have been aware of a risk of serious injury to the Registrant or its stockholders, for acts or omissions that constitute an unexcused pattern of inattention that amounts to an abdication of the director's duty to the Registrant or its stockholders, for improper transactions between the director and the Registrant and for improper distributions to stockholders and loans to directors and officers. The provision also does not affect a director's responsibilities under any other law, such as the federal securities law or state or federal environmental laws. II-1 97 The Registrant has entered into indemnity agreements with each of its directors and executive officers that require the Registrant to indemnify such persons against any and all expenses (including attorneys' fees), witness fees, damages, judgments, fines, settlements and other amounts incurred (including expenses of a derivative action) in connection with any action, suit or proceeding, whether actual or threatened, to which any such person may be made a party by reason of the fact that such person is or was a director, an officer or an employee of the Registrant or any of its affiliated enterprises, provided that such person acted in good faith and in a manner such person reasonably believed to be in or not opposed to the best interests of the Registrant and, with respect to any criminal proceeding, had no reasonable cause to believe his conduct was unlawful. The indemnification agreements also set forth certain procedures that will apply in the event of a claim for indemnification thereunder. At present, there is no pending litigation or proceeding involving a Director, officer or key employee of the Registrant as to which indemnification is being sought nor is the Registrant aware of any threatened litigation that may result in claims for indemnification by any officer or Director. The Registrant has an insurance policy covering the officers and Directors of the Registrant with respect to certain liabilities, including liabilities arising under the Securities Act or otherwise. ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES. Since January 1, 1995, the Registrant has sold and issued the following unregistered securities: 1. On July 1, 1995, the Company issued 3,750 shares of Common Stock, valued at $0.56 per share, to the New England Medical Center in connection with the execution of a license agreement. 2. On March 31, 1996, the Company issued a warrant to purchase $2.0 million worth of Common Stock to Tanabe, exercisable only in connection with the initial public offering of the Company's Common Stock on Form S-1 at the same per share price of such offering. 3. On March 31, 1996, the Company sold 125,000 shares of Series D Preferred Stock at a price of $1.00 per share. On September 9, 11 and 12, 1997, the Company sold an aggregate of 1,613,865 shares of Series E Preferred Stock at a price of $7.64 per share and issued an additional 58,150 shares of Series D Preferred Stock for no additional consideration as part of a purchase price adjustment with respect to its prior sale of Series D Preferred Stock. On December 1, 1997, the Company sold 680,628 shares of Series F Preferred Stock at a price of $12.04 per share. Upon the closing of this offering, the shares of Series D Preferred Stock, Series E Preferred Stock and Series F Preferred Stock will automatically convert into 194,243, 1,613,865 and 680,628 shares of Common Stock, respectively. 4. On October 19, 1996, the Company issued 2,500 shares of Common Stock, valued at $0.56 per share, in connection with the execution of an exclusive license agreement. 5. On November 22, 1996, the Company issued a warrant to purchase 62,500 shares of Series C-1 Preferred Stock to MMC/GATX Partnership No. 1 ("MMC/GATX") at an exercise price of $8.40 per share. If such warrant is exercised, the resulting shares of Series C-1 Preferred Stock would, upon the closing of this offering, automatically convert into 62,500 shares of Common Stock. 6. On December 2, 1996, the Company issued to MMC/GATX a Secured Promissory Note in the principal amount of $3.0 million in connection with a loan to the Company of the same amount. Such promissory note bears interest at a rate of 13.6% annually. 7. On December 31, 1996, the Company issued 1,250 shares of Common Stock, valued at $0.56 per share, in connection with an exclusive license agreement. II-2 98 8. On December 8, 1997, the Company issued 5,000 shares of Common Stock, valued at $1.12 per share, in connection with the execution of a license agreement. 9. On December 31, 1997, the Company issued 625 shares of Common Stock, valued at $14.40 per share, pursuant to a consulting agreement. 10. On January 14, 1998, the Company issued 1,250 shares of Common Stock, valued at $1.12 per share, in connection with an exclusive license agreement. 11. On March 8, 1998, the Company issued 6,248 shares of Common Stock, valued at $1.12 per share, in connection with a license agreement. 12. As of March 31, 1998, the Company has granted options to purchase an aggregate of 1,103,444 shares of its Common Stock to directors, employees and consultants pursuant to its Prior Plans, and the Company has issued an aggregate of 435,570 shares of its Common Stock upon the exercise of stock options under its Prior Plans. The exercise price for such options range from $0.08 to $1.12 per share. The offers, sales and issuances of the above securities were deemed to be exempt from registration under the Securities Act in reliance on Section 4(2) of the Securities Act, and/or Regulation D promulgated thereunder, or Rule 701 promulgated under Section 3(b) of the Securities Act as transactions by an issuer not involving a public offering or transactions pursuant to compensatory benefit plans and contracts relating to compensation as provided under such Rule 701. The recipients of securities in each such transaction represented their intention to acquire the securities for investment only and not with a view to or for sale in connection with any distribution thereof and appropriate legends were affixed to the share certificates and warrants issued in such transactions. All recipients had adequate access, through employment or other relationships, to information about the Company. ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES. (A) EXHIBITS.
EXHIBIT NUMBER DESCRIPTION OF DOCUMENT - -------- ----------------------- 1.1+ Form of Underwriting Agreement. 3.1 Articles of Incorporation effective prior to reincorporation of the Company in Delaware. 3.2 Bylaws effective prior to reincorporation of the Company in Delaware. 3.3+ Form of Amended and Restated Certificate of Incorporation, to be filed and become effective prior to the effectiveness of this Registration Statement. 3.4+ Form of Second Amended and Restated Certificate of Incorporation, to be filed and become effective upon completion of the offering. 3.5+ Form of Bylaws to become effective prior to the effectiveness of this Registration Statement. 4.1 Reference is made to Exhibits 3.1, 3.2, 3.3, 3.4 and 3.5. 4.2+ Form of Common Stock Certificate. 5.1+ Opinion of Cooley Godward LLP. 10.1 Second Amended and Restated Voting Agreement, dated September 8, 1994, entered into between the Registrant and certain of its stockholders. 10.2 Form of Indemnity Agreement entered into between the Registrant and its directors and officers. 10.3 Registrant's 1998 Equity Incentive Plan.
II-3 99
EXHIBIT NUMBER DESCRIPTION OF DOCUMENT - -------- ----------------------- 10.4 Form of Incentive and Nonstatutory Stock Option Agreements under the 1998 Equity Incentive Plan. 10.5 Registrant's Employee Stock Purchase Plan and related offering document. 10.6 Registrant's Non-Employee Directors' Stock Option Plan. 10.7 Form of Nonstatutory Stock Option under Registrant's Non-Employee Directors' Stock Option Plan. 10.8 Registrant's 401(k) Profit Sharing Plan and Trust, effective as of January 1, 1998. 10.9 Management Rights Letter delivered by the Registrant to U.S. Venture Partners IV, L.P., dated September 6, 1994. 10.10 Management Rights Letter delivered by the Registrant to U.S. Venture Partners IV, L.P., Second Ventures II, L.P. and USVP Entrepreneur Partners II, L.P., dated September 8, 1994. 10.11 Management Rights Letter delivered by the Registrant to Oxford Bioscience Partners L.P., Oxford Bioscience Partners (Bermuda) Limited Partnership and Oxford Bioscience Partners (Adjunct) L.P., dated September 8, 1994. 10.12 Management Rights Letter delivered by the Registrant to U.S. Venture Partners IV, L.P. dated September 5, 1997. 10.13 Amended and Restated Investors' Rights Agreement, dated September 9, 1997, entered into between the Registrant and certain of its stockholders. 10.14 Amendment to the Amended and Restated Investors' Rights Agreement dated November 25, 1997, entered into between the Registrant and certain of its stockholders. 10.15 Loan and Security Agreement, dated November 22, 1996, entered into between the Registrant and MMC/GATX Partnership No. 1. 10.16 Warrant to Purchase 250,000 shares of Series C-1 Preferred Stock, issued by the Registrant to MMC/GATX Partnership No. 1. 10.17 Secured Promissory Note, dated December 2, 1996, issued by the Registrant to MMC/ GATX Partnership No. 1. 10.18 Series E Preferred Stock Purchase Agreement, dated September 9, 1997, between the Registrant and certain of its stockholders. 10.19 Series F Preferred Stock Purchase Agreement, dated November 25, 1997, between the Registrant and Ares-Serono S.A. 10.20 Promissory Note, dated June 14, 1994, issued to the Registrant by Alan J. Lewis. 10.21 Security Agreement, dated June 14, 1994, entered into between the Registrant to Alan J. Lewis. 10.22 Employment letter agreement, dated December 8, 1993, between the Registrant and Alan J. Lewis. 10.23 Employment letter agreement, dated March 4, 1994, between the Registrant and David W. Anderson. 10.24 Employment letter agreement, dated August 18, 1994, between the Registrant and Bradley B. Gordon. 10.25 Employment letter agreement, dated June 13, 1995, between the Registrant and Carl F. Bobkoski. 10.26 Consulting Agreement, dated April 1, 1996, between the Registrant and John P. Walker.
II-4 100
EXHIBIT NUMBER DESCRIPTION OF DOCUMENT - -------- ----------------------- 10.27 Lease, dated April 30, 1993, as amended, between the Registrant and Sorrento Valley Business Park. 10.28 Master Lease Agreement, dated July 8, 1993, between the Registrant and E.I. Dupont de Nemours & Co. 10.29 Master Equipment Lease, dated September 1, 1993, between the Registrant and Phoenix Leasing Incorporated. 10.30 Master Lease Agreement, dated January 1, 1998, between the Registrant and Transamerica Business Credit Corporation. 10.31 Lease, dated January 1, 1998, between the Registrant and Sorrento Valley Business Park. 10.32* Exclusive License Agreement, dated October 26, 1993, between the Registrant and The Regents of the University of California. 10.33* First Amendment to Exclusive License Agreement, dated June 22, 1997, between the Registrant and The Regents of the University of California. 10.34* Second Amendment to Exclusive License Agreement, dated February 2, 1998, between the Registrant and The Regents of the University of California. 10.35* Restricted Stock Purchase Agreement, dated October 26, 1993, between the Registrant and the Regents of the University of California. 10.36* License Agreement, dated February 18, 1998, between the Registrant and The Regents of the University of California. 10.37* Restricted Stock Purchase Agreement, dated February 18, 1998, between the Registrant and The Regents of the University of California. 10.38* Collaborative Development and Licensing Agreement, dated March 31, 1996, between the Registrant and Tanabe Seiyaku Co., Ltd. 10.39* Amendment to Collaborative Development and Licensing Agreement, dated March 31, 1998, between the Registrant and Tanabe Seiyaku Co., Ltd. 10.40 Stock Purchase Agreement, dated March 31, 1996, between the Registrant and Tanabe Seiyaku Co., Ltd. 10.41* Agreement dated July 30, 1996, between the Registrant and N.V. Organon. 10.42+ First Amendment to Agreement, dated January 30, 1998, between the Registrant and N.V. Organon. 10.43* Research Collaboration Agreement, dated August 26, 1996, and as amended on September 5, 1997, between the Registrant and Roche Bioscience. 10.44* Exclusive License Agreement, dated October 1996, between the Registrant and the University of Massachusetts. 10.45* Restricted Stock Purchase Agreement, dated October 31, 1996, between the Registrant and the University of Massachusetts. 10.46* License Agreement, dated October 28, 1997, between the Registrant and the University of Massachusetts. 10.47* Restricted Stock Purchase Agreement, dated December 7, 1997, between the Registrant and the University of Massachusetts. 10.48* Research, Development and License Agreement, dated November 25, 1997, between the Registrant and Ares Trading S.A. 10.49* Collaborative Research and License Agreement, dated December 26, 1997, between the Registrant and The DuPont Merck Pharmaceutical Company.
II-5 101
EXHIBIT NUMBER DESCRIPTION OF DOCUMENT - -------- ----------------------- 10.50* Stock Purchase Agreement dated December 26, 1997, between the Registrant and The DuPont Merck Pharmaceutical Company. 10.51* Collaboration Agreement, dated February 9, 1998, between the Registrant and Nippon Kayaku Co., Ltd. 10.52 Promissory Note, dated May 8, 1998, issued to the Registrant by Alan J. Lewis. 11.1 Computation of Net Loss per Share. 23.1 Consent of Ernst & Young LLP, Independent Auditors. 23.2 Consent of Cooley Godward LLP. Reference is made to Exhibit 5.1. 24.1 Power of Attorney. Reference is made to page II-6.
- ------------------------------ * Confidential Treatment has been requested with respect to certain portions of this exhibit. Omitted portions have been filed separately with the Securities and Exchange Commission. + To be filed by amendment. (B) SCHEDULES. All schedules are omitted because they are not required, are not applicable or the information is included in the consolidated financial statements or notes thereto. ITEM 17. UNDERTAKINGS. The undersigned Registrant 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 registrant pursuant to provisions described in Item 14 of this Registration Statement, or otherwise, the Registrant has been advised that in the opinion of the Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. The undersigned Registrant hereby undertakes: (1) That, for purposes of determining any liability under the Securities Act, each filing of the Registrant's annual report pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), (and, where applicable, each filing of an employee benefit plan's annual report pursuant to Section 15(d) of the Exchange Act) that is incorporated by reference in the registration statement 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. (2) That, 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. II-6 102 (3) 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-7 103 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the Registrant certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form S-1 and has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of San Diego, County of San Diego, State of California, on the 15th day of May 1998. /s/ ALAN J. LEWIS, PH.D. By: Alan J. Lewis, Ph.D. President and Chief Executive Officer POWER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Alan J. Lewis, Carl F. Bobkoski, and Bradley B. Gordon and each of them, as his true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him and in his name, place, and stead, in any and all capacities, to sign any and all amendments (including post-effective amendments, exhibits thereto and other documents in connection therewith) to this Registration Statement and any subsequent registration statement filed by the registrant pursuant to Rule 462(b) of the Securities Act of 1933, as amended, which relates to this Registration Statement, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them, or their or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities and on the dates indicated.
SIGNATURE TITLE DATE --------- ----- ---- /s/ ALAN J. LEWIS, PH.D. President, Chief Executive Officer and May 15, 1998 - --------------------------------------------- Director (Principal Executive Officer) Alan J. Lewis, Ph.D. /s/ BRADLEY B. GORDON Vice President, Finance, Chief Financial May 15, 1998 - --------------------------------------------- Officer and Secretary (Principal Bradley B. Gordon Financial and Accounting Officer) /s/ JOHN P. WALKER Chairman of the Board May 15, 1998 - --------------------------------------------- John P. Walker /s/ BROOK H. BYERS Director May 15, 1998 - --------------------------------------------- Brook H. Byers
II-8 104
SIGNATURE TITLE DATE --------- ----- ---- /s/ LUKE B. EVNIN, PH.D. Director May 15, 1998 - --------------------------------------------- Luke B. Evnin, Ph.D. /s/ HARRY F. HIXSON, PH.D. Director May 15, 1998 - --------------------------------------------- Harry F. Hixson, Ph.D. /s/ PATRICK F. LATTERELL Director May 15, 1998 - --------------------------------------------- Patrick F. Latterell /s/ ARNOLD ORONSKY, PH.D. Director May 15, 1998 - --------------------------------------------- Arnold Oronsky, Ph.D.
II-9 105 EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION OF DOCUMENT - ------- ----------------------- 1.1+ Form of Underwriting Agreement. 3.1 Articles of Incorporation effective prior to reincorporation of the Company in Delaware. 3.2 Bylaws effective prior to reincorporation of the Company in Delaware. 3.3+ Form of Amended and Restated Certificate of Incorporation, to be filed and become effective prior to the effectiveness of this Registration Statement. 3.4+ Form of Second Amended and Restated Certificate of Incorporation, to be filed and become effective upon completion of the offering. 3.5+ Form of Bylaws to become effective prior to the effectiveness of this Registration Statement. 4.1 Reference is made to Exhibits 3.1, 3.2, 3.3, 3.4 and 3.5. 4.2+ Form of Common Stock Certificate. 5.1+ Opinion of Cooley Godward LLP. 10.1 Second Amended and Restated Voting Agreement, dated September 8, 1994, entered into between the Registrant and certain of its stockholders. 10.2 Form of Indemnity Agreement entered into between the Registrant and its directors and officers. 10.3 Registrant's 1998 Equity Incentive Plan. 10.4 Form of Incentive and Nonstatutory Stock Option Agreements under the 1998 Equity Incentive Plan. 10.5 Registrant's Employee Stock Purchase Plan and related offering document. 10.6 Registrant's Non-Employee Directors' Stock Option Plan. 10.7 Form of Nonstatutory Stock Option under Registrant's Non-Employee Directors' Stock Option Plan. 10.8 Registrant's 401(k) Profit Sharing Plan and Trust, effective as of January 1, 1998. 10.9 Management Rights Letter delivered by the Registrant to U.S. Venture Partners IV, L.P., dated September 6, 1994. 10.10 Management Rights Letter delivered by the Registrant to U.S. Venture Partners IV, L.P., Second Ventures II, L.P. and USVP Entrepreneur Partners II, L.P., dated September 8, 1994. 10.11 Management Rights Letter delivered by the Registrant to Oxford Bioscience Partners L.P., Oxford Bioscience Partners (Bermuda) Limited Partnership and Oxford Bioscience Partners (Adjunct) L.P., dated September 8, 1994. 10.12 Management Rights Letter delivered by the Registrant to U.S. Venture Partners IV, L.P. dated September 5, 1997. 10.13 Amended and Restated Investors' Rights Agreement, dated September 9, 1997, entered into between the Registrant and certain of its stockholders. 10.14 Amendment to the Amended and Restated Investors' Rights Agreement dated November 25, 1997, entered into between the Registrant and certain of its stockholders. 10.15 Loan and Security Agreement, dated November 22, 1996, entered into between the Registrant and MMC/GATX Partnership No. 1.
106
EXHIBIT NUMBER DESCRIPTION OF DOCUMENT - ------- ----------------------- 10.16 Warrant to Purchase 250,000 shares of Series C-1 Preferred Stock, issued by the Registrant to MMC/GATX Partnership No. 1. 10.17 Secured Promissory Note, dated December 2, 1996, issued by the Registrant to MMC/ GATX Partnership No. 1. 10.18 Series E Preferred Stock Purchase Agreement, dated September 9, 1997, between the Registrant and certain of its stockholders. 10.19 Series F Preferred Stock Purchase Agreement, dated November 25, 1997, between the Registrant and Ares-Serono S.A. 10.20 Promissory Note, dated June 14, 1994, issued to the Registrant by Alan J. Lewis. 10.21 Security Agreement, dated June 14, 1994, entered into between the Registrant to Alan J. Lewis. 10.22 Employment letter agreement, dated December 8, 1993, between the Registrant and Alan J. Lewis. 10.23 Employment letter agreement, dated March 4, 1994, between the Registrant and David W. Anderson. 10.24 Employment letter agreement, dated August 18, 1994, between the Registrant and Bradley B. Gordon. 10.25 Employment letter agreement, dated June 13, 1995, between the Registrant and Carl F. Bobkoski. 10.26 Consulting Agreement, dated April 1, 1996, between the Registrant and John P. Walker. 10.27 Lease, dated April 30, 1993, as amended, between the Registrant and Sorrento Valley Business Park. 10.28 Master Lease Agreement, dated July 8, 1993, between the Registrant and E.I. Dupont de Nemours & Co. 10.29 Master Equipment Lease, dated September 1, 1993, between the Registrant and Phoenix Leasing Incorporated. 10.30 Master Lease Agreement, dated January 1, 1998, between the Registrant and Transamerica Business Credit Corporation. 10.31 Lease, dated January 1, 1998, between the Registrant and Sorrento Valley Business Park. 10.32* Exclusive License Agreement, dated October 26, 1993, between the Registrant and The Regents of the University of California. 10.33* First Amendment to Exclusive License Agreement, dated June 22, 1997, between the Registrant and The Regents of the University of California. 10.34* Second Amendment to Exclusive License Agreement, dated February 2, 1998, between the Registrant and The Regents of the University of California. 10.35* Restricted Stock Purchase Agreement, dated October 26, 1993, between the Registrant and the Regents of the University of California. 10.36* License Agreement, dated February 18, 1998, between the Registrant and The Regents of the University of California. 10.37* Restricted Stock Purchase Agreement, dated February 18, 1998, between the Registrant and The Regents of the University of California. 10.38* Collaborative Development and Licensing Agreement, dated March 31, 1996, between the Registrant and Tanabe Seiyaku Co., Ltd.
107
EXHIBIT NUMBER DESCRIPTION OF DOCUMENT - ------- ----------------------- 10.39* Amendment to Collaborative Development and Licensing Agreement, dated March 31, 1998, between the Registrant and Tanabe Seiyaku Co., Ltd. 10.40 Stock Purchase Agreement, dated March 31, 1996, between the Registrant and Tanabe Seiyaku Co., Ltd. 10.41* Agreement dated July 30, 1996, between the Registrant and N.V. Organon. 10.42+ First Amendment to Agreement, dated January 30, 1998, between the Registrant and N.V. Organon. 10.43* Research Collaboration Agreement, dated August 26, 1996, and as amended on September 5, 1997, between the Registrant and Roche Bioscience. 10.44* Exclusive License Agreement, dated October 1996, between the Registrant and the University of Massachusetts. 10.45* Restricted Stock Purchase Agreement, dated October 31, 1996, between the Registrant and the University of Massachusetts. 10.46* License Agreement, dated October 28, 1997, between the Registrant and the University of Massachusetts. 10.47* Restricted Stock Purchase Agreement, dated December 7, 1997, between the Registrant and the University of Massachusetts. 10.48* Research, Development and License Agreement, dated November 25, 1997, between the Registrant and Ares Trading S.A. 10.49* Collaborative Research and License Agreement, dated December 26, 1997, between the Registrant and The DuPont Merck Pharmaceutical Company. 10.50* Stock Purchase Agreement dated December 26, 1997, between the Registrant and The DuPont Merck Pharmaceutical Company. 10.51* Collaboration Agreement, dated February 9, 1998, between the Registrant and Nippon Kayaku Co., Ltd. 10.52 Promissory Note, dated May 8, 1998, issued to the Registrant by Alan J. Lewis. 11.1 Computation of Net Loss per Share. 23.1 Consent of Ernst & Young LLP, Independent Auditors. 23.2 Consent of Cooley Godward LLP. Reference is made to Exhibit 5.1. 24.1 Power of Attorney. Reference is made to page II-6.
- ------------------------------ * Confidential Treatment has been requested with respect to certain portions of this exhibit. Omitted portions have been filed separately with the Securities and Exchange Commission. + To be filed by amendment. EX-3.1 2 EXHIBIT 3.1 1 EXHIBIT 3.1 AMENDED AND RESTATED ARTICLES OF INCORPORATION OF SIGNAL PHARMACEUTICALS, INC., a California corporation The undersigned Alan J. Lewis and Bradley B. Gordon hereby certify that: ONE: They are the duly elected and acting President and Chief Executive Officer, and Secretary, respectively, of said corporation. TWO: The Amended and Restated Articles of Incorporation of said corporation shall be amended and restated to read in full as follows: ARTICLE I The name of this corporation is Signal Pharmaceuticals, Inc. ARTICLE II The purpose of this corporation is to engage in any lawful act or activity for which a corporation may be organized under the General Corporation Law of California other than the banking business, the trust company business or the practice of a profession permitted to be incorporated by the California Corporations Code. ARTICLE III (A) CLASSES OF STOCK. This corporation is authorized to issue two classes of stock to be designated, respectively, "Common Stock" and "Preferred Stock." The total number of shares which the corporation is authorized to issue is Fifty-Nine Million Four Hundred Fifty-Three Thousand Nine Hundred Thirty-One (59,453,931) shares. Thirty Five Million (35,000,000) shares shall be Common Stock and Twenty-Four Million Four Hundred Fifty-Three Thousand Nine Hundred Thirty-One (24,453,931) shares shall be Preferred Stock. (B) RIGHTS, PREFERENCES AND RESTRICTIONS OF PREFERRED STOCK. The Preferred Stock authorized by these Amended and Restated Articles of Incorporation may be issued from time to time in series. The rights, preferences, privileges, and restrictions granted to and imposed on the Series A Preferred Stock, which series shall consist of 2,626,892 shares, the Series B Preferred Stock, which series shall consist of 2,875,000 shares, the Series C Preferred Stock, which series shall consist of 8,791,432 shares, the Series C-1 Preferred Stock, which series shall consist of 250,000 shares, the Series D Preferred Stock, which series shall consist of 732,601 shares, the Series E Preferred Stock, which series shall consist of 6,455,493 shares, and the Series F Preferred Stock, which series shall consist of 2,722,513 shares, are set forth below in this Article III(B). 1. 2 1. DIVIDEND PROVISIONS. Subject to the rights of series of Preferred Stock which may from time to time come into existence, the holders of shares of Series A Preferred Stock, the Series B Preferred Stock, the Series C Preferred Stock, the Series C-1 Preferred Stock, the Series D Preferred Stock, the Series E Preferred Stock and the Series F Preferred Stock shall be entitled to receive dividends, out of any assets legally available therefor, prior and in preference to any declaration or payment of any dividend (payable other than in Common Stock or other securities and rights convertible into or entitling the holder thereof to receive, directly or indirectly, additional shares of Common Stock of the corporation, including pursuant to an event causing the Conversion Price of the Series A, Series B, Series C, Series C-1, Series D, Series E or Series F Preferred Stock to be adjusted pursuant to Section 4(d)(i) hereof) on the Common Stock of the corporation, at the rate of $0.08, $0.096, $0.112, $0.168, $0.32, $0.1528 and $0.24095, respectively, per share per annum, payable when, as and if declared by the Board of Directors. Such dividends shall not be cumulative. After payment of the dividend preference referred to above, outstanding shares of Series A, Series B, Series C, Series C-1, Series D, Series E and Series F Preferred Stock shall participate with shares of Common Stock as to any additional declaration or payment of any dividend (payable other than in Common Stock or other securities and rights convertible into or entitling the holder thereof to receive, directly or indirectly, additional shares of Common Stock of the corporation including pursuant to an event causing the Conversion Price of the Series A, Series B, Series C, Series C-1, Series D, Series E or Series F Preferred Stock to be adjusted pursuant to Section 4(d)(i) hereof), with the outstanding shares of Series A, Series B, Series C, Series C-1, Series D, Series E and Series F Preferred Stock participating as though they had all been converted into Common Stock. 2. LIQUIDATION PREFERENCE. (a) In the event of any liquidation, dissolution or winding up of the corporation, either voluntary or involuntary, subject to the rights of series of Preferred Stock which may from time to time come into existence, the holders of Series A, Series B, Series C, Series C-1, Series D, Series E and Series F Preferred Stock shall be entitled to receive, prior and in preference to any distribution of any of the assets of the corporation to the holders of the Common Stock by reason of their ownership thereof, an amount per share equal to the sum of (i) $1.00 for each outstanding share of Series A Preferred Stock (the "Original Series A Issue Price") and (ii) $1.20 for each outstanding share of Series B Preferred Stock (the "Original Series B Issue Price") and (iii) $1.40 for each outstanding share of Series C Preferred Stock (the "Original Series C Issue Price") and (iv) $2.10 for each outstanding share of Series C-1 Preferred Stock (the "Original Series C-1 Issue Price") and (v) $2.73 for each outstanding share of Series D Preferred Stock (the "Original Series D Issue Price") and (vi) $1.91 for each outstanding share of 2. 3 Series E Preferred Stock (the "Original Series E Issue Price") and (vii) $3.01192 for each outstanding share of Series F Preferred Stock (the "Original Series F Issue Price") and (viii) an amount equal to declared but unpaid dividends on such share(s). If upon the occurrence of such event, the assets and funds thus distributed among the holders of the Series A, Series B, Series C, Series C-1, Series D, Series E and Series F Preferred Stock shall be insufficient to permit the payment to such holders of the full aforesaid preferential amounts, then, subject to the rights of series of Preferred Stock which may from time to time come into existence, the entire assets and funds of the corporation legally available for distribution shall be distributed ratably among the holders of the Series A, Series B, Series C, Series C-1, Series D, Series E and Series F Preferred Stock in proportion to the aggregate liquidation preferences of the respective series, and ratably among the holders of each series in proportion to the amount of stock in such series owned by each such holder. (b) Upon completion of the distribution required by subparagraph (a) of this Section 2 and any other distribution which may be required with respect to series of Preferred Stock which may from time to time come into existence, if assets remain in this corporation, the holder of each share of Common Stock shall be entitled to receive an amount equal to $0.10 per share. (c) Upon the completion of the distribution required by subparagraphs (a) and (b) of this Section 2, the remaining assets of the corporation available for distribution to shareholders shall be distributed among the holders of Series A, Series B, Series C, Series C-1, Series D, Series E and Series F Preferred Stock and Common Stock pro rata based on the number of shares of Common Stock held by each (assuming conversion of all such Series A, Series B, Series C, Series C-1, Series D, Series E and Series F Preferred Stock) until, with respect to the holders of Series A, Series B, Series C, Series C-1, Series D, Series E and Series F Preferred Stock, such holders shall have received an aggregate of $5.00 per share (including amounts paid pursuant to subsection (a) of this Section 2); thereafter, if assets remain in this corporation, the holders of the Common Stock of this corporation shall receive all of the remaining assets of this corporation pro rata based on the number of shares of Common Stock held by each. (d) (i) For purposes of this Section 2, a liquidation, dissolution or winding up of this corporation shall be deemed to be occasioned by, or to include, (A) the acquisition of the corporation by another entity by means of any transaction or series of related transactions (including, without limitation, any reorganization, merger or consolidation but, excluding any merger effected exclusively for the purpose of changing the domicile of the corporation); or (B) a sale of all or 3. 4 substantially all of the assets of the corporation; unless the corporation's shareholders of record as constituted immediately prior to such acquisition or sale will, immediately after such acquisition or sale (by virtue of securities issued as consideration for the corporation's acquisition or sale or otherwise) hold at least 50% of the voting power of the surviving or acquiring entity. (ii) In any of such events, if the consideration received by the corporation is other than cash its value will be deemed its fair market value. Any securities shall be valued as follows: (A) Securities not subject to investment letter or other similar restrictions on free marketability covered by (B) below: (1) If traded on a securities exchange or through Nasdaq National Market, the value shall be deemed to be the average of the closing prices of the securities on such exchange over the thirty-day period ending three (3) days prior to the closing; (2) If actively traded over-the-counter, the value shall be deemed to be the average of the closing bid or sale prices (whichever is applicable) over the thirty-day period ending three (3) days prior to the closing; and (3) If there is no active public market, the value shall be the fair market value thereof, as mutually determined by the corporation and the holders of at least a majority of the voting power of all then outstanding shares of Preferred Stock. (B) The method of valuation of securities subject to investment letter or other restrictions on free marketability (other than restrictions arising solely by virtue of a shareholder's status as an affiliate or former affiliate) shall be to make an appropriate discount from the market value determined as above in (A) (1), (2) or (3) to reflect the approximate fair market value thereof, as mutually determined by the corporation and the holders of at least a majority of the voting power of all then outstanding shares of such Preferred Stock. (iii) In the event the requirements of this Subsection 2(d) are not complied with, this corporation shall forthwith either: (A) cause such closing to be postponed until such time as the requirements of this Section 2 have been complied with; or (B) cancel such transaction, in which event the rights, preferences and privileges of the holders of the Series A, Series B, Series C, Series 4. 5 C-1, Series D, Series E and Series F Preferred Stock shall revert to and be the same as such rights, preferences and privileges existing immediately prior to the date of the first notice referred to in subsection 2(d)(iv) hereof. (iv) The corporation shall give each holder of record of Series A, Series B, Series C, Series C-1, Series D, Series E and Series F Preferred Stock written notice of such impending transaction not later than twenty (20) days prior to the shareholders' meeting called to approve such transaction, or twenty (20) days prior to the closing of such transaction, whichever is earlier, and shall also notify such holders in writing of the final approval of such transaction. The first of such notices shall describe the material terms and conditions of the impending transaction and the provisions of this Section 2, and the corporation shall thereafter give such holders prompt notice of any material changes. The transaction shall in no event take place sooner than twenty (20) days after the corporation has given the first notice provided for herein or sooner than ten (10) days after the corporation has given notice of any material changes provided for herein; provided, however, that such periods may be shortened upon the written consent of holders of a majority of each series of Preferred Stock. 3. REDEMPTION. The Series A, Series B, Series C, Series C-1, Series D, Series E and Series F Preferred Stock are not redeemable. 4. CONVERSION. The holders of the Series A, Series B, Series C, Series C-1, Series D, Series E and Series F Preferred Stock shall have conversion rights as follows (the "Conversion Rights"): (a) RIGHT TO CONVERT. (i) Each share of Series A, Series B, Series C, Series C-1, Series D, Series E and Series F Preferred Stock shall be convertible, at the option of the holder thereof, at any time after the date of issuance of such share, at the office of the corporation or any transfer agent for the Preferred Stock, into such number of fully paid and nonassessable shares of Common Stock as is determined by dividing the Original Series A Issue Price, the Original Series B Issue Price, the Original Series C Issue Price, the Original Series C-1 Issue Price, the Original Series D Issue Price, the Original Series E Issue Price or the Original Series F Issue Price, respectively, by the Conversion Price at the time in effect for such share. The initial "Conversion Price" per share for shares of Series A shall be the Original Series A Issue Price, the initial "Conversion Price" per share for shares of Series B Preferred Stock shall be the Original Series B Issue Price, the initial "Conversion Price" for shares of Series C shall be the Original Series C Issue Price, the initial "Conversion Price" for shares of Series C-1 shall be the Original Series C-1 Issue Price, the initial "Conversion Price" for shares of Series D shall be the Original Series D Issue Price, the initial "Conversion Price" for shares of Series E shall be the 5. 6 Original Series E Issue Price and the initial "Conversion Price" for shares of Series F shall be the Original Series F Issue Price; provided, however, that the Conversion Price for the Series A, Series B, Series C, Series C-1, Series D, Series E and Series F Preferred Stock shall be subject to adjustment as set forth in this Section 4. (ii) Each share of Series A, Series B, Series C, Series C-1, Series D, Series E and Series F Preferred Stock shall automatically be converted into shares of Common Stock at the Conversion Price at the time in effect for such Preferred Stock immediately upon the earlier of (A) the consummation of the sale of the corporation's Common Stock in a bona fide, firm commitment underwriting pursuant to a registration statement under the Securities Act of 1933, as amended, the public offering price of which is not less than $5.00 per share (adjusted to reflect subsequent stock dividends, stock splits or recapitalizations) with aggregate gross proceeds to the Company in excess of $15,000,000; (B) the date upon which the corporation obtains the consent of the holders of at least 75% of the then outstanding shares of Preferred Stock, to the conversion of their shares; (C) as to each of the Series A, the Series B, the Series C, the Series C-1, the Series D, the Series E and Series F Preferred Stock, the date upon which there are less than 100,000 shares of such series of Preferred Stock then outstanding (such number to be adjusted to reflect subsequent stock dividends, stock splits, combinations or recapitalizations); or (D) as to the Series D Preferred Stock, ten (10) days after written notice to all holders of the Series D Preferred Stock of the occurrence of a material breach by Tanabe Seiyaku Co., Ltd., a Japanese corporation ("Tanabe"), of that certain Stock Purchase Agreement dated as of March 31, 1996 between the Company and Tanabe (the "Tanabe Agreement"), which breach has not been cured by Tanabe pursuant to the terms of the Tanabe Agreement. (b) MECHANICS OF CONVERSION. Before any holder of Series A, Series B, Series C, Series C-1, Series D, Series E or Series F Preferred Stock shall be entitled to convert the same into shares of Common Stock, he shall surrender the certificate or certificates therefor, duly endorsed, at the office of the corporation or of any transfer agent for the Preferred Stock, and shall give written notice by mail, postage prepaid, to the corporation at its principal corporate office, of the election to convert the same and shall state therein the name or names in which the certificate or certificates for shares of Common Stock are to be issued; provided, however, that in the event of an automatic conversion in connection with an underwritten offering of securities registered pursuant to the Securities Act of 1933, as amended, the outstanding shares of Preferred Stock shall be converted automatically without any further action by the holders of such shares and whether or not the certificates representing such shares are surrendered to the corporation or its transfer agent; and provided further that the corporation shall not be obligated to issue certificates evidencing the shares of Common Stock issuable upon conversion unless the certificates evidencing such shares of Preferred Stock are either delivered to the corporation or its transfer agent as provided above, or the holder notifies 6. 7 the corporation or its transfer agent that such certificates have been lost, stolen or destroyed and executes an agreement satisfactory to the corporation to indemnify the corporation from any loss incurred by it in connection with such certificates. The corporation shall, as soon as practicable thereafter, issue and deliver at such office to such holder of Preferred Stock, or to the nominee or nominees of such holder, a certificate or certificates for the number of shares of Common Stock to which such holder shall be entitled as aforesaid. Such conversion shall be deemed to have been made immediately prior to the close of business on the date of such surrender of the shares of Preferred Stock to be converted, and the person or persons entitled to receive the shares of Common Stock issuable upon such conversion shall be treated for all purposes as the record holder or holders of such shares of Common Stock as of such date. If the conversion is in connection with an underwritten offering of securities registered pursuant to the Securities Act of 1933, as amended, the conversion will, unless otherwise designated by the holder tendering Series A, Series B, Series C, Series C-1, Series D, Series E or Series F Preferred Stock for conversion, be conditioned upon the closing of the sale of securities pursuant to such offering, and the person(s) entitled to receive the Common Stock issuable upon such conversion of such Preferred Stock shall not be deemed to have converted such Preferred Stock until immediately prior to the closing of such sale of securities. (c) SALE OF SHARES BELOW CONVERSION PRICE. (i) If at any time or from time to time after the date when the first shares of Series E Preferred Stock are issued (the "Original Issue Date"), the Company issues or sells, or is deemed by the express provisions of this subsection (c) to have issued or sold, Additional Shares of Common Stock (as defined in subsection (c)(iv) below)), other than as a dividend or other distribution on any class of stock as provided in Section 4(d) below for an Effective Price (as defined in subsection (c)(iv) below) less than the then effective Conversion Price for the Series A, Series B, Series C, Series C-1 or Series E Preferred Stock, respectively, or the then effective Series F Anti-Dilution Price for the Series F Preferred Stock, then and in each such case: (1) the then existing Conversion Price for the Series A, Series B, Series C, Series C-1 and Series E Preferred Stock, as applicable, and the then existing Series F Anti-Dilution Price, as applicable, shall be reduced, as of the opening of business on the date of such issue or sale, to a price determined by multiplying the then existing Conversion Price or Series F Anti-Dilution Price, as applicable, by a fraction (i) the numerator of which shall be (A) the number of shares of Common Stock deemed outstanding (as defined below) immediately prior to such issue or sale, plus (B) the number of shares of Common Stock which the aggregate consideration received (as defined in subsection (c)(ii)) by the Company for the total number of Additional Shares of Common Stock so issued would purchase at such Conversion Price or Series F Anti-Dilution Price, and (ii) the denominator of which shall be the number of shares of Common Stock deemed outstanding (as defined below) 7. 8 immediately prior to such issue or sale plus the total number of Additional Shares of Common Stock so issued; and (2) the then existing Conversion Price for the Series F Preferred Stock, as applicable, shall be reduced, as of the opening of business on the date of such issue or sale, to a price determined by subtracting from the then existing Conversion Price the difference between the Series F Anti-Dilution Price in effect immediately prior to the issuance of the Additional Shares of Common Stock and the Series F Anti-Dilution Price in effect immediately after the issuance of the Additional Shares of Common Stock. For the purposes of the preceding sentence, the number of shares of Common Stock deemed to be outstanding as of a given date shall be the sum of (A) the number of shares of Common Stock actually outstanding, (B) the number of shares of Common Stock into which the then outstanding shares of the Series A, Series B, Series C, Series C-1, Series D, Series E or Series F Preferred Stock could be converted if fully converted on the day immediately preceding the given date, and (C) the number of shares of Common Stock which could be obtained through the exercise or conversion of all other rights, options and convertible securities on the day immediately preceding the given date. For purposes of this Section 4(c), the original Series F Anti-Dilution Price shall be $1.91. (ii) For the purpose of making any adjustment required under this Section 4(c), the consideration received by the Company for any issue or sale of securities shall (A) to the extent it consists of cash, be computed at the net amount of cash received by the Company after deduction of any underwriting or similar commissions, compensation or concessions paid or allowed by the Company in connection with such issue or sale but without deduction of any expenses payable by the Company, (B) to the extent it consists of property other than cash, be computed at the fair value of that property as determined in good faith by the Board of Directors, and (C) if Additional Shares of Common Stock, Convertible Securities (as defined in subsection (c)(iii) below) or rights or options to purchase either Additional Shares of Common Stock or Convertible Securities are issued or sold together with other stock or securities or other assets of the Company for a consideration which covers both, be computed as the portion of the consideration so received that may be reasonably determined in good faith by the Board of Directors to be allocable to such Additional Shares of Common Stock, Convertible Securities or rights or options. (iii) For the purpose of the adjustment required under this Section 4(c), if the Company issues or sells any rights or options for the purchase of, or stock or other securities convertible into, Additional Shares of Common Stock (such convertible stock or securities being herein referred to as "Convertible Securities") and if the Effective Price of such Additional Shares of Common Stock is less than the Conversion Price or Series F Anti-Dilution Price, as applicable, in each case the Company shall be deemed to have issued at the time of the issuance of such rights or options or Convertible Securities the maximum number of Additional Shares of Common 8. 9 Stock issuable upon exercise or conversion thereof and to have received as consideration for the issuance of such shares an amount equal to the total amount of the consideration, if any, received by the Company for the issuance of such rights or options or Convertible Securities, plus, in the case of such rights or options, the minimum amounts of consideration, if any, payable to the Company upon the exercise of such rights or options, plus, in the case of Convertible Securities, the minimum amounts of consideration, if any, payable to the Company (other than by cancellation of liabilities or obligations evidenced by such Convertible Securities) upon the conversion thereof; provided that if in the case of Convertible Securities the minimum amounts of such consideration cannot be ascertained, but are a function of antidilution or similar protective clauses, the Company shall be deemed to have received the minimum amounts of consideration without reference to such clauses; provided further that if the minimum amount of consideration payable to the Company upon the exercise or conversion of rights, options or Convertible Securities is reduced over time or on the occurrence or non-occurrence of specified events other than by reason of antidilution adjustments, the Effective Price shall be recalculated using the figure to which such minimum amount of consideration is reduced; provided further that if the minimum amount of consideration payable to the Company upon the exercise or conversion of such rights, options or Convertible Securities is subsequently increased, the Effective Price shall be again recalculated using the increased minimum amount of consideration payable to the Company upon the exercise or conversion of such rights, options or Convertible Securities. No further adjustment of the Conversion Price or Series F Anti-Dilution Price, as adjusted upon the issuance of such rights, options or Convertible Securities, shall be made as a result of the actual issuance of Additional Shares of Common Stock on the exercise of any such rights or options or the conversion of any such Convertible Securities. If any such rights or options or the conversion privilege represented by any such Convertible Securities shall expire without having been exercised, the Conversion Price and Series F Anti-Dilution Price, as adjusted upon the issuance of such rights, options or Convertible Securities, shall be readjusted to the Conversion Price and Series F Anti-Dilution Price which would have been in effect had an adjustment been made on the basis that the only Additional Shares of Common Stock so issued were the Additional Shares of Common Stock, if any, actually issued or sold on the exercise of such rights or options or rights of conversion of such Convertible Securities, and such Additional Shares of Common Stock, if any, were issued or sold for the consideration actually received by the Company upon such exercise, plus the consideration, if any, actually received by the Company for the granting of all such rights or options, whether or not exercised, plus the consideration received for issuing or selling the Convertible Securities actually converted, plus the consideration, if any, actually received by the Company (other than by cancellation of liabilities or obligations evidenced by such Convertible Securities) on the conversion of such Convertible 9. 10 Securities, provided that such readjustment shall not apply to prior conversions of the Series A, Series B, Series C, Series C-1, Series E or Series F Preferred Stock. (iv) "Additional Shares of Common Stock" shall mean all shares of Common Stock issued by the Company or deemed to be issued pursuant to this Section 4(c), whether or not subsequently reacquired or retired by the Company other than (A) shares of Common Stock issued upon conversion of the Series A, Series B, Series C, Series C-1, Series D, Series E or Series F Preferred Stock; (B) shares of Common Stock and/or options, warrants or other Common Stock purchase rights and the Common Stock issued pursuant to such options, warrants or other rights (as adjusted for any stock dividends, combinations, splits, recapitalizations and the like) after the Original Issue Date to employees, officers or directors of, or consultants or advisors to the Company or any subsidiary pursuant to stock purchase or stock option plans or other arrangements that are approved by the Board; and (C) shares of Common Stock issued pursuant to the exercise of options, warrants or convertible securities outstanding as of the Original Issue Date. The "Effective Price" of Additional Shares of Common Stock shall mean the quotient determined by dividing the total number of Additional Shares of Common Stock issued or sold, or deemed to have been issued or sold by the Company under this Section 4(c), into the aggregate consideration received, or deemed to have been received by the Company for such issue under this Section 4(c), for such Additional Shares of Common Stock. (d) CONVERSION PRICE ADJUSTMENTS OF PREFERRED STOCK FOR STOCK DIVIDENDS AND STOCK SPLITS. The Conversion Price of the Series A, Series B, Series C, Series C-1, Series D, Series E and Series F Preferred Stock shall be subject to adjustment from time to time as follows: (i) In the event the corporation should at any time or from time to time after the date when the first shares of Series A, Series B, Series C, Series C-1, Series D, Series E or Series F Preferred Stock, respectively, are issued (the "Purchase Date" with respect to each such series) fix a record date for the effectuation of a split or subdivision of the outstanding shares of Common Stock or the determination of holders of Common Stock entitled to receive a dividend or other distribution payable in additional shares of Common Stock or other securities or rights convertible into, or entitling the holder thereof to receive directly or indirectly, additional shares of Common Stock (hereinafter referred to as "Common Stock Equivalents") without payment of any consideration by such holder for the additional shares of Common Stock or the Common Stock Equivalents (including the additional shares of Common Stock issuable upon conversion or exercise thereof), then, as of such record date (or the date of such dividend distribution, split or subdivision if no record date is fixed), the Conversion Price of the Series A, Series B, Series C, Series C-1, Series D, Series E or Series F Preferred Stock shall be appropriately decreased so that the number of shares of Common Stock issuable 10. 11 on conversion of each share of such series shall be increased in proportion to such increase in the aggregate number of shares of Common Stock outstanding and those issuable with respect to such Common Stock Equivalents. (ii) If the number of shares of Common Stock outstanding at any time after the Purchase Date is decreased by a combination of the outstanding shares of Common Stock, then, following the record date of such combination, the Conversion Price for the Series A, Series B, Series C, Series C-1, Series D, Series E and Series F Preferred Stock shall be appropriately increased so that the number of shares of Common Stock issuable on conversion of each share of such series shall be decreased in proportion to such decrease in outstanding shares. (e) OTHER DISTRIBUTIONS. In the event the corporation shall declare a distribution payable in securities of other persons, evidences of indebtedness issued by the corporation or other persons, assets or other property or options or rights not referred to in Subsection 4(d)(i) (excluding any dividends described in Section 1), then, in each such case for the purpose of this subsection 4(e), the holders of the Series A, Series B, Series C, Series C-1, Series D, Series E and Series F Preferred Stock shall be entitled to a proportionate share of any such distribution as though they were the holders of the number of shares of Common Stock of the corporation into which their shares of Series A, Series B, Series C, Series C-1, Series D, Series E and Series F Preferred Stock are convertible as of the record date fixed for the determination of the holders of Common Stock of the corporation entitled to receive such distribution. (f) RECAPITALIZATIONS. If at any time or from time to time there shall be a recapitalization of the Common Stock (other than a subdivision, combination or merger or sale of assets transaction provided for elsewhere in this Section 4) provision shall be made so that the holders of the Series A, Series B, Series C, Series C-1, Series D, Series E and Series F Preferred Stock shall thereafter be entitled to receive upon conversion of the Series A, Series B, Series C, Series C-1, Series D, Series E and Series F Preferred Stock, respectively, the number of shares of stock or other securities or property of the corporation or otherwise, to which a holder of Common Stock deliverable upon conversion would have been entitled on such recapitalization. In any such case, appropriate adjustment shall be made in the application of the provisions of this Section 4 with respect to the rights of the holders of the Series A, Series B, Series C, Series C-1, Series D, Series E and Series F Preferred Stock after the recapitalization to the end that the provisions of this Section 4 (including adjustment of the Conversion Price then in effect and the number of shares purchasable upon conversion of the Series A, Series B, Series C, Series C-1, Series D, Series E and Series F Preferred Stock) shall be applicable after that event as nearly equivalent as may be practicable. 11. 12 (g) NO IMPAIRMENT. The corporation will not, by amendment of its Articles of Incorporation or through any reorganization, recapitalization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms to be observed or performed hereunder by the corporation, but will at all times in good faith assist in the carrying out of all the provisions of this Section 4 and in the taking of all such action as may be necessary or appropriate in order to protect the Conversion Rights of the holders of the Preferred Stock against impairment. (h) NO FRACTIONAL SHARES AND CERTIFICATE AS TO ADJUSTMENTS. (i) No fractional shares shall be issued upon conversion of the Series A, Series B, Series C, Series C-1, Series D, Series E or Series F Preferred Stock, and the number of shares of Common Stock to be issued shall be rounded to the nearest whole share. Such rounding shall be based on the total number of shares of Series A, Series B, Series C, Series C-1, Series D, Series E and Series F Preferred Stock the holder is at the time converting into Common Stock and the number of shares of Common Stock issuable upon such aggregate conversion. (ii) Upon the occurrence of each adjustment or readjustment of the Conversion Price of Series A, Series B, Series C, Series C-1, Series D, Series E or Series F Preferred Stock pursuant to this Section 4, the corporation, at its expense, shall promptly compute such adjustment or readjustment in accordance with the terms hereof and prepare and furnish to each holder of Series A, Series B, Series C, Series C-1, Series D, Series E or Series F Preferred Stock a certificate setting forth such adjustment or readjustment and showing in detail the facts upon which such adjustment or readjustment is based. The corporation shall, upon the written request at any time of any holder of Series A, Series B, Series C, Series C-1, Series D, Series E or Series F Preferred Stock, furnish or cause to be furnished to such holder a like certificate setting forth (A) such adjustment and readjustment, (B) the Conversion Price at the time in effect, and (C) the number of shares of Common Stock and the amount, if any, of other property which at the time would be received upon the conversion of a share of Series A, Series B, Series C, Series C-1, Series D, Series E or Series F Preferred Stock. (i) NOTICES OF RECORD DATE. In the event of any taking by the corporation of a record of the holders of any class of securities for the purpose of determining the holders thereof who are entitled to receive any dividend or other distribution, any right to subscribe for, purchase or otherwise acquire any shares of stock of any class or any other securities or property, or to receive any other right, the corporation shall mail to each holder of Series A, Series B, Series C, Series C-1, Series D, Series E and Series F Preferred Stock, at least 20 days prior to the date specified therein, a notice specifying the date on which any such record is to be taken for the purpose of such 12. 13 dividend, distribution or right, and the amount and character of such dividend, distribution or right. (j) RESERVATION OF STOCK ISSUABLE UPON CONVERSION. The corporation shall at all times reserve and keep available out of its authorized but unissued shares of Common Stock solely for the purpose of effecting the conversion of the shares of the Series A, Series B, Series C, Series C-1, Series D, Series E and Series F Preferred Stock such number of its shares of Common Stock as shall from time to time be sufficient to effect the conversion of all outstanding shares of the Series A, Series B, Series C, Series C-1, Series D, Series E and Series F Preferred Stock; and if at any time the number of authorized but unissued shares of Common Stock shall not be sufficient to effect the conversion of all then outstanding shares of the Series A, Series B, Series C, Series C-1, Series D, Series E and Series F Preferred Stock, in addition to such other remedies as shall be available to the holders of such Preferred Stock, the corporation will take such corporate action as may, in the opinion of its counsel, be necessary to increase its authorized but unissued shares of Common Stock to such number of shares as shall be sufficient for such purposes, including without limitation, using its best efforts to obtain the requisite shareholder approval of any necessary amendment to these Amended and Restated Articles of Incorporation. (k) NOTICES. Any notice required by the provisions of this Section 4 to be given to the holders of shares of Series A, Series B, Series C, Series C-1, Series D, Series E and Series F Preferred Stock shall be deemed given if deposited in the United States mail, postage prepaid, and addressed to each holder of record at the address for such holder appearing on the books of the corporation. 5. VOTING RIGHTS. Except as otherwise required by applicable law or by Section 6 hereof, and so long as at least Five Million (5,000,000) shares of Series A, Series B, Series C, Series C-1, Series E and Series F Preferred Stock are outstanding, the holders of the Series A, Series B, Series C, Series C-1, Series E and Series F Preferred Stock voting together shall vote as a separate class to elect four (4) directors to the Board of Directors at each annual meeting of shareholders. In voting on all other matters and in all other cases the holder of each share of Series A, Series B, Series C, Series C-1, Series D, Series E or Series F Preferred Stock shall have the right to one vote for each share of Common Stock into which such series of Preferred Stock could then be converted (with any fractional share determined on an aggregate conversion basis being rounded to the nearest whole share), and with respect to such vote, such holder shall have full voting rights and powers equal to the voting rights and powers of the holders of Common Stock, and shall be entitled, notwithstanding any provision hereof, to notice of any shareholders' meeting in accordance with the bylaws of the corporation, and shall be entitled to vote, together with holders of Common Stock, with respect to any question upon which holders of Common Stock have the right to vote. 13. 14 6. PROTECTIVE PROVISIONS. (a) Notwithstanding anything to the contrary in the foregoing provisions, and provided that at least 1,000,000 shares of Series A, Series B, Series C, Series C-1, Series D, Series E or Series F Preferred Stock in the aggregate remain outstanding then this corporation shall not without first obtaining the approval (by vote or written consent, as provided by law) of the holders of at least a majority of the then outstanding shares of Series A, Series B, Series C, Series C-1, Series D, Series E and Series F Preferred Stock, voting together as one class: (i) sell, convey, or otherwise dispose of or encumber all or substantially all of its property or business or merge into or consolidate with any other corporation (other than a wholly-owned subsidiary corporation) or effect any transaction or series of related transactions in which more than 50% of the voting power of the corporation is disposed of; or (ii) effect a dissolution or liquidation of the corporation; or (iii) do any act or thing which would result in taxation to the holders of shares of Preferred Stock under Section 305 of the Internal Revenue Code of 1986, as amended (or any comparable provision of the Internal Revenue Code as hereinafter from time to time amended); or (iv) increase the authorized number of shares of Preferred Stock or Series A, Series B, Series C, Series C-1, Series D, Series E or Series F Preferred Stock; or (v) create (by new authorization, reclassification, recapitalization, designation or otherwise) any class or series or issue any previously unissued series, class or series of stock or any other securities convertible into equity securities of the corporation having a preference over, or being on a parity with, the Series A, Series B, Series C, Series C-1, Series D, Series E or Series F Preferred Stock; or (vi) redeem, purchase or otherwise acquire (or pay into or set aside for a sinking fund for such purpose) any share or shares of Common Stock; provided, however, that this restriction shall not apply to the repurchase of shares of Common Stock from employees, officers, directors, consultants or other persons performing services for the Company or any subsidiary pursuant to agreements under which the Company has the option to repurchase such shares at cost or at cost upon the occurrence of certain events, such as the termination of employment or service; or 14. 15 (vii) amend the corporation's articles of incorporation or bylaws; or (viii) amend this Section 6. (b) Subject to the rights of series of Preferred Stock which may from time to time come into existence, so long as any shares of any series of Preferred Stock are outstanding (an "Existing Series"), this corporation shall not, without first obtaining the approval (by vote or written consent, as provided by law) of the holders of at least a majority of the then outstanding shares of each Existing Series, alter or change the rights, preferences or privileges of the outstanding shares of any Existing Series; (c) Notwithstanding anything to the contrary in the foregoing provisions, and provided that at least 500,000 shares of Series E Preferred Stock remain outstanding, this corporation shall not without first obtaining the approval (by vote or written consent, as provided by law) of the holders of a majority of the then outstanding shares of Series E Preferred Stock, voting together as a single class, other than pursuant to a Qualifying Financing (as defined below) (i) increase the authorized number of shares of Preferred Stock or Series A, Series B, Series C, Series C-1, Series D, Series E or Series F Preferred Stock, or (ii) create (by new authorization, reclassification, recapitalization, designation or otherwise) any class or series or issue any previously unissued series, class or series of stock or any other securities convertible into equity securities of the corporation having a preference over, or being on a parity with, the Series E Preferred Stock. For purposes of this subparagraph either of the following shall be deemed to be a "Qualifying Financing:" (i) any sale by the corporation of any of its equity securities to an investor or investors where the primary purpose of such sale by the corporation is other than to raise capital, or (ii) any sale by the corporation of any of its equity securities at a price per share of at least $2.10 (appropriately adjusted for any stock split, dividend, combination or other recapitalization), so long as such securities do not have a preference over or are not senior to the Series E Preferred Stock. 7. STATUS OF CONVERTED STOCK. In the event any shares of Series A, Series B, Series C, Series C-1, Series D, Series E or Series F Preferred Stock shall be converted pursuant to Section 4 hereof, the shares so converted shall be canceled and shall not be reissuable by the corporation. The Articles of Incorporation of the corporation shall be appropriately amended to effect the corresponding reduction in the corporation's authorized capital stock. (c) COMMON STOCK. 1. DIVIDEND RIGHTS. Subject to the prior rights of holders of all classes of stock at the time outstanding having prior rights as to dividends, the holders of the 15. 16 Common Stock shall be entitled to receive, when and as declared by the Board of Directors, out of any assets of the corporation legally available therefor, such dividends as may be declared from time to time by the Board of Directors. 2. LIQUIDATION RIGHTS. Upon the liquidation, dissolution or winding up of the corporation, the assets of the corporation shall be distributed to the holders of the Common Stock as provided in Section 2 of subsection (B) of this Article III hereof. 3. REDEMPTION. The Common Stock is not redeemable. 4. VOTING RIGHTS. The holders of the Common Stock voting as a class shall have the right to elect one (1) director to the Board of Directors at the annual meeting of shareholders. Except as set forth in this Section 4 of subsection (C) of this Article III and in Section 5 of subsection (B) of this Article III, all other directors shall be elected by the holders of the Preferred Stock and Common Stock voting together on an as-converted basis. In voting on all other matters and in all other cases, the holder of each share of Common Stock shall have the right to one vote. In addition, such holder shall be entitled to notice of any shareholders' meeting in accordance with the Bylaws of the corporation, and shall be entitled to vote upon such matters and in such manner as may be provided by law. ARTICLE IV (A) ELIMINATION OF MONETARY DAMAGES. The liability of the directors of this corporation for monetary damages shall be eliminated to the fullest extent permissible under California law. (B) INDEMNIFICATION. This corporation is authorized to provide indemnification of agents (as defined in Section 317 of the California Corporations Code) through bylaw provisions, agreements with the agents, vote of shareholders or disinterested directors, or otherwise in excess of the indemnification otherwise permitted by Section 317 of the California Corporations Code, subject only to applicable limits set forth in Section 204 of the California Corporations Code with respect to actions for breach of duty to the corporation and its shareholders. * * * THREE: The foregoing amendment and restatement has been approved by the Board of Directors of said corporation. FOUR: The foregoing amendment was approved by the holders of the requisite number of shares of said corporation in accordance with Sections 902 and 903 of the 16. 17 California General Corporation Law; the total number of outstanding shares of each class entitled to vote with respect to the foregoing amendment was two million four hundred forty nine thousand one hundred thirty one (2,449,131) shares of Common Stock, two million six hundred twenty six thousand eight hundred ninety two (2,626,892) shares of Series A Preferred Stock, two million eight hundred seventy-five thousand (2,875,000) shares of Series B Preferred Stock, eight million seven hundred ninety one thousand four hundred thirty two (8,791,432) shares of Series C Preferred Stock, seven hundred thirty-two thousand six hundred one (732,601) shares of Series D Preferred Stock and six million four hundred fifty-five thousand four hundred ninety-three (6,455,493) shares of Series E Preferred Stock. The number of shares voting in favor of the foregoing amendment equaled or exceeded the vote required, such required vote being a majority of the outstanding shares of Common Stock and Preferred Stock, each voting separately as a class, and a majority of the outstanding shares of Series D Preferred Stock, voting separately as a single class. No shares of Series C-1 Preferred Stock are outstanding. The undersigned certify under penalty of perjury that they have read the foregoing Amended and Restated Articles of Incorporation and know the contents thereof, and that the statements therein are true to our own knowledge. IN WITNESS WHEREOF, the undersigned have executed this certificate on November 18, 1997 at San Diego, California. /s/ ALAN J. LEWIS -------------------------------------------- Alan J. Lewis, President and Chief Executive Officer /s/ BRADLEY B. GORDON -------------------------------------------- Bradley B. Gordon, Secretary 17. [SEAL] EX-3.2 3 EXHIBIT 3.2 1 EXHIBIT 3.2 _______________________________________________________________________________ BYLAWS OF SIGNAL PHARMACEUTICALS, INC. (A CALIFORNIA CORPORATION) ______________________________________________________________________________ 2
BYLAWS OF SIGNAL PHARMACEUTICALS, INC. (a California corporation) TABLE OF CONTENTS PAGE ARTICLE I OFFICES....................................................... 1 Section 1.1: Principal Office.............................................. 1 Section 1.2: Other Offices................................................. 1 ARTICLE II DIRECTORS............................................................ 1 Section 2.1: Exercise of Corporate Powers.................................. 1 Section 2.2: Number........................................................ 1 Section 2.3: Need Not Be Shareholders...................................... 2 Section 2.4: Compensation.................................................. 2 Section 2.5: Election and Term of Office................................... 2 Section 2.6: Vacancies..................................................... 2 Section 2.7: Removal....................................................... 3 Section 2.8: Powers and Duties............................................. 3 ARTICLE III MEETINGS OF DIRECTORS................................................ 6 Section 3.1: Place of Meetings............................................. 6 Section 3.2: Regular Meetings.............................................. 6 Section 3.3: Special Meetings.............................................. 7 Section 3.4: Notice of Special Meetings.................................... 7 Section 3.5: Quorum........................................................ 7 Section 3.6: Conference Telephone.......................................... 7 Section 3.7: Waiver of Notice and Consent.................................. 8 Section 3.8: Action Without a Meeting...................................... 8 Section 3.9: Committees.................................................... 8 ARTICLE IV COMMITTEES........................................................... 8 Section 4.1: Appointment and Procedure..................................... 8 Section 4.2: Executive Committee Powers.................................... 8 Section 4.3: Powers of Other Committees.................................... 9 Section 4.4: Limitations on Powers of Committees........................... 9 ARTICLE V OFFICERS...................................................... 9 Section 5.1: Election and Qualifications................................... 9 Section 5.2: Term of Office and Compensation............................... 10 Section 5.3: Chief Executive Officer....................................... 10 Section 5.4: Chairman of the Board......................................... 11 Section 5.5: President..................................................... 11 Section 5.6: President Pro Tem............................................. 11 Section 5.7: Vice President................................................ 11 Section 5.8: Secretary..................................................... 11 Section 5.9: Chief Financial Officer....................................... 13 Section 5.10: Instruments in Writing....................................... 13
i. 3 ARTICLE VI INDEMNIFICATION...................................................... 14 Section 6.1: Indemnification of Directors and Officers...................................................... 14 Section 6.2: Advancement of Expenses....................................... 14 Section 6.3: Non-Exclusivity of Rights..................................... 14 Section 6.4: Indemnification Contracts..................................... 15 Section 6.5: Effect of Amendment........................................... 15 ARTICLE VII MEETINGS OF, AND REPORTS TO, SHAREHOLDERS............................ 15 Section 7.1: Place of Meetings............................................. 15 Section 7.2: Annual Meetings............................................... 15 Section 7.3: Special Meetings.............................................. 16 Section 7.4: Notice of Meetings............................................ 16 Section 7.5: Consent to Shareholders' Meetings............................. 17 Section 7.6: Quorum........................................................ 18 Section 7.7: Adjourned Meetings............................................ 18 Section 7.8: Voting Rights................................................. 18 Section 7.9: Action by Written Consents.................................... 19 Section 7.10: Election of Directors......................................... 20 Section 7.11: Proxies....................................................... 20 Section 7.12: Inspectors of Election........................................ 21 Section 7.13: Annual Reports,............................................... 21 ARTICLE VIII SHARES AND SHARE CERTIFICATES........................................ 21 Section 8.1: Shares Held By the Company.................................... 21 Section 8.2: Certificates for Shares....................................... 22 Section 8.3: Lost Certificates............................................. 22 Section 8.4: Restrictions on Transfer of Shares............................ 22 ARTICLE IX CONSTRUCTION OF BYLAWS WITH REFERENCE TO PROVISIONS OF LAW....................................... 23 Section 9.1: Bylaw Provisions Construed as Additional and Supplemental to Provisions of Law................................. 23 Section 9.2: Bylaws Provisions Contrary to or Inconsistent with Provisions of Law................................... 23 ARTICLE X CERTIFICATION, ADOPTION, AMENDMENT OR REPEAL OF BYLAWS............................................................ 24 Section 10.1: By Shareholders.............................................. 24 Section 10.2: By the Board of Directors.................................... 24 Section 10.3: Certification and Inspection of Bylaws....................... 24
ii. 4 BYLAWS OF SIGNAL PHARMACEUTICALS, INC. (a California corporation) ARTICLE I OFFICES Section 1.1: Principal Office. The principal executive office for the transaction of the business of this corporation (the "Company") shall be located at such place as the Board of Directors may from time to time decide. The Board of Directors is hereby granted full power and authority to change the location of the principal executive office from one location to another. Section 1.2: Other Offices. One or more branch or other subordinate offices may at any time be fixed and located by the Board of Directors at such place or places within or outside the State of California as it deems appropriate. ARTICLE II DIRECTORS Section 2.1: Exercise of Corporate Powers. Except as otherwise provided by these Bylaws, by the Articles of Incorporation of the Company or by the laws of the State of California now or hereafter in force, the business and affairs of the Company shall be managed and all corporate powers shall be exercised by or under the ultimate direction of a board of directors (the "Board of Directors"). Section 2.2: Number. The authorized number of directors of the Company shall initially be five (5). The authorized number of directors may be varied from time to time by resolution of the Board of Directors, provided that the minimum authorized number shall be not less than five (5) and the maximum authorized number shall not be more than nine (9). Until changed by an amendment of this Section by the shareholders of the Company, the authorized number of directors of the Company may be varied by the Board of Directors, as opposed to being fixed, within the range of the minimum and the maximum authorized numbers. Any amendment to these Bylaws reducing such minimum number of authorized directors to a number less than nine (9) cannot be adopted if the votes cast against its adoption at a meeting, or the shares not consenting in 5 the case of action by written consent, are equal to more than 16-2/3% of the outstanding shares entitled to vote. This Section 2.2 may only be amended with the approval of the holders of a majority of the Company's outstanding Series A Preferred Stock, Series B Preferred Stock and Series C Preferred Stock, voting together. Section 2.3: Need Not Be Shareholders. The directors of the Company need not be shareholders of this Company. Section 2.4: Compensation. Directors and members of committees may receive such compensation, if any, for their services as may be fixed or determined by resolution of the Board of Directors. Nothing herein contained shall be construed to preclude any director from serving the Company in any other capacity and receiving compensation therefor. Section 2.5: Election and Term of Office. The directors shall be elected annually by the shareholders at the annual meeting of the shareholders. The term of office of the directors shall begin immediately after their election and shall continue until the next annual meeting of the shareholders and until their respective successors are elected. A reduction of the authorized number of directors shall not shorten the term of any incumbent director or remove any incumbent director prior to the expiration of such director's term of office. Section 2.6: Vacancies. A vacancy or vacancies on the Board of Directors shall exist: (a) in the case of the death of any director; or (b) in the case of the resignation or removal of any director; or (c) if the authorized number of directors is increased; or (d) if the shareholders fail, at any annual meeting of shareholders at which any director is elected, to elect the full authorized number of directors at that meeting. The Board of Directors may declare vacant the office of a director if he or she is declared of unsound mind by an order of court or convicted of a felony or if, within 60 days after notice of his or her election, he or she does not accept the office. Any vacancy, except for a vacancy created by removal of a director as provided in Section 2.7 hereof, may be filled by a person selected by a majority of the remaining directors then in office, whether or not less than a quorum, or by a sole remaining director. Vacancies 2. 6 occurring in the Board of Directors by reason of removal of directors shall be filled only by approval of shareholders. The shareholders may elect a director at any time to fill any vacancy not filled by the directors. Any such election by the written consent of shareholders, other than to fill a vacancy created by removal, requires the consent of shareholders holding a majority of the outstanding shares entitled to vote. If, after the filling of any vacancy by the directors, the directors then in office who have been elected by the shareholders shall constitute less than a majority of the directors then in office, any holder or holders of an aggregate of 5% or more of the total number of shares at that time having the right to vote for such directors may call a special meeting of shareholders to be held to elect the entire Board of Directors. The term of office of any director then in office shall terminate upon the election of such director's successor. Any director may resign effective upon giving written notice to the Chairman of the Board, if any, the President, the Secretary or the Board of Directors, unless the notice specifies a later time for the effectiveness of such resignation. After the notice is given and if the resignation is effective at a future time, a successor may be elected or appointed to take office when the resignation becomes effective. Section 2.7: Removal. The entire Board of Directors or any individual director may be removed from office without cause by an affirmative vote of shareholders holding a majority of the outstanding shares entitled to vote. If the entire Board of Directors is not removed, however, then no individual director shall be removed if the votes cast against removal of that director, plus the votes not consenting in writing to such removal, would be sufficient to elect that director if voted cumulatively in an election at which the following were true: (a) the same total number of votes were cast, or, if such action is taken by written consent, all shares entitled to vote were voted; and (b) the entire number of directors authorized at the time of the director's most recent election were then being elected. If any or all directors are so removed, new directors may be elected at the same meeting or at a subsequent meeting. If at any time a class or series of shares is entitled to elect one or more directors under authority granted by the Articles of Incorporation, the provisions of this Section 2.7 shall apply to the vote of that class or series and not to the vote of the outstanding shares as a whole. Section 2.8: Powers and Duties. Without limiting the generality or extent of the general corporate powers to be 3. 7 exercised by the Board of Directors pursuant to Section 2.1 of these Bylaws, it is hereby provided that the Board of Directors shall have full power with respect to the following matters: (a) To purchase, lease and acquire any and all kinds of property, real, personal or mixed, and at its discretion to pay therefor in money, in property and/or in stocks, bonds, debentures or other securities of the Company. (b) To enter into any and all contracts and agreementS which in its judgment may be beneficial to the interests and purposes of the Company. (c) To fix and determine and to vary from time to time the amount or amounts to be set aside or retained as reserve funds or as working capital of the Company or for maintenance, repairs, replacements or enlargements of its properties. (d) To declare and pay dividends in cash, shares and/or property out of any funds of the Company at the time legally available for the declaration and payment of dividends on its shares. (e) To adopt such rules and regulations for the conduct of its meetings and the management of the affairs of the Company as it may deem proper. (f) To prescribe the manner in which and the person or persons by whom any or all of the checks, drafts, notes, bills of exchange, contracts and other corporate instruments shall be executed. (g) To accept resignations of directors; to declare vacant the office of a director as provided in Section 2.6 hereof; and, in case of vacancy in the office of directors, to fill the same to the extent provided in Section 2.6 hereof. (h) To create offices in addition to those for which provision is made by law or these Bylaws; to elect and remove at pleasure all officers of the Company, fix their terms of office, prescribe their titles, powers and duties, limit their authority and fix their salaries in any way it may deem advisable that is not contrary to law or these Bylaws. (i) To designate one or more persons to perform the duties and exercise the powers of any officer of the Company during the temporary absence or disability of such officer. 4. 8 (j) To appoint or employ and to remove at pleasure such agents and employees as it may see fit, to prescribe their titles, powers and duties, limit their authority and fix their salaries in any way it may deem advisable that is not contrary to law or these Bylaws. (k) To fix a time in the future, which shall not be more than 60 days nor less than 10 days prior to the date of the meeting nor more than 60 days prior to any other action for which it is fixed, as a record date for the determination of the shareholders entitled to notice of and to vote at any meeting, or entitled to receive any payment of any dividend or other distribution, or allotment of any rights, or entitled to exercise any rights in respect of any other lawful action; and in such case only shareholders of record on the date so fixed shall be entitled to notice of and to vote at the meeting or to receive the dividend, distribution or allotment of rights or to exercise the rights, as the case may be, notwithstanding any transfer of any shares on the books of the Company after any record date fixed as aforesaid. The Board of Directors may close the books of the Company against transfers of shares during the whole or any part of such period. (l) To fix and locate from time to time the principal office for the transaction of the business of the Company and one or more branch or other subordinate offices of the Company within or without the State of California; to designate any place within or without the State of California for the holding of any meeting or meetings of the shareholders or the Board of Directors, as provided in Sections 3.1 and 7.1 hereof; to adopt, make and use a corporate seal, and to prescribe the forms of certificates for shares and to alter the form of such seal and of such certificates from time to time as in its judgment it may deem best, provided such seal and such certificates shall at all times comply with the provisions of law now or hereafter in effect. (m) To authorize the issuance of shares of stock of the Company in accordance with the laws of the State of California and the Articles of Incorporation. (n) Subject to the limitation provided in Section 10.2 hereof, to adopt, amend or repeal from time to time and at any time these Bylaws and any and all amendments thereof. (o) To borrow money, make guarantees of indebtedness or other obligations of third parties and incur indebtedness 5. 9 on behalf of the Company, including the power and authority to borrow money from any of the shareholders, directors or officers of the Company; and to cause to be executed and delivered therefor in the corporate name promissory notes, bonds, debentures, deeds of trust, mortgages, pledges (or other transfers of property as security or collateral for a debt), or other evidences of debt and securities therefor; and the note or other obligation given for any indebtedness of the Company, signed officially by any officer or officers thereunto duly authorized by the Board of Directors, shall be binding on the Company. (p) To approve a loan of money or property to any officer or director of the Company or any parent or subsidiary company, guarantee the obligation of any such officer or director, or approve an employee benefit plan authorizing such a loan or guaranty to any such officer or director; provided that, on the date of approval of such loan or guaranty, the Company has outstanding shares held of record by 100 or more persons. Such approval shall require a determination by the Board of Directors that the loan or guaranty may reasonably be expected to benefit the Company and must be by vote sufficient without counting the vote of any interested director. (q) Generally to do and perform every act and thing whatsoever that may pertain to the office of a director or to a board of directors. ARTICLE III MEETINGS OF DIRECTORS Section 3.1: Place of Meetings. Meetings (whether regular, special or adjourned) of the Board of Directors of the Company shall be held at the principal executive office of the Company or at any other place within or outside the State of California which may be designated from time to time by resolution of the Board of Directors or which is designated in the notice of the meeting. Section 3.2: Regular Meetings. Regular meetings of the Board of Directors shall be held after the adjournment of each annual meeting of the shareholders (which regular directors' meeting shall be designated the "Regular Annual Meeting") and at such other times as may be designated from time to time by resolution of the Board of Directors. Notice of the time and place of all regular meetings shall be given in the same manner as for special meetings, except that no such notice need be given if (a) 6. 10 the time and place of such meetings are fixed by the Board of Directors or (b) the Regular Annual Meeting is held at the principal executive office of this Corporation and on the date specified by the Board of Directors. Section 3.3: Special Meetings. Special meetings of the Board of Directors may be called at any time by the Chairman of the Board, if any, or the President, or any Vice President, or the Secretary or by any two or more directors. Section 3.4: Notice of Special Meetings. Special meetings of the Board of Directors shall be held upon no less than 4 days' notice by mail or 48 hours' notice delivered personally or by telephone or telegraph to each director. Notice need not be given to any director who signs a waiver of notice or a consent to holding the meeting or an approval of the minutes thereof, whether before or after the meeting, or who attends the meeting without protesting, prior thereto or at its commencement, the lack of notice to such director. All such waivers, consents and approvals shall be filed with the corporate records or made a part of the minutes of the meeting. Any oral notice given personally or by telephone may be communicated either to the director or to a person at the home or office of the director who the person giving the notice has reason to believe will promptly communicate it to the director. A notice or waiver of notice need not specify the purpose of any meeting of the Board of Directors. If the address of a director is not shown on the records of the Company and is not readily ascertainable, notice shall be addressed to him or her at the city or place in which meetings of the directors are regularly held. If a meeting is adjourned for more than 24 hours, notice of any adjournment to another time or place shall be given prior to the time of the adjourned meeting to all directors not present at the time of adjournment. Section 3.5: Quorum. A majority of the authorized number of directors constitutes a quorum of the Board of Directors for the transaction of business. Every act or decision done or made by a majority of the directors present at a meeting duly held at which a quorum is present is the act of the Board of Directors subject to provisions of law relating to interested directors and indemnification of agents of the Company. A majority of the directors present, whether or not a quorum is present, may adjourn any meeting to another time and place. A meeting at which a quorum is initially present may continue to transact business notwithstanding the withdrawal of directors, if any action taken is approved by at least a majority of the required quorum for such meeting. Section 3.6: Conference Telephone. Members of the Board of Directors may participate in a meeting through use of conference telephone or similar communications equipment, so long as all 7. 11 directors participating in such meeting can hear one another. Participation in a meeting pursuant to this Section constitutes presence in person at such meeting. Section 3.7: Waiver of Notice and Consent. The transactions of any meeting of the Board of Directors, however called and noticed or wherever held, shall be as valid as though had at a meeting duly held after regular call and notice if a quorum is present, and if, either before or after the meeting, each of the directors not present signs a written waiver of notice, a consent to holding such meeting or an approval of the minutes thereof. All such waivers, consents and approvals shall be filed with the corporate records or made a part of the minutes of the meeting. Section 3.8: Action Without a Meeting. Any action required or permitted by law to be taken by the Board of Directors may be taken without a meeting, if all members of the Board of Directors shall individually or collectively consent in writing to the taking of such action. Such written consent or consents shall be filed with the minutes of the proceedings of the Board of Directors. Such action by written consent shall have the same force and effect as a unanimous vote of such directors at a duly held meeting. Section 3.9: Committees. The provisions of this Article apply also to committees of the Board of Directors and action by such committees. ARTICLE IV COMMITTEES Section 4.1: Appointment and Procedure. The Board of Directors may, by resolution adopted by a majority of the authorized number of directors, appoint from among its members one or more committees, including without limitation an executive committee, an audit committee and a compensation committee, of two or more directors. Each committee may make its own rules of procedure subject to Section 3.9 hereof, and shall meet as provided by such rules or by a resolution adopted by the Board of Directors (which resolution shall take precedence). A majority of the members of the committee shall constitute a quorum, and in every case the affirmative vote of a majority of all members of the committee shall be necessary to the adoption of any resolution. Section 4.2: Executive Committee Powers. During the intervals between the meetings of the Board of Directors, the Executive Committee, if any, in all cases in which specific 8. 12 directions shall not have been given by the Board of Directors, shall have and may exercise all the powers and authority of the Board of Directors in the management of the business and affairs of the Company in such manner as the Executive Committee may deem best for the interests of the Company. Section 4.3: Powers of Other Committees. Other committees shall have such powers as are given them in a resolution of the Board of Directors. Section 4.4: Limitations on Powers of Committees. No committee shall have the power to act with respect to: (a) any action for which the laws of the State of California also require shareholder approval or approval of the outstanding shares; (b) the filling of vacancies on the Board of Directors or in any committee; (c) the fixing of compensation of the directors for serving on the Board of Directors or on any committee; (d) the amendment or repeal of these Bylaws or the adoption of new Bylaws; (e) the amendment or repeal of any resolution of the Board of Directors which by its express terms is not amendable or repealable; (f) a distribution to the shareholders of the Company, except at a rate or in a periodic amount or within a price range as set forth in the Articles of Incorporation or determined by the Board of Directors; and (g) the appointment of other committees of the Board of Directors or the members thereof. ARTICLE V OFFICERS Section 5.1: Election and Qualifications. The officers of the Company shall consist of a President and/or a Chief Executive Officer, a Secretary, a Chief Financial Officer and such other officers, including, but not limited to, a Chairman of the Board of Directors, one or more Vice Presidents, a Treasurer, and Assistant Vice Presidents, Assistant Secretaries and Assistant Treasurers, as the Board of Directors shall deem expedient, who shall be chosen in such manner and hold their offices for such 9. 13 terms as the Board of Directors may prescribe. Any number of offices may be held by the same person. Any Vice President, Assistant Treasurer or Assistant Secretary, respectively, may exercise any of the powers of the President, the Chief Financial Officer or the Secretary, respectively, as directed by the Board of Directors, and shall perform such other duties as are imposed upon him or her by these Bylaws or the Board of Directors. Section 5.2: Term of Office and Compensation. The term of office and salary of each of said officers and the manner and time of the payment of such salaries shall be fixed and determined by the Board of Directors and may be altered by said Board of Directors from time to time at its pleasure, subject to the rights, if any, of any officer under any contract of employment. Any officer may resign at any time upon written notice to the Company, without prejudice to the rights, if any, of the Company under any contract to which the officer is a party. If any vacancy occurs in any office of the Company, the Board of Directors may appoint a successor to fill such vacancy. Section 5.3: Chief Executive Officer. Subject to the control of the Board of Directors and such supervisory powers, if any, as may be given by the Board of Directors, the powers and duties of the Chief Executive Officer of the Company are: (a) To act as the general manager and, subject to the control of the Board of Directors, to have general supervision, direction and control of the business and affairs of the Company. (b) To preside at all meetings of the shareholders and, in the absence of the Chairman of the Board of Directors or if there be no Chairman, at all meetings of the Board of Directors. (c) To call meetings of the shareholders and meetings of the Board of Directors to be held at such times and, subject to the limitations prescribed by law or by these Bylaws, at such places as he or she shall deem proper. (d) To affix the signature of the Company to all deeds, conveyances, mortgages, leases, obligations, bonds, certificates and other papers and instruments in writing which have been authorized by the Board of Directors or which, in the judgment of the Chief Executive Officer, should be executed on behalf of the Company; to sign certificates for shares of stock of the Company; and, subject to the direction of the Board of Directors, to have general charge of the property of the Company and to supervise and control all officers, agents and employees of the Company. 10. 14 The President shall be the Chief Executive Officer of the Company unless the Board of Directors shall designate the Chairman of the Board or another officer to be the Chief Executive Officer. If there is no President, then the Chairman of the Board shall be the Chief Executive Officer. Section 5.4: Chairman of the Board. The Chairman of the Board of Directors, if there be one, shall have the power to preside at all meetings of the Board of Directors and shall have such other powers and shall be subject to such other duties as the Board of Directors may from time to time prescribe. Section 5.5: President. Subject to the supervisory powers of the Chief Executive Officer, if not the President, and to such supervisory powers as may be given by the Board of Directors to the Chairman of the Board, if one is elected, or to any other officer, the President shall have the general powers and duties of management usually vested in the office of president of a corporation and shall have such other powers and duties as may be prescribed by the Board of Directors or these Bylaws. Section 5.6: President Pro Tem. If neither the Chairman of the Board of Directors, the President, nor any Vice President is present at any meeting of the Board of Directors, a President pro tem may be chosen by the directors present at the meeting to preside and act at such meeting. If neither the President nor any Vice President is present at any meeting of the shareholders, a President pro tem may be chosen by the shareholders present at the meeting to preside at such meeting. Section 5.7: Vice President. The titles, powers and duties of the Vice President or Vice Presidents, if any, shall be as prescribed by the Board of Directors. In case of the resignation, disability or death of the President, the Vice President, or one of the Vice Presidents, shall exercise all powers and duties of the President. If there is more than one Vice President, the order in which the Vice Presidents shall succeed to the powers and duties of the President shall be as fixed by the Board of Directors. Section 5.8: Secretary. The powers and duties of the Secretary are: (a) To keep a book of minutes at the principal executive office of the Company, or such other place as the Board of Directors may order, of all meetings of its directors and shareholders with the time and place of holding of such meeting, whether regular or special, and, if special, how authorized, the notice thereof given, the names of those present at directors' meetings, the number of shares present or represented at shareholders' 11. 15 meetings and the proceedings thereof. (b) To keep the seal of the Company and to affix the same to all instruments which may require it. (c) To keep or cause to be kept at the principal executive office of the Company, or at the office of the transfer agent or agents, a record of the shareholders of the Company, giving the names and addresses of all shareholders and the number and class of shares held by each, the number and date of certificates issued for shares and the number and date of cancellation of every certificate surrendered for cancellation. (d) To keep a supply of certificates for shares of the Company, to fill in all certificates issued, and to make a proper record of each such issuance; provided that, so long as the Company shall have one or more duly appointed and acting transfer agents of the shares, or any class or series of shares, of the Company, such duties with respect to such shares shall be performed by such transfer agent or transfer agents. (e) To transfer upon the share books of the Company any and all shares of the Company; provided that, so long as the Company shall have one or more duly appointed and acting transfer agents of the shares, or any class or series of shares, of the Company, such duties with respect to such shares shall be performed by such transfer agent or transfer agents, and the method of transfer of each certificate shall be subject to the reasonable regulations of the transfer agent to whom the certificate is presented for transfer and, if the Company then has one or more duly appointed and acting registrars, subject to the reasonable regulations of the registrar to which a new certificate is presented for registration; and, provided further, that no certificate for shares of stock shall be issued or delivered or, if issued or delivered, shall have any validity whatsoever until and unless it has been signed or authenticated in the manner provided in Section 8.2 hereof. (f) To make service and publication of all notices that may be necessary or proper in connection with meetings of the Board of Directors of the shareholders of the Company. In case of the absence, disability, refusal or neglect of the Secretary to make service or publication of any notices, then such notices may be served and/or published by the President or a Vice President, or by any person thereunto authorized by either of them, or by the Board of Directors, or by the holders of a majority of 12. 16 the outstanding shares of the Company. (g) Generally to do and perform all such duties as pertain to such office and as may be required by the Board of Directors. Section 5.9: Chief Financial Officer. The powers and duties of the Chief Financial Officer are: (a) To supervise and control the keeping and maintaining of adequate and correct accounts of the Company's properties and business transactions, including accounts of its assets, liabilities, receipts, disbursements, gains, losses, capital, surplus and shares. The books of account shall at all reasonable times be open to inspection by any director. (b) To have the custody of all funds, securities, evidences of indebtedness and other valuable documents of the Company and, at his or her discretion, to cause any or all thereof to be deposited for the account of the Company with such depository as may be designated from time to time by the Board of Directors. (c) To receive or cause to be received, and to give or cause to be given, receipts and acquittances for monies paid in for the account of the Company. (d) To disburse, or cause to be disbursed, all funds of the Company as may be directed by the President or the Board of Directors, taking proper vouchers for such disbursements. (e) To render to the President or to the Board of Directors, whenever either may require, accounts of all transactions as Chief Financial Officer and of the financial condition of the Company. (f) Generally to do and perform all such duties as pertain to such office and as may be required by the Board of Directors. Section 5.10: Instruments in Writing. All checks, drafts, demands for money, notes and written contracts of the Company shall be signed by such officer or officers, agent or agents, as the Board of Directors may from time to time designate. No officer, agent, or employee of the Company shall have the power to bind the Company by contract or otherwise unless authorized to do so by these Bylaws or by the Board of Directors. 13. 17 ARTICLE VI INDEMNIFICATION Section 6.1: Indemnification of Directors and Officers. The Company shall indemnify each person who was or is a party, or is threatened to be made a party, to any threatened, pending or completed action or proceeding, whether civil, criminal, administrative or investigative (a "Proceeding") by reason of the fact that such person is or was a director or officer of the Company, or is or was serving at the request of the Company as a director or officer of another foreign or domestic corporation, partnership, joint venture, trust or other enterprise, or was a director or officer of a foreign or domestic corporation which was a predecessor corporation of the Company or of another enterprise at the request of such predecessor corporation, to the fullest extent permitted by the California Corporations Code, against all expenses, including, without limitation, attorneys' fees and any expenses of establishing a right to indemnification, judgments, fines, settlements and other amounts actually and reasonably incurred in connection with such Proceeding, and such indemnification shall continue as to a person who has ceased to be such a director or officer, and shall inure to the benefit of the heirs, executors and administrators of such person; provided, however, that the Company shall indemnify any such person seeking indemnity in connection with a Proceeding (or part thereof) initiated by such person only if such Proceeding (or part thereof) was authorized by the Board of Directors of the Company. Section 6.2: Advancement of Expenses. The Company shall pay all expenses incurred by such a director or officer in defending any Proceeding as they are incurred in advance of its final disposition; provided, however, that the payment of such expenses incurred by a director or officer in advance of the final disposition of a Proceeding shall be made only upon receipt by the Company of an agreement by or on behalf of such director or officer to repay such amount if it shall be determined ultimately that such person is not entitled to be indemnified under this Article VI or otherwise; and provided further that the Company shall not be required to advance any expenses to a person against whom the Company brings an action, alleging that such person committed an act or omission not in good faith or that involved intentional misconduct or a knowing violation of law, or that was contrary to the best interest of the Company, or derived an improper personal benefit from a transaction. Section 6.3: Non-Exclusivity of Rights. The rights conferred on any person in this Article VI shall not be deemed exclusive of any other rights that such person may have or hereafter acquire under any statute, by law, agreement, vote of shareholders or disinterested directors or otherwise, both as to 14. 18 action in an official capacity and as to action in another capacity while holding such office. Additionally, nothing in this Article VI shall limit the ability of the Company, in its discretion, to indemnify or advance expenses to persons whom the Company is not obligated to indemnify or advance expenses to pursuant to this Article VI. Section 6.4: Indemnification Contracts. The Board of Directors is authorized to cause the Company to enter into a contract with any director, officer, employee or agent of the Company, or any person serving at the request of the Company as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, providing for indemnification rights equivalent to or, if the Board of Directors so determines, greater than (to the extent permitted by the Company's Articles of Incorporation and the California Corporations Code), those provided for in this Article VI. Section 6.5: Effect of Amendment. Any amendment, repeal or modification of any provision of this Article VI shall be prospective only, and shall not adversely affect any right or protection conferred on a person pursuant to this Article VI and existing at the time of such amendment, repeal or modification. ARTICLE VII MEETINGS OF, AND REPORTS TO, SHAREHOLDERS Section 7.1: Place of Meetings. Meetings (whether regular, special or adjourned) of the shareholders of the Company shall be held at the principal executive office for the transaction of business of the Company, or at any place within or outside the State of California which may be designated by written consent of all the shareholders entitled to vote thereat, or which may be designated by resolution of the Board of Directors. Any meeting shall be valid wherever held if held by the written consent of all the shareholders entitled to vote thereat, given either before or after the meeting and filed with the Secretary of the Company. Section 7.2: Annual Meetings. The annual meetings of the shareholders shall be held at the place provided pursuant to Section 7.1 hereof and at such time in a particular year as may be designated by written consent of all the shareholders entitled to vote thereat or which may be designated by resolution of the Board of Directors of the Company. Said annual meetings shall be held for the purpose of the election of directors, for the making of reports of the affairs of the Company and for the transaction of such other business as may properly come before the meeting. 15. 19 Section 7.3: Special Meetings. Special meetings of the shareholders for any purpose or purposes whatsoever may be called at any time by the President, the Chairman of the Board of Directors or by the Board of Directors, or by two or more members thereof, or by one or more holders of shares entitled to cast not less than 10% of the votes at the meeting. Upon request in writing sent by registered mail to the Chairman of the Board of Directors, President, Vice President or Secretary, or delivered to any such officer in person, by any person entitled to call a special meeting of shareholders, it shall be the duty of such officer forthwith to cause notice to be given to the shareholders entitled to vote that a meeting will be held at a time requested by the person or persons calling the meeting, which (except where called by the Board of Directors) shall be not less than 35 days nor more than 60 days after the receipt of such request. If the notice is not given within 20 days after receipt of the request, the person entitled to call the meeting may give the notice. Notices of meetings called by the Board of Directors shall be given in accordance with Section 7.4. Section 7.4: Notice of Meetings. Notice of any meeting of shareholders shall be given in writing not less than 10 (or, if sent by third-class mail, 30) nor more than 60 days before the date of the meeting to each shareholder entitled to vote thereat by the Secretary or an Assistant Secretary, or such other person charged with that duty, or if there be no such officer or person, or in case of his or her neglect or refusal, by any director or shareholder. The notice shall state the place, date and hour of the meeting and (a) in the case of a special meeting, the general nature of the business to be transacted, and no other business may be transacted, or (b) in the case of the annual meeting, those matters which the Board of Directors, at the time of the mailing of the notice, intends to present for action by the shareholders, but any proper matter may be presented at the meeting for such action, except that notice must be given or waived in writing of any proposal relating to approval of contracts between the Company and any director of the Company, amendment of the Articles of Incorporation, reorganization of the Company or winding up of the affairs of the Company. The notice of any meeting at which directors are to be elected shall include the names of nominees intended at the time of the notice to be presented by the Board of Directors for election. Notice of a shareholders' meeting or any report shall be given to any shareholder, either (a) personally or (b) by first-class mail, or, in case the Company has outstanding shares held of record by 500 or more persons on the record date for the shareholders' meeting, notice may be sent by third-class mail, or other means of written communication, charges prepaid, addressed to such shareholder at such shareholder's address appearing on the books of the Company or given by such shareholder to the Company for the purpose of notice. If a shareholder gives no address or no such address appears on the books of the Company, notice shall be 16. 20 deemed to have been given if sent by mail or other means of written communication addressed to the place where the principal executive office of the Company is located, or if published at least once in a newspaper of general circulation in the county in which such office is located. The notice or report shall be deemed to have been given at the time when delivered personally or deposited in the United States mail, postage prepaid, or sent by other means of written communication and addressed as hereinbefore provided. An affidavit or declaration of delivery or mailing of any notice or report in accordance with the provisions of this Section 7.4, executed by the Secretary, Assistant Secretary or any transfer agent, shall be prima facie evidence of the giving of the notice or report. If any notice or report addressed to the shareholder at the address of such shareholder appearing on the books of the Company is returned to the Company by the United States Postal Service marked to indicate that the United States Postal Service is unable to deliver the notice or report to the shareholder at such address, all future notices or reports shall be deemed to have been duly given without further mailing if the same shall be available for the shareholder upon written demand of the shareholder at the principal executive office of the Company for a period of one year from the date of the giving of the notice or report to all other shareholders. Section 7.5: Consent to Shareholders' Meetings. The transactions of any meeting of shareholders, however called and noticed, and wherever held, are as valid as though they had taken place at a meeting duly held after regular call and notice, if the following conditions are met: (a) a quorum is present, either in person or by proxy, and (b) either before or after the meeting, each of the shareholders entitled to vote, who was not present in person or by proxy, signs a written waiver of notice or a consent to the holding of such meeting or an approval of the minutes thereof. All such waivers, consents or approvals shall be filed with the corporate records or made a part of the minutes of the meeting. Attendance of a person at a meeting shall constitute both a waiver of notice of and presence at such meeting, except: (a) when the person objects, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened; or (b) when the person expressly makes an objection at some time during the meeting to the consideration of matters required by law to be included in the notice but not so included. Neither the business to be transacted at, nor the purpose of, any regular or special meeting of shareholders need be specified in any 17. 21 written waiver of notice, consent to the holding of the meeting or approval of the minutes thereof, except as to approval of contracts between the Company and any of its directors, amendment of the Articles of Incorporation, reorganization of the Company or winding up the affairs of the Company. Section 7.6: Quorum. The presence in person or by proxy of the holders of a majority of the shares entitled to vote at any meeting of the shareholders shall constitute a quorum for the transaction of business. Shares shall not be counted to make up a quorum for a meeting if voting of such shares at the meeting has been enjoined or for any reason they cannot be lawfully voted at the meeting. Shareholders present at a duly called or held meeting at which a quorum is present may continue to transact business until adjournment notwithstanding the withdrawal of enough shareholders to leave less than a quorum, if any action taken (other than adjournment) is approved by at least a majority of the shares required to constitute a quorum. Except as provided herein, the affirmative vote of a majority of the shares represented and voting at a duly held meeting at which a quorum is present (which shares voting affirmatively also constitute at least a majority of the required quorum) shall be the act of the shareholders, unless the vote of a greater number or voting by classes is required. Section 7.7: Adjourned Meetings. Any shareholders' meeting, whether or not a quorum is present, may be adjourned from time to time by the vote of a majority of the shares, the holders of which are either present in person or represented by proxy thereat, but, except as provided in Section 7.6 hereof, in the absence of a quorum, no other business may be transacted at such meeting. When a meeting is adjourned for more than 45 days or if after adjournment a new record date is fixed for the adjourned meeting, a notice of the adjourned meeting shall be given to each shareholder of record entitled to vote at a meeting. Except as aforesaid, it shall not be necessary to give any notice of the time and place of the adjourned meeting or of the business to be transacted thereat other than by announcement at the meeting at which such adjournment is taken. At any adjourned meeting the shareholders may transact any business which might have been transacted at the original meeting. Section 7.8: Voting Rights. Only persons in whose names shares entitled to vote stand on the stock records of the Company at: (a) the close of business on the business day immediately preceding the day on which notice is given; or (b) if notice is waived, at the close of business on the business day immediately preceding the day on which the 18. 22 meeting is held; or (c) if some other day be fixed for the determination of shareholders of record pursuant to Section 2.8(k) hereof, then on such other day, shall be entitled to vote at such meeting. The record date for determining shareholders entitled to give consent to corporate action in writing without a meeting, when no prior action by the Board of Directors has been taken, shall be the day on which the first written consent is given. In the absence of any contrary provision in the Articles of Incorporation or in any applicable statute relating to the election of directors or to other particular matters, each such person shall be entitled to one vote for each share. Section 7.9: Action by Written Consents. Any action which may be taken at any annual or special meeting of shareholders may be taken without a meeting and without prior notice, if a consent in writing, setting forth the action so taken, shall be signed by holders of outstanding shares having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted. Unless the consents of all shareholders entitled to vote have been solicited in writing, the Company shall provide notice of any shareholder approval obtained without a meeting by less than unanimous written consent to those shareholders entitled to vote but who have not yet consented in writing at least 10 days before the consummation of the following actions authorized by such approval: (a) contracts between the Company and any of its directors; (b) indemnification of any person; (c) reorganization of the Company; or (d) distributions to shareholders upon the winding-up of the affairs of the Company. In addition, the Company shall provide, to those shareholders entitled to vote who have not consented in writing, prompt notice of the taking of any other corporate action approved by the shareholders without a meeting by less than unanimous written consent. All notices given hereunder shall conform to the requirements of Section 7.4 hereto and applicable law. When written consents are given with respect to any shares, they shall be given by and accepted from the persons in whose names such shares stand on the books of the Company at the time such respective consents are given, or their proxies. Any shareholder giving a written consent (including any shareholder's proxy holder, or a transferee of the shares or a personal representative of the shareholder, or their respective proxy holders) may revoke the consent by a writing. This writing must be received by the Company prior to the time that written consents of the number of shares required to authorize the proposed action have been filed with the Secretary of the Company. Such revocation is effective upon its receipt by the Secretary of the Company. Notwithstanding anything herein to the contrary, and 19. 23 subject to Section 305(b) of the California Corporations Code, directors may not be elected by written consent except by unanimous written consent of all shares entitled to vote for the election of directors. Section 7.10: Election of Directors. Every shareholder entitled to vote at any election of directors of the Company may cumulate such shareholder's votes and give one candidate a number of votes equal to the number of directors to be elected multiplied by the number of votes to which the shareholder's shares are normally entitled, or distribute the shareholder's votes on the same principle among as many candidates as such shareholder thinks fit. No shareholder, however, may cumulate such shareholder's votes for one or more candidates unless such candidate's or candidates' names have been placed in nomination prior to the voting and the shareholder has given notice at the meeting, prior to voting, of such shareholder's intention to cumulate such shareholder's votes. If any one shareholder has given such notice, all shareholders may cumulate their votes for candidates in nomination. The candidates receiving the highest number of affirmative votes of the shares entitled to be voted for them up to the number of directors to be elected by such shares shall be declared elected. Votes against the director and votes withheld shall have no legal effect. Election of directors need not be by ballot except upon demand made by a shareholder at the meeting and before the voting begins. Section 7.11: Proxies. Every person entitled to vote or execute consents shall have the right to do so either in person or by one or more agents authorized by a written proxy executed by such person or such person's duly authorized agent and filed with the Secretary of the Company. No proxy shall be valid (a) after revocation thereof, unless the proxy is specifically made irrevocable and otherwise conforms to this Section and applicable law, or (b) after the expiration of eleven months from the date thereof, unless the person executing it specifies therein the length of time for which such prosy is to continue in force. Revocation may be effected by a writing delivered to the Secretary of the Company stating that the proxy is revoked or by a subsequent proxy executed by the person executing the prior proxy and presented to the meeting, or as to any meeting by attendance at the meeting and voting in person by the person executing the proxy. A proxy is not revoked by the death or incapacity of the maker unless, before the vote is counted, a written notice of such death or incapacity is received by the Secretary of the Company. In addition, a proxy may be revoked, notwithstanding a provision making it irrevocable, by a transferee of shares without knowledge of the existence of the provision unless the existence of the proxy and its irrevocability appears on the certificate representing such shares. 20. 24 Section 7.12: Inspectors of Election. Before any meeting of shareholders, the Board of Directors may appoint any persons other than nominees for office as inspectors of election. This appointment shall be valid at the meeting and at any subsequent meeting that is a continuation of the meeting at which the persons were originally appointed to be inspectors. If no inspectors of election are so appointed, the Chairman of the meeting may, and on the request of any shareholder or a shareholder's proxy shall, appoint inspectors of election at the meeting. The number of inspectors shall be either one or three. If inspectors are appointed at a meeting on the request of one or more shareholders or proxies, the holders of a majority of shares or their proxies present at the meeting shall determine whether one or three inspectors are to be appointed. If any person appointed as inspector fails to appear or fails or refuses to act, the Chairman of the meeting may, and upon the request of any shareholder or a shareholder's proxy shall, appoint a person to fill that vacancy. These inspectors shall: (a) determine the number of shares outstanding and the voting power of each, the shares represented at the meeting, the existence of a quorum, and the authenticity, validity, and effect of proxies; (b) receive votes, ballots, or consents; (c) hear and determine all challenges and questions in any way arising in connection with the right to vote; (d) count and tabulate all votes or consents; (e) determine when the polls shall close; (f) determine the result; and (g) do any other acts that may be proper to conduct the election or vote with fairness to all shareholders. Section 7.13: Annual Reports. Provided that the Company has 100 or fewer shareholders, the making of annual reports to the shareholders is dispensed with and the requirement that such annual reports be made to shareholders is expressly waived, except as may be directed from time to time by the Board of Directors or the President. ARTICLE VIII SHARES AND SHARE CERTIFICATES Section 8.1: Shares Held By the Company. Shares in 21. 25 other companies standing in the name of the Company may be voted or represented and all rights incident thereto may be exercised on behalf of the Company by any officer of the Company authorized to do so by resolution of the Board of Directors. Section 8.2: Certificates for Shares. There shall be issued to every holder of shares in the Company a certificate or certificates signed in the name of the Company by the Chairman of the Board, if any, or the President or a Vice President and by the Chief Financial Officer or an Assistant Chief Financial Officer or the Secretary or any Assistant Secretary, certifying the number of shares and the class or series of shares owned by the shareholder. Any or all of the signatures on the certificate may be facsimile. In case any officer, transfer agent or registrar who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer, transfer agent or registrar before such certificate is issued, it may be issued by the Company with the same effect as if such person were an officer, transfer agent or registrar at the date of issue. Section 8.3: Lost Certificates. Where the owner of any certificate for shares of the Company claims that the certificate has been lost, stolen or destroyed, a new certificate shall be issued in place of the original certificate if the owner (a) so requests before the Company has notice that the original certificate has been acquired by a bona fide purchaser and (b) satisfies any reasonable requirements imposed by the Company, including without limitation the filing with the Company of an indemnity bond or agreement in such form and in such amount as shall be required by the President or a Vice President of the Company. The Board of Directors may adopt such other provisions and restrictions with reference to lost certificates, not inconsistent with applicable law, as it shall in its discretion deem appropriate. Section 8.4: Restrictions on Transfer of Shares. (a) Before any shareholder of the Company may sell, assign, gift, pledge or otherwise transfer any shares of the Company's capital stock, such shareholder shall first notify the Company in writing of such transfer and such transfer may not be effected unless and until legal counsel for the Company has concluded that such transfer, when effected as proposed by such shareholder (i) will comply with all applicable provisions of any applicable state and federal securities laws, including but not limited to the Securities Act of 1933, as amended, and the California Corporate Securities Law of 1968, as amended, and (ii) will not jeopardize, terminate or adversely affect the Company's status as an S Corporation, if applicable, as that term is defined in the Internal Revenue Code of 1986, as amended. The Company may require that certificates representing shares of stock 22. 26 of the Company be endorsed with a legend describing the restrictions set forth in this Section. (b) If (i) any two or more shareholders of the Company shall enter into any agreement abridging, limiting or restricting the rights of any one or more of them to sell, assign, transfer, mortgage, pledge, hypothecate or transfer on the books of the Company any or all of the shares of the Company held by them, and if a copy of said agreement shall be filed with the Company, or if (ii) shareholders entitled to vote shall adopt any Bylaw provision abridging, limiting or restricting the rights of any shareholders mentioned above, then, and in either of such events, all certificates of shares of stock subject to such abridgments, limitations or restrictions shall have a reference thereto endorsed thereon by an officer of the Company and such certificates shall not thereafter be transferred on the books of the Company except in accordance with the terms and provisions of such as the case may be; however, no restriction shall be binding with respect to shares issued prior to adoption of the restriction unless the holders of such shares voted in favor of, or consented in writing to, the restriction. (c) To the extent that the provisions of this Section 8.4 conflict with the restrictions on transfer of shares set forth in any stock purchase agreement governing the purchase and sale of shares of the Company's capital stock, any such conflicting provisions contained herein shall be void with respect to such shares, and such restrictions on transfer of shares set forth in any such stock purchase agreement shall govern the transfer of such shares. ARTICLE IX CONSTRUCTION OF BYLAWS WITH REFERENCE TO PROVISIONS OF LAW Section 9.1: Bylaw Provisions Construed as Additional and Supplemental to Provisions of Law. All restrictions, limitations, requirements and other provisions of these Bylaws shall be construed, insofar as possible, as supplemental and additional to all provisions of law applicable to the subject matter thereof and shall be fully complied with in addition to the said provisions of law unless such compliance shall be illegal. Section 9.2: Bylaws Provisions Contrary to or Inconsistent with Provisions of Law. Any article, section, subsection, subdivision, sentence, clause or phrase of these Bylaws which, upon being construed in the manner provided in Section 9.1 hereof, shall be contrary to or inconsistent with any applicable provision of law, shall not apply so long as said provisions of law 23. 27 shall remain in effect, but such result shall not affect the validity or applicability of any other portion of these Bylaws, it being hereby declared that these Bylaws, and each article, section, subsection, subdivision, sentence, clause or phrase thereof, would have been adopted irrespective of the fact that any one or more articles, sections, subsections, subdivisions, sentences, clauses or phrases is or are illegal. ARTICLE X CERTIFICATION, ADOPTION, AMENDMENT OR REPEAL OF BYLAWS Section 10.1: By Shareholders. Bylaws may be adopted, amended or repealed by the vote or written consent of holders of a majority of the outstanding shares entitled to vote. Bylaws specifying or changing a fixed number of directors or the maximum or minimum number or changing from a fixed to a variable board or vice versa may be adopted only by the shareholders. Section 10.2: By the Board of Directors. Subject to the right of shareholders to adopt, amend or repeal Bylaws, and other than a Bylaw or amendment thereof specifying or changing a fixed number of directors or the maximum or minimum number or changing from a fixed to a variable board or vice versa, these Bylaws may be adopted, amended or repealed by the Board of Directors. A Bylaw adopted by the shareholders may restrict or eliminate the power of the Board of Directors to adopt, amend or repeal Bylaws. Section 10.3: Certification and Inspection of Bylaws. The Company shall keep at its principal executive office the original or a copy of these Bylaws as amended or otherwise altered to date, which shall be open to inspection by the shareholders at all reasonable times during office hours. 24. 28 CERTIFICATION OF BYLAWS OF SIGNAL PHARMACEUTICALS, INC. (a California corporation) KNOW ALL BY THESE PRESENTS: I, Stephan Dolezalek, certify that I am Secretary of Signal PHARMACEUTICALS, Inc.,. a California corporation (the "Company"), that I am duly authorized to make and deliver this certification, and that the attached Bylaws are a true and correct copy of the Bylaws of the Company in effect as of the date of this certificate. Dated: September 8, 1994 /s/ STEPHAN DOLEZALEK -------------------------------- Stephan Dolezalek, Secretary EX-10.1 4 EXHIBIT 10.1 1 EXHIBIT 10.1 SECOND AMENDED AND RESTATED VOTING AGREEMENT THIS AMENDED AND RESTATED VOTING AGREEMENT is made as of the th day of September, 1994, by and among SIGNAL PHARMACEUTICALS, INC., a California corporation (the "Company"), Accel IV L.P., Accel Japan, Accel Keiretsu L.P., Accel Investors '93 L.P., Ellmore C. Patterson Partners, Prosper Partners (hereinafter collectively referred to as "Accel Partners"), Kleiner Perkins Caufield & Byers VI and KPCB VI Founders Fund (hereinafter collectively referred to as "Kleiner Perkins Caufield & Byers"), Venrock Associates and Harry F. Hixson, Jr. (together Accel Partners, Kleiner Perkins Caufield & Byers, Venrock Associates and Harry F. Hixson, Jr. may be referred to collectively, as the "Old Investors") and the parties listed on Schedule A, attached hereto, (the "New Investors"). The Old Investors and the New Investors are herein referred to collectively as the "Investors" or the "Voting Parties". All terms not otherwise defined herein shall have the meaning ascribed such terms in the Series C Preferred Stock Purchase Agreement or the Investors' Rights Agreement among the Company and certain investors of even date herewith. THE PARTIES HEREBY AGREE AS FOLLOWS: 1. Agreement to Vote. During the term of this Agreement, the Voting Parties agree to vote all of the shares of the Company's voting securities now or hereafter owned by them, whether beneficially or otherwise (the "Shares"), at any regular or special meeting of stockholders of the Company, or, in lieu of any such meeting, to give their written consent, in the election or removal of directors of the Company as provided in this Agreement. 2. Election of Directors After the First Closing. (a) During the term of this Agreement, with respect to the election of the directors of the Company that the holders of Preferred Stock (voting together as a class) are entitled to elect, the Voting Parties agree to vote to elect (i) one person designated by Accel Partners, such person to initially be Luke Evnin; (ii) one person designated by Venrock Associates, such person to initially be Patrick Latterell; (iii) one person designated by Kleiner Perkins Caufield & Byers, such person to initially be Brook Byers; and (iv) one person designated by InterWest Partners, such person to initially be Arnold Oronsky. (b) Notwithstanding the provisions of subsection (a) above, Accel Partners, Venrock Associates, Kleiner Perkins Caufield & Byers, and InterWest Partners, respectively, shall forfeit their right to designate a nominee to the Board of Directors if at any time following the First Closing, such Investor holds less than 50% of the 2 aggregate number of shares of Series C Preferred Stock set forth opposite such Investor's name on Schedule B attached hereto. (c) In the event any of Accel Partners, Venrock Associates, Kleiner Perkins Caufield & Byers or InterWest Partners forfeits their right to designate a nominee to the Board of Directors pursuant to subsection (b) above, then the nominee for the resulting vacancy shall be designated by the holders of a majority of the outstanding Preferred Stock and all Voting Parties hereby agree to vote to elect such designee. 3. Replacement of Director. In the event of any termination or resignation of any Director, the Voting Parties shall take all actions necessary and appropriate to cause such vacancy to be filled in accordance with the provisions hereof. 4. Successors in Interest of the Parties. (a) The provisions of this Agreement shall be binding upon the successors in interest of the Voting Parties to any of the Shares. The Company shall not permit the transfer of any Shares on its books or issue a new certificate representing any Shares unless and until the person to whom such security is to be transferred shall have executed a written agreement pursuant to which such person becomes a party to this Agreement and agrees to be bound by all the provisions hereof as if such person was a Voting Party hereunder. (b) Each certificate representing any Shares shall be endorsed by the Company with a legend reading substantially as follows: The Shares evidenced hereby are subject to a Voting Agreement dated as of September 8, 1994, (a copy of which may be obtained upon written request from the issuer), and by accepting any interest in such shares the person accepting such interest shall be deemed to agree to and shall become bound by all the provisions of said Voting Agreement. 5. Covenants of the Company. So long as the Voting Parties are entitled to the rights granted to them under this Voting Agreement, the Company agrees to use its best efforts to ensure that such rights are effective and that the Voting Parties enjoy the benefits thereof. Such actions include, without limitation, the use of the Company's best efforts to cause the nomination and election of the Directors as provided in Section 2. The Company will not, by any voluntary action, avoid or seek to avoid the observance or performance of any of the terms to be performed hereunder by the Company, but will at all times in good faith assist in the carrying out of all of the provisions of this Agreement and in the taking of all such actions as may be necessary, appropriate or reasonably requested by the holders of a majority of the outstanding voting securities held by the Voting Parties assuming exercise and conversion of all 2. 3 outstanding securities in order to protect the rights of the parties hereunder against impairment. 6. No Liability for Election of Recommended Directors. Neither the Company, nor the Investors, nor any officer, director, shareholder, partner, employee or agent of such party makes any representation or warranty as to the fitness or competence of any nominee designated pursuant to Section 2 above to serve on the Board of Directors of the Company by virtue of such party's execution of this Voting Agreement or by the act of such party in voting for the nominees. 7. Grant of Proxy. Should the provisions of this Voting Agreement be construed to constitute the granting of proxies, such proxies shall be deemed coupled with an interest and, to the extent permitted by law, are irrevocable for the term of this Voting Agreement. 8. Specific Enforcement. It is agreed and understood that monetary damages would not adequately compensate an injured Voting Party for the breach of this Voting Agreement by any Voting Party, that this Voting Agreement shall be specifically enforceable, and that any breach or threatened breach of this Voting Agreement shall be the proper subject of a temporary or permanent injunction or restraining order. Further, each Voting Party hereto waives any claim or defense that there is an adequate remedy at law for such breach or threatened breach. 9. Manner of Voting. The voting of shares pursuant to this Voting Agreement may be effected in person, by proxy, by written consent, or in any other manner permitted by applicable law. 10. Termination. This Agreement shall terminate upon the earlier of (i) the date the Company has consummated a bona fide, firmly underwritten public offering of shares of Common Stock, registered under the Act pursuant to a registration statement on Form S-1, at an offering price of at least $5.00 per share (appropriately adjusted for any stock split, dividend, combination or other recapitalization) and $12,500,000 of aggregate proceeds, (ii) the date which is ten (10) years after the date of this Agreement, or (iii) the date the Voting Parties lose the right to elect 4 directors to the Board of Directors pursuant to Article III subsection (B)(5) of the Amended and Restated Articles of Incorporation in effect as of the date of the First Closing. 11. Amendment of Prior Voting Agreement. The undersigned Old Investors, constituting all of the parties to that certain Amended and Restated Voting Agreement dated as of April 12, 1993 by and between the Company and the Old Investors (the "First Amended and Restated Voting Agreement") hereby agree that upon the execution by them of this Agreement, the First Amended and Restated Voting Agreement shall be deemed amended and restated in its entirety to read as set forth in 3. 4 this Agreement and this Agreement shall supersede in its entirety the First Amended and Restated Voting Agreement. 12. Amendments and Waivers. Any term hereof, may be amended and the observance of any term hereof may be waived (either generally or in a particular instance and either retroactively or prospectively) only with the written consent of the Company and the holders of a majority of the outstanding voting securities held by the Voting Parties (assuming exercise or conversion of all outstanding securities). Any amendment or waiver so effected shall be binding upon the parties hereto. 13. Stock Splits, Stock Dividends, etc. In the event of any stock split, stock dividend, recapitalization, reorganization, or the like, any securities issued with respect to the Shares shall become Shares for purposes of this Agreement and shall be endorsed with the legend set forth in Section 5(b) hereof. 14. Severability. Whenever possible, each provision of this Agreement shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Agreement shall be held to be prohibited by or invalid under applicable law, such provision shall be ineffective only to the extent of such prohibition or invalidity, without invalidating the remainder of such provision or the remaining provisions of this Agreement. 15. Governing Law. This Agreement shall be governed by and construed under the laws of the State of California as applied to contracts among California residents entered into and to be performed entirely within California. 16. Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. 17. Successors and Assigns. Except as otherwise expressly provided in this Agreement, the provisions hereof shall inure to the benefit of, and be binding upon, the successors and assigns of the parties hereto. 4. 5 IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year hereinabove first written. SIGNAL PHARMACEUTICALS, INC. By: /s/ ALAN J. LEWIS ------------------------------------ Alan J. Lewis, President INVESTORS: ACCEL IV L.P. By: Accel IV Associates, L.P. Its General Partner By: ------------------------------------ General Partner ACCEL JAPAN By: Accel Japan Associates, L.P. ------------------------------------ Its General Partner By: ------------------------------------ General Partner SIGNATURE PAGE FOR SECOND AMENDED AND RESTATED VOTING AGREEMENT 6 IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year hereinabove first written. SIGNAL PHARMACEUTICALS, INC. By: ------------------------------------ Alan J. Lewis, President INVESTORS: ACCEL IV L.P. By: Accel IV Associates, L.P. Its General Partner By: [SIG] ------------------------------------ General Partner ACCEL JAPAN By: Accel Japan Associates, L.P. ------------------------------------ Its General Partner By: [SIG] ------------------------------------ General Partner SIGNATURE PAGE FOR SECOND AMENDED AND RESTATED VOTING AGREEMENT 7 ACCEL KEIRETSU L.P. By: Accel Partners & Co., Inc. Its General Partner By: [SIG] ------------------------------------ General Partner ACCEL INVESTORS '93 L.P. By: [SIG] ------------------------------------ General Partner ELLMORE C. PATTERSON PARTNERS By: [SIG] ------------------------------------ General Partner PROSPER PARTNERS By: [SIG] ------------------------------------ Attorney-In-Fact SIGNATURE PAGE FOR SECOND AMENDED AND RESTATED VOTING AGREEMENT 8 VENROCK ASSOCIATES By: [SIG] ------------------------------------ General Partner SIGNATURE PAGE FOR SECOND AMENDED AND RESTATED VOTING AGREEMENT 9 KLEINER PERKINS CAUFIELD & BYERS VI By: KLEINER PERKINS CAUFIELD & BYERS VI ASSOCIATES, General Partner By: [SIG] ------------------------------------ KPCB VI FOUNDERS FUND By: KLEINER PERKINS CAUFIELD & BYERS VI ASSOCIATES, General Partner By: [SIG] ------------------------------------ SIGNATURE PAGE FOR SECOND AMENDED AND RESTATED VOTING AGREEMENT 10 HIXSON FAMILY TRUST DATED 08/25/86 By: [SIG] ------------------------------------ Trustee SIGNATURE PAGE FOR SECOND AMENDED AND RESTATED VOTING AGREEMENT 11 INTERWEST PARTNERS V By: [SIG] ------------------------------------ Its: General Partner ----------------------------------- INTERWEST INVESTORS V By: [SIG] ------------------------------------ Its: General Partner ----------------------------------- SIGNATURE PAGE FOR SECOND AMENDED AND RESTATED VOTING AGREEMENT 12 OXFORD BIOSCIENCE PARTNERS L.P. By: OBP Management L.P. Its: General Partner By: /s/EDMUND M. OLIVIER ----------------------------------- Edmund M. Olivier Its: General Partner OXFORD BIOSCIENCE PARTNERS (BERMUDA) LIMITED PARTNERSHIP By: OBP Management Bermuda) Limited Partnership Its: General Partner By: /s/EDMUND M. OLIVIER ----------------------------------- Edmund M. Olivier Its: General Partner OXFORD BIOSCIENCE PARTNERS (ADJUNCT) L.P. By: OBP Management L.P. Its: General Partner By: /s/EDMUND M. OLIVIER ----------------------------------- Edmund M. Olivier Its: General Partner SIGNATURE PAGE FOR SECOND AMENDED AND RESTATED VOTING AGREEMENT 13 USVP ENTREPRENEUR PARTNERS II, L.P. By Presidio Management Group IV, L.P. Its General Partner By: [SIG] ------------------------------------ Its: Attorney In Fact ----------------------------------- SECOND VENTURES II, L.P. By Presidio Management Group IV, L.P. Its General Partner By: [SIG] ------------------------------------ Its: Attorney In Fact ----------------------------------- U.S. VENTURE PARTNERS IV, L.P. By Presidio Management Group IV, L.P. Its General Partner By: [SIG] ------------------------------------ Its: Attorney In Fact ----------------------------------- SIGNATURE PAGE FOR SECOND AMENDED AND RESTATED VOTING AGREEMENT 14 VERTICAL MEDICAL PARTNERS, L.P. By: [SIG] ----------------------------------- Its: General Partner ----------------------------------- SIGNATURE PAGE FOR SECOND AMENDED AND RESTATED VOTING AGREEMENT 15 SCHEDULE A InterWest Partners V, Interwest Investors V (InterWest Partners V and InterWest Investors V, collectively, "InterWest") Oxford Bioscience Partners L.P. Oxford Bioscience Partners (Bermuda) Limited Partnership Oxford Bioscience Partners (Adjunct) L.P. USVP Entrepreneur Partners II, L.P. Second Ventures II, L.P. U.S. Venture Partners IV, L.P. Vertical Medical Partners, L.P. SIGNATURE PAGE FOR SECOND AMENDED AND RESTATED VOTING AGREEMENT 16 SIGNAL PHARMACEUTICALS, INC. AGREEMENT TO BE BOUND BY THE TERMS OF SECOND AMENDED AND RESTATED VOTING AGREEMENT Reference is made to that certain Second Amended and Restated Voting Agreement (the "Voting Agreement"), dated as of September 8, 1994, between Signal Pharmaceuticals, Inc. (the "Company") and certain investors, including the Hixson Family Trust dated August 25, 1986 (the "Trust"), which placed certain restrictions on the voting and transfer of all of the Series A, Series B, and Series C Preferred Shares of the Company owned by the Trust (the "Shares"). A copy of the Voting Agreement is attached hereto as Exhibit A. WHEREAS, the Voting Agreement provides that the Shares may not be transferred by the Trust, as represented by its trustee, Harry F. Hixson, Jr., unless the transferee agrees to be bound by the provisions of the Voting Agreement; and WHEREAS, pursuant to the terms of a dissolution of marriage judgment, the Trust is seeking to transfer (i) sixty-two thousand five hundred (62,500) shares of Series A Preferred Stock, (ii) one hundred twenty-five thousand (125,000) shares of Series B Preferred Stock, and (iii) one hundred ten thousand (110,000) shares of Series C Preferred Stock (the "Transferred Shares") to the undersigned; NOW, THEREFORE, to induce the Company to effect the transfer of the Transferred Shares to the undersigned: 1. The undersigned hereby agrees to be bound by all of the provisions of the Voting Agreement as if the undersigned was an original signatory thereto and hereby acknowledges that, notwithstanding the transfer of such Transferred Shares to the undersigned, such Transferred Shares shall remain subject to the restrictions on transfer, voting rights and all of the other provisions of the Voting Agreement. 2. The undersigned understands and agrees that all certificates evidencing the Settlement Shares to be issued to the undersigned may bear the following legend: THE SHARES EVIDENCED HEREBY ARE SUBJECT TO CERTAIN VOTING AGREEMENT(S) AS AMENDED FROM TIME TO TIME (COPIES OF WHICH MAY BE OBTAINED UPON WRITTEN REQUEST FROM THE ISSUER), AND BY ACCEPTING ANY INTEREST IN SUCH SHARES THE PERSON ACCEPTING SUCH INTEREST SHALL BE DEEMED TO AGREE TO AND SHALL BECOME BOUND BY ALL THE PROVISIONS OF SAID VOTING AGREEMENT(S). Dated as of August ____, 1997 ---------------------------------------- GEORGIANA B. HIXSON 1 Moss Landing Laguna Niguel, CA 92677 17 EXHIBIT A VOTING AGREEMENT 18 SIGNAL PHARMACEUTICALS, INC. AGREEMENT TO BE BOUND BY THE TERMS OF SECOND AMENDED AND RESTATED VOTING AGREEMENT Reference is made to that certain Second Amended and Restated Voting Agreement (the "Voting Agreement"), dated as of September 8, 1994, between Signal Pharmaceuticals, Inc. (the "Company") and certain investors, including the Hixson Family Trust dated August 25, 1986 (the "Trust"), which placed certain restrictions on the voting and transfer of all of the Series A, Series B, and Series C Preferred Shares of the Company owned by the Trust (the "Shares"). A copy of the Voting Agreement is attached hereto as Exhibit A. WHEREAS, the Voting Agreement provides that the Shares may not be transferred by the Trust, as represented by its trustee, Harry F. Hixson, Jr., unless the transferee agrees to be bound by the provisions of the Voting Agreement; and WHEREAS, pursuant to the terms of a dissolution of marriage judgment, the Trust is seeking to transfer (i) sixty-two thousand five hundred (62,500) shares of Series A Preferred Stock, (ii) one hundred twenty-five thousand (125,000) shares of Series B Preferred Stock, and (iii) one hundred ten thousand (110,000) shares of Series C Preferred Stock (collectively, the "Transferred Shares") to the undersigned; NOW, THEREFORE, to induce the Company to effect the transfer of the Transferred Shares to the undersigned: 1. The undersigned hereby agrees to be bound by all of the provisions of the Voting Agreement as if the undersigned was an original signatory thereto and hereby acknowledges that, notwithstanding the transfer of such Transferred Shares to the undersigned, such Transferred Shares shall remain subject to the restrictions on transfer, voting rights and all of the other provisions of the Voting Agreement. 2. The undersigned understands and agrees that all certificates evidencing the Settlement Shares to be issued to the undersigned may bear the following legend: THE SHARES EVIDENCED HEREBY ARE SUBJECT TO CERTAIN VOTING AGREEMENT(S) AS AMENDED FROM TIME TO TIME (COPIES OF WHICH MAY BE OBTAINED UPON WRITTEN REQUEST FROM THE ISSUER), AND BY ACCEPTING ANY INTEREST IN SUCH SHARES THE PERSON ACCEPTING SUCH INTEREST SHALL BE DEEMED TO AGREE TO AND SHALL BECOME BOUND BY ALL THE PROVISIONS OF SAID VOTING AGREEMENT(S). Dated as of August ____, 1997 ---------------------------------------- HARRY F. HIXSON, JR., TRUSTEE HARRY F. HIXSON, JR. SEPARATE PROPERTY TRUST DATED 12/15/95 19 EXHIBIT A VOTING AGREEMENT EX-10.2 5 EXHIBIT 10.2 1 EXHIBIT 10.2 INDEMNITY AGREEMENT THIS AGREEMENT is made and entered into this ____ day of _____________, 1998 by and between SIGNAL PHARMACEUTICALS, INC., a Delaware corporation (the "Company"), and ______________ ("Agent"). RECITALS WHEREAS, Agent performs a valuable service to the Company in his capacity as an officer or director of the Company; WHEREAS, the stockholders of the Company have adopted bylaws (the "Bylaws") providing for the indemnification of the directors, officers, employees and other agents of the Company, including persons serving at the request of the Company in such capacities with other corporations or enterprises, as authorized by the Delaware General Corporation Law, as amended (the "Code"); WHEREAS, the Bylaws and the Code, by their non-exclusive nature, permit contracts between the Company and its agents, officers, employees and other agents with respect to indemnification of such persons; and WHEREAS, in order to induce Agent to continue to serve as an officer or director of the Company, the Company has determined and agreed to enter into this Agreement with Agent; NOW, THEREFORE, in consideration of Agent's continued service as an officer or director after the date hereof, the parties hereto agree as follows: AGREEMENT 1. SERVICES TO THE COMPANY. Agent will serve, at the will of the Company or under separate contract, if any such contract exists, as an officer or director of the Company or as a director, officer or other fiduciary of an affiliate of the Company (including any employee benefit plan of the Company) faithfully and to the best of his ability so long as he is duly elected and qualified in accordance with the provisions of the Bylaws or other applicable charter documents of the Company or such affiliate; provided, however, that Agent may at any time and for any reason resign from such position (subject to any contractual obligation that Agent may have assumed apart from this Agreement) and that the Company or any affiliate shall have no obligation under this Agreement to continue Agent in any such position. 2. INDEMNITY OF AGENT. The Company hereby agrees to hold harmless and indemnify Agent to the fullest extent authorized or permitted by the provisions of the 1. 2 Bylaws and the Code, as the same may be amended from time to time (but, only to the extent that such amendment permits the Company to provide broader indemnification rights than the Bylaws or the Code permitted prior to adoption of such amendment). 3. ADDITIONAL INDEMNITY. In addition to and not in limitation of the indemnification otherwise provided for herein, and subject only to the exclusions set forth in Section 4 hereof, the Company hereby further agrees to hold harmless and indemnify Agent: (a) against any and all expenses (including attorneys' fees), witness fees, damages, judgments, fines and amounts paid in settlement and any other amounts that Agent becomes legally obligated to pay because of any claim or claims made against or by him in connection with any threatened, pending or completed action, suit or proceeding, whether civil, criminal, arbitrational, administrative or investigative (including an action by or in the right of the Company) to which Agent is, was or at any time becomes a party, or is threatened to be made a party, by reason of the fact that Agent is, was or at any time becomes a director, officer, employee or other agent of Company, or is or was serving or at any time serves at the request of the Company as a director, officer, employee or other agent of another corporation, partnership, joint venture, trust, employee benefit plan or other enterprise; and (b) otherwise to the fullest extent as may be provided to Agent by the Company under the non-exclusivity provisions of the Code and Section 43 of the Bylaws. 4. LIMITATIONS ON ADDITIONAL INDEMNITY. No indemnity pursuant to Section 3 hereof shall be paid by the Company: (a) on account of any claim against Agent for an accounting of profits made from the purchase or sale by Agent of securities of the Company pursuant to the provisions of Section 16(b) of the Securities Exchange Act of 1934 and amendments thereto or similar provisions of any federal, state or local statutory law; (b) on account of Agent's conduct that was knowingly fraudulent or deliberately dishonest or that constituted willful misconduct; (c) on account of Agent's conduct that constituted a breach of Agent's duty of loyalty to the Company or resulted in any personal profit or advantage to which Agent was not legally entitled; (d) for which payment is actually made to Agent under a valid and collectible insurance policy or under a valid and enforceable indemnity clause, bylaw or agreement, except in respect of any excess beyond payment under such insurance, clause, bylaw or agreement; 2. 3 (e) if indemnification is not lawful (and, in this respect, both the Company and Agent have been advised that the Securities and Exchange Commission believes that indemnification for liabilities arising under the federal securities laws is against public policy and is, therefore, unenforceable and that claims for indemnification should be submitted to appropriate courts for adjudication); or (f) in connection with any proceeding (or part thereof) initiated by Agent, or any proceeding by Agent against the Company or its directors, officers, employees or other agents, unless (i) such indemnification is expressly required to be made by law, (ii) the proceeding was authorized by the Board of Directors of the Company, (iii) such indemnification is provided by the Company, in its sole discretion, pursuant to the powers vested in the Company under the Code, or (iv) the proceeding is initiated pursuant to Section 9 hereof. 5. CONTINUATION OF INDEMNITY. All agreements and obligations of the Company contained herein shall continue during the period Agent is a director, officer, employee or other agent of the Company (or is or was serving at the request of the Company as a director, officer, employee or other agent of another corporation, partnership, joint venture, trust, employee benefit plan or other enterprise) and shall continue thereafter so long as Agent shall be subject to any possible claim or threatened, pending or completed action, suit or proceeding, whether civil, criminal, arbitrational, administrative or investigative, by reason of the fact that Agent was serving in the capacity referred to herein. 6. PARTIAL INDEMNIFICATION. Agent shall be entitled under this Agreement to indemnification by the Company for a portion of the expenses (including attorneys' fees), witness fees, damages, judgments, fines and amounts paid in settlement and any other amounts that Agent becomes legally obligated to pay in connection with any action, suit or proceeding referred to in Section 3 hereof even if not entitled hereunder to indemnification for the total amount thereof, and the Company shall indemnify Agent for the portion thereof to which Agent is entitled. 7. NOTIFICATION AND DEFENSE OF CLAIM. Not later than thirty (30) days after receipt by Agent of notice of the commencement of any action, suit or proceeding, Agent will, if a claim in respect thereof is to be made against the Company under this Agreement, notify the Company of the commencement thereof; but the omission so to notify the Company will not relieve it from any liability which it may have to Agent otherwise than under this Agreement. With respect to any such action, suit or proceeding as to which Agent notifies the Company of the commencement thereof: (a) the Company will be entitled to participate therein at its own expense; 3. 4 (b) except as otherwise provided below, the Company may, at its option and jointly with any other indemnifying party similarly notified and electing to assume such defense, assume the defense thereof, with counsel reasonably satisfactory to Agent. After notice from the Company to Agent of its election to assume the defense thereof, the Company will not be liable to Agent under this Agreement for any legal or other expenses subsequently incurred by Agent in connection with the defense thereof except for reasonable costs of investigation or otherwise as provided below. Agent shall have the right to employ separate counsel in such action, suit or proceeding but the fees and expenses of such counsel incurred after notice from the Company of its assumption of the defense thereof shall be at the expense of Agent unless (i) the employment of counsel by Agent has been authorized by the Company, (ii) Agent shall have reasonably concluded that there may be a conflict of interest between the Company and Agent in the conduct of the defense of such action or (iii) the Company shall not in fact have employed counsel to assume the defense of such action, in each of which cases the fees and expenses of Agent's separate counsel shall be at the expense of the Company. The Company shall not be entitled to assume the defense of any action, suit or proceeding brought by or on behalf of the Company or as to which Agent shall have made the conclusion provided for in clause (ii) above; and (c) the Company shall not be liable to indemnify Agent under this Agreement for any amounts paid in settlement of any action or claim effected without its written consent, which shall not be unreasonably withheld. The Company shall be permitted to settle any action except that it shall not settle any action or claim in any manner which would impose any penalty or limitation on Agent without Agent's written consent, which may be given or withheld in Agent's sole discretion. 8. EXPENSES. The Company shall advance, prior to the final disposition of any proceeding, promptly following request therefor, all expenses incurred by Agent in connection with such proceeding upon receipt of an undertaking by or on behalf of Agent to repay said amounts if it shall be determined ultimately that Agent is not entitled to be indemnified under the provisions of this Agreement, the Bylaws, the Code or otherwise. 9. ENFORCEMENT. Any right to indemnification or advances granted by this Agreement to Agent shall be enforceable by or on behalf of Agent in any court of competent jurisdiction if (i) the claim for indemnification or advances is denied, in whole or in part, or (ii) no disposition of such claim is made within ninety (90) days of request therefor. Agent, in such enforcement action, if successful in whole or in part, shall be entitled to be paid also the expense of prosecuting his claim. It shall be a defense to any action for which a claim for indemnification is made under Section 3 hereof (other than an action brought to enforce a claim for expenses pursuant to Section 8 hereof, provided that the required undertaking has been tendered to the Company) that Agent is not entitled to indemnification because of the limitations set forth in Section 4 hereof. Neither the 4. 5 failure of the Company (including its Board of Directors or its stockholders) to have made a determination prior to the commencement of such enforcement action that indemnification of Agent is proper in the circumstances, nor an actual determination by the Company (including its Board of Directors or its stockholders) that such indemnification is improper shall be a defense to the action or create a presumption that Agent is not entitled to indemnification under this Agreement or otherwise. 10. SUBROGATION. In the event of payment under this Agreement, the Company shall be subrogated to the extent of such payment to all of the rights of recovery of Agent, who shall execute all documents required and shall do all acts that may be necessary to secure such rights and to enable the Company effectively to bring suit to enforce such rights. 11. NON-EXCLUSIVITY OF RIGHTS. The rights conferred on Agent by this Agreement shall not be exclusive of any other right which Agent may have or hereafter acquire under any statute, provision of the Company's Certificate of Incorporation or Bylaws, agreement, vote of stockholders or directors, or otherwise, both as to action in his official capacity and as to action in another capacity while holding office. 12. SURVIVAL OF RIGHTS. (a) The rights conferred on Agent by this Agreement shall continue after Agent has ceased to be a director, officer, employee or other agent of the Company or to serve at the request of the Company as a director, officer, employee or other agent of another corporation, partnership, joint venture, trust, employee benefit plan or other enterprise and shall inure to the benefit of Agent's heirs, executors and administrators. (b) The Company shall require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business or assets of the Company, expressly to assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform if no such succession had taken place. 13. SEPARABILITY. Each of the provisions of this Agreement is a separate and distinct agreement and independent of the others, so that if any provision hereof shall be held to be invalid for any reason, such invalidity or unenforceability shall not affect the validity or enforceability of the other provisions hereof. Furthermore, if this Agreement shall be invalidated in its entirety on any ground, then the Company shall nevertheless indemnify Agent to the fullest extent provided by the Bylaws, the Code or any other applicable law. 14. ENTIRE AGREEMENT. This Agreement and the agreements referenced herein constitute the entire agreement between the parties hereto pertaining to the subject matter 5. 6 hereof, and any and all other written or oral agreements existing between the parties hereto pertaining to the subject matters hereof are superseded and expressly canceled. 15. GOVERNING LAW. This Agreement shall be interpreted and enforced in accordance with the laws of the State of Delaware. 16. AMENDMENT AND TERMINATION. No amendment, modification, termination or cancellation of this Agreement shall be effective unless in writing signed by both parties hereto. 17. IDENTICAL COUNTERPARTS. This Agreement may be executed in one or more counterparts, each of which shall for all purposes be deemed to be an original but all of which together shall constitute but one and the same Agreement. Only one such counterpart need be produced to evidence the existence of this Agreement. 18. HEADINGS. The headings of the sections of this Agreement are inserted for convenience only and shall not be deemed to constitute part of this Agreement or to affect the construction hereof. 19. NOTICES. All notices, requests, demands and other communications hereunder shall be in writing and shall be deemed to have been duly given (i) upon delivery if delivered by hand to the party to whom such communication was directed or (ii) upon the third business day after the date on which such communication was mailed if mailed by certified or registered mail with postage prepaid: (a) If to Agent, at the address indicated on the signature page hereof. (b) If to the Company, to Signal Pharmaceuticals, Inc. 5555 Oberlin Drive San Diego, CA 92121 or to such other address as may have been furnished to Agent by the Company. 6. 7 IN WITNESS WHEREOF, the parties hereto have executed this Agreement on and as of the day and year first above written. SIGNAL PHARMACEUTICALS, INC. By: ------------------------------------- Name: ----------------------------------- Title: --------------------------------- AGENT ---------------------------------- Address: -------------------------------- -------------------------------- INDEMNITY AGREEMENT 8 EXHIBIT D-1 Indemnity Agreement EX-10.3 6 EXHIBIT 10.3 1 EXHIBIT 10.3 SIGNAL PHARMACEUTICALS, INC. 1998 EQUITY INCENTIVE PLAN AMENDED AND RESTATED FEBRUARY 17, 1998 APPROVED BY STOCKHOLDERS , 1998 1. PURPOSES. (a) The purpose of the Plan is to provide a means by which selected Employees and Directors and Consultants may be given an opportunity to benefit from increases in value of the common stock of the Company ("Common Stock") through the granting of (i) Incentive Stock Options, (ii) Nonstatutory Stock Options, (iii) stock bonuses, and (iv) rights to purchase restricted stock, and (v) stock appreciation rights, all as defined below. (b) The Company, by means of the Plan, seeks to retain the services of persons who are now Employees or Directors of or Consultants to the Company and its Affiliates, to secure and retain the services of new Employees, Directors and Consultants, and to provide incentives for such persons to exert maximum efforts for the success of the Company and its Affiliates. (c) On February 17, 1998 the Company amended and restated its 1993 Founders' Stock Option Plan, its 1993 Stock Option Plan and its 1997 Stock Option Plan into this 1998 Equity Incentive Plan, such combination conditioned, however, on the Company's initial public offering of shares of common stock becoming effective. No options shall be granted under the 1993 Stock Option Plan, the 1993 Founders' Stock Option Plan or the 1997 Stock Option Plan after the date on which the Company's initial public offering of shares of common stock becomes effective (the "Effective Date"). The terms of options granted prior to the Effective Date are not affected by the terms of this Plan. (d) The Company intends that the Stock Awards issued under the Plan shall, in the discretion of the Board or any Committee to which responsibility for administration of the Plan has been delegated pursuant to subsection 3(c), be either (i) Options granted pursuant to Section 6 hereof, including Incentive Stock Options and Nonstatutory Stock Options, or (ii) stock bonuses or rights to purchase restricted stock granted pursuant to Section 7 hereof, or (iii) stock appreciation rights granted pursuant to Section 8 hereof. All Options shall be separately designated Incentive Stock Options or Nonstatutory Stock Options at the time of grant, and in such form as issued pursuant to Section 6, and a 1. 2 separate certificate or certificates will be issued for shares purchased on exercise of each type of Option. 2. DEFINITIONS. (a) "AFFILIATE" means any parent corporation or subsidiary corporation, whether now or hereafter existing, as those terms are defined in Sections 424(e) and (f) respectively, of the Code. (b) "BOARD" means the Board of Directors of the Company. (c) "CODE" means the Internal Revenue Code of 1986, as amended. (d) "COMMITTEE" means a Committee appointed by the Board in accordance with subsection 3(c) of the Plan. (e) "COMPANY" means Signal Pharmaceuticals, Inc. a Delaware corporation. (f) "CONCURRENT STOCK APPRECIATION RIGHT" OR "CONCURRENT RIGHT" mean a right granted pursuant to subsection 8(b)(2) of the Plan. (g) "CONSULTANT" means any person, including an advisor, engaged by the Company or an Affiliate to render consulting services and who is compensated for such services, provided that the term "Consultant" shall not include Directors who are paid only a director's fee by the Company or who are not compensated by the Company for their services as Directors. (h) "CONTINUOUS STATUS AS AN EMPLOYEE, DIRECTOR OR CONSULTANT" means the employment or relationship as a Director or Consultant is not interrupted or terminated. The Board, in its sole discretion, may determine whether Continuous Status as an Employee, Director or Consultant shall be considered interrupted in the case of: (i) any leave of absence approved by the Board, including sick leave, military leave, or any other personal leave; or (ii) transfers between locations of the Company or between the Company, Affiliates or their successors. (i) "DIRECTOR" means a member of the Board. (j) "EMPLOYEE" means any person, including Officers and Directors, employed by the Company or any Affiliate of the Company. Neither service as a Director nor payment of a director's fee by the Company shall be sufficient to constitute "employment" by the Company. (k) "EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended. 2. 3 (l) "FAIR MARKET VALUE" means, as of any date, the value of the Common Stock of the Company determined as follows: (i) If the Common Stock is listed on any established stock exchange, or traded on the Nasdaq National Market or the Nasdaq SmallCap Market, the Fair Market Value of a share of Common Stock shall be the closing sales price for such stock (or the closing bid, if no sales were reported) as quoted on such exchange or market (or the exchange or market with the greatest volume of trading in Common Stock) on the last market trading day prior to the day of determination, as reported in the Wall Street Journal or such other source as the Board deems reliable; (ii) In the absence of such markets for the Common Stock, the Fair Market Value shall be determined in good faith by the Board. (m) "INCENTIVE STOCK OPTION" means an Option intended to qualify as an incentive stock option within the meaning of Section 422 of the Code and the regulations promulgated thereunder. (n) "INDEPENDENT STOCK APPRECIATION RIGHT" OR INDEPENDENT RIGHT" means a right granted pursuant to subsection 8(b)(3) of the Plan. (o) "LISTING DATE" means the first date upon which any security of the Company is listed (or approved for listing) upon notice of issuance on any securities exchange, or designated (or approved for designation) upon notice of issuance as a national market security on an interdealer quotation system if such securities exchange or interdealer quotation system has been certified in accordance with the provisions of Section 25100(o) of the California Corporate Securities Law of 1968. (p) "NON-EMPLOYEE DIRECTOR" means a Director who either (i) is not a current Employee or Officer of the Company or its parent or subsidiary, does not receive compensation (directly or indirectly) from the Company or its parent or subsidiary for services rendered as a consultant or in any capacity other than as a Director (except for an amount as to which disclosure would not be required under Item 404(a) of Regulation S-K promulgated pursuant to the Securities Act of 1933 ("Regulation S-K"), does not possess an interest in any other transaction as to which disclosure would be required under Item 404(a) of Regulation S-K, and is not engaged in a business relationship as to which disclosure would be required under Item 404(b) of Regulation S-K; or (ii) is otherwise considered a "non-employee director" for purposes of Rule 16b-3. (q) "NONSTATUTORY STOCK OPTION" means an Option not intended to qualify as an Incentive Stock Option. 3. 4 (r) "OFFICER" means a person who is an officer of the Company within the meaning of Section 16 of the Exchange Act and the rules and regulations promulgated thereunder. (s) "OPTION" means a stock option granted pursuant to the Plan. (t) "OPTION AGREEMENT" means a written agreement between the Company and an Optionee evidencing the terms and conditions of an individual Option grant. Each Option Agreement shall be subject to the terms and conditions of the Plan. (u) "OPTIONEE" means a person to whom an Option is granted pursuant to the Plan. (v) "OUTSIDE DIRECTOR" means a Director who either (i) is not a current employee of the Company or an "affiliated corporation" (within the meaning of Treasury regulations promulgated under Section 162(m) of the Code), is not a former employee of the Company or an "affiliated corporation" receiving compensation for prior services (other than benefits under a tax qualified pension plan), was not an officer of the Company or an "affiliated corporation" at any time, and is not currently receiving direct or indirect remuneration from the Company or an "affiliated corporation" for services in any capacity other than as a Director, or (ii) is otherwise considered an "outside director" for purposes of Section 162(m) of the Code. (w) "PLAN" means this Signal Pharmaceuticals, Inc. 1998 Equity Incentive Plan. (x) "RULE 16B-3" means Rule 16b-3 of the Exchange Act or any successor to Rule 16b-3, as in effect with respect to the Company when discretion is being exercised regarding the Plan. (y) "STOCK APPRECIATION RIGHT" means any of the various types of rights which may be granted under Section 8 of the Plan. (z) "STOCK AWARD" means any right granted under the Plan, including any Option, any stock bonus and any right to purchase restricted stock, and any Stock Appreciation Right. (aa) "STOCK AWARD AGREEMENT" means a written agreement between the Company and a holder of a Stock Award evidencing the terms and conditions of an individual Stock Award grant. Each Stock Award Agreement shall be subject to the terms and conditions of the Plan. (bb) "TANDEM STOCK APPRECIATION RIGHT" OR "TANDEM RIGHT" means a right granted pursuant to subsection 8(b)(1) of the Plan. 4. 5 3. ADMINISTRATION. (a) The Plan shall be administered by the Board unless and until the Board delegates administration to a Committee, as provided in subsection 3(c). (b) The Board shall have the power, subject to, and within the limitations of, the express provisions of the Plan: (i) To determine from time to time which of the persons eligible under the Plan shall be granted Stock Awards; when and how each Stock Award shall be granted; whether a Stock Award will be an Incentive Stock Option, a Nonstatutory Stock Option, a stock bonus, a right to purchase restricted stock, a Stock Appreciation Right, or a combination of the foregoing; the provisions of each Stock Award granted (which need not be identical), including the time or times when a person shall be permitted to receive stock pursuant to a Stock Award; whether a person shall be permitted to receive stock upon exercise of an Independent Stock Appreciation Right; and the number of shares with respect to which a Stock Award shall be granted to each such person. (ii) To construe and interpret the Plan and Stock Awards granted under it, and to establish, amend and revoke rules and regulations for its administration. The Board, in the exercise of this power, may correct any defect, omission or inconsistency in the Plan or in any Stock Award Agreement, in a manner and to the extent it shall deem necessary or expedient to make the Plan fully effective. (iii) To amend the Plan or a Stock Award as provided in Section 14. (iv) Generally, to exercise such powers and to perform such acts as the Board deems necessary or expedient to promote the best interests of the Company which are not in conflict with the provisions of the Plan. (c) The Board may delegate administration of the Plan to a committee or committees ("Committee") of two (2) or more members of the Board. In the discretion of the Board, a Committee may consist solely of two (2) or more Outside Directors, in accordance with Code Section 162(m), or solely of two (2) or more Non-Employee Directors, in accordance with Rule 16(b)-3. If administration is delegated to a Committee, the Committee shall have, in connection with the administration of the Plan, the powers theretofore possessed by the Board (and references in this Plan to the Board shall thereafter be to the Committee), subject, however, to such resolutions, not inconsistent with the provisions of the Plan, as may be adopted from time to time by the Board. The Board may abolish the Committee at any time and revest in the Board the administration of the Plan. 5. 6 4. SHARES SUBJECT TO THE PLAN. (a) Subject to the provisions of Section 13 relating to adjustments upon changes in stock, the stock that may be issued pursuant to Stock Awards shall not exceed in the aggregate 2,016,667 shares (after giving effect to any reverse stock split effected on or prior to the Effective Date and following adoption hereof, by way of reincorporation of the Company or otherwise (the "Reverse Split")) of the Common Stock. This share reserve shall be comprised of (i) shares subject to options granted under the 1993 Stock Option Plan, the 1993 Founders' Stock Option Plan or the 1997 Stock Option Plan which are outstanding as of the Effective Date, plus (ii) the shares available for grant under the 1993 Stock Option Plan, the 1993 Founders' Stock Option Plan and the 1997 Stock Option Plan as of the Effective Date. If any Stock Award shall for any reason expire or otherwise terminate, in whole or in part, without having been exercised in full (or vested in the case of Restricted Stock), the stock not acquired under such Stock Award shall revert to and again become available for issuance under the Plan. Shares subject to Stock Appreciation Rights exercised in accordance with Section 8 of the Plan shall not be available for subsequent issuance under the Plan. (b) The stock subject to the Plan may be unissued shares or reacquired shares, bought on the market or otherwise. 5. ELIGIBILITY. (a) Incentive Stock Options and Stock Appreciation Rights appurtenant thereto may be granted only to Employees. Stock Awards other than Incentive Stock Options and Stock Appreciation Rights appurtenant thereto may be granted only to Employees, Directors or Consultants. (b) No person shall be eligible for the grant of an Incentive Stock Option or an award to purchase restricted stock if, at the time of grant, such person owns (or is deemed to own pursuant to Section 424(d) of the Code) stock possessing more than ten percent (10%) of the total combined voting power of all classes of stock of the Company or of any of its Affiliates unless the exercise price of such Option is at least one hundred ten percent (110%) of the Fair Market Value of such stock at the date of grant and the Option is not exercisable after the expiration of five (5) years from the date of grant, or in the case of a restricted stock purchase award, the purchase price is at least one hundred percent (100%) of the Fair Market Value of such stock at the date of grant. (c) Subject to the provisions of Section 13 relating to adjustments upon changes in stock, no person shall be eligible to be granted Options and Stock Appreciation Rights covering more than seven hundred fifty thousand (750,000) shares (after giving effect to the Reverse Split) of the Common Stock in any calendar year. This 6. 7 subsection 5(c) shall not apply until (i) the earliest of: (A) the first material modification of the Plan (including any increase to the number of shares reserved for issuance under the Plan in accordance with Section 4); (B) the issuance of all of the shares of Common Stock reserved for issuance under the Plan; (C) the expiration of the Plan; or (D) the first meeting of stockholders at which directors are to be elected that occurs after the close of the third calendar year following the calendar year in which occurred the first registration of an equity security under Section 12 of the Exchange Act; or (ii) such other date required by Section 162(m) of the Code and the rules and regulations promulgated thereunder. 6. OPTION PROVISIONS. Each Option shall be in such form and shall contain such terms and conditions as the Board shall deem appropriate. The provisions of separate Options need not be identical, but each Option shall include (through incorporation of provisions hereof by reference in the Option or otherwise) the substance of each of the following provisions: (a) TERM. No Option shall be exercisable after the expiration of ten (10) years from the date it was granted. (b) PRICE. The exercise price of each Incentive Stock Option shall be not less than one hundred percent (100%) of the Fair Market Value of the stock subject to the Option on the date the Option is granted and the exercise price of each Nonstatutory Stock Option shall be not less than eighty-five percent (85%) of the Fair Market Value of the stock subject to the Option on the date the Option is granted. Notwithstanding the foregoing, an Option may be granted with an exercise price lower than that set forth in the preceding sentence if such Option is granted pursuant to an assumption or substitution for another option in a manner satisfying the provisions of Section 424(a) of the Code. (c) CONSIDERATION. The purchase price of stock acquired pursuant to an Option shall be paid, to the extent permitted by applicable statutes and regulations, either (A) in cash at the time the Option is exercised, or (B) at the discretion of the Board or the Committee, at the time of the grant of the Option, (a) by delivery to the Company of other Common Stock of the Company, (b) according to a deferred payment arrangement (except that payment of the par value of the stock shall not be deferred) or other arrangement (which may include, without limiting the generality of the foregoing, the use of other Common Stock of the Company) with the person to whom the Option is granted or to whom the Option is transferred pursuant to subsection 6(d), or (C) in any other form of legal consideration that may be acceptable to the Board. In the case of any deferred payment arrangement, interest shall be payable at least annually and shall be charged at the minimum rate of interest necessary to avoid the 7. 8 treatment as interest, under any applicable provisions of the Code, of any amounts other than amounts stated to be interest under the deferred payment arrangement. (d) TRANSFERABILITY. An Incentive Stock Option shall not be transferable except by will or by the laws of descent and distribution, and shall be exercisable during the lifetime of the person to whom the Option is granted only by such person. A Nonstatutory Stock Option may be transferred to the extent provided in the Option Agreement; provided that if the Option Agreement does not expressly permit the transfer of a Nonstatutory Stock Option, the Nonstatutory Stock Option shall not be transferable except by will or by the laws of descent and distribution or pursuant to a domestic relations order satisfying the requirements of Rule 16b-3, and shall be exercisable during the lifetime of the person to whom the Nonstatutory Stock Option is granted only by such person or any transferee pursuant to a domestic relations order. Notwithstanding the foregoing, the person to whom an Option is granted may, by delivering written notice to the Company, in a form satisfactory to the Company, designate a third party who, in the event of the death of the Optionee, shall thereafter be entitled to exercise the Option. (e) VESTING. The total number of shares of stock subject to an Option may, but need not, be allotted in periodic installments (which may, but need not, be equal). The Option Agreement may provide that from time to time during each of such installment periods, the Option may become exercisable ("vest") with respect to some or all of the shares allotted to that period, and may be exercised with respect to some or all of the shares allotted to such period and/or any prior period as to which the Option became vested but was not fully exercised, provided however that prior to the Listing Date an Option granted to a non-officer Employee shall vest at least twenty percent (20%) of the shares per year. The Option may be subject to such other terms and conditions on the time or times when it may be exercised (which may be based on performance or other criteria) as the Board may deem appropriate. The provisions of this subsection 6(e) are subject to any Option provisions governing the minimum number of shares as to which an Option may be exercised. (f) TERMINATION OF EMPLOYMENT OR RELATIONSHIP AS A DIRECTOR OR CONSULTANT. In the event an Optionee's Continuous Status as an Employee, Director or Consultant terminates (other than upon the Optionee's death or disability), the Optionee may exercise his or her Option (to the extent that the Optionee was entitled to exercise it at the date of termination) but only within such period of time ending on the earlier of (i) the date three (3) months after the termination of the Optionee's Continuous Status as an Employee, Director or Consultant (or after the Listing Date such longer or shorter period specified in the Option Agreement), or (ii) the expiration of the term of the Option as set forth in the Option Agreement. If, after termination, the Optionee does not exercise his or her Option within the time specified in the Option Agreement, the Option shall terminate, 8. 9 and the shares covered by such Option shall revert to and again become available for issuance under the Plan. An Optionee's Option Agreement may also provide that if the exercise of the Option following the termination of the Optionee's Continuous Status as an Employee, Director, or Consultant (other than upon the Optionee's death or disability) would result in liability under Section 16(b) of the Exchange Act, then the Option shall terminate on the earlier of (i) the expiration of the term of the Option set forth in the Option Agreement, or (ii) the tenth (10th) day after the last date on which such exercise would result in such liability under Section 16(b) of the Exchange Act. Finally, an Optionee's Option Agreement may also provide that if the exercise of the Option following the termination of the Optionee's Continuous Status as an Employee, Director or Consultant (other than upon the Optionee's death or disability) would be prohibited at any time solely because the issuance of shares would violate the registration requirements under the Act, then the Option shall terminate on the earlier of (i) the expiration of the term of the Option set forth in the first paragraph of this subsection 6(f), or (ii) the expiration of a period of three (3) months after the termination of the Optionee's Continuous Status as an Employee, Director or Consultant during which the exercise of the Option would not be in violation of such registration requirements. (g) DISABILITY OF OPTIONEE. In the event an Optionee's Continuous Status as an Employee, Director or Consultant terminates as a result of the Optionee's disability, the Optionee may exercise his or her Option (to the extent that the Optionee was entitled to exercise it at the date of termination), but only within such period of time ending on the earlier of (i) the date twelve (12) months following such termination (or such longer or shorter period specified in the Option Agreement), or (ii) the expiration of the term of the Option as set forth in the Option Agreement. If, at the date of termination, the Optionee is not entitled to exercise his or her entire Option, the shares covered by the unexercisable portion of the Option shall revert to and again become available for issuance under the Plan. If, after termination, the Optionee does not exercise his or her Option within the time specified herein, the Option shall terminate, and the shares covered by such Option shall revert to and again become available for issuance under the Plan. (h) DEATH OF OPTIONEE. In the event of the death of an Optionee during, or within a period specified in the Option after the termination of, the Optionee's Continuous Status as an Employee, Director or Consultant, the Option may be exercised (to the extent the Optionee was entitled to exercise the Option at the date of death) by the Optionee's estate, by a person who acquired the right to exercise the Option by bequest or inheritance or by a person designated to exercise the option upon the Optionee's death pursuant to subsection 6(d), but only within the period ending on the earlier of (i) the date twelve (12) months following the date of death (or such longer or shorter period specified in the Option Agreement), or (ii) the expiration of the term of such Option as set forth in 9. 10 the Option Agreement. If, at the time of death, the Optionee was not entitled to exercise his or her entire Option, the shares covered by the unexercisable portion of the Option shall revert to and again become available for issuance under the Plan. If, after death, the Option is not exercised within the time specified herein, the Option shall terminate, and the shares covered by such Option shall revert to and again become available for issuance under the Plan. (i) EARLY EXERCISE. The Option may, but need not, include a provision whereby the Optionee may elect at any time while an Employee, Director or Consultant to exercise the Option as to any part or all of the shares subject to the Option prior to the full vesting of the Option. Any unvested shares so purchased may be subject to a repurchase right in favor of the Company or to any other restriction the Board determines to be appropriate. (j) RE-LOAD OPTIONS. Without in any way limiting the authority of the Board or Committee to make or not to make grants of Options hereunder, the Board or Committee shall have the authority (but not an obligation) to include as part of any Option Agreement a provision entitling the Optionee to a further Option (a "Re-Load Option") in the event the Optionee exercises the Option evidenced by the Option agreement, in whole or in part, by surrendering other shares of Common Stock in accordance with this Plan and the terms and conditions of the Option Agreement. Any such Re-Load Option (i) shall be for a number of shares equal to the number of shares surrendered as part or all of the exercise price of such Option; (ii) shall have an expiration date which is the same as the expiration date of the Option the exercise of which gave rise to such Re-Load Option; and (iii) shall have an exercise price which is equal to one hundred percent (100%) of the Fair Market Value of the Common Stock subject to the Re-Load Option on the date of exercise of the original Option. Notwithstanding the foregoing, a Re-Load Option which is granted to a 10% stockholder (as described in subsection 5(c)), shall have an exercise price which is equal to one hundred ten percent (110%) of the Fair Market Value of the stock subject to the Re-Load Option on the date of exercise of the original Option and shall have a term which is no longer than five (5) years. Any such Re-Load Option may be an Incentive Stock Option or a Nonstatutory Stock Option, as the Board or Committee may designate at the time of the grant of the original Option; provided, however, that the designation of any Re-Load Option as an Incentive Stock Option shall be subject to the one hundred thousand dollars ($100,000) annual limitation on exercisability of Incentive Stock Options described in subsection 11(d) of the Plan and in Section 422(d) of the Code. There shall be no Re-Load Options on a Re-Load Option. Any such Re-Load Option shall be subject to the availability of sufficient shares under subsection 4(a) and shall be subject to such other terms and 10. 11 conditions as the Board or Committee may determine which are not inconsistent with the express provisions of the Plan regarding the terms of Options. 7. TERMS OF STOCK BONUSES AND PURCHASES OF RESTRICTED STOCK. Each stock bonus or restricted stock purchase agreement shall be in such form and shall contain such terms and conditions as the Board or the Committee shall deem appropriate. The terms and conditions of stock bonus or restricted stock purchase agreements may change from time to time, and the terms and conditions of separate agreements need not be identical, but each stock bonus or restricted stock purchase agreement shall include (through incorporation of provisions hereof by reference in the agreement or otherwise) the substance of each of the following provisions as appropriate: (a) PURCHASE PRICE. The purchase price under each restricted stock purchase agreement shall be such amount as the Board or Committee shall determine and designate in such agreement but in no event shall the purchase price be less than eighty-five percent (85%) of the stock's Fair Market Value on the date such award is made. Notwithstanding the foregoing, the Board or the Committee may determine that eligible participants in the Plan may be awarded stock pursuant to a stock bonus agreement in consideration for past services actually rendered to the Company for its benefit. (b) TRANSFERABILITY. No rights under a stock bonus or restricted stock purchase agreement shall be transferable except by will or the laws of descent and distribution so long as stock awarded under such agreement remains subject to the terms of the agreement. (c) CONSIDERATION. The purchase price of stock acquired pursuant to a stock purchase agreement shall be paid either: (i) in cash at the time of purchase; (ii) at the discretion of the Board or the Committee, according to a deferred payment arrangement or other arrangement with the person to whom the stock is sold (except that payment of the par value of the stock shall not be deferred); or (iii) in any other form of legal consideration that may be acceptable to the Board or the Committee in its discretion. Notwithstanding the foregoing, the Board or the Committee to which administration of the Plan has been delegated may award stock pursuant to a stock bonus agreement in consideration for past services actually rendered to the Company or for its benefit. (d) VESTING. Shares of stock sold or awarded under the Plan may, but need not, be subject to a repurchase option in favor of the Company in accordance with a vesting schedule to be determined by the Board or the Committee, provided however that prior to the Listing Date stock sold or awarded to a non-officer Employee shall vest at least twenty percent (20%) of the shares per year. Prior to the Listing Date the terms of such 11. 12 repurchase option shall otherwise comply with the requirements of Section 260.140.42 of Title 10 of the California Code of Regulations. (e) TERMINATION OF CONTINUOUS STATUS AS AN EMPLOYEE, DIRECTOR OR CONSULTANT. In the event a Participant's Continuous Status as an Employee, Director or Consultant terminates, the Company may repurchase or otherwise reacquire any or all of the shares of stock held by that person which have not vested as of the date of termination under the terms of the stock bonus or restricted stock purchase agreement between the Company and such person. 8. STOCK APPRECIATION RIGHTS. (a) The Board or Committee shall have full power and authority, exercisable in its sole discretion, to grant Stock Appreciation Rights under the Plan to Employees or Directors of or Consultants to, the Company or its Affiliates. To exercise any outstanding Stock Appreciation Right, the holder must provide written notice of exercise to the Company in compliance with the provisions of the Stock Award Agreement evidencing such right. Except as provided in subsection 5(c), no limitation shall exist on the aggregate amount of cash payments the Company may make under the Plan in connection with the exercise of a Stock Appreciation Right. (b) Three types of Stock Appreciation Rights shall be authorized for issuance under the Plan: (i) TANDEM STOCK APPRECIATION RIGHTS. Tandem Stock Appreciation Rights will be granted appurtenant to an Option, and shall, except as specifically set forth in this Section 8, be subject to the same terms and conditions applicable to the particular Option grant to which it pertains. Tandem Stock Appreciation Rights will require the holder to elect between the exercise of the underlying Option for shares of stock and the surrender, in whole or in part, of such Option for an appreciation distribution. The appreciation distribution payable on the exercised Tandem Right shall be in cash (or, if so provided, in an equivalent number of shares of stock based on Fair Market Value on the date of the Option surrender) in an amount up to the excess of (A) the Fair Market Value (on the date of the Option surrender) of the number of shares of stock covered by that portion of the surrendered Option in which the Optionee is vested over (B) the aggregate exercise price payable for such vested shares. (ii) CONCURRENT STOCK APPRECIATION RIGHTS. Concurrent Rights will be granted appurtenant to an Option and may apply to all or any portion of the shares of stock subject to the underlying Option and shall, except as specifically set forth in this Section 8, be subject to the same terms and conditions applicable to the particular Option grant to which it pertains. A Concurrent Right shall be exercised automatically at the 12. 13 same time the underlying Option is exercised with respect to the particular shares of stock to which the Concurrent Right pertains. The appreciation distribution payable on an exercised Concurrent Right shall be in cash (or, if so provided, in an equivalent number of shares of stock based on Fair Market Value on the date of the exercise of the Concurrent Right) in an amount equal to such portion as shall be determined by the Board or the Committee at the time of the grant of the excess of (A) the aggregate Fair Market Value (on the date of the exercise of the Concurrent Right) of the vested shares of stock purchased under the underlying Option which have Concurrent Rights appurtenant to them over (B) the aggregate exercise price paid for such shares. (iii) INDEPENDENT STOCK APPRECIATION RIGHTS. Independent Rights will be granted independently of any Option and shall, except as specifically set forth in this Section 8, be subject to the same terms and conditions applicable to Nonstatutory Stock Options as set forth in Section 6. They shall be denominated in share equivalents. The appreciation distribution payable on the exercised Independent Right shall be not greater than an amount equal to the excess of (A) the aggregate Fair Market Value (on the date of the exercise of the Independent Right) of a number of shares of Company stock equal to the number of share equivalents in which the holder is vested under such Independent Right, and with respect to which the holder is exercising the Independent Right on such date, over (B) the aggregate Fair Market Value (on the date of the grant of the Independent Right) of such number of shares of Company stock. The appreciation distribution payable on the exercised Independent Right shall be in cash or, if so provided, in an equivalent number of shares of stock based on Fair Market Value on the date of the exercise of the Independent Right. 9. CANCELLATION AND RE-GRANT OF OPTIONS. (a) The Board or the Committee shall have the authority to effect, at any time and from time to time, (i) the repricing of any outstanding Options and/or any Stock Appreciation Rights under the Plan and/or (ii) with the consent of any adversely affected holders of Options and/or Stock Appreciation Rights, the cancellation of any outstanding Options and/or Stock Appreciation Rights under the Plan and the grant in substitution therefor of new Options and/or Stock Appreciation Rights under the Plan covering the same or different numbers of shares of stock, but having an exercise price per share not less than eighty-five percent (85%) of the Fair Market Value for a Nonstatutory Stock Option, one hundred percent (100%) of the Fair Market Value for an Incentive Stock Option or, in the case of an Option held by a 10% stockholder (as described in subsection 5(c)), not less than one hundred ten percent (110%) of the Fair Market Value per share of stock on the new grant date. Notwithstanding the foregoing, the Board or the Committee may grant an Option and/or Stock Appreciation Rights with an exercise price lower than that set forth above if such Option and/or Stock Appreciation Rights is granted as part of a transaction to which section 424(a) of the Code applies. 13. 14 (b) Shares subject to an Option or Stock Appreciation Right canceled under this Section 8 shall continue to be counted against the maximum award of Options or Stock Appreciation Rights permitted to be granted pursuant to subsection 5(c) of the Plan. The repricing of an Option and/or Stock Appreciation Right under this Section 8, resulting in a reduction of the exercise price, shall be deemed to be a cancellation of the original Option and/or Stock Appreciation Right and the grant of a substitute Option and/or Stock Appreciation Rights; in the event of such repricing, both the original and the substituted Options and Stock Appreciation Rights shall be counted against the maximum awards of Options and Stock Appreciation Rights permitted to be granted pursuant to subsection 5(c) of the Plan. The provisions of this subsection 8(b) shall be applicable only to the extent required by Section 162(m) of the Code. 10. COVENANTS OF THE COMPANY. (a) During the terms of the Stock Awards, the Company shall keep available at all times the number of shares of stock required to satisfy such Stock Awards as such Stock Awards become exercisable. The grant of a Stock Award which, if exercised, would result in the issuance of shares in excess of the number of shares then reserved for issuance under the Plan shall be conditioned on the Company obtaining the necessary approval of its stockholders within the twelve (12) months following the date of such grant. (b) The Company shall seek to obtain from each regulatory commission or agency having jurisdiction over the Plan such authority as may be required to issue and sell shares under Stock Awards; provided, however, that this undertaking shall not require the Company to register under the Securities Act of 1933, as amended (the "Securities Act") either the Plan, any Stock Award or any stock issued or issuable pursuant to any such Stock Award. If, after reasonable efforts, the Company is unable to obtain from any such regulatory commission or agency the authority which counsel for the Company deems necessary for the lawful issuance and sale of stock under the Plan, the Company shall be relieved from any liability for failure to issue and sell stock upon exercise of such Stock Awards unless and until such authority is obtained. 11. USE OF PROCEEDS FROM STOCK. Proceeds from the sale of stock pursuant to Stock Awards shall constitute general funds of the Company. 12. MISCELLANEOUS. (a) The Board shall have the power to accelerate the time at which a Stock Award may first be exercised or the time during which a Stock Award or any part thereof will vest pursuant to subsection 6(e) or 7(d), notwithstanding the provisions in the Stock 14. 15 Award stating the time at which it may first be exercised or the time during which it will vest. (b) Neither an Employee, Director nor a Consultant nor any person to whom a Stock Award is transferred in accordance with the Plan shall be deemed to be the holder of, or to have any of the rights of a holder with respect to, any shares subject to such Stock Award unless and until such person has satisfied all requirements for exercise of the Stock Award pursuant to its terms. (c) Nothing in the Plan or any instrument executed or Stock Award granted pursuant thereto shall confer upon any Employee, Consultant or other holder of Stock Awards any right to continue in the employ of the Company or any Affiliate or to continue serving as a Consultant and Director, or shall affect the right of the Company or any Affiliate to terminate the employment of any Employee with or without notice and with or without cause, or the right to terminate the relationship of any Consultant pursuant to the terms of such Consultant's agreement with the Company or Affiliate or service as a Director pursuant to the Company's Bylaws and the laws of the state in which the Company is incorporated. (d) To the extent that the aggregate Fair Market Value (determined at the time of grant) of stock with respect to which Incentive Stock Options are exercisable for the first time by any Optionee during any calendar year under all plans of the Company and its Affiliates exceeds one hundred thousand dollars ($100,000), the Options or portions thereof which exceed such limit (according to the order in which they were granted) shall be treated as Nonstatutory Stock Options. (e) The Company may require any person to whom a Stock Award is granted, or any person to whom a Stock Award is transferred in accordance with the Plan, as a condition of exercising or acquiring stock under any Stock Award, (i) to give written assurances satisfactory to the Company as to such person's knowledge and experience in financial and business matters and/or to employ a purchaser representative reasonably satisfactory to the Company who is knowledgeable and experienced in financial and business matters, and that he or she is capable of evaluating, alone or together with the purchaser representative, the merits and risks of exercising the Stock Award; and (ii) to give written assurances satisfactory to the Company stating that such person is acquiring the stock subject to the Stock Award for such person's own account and not with any present intention of selling or otherwise distributing the stock. The foregoing requirements, and any assurances given pursuant to such requirements, shall be inoperative if (A) the issuance of the shares upon the exercise or acquisition of stock under the Stock Award has been registered under a then currently effective registration statement under the Securities Act, or (B) as to any particular requirement, a determination is made by counsel for the Company that such requirement need not be met 15. 16 in the circumstances under the then applicable securities laws. The Company may, upon advice of counsel to the Company, place legends on stock certificates issued under the Plan as such counsel deems necessary or appropriate in order to comply with applicable securities laws, including, but not limited to, legends restricting the transfer of the stock. (f) To the extent provided by the terms of a Stock Award Agreement, the person to whom a Stock Award is granted may satisfy any federal, state or local tax withholding obligation relating to the exercise or acquisition of stock under a Stock Award by any of the following means or by a combination of such means: (1) tendering a cash payment; (2) authorizing the Company to withhold shares from the shares of the Common Stock otherwise issuable to the participant as a result of the exercise or acquisition of stock under the Stock Award; or (3) delivering to the Company owned and unencumbered shares of the Common Stock of the Company. (g) Throughout the term of any Stock Award, the Company shall deliver to the holder of such Stock Award, not later than one hundred twenty (120) days after the close of each of the Company's fiscal years during the term of such Stock Award, a balance sheet and an income statement. This subsection shall not apply (i) after the Listing Date, or (ii) when issuance is limited to key employees whose duties in connection with the Company assure them access to equivalent information. 13. ADJUSTMENTS UPON CHANGES IN STOCK. (a) If any change is made in the stock subject to the Plan, or subject to any Stock Award, without the receipt of consideration by the Company (through merger, consolidation, reorganization, recapitalization, reincorporation, stock dividend, dividend in property other than cash, stock split, liquidating dividend, combination of shares, exchange of shares, change in corporate structure or other transaction not involving the receipt of consideration by the Company), the Plan will be appropriately adjusted in the class(es) and maximum number of shares subject to the Plan pursuant to subsection 4(a) and the maximum number of shares subject to award to any person during any calendar year pursuant to subsection 5(d), and the outstanding Stock Awards will be appropriately adjusted in the class(es) and number of shares and price per share of stock subject to such outstanding Stock Awards. Such adjustments shall be made by the Board or the Committee, the determination of which shall be final, binding and conclusive. (The conversion of any convertible securities of the Company shall not be treated as a "transaction not involving the receipt of consideration by the Company".) (b) In the event of: (1) a dissolution, liquidation or sale of substantially all of the assets of the Company; (2) a merger or consolidation in which the Company is not the surviving corporation; (3) a reverse merger in which the Company is the surviving corporation but the shares of the Company's common stock outstanding immediately 16. 17 preceding the merger are converted by virtue of the merger into other property, whether in the form of securities, cash or otherwise; or (4) the acquisition by any person, entity or group within the meaning of Section 13(d) or 14(d) of the Exchange Act, or any comparable successor provisions (excluding any employee benefit plan, or related trust, sponsored or maintained by the Company or any Affiliate of the Company) of the beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act, or comparable successor rule) of securities of the Company representing at least fifty percent (50%) of the combined voting power entitled to vote in the election of directors, then to the extent permitted by applicable law: (i) any surviving corporation or an Affiliate of such surviving corporation shall assume any Stock Awards outstanding under the Plan or shall substitute similar stock awards for those Stock Awards outstanding under the Plan, or (ii) such Stock Awards shall continue in full force and effect. In the event any surviving corporation and its Affiliates refuse to assume or continue such Stock Awards, or to substitute similar stock awards for those outstanding under the Plan, then such Stock Awards shall terminate as of such event to the extent not exercised prior to such event. 14. AMENDMENT OF THE PLAN AND STOCK AWARDS. (a) The Board at any time, and from time to time, may amend the Plan. However, except as provided in Section 13 relating to adjustments upon changes in stock, no amendment shall be effective unless approved by the stockholders of the Company to the extent stockholder approval is necessary for the Plan to satisfy the requirements of Section 422 of the Code, Rule 16b-3 or any Nasdaq or securities exchange listing requirements. (b) The Board may in its sole discretion submit any other amendment to the Plan for stockholder approval, including, but not limited to, amendments to the Plan intended to satisfy the requirements of Section 162(m) of the Code and the regulations thereunder regarding the exclusion of performance-based compensation from the limit on corporate deductibility of compensation paid to certain executive officers. (c) It is expressly contemplated that the Board may amend the Plan in any respect the Board deems necessary or advisable to provide eligible Employees, Directors or Consultants with the maximum benefits provided or to be provided under the provisions of the Code and the regulations promulgated thereunder relating to Incentive Stock Options and/or to bring the Plan and/or Incentive Stock Options granted under it into compliance therewith. (d) Rights and obligations under any Stock Award granted before amendment of the Plan shall not be impaired by any amendment of the Plan unless (i) the Company 17. 18 requests the consent of the person to whom the Stock Award was granted and (ii) such person consents in writing. (e) The Board at any time, and from time to time, may amend the terms of any one or more Stock Award; provided, however, that the rights and obligations under any Stock Award shall not be impaired by any such amendment unless (i) the Company requests the consent of the person to whom the Stock Award was granted and (ii) such person consents in writing. 15. TERMINATION OR SUSPENSION OF THE PLAN. (a) The Board may suspend or terminate the Plan at any time. Unless sooner terminated, the Plan shall terminate ten (10) years from the date the Plan is adopted by the Board or approved by the stockholders of the Company, whichever is earlier. No Stock Awards may be granted under the Plan while the Plan is suspended or after it is terminated. (b) Rights and obligations under any Stock Award granted while the Plan is in effect shall not be impaired by suspension or termination of the Plan, except with the consent of the person to whom the Stock Award was granted. 16. EFFECTIVE DATE OF PLAN. The Plan shall become effective on the Effective Date, but no Stock Awards granted under the Plan shall be exercised unless and until the Plan has been approved by the stockholders of the Company within twelve (12) months before or after the date the Plan is adopted by the Board, which date may be prior to the Effective Date. 18. EX-10.4 7 EXHIBIT 10.4 1 SIGNAL PHARMACEUTICALS, INC. STOCK OPTION GRANT NOTICE, AGREEMENT AND NOTICE OF EXERCISE (1998 EQUITY INCENTIVE PLAN) 2 SIGNAL PHARMACEUTICALS, INC. EXHIBIT 10.4 STOCK OPTION GRANT NOTICE (1998 EQUITY INCENTIVE PLAN) SIGNAL PHARMACEUTICALS, INC. (the "Company"), pursuant to its 1998 Equity Incentive Plan (the "Plan"), hereby grants to Optionee an option to purchase the number of shares of the Company's common stock set forth below. This option is subject to all of the terms and conditions as set forth herein and in Attachments I, II and III, which are incorporated herein in their entirety. Optionee: _________________________________ Date of Grant: _________________________________ Vesting Commencement Date: _________________________________ Shares Subject to Option: _________________________________ Exercise Price Per Share: _________________________________ Expiration Date: _________________________________ ____ Incentive Stock Option ____ Nonstatutory Stock Option EXERCISE SCHEDULE: Exercisable as vested. VESTING SCHEDULE: One fourth (1/4th) of the shares subject to this option shall vest on the first anniversary of the Vesting Commencement Date of this option and the balance of the shares shall vest in equal successive monthly installments over each of the next thirty-six (36) months until this option is fully vested or vesting terminates as provided in the Plan or the Stock Option Agreement. PAYMENT: Any one or a combination of the following: (i) by cash or check, (ii) pursuant to a Regulation T program, as set forth in the Stock Option Agreement or (iii) by delivering shares of previously-owned common stock of the Company, as set forth in the Stock Option Agreement. ADDITIONAL TERMS/ACKNOWLEDGEMENTS: The undersigned Optionee acknowledges receipt of, and understands and agrees to, this Grant Notice, the Stock Option Agreement and the Plan. Optionee further acknowledges that as of the Date of Grant, this Grant Notice, the Stock Option Agreement and the Plan set forth the entire understanding between Optionee and the Company regarding the acquisition of stock in the Company and supersedes all prior oral and written agreements on that subject with the exception of (i) options previously granted and delivered to Optionee under the Plan, and (ii) the following agreements only: OTHER AGREEMENTS: ____________________________________________ ____________________________________________ SIGNAL PHARMACEUTICALS, INC. OPTIONEE: By: _______________________________ ___________________________________ Signature Title: ____________________________ Date: _____________________________ Date: _____________________________ Attachment I: Stock Option Agreement Attachment II: 1998 Equity Incentive Plan Attachment III: Notice of Exercise 1. 3 STOCK OPTION AGREEMENT Pursuant to the Grant Notice and this Stock Option Agreement, the Company has granted you an option to purchase the number of shares of the Company's common stock ("Common Stock") indicated in the Grant Notice at the exercise price indicated in the Grant Notice. Defined terms not explicitly defined in this Stock Option Agreement but defined in the Plan shall have the same definitions as in the Plan. The details of your option are as follows: 1. VESTING. Subject to the provisions contained herein, this option will vest as provided in the Grant Notice, provided that vesting will cease upon the termination of your Continuous Status as an Employee, Director or Consultant. 2. METHOD OF PAYMENT. (a) PAYMENT OPTIONS. Payment of the exercise price by cash or check is due in full upon exercise of all or any part of this option, provided that you may elect, to the extent permitted by applicable law and the Grant Notice, to make payment of the exercise price under one of the following alternatives: (i) Payment pursuant to a program developed under Regulation T as promulgated by the Federal Reserve Board which, prior to the issuance of Common Stock, results in either the receipt of cash (or check) by the Company or the receipt of irrevocable instructions to pay the aggregate exercise price to the Company from the sales proceeds; (ii) Provided that at the time of exercise the Company's Common Stock is publicly traded and quoted regularly in the Wall Street Journal, payment by delivery of already-owned shares of Common Stock, held for the period required to avoid a charge to the Company's reported earnings, and owned free and clear of any liens, claims, encumbrances or security interests, which Common Stock shall be valued at its fair market value on the date of exercise; or (iii) Payment by a combination of the above methods. 3. WHOLE SHARES. This option may only be exercised for whole shares. 4. SECURITIES LAW COMPLIANCE. Notwithstanding anything to the contrary contained herein, this option may not be exercised unless the shares issuable upon exercise of this option are then registered under the Securities Act or, if such shares are not then so registered, the Company has determined that such exercise and issuance would be exempt from the registration requirements of the Securities Act. 5. TERM. (a) The term of this option commences on the Date of Grant and expires upon the earliest of: 1. 4 (i) the Expiration Date indicated in the Grant Notice; (ii) the tenth (10th) anniversary of the Date of Grant; (iii) twelve (12) months after your death, if you die during, or within three (3) months after the termination of your Continuous Status as an Employee, Director or Consultant; (iv) twelve (12) months after the termination of your Continuous Status as an Employee, Director or Consultant due to disability; (v) immediately upon the termination of your Continuous Status as an Employee, Director or Consultant for Cause (as defined below); or (vi) three (3) months after the termination of your Continuous Status as an Employee, Director or Consultant for any other reason, provided that if during any part of such three (3)-month period the option is not exercisable solely because of the condition set forth in paragraph 4 (Securities Law Compliance), in which event the option shall not expire until the earlier of the Expiration Date or until it shall have been exercisable for an aggregate period of three (3) months after the termination of Continuous Status as an Employee, Director or Consultant. (b) "Cause" shall include, but not be limited to, the commission of any act of fraud, embezzlement or dishonesty, any unauthorized use or disclosure of confidential information or trade secrets of the Company or any acquiring or surviving corporation, or any other intentional misconduct adversely affecting the business or affairs of the Company or any acquiring or surviving corporation in a material manner. The foregoing definition shall not be deemed to be inclusive of all the acts or omissions which the Company or any acquiring or surviving corporation may consider as Cause for your dismissal or discharge. Nothing herein will limit the right of you and your beneficiaries to contest the validity or propriety of any such determination. (c) To obtain the federal income tax advantages associated with an "incentive stock option," the Code requires that at all times beginning on the grant date of the option and ending on the day three (3) months before the date of the option's exercise, you must be an employee of the Company, except in the event of your death or "permanent and total disability" (as defined in the Code). The Company cannot guarantee that an Incentive Stock Option will be treated as an "incentive stock option" if it is exercised more than three (3) months after the date your employment with the Company terminates. 6. EXERCISE. (a) You may exercise the vested portion of this option during its term (and the unvested portion of this option if the Grant Notice so permits) by delivering a notice of exercise (in a form designated by the Company) together with the exercise price to the Secretary of the Company, or to such other person as the Company may designate, during regular business hours, together with such additional documents as the Company may then require. 2. 5 (b) By exercising this option you agree that: (i) as a condition to any exercise of this option, the Company may require you to enter an arrangement providing for the payment by you to the Company of any tax withholding obligation of the Company arising by reason of (1) the exercise of this option; (2) the lapse of any substantial risk of forfeiture to which the shares are subject at the time of exercise; or (3) the disposition of shares acquired upon such exercise; and (ii) if this option is an Incentive Stock Option you will notify the Company in writing within fifteen (15) days after the date of any disposition of any of the shares of the Common Stock issued upon exercise of this option that occurs within two (2) years after the Date of Grant or within one (1) year after such shares of Common Stock are transferred upon exercise of this option; 7. TRANSFERABILITY. This option is not transferable, except by will or by the laws of descent and distribution, and is exercisable during your life only by you. Notwithstanding the foregoing, by delivering written notice to the Company, in a form satisfactory to the Company, you may designate a third party who, in the event of your death, shall thereafter be entitled to exercise this option. 8. OPTION NOT A SERVICE CONTRACT. This option is not an employment contract and nothing in this option shall be deemed to create in any way whatsoever any obligation on your part to continue in the employ of the Company, or of the Company to continue your employment with the Company. In addition, nothing in this option shall obligate the Company, its shareholders, board of directors, officers or employees to continue any relationship which you might have as a director or consultant for the Company. 9. NOTICES. Any notices provided for in this option or the Plan shall be given in writing and shall be deemed effectively given upon receipt or, in the case of notices delivered by the Company to you, five (5) days after deposit in the United States mail, postage prepaid, addressed to you at the last address you provided to the Company. 10. GOVERNING PLAN DOCUMENT. This option is subject to all the provisions of the Plan, the provisions of which are hereby made a part of this option, including without limitation the provisions of the Plan relating to option provisions, and is further subject to all interpretations, amendments, rules and regulations which may from time to time be promulgated and adopted pursuant to the Plan. In the event of any conflict between the provisions of this option and those of the Plan, the provisions of the Plan shall control. 3. 6 NOTICE OF EXERCISE Signal Pharmaceuticals, Inc. ____________________________ ____________________________ Date of Exercise: _________________ Ladies and Gentlemen: This constitutes notice under my stock option that I elect to purchase the number of shares for the price set forth below. Type of option: ___ Incentive ___ Nonstatutory Stock option dated: _____________ Number of shares as to which option is exercised: _____________ Certificates to be issued in name of: _____________ Total exercise price: $____________ Cash payment delivered herewith: $____________ Value of ______ shares of common stock delivered herewith(1): $____________ By this exercise, I agree (i) to provide such additional documents as you may require pursuant to the terms of the Company's 1998 Equity Incentive Plan, (ii) to provide for the payment by me to you (in the manner designated by you) of your withholding obligation, if any, relating to the exercise of the Option, and (iii) to the extent the Option is an incentive stock option, to notify you in writing within fifteen (15) days after the date of any disposition of any of the shares of Common Stock issued upon exercise of this Option that occurs within two (2) years after the date of grant of the Option or within one (1) year after such shares of Common Stock are issued upon exercise of the Option. - -------- (1) Shares must meet the public trading requirements set forth in the option. Shares must be valued in accordance with the terms of the option being exercised, must have been owned for the minimum period required in the option, and must be owned free and clear of any liens, claims, encumbrances or security interests. Certificates must be endorsed or accompanied by an executed assignment separate from certificate. 1. 7 I hereby make the following certification and representation with respect to the number of shares of Common Stock (the "Shares"), which are being acquired by me for my own account upon exercise of the Option as set forth above: I acknowledge that all certificates representing any of the Shares subject to the provisions of the Option shall have endorsed thereon appropriate legends reflecting any restrictions imposed pursuant to the Company's Articles of Incorporation, Bylaws and/or applicable securities laws. Very truly yours, _______________________________ 2. EX-10.5 8 EXHIBIT 10.5 1 EXHIBIT 10.5 SIGNAL PHARMACEUTICALS, INC. EMPLOYEE STOCK PURCHASE PLAN ADOPTED ON FEBRUARY 17, 1998 APPROVED BY THE STOCKHOLDERS ON _____________, 1998 1. PURPOSE. (a) The purpose of the Employee Stock Purchase Plan (the "Plan") is to provide a means by which employees of Signal Pharmaceuticals, Inc., a Delaware corporation (the "Company"), and its Affiliates, as defined in subparagraph 1(b), which are designated as provided in subparagraph 2(b), may be given an opportunity to purchase stock of the Company. (b) The word "Affiliate" as used in the Plan means any parent corporation or subsidiary corporation of the Company, as those terms are defined in Sections 424(e) and (f), respectively, of the Internal Revenue Code of 1986, as amended (the "Code"). (c) The Company, by means of the Plan, seeks to retain the services of its employees, to secure and retain the services of new employees, and to provide incentives for such persons to exert maximum efforts for the success of the Company. (d) The Company intends that the rights to purchase stock of the Company granted under the Plan be considered options issued under an "employee stock purchase plan" as that term is defined in Section 423(b) of the Code. 2. ADMINISTRATION. (a) The Plan shall be administered by the Board of Directors (the "Board") of the Company unless and until the Board delegates administration to a Committee, as provided in subparagraph 2(c). Whether or not the Board has delegated administration, the Board shall have the final power to determine all questions of policy and expediency that may arise in the administration of the Plan. (b) The Board shall have the power, subject to, and within the limitations of, the express provisions of the Plan: (i) To determine when and how rights to purchase stock of the Company shall be granted and the provisions of each offering of such rights (which need not be identical). (ii) To designate from time to time which Affiliates of the Company shall be eligible to participate in the Plan. (iii) To construe and interpret the Plan and rights granted under it, and to establish, amend and revoke rules and regulations for its administration. The Board, in the 1. 2 exercise of this power, may correct any defect, omission or inconsistency in the Plan, in a manner and to the extent it shall deem necessary or expedient to make the Plan fully effective. (iv) To amend the Plan as provided in paragraph 13. (v) Generally, to exercise such powers and to perform such acts as the Board deems necessary or expedient to promote the best interests of the Company and its Affiliates and to carry out the intent that the Plan be treated as an "employee stock purchase plan" within the meaning of Section 423 of the Code. (c) The Board may delegate administration of the Plan to a Committee composed of not fewer than two (2) members of the Board (the "Committee"). If administration is delegated to a Committee, the Committee shall have, in connection with the administration of the Plan, the powers theretofore possessed by the Board, subject, however, to such resolutions, not inconsistent with the provisions of the Plan, as may be adopted from time to time by the Board. The Board may abolish the Committee at any time and revest in the Board the administration of the Plan. 3. SHARES SUBJECT TO THE PLAN. (a) Subject to the provisions of paragraph 12 relating to adjustments upon changes in stock, the stock that may be sold pursuant to rights granted under the Plan shall not exceed in the aggregate two hundred thousand (200,000) shares (after giving effect to any reverse stock split, by way of reincorporation or otherwise, effected on or prior to the Effective Date and following adoption hereof) of the Company's common stock (the "Common Stock"). If any right granted under the Plan shall for any reason terminate without having been exercised, the Common Stock not purchased under such right shall again become available for the Plan. (b) The stock subject to the Plan may be unissued shares or reacquired shares, bought on the market or otherwise. 4. GRANT OF RIGHTS; OFFERING. (a) The Board or the Committee may from time to time grant or provide for the grant of rights to purchase Common Stock of the Company under the Plan to eligible employees (an "Offering") on a date or dates (the "Offering Date(s)") selected by the Board or the Committee. Each Offering shall be in such form and shall contain such terms and conditions as the Board or the Committee shall deem appropriate, which shall comply with the requirements of Section 423(b)(5) of the Code that all employees granted rights to purchase stock under the Plan shall have the same rights and privileges. The terms and conditions of an Offering shall be incorporated by reference into the Plan and treated as part of the Plan. The provisions of separate Offerings need not be identical, but each Offering shall include (through incorporation of the provisions of this Plan by reference in the document comprising the Offering or otherwise) the period during which the Offering shall be effective, which period shall not exceed twenty-seven (27) months beginning with the Offering Date, and the substance of the provisions contained in paragraphs 5 through 8, inclusive. 2. 3 (b) If an employee has more than one right outstanding under the Plan, unless he or she otherwise indicates in agreements or notices delivered hereunder: (1) each agreement or notice delivered by that employee will be deemed to apply to all of his or her rights under the Plan, and (2) a right with a lower exercise price (or an earlier-granted right, if two rights have identical exercise prices), will be exercised to the fullest possible extent before a right with a higher exercise price (or a later-granted right, if two rights have identical exercise prices) will be exercised. 5. ELIGIBILITY. (a) Rights may be granted only to employees of the Company or, as the Board or the Committee may designate as provided in subparagraph 2(b), to employees of any Affiliate of the Company. Except as provided in subparagraph 5(b), an employee of the Company or any Affiliate shall not be eligible to be granted rights under the Plan, unless, on the Offering Date, such employee has been in the employ of the Company or any Affiliate for such continuous period preceding such grant as the Board or the Committee may require, but in no event shall the required period of continuous employment be equal to or greater than two (2) years. In addition, unless otherwise determined by the Board or the Committee and set forth in the terms of the applicable Offering, no employee of the Company or any Affiliate shall be eligible to be granted rights under the Plan, unless, on the Offering Date, such employee's customary employment with the Company or such Affiliate is for at least twenty (20) hours per week and at least five (5) months per calendar year. (b) The Board or the Committee may provide that each person who, during the course of an Offering, first becomes an eligible employee of the Company or designated Affiliate will, on a date or dates specified in the Offering which coincides with the day on which such person becomes an eligible employee or occurs thereafter, receive a right under that Offering, which right shall thereafter be deemed to be a part of that Offering. Such right shall have the same characteristics as any rights originally granted under that Offering, as described herein, except that: (i) the date on which such right is granted shall be the "Offering Date" of such right for all purposes, including determination of the exercise price of such right; (ii) the period of the Offering with respect to such right shall begin on its Offering Date and end coincident with the end of such Offering; and (iii) the Board or the Committee may provide that if such person first becomes an eligible employee within a specified period of time before the end of the Offering, he or she will not receive any right under that Offering. (c) No employee shall be eligible for the grant of any rights under the Plan if, immediately after any such rights are granted, such employee owns stock possessing five percent (5%) or more of the total combined voting power or value of all classes of stock of the Company or of any Affiliate. For purposes of this subparagraph 5(c), the rules of Section 424(d) of the Code shall apply in determining the stock ownership of any employee, and stock which such 3. 4 employee may purchase under all outstanding rights and options shall be treated as stock owned by such employee. (d) An eligible employee may be granted rights under the Plan only if such rights, together with any other rights granted under "employee stock purchase plans" of the Company and any Affiliates, as specified by Section 423(b)(8) of the Code, do not permit such employee's rights to purchase stock of the Company or any Affiliate to accrue at a rate which exceeds twenty-five thousand dollars ($25,000) of fair market value of such stock (determined at the time such rights are granted) for each calendar year in which such rights are outstanding at any time. (e) Officers of the Company and any designated Affiliate shall be eligible to participate in Offerings under the Plan, provided, however, that the Board may provide in an Offering that certain employees who are highly compensated employees within the meaning of Section 423(b)(4)(D) of the Code shall not be eligible to participate. 6. RIGHTS; PURCHASE PRICE. (a) On each Offering Date, each eligible employee, pursuant to an Offering made under the Plan, shall be granted the right to purchase up to the number of shares of Common Stock of the Company purchasable with a percentage designated by the Board or the Committee not exceeding fifteen percent (15%) of such employee's Earnings (as defined in subparagraph 7(a)) during the period which begins on the Offering Date (or such later date as the Board or the Committee determines for a particular Offering) and ends on the date stated in the Offering, which date shall be no later than the end of the Offering. The Board or the Committee shall establish one or more dates during an Offering (the "Purchase Date(s)") on which rights granted under the Plan shall be exercised and purchases of Common Stock carried out in accordance with such Offering. (b) In connection with each Offering made under the Plan, the Board or the Committee may specify a maximum number of shares that may be purchased by any employee as well as a maximum aggregate number of shares that may be purchased by all eligible employees pursuant to such Offering. In addition, in connection with each Offering that contains more than one Purchase Date, the Board or the Committee may specify a maximum aggregate number of shares which may be purchased by all eligible employees on any given Purchase Date under the Offering. If the aggregate purchase of shares upon exercise of rights granted under the Offering would exceed any such maximum aggregate number, the Board or the Committee shall make a pro rata allocation of the shares available in as nearly a uniform manner as shall be practicable and as it shall deem to be equitable. (c) The purchase price of stock acquired pursuant to rights granted under the Plan shall be not less than the lesser of: (i) an amount equal to eighty-five percent (85%) of the fair market value of the stock on the Offering Date; or (ii) an amount equal to eighty-five percent (85%) of the fair market value of the stock on the Purchase Date. 4. 5 7. PARTICIPATION; WITHDRAWAL; TERMINATION. (a) An eligible employee may become a participant in the Plan pursuant to an Offering by delivering a participation agreement to the Company within the time specified in the Offering, in such form as the Company provides. Each such agreement shall authorize payroll deductions of up to the maximum percentage specified by the Board or the Committee of such employee's Earnings during the Offering. "Earnings" is defined as an employee's regular salary or wages (including amounts thereof elected to be deferred by the employee, that would otherwise have been paid, under any arrangement established by the Company intended to comply with Section 401(k), Section 402(e)(3), Section 125, Section 402(h), or Section 403(b) of the Code, and also including any deferrals under a non-qualified deferred compensation plan or arrangement established by the Company), which shall include or exclude (as provided for each Offering) the following items of compensation: bonuses, commissions, overtime pay, incentive pay, profit sharing, other remuneration paid directly to the employee, the cost of employee benefits paid for by the Company or an Affiliate, education or tuition reimbursements, imputed income arising under any group insurance or benefit program, traveling expenses, business and moving expense reimbursements, income received in connection with stock options, contributions made by the Company or an Affiliate under any employee benefit plan, and similar items of compensation, as determined by the Board or Committee. The payroll deductions made for each participant shall be credited to an account for such participant under the Plan and shall be deposited with the general funds of the Company. A participant may reduce (including to zero) or increase such payroll deductions, and an eligible employee may begin such payroll deductions, after the beginning of any Offering only as provided for in the Offering. A participant may make additional payments into his or her account only if specifically provided for in the Offering and only if the participant has not had the maximum amount withheld during the Offering. (b) At any time during an Offering, a participant may terminate his or her payroll deductions under the Plan and withdraw from the Offering by delivering to the Company a notice of withdrawal in such form as the Company provides. Such withdrawal may be elected at any time prior to the end of the Offering except as provided by the Board or the Committee in the Offering. Upon such withdrawal from the Offering by a participant, the Company shall distribute to such participant all of his or her accumulated payroll deductions (reduced to the extent, if any, such deductions have been used to acquire stock for the participant) under the Offering, without interest, and such participant's interest in that Offering shall be automatically terminated. A participant's withdrawal from an Offering will have no effect upon such participant's eligibility to participate in any other Offerings under the Plan but such participant will be required to deliver a new participation agreement in order to participate in subsequent Offerings under the Plan. (c) Rights granted pursuant to any Offering under the Plan shall terminate immediately upon cessation of any participating employee's employment with the Company and any designated Affiliate, for any reason, and the Company shall distribute to such terminated employee all of his or her accumulated payroll deductions (reduced to the extent, if any, such deductions have been used to acquire stock for the terminated employee), under the Offering, without interest. 5. 6 (d) Rights granted under the Plan shall not be transferable by a participant otherwise than by will or the laws of descent and distribution, or by a beneficiary designation as provided in paragraph 14 and, otherwise during his or her lifetime, shall be exercisable only by the person to whom such rights are granted. 7. EXERCISE. (a) On each Purchase Date specified therefor in the relevant Offering, each participant's accumulated payroll deductions and other additional payments specifically provided for in the Offering (without any increase for interest) will be applied to the purchase of whole shares of stock of the Company, up to the maximum number of shares permitted pursuant to the terms of the Plan and the applicable Offering, at the purchase price specified in the Offering. No fractional shares shall be issued upon the exercise of rights granted under the Plan. The amount, if any, of accumulated payroll deductions remaining in each participant's account after the purchase of shares which is less than the amount required to purchase one share of stock on the final Purchase Date of an Offering shall be held in each such participant's account for the purchase of shares under the next Offering under the Plan, unless such participant withdraws from such next Offering, as provided in subparagraph 7(b), or is no longer eligible to be granted rights under the Plan, as provided in paragraph 5, in which case such amount shall be distributed to the participant after such final Purchase Date, without interest. The amount, if any, of accumulated payroll deductions remaining in any participant's account after the purchase of shares which is equal to the amount required to purchase whole shares of stock on the final Purchase Date of an Offering shall be distributed in full to the participant after such Purchase Date, without interest. (b) No rights granted under the Plan may be exercised to any extent unless the shares to be issued upon such exercise under the Plan (including rights granted thereunder) are covered by an effective registration statement pursuant to the Securities Act of 1933, as amended (the "Securities Act") and the Plan is in material compliance with all applicable state, foreign and other securities and other laws applicable to the Plan. If on a Purchase Date in any Offering hereunder the Plan is not so registered or in such compliance, no rights granted under the Plan or any Offering shall be exercised on such Purchase Date, and the Purchase Date shall be delayed until the Plan is subject to such an effective registration statement and such compliance, except that the Purchase Date shall not be delayed more than twelve (12) months and the Purchase Date shall in no event be more than twenty-seven (27) months from the Offering Date. If on the Purchase Date of any Offering hereunder, as delayed to the maximum extent permissible, the Plan is not registered and in such compliance, no rights granted under the Plan or any Offering shall be exercised and all payroll deductions accumulated during the Offering (reduced to the extent, if any, such deductions have been used to acquire stock) shall be distributed to the participants, without interest. 9. COVENANTS OF THE COMPANY. (a) During the terms of the rights granted under the Plan, the Company shall keep available at all times the number of shares of stock required to satisfy such rights. 6. 7 (b) The Company shall seek to obtain from each federal, state, foreign or other regulatory commission or agency having jurisdiction over the Plan such authority as may be required to issue and sell shares of stock upon exercise of the rights granted under the Plan. If, after reasonable efforts, the Company is unable to obtain from any such regulatory commission or agency the authority which counsel for the Company deems necessary for the lawful issuance and sale of stock under the Plan, the Company shall be relieved from any liability for failure to issue and sell stock upon exercise of such rights unless and until such authority is obtained. 10. USE OF PROCEEDS FROM STOCK. Proceeds from the sale of stock pursuant to rights granted under the Plan shall constitute general funds of the Company. 11. RIGHTS AS A SHAREHOLDER. A participant shall not be deemed to be the holder of, or to have any of the rights of a holder with respect to, any shares subject to rights granted under the Plan unless and until the participant's shareholdings acquired upon exercise of rights hereunder are recorded in the books of the Company. 12. ADJUSTMENTS UPON CHANGES IN STOCK. (a) If any change is made in the stock subject to the Plan, or subject to any rights granted under the Plan (through merger, consolidation, reorganization, recapitalization, stock dividend, dividend in property other than cash, stock split, liquidating dividend, combination of shares, exchange of shares, change in corporate structure or other transaction not involving the receipt of consideration by the Company), the Plan and outstanding rights will be appropriately adjusted in the class(es) and maximum number of shares subject to the Plan and the class(es) and number of shares and price per share of stock subject to outstanding rights. Such adjustments shall be made by the Board or the Committee, the determination of which shall be final, binding and conclusive. (The conversion of any convertible securities of the Company shall not be treated as a "transaction not involving the receipt of consideration by the Company.") (b) In the event of: (1) a dissolution or liquidation of the Company; (2) a merger or consolidation in which the Company is not the surviving corporation; (3) a reverse merger in which the Company is the surviving corporation but the shares of the Company's Common Stock outstanding immediately preceding the merger are converted by virtue of the merger into other property, whether in the form of securities, cash or otherwise; or (4) the acquisition by any person, entity or group within the meaning of Section 13(d) or 14(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act") or any comparable successor provisions (excluding any employee benefit plan, or related trust, sponsored or maintained by the Company or any Affiliate of the Company) of the beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act, or comparable successor rule) of securities of the Company representing at least fifty percent (50%) of the combined voting power entitled to vote in the election of directors, then, as determined by the Board in its sole discretion (i) any surviving or acquiring corporation may assume outstanding rights or substitute similar rights for those under the Plan, (ii) such rights may continue in full force and effect, or (iii) participants' 7. 8 accumulated payroll deductions may be used to purchase Common Stock immediately prior to the transaction described above and the participants' rights under the ongoing Offering terminated. 13. AMENDMENT OF THE PLAN. (a) The Board at any time, and from time to time, may amend the Plan. However, except as provided in paragraph 12 relating to adjustments upon changes in stock, no amendment shall be effective unless approved by the shareholders of the Company within twelve (12) months before or after the adoption of the amendment, where the amendment will: (i) Increase the number of shares reserved for rights under the Plan; (ii) Modify the provisions as to eligibility for participation in the Plan (to the extent such modification requires shareholder approval in order for the Plan to obtain employee stock purchase plan treatment under Section 423 of the Code or to comply with the requirements of Rule 16b-3 promulgated under the Securities Exchange Act of 1934, as amended ("Rule 16b-3")); or (iii) Modify the Plan in any other way if such modification requires shareholder approval in order for the Plan to obtain employee stock purchase plan treatment under Section 423 of the Code or to comply with the requirements of Rule 16b-3. It is expressly contemplated that the Board may amend the Plan in any respect the Board deems necessary or advisable to provide eligible employees with the maximum benefits provided or to be provided under the provisions of the Code and the regulations promulgated thereunder relating to employee stock purchase plans and/or to bring the Plan and/or rights granted under it into compliance therewith. (b) Rights and obligations under any rights granted before amendment of the Plan shall not be altered or impaired by any amendment of the Plan, except with the consent of the person to whom such rights were granted, or except as necessary to comply with any laws or governmental regulations, or except as necessary to ensure that the Plan and/or rights granted under the Plan comply with the requirements of Section 423 of the Code. 14. DESIGNATION OF BENEFICIARY. (a) A participant may file a written designation of a beneficiary who is to receive any shares and cash, if any, from the participant's account under the Plan in the event of such participant's death subsequent to the end of an Offering but prior to delivery to the participant of such shares and cash. In addition, a participant may file a written designation of a beneficiary who is to receive any cash from the participant's account under the Plan in the event of such participant's death during an Offering. (b) Such designation of beneficiary may be changed by the participant at any time by written notice. In the event of the death of a participant and in the absence of a beneficiary validly designated under the Plan who is living at the time of such participant's death, the Company shall deliver such shares and/or cash to the executor or administrator of the estate of 8. 9 the participant, or if no such executor or administrator has been appointed (to the knowledge of the Company), the Company, in its sole discretion, may deliver such shares and/or cash to the spouse or to any one or more dependents or relatives of the participant, or if no spouse, dependent or relative is known to the Company, then to such other person as the Company may designate. 15. TERMINATION OR SUSPENSION OF THE PLAN. (a) The Board in its discretion, may suspend or terminate the Plan at any time. No rights may be granted under the Plan while the Plan is suspended or after it is terminated. (b) Rights and obligations under any rights granted while the Plan is in effect shall not be altered or impaired by suspension or termination of the Plan, except as expressly provided in the Plan or with the consent of the person to whom such rights were granted, or except as necessary to comply with any laws or governmental regulation, or except as necessary to ensure that the Plan and/or rights granted under the Plan comply with the requirements of Section 423 of the Code. 16. EFFECTIVE DATE OF PLAN. The Plan shall become effective on the same day that the Company's initial public offering of shares of common stock becomes effective (the "Effective Date"), but no rights granted under the Plan shall be exercised unless and until the Plan has been approved by the shareholders of the Company within twelve (12) months before or after the date the Plan is adopted by the Board or the Committee, which date may be prior to the Effective Date. 9. 10 11 SIGNAL PHARMACEUTICALS, INC. EMPLOYEE STOCK PURCHASE PLAN OFFERING 1. GRANT; OFFERING DATE. (a) The Board of Directors of Signal Pharmaceuticals, Inc. (the "Company"), pursuant to the Company's Employee Stock Purchase Plan (the "Plan"), hereby authorizes the grant of rights to purchase shares of the common stock of the Company ("Common Stock") to all Eligible Employees (an "Offering"). The first Offering shall begin on the effective date of the initial public offering of the Company's Common Stock and end on July 31, 2000 (the "Initial Offering"). Thereafter, an Offering shall begin on the first day of the first calendar month following the calendar month in which the preceding Offering ended, and end on the last day of the eighteenth calendar month measured beginning with the calendar month in which the Offering began. The first day of an Offering is that Offering's "Offering Date." (b) Prior to the commencement of any Offering, the Board of Directors (or the Committee described in subparagraph 2(c) of the Plan, if any) may change any or all terms of such Offering and any subsequent Offerings. The granting of rights pursuant to each Offering hereunder shall occur on each respective Offering Date unless, prior to such date (a) the Board of Directors (or such Committee) determines that such Offering shall not occur, or (b) no shares remain available for issuance under the Plan in connection with the Offering. 2. ELIGIBLE EMPLOYEES. (a) All employees of the Company shall be granted rights to purchase Common Stock under each Offering on the Offering Date of such Offering, provided that each such employee otherwise meets the employment requirements of subparagraph 5(a) of the Plan and has been continuously employed for at least 10 days on the Offering Date of such Offering (an "Eligible Employee"); however, the 10-day eligibility requirement shall be waived with respect to the Initial Offering only. Notwithstanding the foregoing, the following employees shall not be Eligible Employees or be granted rights under an Offering: (i) part-time or seasonal employees whose customary employment is less than 20 hours per week or 5 months per calendar year or (ii) 5% stockholders (including ownership through unexercised options) described in subparagraph 5(c) of the Plan. (b) Each person who first becomes an Eligible Employee during any Offering and at least six (6) months prior to the final Purchase Date of the Offering will, on the next February 1 or August 1 during that Offering, receive a right under such Offering, which right shall thereafter be deemed to be a part of the Offering. Such right shall have the same characteristics as any rights originally granted under the Offering except that: (i) the date on which such right is granted shall be the "Offering Date" of such right for all purposes, including determination of the exercise price of such right; and (ii) the Offering for such right shall begin on its Offering Date and end coincident with the end of the ongoing Offering. 1. 12 3. RIGHTS. (a) Subject to the limitations contained herein and in the Plan, on each Offering Date each Eligible Employee shall be granted the right to purchase the number of shares of Common Stock purchasable with up to 15% of such Eligible Employee's Earnings paid during such Offering after the Eligible Employee first commences participation; provided, however, that no employee may purchase Common Stock on a particular Purchase Date that would result in more than 15% of such employee's Earnings in the period from the Offering Date to such Purchase Date having been applied to purchase shares under all ongoing Offerings under the Plan and all other Company plans intended to qualify as "employee stock purchase plans" under Section 423 of the Internal Revenue Code of 1986, as amended (the "Code"). For this Offering, "Earnings" means the total compensation paid to an employee, including all salary, wages (including amounts elected to be deferred by the employee, that would otherwise have been paid, under any cash or deferred arrangement established by the Company), overtime pay, commissions, bonuses, and other remuneration paid directly to the employee, but excluding profit sharing, the cost of employee benefits paid for by the Company, education or tuition reimbursements, imputed income arising under any Company group insurance or benefit program, traveling expenses, business and moving expense reimbursements, income received in connection with stock options, contributions made by the Company under any employee benefit plan, and similar items of compensation. (b) Notwithstanding the foregoing, the maximum number of shares of Common Stock an Eligible Employee may purchase on any Purchase Date in an Offering shall be such number of shares as has a fair market value (determined as of the Offering Date for such Offering) equal to (x) $25,000 multiplied by the number of calendar years in which the right under such Offering has been outstanding at any time, minus (y) the fair market value of any other shares of Common Stock (determined as of the relevant Offering Date with respect to such shares) which, for purposes of the limitation of Section 423(b)(8) of the Code, are attributed to any of such calendar years in which the right is outstanding. The amount in clause (y) of the previous sentence shall be determined in accordance with regulations applicable under Section 423(b)(8) of the Code based on (i) the number of shares previously purchased with respect to such calendar years pursuant to such Offering or any other Offering under the Plan, or pursuant to any other Company plans intended to qualify as "employee stock purchase plans" under Section 423 of the Code, and (ii) the number of shares subject to other rights outstanding on the Offering Date for such Offering pursuant to the Plan or any other such Company plan. (c) The maximum aggregate number of shares available to be purchased by all Eligible Employees under an Offering shall be the number of shares remaining available under the Plan on the Offering Date. If the aggregate purchase of shares of Common Stock upon exercise of rights granted under the Offering would exceed the maximum aggregate number of shares available, the Board shall make a pro rata allocation of the shares available in a uniform and equitable manner. 4. PURCHASE PRICE. The purchase price of the Common Stock under the Offering shall be the lesser of 85% of the fair market value of the Common Stock on the Offering Date or 85% of the fair market value 2. 13 of the Common Stock on the Purchase Date, (as defined below), in each case rounded up to the nearest whole cent per share. For the Initial Offering, the fair market value of the Common Stock at the time when the Offering commences shall be the price per share at which shares of Common Stock are first sold to the public in the Company's initial public offering as specified in the final prospectus with respect to that offering. 5. PARTICIPATION. (a) Except as otherwise provided in this paragraph 5 or in the Plan, an Eligible Employee may elect to participate in an Offering only at the beginning of the Offering or as of the day following a Purchase Date during such Offering. An Eligible Employee shall become a participant in an Offering by delivering an agreement authorizing payroll deductions. Such deductions must be in whole percentages, with a minimum percentage of 1% and a maximum percentage of 15%. A participant may not make additional payments into his or her account. The agreement shall be made on such enrollment form as the Company provides, and must be delivered to the Company at least 10 days in advance of the date of participation to be effective, unless a later time for filing the enrollment form is set by the Board for all Eligible Employees with respect to a given Offering Date. For the Initial Offering, the time for filing an enrollment form and commencing participation for individuals who are Eligible Employees on the Offering Date for the Initial Offering may be after the Offering Date, as determined by the Company and communicated to such Eligible Employees. (b) A participant may not increase or decrease his or her participation level during the course of a 6-month purchase interval; provided that a participant may (i) reduce his or her deductions to 0% upon 10 days' prior notice by delivering a notice in such form as the Company provides, (ii) may increase or decrease his or her participation level at any time to become effective on the day following the next subsequent Purchase Date or (iii) may withdraw from an Offering and receive his or her accumulated payroll deductions from the Offering (reduced to the extent, if any, such deductions have been used to acquire Common Stock for the participant on any prior Purchase Dates), without interest at any time prior to the end of the Offering, excluding only each 10-day period immediately preceding a Purchase Date by delivering a withdrawal notice to the Company in such form as the Company provides. A participant who has withdrawn from an Offering shall not again participate in such Offering, but may participate in subsequent Offerings under the Plan in accordance with the terms thereof. 6. PURCHASES. Subject to the limitations contained herein, on each Purchase Date, each participant's accumulated payroll deductions (without any increase for interest) shall be applied to the purchase of whole shares of Common Stock, up to the maximum number of shares permitted under the Plan and the Offering. "Purchase Date" shall be defined as each January 31 and July 31 during an Offering or the last business day immediately prior thereto, provided the first Purchase Date during the Initial Offering shall be January 31, 1999. 3. 14 7. NOTICES AND AGREEMENTS. Any notices or agreements provided for in an Offering or the Plan shall be given in writing, in a form provided by the Company, and unless specifically provided for in the Plan or this Offering shall be deemed effectively given upon receipt or, in the case of notices and agreements delivered by the Company, 5 days after deposit in the United States mail, postage prepaid. 8. EXERCISE CONTINGENT ON STOCKHOLDER APPROVAL. The rights granted under an Offering are subject to the approval of the Plan by the shareholders as required for the Plan to obtain treatment as a tax-qualified employee stock purchase plan under Section 423 of the Code. 9. OFFERING SUBJECT TO PLAN. Each Offering is subject to all the provisions of the Plan, and its provisions are hereby made a part of the Offering, and is further subject to all interpretations, amendments, rules and regulations which may from time to time be promulgated and adopted pursuant to the Plan. In the event of any conflict between the provisions of an Offering and those of the Plan (including interpretations, amendments, rules and regulations which may from time to time be promulgated and adopted pursuant to the Plan), the provisions of the Plan shall control. 4. EX-10.6 9 EXHIBIT 10.6 1 EXHIBIT 10.6 SIGNAL PHARMACEUTICALS, INC. 1998 NON-EMPLOYEE DIRECTORS' STOCK OPTION PLAN ADOPTED ON FEBRUARY 17, 1998 APPROVED BY THE STOCKHOLDERS ON ______________, 1998 1. PURPOSE. (a) The purpose of the 1998 Non-Employee Directors' Stock Option Plan (the "Plan") is to provide a means by which each director of Signal Pharmaceuticals, Inc., a Delaware corporation (the "Company") who is not otherwise at the time of grant an employee of or consultant to the Company or of any Affiliate of the Company (each such person being hereafter referred to as a "Non-Employee Director") will be given an opportunity to purchase stock of the Company. (b) The word "Affiliate" as used in the Plan means any parent corporation or subsidiary corporation of the Company as those terms are defined in Sections 424(e) and (f), respectively, of the Internal Revenue Code of 1986, as amended from time to time (the "Code"). (c) The Company, by means of the Plan, seeks to retain the services of persons now serving as Non-Employee Directors of the Company, to secure and retain the services of persons capable of serving in such capacity, and to provide incentives for such persons to exert maximum efforts for the success of the Company. 2. ADMINISTRATION. (a) The Plan shall be administered by the Board of Directors of the Company (the "Board") unless and until the Board delegates administration to a committee, as provided in subparagraph 2(b). (b) The Board may delegate administration of the Plan to a committee composed of not fewer than two (2) members of the Board (the "Committee"). If administration is delegated to a Committee, the Committee shall have, in connection with the administration of the Plan, the powers theretofore possessed by the Board, subject, however, to such resolutions, not inconsistent with the provisions of the Plan, as may be adopted from time to time by the Board. The Board may abolish the Committee at any time and revest in the Board the administration of the Plan. 3. SHARES SUBJECT TO THE PLAN. (a) Subject to the provisions of Section 10 relating to adjustments upon changes in stock, the stock that may be sold pursuant to options granted under the Plan shall not exceed in the aggregate two hundred thousand (200,000) shares (after giving effect to any reverse stock split, by way of reincorporation or otherwise, effected on or prior to the Effective Date (defined at Section 13) and following adoption hereof (the "Reverse Split")) of the Company's common 1. 2 stock. If any option granted under the Plan shall for any reason expire or otherwise terminate without having been exercised in full, the stock not purchased under such option shall again become available for option grants under the Plan. (b) The stock subject to the Plan may be unissued shares or reacquired shares, bought on the market or otherwise. 4. ELIGIBILITY. Options shall be granted only to Non-Employee Directors of the Company. 5. NON-DISCRETIONARY GRANTS. (a) Each person who, after the Effective Date is elected (whether by the Board or the stockholders) for the first time to serve as a Non-Employee Director, automatically shall, upon being so elected, be granted an option to purchase twenty thousand (20,000) shares (after giving effect to the Reverse Split) of common stock of the Company on the terms and conditions set forth herein. (b) On the date of each annual meeting of stockholders, commencing with the first such annual meeting following the Effective Date, each person who is a Non-Employee Director prior to such annual meeting and will continue to be a Non-Employee Director after such annual meeting automatically shall be granted an option to purchase five thousand (5,000) shares (after giving effect to the Reverse Split) of common stock of the Company on the terms and conditions set forth herein. 6. OPTION PROVISIONS. Each option shall be subject to the following terms and conditions: (a) The term of each option commences on the date it is granted and, unless sooner terminated as set forth herein, expires on the date ("Expiration Date") ten (10) years from the date of grant. If the optionholder's continuous service as a Non-Employee Director or employee of or consultant to the Company or any Affiliate terminates for any reason or for no reason, the option shall terminate on the earlier of the Expiration Date or the date three (3) months following the date of termination of all such service; provided, however, that if such termination of service is due to (i) the optionholder's death, the option shall terminate on the earlier of the Expiration Date or six (6) months following the date of the optionholder's death; or (ii) the optionholder's disability, the option shall terminate on the earlier of the Expiration Date or six (6) months following the date of the optionholder's disability (for purposes of this subparagraph 6(a), "disability" shall mean total and permanent disability as defined in Section 22(e)(3) of the Code). If the exercise of the option following the termination of the optionholder's continuous service as a Non-Employee, Director or employee of or consultant to the Company or any Affiliate (other than upon the optionholder's death or disability) would result in liability under Section 16(b) of the Exchange Act, then the option shall terminate on the earlier of (i) the expiration of the term of the option set forth in the option agreement, or (ii) the tenth (10th) day after the last date on which such exercise would result in such liability under Section 16(b) of the Exchange Act. In any and all circumstances, an option may be exercised following termination of the 2. 3 optionholder's continuous service as a Non-Employee Director or employee of or consultant to the Company or any Affiliate only as to that number of shares as to which it was exercisable as of the date of termination of all such service under the applicable provisions of subparagraph 6(e) or subparagraph 6(f). (b) The exercise price of each option shall be one hundred percent (100%) of the fair market value of the stock subject to such option on the date such option is granted. (c) Payment of the exercise price is due in full upon any exercise. The optionholder may elect to make payment of the exercise price under one of the following alternatives: (i) Payment of the exercise price per share in cash or by check at the time of exercise; or (ii) Provided that at the time of the exercise the Company's common stock is publicly traded and quoted regularly in the Wall Street Journal, payment by delivery of shares of common stock of the Company already owned by the optionholder, held for the period required to avoid a charge to the Company's reported earnings, and owned free and clear of any liens, claims, encumbrances or security interest, which common stock shall be valued at its fair market value on the date preceding the date of exercise; or (iii) Payment by a combination of the methods of payment specified in subparagraphs 6(c)(i) and 6(c)(ii) above. Notwithstanding the foregoing, this option may be exercised pursuant to a program developed under Regulation T as promulgated by the Federal Reserve Board which results in the receipt of payment by cash (or check) by the Company either prior to the issuance of shares of the Company's common stock or pursuant to the terms of irrevocable instructions issued by the optionholder prior to the issuance of shares of the Company's common stock. (d) An option shall only be transferable by will or by the laws of descent and distribution. The optionholder may, by delivering written notice to the Company, in a form satisfactory to the Company, designate a third party who, in the event of the death of the optionholder, shall thereafter be entitled to exercise the option. (e) An option granted pursuant to subsection 5(a) above shall become exercisable ("vest") in equal quarterly installments in arrears over a period of four (4) years from the date of grant, provided that the optionholder has, during the entire period prior to each vesting date, continuously served as a Non-Employee Director or employee of or consultant to the Company or any Affiliate, whereupon such option shall become fully exercisable in accordance with its terms with respect to that portion of the shares represented by that installment. (f) A option granted pursuant to subsection 5(b) above shall vest in equal monthly installments in arrears over a period of one (1) year from the date of grant, provided that the optionholder has, during the entire period prior to each vesting date, continuously served as a Non-Employee Director or employee of or consultant to the Company or any Affiliate, whereupon such option shall become fully exercisable in accordance with its terms with respect to that portion of the shares represented by that installment. 3. 4 (g) The Company may require any optionholder to provide such representations, written assurances or information which the Company shall determine is necessary, desirable or appropriate to comply with applicable securities laws as a condition of granting an option to the optionholder or permitting the optionholder to exercise the option. The Company may, upon advice of counsel to the Company, place legends on stock certificates issued under the Plan as such counsel deems necessary or appropriate in order to comply with applicable securities laws, including, but not limited to, legends restricting the transfer of the stock. (h) Notwithstanding anything to the contrary contained herein, an option may not be exercised unless the shares issuable upon exercise of such option are then registered under the Securities Act or, if such shares are not then so registered, the Company has determined that such exercise and issuance would be exempt from the registration requirements of the Securities Act. (i) The Company (or a representative of the underwriters) may, in connection with the first underwritten registration of the offering of any securities of the Company under the Securities Act, require that you not sell, dispose of, transfer, make any short sale of, grant any option for the purchase of, or enter into any hedging or similar transaction with the same economic effect as a sale, any shares of Common Stock or other securities of the Company held by you, for a period of time specified by the underwriter(s) (not to exceed one hundred eighty (180) days) following the effective date of a registration statement of the Company filed under the Securities Act. You further agree to execute and deliver such other agreements as may be reasonably requested by the Company and/or the underwriter(s) which are consistent with the foregoing or which are necessary to give further effect thereto. In order to enforce the foregoing covenant, the Company may impose stop-transfer instructions with respect to your Common Stock until the end of such period. (j) The option may, but need not, include a provision whereby the optionholder may elect at any time while providing continuous service as a Non-Employee Director or employee of or consultant to the Company or any Affiliate to exercise the option as to any part or all of the shares subject to the option prior to the full vesting of the option. Any unvested shares so purchased may be subject to a repurchase right in favor of the Company or to any other restriction the Board determines to be appropriate. 7. COVENANTS OF THE COMPANY. (a) During the terms of the options granted under the Plan, the Company shall keep available at all times the number of shares of stock required to satisfy such options. (b) The Company shall seek to obtain from each regulatory commission or agency having jurisdiction over the Plan such authority as may be required to issue and sell shares of stock upon exercise of the options granted under the Plan; provided, however, that this undertaking shall not require the Company to register under the Securities Act, or any other applicable or available securities laws, either the Plan, any option granted under the Plan, or any stock issued or issuable pursuant to any such option. If, after reasonable efforts, the Company is unable to obtain from any such regulatory commission or agency the authority which counsel for the Company deems necessary for the lawful issuance and sale of stock under the Plan, the 4. 5 Company shall be relieved from any liability for failure to issue and/or sell stock upon exercise of such options. 8. USE OF PROCEEDS FROM STOCK. Proceeds from the sale of stock pursuant to options granted under the Plan shall constitute general funds of the Company. 9. MISCELLANEOUS. (a) Neither an optionholder nor any person to whom an option is transferred under paragraph 6(d) shall be deemed to be the holder of, or to have any of the rights of a holder with respect to, any shares subject to such option unless and until such person has satisfied all requirements for exercise of the option pursuant to its terms. (b) Nothing in the Plan or in any instrument executed pursuant thereto shall confer upon any Non-Employee Director any right to continue in the service of the Company or any Affiliate in any capacity or shall affect any right of the Company, its Board or stockholders or any Affiliate to remove any Non-Employee Director pursuant to the Company's bylaws and the provisions of the applicable laws of the Company's state of incorporation. (c) No Non-Employee Director, individually or as a member of a group, and no beneficiary or other person claiming under or through him, shall have any right, title or interest in or to any option reserved for the purposes of the Plan except as to such shares of common stock, if any, as shall have been reserved for him pursuant to the term of an option granted to him under the Plan. (d) In connection with each option made pursuant to the Plan, it shall be a condition precedent to the Company's obligation to issue or transfer shares to a Non-Employee Director, or to evidence the removal of any restrictions on transfer, that such Non-Employee Director make arrangements satisfactory to the Company to insure that the amount of any federal or other withholding tax required to be withheld with respect to such sale or transfer, or such removal or lapse, is made available to the Company for timely payment of such tax. (e) As used in this Plan, "fair market value" means, as of any date, the value of the common stock of the Company determined as follows: (i) If the common stock is listed on any established stock exchange or a national market system, including without limitation the National Market System of the National Association of Securities Dealers, Inc. Automated Quotation ("NASDAQ") System, the Fair Market Value of a share of common stock shall be the closing sales price for such stock (or the closing bid, if no sales were reported) as quoted on such system or exchange (or the exchange with the greatest volume of trading in common stock) on the last market trading day prior to the day of determination, as reported in the Wall Street Journal or such other source as the Board deems reliable; (ii) If the common stock is quoted on the NASDAQ System (but not on the National Market System thereof) or is regularly quoted by a recognized securities dealer but 5. 6 selling prices are not reported, the Fair Market Value of a share of common stock shall be the mean between the bid and asked prices for the common stock on the last market trading day prior to the day of determination, as reported in the Wall Street Journal or such other source as the Board deems reliable; (iii) In the absence of an established market for the common stock, the Fair Market Value shall be determined in good faith by the Board. 10. ADJUSTMENTS UPON CHANGES IN STOCK. (a) If any change is made in the stock subject to the Plan, or subject to any option granted under the Plan (through merger, consolidation, reorganization, recapitalization, stock dividend, dividend in property other than cash, stock split, liquidating dividend, combination of shares, exchange of shares, change in corporate structure or other transaction not involving the receipt of consideration by the Company), the Plan and outstanding options will be appropriately adjusted in the class(es) and maximum number of shares subject to the Plan and the class(es) and number of shares and price per share of stock subject to outstanding options. Such adjustments shall be made by the Board, the determination of which shall be final, binding and conclusive. (The conversion of any convertible securities of the Company shall not be treated as a "transaction not involving the receipt of consideration by the Company.") (b) In the event of: (1) a dissolution, liquidation, or sale of all or substantially all of the assets of the Company; (2) a merger or consolidation in which the Company is not the surviving corporation; (3) a reverse merger in which the Company is the surviving corporation but the shares of the Company's common stock outstanding immediately preceding the merger are converted by virtue of the merger into other property, whether in the form of securities, cash or otherwise; or (4) the acquisition by any person, entity or group within the meaning of Section 13(d) or 14(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act") or any comparable successor provisions (excluding any employee benefit plan, or related trust, sponsored or maintained by the Company or any Affiliate) of the beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act, or comparable successor rule) of securities of the Company representing at least fifty percent (50%) of the combined voting power entitled to vote in the election of directors, then: (i) any surviving corporation or acquiring corporation shall assume any options outstanding under the Plan or shall substitute similar options (including an option to acquire the same consideration paid to the stockholders in the transaction described in this paragraph 10(b)) for those outstanding under the Plan, or (ii) in the event any surviving corporation or acquiring corporation refuses to assume such options or to substitute similar options for those outstanding under the Plan, then the vesting of such options (and, if applicable, the time during which such options may be exercised) shall be accelerated prior to such event and the options terminated if not exercised (if applicable) after such acceleration and at or prior to such event. 11. AMENDMENT OF THE PLAN. (a) The Board at any time, and from time to time, may amend the Plan and/or some or all outstanding options granted under the Plan; provided, however, that except as provided in Section 10 relating to adjustments upon changes in stock, no amendment to increase the number 6. 7 of shares which may be issued under the Plan shall be effective unless approved by the stockholders of the Company within twelve (12) months before or after the adoption of the amendment. (b) Rights and obligations under any option granted before any amendment of the Plan or an outstanding option shall not be impaired by such amendment unless (i) the Company requests the consent of the person to whom the option was granted and (ii) such person consents in writing. 12. TERMINATION OR SUSPENSION OF THE PLAN. (a) The Board may suspend or terminate the Plan at any time. Unless sooner terminated, the Plan shall terminate at the time that all options granted under the Plan are fully vested and either have been fully exercised or have expired. No options may be granted under the Plan while the Plan is suspended or after it is terminated. (b) Rights and obligations under any option granted while the Plan is in effect shall not be impaired by suspension or termination of the Plan, except with the consent of the person to whom the option was granted, which consent shall be in writing. 13. EFFECTIVE DATE OF PLAN; CONDITIONS OF EXERCISE. The Plan shall become effective on the same day that the Company's initial public offering of shares of common stock becomes effective (the "Effective Date"), but no options granted under the Plan shall be exercised unless and until the Plan has been approved by the stockholders of the Company within twelve (12) months before or after the date the Plan is adopted by the Board, which date may be prior to the Effective Date. 7. EX-10.7 10 EXHIBIT 10.7 1 EXHIBIT 10.7 SIGNAL PHARMACEUTICALS, INC. 1998 NON-EMPLOYEE DIRECTORS' STOCK OPTION PLAN NONSTATUTORY STOCK OPTION ___________________, Optionee: On __________________, 19___, an option was automatically granted to you (the "optionee") pursuant to the Signal Pharmaceuticals, Inc. (the "Company") 1998 Non-Employee Directors' Stock Option Plan (the "Plan") to purchase shares of the Company's common stock ("Common Stock"). This option is not intended to qualify and will not be treated as an "incentive stock option" within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"). Defined terms not explicitly defined in this option agreement, but defined in the Plan, shall have the same definitions as in the Plan. The grant hereunder is in connection with and in furtherance of the Company's compensatory benefit plan for Non-Employee Directors (as defined in the Plan). The details of your option are as follows: 1. The total number of shares of Common Stock subject to this option is ______________ (_____________). 2. The exercise price of this option is _________________________ ($________) per share, such amount being equal to the "fair market value" (as defined in the Plan) of the Common Stock on the date of grant of this option. 3. If the number of shares subject to this option is twenty thousand (20,000), this option shall become exercisable ("vest") as provided in subsection 6(e) of the Plan for an option granted pursuant to subsection 5(a) of the Plan. If the number of shares subject to this option is five thousand (5,000), this option shall vest as provided in subsection 6(f) of the Plan for an option granted pursuant to subsection 5(b) of the Plan. 4. (a) This option may be exercised, to the extent specified in the Plan, by delivering a notice of exercise (in a form designated by the Company) together with the exercise price, in one or a combination of the forms of payment permitted under the Plan, to the Secretary of the Company, or to such other person as the Company may designate, during regular business hours, together with such additional documents as the Company may then require pursuant to Section 6 of the Plan. This option may only be exercised for whole shares. (b) By exercising this option you agree that the Company may require you to enter an arrangement providing for the cash payment by you to the Company of any tax withholding obligation of the Company arising by reason of the exercise of this option. (c) Notwithstanding anything to the foregoing, this option shall not be exercisable in whole or in part unless and until the Plan has been approved by the Company's stockholders and the shares subject to the Plan have been registered under the Securities Act of 1. 2 1933, as amended (the "Securities Act) or if such shares are not then so registered, the Company has determined that such exercise and issuance would be exempt from the registration requirements of the Securities Act. 5. The term of this option is ten (10) years measured from the grant date, subject, however, to earlier termination upon your termination of service, as set forth in Section 6 of the Plan. In no event may this option be exercised on or after the date on which it terminates. 6. Any notices provided for in this option or the Plan shall be given in writing and shall be deemed effectively given upon receipt or, in the case of notices delivered by the Company to you, five (5) days after deposit in the United States mail, postage prepaid, addressed to you at the address specified below or at such other address as you hereafter designate by written notice to the Company. 7. This option is subject to all the provisions of the Plan, a copy of which is attached hereto and its provisions are hereby made a part of this option, including without limitation the provisions of Section 6 of the Plan relating to option provisions, and is further subject to all interpretations, amendments, rules and regulations which may from time to time be promulgated and adopted pursuant to the Plan. In the event of any conflict between the provisions of this option and those of the Plan, the provisions of the Plan shall control. Dated the ____ day of ____________________, 19__. Very truly yours, SIGNAL PHARMACEUTICALS, INC. By: --------------------------- Duly authorized on behalf of the Board of Directors ATTACHMENT: 1998 Non-Employee Directors' Stock Option Plan 2. 3 The undersigned: (a) Acknowledges receipt of the foregoing option and the attachments referenced therein and understands that all rights and liabilities with respect to this option are set forth in the option and the Plan; (b) Acknowledges that as of the date of grant of this option, it sets forth the entire understanding between the undersigned optionee and the Company and its Affiliates regarding the acquisition of Common Stock in the Company and supersedes all prior oral and written agreements on that subject with the exception of (i) the options and any other stock awards previously granted and delivered to the undersigned under stock award plans of the Company, and (ii) the following agreements only: NONE: (Initial) OTHER: ----------------------- ----------------------- ----------------------- --------------------------------- Optionee Address: ---------------------------------- ---------------------------------- 3. 4 NOTICE OF EXERCISE Signal Pharmaceuticals, Inc. - ---------------------------- - ---------------------------- Date of Exercise: --------- Ladies and Gentlemen: This constitutes notice under my nonstatutory stock option that I elect to purchase the number of shares for the price set forth below. Stock option dated: --------------- Number of shares as to which option is exercised: --------------- Certificates to be issued in name of: --------------- Total exercise price: $ --------------- Cash payment delivered herewith: $ --------------- Value of ______ shares of common stock delivered herewith(1): $ --------------- By this exercise, I agree (i) to provide such additional documents as you may require pursuant to the terms of the Company's 1998 Non-Employee Directors' Stock Option Plan and (ii) to provide for the payment by me to you (in the manner designated by you) of your withholding obligation, if any, relating to the exercise of the Option. I hereby make the following acknowledgment with respect to the number of shares of Common Stock (the "Shares"), which are being acquired by me for my own account upon exercise of the Option as set forth above: I acknowledge that all certificates representing any of the Shares subject to the provisions of the Option shall have endorsed thereon appropriate legends reflecting any restrictions pursuant to the Company's Articles of Incorporation, Bylaws and/or applicable securities laws. Very truly yours, - ----------------------------------- (1) Shares must meet the public trading requirements set forth in the option. Shares must be valued in accordance with the terms of the option being exercised, must have been owned for the minimum period required in the option, and must be owned free and clear of any liens, claims, encumbrances or security interests. Certificates must be endorsed or accompanied by an executed assignment separate from certificate. 1. 5 ----------------------------------- 2. 6 EX-10.8 11 EXHIBIT 10.8 1 Exhibit 10.8 [MFS LOGO] THE FIRST NAME IN MUTUAL FUNDS MFS FUND DISTRIBUTORS, INC. 401(k) PROFIT SHARING PLAN AND TRUST MAY, 1995 2 MFS FUND DISTRIBUTORS, INC. 401(k) PROFIT SHARING PLAN AND TRUST TABLE OF CONTENTS ARTICLE I DEFINITIONS ARTICLE II TOP HEAVY PROVISIONS AND ADMINISTRATION 2.1 TOP HEAVY PLAN REQUIREMENTS ........................................ 6 2.2 DETERMINATION OF TOP HEAVY STATUS .................................. 6 2.3 POWERS AND RESPONSIBILITIES OF THE EMPLOYER ........................ 8 2.4 DESIGNATION OF ADMINISTRATIVE AUTHORITY ............................ 8 2.5 ALLOCATION AND DELEGATION OF RESPONSIBILITIES ...................... 8 2.6 POWERS AND DUTIES OF THE ADMINISTRATOR ............................. 8 2.7 RECORDS AND REPORTS ................................................ 8 2.8 APPOINTMENT OF ADVISERS ............................................ 8 2.9 INFORMATION FROM EMPLOYER .......................................... 8 2.10 PAYMENT OF EXPENSES ............................................... 9 2.11 MAJORITY ACTIONS .................................................. 9 2.12 CLAIMS PROCEDURE .................................................. 9 2.13 CLAIMS REVIEW PROCEDURE ........................................... 9 ARTICLE III ELIGIBILITY 3.1 CONDITIONS OF ELIGIBILITY .......................................... 9 3.2 EFFECTIVE DATE OF PARTICIPATION .................................... 9 3.3 DETERMINATION OF ELIGIBILITY ....................................... 9 3.4 TERMINATION OF ELIGIBILITY ......................................... 9 3.5 OMISSION OF ELIGIBLE EMPLOYEE ...................................... 9 3.6 INCLUSION OF INELIGIBLE EMPLOYEE ................................... 9 3.7 ELECTION NOT TO PARTICIPATE ........................................ 9 3.8 CONTROL OF ENTITIES BY OWNER-EMPLOYEE .............................. 10 ARTICLX IV CONTRIBUTTION AND ALLOCATION 4.1 FORMULA FOR DETERMINING EMPLOYER'S CONTRIBUTION .................... 10 4.2 PARTICIPANT'S SALARY REDUCTION ELECTION ............................ 10 4.3 TIME OF PAYMENT OF EMPLOYER'S CONTRIBUTION ......................... 12 4.4 ALLOCATION OF CONTRIBUTION, FORFEITURES AND EARNINGS ............... 12 4.5 ACTUAL DEFERRAL PERCENTAGE TESTS ................................... 14 4.6 ADJUSTMENT TO ACTUAL DEFERRAL PERCENTAGE TESTS ..................... 15 4.7 ACTUAL CONTRIBUTION PERCENTAGE TESTS ............................... 16 4.8 ADJUSTMENT TO ACTUAL CONTRIBUTION PERCENTAGE TESTS ................. 18 4.9 MAXIMUM ANNUAL ADDITIONS ........................................... 19 4.10 ADJUSTMENT FOR EXCESSIVE ANNUAL ADDITIONS ......................... 22
i 3 4.11 TRANSFERS FROM QUALIFIED PLANS .................................... 22 4.12 VOLUNTARY CONTRIBUTIONS ........................................... 22 4.13 DIRECTED INVESTMENT ACCOUNT ....................................... 23 4.14 QUALIFIED VOLUNTARY EMPLOYEE CONTRIBUTIONS ........................ 23 4.15 INTEGRATION IN MORE THAN ONE PLAN ................................. 23 ARTICLE V VALUATIONS 5.1 VALUATION OF THE TRUST FUND ........................................ 23 5.2 METHOD OF VALUATION ................................................ 23 ARTICLE VI DETERMINATION AND DISTRIBUTION OF BENEFITS 6.1 DETERMINATION OF BENEFITS UPON RETIREMENT .......................... 23 6.2 DETERMINATION OF BENEFITS UPON DEATH ............................... 24 6.3 DETERMINATION OF BENEFITS IN EVENT OF DISABILITY ................... 24 6.4 DETERMINATION OF BENEFITS UPON TERMINATION ......................... 24 6.5 DISTRIBUTION OF BENEFITS ........................................... 26 6.6 DISTRIBUTION OF BENEFITS UPON DEATH ................................ 27 6.7 TIME OF SEGREGATION OR DISTRIBUTION ................................ 29 6.8 DISTRIBUTION FOR MINOR BENEFICIARY ................................. 29 6.9 LOCATION OF PARTICIPANT OR BENEFICIARY UNKNOWN ..................... 29 6.10 PRE-RETIREMENT DISTRIBUTION ....................................... 30 6.11 ADVANCE DISTRIBUTION FOR HARDSHIP ................................. 30 6.12 LIMITATIONS ON BENEFITS AND DISTRIBUTIONS ......................... 30 6.13 SPECIAL RULE FOR NON-ANNUITY PLANS ................................ 30 ARTICLE VII TRUSTEE 7.1 BASIC RESPONSIBILITIES OF THE TRUSTEE .............................. 30 7.2 INVESTMENT POWERS AND DUTIES OF THE TRUSTEE ........................ 31 7.3 OTHER POWERS OF THE TRUSTEE ........................................ 31 7.4 LOANS TO PARTICIPANTS .............................................. 32 7.5 DUTIES OF THE TRUSTEE REGARDING PAYMENTS ........................... 33 7.6 TRUSTEE'S COMPENSATION AND EXPENSES AND TAXES ...................... 33 7.7 ANNUAL REPORT OF THE TRUSTEE ....................................... 33 7.8 AUDIT .............................................................. 33 7.9 RESIGNATION, REMOVAL AND SUCCESSION OF TRUSTEE ...................... 34 7.10 TRANSFER OF INTEREST .............................................. 34 7.11 TRUSTEE INDEMNIFICATION ........................................... 34 7.12 EMPLOYER SECURITIES AND REAL PROPERTY ............................. 34 7.13 PASSIVE TRUSTEE ................................................... 34 7.14 DIRECT ROLLOVER ................................................... 34 ARTICLE VIII AMENDMENT, TERMINATION, AND MERGERS 8.1 AMENDMENT .......................................................... 35 8.2 TERMINATION ........................................................ 35 8.3 MERGER OR CONSOLIDATION ............................................ 35
ii 4 ARTICLE IX MISCELLANEOUS 9.1 EMPLOYER ADOPTIONS ................................................. 35 9.2 PARTICIPANT'S RIGHTS ............................................... 35 9.3 ALIENATION ......................................................... 36 9.4 CONSTRUCTION OF PLAN ............................................... 36 9.5 GENDER AND NUMBER .................................................. 36 9.6 LEGAL ACTION ....................................................... 36 9.7 PROHIBITION AGAINST DIVERSION OF FUNDS ............................. 36 9.8 BONDING ............................................................ 36 9.9 INSURER'S PROTECTIVE CLAUSE ........................................ 36 9.10 RECEIPT AND RELEASE FOR PAYMENTS .................................. 36 9.11 ACTION BY THE EMPLOYER ............................................ 36 9.12 NAMED FIDUCIARIES AND ALLOCATION OF RESPONSIBILITY ................ 36 9.13 HEADINGS .......................................................... 37 9.14 APPROVAL BY INTERNAL REVENUE SERVICE .............................. 37 9.15 UNIFORMITY ........................................................ 37 9.16 PAYMENT OF BENEFITS ............................................... 37 ARTICLE X PARTICIPATING EMPLOYERS 10.1 ELECTION TO BECOME A PARTICIPATING EMPLOYER ....................... 37 10.2 REQUIREMENTS OF PARTICIPATING EMPLOYERS ........................... 37 10.3 DESIGNATION OF AGENT .............................................. 37 10.4 EMPLOYEE TRANSFERS ................................................ 37 10.5 PARTICIPATING EMPLOYER'S CONTRIBUTION AND FORFEITURES ............. 37 10.6 AMENDMENT ......................................................... 38 10.7 DISCONTINUANCE OF PARTICIPATION ................................... 38 10.8 ADMINISTRATOR'S AUTHORITY ......................................... 38 10.9 PARTICIPATING EMPLOYER CONTRIBUTION FOR AFFILIATE ................. 38
iii 5 ARTICLE I DEFINITIONS As used in this Plan. the following words and phrases shall have the meanings set forth herein unless a different meaning is clearly required by the context: 1.1 "Act" means the Employee Retirement Income Security Act of 1974. as it may be amended from time to time. 1.2 "Administrator" means the person(s) or entity designated by the Employer pursuant to Section 2.4 to administer the Plan on behalf of the Employer. 1.3 "Adoption Agreement" means the separate Agreement which is executed by the Employer and accepted by the Trustee which sets forth the elective provisions of this Plan and Trust as specified by the Employer. 1.4 "Affiliated Employer" means the Employer and any corporation which is a member of a controlled group of corporations (as defined in Code Section 414(b)) which includes the Employer; any trade or business (whether or not incorporated) which is under common control (as defined in Code Section 414(c)) with the Employer; any organization (whether or not incorporated) which is a member of an affiliated service group (as defined in Code Section 414(m)) which includes the Employer; and any other entity required to be aggregated with the Employer pursuant to Regulations under Code Section 414(o). 1.5 "Aggregate Account" means with respect to each Participant, the value of all accounts maintained on behalf of a Participant, whether attributable to Employer or Employee contributions, subject to the provisions of Section 2.2. 1.6 "Anniversary Date" means the anniversary date specified in C3 of the Adoption Agreement. 1.7 "Beneficiary" means the person to whom a share of a deceased Participant's interest in the Plan is payable, subject to the restrictions of Sections 6.2 and 6.6. 1.8 "Code" means the Internal Revenue Code of 1986, as amended or replaced from time to time. 1.9 "Compensation" with respect to any Participant means one of the following: (a) Compensation on Form W-2. Compensation is defined as wages, as defined in Code Section 3401(a), and all other payments of Compensation to an Employee by the Employer (in the course of the Employer's trade or business) for which the Employer is required to furnish the Employee a written statement under Code Sections 6041(d) and 6051(a)(3). Compensation must be determined without regard to any rules under Code Section 3401(a) that limit the remuneration included in wages based on the nature or location of the employment or the services performed (such as the exception for agricultural labor in Section 3401(a)(2). Compensation for any Self-Employed Individual shall be equal to his Earned Income. (b) Code Section 3401(a) wages. Compensation is defined as wages within the meaning of Code Section 3401(a) for the purposes of income tax withholding at the source but determined without regard to any rules that limit the remuneration included in wages based on the nature or location of the employment or the services performed (such as the exception for agricultural labor in Code Section 3401(a)(2)). (c) 415 safe-harbor compensation. Compensation is defined as wages, salaries, and fees for professional services and other amounts received (without regard to whether or not an amount is paid in cash) for personal services actually rendered in the course of employment with the Employer maintaining the Plan to the extent that the amounts are includible in gross income (including, but not limited to, commissions paid salesmen, compensation for services on the basis of a percentage of profits, commissions on insurance premiums, tips, bonuses fringe benefits, and reimbursements, or other expense allowances under a nonaccountable plan (as described in Regulation Section 1.622(c)), and excluding the following: 1) Employer contributions to a plan of Deferred Compensation which are not includible in the Employee's gross income for the taxable year in which contributed, or Employer contributions under a simplified employee pension plan to the extent such contributions are deductible by the Employee, or any distributions from a plan of Deferred Compensation; (2) Amounts realized from the exercise of a nonqualified stock option, or when restricted stock (or property) held by the Employee either becomes freely transferable or is no longer subject to a substantial risk of forfeiture; (3) Amounts realized from the sale, exchange or other disposition of stock acquired under a qualified stock option and (4) other amounts which received special tax benefits, or contributions made by the Employer (whether or not under a salary reduction agreement) towards the purchase of an annuity contract described in section 403(b) of the Internal Revenue Code (whether or not the contributions are actually excludable from the gross income of the Employee). In addition, if specified in the Adoption Agreement, Compensation for all Plan purposes shall also include compensation which is not currently includible in the Participant's gross income by reason of the application of Code Sections 125, 402(e)(3), 402(h)(1)(B), or 403(b). Compensation in excess of $200,000 shall be disregarded. Such amount shall be adjusted at the same time and in such manner as permitted under Code Section 415(d). Notwithstanding the above, for Plan Years beginning on or after January 1, 1994. the Compensation of each Employee taken into account under the Plan shall not exceed the OBRA '93 annual compensation limit. The OBRA '93 annual compensation limit is $150,000 as adjusted by the Commissioner for increases in the cost of living in accordance with Code Section 401(a)(17)(B). The cost-of-living adjustment in effect for a calendar year applies to any period, not exceeding 12 months. over which Compensation is determined (determination period) beginning in such calendar yew. If a determination period consists of fewer than 12 months, over which Compensation is determined (determination period) beginning in such calendar year. If a determination period consists of fewer than 12 months, over which Compensation is determined (determination period) beginning in each calendar year. If a determination period consists of fewer than 12 months, the OBRA '93 annual compensation limit will be multiplied by a fraction. the numerator of which is the number of months in the determination period, and the denominator of which is 12. For Plan Years beginning on or after January 1, 1994, any reference in this Plan to the limitation under Code Section 401(a)(17) shall mean the OBRA '93 annual compensation limit set forth in this Section. In applying these limitations, the family group of a Highly Compensated Participant who is subject to the Family Member aggregation rules of Code Section 414(q)(6) because such Participant is either a "five percent owner" of the Employer or one of the ten (10) Highly Compensated Employees paid the greatest "415 Compensation" during the year, shall be treated as a single Participant, except that for this purpose Family Members shall include only the affected participant's spouse and any lineal descendants who have not attained age nineteen (19) before the close of the year. If, as a result of the application of such rules, the adjusted limitation is exceeded, then (except for purposes of determining the portion of Compensation up to the integration level if this plan is integrated), the limitation shall be prorated among the affected individuals in proportion to each such individual's Compensation as determined under this Section prior to the application of this limitation. 1 6 For Plan Years beginning prior to January 1, 1989 the $200,000 limit (without regard to Family Member aggregation) shall apply only for Top Heavy Plan Years and shall not be adjusted. 1.10 "Contract" or "Policy" means any life insurance policy, retirement income policy, or annuity contract (group or individual) issued by the Insurer. In the event of any conflict between the terms of this Plan and the terms of any insurance contract purchased hereunder, the Plan provisions shall control. 1.11 "Deferred Compensation" means that portion of a Participant's total Compensation that such Participant has elected to defer for a Plan Year pursuant to Section 4.2 1.12 "Early Retirement Date" means the date specified in the Adoption Agreement on which a Participant or Former Participant has satisfied the age and service requirements specified in the Adoption Agreement (Early Retirement Age). A Participant shall become fully Vested upon satisfying this requirement if still employed at his Early Retirement Age. A Former Participant who terminates employment after satisfying the service requirement for Early Retirement and who thereafter reaches the age requirement contained herein shall be entitled to receive his benefits under this Plan. 1.13 "Earned Income" means with respect to a Self-Employed Individual, the net earnings from self-employment in the trade or business with respect to which the Plan is established, for which the personal services of the individual are a material income-producing factor. Net earnings will be determined without regard to items not included in gross income and the deductions allocable to such items. Net earnings am reduced by contributions by the Employer to a qualified Plan to the extent deductible under Code Section 404. In addition, for Plan Years beginning after December 31, 1989, net earnings shall be determined with regard to the deduction allowed to the Employer by Code Section 164(f). 1.14 "Elective Contribution" means the Employer's contributions to the Plan that are made pursuant to the Participant's deferral election pursuant to Section 4.2. In addition, if selected in E3 of the Adoption Agreement, the Employer's matching contribution made pursuant to Section 4.1(b) shall be considered an Elective Contribution for purposes of the Plan. Elective Contributions shall be subject to the requirements of Sections 4.2(b) and 4.2(c) and shall further be required to satisfy the discrimination requirements of Regulation 1.401(k)-1(b)(3), the provisions of which are specifically incorporated herein by reference. 1.15 "Eligible Employee" means any Employee specified in D1 of the Adoption Agreement. 1.16 "Employee" means any person who is employed by the Employer, but excludes any person who is employed as an independent contractor. The term Employee shall also include Leased Employees as provided in Code Section 414(n) or (o). Except as provided in the Non-Standardized Adoption Agreement, all Employees of all entities which are an Affiliated Employer will be treated as employed by a single employer. 1.17 "Employer" means the entity specified in the Adoption Agreement, any Participating Employer (as defined in Section 10.1) which shall adopt this Plan, any successor which shall maintain this Plan and any predecessor which has maintained this Plan. 1.18 "Excess Compensation" means, with respect to a Plan that is integrated with Social Security, a Participant's Compensation which is in excess of the amount set forth in the Adoption Agreement. 1.19 "Excess Contributions" means, with respect to a Plan Year, the excess of Elective Contributions and Qualified Non-Elective Contributions made on behalf of Highly Compensated Participants for the Plan Year over the maximum amount of such contributions permitted under Section 4.5(a). 1.20 "Excess Deferred Compensation" means, with respect to any taxable year of a Participant the excess of the aggregate amount of such Participant's Deferred Compensation and the elective deferrals pursuant to Section 4.2(f) actually made on behalf of such Participant for such taxable year, over the dollar limitation provided for in Code Section 402(g), which is incorporated herein by reference. 1.21 "Family Member" means, with respect to an affected Participant, such participants spouse, and such Participant's lineal descendants and ascendants and their spouses, all as described in Code Section 414(q)(6)(B). 1.22 "Fiduciary" means any person who (a) exercises any discretionary authority or discretionary control respecting management of the Plan or exercises any authority or control respecting management or disposition of its assets, (b) renders investment advice for a fee or other compensation, direct or indirect, with respect to any monies or other property of the Plan or has any authority or responsibility to do so, or (c) has any discretionary authority or discretionary responsibility in the administration of the Plan, including, but not limited to, the Trustee, the Employer and its representative body, and the Administrator. 1.23 "Fiscal Year" means the Employer's accounting year as specified in the Adoption Agreement. 1.24 "Forfeiture" means that portion of a Participant's Account that is not Vested, and occurs on the earlier of: (a) the distribution of the entire Vested portion of a Participant's Account, or (b) the last day of the Plan Year in which the Participant incurs five (5) consecutive 1-Year Breaks in Service. Furthermore, for purposes of paragraph (a) above, in the case of a Terminated Participant whose Vested benefit is zero, such Terminated Participant shall be deemed to have received a distribution of his Vested benefit upon his termination of employment. In addition, the term Forfeiture shall also include amounts deemed to be Forfeitures pursuant to any other provision of this Plan. 1.25 "Former Participant" means a person who has been a Participant, but who has ceased to be a Participant for any reason. 1.26 "414(s) Compensation" with respect to any Employee means his Compensation as defined in Section 1.9. However, for purposes of tins Section, Compensation shall be Compensation paid and shall be determined by including, in the case of a non-standardized Adoption Agreement, any items that are excluded from Compensation pursuant to the Adoption Agreement. The amount of "414(s) Compensation" with respect to any Employee shall include "414(s) Compensation" during the entire twelve (12) month period ending on the last day of such Plan Year, except that for Plan Years beginning prior to the later of January 1, 1992, or the date that is sixty (60) days after the date final Regulations are issued, "414(s) Compensation" shall only be recognized as of an Employee's effective date of participation. In addition, if specified in the Adoption Agreement "414(s) Compensation" shall also include compensation which is not currently includible in the Participant's gross income by reason of the application of Code Sections 125, 402(e)(3), 402(h)(1)(B), or 403(b), plus Elective Contributions attributable to Deferred Compensation recharacterized as voluntary Employee contributions pursuant to 4.6(a). 1.27 "415 Compensation" means compensation as defined in Section 4.9(f)(2). 1.28 "Highly Compensated Employee" means an Employee described in Code Section 414(q) and the Regulations thereunder and generally means an Employee who performed services for the Employer during the "determination year" and is in one or more of the following groups: (a) Employees who at any time during the "determination year" or "look-back year" were "five percent owners" as defined in Section 1.35(c). 2 7 (b) Employees who received "415 Compensation" during the "look-back year" from the Employer in excess of $75,000. (c) Employees who received "415 Compensation" during the "look-back year" from the Employer in excess of $50,000 and were in the Top Paid Group of Employees for the Plan Year. (d) Employees who during the "look-back year" were officers of the Employer (as that term is defined within the meaning of the Regulations under Code Section 416) and received "415 Compensation" during the "look-back year" from the Employer greater than 50 percent of the limit in effect under Code Section 415(b)(1)(A) for any such Plan Year. The number of officers shall be limited to the lesser of (i) 50 employees: or (ii) the greater of 3 employees or 10 percent of all employees. If the Employer does not have at least one officer whose annual "415 Compensation" is in excess of 50 percent of the Code Section 415(b)(1)(A) limit, then the highest paid officer of the Employer will be treated as a Highly Compensated Employee. (e) Employees who are in the group consisting of the 100 Employees paid the greatest "415 Compensation" during the "determination year" and are also described in (b),(c) or (d) above when these paragraphs are modified to substitute "determination year" for "look-back year". The "determination year" shall be the Plan Year for which testing is being performed, and the "look-back year" shall be the immediately preceding twelve-month period. However, if the Plan Year is a calendar year, or if another Plan of the Employer so provides, then the "look-back year" shall be the calendar year ending with or within the Plan Year for which testing is being performed, and the "determination year" (if applicable) shall be the period of time, if any, which extends beyond the "look-back year" and ends on the last day of the Plan Year for which testing is being performed (the "lag period"). With respect to this election, it shall be applied on a uniform and consistent basis to all plans, entities, and arrangements of the Employer. For purposes of this Section, the determination of "415 Compensation" shall be made by including amounts that would otherwise be excluded from a Participant's gross income by reason of the application of Code Sections 125.402(e)(3), 402(h)(l)(B) and, in the case of Employer contributions made pursuant to a salary reduction agreement Code Section 403(b). Additionally, the dollar threshold amounts specified in (b) and (c) above shall be adjusted at such time and in such manner as is provided in Regulations. In the case of such an adjustment the dollar limits which shall be applied are those for the calendar year in which the "determination year" or "look back year" begins. In determining who is a Highly Compensated Employee, Employees who are non-resident aliens and who received no earned income (within the meaning of Code Section 911(d)) from the Employer constituting United States source income within the meaning of Code Section 861(a)(3) shall not be treated as Employees. Additionally, all Affiliated Employers shall be taken into account as a single employer and Leased Employees within the meaning of Code Sections 414(n)(2) and 414(o)(2) shall be considered Employees unless such Leased Employees are covered by a plan described in Code Section 414(n)(5) and are not covered in any qualified plan maintained by the Employer. The exclusion of Leased Employees for this purpose shall be applied on a uniform and consistent basis for all of the Employer's retirement plans. In addition, Highly Compensated Former Employees shall be treated as Highly Compensated Employees without regard to whether they performed services during the "determination year". 1.29 "Highly Compensated Former Employee" means a form Employee who had a separation year prior to the "determination year" and was a Highly Compensated Employee in the year of separation from service or in any "determination year" after attaining age 55. Notwithstanding the foregoing, an Employee who separated from service prior to 1987 will be treated as a Highly Compensated Former Employee only if during the separation year (or year preceding the separation year) or any year after the Employee attains age 55 (or the last year ending before the Employee's 55th birthday), the Employee either received "415 Compensation" in excess of $50,000) or was a "five percent owner". For purposes of this Section, "determination year", "415 Compensation" and "five percent owner" shall be determined in accordance with Section 1.28. Highly Compensated Former Employees shall be treated as Highly Compensated Employees. The method set forth in this Section for determining who is a "Highly Compensated Former Employee" shall be applied on a uniform and consistent basis for all purposes for which the Code Section 414(q) definition is applicable. 1.30 "Highly Compensated Participant" means any Highly Compensated Employee who is eligible to participate in the Plan. 1.31 "Hour of Service" means (1)each hour for which an Employee is directly or indirectly compensated or entitled to compensation by the Employer for the performance of duties during the applicable computation period: (2) each hour for which an Employee is directly or indirectly compensated or entitled to compensation by the Employer (irrespective of whether the employment relationship has terminated) for reasons other than performance of duties (such as vacation, holidays, sickness, jury duty, disability, lay-off, military duty or leave of absence) during the applicable computation period. (3) each hour for which back pay is awarded or agreed to by the Employer without regard to mitigation of damages. The same Hours of Service shall not be credited both under (1) or (2), as the case may be, and under (3). Notwithstanding the above, (i) no more than 501 Hours of Service are required to be credited to an Employee on account of any single continuous period during which the Employee performs no duties (whether or not such period occurs in a single computation period); (ii) an hour for which an Employee is directly or indirectly paid, or entitled to payment, on account of a period during which no duties are performed is not required to be credited to the Employee if such payment is made or due under a plan maintained solely for the purpose of complying with applicable worker's compensation, or unemployment compensation or disability insurance laws, and (iii) Hours of Service are not required to be credited for a payment which solely reimburses an Employee for medical or medically related expenses incurred by the Employee. For purposes of this Section, a payment shall be deemed to be made by or due from the Employer regardless of whether such payment is made by or due from this Employer directly, or indirectly through, among others, a trust fund, or insurer, to which the Employer contributes or pays premiums and regardless of whether contributions made or due to the trust fund, insurer, or other entity are for the benefit of particular Employees or are on behalf of a group of Employees in the aggregate. An Hour of Service must be counted for the purpose of determining a Year of Service, a year of participation for purposes of accrued benefits a 1-Year Break in Service, and employment commencement date (or reemployment commencement date). The provisions of Department of Labor regulations 2530.200b-2(b) and (c) are incorporated herein by reference. Hours of Service will be credited for employment with all Affiliated Employers and for any individual considered to be a Leased Employee pursuant to Code Sections 414(n) or 414(o) and the Regulations thereunder. Hours of Service will be determined on the basis of the method selected in the Adoption Agreement. 1.32 "Insurer" means any legal reserve insurance company which shall issue one or more policies under the Plan. 1.33 "Investment Manager" means an entity that (a) has the power to manage, acquire, or dispose of Plan assets and (b) acknowledges fidu- 3 8 ciary responsibility to the Plan in writing. Such entity must be a person, firm, or corporation registered as an investment adviser under the Investment Advisers, Act of 1940, a bank, or an insurance company. 1.34 "Joint and Survivor Annuity" means an annuity for the life of a Participant with a survivor annuity for the life of the Participant's spouse which is not less that 1/2, nor greater than the amount of the annuity payable during the joint lives of the Participant and the Participant's spouse. The Joint and Survivor Annuity will be the amount of benefit which can be purchased with the Participant's Vested interest in the Plan. 1.35 "Key Employee" means an Employee as defined in Code Section 416(i) and the Regulations thereunder. Generally, any Employee or former Employee (as well as each of his Beneficiaries) is considered a Key Employee if he, at any time during the Plan Year that contains the "Determination Date" or any of the preceding four (4) Plan Years, has been included in one of the following categories: (a) an officer of the Employer (as that term is defined within the meaning of the Regulations under Code Section 416) having annual "415 Compensation" greater than 50 percent of the amount in effect under Code Section 415(b)(1)(A) for any such Plan Year. (b) one of the ten employees having annual "415 Compensation" from the Employer for a Plan Year greater than the dollar limitation in effect under Code Section 415(c)(1)(A) for the calendar year in which such Plan Year ends and owning (or considered as owning within the meaning of Code Section 318) both more than one-half percent interest and the largest interests in the Employer. (c) a "five percent owner" of the Employer. "Five percent owner" means any person who owns (or is considered as owning within the meaning of Code Section 318) more than five percent (5%) of the outstanding stock of the Employer or stock possessing more than five percent (5%) of the total combined voting power of all stock of the Employer or, in the case of an unincorporated business, any person who owns more than five percent (5%) of the capital or profits merest in the Employer. In determining percentage ownership hereunder, employers that would otherwise be aggregated under Code Sections 414(b), (c), (m) and (o) shall be treated as separate employers. (d) a "one percent owner" of the Employer having an annual "415 Compensation" from the Employer of more than $150,000. "One percent owner" means any person who owns (or is considered as owning within the meaning of Code Section 318) more than one percent (1%) of the outstanding stock of the Employer or stock possessing more than one percent (1%) of the total combined voting power of all stock of the Employer or, in the case of an unincorporated business, any person who owns more than one percent (1%) of the capital or profits interest in the Employer. In determining percentage ownership hereunder, employers that would otherwise be aggregated under Code Sections 414(b), (c), (m) and (o) shall be treated as separate employers. However, in determining whether an individual has "415 Compensation" of more than $150,000. "415 Compensation" from each employer required to be aggregated under Code Sections 414(b), (c), (m) and (o) shall be taken into account. For purposes of this Section, the determination of "415 Compensation" shall be made by including amounts that would otherwise be excluded from a Participant's gross income by reason of the application of Code Sections 125,402(e)(3), 402(h)(1)(B) and, in the case of Employer contributions made pursuant to a salary reduction agreement Code section 403(b). 1.36 "Late Retirement Date" means the date of, or the first day of the month or the Anniversary Date coinciding with or next following, whichever corresponds to the election made for the Normal Retirement Date, a Participant's actual retirement after having reached his Normal Retirement Date. 1.37 "Leased Employee" means any person (other than an Employee of the recipient) who pursuant to an agreement between the recipient and any other person ("leasing organization") has performed services for the recipient (or for the recipient and related persons determined in accordance with Code Section 414(n)(6)) on a substantially full time basis for a period of at least one year, and such services are of a type historically performed by employees in the business field of the recipient employer. Contributions or benefits provided a leased employee by the leasing organization which are attributable to services performed for the recipient employer shall be treated as provided by the recipient employer. A leased employee shall not be considered an Employee of the recipient if: (i) such employee is covered by a money purchase pension plan providing: (1) a nonintegrated employer contribution rate of at least 10 percent of compensation, as defined in Code Section 415(c)(3), but including amounts contributed pursuant to a salary reduction agreement which am excludable from the employee's gross income under Code Sections 125, 402(e)(3), 402(h), or 403(b), (2) immediate participation, and (3) full and immediate vesting; and (ii) leased employees do not constitute more than 20 percent of the recipient's non-highly compensated workforce. 1.38 "Net Profit" means with respect to any Fiscal Year the Employer's net income or profit for such Fiscal Year determined upon the basis of the Employer's books of account in accordance with generally accepted accounting principles, without any reduction for taxes based upon income, or for contributions made by the Employer to this Plan and any other qualified plan. 1.39 "Non-Elective Contribution" means the Employer's contributions to the Plan other than those made pursuant to the Participant's deferral election made pursuant to Section 4.2 and any Qualified Non-Elective Contribution. In addition, if selected in E3 of the Adoption Agreement, the Employer's Matching Contribution made pursuant to Section 4. 1 (b) shall be considered a Non-Elective Contribution for purposes of the Plan. 1.40 "Non-Highly Compensated Participant" means any Participant who is neither a Highly Compensated Employee nor a Family Member. 1.41 "Non-Key Employee" means any Employee or former Employee (and his Beneficiaries) who is not a Key Employee. 1.42 "Normal Retirement Age" means the age specified in the Adoption Agreement at which time a Participant shall become fully Vested in his Participant's Account. 1.43 "Normal Retirement Date" means the date specified in the Adoption Agreement on which a Participant shall become eligible to have his benefits distributed to him. 1.44 "1-Year Break in Service" means the applicable computation period during which an Employee has not completed more than 500 Hours of Service with the Employer. Further solely for the purpose of determining whether a Participant has incurred a 1-Year Break in Service. Hours of Service shall be recognized for "authorized leaves of absence" and "maternity and paternity leaves of absence." "Authorized leave of absence" means an unpaid, temporary cessation from active employment with the Employer pursuant to an established nondiscriminatory policy, whether occasioned by illness, military service, or any other reason. A "maternity or paternity leave of absence" means for Plan Years beginning after December 31, 1994, an absence from work for any period by reason of the Employee's pregnancy, birth of the Employee's child, placement of a child with the Employee in connection with the adoption of such child, or any absence for the purpose of caring for such child for a period immediately following such birth or placement. For this purpose, Hours of Service shall be credited for the computation period in which the absence from work begins, only if credit therefore is necessary to prevent the Employee 4 9 from incurring a 1-Year Break in Service, or, in any other case, in the immediately following computation period. The Hours of Service credited for a "maternity or paternity leave of absence" shall be those which would normally have been credited but for such absence. or, in any case in which the Administrator is unable to determine such hours normally credited, eight (8) Hours of Service per day. The total Hours of Service required to be credited for a "maternity or paternity leave of absence" shall not exceed 501. 1.45 "Owner-Employee" means a sole proprietor who owns the entire interest in the Employer or a partner who owns more than 10% of either the capital interest or the profits interest in the Employer and who receives income for personal services from the Employer. 1.46 "Participant" means any Eligible Employee who participates in the Plan as provided in Section 3.2 and has not for any reason become ineligible to participate further in the Plan. 1.47 "Participant's Account" means the account established and maintained by the Administrator for each Participant with respect to his total interest under the Plan resulting from the Employer's Non-Elective Contributions. A separate accounting shall be maintained for matching contributions if they are deemed to be Non-Elective Contributions. 1.48 "Participant's Combined Account" means the total aggregate amount of each Participant's Elective Account, Qualified Non-Elective Account, and Participant's Account. 1.49 "Participant's Elective Account" means the account established and maintained by the Administrator for each Participant with respect to his total interest in the Plan and Trust resulting from the Employer's Elective Contributions. A separate accounting shall be maintained with respect to that portion of the Participant's Elective Account attributable to Elective Contributions made pursuant to Section 4.2. Employer matching contributions if they are deemed to be Elective Contributions, and any Qualified Non-Elective Contributions. 1.50 "Participant's Rollover Account" means the account established and maintained by the Administrator for each Participant with respect to his total interest in the Plan resulting from amounts transferred from another qualified plan or "conduit" Individual Retirement Account in accordance with Section 4.11. 1.51 "Plan" means this instrument (hereinafter referred to as MFS Fund Distributors, Inc. 401(k) Profit Sharing Plan and Trust Basic Plan Document #02) including all amendments thereto, and the Adoption Agreement as adopted by the Employer. 1.52 "Plan Year" means the Plan's accounting year as specified in C2 of the Adoption Agreement. 1.53 "Pre-Retirement Survivor Annuity" means an immediate annuity for the life of the Participant's spouse, the payments under which must be equal to die actuarial equivalent of 50% of the Participant's Vested interest in the Plan as of the date of death. 1.54 "Qualified Non-Elective Account" means the account established hereunder to which Qualified Non-Elective Contributions are allocated. 1.55 "Qualified Non-Elective Contribution" means the Employer's contributions to the Plan that are made pursuant to Section 4.1(d) and Section 4.6(b) which are used to satisfy the "Actual Deferral Percentage" tests. Qualified Non-Elective Contributions are nonforfeitable when made and are distributable only as specified in Sections 4.2(c) and 6.11. In addition, the Employer's contributions to the Plan that are made pursuant to Section 4.8(h) and which are used to satisfy the "Actual Contribution Percentage" tests shall be considered Qualified Non-Elective Contributions. 1.56 "Qualified Voluntary Employee Contribution Account" means the account established and maintained by the Administrator for each Participant with respect to his total interest under the Plan resulting from the Participant's tax deductible qualified voluntary employee contributions made pursuant to Section 4-14. 1.57 "Regulation" means the Income Tax Regulations as promulgated by the Secretary of the Treasury or his delegate, and as amended from time to time. 1.58 "Retired Participant" means a person who has been a Participant, but who has become entitled to retirement benefits under the Plan. 1.59 "Retirement Date" means the date as of which a Participant retires for reasons other than Total and Permanent Disability, whether such retirement occurs on a Participant's Normal Retirement Date. Early or Late Retirement Date (see Section 6.1). 1.60 "Self-Employed Individual" means an individual who has earned income for the taxable year from the trade or business for which the Plan is established, and, also, an individual who would have had earned income but for the fact that the trade or business had no net profits for the taxable year. A Self-Employed Individual shall be treated as an Employee. 1.61 "Shareholder-Employee" means a Participant who owns more than five percent (5%) of the Employer's outstanding capital stock during any year in which the Employer elected to be taxed as a Small Business Corporation under the applicable Code Section. 1.62 "Short Plan Year" means, if specified in the Adoption Agreement, that the Plan Year shall be less than a 12 month period. If chosen, the following rules shall apply in the administration of this Plan. In determining whether an Employee has completed a Year of Service for benefit accrual purposes in the Short Plan Year. the number of the Hours of Service required shall be proportionately reduced based on the number of days in the Short Plan Year. The determination of whether an Employee has completed a Year of Service for vesting and eligibility purposes shall be made in accordance with Department of Labor Regulation 2530.203-2(c). In addition, if this Plan is integrated with Social Security, the integration level shall also be proportionately reduced based on the number of days in the Short Plan Year. 1.63 "Super Top Heavy Plan" means a plan described in Section 2.2(b). 1.64 "Taxable Wage Base" means, with respect to any year, the maximum amount of earnings which may be considered wages for such year under Code Section 3121(a)(1). 1.65 "Terminated Participant" means a person who has been a Participant, but whose employment has been terminated other than by death, Total and Permanent Disability or retirement. 1.66 "Top Heavy Plan" means a plan described in Section 2.2(a). 1.67 "Top Heavy Plan Year" means a Plan Year commencing after December 31. 1983 during which the Plan is a Top Heavy Plan. 1.68 "Top Paid Group" shall be deemed pursuant to Code Section 414(q) and the Regulations thereunder and generally means the top 20 percent of Employees who performed services for the Employer during the applicable year, ranked according to the amount of "415 Compensation" (as determined pursuant to Section 1.28) received from the Employer during such year. All affiliated Employers shall be taken into account as a single employer and Leased Employees shall be treated as Employees pursuant to Code Section 414(n) or (o). Employees who are non-resident aliens who received no earned income (within the meaning of Code Section 911(d)(2)) from the Employer constituting United States source income within the meaning of Code Section 861(a)(3) shall not be treated as Employees. Additionally, for the purpose of determining the number of active Employees in any year the following additional Employees shall also be excluded, however, such Employees shall still be considered for the purpose of identifying the particular Employees in the Top Paid Group: (a) Employees with less than six (6) months of service; (b) Employees who normally work less than 17 1/2 hours per week; (c) Employees who normally work less than six (6) months during a year; and (d) Employees who have not yet attained age 21. 5 10 In addition, if 90 percent or more of the Employees of the Employer are covered under agreements the Secretary of Labor finds to be collective bargaining agreements between Employee representatives and the Employer, and the Plan covers only Employees who are not covered under such agreements, then Employees covered by such agreements shall be excluded from both the total number of active Employees as well as from the identification of particular Employees in the Top Paid Group. The foregoing exclusions set forth in this Section shall be applied on a uniform and consistent basis for all purposes for which the Code Section 414(q) definition is applicable. 1.69 "Total and Permanent Disability" means the inability to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment that can be expected to result in death or which has lasted or can be expected to last for a continuous period of not less than 12 months. The disability of a Participant shall be determined by a licensed physician chosen by the Administrator. However, if the condition constitutes total disability under the federal Social Security Acts, the Administrator may rely upon such determination that the Participant is Totally and Permanently Disabled for the purposes of this Plan. The determination shall be applied uniformly to all Participants. 1.70 "Trustee" means the person or entity named in B6 of the Adoption Agreement and any successors. 1.71 "Trust Fund" means the assets of the Plan and Trust as the same shall exist from time to time. 1.72 "Vested" means the nonforfeitable portion of any account maintained on behalf of a Participant. 1.73 "Voluntary Contribution Account" means the account established and maintained by the Administrator for each Participant with respect to his total interest in the Plan resulting from the Participant's nondeductible voluntary contributions made pursuant to Section 4.12. Amounts recharacterized as voluntary Employee contributions pursuant to Section 4.6(a) shall remain subject to the limitations of Sections 4.2(b) and 4.2(c). Therefore, a separate accounting shall be maintained with respect to that portion of the Voluntary Contribution Account attributable to voluntary Employee contributions made pursuant to Section 4.12. 1.74 "Year of Service" means the computation period of twelve (12) consecutive months, herein set forth, and during which an Employee has completed at least 1000 Hours of Service. For purposes of eligibility for participation, the initial computation period shall begin with the date on which the Employee first performs an Hour of Service (employment commencement date). The computation period beginning after a 1-Year Break in Service shall be measured from the date on which an Employee again performs an Hour of Service. The suceeding computation periods shall begin with the first anniversary of the Employee's employment commencement date. However, if one (1) Year of Service or less is required as a condition of eligibility, then after the initial eligibility computation period. the eligibility computation period shall shift to the current Plan Year which includes the anniversary of the date on which the Employee first performed an Hour of Service. An Employee who is credited with 1,000 Hours of Service in both the initial eligibility computation period and the first Plan Year which commences prior to the first anniversary of the Employee's initial eligibility computation period will be credited with two Years of Service for purposes of eligibility to Participate. For vesting purposes, and all other purposes not specifically addressed in this Section, the computation period shall be the Plan Year including periods prior to the Effective Date of the Plan unless specifically excluded pursuant to the Adoption Agreement. Years of service and breaks in service will be measured on the same computation period. Years of Service with any predecessor Employer which maintained this Plan shall be recognized. Years of Service with any other predecessor Employer shall be recognized as specified in the Adoption Agreement Years of Service with any Affiliated Employer shall be recognized. ARTICLE II TOP HEAVY PROVISIONS AND ADMINISTRATION 2.1 TOP HEAVY PLAN REQUIREMENTS For any Top Heavy Plan Year, the Plan shall provide the special vesting requirements of Code Section 416(b) pursuant to Section 6.4 of the Plan and the special minimum allocation requirements of Code Section 416(c) pursuant to Section 4.4(i) of the Plan. 2.2 DETERMINATION OF TOP HEAVY STATUS (a) This Plan shall be a Top Heavy Plan for any Plan Year beginning after December 31, 1983, in which, as of the Determination Date. (1) the Present Value of Accrued Benefits of Key Employees and (2) the sum of the Aggregate Accounts of Key Employees under this Plan and all plans of an Aggregation Group, exceeds sixty percent (60%) of the Present Value of Accrued Benefits and the Aggregate Accounts of all Key and Non-Key Employees under this Plan and all plans of an Aggregation Group. If any Participant is a Non-Key Employee for any Plan Year, but such Participant was a Key Employee for any prior Plan Year, such Participant's Present Value of Accrued Benefit and/or Aggregate Account balance shall not be taken into account for purposes of determining whether this Plan is a Top Heavy or Super Top Heavy Plan (or whether any Aggregation Group which includes this Plan is a Top Heavy Group). In addition if a Participant or Former Participant has not performed any services for any Employer maintaining the Plan at any time during the five year period ending on the Determination Date, any accrued benefit for such Participant or Former Participant shall not be taken into account for the purposes of determining whether this Plan is a Top Heavy or Super Top Heavy Plan. (b) This Plan shall be a Super Top Heavy Plan for any Plan Year beginning after December 31, 1983, in which, as of the Determination Date, (1) the Present Value of Accrued Benefits of Key Employees and (2) the sum of the Aggregate Accounts of Key Employees under this Plan and all plans of an Aggregation Group, exceeds ninety percent (90%) of the Present Value of Accrued Benefits and the Aggregate Accounts of all Key and Non-Key Employees under this Plan and all plans of an Aggregation Group. (c) Aggregate Account: A Participant's Aggregate Account as of the Determination Date is the sum of: (1) his Participant's Combined Account balance as of the most recent valuation occurring within a twelve (12) month period ending on the Determination Date; (2) an adjustment for any contributions due as of the Determination Date. Such adjustment shall be the amount of any contributions actually made after the valuation date but on or before the Determination Date, except for the first Plan Year when such adjustment shall also reflect the amount of any contributions made after the Determination Date that are allocated as of a date in that first Plan Year; (3) any Plan distributions made within the Plan Year that includes the Determination Date or within the four (4) preceding Plan Years. However, in the case of distributions made after the valuation date and prior to the Determination Date, such distributions are not included 6 11 as distributions for top heavy purposes to the extent that such distributions are already included in the Participant's Aggregate Account balance as of the valuation date. Notwithstanding anything herein to the contrary, all distributions, including distributions made prior to January 1, 1984, and distributions under a terminated plan which if it had not been terminated would have been required to be included in an Aggregation Group, will be counted. Further, distributions from the Plan (including the cash value of life insurance policies) of a Participant's account balance because of death shall be treated as a distribution for the purposes of this paragraph. (4) any Employee contributions, whether voluntary or mandatory. However, amounts attributable to tax deductible qualified voluntary employee contributions shall not be considered to be a part of the Participant's Aggregate Account balance. (5) with respect to unrelated rollovers and plan-to-plan transfers (ones which are both initiated by the Employee and made from a plan maintained by one employer to a plan maintained by another employer), if this Plan provides the rollovers or plan-to-plan transfers, it shall always consider such rollovers or plan-to-plan transfers as a distribution for the purposes of this Section. If this Plan is the plan accepting such rollovers or plan-to-plan transfers, it shall not consider such rollovers or plan-to-plan transfers accepted after December 31, 1983 as part of the Participant's Aggregate Account balance. However, rollovers or plan-to-plan transfers accepted prior to January 1, 1984 shall be considered as part of the Participant's Aggregate Account balance. (6) with respect to related rollovers and plan-to-plan transfers (ones either not initiated by the Employee or made to a plan maintained by the same employer), if this Plan provides the rollover or plan-to-plan transfer. it shall not be counted as a distribution for purposes of this Section. If this Plan is the plan accepting such rollover or plan-to-plan transfer, it shall consider such rollover or plan-to-plan transfer as part of the Participant's Aggregate Account balance. irrespective of the date on which such rollover or plan-to-plan transfer is accepted. (7) For the purposes of determining whether two employers are to be treated as the same employer in 2.2(c)(5) and 2.2(c)(6) above, all employers aggregated under Code Section 414(b),(c),(m) and (o) are treated as the same employer. (d) "Aggregation Group" means either a Required Aggregation Group or a Permissive Aggregation Group as hereinafter determined. (1) Required Aggregation Group: In determining a Required Aggregation Group hereunder, each qualified plan of the Employer, including any Simplified Employee Pension Plan, in which a Key Employee is a participant in the Plan Year containing the Determination Date or any of the four Preceding Plan Years, and each other qualified plan of the Employer which enables any qualified plan in which a Key Employee participates to meet the requirements of Code Sections 401(a)(4) or 410, will be required to be Aggregated. Such group shall be known as a Required Aggregation Group. In the case of a Required Aggregation Group, each plan in the group will be considered a Top Heavy Plan if the Required Aggregation Group is a Top Heavy Group. No plan in the Required Aggregation Group will be considered a Top Heavy Plan if the Required Aggregation Group is not a Top Heavy Group. (2) Permissive Aggregation Group: The Employer may also include any other plan of the Employer, including any Simplified Employee Pension Plan, not required to be included in the Required Aggregation Group, provided the resulting group, taken as a whole, would continue to satisfy the provisions of Code Sections 401(a)(4) and 410. Such group shall be known as a Permissive Aggregation Group. In the case of a Permissive Aggregation Group, only a plan that is part of the Required Aggregation Group will be considered a Top Heavy Plan if the Permissive Aggregation Group is a Top Heavy Group. No plan in the Permissive Aggregation Group will be considered a Top Heavy Plan if the Permissive Aggregation Group is not a Top Heavy Group. (3) Only those plans of the Employer in which the Determination Dates fall within the same calendar year shall be aggregated in order to determine whether such plans are Top Heavy Plans. (4) When aggregating plans, the value of Aggregate Accounts and Accrued Benefits will be calculated with reference to the Determination Dates that fall within the same calendar year. (5) An Aggregation Group shall include any terminated plan of the Employer if it was maintained within the last five (5) years ending on the Determination Date. (e) "Determination Date" means (a) the last day of the preceding Plan Year, or (b) in the case of the first Plan Year, the last day of such Plan Year. (f) Present Value of Accrued Benefit: In the case of a defined benefit plan, the Present Value of Accrued Benefit for a Participant other than a Key Employee shall be as determined using the single accrual method used for all plans of the Employer and Affiliated Employers, or if no such single method exists, using a method which results in benefits accruing not more rapidly than the slowest accrual rate permitted under Code Section 411(b)(1)(C). The determination of the Present Value of Accrued Benefit shall be determined as of the most recent valuation date that falls within or ends with the 12-month period ending on the Determination Date, except as provided in Code Section 416 and the Regulations thereunder for the first and second plan years of a defined benefit plan. However, any such determination must include present value of accrued benefit attributable to any Plan distributions referred to in Section 2.2(c)(3) above, any Employee contributions referred to in Section 2.2(c)(4) above or any related or unrelated rollovers referred to in Sections 2.2(c)(5) and 2.2(c)(6) above. (g) "Top Heavy Group" means an Aggregation Group in which, as of the Determination Date, the sum of: (1) the Present Value of Accrued Benefits of Key Employees under all defined benefit plans included in the group, and (2) the Aggregate Accounts of Key Employees under all defined contribution plans included in the group, exceeds sixty percent (60%) of a similar sum determined for all Participants. (h) The Administrator shall determine whether this Plan is a Top Heavy Plan on the Anniversary Date specified in the Adoption Agreement. Such determination of the top heavy ratio shall be in accordance with Code Section 416 and the Regulations thereunder. 7 12 2.3 POWERS AND RESPONSIBILITIES OF THE EMPLOYER (a) The Employer shall be empowered to appoint and remove the Trustee and the Administrator from time to time as it deems necessary for the proper administration of the Plan to assure that the Plan is being operated for the exclusive benefit of the Participants and their Beneficiaries in accordance with the terms of the Plan, the Code, and the Act. (b) The Employer shall establish a "funding policy and method", i.e., it shall determine whether the Plan has a short run need for liquidity (e.g., to pay benefits) or whether liquidity is a long run goal and investment growth (and stability of same) is a more current need, or shall appoint a qualified person to do so. The Employer or its delegate shall communicate such needs and goals to the Trustee, who shall coordinate such Plan needs with its investment policy. The communication of such a "funding policy and method" shall not, however, constitute a directive to the Trustee as to investment of the Trust Funds. Such "funding policy and method" shall be consistent with the objectives of this Plan and with the requirements of Title I of the Act. (c) The Employer may, in its discretion, appoint an Investment Manager to manage all or a designated portion of the assets of the Plan. In such event, the Trustee shall follow the directive of the Investment Manager in investing the assets of the Plan managed by the Investment Manager. (d) The Employer shall periodically review the performance of any Fiduciary or other person to whom duties have been delegated or allocated by it under the provisions of this Plan or pursuant to procedures established hereunder. This requirement may be satisfied by formal periodic review by the Employer or by a qualified person specifically designated by the Employer, through day-to-day conduct and evaluation or through other appropriate ways. 2.4 DESIGNATION OF ADMINISTRATIVE AUTHORITY The Employer shall appoint one or more Administrators. Any person, including, but not limited to, the Employees of the Employer, shall be eligible to serve as an Administrator. Any person so appointed shall signify his acceptance by filing written acceptance with the Employer. An Administrator may resign by delivering his written resignation to the Employer or be removed by the Employer by delivery of written notice of removal to take effect at a date specified therein, or upon delivery to the Administrator if no date is specified. The Employer, upon the resignation or removal of an Administrator, shall promptly designate in writing a successor to this position. If the Employer does not appoint an Administrator, the Employer, will function as the Administrator. 2.5 ALLOCATION AND DELEGATION OF RESPONSIBILITIES If more than one person is appointed as Administrator, the responsibilities of each Administrator may be specified by the Employer and accepted in writing by each Administrator. In the event that no such delegation is made by the Employer, the Administrators may allocate the responsibilities among themselves, in which event the Administrators shall notify the Employer and the Trustee in writing of such action and specify the responsibilities of each Administrator. The Trustee thereafter shall accept and rely upon any documents executed by the appropriate Administrator until such time as the Employer or the Administrators file with the Trustee a written revocation of such designation. 2.6 POWERS AND DUTIES OF THE ADMINSTRATOR The primary responsibility of the Administrator is to administer the Plan for the exclusive benefit of the Participants and their Beneficiaries, subject to the specific terms of the Plan. The Administrator shall administer the Plan in accordance with its terms and shall have the power and discretion to construe the terms of the plan and determine all questions arising in connection with the administration, interpretation, and application of the Plan. Any such determination by the Administrator shall be conclusive and binding upon all persons. The Administrator may establish procedures, correct any defect, supply any information, or reconcile any inconsistency in such manner and to such extent as shall be deemed necessary or advisable to carry out the purpose of the Plan; provided, however, that any procedure, discretionary act, interpretation or construction shall be done in a nondiscriminatory manner based upon uniform principles consistently applied and shall be consistent with the intent that the Plan shall continue to be deemed a qualified plan under the terms of Code Section 401(a), and shall comply with the terms of the Act and all regulations issued pursuant thereto. The Administrator shall have all powers necessary or appropriate to accomplish his duties under this Plan. The Administrator shall be charged with the duties of the general administration of the Plan, including, but not limited to, the following: (a) the discretion to determine all questions relating to the eligibility of Employees to participate or remain a Participant hereunder and to receive benefits under the Plan; (b) to compute, certify, and direct the Trustee with respect to the amount and the kind of benefits to which any Participant shall be entitled hereunder; (c) to authorize and direct the Trustee with respect to all nondiscretionary or otherwise directed disbursements from the Trust Fund; (d) to maintain all necessary records for the administration of the Plan; (e) to interpret the provisions of the Plan and to make and publish such rules for regulation of the Plan as are consistent with the terms hereof; (f) to determine the size and type of any Contract to be purchased from any Insurer, and to designate the Insurer from which such Contract shall be purchased; (g) to compute and certify to the Employer and to the Trustee from time to time the sums of money necessary or desirable to be contributed to the Trust Fund; (h) to consult with die Employer and the Trustee regarding the short and long-term liquidity needs of the Plan in order that the Trustee can exercise any investment discretion in a manner designed to accomplish specific objectives; (i) to prepare and distribute to Employees a procedure for notifying Participants and Beneficiaries of their rights to elect Joint and Survivor Annuities and Pre-Retirement Survivor Annuities if required by the Code and Regulations thereunder; (j) to prepare and implement a procedure to notify Eligible Employees that they may elm to have a portion of their Compensation deferred or paid to them in cash; (k) to assist any Participant regarding his rights, benefits, or elections available under the Plan. 2.7 RECORDS AND REPORTS The Administrator shall keep a record of all actions taken and shall keep all others books of account, records, and other data that may be necessary for proper administration of the Plan and shall be responsible for supplying all information and reports to the Internal Revenue Service, Department of Labor, Participants, Beneficiaries and others as required by law. 2.8 APPOINTMENT OF ADVISERS The Administrator, or the Trustee with the consent of the Administrator, may appoint counsel, specialists, advisers, and other persons as the Administrator or the Trustee deems necessary or desirable in connection with the administration of this Plan. 2.9 INFORMATION FROM EMPLOYER To enable the Administrator to perform his functions, the Employer 8 13 shall supply full and timely information to the Administrator on all matters relating to the Compensation of all Participants, their Hours, of Service, their Years of Service, their retirement, death, disability, or termination of employment, and such other pertinent facts as the Administrator may require, and the Administrator shall advise the Trustee of such of the foregoing facts as may be pertinent to the Trustee's duties under the Plan. The Administrator may rely upon such information as is supplied by the Employer and shall have no duty or responsibility to verify such information. 2.10 PAYMENT OF EXPENSES All expenses of administration may be paid out of the Trust Fund unless paid by the Employer. Such expenses shall include any expenses incident to the functioning of the Administrator, including, but not limited to, fees of accountants, counsel, and other specialists and their agents, and other costs of administering the Plan. Until paid, the expenses shall constitute a liability of the Trust Fund. However, the Employer may reimburse the Trust Fund for any administration expense incurred. Any administration expense paid to the Trust Fund as a reimbursement shall not be considered an Employer contribution. 2.11 MAJORITY ACTIONS Except where there has been an allocation and delegation of administrative authority pursuant to Section 2.5, if there shall be more than one Administrator, they shall act by a majority of their number, but may authorize one or more of them to sign all papers on their behalf. 2.12 CLAIMS PROCEDURE Claims for benefits under the Plan may be filed in writing with the Administrator. Written notice of the disposition of a claim shall be furnished to the claimant within 90 days after the application is filed. In the event the claim is denied, the reasons for the denial shall be specifically set forth in the notice in language calculated to be understood by the claimant, pertinent provisions of the Plan shall be cited, and, where appropriate, an explanation as to how the claimant can perfect the claim will be provided. In addition, the claimant shall be furnished with an explanation of the Plan's claims review procedure. 2.13 CLAIMS REVIEW PROCEDURE Any Employee, former Employee, or Beneficiary of either, who has been denied a benefit by a decision of the Administrator pursuant to Section 2.12 shall be entitled to request the Administrator to give further consideration to his claim by filing with the Administrator a written request for a hearing. Such request, together with a written statement of the reasons why the claimant believes his claim should be allowed, shall be filed with the Administrator no later than 60 days after receipt of the written notification provided for in Section 2.12. The Administrator shall then conduct a hearing within the next 60 days, at which the claimant may be represented by an attorney or any other representative of his choosing and expense and at which the claimant shall have an opportunity to submit written and oral evidence and arguments in support of his claim. At the hearing (or prior thereto upon 5 business days written notice to the Administrator) the claimant or his representative shall have an opportunity to review all documents in the possession of the Administrator which are pertinent to the claim at issue and its disallowance. Either the claimant or the Administrator may cause a court reporter to attend the hearing and record the proceedings. In such event, a complete written transcript of the proceedings shall be furnished to both parties by the court reporter. The full expense of any such court reporter and such transcripts shall be borne by the party causing the court reporter to attend the hearing. A final decision as to the allowance of the claim shall be made by the Administrator within 60 days of receipt of the appeal (unless there has been an extension of 60 days due to special circumstances, provided the delay and the special circumstances occasioning it are communicated to the claimant within the 60 day period). Such communication shall be written in a manner calculated to be understood by the claimant and shall include specific reasons for the decision and specific references to the Pertinent Plan provisions on which the decision is based. ARTICLE III ELIGIBILITY 3.1 CONDITIONS OF ELIGIBILITY Any Eligible Employee shall be eligible to participate hereunder on the date he has satisfied the requirements specified in the Adoption Agreement. 3.2 EFFECTIVE DATE OF PARTICIPATION An Eligible Employee who has become eligible to be a Participant shall become a Participant effective as of the day specified in the Adoption Agreement. In the event an Employee who has satisfied the Plan's eligibility requirements and would otherwise have become a Participant shall go from a classification of a noneligible Employee to an Eligible Employee, such Employee shall become a Participant as of the date he becomes an Eligible Employee. In the event an Employee who has satisfied the Plan's eligibility requirements and would otherwise become a Participant shall go from a classification of an Eligible Employee to a noneligible Employee and becomes ineligible to participate and has not incurred a 1-Year Break in Service, such Employee shall participate in the Plan as of the date he returns to an eligible class of Employees. If such Employee does incur a 1-Year Break in Service, eligibility will be determined under the Break in Service rules of the Plan. 3.3 DETERMINATION OF ELIGIBILITY The Administrator shall determine the eligibility of each Employee for participation in the Plan based upon information furnished by the Employer. Such determination shall be conclusive and binding upon all persons, as long as the same is made pursuant to the Plan and the Act. Such determination shall be subject to review per Section 2.13. 3.4 TERMINATION OF ELIGIBILITY In the event a Participant shall go from a classification of an Eligible Employee to an ineligible Employee, such Former Participant shall continue to vest in his interest in the Plan for each Year of Service completed while a noneligible Employee, until such time as his Participant's Account shall be forfeited or distributed pursuant to the terms of the Plan. Additionally, his interest in the Plan shall continue to share in the earnings of the Trust Fund. 3.5 OMISSION OF ELIGIBLE EMPLOYEE If, in any Plan Year, any Employee who should be included as a Participant in the Plan is erroneously omitted and discovery of such omission is not made until after a contribution by his Employer for the year has been made, the Employer shall make a subsequent contribution, if necessary after the application of Section 4.4(e), so that the omitted Employee receives a total amount which the said Employee would have received had he not been omitted. Such contribution shall be made regardless of whether or not it is deductible in whole or in part in any taxable year under applicable provisions of the Code. 3.6 INCLUSION OF INELIGIBLE EMPLOYEE If, in any Plan Year, any person who should not have been included as a Participant in the Plan is erroneously included and discovery of such incorrect inclusion is not made until after a contribution for the year has been made, the Employer shall not be entitled to recover the contribution made with respect to the ineligible person regardless of whether or not a deduction is allowable with respect to such contribution. In such event, the amount contributed with respect to the ineligible person shall constitute a Forfeiture for the Plan Year in which the discovery is made. 3.7 ELECTION NOT TO PARTICIPATE An Employee may, subject to the approval of the Employer, elect voluntarily not to participate in the Plan. The election not to participate must be communicated to the Employer, in writing, at least thirty (30) days before the beginning of a Plan Year. For Standardized 9 14 Plans, a Participant or an Eligible Employee may not elect not to participate. Furthermore, the foregoing election not to participate shall not be available with respect to partners in a partnership. 3.8 CONTROL OF ENTITIES BY OWNER-EMPLOYEE (a) If this Plan provides contributions or benefits for one or more Owner-Employees who control both the business for which this Plan is established and one or more other entities, this Plan and the plan established for other trades or businesses must, when looked at as a single Plan, satisfy Code Sections 401(a) and (d) for the Employees of this and all other entities. (b) If the Plan provides contributions or benefits for one or more Owner-Employees who control one or more other trades or businesses, the employees of the other trades or businesses must be included in a plan which satisfies Code Sections 401(a) and (d) and which provides contributions and benefits not less favorable than provided for Owner-Employees under this Plan. (c) If an individual is covered as an Owner-Employee under the plans of two or more trades or businesses which are not controlled and the individual controls a trade or business, then the benefits or contributions of the employees under the plan of the trades or businesses which are controlled must be as favorable as those provided for him under the most favorable plan of the trade or business which is not controlled. (d) For purposes of the preceding paragraphs, an Owner-Employee, or two or more Owner-Employees, will be considered to control an entity if the Owner-Employee, or two or more Owner-Employees together: (1) own the entire interest in an unincorporated entity, or (2) in the case of a partnership, own more than 50 percent of either the capital interest or the profits interest in the partnership. (e) For purposes of the preceding sentence, an Owner-Employee, or two or more Owner-Employees shall be treated as owning any interest in a Partnership which is owned, directly or indirectly, by a partnership which such Owner-Employee, or such two or more Owner-Employees, are considered to control within the meaning of the preceding sentence. ARTICLE IV CONTRIBUTION AND ALLOCATION 4.1 FORMULA FOR DETERMINING EMPLOYER'S CONTRIBUTION For each Plan Year, the Employer shall contribute to the Plan: (a) The amount of the total salary reduction elections of all Participants made pursuant to Section 4-2(a), which amount shall be deemed an Employer's Elective Contribution, plus (b) If specified in E3 of the Adoption Agreement, a matching contribution equal to the Percentage specified in the Adoption Agreement of the Deferred Compensation of each Participant eligible to sham in the allocations of the matching contribution, which amount shall be deemed an Employer's Non-Elective or Elective Contribution as selected in the Adoption Agreement, plus (c) If specified in E4 of the Adoption Agreement, a discretionary amount, if any, which shall be deemed an Employer's Non-Elective Contribution, plus (d) If specified in E5 of the Adoption Agreement, a Qualified Non-Elective Contribution. (e) Notwithstanding the foregoing, however, the Employer's contributions for any Fiscal Year shall not exceed the maximum amount allowable as a deduction to the Employer under the provisions of Code Section 404. All contributions by the Employer shall be made in cash or in such property as is acceptable to the Trustee. (f) Except, however, to the extent necessary to provide the top heavy minimum allocations, the Employer shall make a contribution even if it exceeds current or accumulated Net Profit or the amount which is deductible under Code Section 404. 4.2 PARTICIPANT'S SALARY REDUCTION ELECTION (a) Each Participant may elect to defer his Compensation which would have been received in the Plan Year, but for the deferral election, subject to the limitations of this Section and the Adoption Agreement. A deferral election (or modification of an earlier election) may not be made with respect to Compensation which is currently available on or before the date the Participant executed such election, or if later, the latest of the date the Employer adopts this cash or deferred arrangement or the date such arrangement first became effective. Any elections made pursuant to this Section shall become effective as soon as is administratively feasible. Additionally, if elected in the Adoption Agreement, each Participant may elect to defer and have allocated for a Plan Year all or a portion of any cash bonus attributable to services performed by the Participant for the Employer during such Plan Year and which would have been received by the Participant on or before two and one-half months following the end of the Plan Year but for the deferral. A deferral election may not be made with respect to cash bonuses which am currently available on or before the date the Participant executed such election. Notwithstanding the foregoing, cash bonuses attributable to services performed by the Participant during a Plan Year but which are to be paid to the Participant later than two and one-half months after the close of such Plan Year will be subjected to whatever deferral election is in effect at the time such cash bonus would have otherwise been received. The amount by which Compensation and/or cash bonuses are reduced shall be that Participant's Deferred Compensation and be treated as an Employer Elective Contribution and allocated to that Participant's Elective Account. Once made, a Participant's election to reduce Compensation shall remain in effect until modified or terminated. Modifications may be made as specified in the Adoption Agreement, and terminations, may be made at any time. Any modification or termination of an election will become effective as soon as is administratively feasible. (b) The balance in each Participant's Elective Account shall be fully Vested at all times and shall not be subject to Forfeiture for any reason. (c) Amounts held in the Participant's Elective Account and Qualified Non-Elective Account may be distributable as permitted under the Plan, but in no event prior to the earlier of: (1) a Participant's termination of employment, Total and Permanent Disability, or death; (2) a Participant's attainment of age 59 1/2; (3) the proven financial hardship of a Participant subject to the limitations of Section 6.11. (4) the termination of the Plan without the existence at the time of Plan termination of another defined contribution plan (other than an employee stock ownership pin as defined in Code Section 4975(e)(7)) or the 10 15 establishment of a successor defined contribution plan (other than an employee stock ownership plan as defined in Code Section 4975(e)(7)) by the Employer or an Affiliated Employer within the period ending twelve months after distribution of all assets from the Plan maintained by the Employer: (5) the date of the sale by the Employer to an entity that is not an Affiliated Employer of substantially all of the assets (within the meaning of Code Section 409(d)(2)) with respect to a Participant who continues employment with the corporation acquiring such assets; or (6) the date of the sale by the Employer or an Affiliated Employer of its interest in a subsidiary (within the meaning of Code Section 409(d)(3)) to an entity that is not an Affiliated Employer with respect to a Participant who continues employment with such subsidiary. (d) In any Plan Year beginning after December 31, 1987, a Participant's Deferred Compensation made under this Plan and all other plans, contracts or arrangements of the Employer maintaining this Plan shall not exceed the limitation imposed by Code Section 402(g), as in effect for the calendar year in which such Plan Year began. If such dollar limitation is excluded solely from elective deferrals under this Plan or any other Plan maintained by the Employer, a Participant will be deemed to have notified the Administrator of such excess amount which shall be distributed in a manner consistent with Section 4.2(f). This dollar limitation shall be adjusted annually pursuant to the method provided in Code Section 415(d) in accordance with Regulations. (e) In the event a Participant has received a hardship distribution pursuant to Regulation 1.401(k)-1(d)(2)(iii)(B) from any other plan maintained by the Employer or from his Participant's Elective Account pursuant to Section 6.11 (c), then such Participant shall not be permitted to elect to have Deferred Compensation contributed to the Plan on his behalf for a period of twelve (12) months following the receipt of the distribution. Furthermore, the dollar limitation under Code Section 402(g) shall be reduced, with respect to the Participant's taxable year following the taxable year in which the hardship distribution was made, by the amount of such Participant's Deferred Compensation, if any, made pursuant to this Plan (and any other plan maintained by the Employer) for the taxable year of the hardship distribution. (f) If a Participant's Deferred Compensation under this Plan together with any elective deferrals (as defined in Regulation 1.402(g)-1(b)) under another qualified cash or deferred arrangement (as defined in Code Section 401(k)), a simplified employee pension (as defined in Code Section 408(k)), a salary reduction arrangement (within the meaning of Code Section 3121(a)(5)(D)), a deferred compensation plan under Code Section 457, or a trust described in Code Section 501(c)(18) cumulatively exceed the limitation imposed by Code Section 402(g) (as adjusted annually in accordance with the method provided in Code Section 415(d) pursuant to Regulations) for such participant's taxable year, the Participant may, not later than March 1st following the close of his taxable Year, notify the Administrator in writing of such excess and request that his Deferred Compensation under this Plan be reduced by an amount specified by the Participant. In such event, the Administrator shall direct the Trustee to distribute such excess amount (and any Income allocable to such excess amount) to the Participant not later than the first April 15th following the close of the Participant's taxable year. Distributions in accordance with this paragraph may be made for any taxable year of the Participant which begins after December 31, 1986. Any distribution of less than the entire amount of Excess Deferred Compensation and Income shall be treated as a pro rata distribution of Excess Deferred Compensation and Income. The amount distributed shall not exceed the Participant's Deferred Compensation under the Plan for the taxable year. Any distribution on or before the last day of the Participant's taxable year must satisfy each of the following conditions: (1) the Participant shall designate the distribution as Excess Deferred Compensation; (2) the distribution must be made after the date on which the Plan received the Excess Deferred Compensation; and (3) the Plan must designate the distribution as a distribution of Excess Deferred Compensation. (4) Any distribution made pursuant to this Section shall be made first from unmatched Deferred Compensation and, thereafter. simultaneously from Deferred Compensation which is matched and matching contributions which relate to such Deferred Compensation. However, any such matching contributions which are not Vested shall be forfeited in lieu of being distributed. Any distribution under this Section shall be made first from unmatched Deferred Compensation and, thereafter, simultaneously from Deferred Compensation which is matched and matching contributions which relate to such Deferred Compensation. However, any such matching contributions which are not Vested shall be forfeited in lieu of being distributed. For the purpose of this Section, "Income" means the amount of income or loss allocable to a Participant's Excess Deferred Compensation and shall be equal to the sum of the allocable gain or loss for the taxable year of the Participant and the allocable gain or loss for the period between the end of the taxable year of the Participant and the date of distribution ("gap period"). The income or loss allocable to each such period is calculated separately and is determined by multiplying the income or loss allocable to the Participant's Deferred Compensation for the respective period by a fraction. The numerator of the fraction is the Participant's Excess Deferred Compensation for the taxable year of the Participant. The denominator is the balance, as of the last day of the respective period, of the Participant's Elective Account that is attributable to the Participant's Deferred Compensation reduced by the gain allocable to such total amount for the respective period and increased by the loss allocable to such total amount for the respective period. In lieu of the "fractional method" described above, a "safe harbor method" may be used to calculate the allocable income or loss for the "gap period". Under such "safe harbor method", allocable income or loss for the "gap period" shall be deemed to equal ten percent (10%) of the income or loss allocable to a Participants Excess Deferred Compensation for the taxable year of the Participant multiplied by the number of calendar months in the "gap period". For purposes of determining the number of calendar months in the "gap period", a distribution occurring on or before the fifteenth day of the month shall be treated as having been made on the last day of the preceding month and a distribution occurring after such fifteenth day shall be treated as having been made on the first day of the next subsequent month. Income or loss allocable to any distribution of Excess Deferred Compensation on or before the last day of the taxable year of the Participant shall be calculated from the 11 16 first day of the taxable year of the Participant to the date on which the distribution is made pursuant to either the "fractional method" or the "safe harbor method". Notwithstanding the above, for the 1987 calendar year. and for Plan Years beginning on or after the date this Plan is adopted. Income during the "gap period" shall not be taken into account. (g) Notwithstanding Section 4.2(f) above, a Participant's Excess Deferred Compensation shall be reduced, but not below zero, by any distribution and/or recharacterization of Excess Contributions pursuant to Section 4.6(a) for the Plan Year beginning with or within the taxable year of the Participant. (h) At Normal Retirement Date, or such other date when the Participant shall be entitled to receive benefits, the fair market value of the Participant's Elective Account shall be used to provide benefits to the Participant or his Beneficiary. (i) Employer Elective Contributions made pursuant to this Section may be segregated into a separate account for each Participant in a federally insured savings account certificate of deposit in a bank or savings and loan association, money market certificate, or other short-term debt security acceptable to the Trustee until such time as the allocations pursuant to Section 4.4 have been made. (j) The Employer and the Administrator or shall adopt a procedure necessary to implement the salary reduction elections provided for herein. 4.3 TIME OF PAYMENT OF EMPLOYER'S CONTRIBUTION The Employer shall generally pay to the Trustee its contribution to the Plan for each Plan Year within the time prescribed by law, including extensions of time, for the filing of the Employer's federal income tax return for the Fiscal Year. However, Employer Elective Contributions accumulated through payroll deductions shall be paid to the Trustee as of the earliest date on which such contributions can reasonably be segregated from the Employer's general assets, but in any event within ninety (90) days from the date on which such amounts would otherwise have been payable to the Participant in cash. The provisions of Department of Labor regulations 2510.3-102 are incorporated herein by reference. Furthermore, any additional Employer contributions which are allocable to the Participant's Elective Account for a Plan Year shall be paid to the Plan no later than the twelve-month period immediately following the close of such Plan Year. 4.4 ALLOCATION OF CONTRIBUTION, FORFEITURES AND EARNINGS (a) The Administrator shall establish and maintain an account in the name of each Participant to which the Administrator shall credit as of each Anniversary Date, or other valuation date, all amounts allocated to each such Participant as set forth herein. (b) The Employer shall provide the Administrator with all information required by the Administrator to make a proper allocation of the Employer's contributions for each Plan Year. Within a reasonable period of time after the date of receipt by the Administrator of such information, the Administrator shall allocate such contribution as follows: (1) With respect to the Employer's Elective Contribution made pursuant to Section 4.1(a), to each Participant's Elective Account in an amount equal to each such Participant's Deferred Compensation for the year. (2) With respect to the Employer's Matching Contribution made pursuant to Section 4.1(b), to each Participant's Account, or Participant's Elective Account as selected in E3 of the Adoption Agreement, in accordance with Section 4.1(b). Except, however, a Participant who is not credited with a Year of Service during any Plan Year shall or shall not share in the Employer's Matching Contribution for that year as provided in E3 of the Adoption Agreement. However, for Plan Years beginning after 1989, if this is a standardized Plan, a Participant shall share in the Employer's Matching Contribution regardless of Hours of Service. (3) With respect to the Employer's Non-Elective Contribution made pursuant to Section 4.1(c), to each Participant's Account in accordance with the provisions of E4 of the Adoption Agreement. However, if an integrated allocation formula is selected at E4 of the Adoption Agreement. then such contribution shall be allocated to each Participant's Combined Account in a dollar amount equal to 5.7% of the sum of each Participant's total Compensation plus Excess Compensation. If the Employer does not contribute such amount for all Participants, each Participant will be allocated a share of the contribution in the same proportion that his total Compensation plus his total Excess Compensation for the Plan Years bears to the total Compensation plus the total Excess Compensation of all Participants for that year. The balance of the contribution, if any, will be allocated in the same proportion that his total Compensation bears to the total Compensation of all Participant's eligible to share in the allocation. Regardless of the preceding, 4.3% shall be substituted for 5.7% above if Excess Compensation is based on more than 20% and less than or equal to 80% of the Taxable Wage Base. If Excess Compensation is based on less than 100% and more than 80% of the Taxable Wage Base, then 5.4% shall be substituted for 5.7% above. (4) With respect to the Employer's Qualified Non-Elective Contribution made pursuant to Section 4.1(d), to each Participant's Qualified Non-Elective Contribution Account in the same proportion that each such Participant's Compensation for the year bears to the total Compensation of all Participants for such year. (5) Regardless of the preceding, a Participant who is not credited with a Year of Service during a Plan Year shall not share in the allocation of the Employer's Non-Elective Contribution made pursuant to Section 4.1(c) and the Employer's Qualified Non-Elective Contribution made pursuant to Section 4.1(d), unless reduced pursuant to Section 4.4(h). However, for Plan Years beginning after 1989, for a standardized plan, and if elected in the non-standardized Adoption Agreement, a Participant shall share in the allocation of such contributions regardless of whether a Year of Service was completed during the Plan Year (c) As of each Anniversary Date or other valuation date, before allocation of Employer contributions and Forfeitures, any earnings or losses (net appreciation or net depreciation) of the Trust Fund shall be allocated in the same proportion that each Participant's and Former Participant's nonsegregated accounts bear to the total of all Participants' and Former Participants' nonsegregated accounts as of such date. If any nonsegregated account of a Participant has been distributed prior to the Anniversary Date or other valuation date subsequent to a Participant's termination of employment, no earnings or losses shall be credited to such account. Notwithstanding the above, with respect to contributions made to a 401(k) Plan after the previous Anniversary Date 12 17 or allocation date, the method specified in the Adoption Agreement shall be used. (d) Participants' Accounts shall be debited for any insurance or annuity premiums paid, if any, and credited with any dividends or interest received on insurance contracts. (e) As of each Anniversary Date any amounts which became Forfeitures since the last Anniversary date shall first be made available to reinstate previously forfeited account balances of Former Participants, if any, in accordance with Section 6.4(g)(2) or be used to satisfy any contribution that may be required pursuant to Section 3.5 and/or 6.9. The remaining Forfeitures, if any, shall be treated in accordance with the Adoption Agreement Provided, however, that in the event the allocation of Forfeitures provided herein shall cause the "annual addition" (as defined in Section 4.9) to any Participant's Account to exceed the amount allowable by the Code, the excess shall be reallocated in accordance with Section 4.10. Except, however, for any Plan Year beginning prior to January 1, 1990, and if elected in the non-standardized Adoption Agreement for any Plan Year beginning on or after January 1, 1990, a Participant who performs less than a Year of Service during any Plan Year shall not share in the Plan Forfeitures for that year, unless there is a Short Plan Year or a contribution required pursuant to Section 4.4(h). (f) Minimum Allocations Required for Top Heavy Plan Years: Notwithstanding the foregoing, for any Top Heavy Plan Year, the sum of the Employer's contributions and forfeitures allocated to the Participant's Combined Account of each Non-Key Employee shall be equal to at least three percent (3%) of such Non-Key Employee's "415 Compensation" (reduced by contributions and forfeitures, if any, allocated to each Non-Key Employee in any defined contribution plan included with this plan in a Required Aggregation Group). However, if (i) the sum of the Employer's contributions and Forfeitures allocated to the Participant's Combined Account of each Key Employee for such Top Heavy Plan Year is less than three percent (3%) of each Key Employee's "415 Compensation" and (ii) this Plan is not required to be included in an Aggregation Group to enable a defined benefit plan to meet the requirements of Code Section 401(a)(4) or 410, the sum of the Employer's contributions and Forfeitures allocated to the Participant's Combined Account of each Non-Key Employee shall be equal to the largest percentage allocated to the Participant's Combined Account of any Key Employee. However, for Plan Years beginning after December 31, 1998, in determining whether a Non-Key Employee has received the required minimum allocation, such Non-Key Employee's Deferred Compensation and matching contributions used to satisfy the "Actual Deferral Percentage" test pursuant to Section 4.5(a) or the "Actual Contribution Percentage" test of Section 4.7(a) shall not be taken into account. If this is an integrated Plan, then for any Top Heavy Plan Year the Employer's contribution shall be allocated as follows: (1) An amount equal to 3% multiplied by each Participant's Compensation for the Plan Year shall be allocated to each Participant's Account. If the Employer does not contribute such amount for all Participants, the amount shall be allocated to each participant's Account in the same proportion that his total Compensation for the Plan Year bears to the total Compensation of all Participants for such year. (2) The balance of the Employer's contribution over the amount allocated under subparagraph (1) hereof shall be allocated to each Participant's Account in a dollar amount equal to 3% multiplied by a Participant's Excess Compensation. If the Employer does not contribute such amount for all Participants, each Participant will be allocated a share of the contribution in the same proportion that his Excess Compensation bears to the total Excess Compensation of all Participants for that year. (3) The balance of the Employer's contribution over the Amount allocated under subparagraph (2) hereof shall be allocated to each Participant's Account in a dollar amount equal to 2.7% multiplied by the sum of each Participant's total Compensation plus Excess Compensation. If the Employer does not contribute such amount for all Participants, each Participant will be allocated a share of the contribution in the same proportion that his total Compensation plus his total Excess Compensation for the Plan Year bears to the total Compensation plus the total Excess Compensation of all Participants for that year. Regardless of the proceeding, 1.3% shall be substituted for 2.7% above if Excess Compensation is based on more than 20% and less than or equal to 80% of the Taxable Wage Base. If Excess Compensation is based on less than 100% and more than 80% of the Taxable Wage Base, then 2.4% shall be substituted for 2.7% above. (4) The balance of the Employer's contributions over the amount allocated above, if any shall be allocated to each Participant's Account in the same proportion that his total Compensation for the Plan Year bears to the total Compensation of all Participants for such year. For each Non-Key Employee who is a Participant in this Plan and another non-paired defined contribution plan maintained by the Employer, the minimum 3% allocation specified above shall be provided as specified in F3 of the Adoption Agreement. (g) For purposes of the minimum allocations set forth above, the percentage allocated to the Participant's Combined Account of any Key Employee shall be equal to the ratio of the sum of the Employer's contributions and Forfeitures allocated on behalf of such Key Employee divided by the "415 Compensation" for such Key Employee. (h) For any Top Heavy Plan year, the minimum allocations set forth above shall be allocated to the Participant's Combined Account of all Non-Key Employees who are Participants and who are employed by the Employer on the last day of the Plan Year, including Non-Key Employees who have (1) failed to complete a year of Service; or (2) declined to make mandatory contributions (if required) or salary reduction contributions to the Plan. (i) Notwithstanding anything herein to the contrary , in any Plan year in which the Employer maintains both this Plan and a defined benefit pension plan included in a Required Aggregation group which is top heavy, the Employer shall not be required to provide a Non-Key Employee with both the full separate minimum defined benefit plan benefit and the full separate defined contribution plan allocations. Therefore, if the Employer maintains both a Defined Benefit and a Defined Contribution Plan that are a Top Heavy group, the top heavy minimum benefits shall be provided as follows: Applies if F1b of the Adoption Agreement is selected - (1) The requirements of Section 2.1 shall apply except that each Non-Key Employee who is a Participant in this Plan or a Money Purchase Plan and who is also a Participant in the Defined Benefit Plan shall receive a minimum allocation of five percent (5%) of such 13 18 Participant's "415 Compensation" from the applicable Defined Contribution Plan(s). (2) For each Non-Key Employee who is a Participant only in the Defined Benefit Plan, the Employer will provide a minimum non-integrated benefit in the Defined Benefit Plan equal to 2% of his highest five consecutive year average "415 Compensation" for each Year of Service while a Participant in the Plan, in which the Plan is top heavy, not to exceed ten. (3) For each Non-Key Employee who is a Participant only in this Defined Contribution Plan, the Employer will provide a contribution equal to 3% of his "415 Compensation". Applies if F1c of the Adoption Agreement is selected - (4) The minimum allocation specified in Section 4.4(i)(1) shall be 7 1/2% for years in which the Plan is Top Heavy, but not Super Top Heavy. (5) The minimum benefit specified in Section 4.4(i)(2) shall be 3% for years in which the Plan is Top heavy, but not Super Top Heavy. (6) The minimum allocation specified in Section 4.4(i)(3) shall be 4% for years in which the Plan is Top Heavy, but not Super Top Heavy. (j) For the purposes of this Section, "415 Compensation" shall be limited to the same dollar limitations set forth in Section 1.9. However, for Plan Years beginning prior to January 1, 1989, the $200,000 limit shall apply only for Top Heavy Plan Years and shall not be adjusted. (k) Notwithstanding anything herein to the contrary, participants who terminated employment during the Plan Year shall share in the salary reduction contributions made by the Employer for the year of termination without regard to the Hours of Service credited. (l) Notwithstanding anything herein to the contrary (other than Sections 4.4(k) and 6.6(h)(1)), any Participant who terminated employment during the Plan Year for reasons other than death, Total and Permanent Disability, or retirement shall or shall not share in the allocations of the Employer's Matching Contribution made pursuant to Section 4.1(b), the Employer's Non-Elective Contributions made pursuant to Section 4.1(c), the Employer's Qualified Non-Elective Contribution made pursuant to Section 4.1(d), and Forfeitures as provided in the Adoption Agreement. Notwithstanding the foregoing, for Plan Years beginning after 1989, if this is a standardized Plan, any such terminated Participant shall share in such allocations provided the terminated Participant completed more than 500 Hours of Service. (m) Notwithstanding anything herein to the contrary, Participants terminating for reasons of death, Total and Permanent Disability, or retirement shall share in the allocation of the Employer's Matching Contribution made pursuant to Section 4.1(b), the Employer's Non-Elective Contributions made pursuant to Section 4.1(c), the Employer's Qualified Non-Elective Contribution made pursuant to Section 4.1(d), and Forfeitures as provided in this Section regardless of whether they completed a Year of Service during the Plan Year. (n) If a Former Participant is reemployed after five (5) consecutive 1-Year Breaks in Service, then separate accounts shall be maintained as follows: (1) one account for nonforfeitable benefits attributable to pre-break service; and (2) one account representing his status in the Plan attributable to post-break service. (o) Notwithstanding any election in the Adoption Agreement to the contrary, if this is a non-standardized Plan that would otherwise fail to meet the requirements of Code Sections 401(a)(26), 410(b)(1), or 410(b)(2)(A)(i) and the Regulations thereunder because Employer matching Contributions made pursuant to Section 4.1(b). Employer Non-Elective Contributions made pursuant to Section 4.1(c) or Employer Qualified Non-Elective Contributions made pursuant to Section 4.1(d) have not been allocated to a sufficient number or percentage of Participants for a Plan Year, then the following rules shall apply: (1) Allocations of the respective contribution and Forfeitures shall first be made to all active Participants who are employed on the last day of the Plan Year, regardless of the number of Hours of Service completed; and (2) If after application of paragraph (1) above, the applicable test is still not satisfied, then the group of Participants eligible to share in the Employer's contribution and Forfeitures for the Plan Year shall be further expanded to include the minimum number of Participants who are not actively employed on the last day of the Plan Year as are necessary to satisfy the applicable test. The specific Participants who shall become eligible to share shall be those Participants, when compared to similarly situated Participants, who have completed the greatest number of Hours of Service in the Plan Year before terminating employment. Nothing in this Section shall permit the reduction of a Participant's accrued benefit. Therefore any amounts that have previously been allocated to Participants may not be reallocated to satisfy these requirements. In such event, the Employer shall make an additional contribution equal to the amount such affected Participants would have received had they been included in the allocations, even if it exceeds the amount which would be deductible under Code Section 404. Any adjustment to the allocations pursuant to this paragraph shall be considered a retroactive amendment adopted by the last day of the Plan Year. 4.5 ACTUAL DEFERRAL PERCENTAGE TESTS (a) Maximum Annual Allocation: For each Plan Year beginning after December 31, 1986, the annual allocation derived from Employer Elective Contributions and Qualified Non-Elective Contributions to a Participant's Elective Account and Qualified Non-Elective Account shall satisfy one of the following tests: (1) The "Actual Deferral Percentage" for the Highly Compensated Participant group shall not be more than the "Actual Deferral Percentage" of the Non-Highly Compensated Participant group multiplied by 1.25, or (2) The excess of the "Actual Deferral Percentage" for the Highly Compensated Participant group over the "Actual Deferral Percentage" for the Non-Highly Compensated Participant group shall not be more than two percentage points. Additionally, the "Actual Deferral Percentage" for the Highly Compensated Participant group shall not exceed the "Actual Deferral Percentage" for the Non-Highly compensated Participant group multiplied by 2. The provisions of Code Section 401(k)(3) and Regulation 1.401(k)-1(b) are incorporated herein by reference. However, for Plan Years beginning after December 31, 1988, to prevent the multiple use of the alternative method described in (2) above and Code Section 401(m)(9)(A), any Highly Compensated Participant eligible to make elective deferrals pursuant to Section 4.2 and to make Employee contributions or to receive matching contributions under this Plan or under any other plan maintained by the Employer or an Affil- 14 19 iated Employer shall have his actual contribution ratio reduced pursuant to Regulation 1.41(m)-2, the provisions of which are incorporated herein by reference. (b) For the purposes of this Section "Actual Deferral Percentage" means, with respect to the Highly Compensated Participant group and Non-Highly Compensated Participant group for a Plan Year, the average of the ratios, calculated separately for each Participant in such group, of the amount of Employer Elective Contributions and Qualified Non-Elective Contributions allocated to each Participant's Elective Account and Qualified Non-Elective Account for such Plan Year, to such Participant's "414(s) Compensation" for such Plan Year. The actual deferral ratio for each Participant and the "Actual Deferral Percentage" for each group, for Plan Years beginning after December 31, 1998, shall be calculated to the nearest one-hundredth of one percent of the Participant's "414(s) Compensation". Employer Elective Contributions allocated to each Non-Highly Compensated Participant's Elective Account shall be reduced by Excess Deferred Compensation to the extent such excess amounts are made under this Plan or any other plan maintained by the Employer. (c) For the purpose of determining the actual deferral ratio of a Highly Compensated Participant who is subject to the Family Member aggregation rules of Code Section 414(q)(6) because such Participant is either a "five percent owner" of the Employer or one of the ten (10) Highly Compensated Employees paid the greatest "415 Compensation" during the year, the following shall apply: (1) The combined actual deferral ratio for the family group (which shall be determined by aggregating Employer Elective Contributions and "414(s) Compensation" of all eligible Family Members (including Highly Compensated Participants). However, in applying the $200,000 limit to "414(s) Compensation" for Plan Years beginning after December 31, 1998. Family Members shall include only the affected Employee's spouse and any lineal descendants who have not attained age 19 before the close of the Plan Year. (2) The Employer Elective Contributions and "414(s) Compensation" of all Family Members shall be disregarded for purposes of determining the "Actual Deferral Percentage" of the Non-Highly Compensated Participant group except to the extent taken into account in paragraph (1) above. (3) If a Participant is required to be aggregated as a member of more than one family group in a plan, all Participants who are members of those family groups that include the Participant are aggregated as one family group in accordance with paragraphs (1) and (2) above. (d) For the purposes of Sections 4.5(a) and 4.6. a Highly Compensated Participant and a Non-Highly Compensated Participant shall include any Employee eligible to make a deferral election pursuant to Section 4.2. whether or not such deferral election was made or suspended pursuant to Section 4.2. (e) For the purposes of this Section and Code Sections 401(a)(4), 410(b) and 401(k), if two or more plans which include cash or deferred arrangements are considered one plan for the purposes of Code Section 401(a)(4) or 410(b) (other than Code Section 401(b)(2)(A)(ii) as in effect for Plan Years beginning after December 31, 1998), the cash or deferred arrangements included in such plans shall be treated as one arrangement. In addition, two or more cash or deferred arrangements may be considered as a single arrangement for purposes of determining whether or not such arrangements satisfy Code Sections 401(a)(4), 410(b) and 401(k). In such cases the cash or deferred arrangements included in such plans and the plans including such arrangements shall be treated as one arrangement and as one plan for purposes of this Section and Code Sections 401(a)(4), 410(b) and 401(k). For plan years beginning after December 31, 1989, plans may be aggregated under this paragraph (e) only if they have the same plan year. Notwithstanding the above, for Plan Years beginning after December 31, 1988, an employee stock ownership plan described in Code Section 497(e)(7) may not be combined with this Plan for purposes of determining whether the employee stock ownership plan or this Plan satisfies this Section and Code Sections 401(a)(4), 410(b) and 401(k). (f) For the purposes of this Section, if a Highly Compensated Participant is a Participant under two (2) or more cash or deferred arrangements (other than a cash or deferred arrangement which is part of an employee stock ownership plan as defined in Code Section 4975(e)(7) for Plan Years beginning after December 31, 1988) of the Employer or an Affiliated Employer, all such cash or deferred arrangements shall be treated as one cash or deferred arrangement for the purpose of determining the actual deferred ratio with respect to such Highly Compensated Participant. However, for Plan Years beginning after December 31, 1988, if the cash or deferred arrangements have different Plan Years, this paragraph shall be applied by treating all cash or deferred arrangements ending with or within the same calendar year as a single arrangement. 4.6 ADJUSTMENTS TO ACTUAL DEFERRAL PERCENTAGE TESTS In the event that the initial allocations of the Employer's Elective Contributions and Qualified Non-Elective Contributions made pursuant to Section 4.4 do not satisfy one of the tests set forth in Section 4.5, for Plan Years beginning after December 31, 1986, the Administrator shall adjust Excess Contributions pursuant to the options set forth below: (a) On or before the fifteenth day of the third month following the end of each Plan Year, the Highly Compensated Participant having the highest actual deferral ratio shall have his portion of Excess Contributions distributed to him and/or at his election recharacterized as a voluntary Employee contribution pursuant to Section 4.12 until one of the tests set forth on Section 4.5 is satisfied, or until his actual deferral ratio equals the actual deferral ratio of the Highly Compensated Participant having the second highest actual deferral ratio. This process shall continue until one of the tests set forth in Section 4.5 is satisfied. For each Highly Compensated Participant, the amount of Excess Contributions is equal to the Elective Contributions and Qualified Non-Elective Contributions made on behalf of such Highly Compensated Participant (determined prior to the application of this paragraph) minus the amount determined by multiplying the Highly Compensated Participant's actual deferral ratio (determined after application of this paragraph) by his "414(s) Compensation". However, in determining the amount of Excess Contributions to be distributed and/or recharacterized with respect to an affected Highly Compensated Participant as determined herein, such amount shall be reduced by any Excess Deferred Compensation previously distributed to such affected Highly Compensated Participant for his taxable year ending with or within such Plan Year. Any distribution and/or recharacterization of Excess Contributions shall be made in accordance with the following: (1) With respect to the distribution of Excess Contributions pursuant to (a) above, such distribution: 15 20 (i) may be postponed but not later than the close of the Plan Year following the Plan Year to which they are allocable: (ii) shall be made first from unmatched Deferred Compensation and, thereafter, simultaneously from Deferred Compensation which is matched and matching contributions which relate to such Deferred Compensation. However, any such matching contributions which are not Vested shall be forfeited in lieu of being distributed: (iii) shall be made from Qualified Non-Elective Contributions only to the extent that Excess Contributions exceed the balance in the Participant's Elective Account attributable to Deferred Compensation and Employer matching contributions. (iv) shall be adjusted for Income; and (v) shall be designated by the Employer as a distribution of Excess Contributions (and Income). (2) With respect to the recharacterization of Excess Contributions pursuant to (a) above, such recharacterized amounts: (i) shall be deemed to have occurred on the date on which the last of those Highly Compensated Participants with Excess Contributions to be recharacterized is notified of the recharacterization and the tax consequences of such recharacterization: (ii) for Plan years ending on or before August 8, 1988, may be postponed but not later than October 24, 1988; (iii) shall not exceed the amount of Deferred Compensation on behalf of any Highly Compensated Participant for any Plan Year; (iv) Shall be treated as voluntary Employee contributions for purpose of Code Section 401(a)(4) and Regulation 1.401(k)-1(b). However, for purposes of Sections 2.2 and 4.4(f); recharacterized Excess Contributions continue to be treated as Employer contributions that are Deferred Compensation. For Plan Years beginning after December 31, 1988, Excess Contributions recharacterized as voluntary Employe contributions shall continue to be nonforfeitable and subject to the same distribution rules provided for in Section 4.9(f); (v) which relate to Plan years ending on or before October 24, 1988, may be treated as either Employer contributions or voluntary Employee contributions and therefore shall not be subject to the restrictions of Section 4.2(c); (vi) are not permitted if the amount recharacterized plus voluntary Employee contributions actually made by such Highly Compensated Participant, exceed the maximum amount of voluntary Employee contributions (determined prior to application of Section 4.7(a)) that such Highly Compensation Participant is permitted to make under the Plan in the absence of recharacterization; (vii) shall be adjusted for Income. (3) Any distribution and/or recharacterization of less than the entire amount of Excess Contributions shall be treated as a pro rata distribution and/or recharacterization of Excess Contributions and Income. (4) The determination and correction of Excess Contributions of a Highly Compensated Participated whose actual deferral ratio is determined under the family aggregation rules shall be accomplished by reducing the actual deferral ratio as required herein and the Excess Contributions for the family unit shall be allocated among the Family Members in proportion to the Elective Contributions of each Family Member that were combined to determine the group actual deferral ratio. (b) Within twelve (12) months after the end of the Plan Year, the Employer shall make a special Qualified Non-Elective Contribution on behalf of Non-Highly Compensated Participants in an amount sufficient to satisfy one of the tests set forth in Section 4.5(a). Such contribution shall be allocated to the Participant's Qualified Non-Elective Account of each Non-Highly Compensated Participant in the same proportion that each Non-Highly Compensated Participant's Compensation for the year bears to the total Compensation of all Non-Highly Compensated Participants. (c) For purposes of this Section, "Income" means the income or loss allocable to Excess Contributions which shall equal the sum of the allocable gain or loss for the Plan year and the allocable gain or loss for the period between the end of the Plan Year and the date of distribution ("gap period"). The income or loss allocable to Excess Contributions for the Plan Year and the "gap period" is calculated separately and is determined by multiplying the income or loss for the Plan year or the "gap period" by a fraction. The numerator of the fraction is the Excess Contributions for the Plan Year. The denominator of the fraction is the total of the Participant's Elective Account attributable to Elective Contributions and the Participant's Qualified Non-Elective Account as of the end of the Plan Year or the "gap period", reduced by the gain allocable to such total amount for the Plan Year or the "gap period" and increased by the loss allocable to such total amount for the Plan Year or the "gap period". In lieu of the "fractional method" described above, a "safe harbor method" may be used to calculate the allocable Income for the "gap period". Under such "safe harbor method", allocable Income for the "gap period" shall be deemed to equal ten percent (10%) of the Income allocable to Excess Contributions for the Plan Year of the Participant multiplied by the number of calendar months in the "gap period". For purposes of determining the number of calendar months in the "gap period", a distribution occurring on or before the fifteenth day of the month shall be treated as having been made on the last day of the preceding month and a distribution occurring after such fifteenth day shall be treated as having been made on the first day of the next subsequent month. Notwithstanding the above, for Plan years which began in 1987, and for Plan years beginning on or after the date this Plan is adopted, Income during the "gap period" shall not be taken into account. (d) Any amounts not distributed or recharacterized within 2 1/2 months after the end of the Plan Year shall be subject to the 10% Employer exercise tax imposed by Code Section 4979. 4.7 ACTUAL CONTRIBUTION PERCENTAGE TESTS (a) The "Actual Contribution Percentage", for Plan Years beginning after the later of the Effective Date of this Plan or December 31, 1986, for the Highly Compensated Participant group shall not exceed the greater of: (1) 125 percent of such percentage for the Non-Highly Compensated Participating group; or 16 21 (2) the lesser of 200 percent of such percentage for the Non-Highly Compensated Participant group, or such percentage for the Non-Highly Compensated Participant group plus 2 percentage points. However, for Plan Years beginning after December 31, 1988, to prevent the multiple use of the alternative method described in this paragraph and Code Section 401(m)(9)(A), any Highly Compensated Participant eligible to make elective deferrals pursuant to Section 4.2 or any other cash or deferred arrangement maintained by the Employer or an Affiliated Employer and to make Employee contributions or to receive matching contributions under any plan maintained by the Employer or an Affiliated Employer shall have his actual contribution ratio reduced pursuant to Regulation 1.401(m)-2. The provisions of Code Section 401(m) and Regulations 1.401(m)-1(b) and 1.401(m)-2 are incorporated herein by reference. (b) For the purposes of this Section and Section 4.8, "Actual Contribution Percentage" for a Plan Year means, with respect to the Highly Compensated Participant group and Non-Highly Compensated Participant group, the average of the ratios (calculated separately for each Participant in each group) of: (1) the sum of Employer matching contributions pursuant to Section 4.1(b) (to the extent such matching contributions are not used to satisfy the tests set forth in Section 4.5), voluntary Employee contributions made pursuant to Section 4.12 and Excess Contributions recharacterized as voluntary Employee contributions pursuant to Section 4.6(a) contributed under the Plan on behalf of each such Participant for such Plan Year; to (2) the Participant's "414(s) Compensation" for such Plan Year. (c) For purposes of determining the "Actual Contribution Percentage" and the amount of Excess Aggregate Contributions pursuant to Section 4.8(e), only Employer matching contributions contributed to the Plan prior to the end of the succeeding Plan Year shall be considered. In addition, the Administrator may elect to take into account, with respect to Employees eligible to have Employer matching contributions made pursuant to Section 4.1(b) or voluntary Employee contributions made pursuant to Section 4.12 allocated to their accounts, elective deferrals (as defined in Regulation 1.402(g)-1(b)) and qualified non-elective contributions (as defined in Code Section 401(m)(4)(C)) contributed to any plan maintained by the Employer. Such elective deferrals and qualified non-elective contributions shall be treated as Employer matching contributions subject to Regulation 1.401(m)-1(b)(2) which is incorporated herein by reference. However, for Plan Years beginning after December 31, 1988, the Plan Year must be the same as the plan year of the plan to which the elective deferrals and the qualified non-elective contributions are made. (d) For the purpose of determining the actual contribution ratio of a Highly Compensated Employee who is subject to the Family Member aggregation rules of Code Section 414(q)(6) because such Employee is either a "five percent owner" of the Employer or one of the ten (10) Highly Compensated Employees paid the greatest "415 Compensation" during the year, the following shall apply: (1) The combined actual contribution ratio for the family group (which shall be treated as one Highly Compensated Participant) shall be the ratio determined by aggregating Employer matching contributions made pursuant to Section 4.1(b) (to the extent such matching contributions are not used to satisfy the tests set forth in Section 4.5), voluntary Employee contributions made pursuant to Section 4.12. Excess Contributions recharacterized as voluntary Employee contributions pursuant to Section 4.6(a) and "414(s) Compensation" of all eligible Family Members (including Highly Compensated Participants). However, in applying the $200,000 limit to "414(s) Compensation" for Plan Years beginning after December 31, 1988. Family Members shall include only the affected Employee's spouse and any lineal descendants who have not attained age 19 before the close of the Plan Year. (2) The Employer matching contributions made pursuant to Section 4.1(b) (to the extent such matching contributions are not used to satisfy the tests set forth in Section 4.5), voluntary Employee contributions made pursuant to Section 4.12, Excess Contributions recharacterized as voluntary Employee contributions pursuant to Section 4.6(a) and "414(s) Compensation" of all Family Members shall be disregarded for purposes of determining the "Actual Contribution Percentage" of the Non-Highly Compensated Participant group except to the extent taken into account in paragraph (1) above. (3) If a Participant is required to be aggregated as a member of more than one family group in a plan, all Participants who are members of those family groups that include the Participant are aggregated as one family group in accordance with paragraphs (1) and (2) above. (e) For purposes of this Section and Code Sections 401(a)(4), 410(b) and 401(m), if two or more plans of the Employer to which matching contributions, Employee contributions, or both, are made are treated as one plan for purposes of Code Sections 401(a)(4) or 410(b) (other than the average benefits test under Code Section 410(b)(2)(A)(ii) as in effect for Plan Years beginning after December 31, 1988), such plans shall be treated as one plan. In addition, two or more plans of the Employer to which matching contributions, Employee contributions, or both, are made may be considered as a single plan for purposes of determining whether or not such plans satisfy Code Sections 401(a)(4), 410(b) and 401(m). In such a case, the aggregated plans must satisfy this Section and Code Sections 401(a)(4), 410(b) and 401(m) as though such aggregated plans were a single plan. For plan years beginning after December 31, 1989, plans may be aggregated under this paragraph only if they have the same plan year. Notwithstanding the above, for Plan Years beginning after December 31, 1988, an employee stock ownership plan described in Code Section 4975(e)(7) may not be aggregated with this Plan for purposes of determining whether the employee stock ownership plan or this Plan satisfies this Section and Code Sections 401(a)(4), 410(b) and 401(m). (f) If a Highly Compensated Participant is a Participant under two or more plans (other than an employee stock ownership plan as defined in Code Section 4975(e)(7) for Plan Years beginning after December 31, 1988) which are maintained by the Employer or an Affiliated Employer to which matching contributions, Employee contributions, or both, are made, all such contributions on behalf of such Highly Compensated Participant shall be aggregated for purposes of determining such Highly Compensated Participant's actual contribution ratio. However, for Plan Years beginning after December 31, 1988, if the plans have different plan years, this paragraph shall be applied by treating all plans ending with or within the same calendar year as a single plan. 17 22 (g) For purposes of Section 4.7(a) and 4.8, a Highly Compensated Participant and a Non-Highly Compensated Participant shall include any Employee eligible to have matching contributions made pursuant to Section 4.1(b) (whether or not a deferred election was made or suspended pursuant to Section 4.2(e)) allocated to his account for the Plan Year or to make salary deferrals pursuant to Section 4.2 (if the Employer uses salary deferrals to satisfy the provisions of this Section) or voluntary Employee contributions pursuant to Section 4.12 (whether or not voluntary Employee contributions are made) allocated to his account for the Plan Year. (h) For purposes of this Section, "Matching Contribution" shall mean an Employer contribution made to the Plan, or to a contract described in Code Section 403(b), on behalf of a Participant on account of an Employee contribution made by such Participant, or on account of a participant's deferred compensation, under a plan maintained by the Employer. 4.8 ADJUSTMENT TO ACTUAL CONTRIBUTION PERCENTAGE TESTS (a) In the event that for Plan Years beginning after December 31, 1986, the "Actual Contribution Percentage" for the Highly Compensated Participant group exceeds the "Actual Contribution Percentage" for the Non-Highly Compensated Participant group pursuant to Section 4.7(a), the Administrator (on or before the fifteenth day of the third month following the end of the Plan Year, but in no event later than the close of the following Plan Year) shall direct the Trustee to distribute to the Highly Compensated Participant having the highest actual contribution ratio, his portion of Excess Aggregate Contributions (and Income allocable to such contributions) or, if forfeitable, forfeit such non-Vested Excess Aggregate Contributions attributable to Employer matching contributions (and Income allocable to such Forfeitures) until either one of the tests set forth in Section 4.7(a) is satisfied, or until his actual contribution ratio equals the actual contribution ratio of the Highly Compensated Participant having the second highest actual contribution ratio. This process shall continue until one of the tests set forth in Section 4.7(a) is satisfied. The distribution and/or Forfeiture of Excess Aggregate Contributions shall be made in the following order. (1) Employer matching contributions distributed and/or forfeited pursuant to Section 4.6(a)(1); (2) Voluntary Employee contributions including Excess Contributions recharacterized as voluntary Employee contributions pursuant to Section 4.6(a)(2); (3) Remaining Employer matching contributions. (b) Any distribution or Forfeiture of less than the entire amount of Excess Aggregate Contributions (and Income) shall be treated as a pro rata distribution of Excess Aggregate Contributions and Income. Distribution of Excess Aggregate Contributions shall be designated by the Employer as a distribution shall be designated by the Employer as a distribution of Excess Aggregate Contributions (and Income). Forfeitures of Excess Aggregate Contributions shall be treated in accordance with Section 4.4. However, no such Forfeiture may be allocated to a Highly Compensated Participant whose contributions are reduced pursuant to this Section. (c) Excess Aggregate Contributions attributable to amounts other than voluntary Employee contributions, including forfeited matching contributions, shall be treated as Employer contributions for purposes of Code Sections 404 and 415 even if distributed from the Plan. (d) For the purposes of this Section and Section 4.7, "Excess Aggregate Contributions" means, with respect to any Plan Year, the excess of: (1) the aggregate amount of Employer matching contributions made pursuant to Section 4.1(b) (to the extent such contributions are taken into account pursuant to Section 4.7(b), voluntary Employee contributions made pursuant to Section 4.12, Excess Contributions recharacterized as voluntary Employee contributions pursuant to Section 4.6(a) and any Qualified Non-Elective Contributions or elective deferrals taken into account pursuant to Section 4.7(c) actually made on behalf of the Highly Compensated Participant group for such Plan Year, over (2) the maximum amount of such contributions permitted under the limitations of Section 4.7(a). (e) For each Highly Compensated Participant, the amount of Excess Aggregate Contribution is equal to the total Employer matching contributions made pursuant to Section 4.1(b) (to the extent taken into account pursuant to Section 4.1(b) (to the extent taken into account pursuant to Section 4.7(b)), voluntary Employee contributions made pursuant to Section 4.12, Excess Contributions recharacterized as voluntary Employee contributions pursuant to Section 4.6(a) and any Qualified Non-Elective Contributions or elective deferrals taken into account pursuant to Section 4.7(c) on behalf of the Highly Compensated Participant (determined prior to the application of this paragraph) minus the amount determined by multiplying the Highly Compensated Participant's actual contribution ratio (determined after application of this paragraph) by his "414(s) Compensation". The actual contribution ratio must be rounded to the nearest one- hundredth of one percent for Plan Years beginning after December 31, 1988. In no case shall the amount of Excess Aggregate Contribution with respect to any Highly Compensated Participant exceed the amount of Employer matching contributions made pursuant to Section 4.1(b) (to the extent taken into account pursuant to Section 4.7(b)), voluntary Employee contributions made pursuant to Section 4.12, Excess Contributions recharacterized as voluntary Employee contributions pursuant to Section 4.6(a) and any Qualified Non- Elective Contributions or elective deferrals taken into account pursuant to Section 4.7(c) on behalf of such Highly Compensated Participant for such Plan Year. (f) The determination of the amount of Excess Aggregate Contributions with respect to any Plan Year shall be made after first determining the Excess Contributions, if any, to be treated as voluntary Employee contributions due to recharacterization for the plan year of any other qualified cash or deferred arrangement (as defined in Code Section 401(k)) maintained by the Employer that ends with or within the Plan Year or which are treated as voluntary Employee contributions due to recharacterization pursuant to Section 4.6(a). (g) The determination and correction of Excess Aggregate Contributions of a Highly Compensated Participant whose actual contribution ratio is determined under the family aggregation rules shall be accomplished by reducing the actual contribution percentage ratio as required herein and the Excess Aggregate Contributions for the family unit shall be allocated among the Family Members in proportion to the sum of Employer matching contributions made pursuant to Section 4.1(b) (to the extent taken into account pursuant to Section), voluntary Employee contributions made pursuant to Section 4.12, Excess Contributions recharacterized as voluntary Employee contributions pursuant to Section and any Qualified Non-elective Contributions or elective deferrals taken into account pursuant to Section 5.1 of each Family Member that were combined to determine the group actual contribution ratio. 18 23 (h) Notwithstanding the above, within twelve (12) months after the end of the Plan Year, the Employer may make a special Qualified Non-Elective Contribution on behalf of Non-Highly Compensated Participants in an amount sufficient to satisfy one of the tests set forth in Section 4.7(a). Such contribution shall be allocated to the Participant's Qualified Non-Elective Account of each Non-Highly Compensated Participant in the same proportion that each Non-Highly Compensated Participant's Compensation for the year bears to the total Compensation of all Non-Highly Compensated Participants. A separate accounting shall be maintained for the purpose of excluding such contributions from the "Actual Deferral Percentage" tests pursuant to Code Section 4.5(a). (i) For purposes of this Section, "Income" means the income or loss allocable to Excess Aggregate Contributions which shall equal the sum of the allocable gain or loss for the Plan Year and the allocable gain or loss for the period between the end of the Plan Year and the date of distribution ("gap period"). The income or loss allocable to Excess Aggregate Contributions for the Plan Year and the "gap period" is calculated separately and is determined by multiplying the income or loss for the Plan Year or the "gap period" by a fraction. The numerator of the fraction is the Excess Aggregate Contributions for the Plan Year. The denominator of the fraction is the total Participant's Account and Voluntary Contribution Account attributable to Employer matching contributions subject to Section 4.7, voluntary Employee contributions made pursuant to Section 4.12, and any Qualified Non-Elective Contributions and elective deferrals taken into account pursuant to Section 4.7(c) as of the end of the Plan Year or the "gap period" reduced by the gain allocable to such total amount for the Plan Year or the "gap period" and increased by the loss allocable to such total amount for the Plan Year or the "gap period". In lieu of the "fractional method" described above, a "safe harbor method" may be used to calculate the allocable Income for the "gap period". Under such "safe harbor method", allocable Income for the "gap period" shall be deemed to equal ten percent (10%) of the Income allocable to Excess Aggregate Contributions for the Plan Year of the Participant multiplied by the number of calendar months in the "gap period". For purposes of determining the number of calendar months in the "gap period", a distribution occurring on or before the fifteenth day of the month shall be treated as having been made on the last day of the preceding month and a distribution occurring after such fifteenth day shall be treated as having been made on the first day of the next subsequent month. The Income allocable to Excess Aggregate Contributions resulting from recharacterization of Elective Contributions shall be determined and distributed as if such recharacterized Elective Contributions had been distributed as Excess Contributions. Notwithstanding the above, for Plan Years which began in 1987, and for Plan Years beginning on or after the date this Plan is adopted, Income during the "gap period" shall not be taken into account. 4.9 MAXIMUM ANNUAL ADDITIONS (a) (1) If the Participant does not participate in, and has never participated in another qualified plan maintained by the Employer, or a welfare benefit fund (as defined in Code Section 419(e)), maintained by the Employer, or an individual medical account (as defined in Code Section 415(1)(2)) maintained by the Employer, which provides Annual Additions, the amount of Annual Additions which may be credited to Participant's accounts for any Limitation Year shall not exceed the lesser of the Maximum Permissible Amount or any other limitation contained in this Plan. If the Employer contribution that would otherwise be contributed or allocated to the Participant's accounts would cause the Annual Additions for the Limitation Year to exceed the Maximum Permissible Amount, the amount contributed or allocated will be reduced so that the Annual Additions for the Limitation Year will equal the Maximum Permissible Amount. (2) Prior to determining the Participant's actual Compensation for the Limitation Year, the Employer may determine the Maximum Permissible Amount for a Participant on the basis of a reasonable estimation of the Participant's Compensation for the Limitation Year, uniformly determined for all Participants similarly situated. (3) As soon as is administratively feasible after the end of the Limitation Year, the Maximum Permissible Amount for such Limitation Year shall be determined on the basis of the Participant's annual compensation for such Limitation Year. (4) If pursuant to Section 4.9(a)(2) or Section 4.5, there is an Excess Amount, the excess will be disposed of in one of the following manners, as uniformly determined by the Administrator for all Participants similarly situated. (i) Any Deferred Compensation or nondeductible Voluntary Employee Contributions, to the extent they would reduce the Excess Amount, will be distributed to the Participant; (ii) If, after the application of subparagraph (i), an Excess Amount still exists, and the Participant is covered by the Plan at the end of the Limitation Year, the Excess Amount in the Participant's account will be used to reduce Employer contributions (including any allocation of Forfeitures) for such Participant in the next Limitation Year, and each succeeding Limitation Year if necessary; (iii) If, after the application subparagraph (i), an Excess Amount still exists, and the Participant is not covered by the Plan at the end of a Limitation Year, the Excess Amount will be held unallocated in a suspense account. The suspense account will be applied to reduce future Employer contributions (including allocation of any Forfeitures) for all remaining Participants in the next Limitation Year, and each succeeding Limitation Year if necessary; (iv) If a suspense account is in existence at any time during a Limitation Year pursuant to this Section, it will not participate in the allocation of investment gains and losses. If a suspense account is in existence at any time during a particular limitation year, all amounts in the suspense account must be allocated and reallocated to participants' accounts before any employer contributions or any employee contributions may be made to the plan for that limitation year. Excess amounts may not be distributed to participants or former participants. (b) (1) This subsection applies if, in addition to this Plan, the Participant is covered under another qualified Prototype defined contribution plan maintained by the Employer, or a welfare benefit fund (as defined in Code Section 419(e)) maintained by the Employer, or 19 24 an individual medical account (as defined in Code Section 415(1)(2)) maintained by the Employer, which provides Annual Additions, during any Limitation Year. The Annual Additions which may be credited to a Participant's accounts under this Plan for any such Limitation Year shall not exceed the Maximum Permissible Amount reduced by the Annual Additions credited to a Participant's accounts under the other plans and welfare benefit funds for the same Limitation Year. If the Annual Additions with respect to the Participant under other defined contribution plans and welfare benefit funds maintained by the Employer are less than the Maximum Permissible Amount and the Employer contribution that would otherwise be contributed or allocated to the Participant's accounts under this Plan would cause the Annual Additions for the Limitation Year to exceed this limitation, the amount contributed or allocated will be reduced so that the Annual Additions under all such plans and welfare benefit funds for the Limitation Year will equal the Maximum Permissible Amount. If the Annual Additions with respect to the Participant under such other defined contribution plans and welfare benefit funds in the aggregate are equal to or greater than the Maximum Permissible Amount, no amount will be contributed or allocated to the Participant's account under this Plan for the Limitation Year. (2) Prior to determining the Participant's actual Compensation for the Limitation Year, the Employer may determine the maximum Permissible Amount for a Participant in the manner described in Section 4.9(a)(2). (3) As soon as is administratively feasible after the end of the Limitation Year, the Maximum Permissible Amount for the Limitation Year will be determined on the basis of the Participant's actual Compensation for the Limitation Year. (4) If, pursuant to Section 4.9(b)(2) or Section 4.5, a Participant's Annual Additions under this Plan and such other plans would result in an Excess Amount for a Limitation Year, the Excess Amount will be deemed to consist of the Annual Additions last allocated, except that Annual Additions attributable to a welfare benefit fund or individual medical account will be deemed to have been allocated first regardless of the actual allocation date. (5) If an Excess Amount was allocated to a Participant on an allocation date of this Plan which coincides with an allocation date of another plan, the Excess Amount attributed to this Plan will be the product of: (i) the total Excess Amount allocated as of such date, times (ii) the ratio of (1) the Annual Additions allocated to the Participant for the Limitation Year as of such date under this Plan to (2) the total Annual Additions allocated to the Participant for the Limitation Year as of such date under this and all the other qualified defined contribution plans. (6) Any Excess Amount attributed to this Plan will be disposed in the manner described in Section 4.9(a)(4). (c) If the Participant is covered under another qualified defined contribution plan maintained by the Employer which is not a Prototype Plan, Annual Additions, which may be credited to the Participant's account under this Plan for any Limitation Year will be limited in accordance with Section 4.9(b), unless the Employer provides other limitations in the Adoption Agreement. (d) If the Employer maintains, or at any time maintained, a qualified defined benefit plan covering any Participant in this Plan the sum of the Participant's Defined Benefit Plan Fraction and Defined Contribution Plan Fraction will not exceed 1.0 in any Limitation Year. The Annual Additions which may be credited to the Participant's account under this Plan for any Limitation Year will be limited in accordance with the Limitation on Allocations Section of the Adoption Agreement. (e) For purposes of applying the limitations of Code Section 415, the transfer of funds from one qualified plan to another is not an "annual addition". In addition, the following are not Employee contributions for the purposes of Section 4.9(f)(1)(2); (1) rollover contributions (as defined in Code Sections 402(a)(5), 403(a)(4), 403(b)(8) and 408(d)(3)); (2) repayments of loans made to a Participant from the Plan; (3) repayments of distributions received by an Employee pursuant to Code Section 411(a)(7)(B) (cash-outs); (4) repayments of distributions received by an Employee pursuant to Code Section 411(a)(3)(D) (mandatory contributions); and (5) Employee contributions to a simplified employee pension excludable from gross income under Code Section 408(k)(6). (f) For purposes of this Section, the following terms shall be defined as follows: (1) Annual Additions means the sum credited to a Participant's accounts for any Limitation Year of (1) Employer contributions, (2) effective with respect to "limitation years" beginning after December 31, 1986, Employee contributions, (3) forfeitures, (4) amounts allocated, after March 31, 1984, to an individual medical account, as defined in Code Section 415(1)(2), which is part of a pension or annuity plan maintained by the Employer and (5) amounts derived from contributions paid or accrued after December 31, 1985, in taxable years ending after such date, which are attributable to post-retirement medical benefits allocated to the separate account of a key employee (as defined in Code Section 419A(d)(3)) under a welfare benefit fund (as defined in Code Section 419(e)) maintained by the Employer. Except, however, the "415 Compensation" percentage limitation referred to in paragraph (a)(2) above shall not apply to: (1) any contribution for medical benefits (within the meaning of Code Section 419A(f)(2)) after separation from service which is otherwise treated as an "annual addition", or (2) any amount otherwise treated as an "annual addition" under Code Section 415(l)(1). Notwithstanding the foregoing, for "limitation years" beginning prior to January 1, 1987, only that portion of Employee contributions equal to the lesser of Employee contributions in excess of six percent (6%) of "415 Compensation" or one-half of Employee contributions shall be considered an "annual addition". For this purpose, any Excess Amount applied under Sections 4.9(a)(4) and 4.9(b)(6) in the Limitation Year to reduce Employer contributions shall be considered Annual Additions for such Limitation Year. (2) Compensation means a Participant's Compensation as defined in Section E1 of the Adoption Agreement. For purposes of applying the limitations of this Section 4.9, Compensation for any Limitation Year is the Compensation actually paid or includible in gross income during such year. Notwithstanding the preceding sentence, Compensation for a Participant in a profit-sharing plan who is permanently and totally disabled (as defined in Code Section 22(e)(3)) is the Compen- 20 25 sation such Participant would have received for the Limitation Year if the Participant had been paid at the rate of Compensation paid immediately before becoming permanently and totally disabled; such imputed Compensation for the disabled Participant may be taken into account only if the Participant is not a Highly Compensated Employee and contributions made on behalf of such Participant are nonforfeitable when made. (3) Defined Benefit Fractions means a fraction, the numerator of which is the sum of the Participant's Projected Annual Benefits under all the defined benefit plans (whether or not terminated) maintained by the Employer, and the denominator of which is the lesser of 125 percent of the dollar limitation determined for the Limitation Year under Code Sections 415(b) and (d) or 140 percent of his highest Average Compensation including any adjustments under Code Section 415(b). Notwithstanding the above, if the Participant was a Participant as of the first day of the first Limitation Year beginning after December 31, 1986, in one or more defined benefit plans maintained by the Employer which were in existence on May 6, 1986, the denominator of this fraction will not be less than 125 percent of the sum of the annual benefits under such plans which the Participant had accrued as of the end of the close of the last Limitation Year beginning before January 1, 1987, disregarding any changes in the terms and conditions of the plan after May 5, 1986. The preceding sentence applies only if the defined benefit plans individually and in the aggregate satisfied the requirements of Code Section 415 for all Limitation Years beginning before January 1, 1987. Notwithstanding the foregoing, for any Top Heavy Plan Year, 100 shall be substituted for 125 unless the extra minimum allocation is being made pursuant to the Employer's election in F1 of the Adoption Agreement. However, for any Plan Year in which this Plan is a Super Top Heavy Plan, 100 shall be substituted for 125 in any event. (4) Defined Contribution Dollar Limitation means $30,000, or, if greater, one-fourth of the defined benefit dollar limitation set forth in Code Section 415(b)(1) as in effect for the Limitation Year. (5) Defined Contribution Fraction means a fraction, the numerator of which is the sum of the Annual Additions to the Participant's account under all the defined contribution plans (whether or not terminated) maintained by the Employer for the current and all prior Limitation Years, (including the Annual Additions attributable to the Participant's nondeductible voluntary employee contributions to any defined benefit plans, whether or not terminated, maintained by the Employer and the annual additions attributable to all welfare benefit funds, as defined in Code Section 419(e), and individual medical accounts, as defined in Code Section 415(1)(2), maintained by the Employer), and the denominator of which is the sum of the maximum aggregate amounts for the current and all prior Limitation Years of Service with the Employer (regardless of whether a defined contribution plan was maintained by the Employer). The maximum aggregate amount in any Limitation Year is the lesser of 125 percent of the Defined Contribution Dollar Limitation or 35 percent of the Participant's Compensation for such year. For Limitation Years beginning prior to January 1, 1987, the "annual addition" shall not be recomputed to treat all Employees contributions as an Annual Addition. If the Employee was a Participant as of the end of the first day of the first Limitation Year beginning after December 31, 1986, in one or more defined contribution plans maintained by the Employer which were in existence on May 5, 1986, the numerator of this fraction will be adjusted if the sum of this fraction and the Defined Benefit Fraction would otherwise exceed 1.0 under the terms of this Plan. Under the adjustment, an amount equal to the product of (1) the excess of the sum of the fractions over 1.0 times (2) the denominator of this fraction, will be permanently subtracted from the numerator of this fraction. The adjustment is calculated using the fractions as they would be computed as of the end of the last Limitation Year beginning before January 1, 1987, and disregarding any changes in the terms and conditions of the plan made after May 5, 1986, but using the Code Section 415 limitation applicable to the first Limitation Year beginning on or after January 1, 1987. Notwithstanding the foregoing, for any Top Heavy Plan Year, 100 shall be substituted for 125 unless the extra minimum allocation is being made pursuant to the Employer's election in F1 of the Adoption Agreement. However, for any Plan Year in which this Plan is a Super Top Heavy Plan, 100 shall be substituted for 125 in any event. (6) Employer means the Employer that adopts this Plan and all Affiliated Employers, except that for purposes of this Section, Affiliated Employers shall be determined pursuant to the modification made by Code Section 415(h). (7) Excess Amount means the excess of the Participant's Annual Additions for the Limitation Year over the Maximum Permissible Amount. (8) Highest Average Compensation means the average Compensation for the three consecutive Years of Service with the Employer that produces the highest average. A Year of Service with the Employer is the 12 consecutive month period defined in Section E1 of the Adoption Agreement which is used to determine Compensation under the Plan. (9) Limitation Year means the Compensation Year (a 12 consecutive month period) as elected by the Employer in the Adoption Agreement. All qualified plans maintained by the Employer must use the same Limitation Year. If the Limitation Year is amended to a different 12 consecutive month period, the new Limitation Year must begin on a date within the Limitation Year in which the amendment is made. (10) Master or Prototype Plan means a plan the form of which is the subject of a favorable opinion letter from the Internal Revenue Service. (11) Maximum Permissible Amount means the maximum Annual Addition that may be contributed or allocated to a Participant's account under the plan for any Limitation Year, which shall not exceed the lesser of: (i) the Defined Contribution Dollar Limitation, or (ii) 25 percent of the Participant's Compensation for the Limitation Year. The Compensation Limitation referred to in (ii) shall not apply to any contribution for medical benefits (within the meaning of Code Sections 401(h) or 419A(f)(2)) which is otherwise treated as an annual addition under Code Sections 415(l)(1) or 419A(d)(2). 21 26 If a short Limitation Year is created because of an amendment changing the Limitation Year to a different 12 consecutive month period, the Maximum Permissible Amount will not exceed the Defined Contribution Dollar Contribution multiplied by the following fraction: number of months in the short Limitation Year 12 (12) Projected Annual Benefit means the annual retirement benefit (adjusted to an actuarially equivalent straight life annuity if such benefit is expressed in a form other than a straight life annuity or qualified Joint and Survivor Annuity) to which the Participant would be entitled under the terms of the plan assuming: (i) the Participant will continue employment until Normal Retirement Age (or current age, if later), and (ii) the Participant's Compensation for the current Limitation Year and all other relevant factors used to determine benefits under the Plan will remain constant for all future Limitation Years. (g) Notwithstanding anything contained in this Section to the contrary, the limitations, adjustments and other requirements prescribed in this Section shall at all times comply with the provisions of Code Section 415 and the Regulations thereunder, the terms of which are specifically incorporated herein by reference. 4.10 ADJUSTMENT FOR EXCESSIVE ANNUAL ADDITIONS (a) If as a result of the allocation of Forfeitures, a reasonable error in estimating a Participant's annual Compensation, a reasonable error in determining the amount of elective deferrals (within the meaning of Code Section 402(g)(3), that may be made with respect to a Participant, or other facts and circumstances to which Regulation 1.415-6(b)(6) shall be applicable, the "annual additions" under this Plan would cause the maximum provided in Section 4.9 to be exceeded, the Administrator shall treat the excess in accordance with Section 4.9(a)(4). 4.11 TRANSFERS FROM QUALIFIED PLANS (a) If specified in the Adoption Agreement and with the consent of the Administrator, amounts may be transferred from other qualified plans, provided that the trust from which such funds are transferred permits the transfer to be made and the transfer will not jeopardize the tax exempt status of the Plan or create adverse tax consequences for the Employer. The amounts transferred shall be set up in a separate account herein referred to as a "Participant's Rollover Account". Such account shall be fully Vested at all times and shall not be subject to forfeiture for any reason. (b) Amounts in a Participant's Rollover Account shall be held by the Trustee pursuant to the provisions of this Plan and may not be withdrawn by, or distributed to the Participant, in whole or in part, except as provided in Paragraphs (c) and (d) of this Section. (c) Amounts attributable to elective contributions (as defined in Regulation 1.401(k)-1(g)(4)), including amounts treated as elective contributions, which are transferred from another qualified plan in a plan-to-plan transfer shall be subject to the distribution limitations provided for in Regulation 1.401(k)-1(d). (d) At Normal Retirement Date, or such other date when the Participant or his Beneficiary shall be entitled to receive benefits, the fair market value of the Participant's Rollover Account shall be used to provide additional benefits to the Participant or his Beneficiary. Any distributions of amounts held in a Participant's Rollover Account shall be made in a manner which is consistent with and satisfies the provisions of Section 6.5, including, but not limited to, all notice and consent requirements of Code Sections 411(a)(11) and 417 and the Regulations thereunder. Furthermore, such amounts shall be considered as part of a Participant's benefit in determining whether an involuntary cash-out of benefits without Participant consent may be made. (e) The Administrator may direct that employee transfers made after a valuation date be segregated into a separate account for each Participant until such time as the allocations pursuant to this Plan have been made, at which time they may remain segregated or be invested as part of the general Trust Fund, to be determined by the Administrator. (f) For purposes of this Section, the term "qualified plan" shall mean any tax qualified plan under Code Section 401(a). The term "amounts transferred from other qualified plans" shall mean: (i) amounts transferred to this Plan directly from another qualified plan; (ii) lump-sum distributions received by an Employee from another qualified plan which are eligible for tax free rollover to a qualified plan and which are transferred by the Employee to this Plan within sixty (60) days following his receipt thereof; (iii) amounts transferred to this Plan from a conduit individual retirement account provided that the conduit individual retirement account has no assets other than assets which (A) were previously distributed to the Employee by another qualified plan as a lump-sum distribution (B) were eligible for tax-free rollover to a qualified plan and (C) were deposited in such conduit individual retirement account within sixty (60) days of receipt thereof and other than earnings on said assets; and (iv) amounts distributed to the Employee from a conduit individual retirement account meeting the requirements of clause (iii) above, and transferred by the Employee to this Plan within sixty (60) days of his receipt thereof from such conduit individual retirement account. (g) Prior to accepting any transfers to which this Section applies, the Administrator may require the Employee to establish that the amounts to be transferred to this Plan meet the requirements of this Section and may also require the Employee to provide an opinion of counsel satisfactory to the Employer that the amounts to be transferred meet the requirements of this Section. (h) Notwithstanding anything herein to the contrary, a transfer directly to this Plan from another qualified plan (or a transaction having the effect of such a transfer) shall only be permitted if it will not result in the elimination or reduction of any "Section 411(d)(6) protected benefit" as described in Section 8.1. 4.12 VOLUNTARY CONTRIBUTIONS (a) If elected in the Adoption Agreement, each Participant may, at the discretion of the Administrator in a nondiscriminatory manner, elect to voluntarily contribute a portion of his compensation earned while a Participant under this Plan. Such contributions shall be paid to the Trustee within a reasonable period of time but in no event later than 90 days after the receipt of the contribution. (b) The balance in each Participant's Voluntary Contribution Account shall be fully Vested at all times and shall not be subject to Forfeiture for any reason. (c) A Participant may elect to withdraw his voluntary contributions from his Voluntary Contribution Account and the actual earnings thereon in a manner which is consistent with and satisfies the provisions of Section 6.5, including, but not limited to, all notice and consent requirements of Code Sections 411(a)(11) and 417 and the Regulations thereunder. If the Administrator maintains sub-accounts with respect to voluntary contributions (and earnings 22 27 thereon) which were made on or before a specified date, a Participant shall be permitted to designate which subaccount shall be the source for his withdrawal. No Forfeitures shall occur solely as a result of an Employee's withdrawal of Employee contributions. In the event such a withdrawal is made, or in the event a Participant has received a hardship distribution pursuant to Regulation 1.401(k)-1(d)(2)(iii)(B) from any other plan maintained by the Employer or from his Participant's Elective Account pursuant to Section 6.11, then such Participant shall be barred from making any voluntary contributions to the Trust Fund for a period of twelve (12) months after receipt of the withdrawal or distribution. (d) At Normal Retirement Date, or such other date when the Participant or his Beneficiary shall be entitled to receive benefits, the fair market value of the Voluntary Contribution Account shall be used to provide additional benefits to the Participant or his Beneficiary. (e) The Administrator may direct that voluntary contributions made after a valuation date be segregated into a separate account until such time as the allocations pursuant to this Plan have been made, at which time they may remain segregated or be invested as part of the general Trust Fund, to be determined by the Administrator. 4.13 DIRECTED INVESTMENT ACCOUNT (a) If elected in the Adoption Agreement, all Participants may direct the Trustee as to the investment of all or a portion of any one or more of their individual account balances. Participants may direct the Trustee in writing to invest their account to specific assets as permitted by the Administrator provided such investments are in accordance with the Department of Labor regulations and are permitted by the Plan. That portion of the account of any Participant so directing will thereupon be considered a Directed Investment Account. (b) A separate Directed Investment Account shall be established for each Participant who has directed an investment. Transfers between the Participant's regular account and their Directed Investment Account shall be charged and credited as the case may be to each account. The Directed Investment Account shall not share in Trust Fund Earnings, but it shall be charged or credited as appropriate with the net earnings, gains, losses and expenses as well as any appreciation or depreciation in market value during each Plan Year attributable to such account. (c) The Administrator shall establish a procedure, to be applied in a uniform and nondiscriminatory manner, setting forth the permissible investment options under this Section, how often changes between investments may be made, and any other limitations that the Administrator shall impose on a Participant's right to direct investments. 4.14 QUALIFIED VOLUNTARY EMPLOYEE CONTRIBUTIONS (a) If this is an amendment to a Plan that previously permitted deductible voluntary contributions, then each Participant who made a "Qualified Voluntary Employee Contribution" within the meaning of Code Section 219(e)(2) as it existed prior to the enactment of the Tax Reform Act of 1986, and shall have his contribution held in a separate Qualified Voluntary Employee Contribution Account which shall be fully Vested at all times. Such contributions, however, shall not be permitted if they are attributable to taxable years beginning after December 31, 1986. (b) A Participant may, upon written request delivered to the Administrator, make withdrawals from his Qualified Voluntary Employee Contribution Account. Any distribution shall be made in a manner which is consistent with and satisfies the provisions of Section 6.5, including, but not limited to, all notice and consent requirements of Code Sections 411(a)(11) and 417 and the Regulations thereunder. (c) At Normal Retirement Date, or such other date when the Participant or his Beneficiary shall be entitled to receive benefits, the fair market value of the Qualified Voluntary Employee Contribution Account shall be used to provide additional benefits to the Participant or his Beneficiary. (d) Unless the Administrator directs Qualified Voluntary Employee Contributions made pursuant to this Section be segregated into a separate account for each Participant, they shall be invested as part of the general Trust Fund and share in earnings and losses. 4.15 INTEGRATION OF MORE THAN ONE PLAN If the Employer and/or an Affiliated Employer maintain qualified retirement plans integrated with Social Security such that any Participant in this Plan is covered under more than one of such plans, then such plans will be considered to be one plan and will be considered to be integrated if the extent of the integration of all such plans does not exceed 100%. For purposes of the preceding sentence, the extent of integration of a plan is the ratio, expressed as a percentage, which the actual benefits, benefit rate, offset rate, or employer contribution rate, whatever is applicable, under the Plan bears to the limitation applicable to such Plan. If the Employer maintains two or more standardized paired plans, only one plan may be integrated with Social Security. ARTICLE V VALUATIONS 5.1 VALUATION OF THE TRUST FUND The Administrator shall direct the Trustee, as of each Anniversary Date, and at such other date or dates deemed necessary by the Administrator, herein called "valuation date", to determine the net worth of the assets comprising the Trust Fund as it exists on the "valuation date". In determining such net worth, the Trustee shall value the assets comprising the Trust Fund at their fair market value as of the "valuation date" and shall deduct all expenses for which the Trustee has not yet obtained reimbursement from the Employer or the Trust Fund. 5.2 METHOD OF VALUATION In determining the fair market value of securities held in the Trust Fund which are listed on a registered stock exchange, the Administrator shall direct the Trustee to value the same at the prices they were last traded on such exchange preceding the close of business on the "valuation date". If such securities were not traded on the "valuation date", or if the exchange on which they are traded was not open for business on the "valuation date", then the securities shall be valued at the prices at which they were last traded prior to the "valuation date". Any unlisted security held in the Trust Fund shall be valued at its bid price next preceding the close of business on the "valuation date", which bid price shall be obtained from a registered broker or an investment banker. In determining the fair market value of assets other than securities for which trading or bid prices can be obtained, the Trustee may appraise such assets itself, or in its discretion, employ one or more appraisers for that purpose and rely on the values established by such appraiser or appraisers. ARTICLE VI DETERMINATION AND DISTRIBUTION OF BENEFITS 6.1 DETERMINATION OF BENEFITS UPON RETIREMENT Every Participant may terminate his employment with the Employer and retire for the purposes hereof on or after his Normal Retirement 23 28 Date or Early Retirement Date. Upon such Normal Retirement Date or Early Retirement Date, all amounts credited to such Participant's Combined Account shall become distributable. However, a Participant may postpone the termination of his employment with the Employer to a later date, in which event the participation of such Participant in the Plan, including the right to receive allocations pursuant to Section 4.4, shall continue until his Late Retirement Date. Upon a Participant's Retirement Date, or as soon thereafter as is practicable, the Administrator shall direct the distribution of all amount credited to such Participant's Combined Account in accordance with Section 6.5. 6.2 DETERMINATION OF BENEFITS UPON DEATH (a) Upon the death of a Participant before his Retirement Date or other termination of his employment, all amounts credited to such Participant's Combined Account shall become fully Vested. The Administrator shall direct, in accordance with the provisions of Sections 6.6 and 6.7, the distribution of the deceased Participant's accounts to the Participant's Beneficiary. (b) Upon the death of a Former Participant, the Administrator shall direct, in accordance with the provisions of Sections 6.6 and 6.7, the distribution of any remaining amounts credited to the accounts of such deceased Former Participant to such Former Participant's Beneficiary. (c) The Administrator may require such proper proof of death and such evidence of the right of any person to receive payment of the value of the account of a deceased Participant or Former Participant as the Administrator may deem desirable. The Administrator's determination of death and of the right of any person to receive payment shall be conclusive. (d) Unless otherwise elected in the manner prescribed in Section 6.6, the Beneficiary of the Pre-Retirement Survivor Annuity shall be the Participant's spouse. Except, however, the Participant may designate a Beneficiary other than his spouse for the Pre-Retirement Survivor Annuity if: (1) the Participant and his spouse have validly waived the Pre-Retirement Survivor Annuity in the manner prescribed in Section 6.6, and the spouse has waived his or her right to be the Participant's Beneficiary, or (2) the Participant is legally separated or has been abandoned (within the meaning of local law) and the Participant has a court order to such effect (and there is no "qualified domestic relations order" as defined in Code Section 414(p) which provides otherwise), or (3) the Participant has no spouse, or (4) the spouse cannot be located. In such event, the designation of a Beneficiary shall be made on a form satisfactory to the Administrator. A Participant may at any time revoke his designation of a Beneficiary or change his Beneficiary by filing written notice of such revocation or change with the Administrator. However, the Participant's spouse must again consent in writing to any change in Beneficiary unless the original consent acknowledged that the spouse had the right to limit consent only to a specific Beneficiary and that the spouse voluntarily elected to relinquish such right. The Participant may, at any time, designate a Beneficiary for death benefits payable under the Plan that are in excess of the Pre-Retirement Survivor Annuity. In the event no valid designation of Beneficiary exist at the time of the Participant's death, the death benefit shall be payable to his estate. (e) If the Plan provides an insured death benefit and a Participant dies before any insurance coverage to which he is entitled under the Plan is effected, his death benefit from such insurance coverage shall be limited to the standard rated premium which was or should have been used for such purpose. (f) In the event of any conflict between the terms of this Plan and the terms of any Contract issued hereunder, the Plan provisions shall control. 6.3 DETERMINATION OF BENEFITS IN EVENT OF DISABILITY In the event of a Participant's Total and Permanent Disability prior to his Retirement Date or other termination of his employment, all amounts credited to such Participant's Combined Account shall become fully Vested. In the event of a Participant's Total and Permanent Disability, the Administrator, in accordance with the provisions of Sections 6.5 and 6.7, shall direct the distribution to such Participant of all amounts credited to such Participant's Combined Account as though he had retired. 6.4 DETERMINATION OF BENEFITS UPON TERMINATION (a) On or before the Anniversary Date coinciding with or subsequent to the termination of a Participant's employment for any reason other than retirement, death, or Total and Permanent Disability, the Administrator may direct the Trustee to segregate the amount of the Vested portion of such Terminated Participant's Combined Account and invest the aggregate amount thereof in a separate, federally insured savings account, certificate of deposit, common or collective trust fund of a bank or a deferred annuity. In the event the Vested portion of a Participant's Combined Account is not segregated, the amount shall remain in a separate account for the Terminated Participant and share in allocations pursuant to Section 4.4 until such time as a distribution is made to the Terminated Participant. The amount of the portion of the Participant's Combined Account which is not Vested may be credited to a separate account (which will always share in gains and losses of the Trust) and at such time as the amount becomes a Forfeiture shall be treated in accordance with the provisions of the Plan regarding Forfeitures. Regardless of whether distributions in kind are permitted, in the event that the amount of the Vested portion of the Terminated Participant's Combined Account equals or exceeds the fair market value of any insurance contracts, the Trustee, when so directed by the Administrator and agreed to by the Terminated Participant, shall assign, transfer, and set over to such Terminated Participant all Contracts on his life in such form or which such endorsements, so that the settlement options and forms of payment are consistent with the provisions of Section 6.5. In the event that the Terminated Participant's Vested portion does not at least equal the fair market value of the Contracts, if any, the Terminated Participant may pay over to the Trustee the sum needed to make the distribution equal to the value of the Contracts being assigned or transferred, or the Trustee, pursuant to the Participant's election, may borrow the cash value of the Contract from the Insurer so that the value of the Contracts from the Insurer so that the value of the Contracts is equal to the Vested portion of the Terminated Participant's Combined Account and then assign the Contracts to the Terminated Participant. Distribution of the funds due to a Terminated Participant shall be made on the occurrence of an event which would result in the distribution had the Terminated Participant remained in the employ of the Employer (upon the Participant's death, Total and Permanent Disability, Early or Normal Retirement). However, at the election of the Participant, the Administrator shall direct that the entire Vested portion of the Terminated Participant's Combined Account to be payable to such Terminated Participant pro- 24 29 vided the conditions, if any, set forth in the Adoption Agreement have been satisfied. Any distribution under this paragraph shall be made in a manner which is consistent with and satisfies the provisions of Section 6.5, including but not limited to, all notice and consent requirements of Code Sections 411(a)(11) and 417 and the Regulations thereunder. Notwithstanding the above, if the value of a Terminated Participant's Vested benefit derived from Employer and Employee contributions does not exceed, and at the time of any prior distribution, has never exceeded $3,500, the Administrator shall direct that the entire Vested benefit be paid to such Participant in a single lump-sum without regard to the consent of the Participant or the Participant's spouse. A Participant's Vested benefit shall not include Qualified Voluntary Employee Contributions within the meaning of Code Section 72(o)(5)(B) for Plan Years beginning prior to January 1, 1989. (b) The Vested portion of any Participant's Account shall be a percentage of such Participant's Account determined on the basis of the Participant's number of Years of Service according to the vesting schedule specified in the Adoption Agreement. (c) For any Top Heavy Plan Year, one of the minimum top heavy vesting schedules as elected by the Employer in the Adoption Agreement will automatically apply to the Plan. The minimum top heavy vesting schedule applies to all benefits within the meaning of Code Section 411(a)(7) except those attributable to Employee contributions, including benefits accrued before the effective date of Code Section 416 and benefits accrued before the Plan became top heavy. Further, no decrease in a Participant's Vested percentage may occur in the event the Plan's status as top heavy changes for any Plan Year. However, this Section does not apply to the account balances of any Employee who does not have an Hour of Service after the Plan has initially become top heavy and the Vested percentage of such Employee's Participant's Account shall be determined without regard to this Section 6.4(c). If in any subsequent Plan Year, the Plan ceases to be a Top Heavy Plan, the Administrator shall continue to use the vesting schedule in effect while the Plan was a Top Heavy Plan for each Employee who had an House of Service during a Plan Year when the Plan was Top Heavy. (d) Notwithstanding the vesting schedule above, upon the complete discontinuance of the Employer's contributions to the Plan or upon any full or partial termination of the Plan, all amounts credited to the account of any affected Participant shall become 100% Vested and shall not thereafter be subject to Forfeiture. (e) If this is an amended or restated Plan, then notwithstanding the vesting schedule specified in the Adoption Agreement, the Vested percentage of a Participant's Account shall not be less than the Vested percentage attained as of the later of the effective date or adoption date of this amendment and restatement. The computation of a Participant's nonforfeitable percentage of his interest in the Plan shall not be reduced as the result of any direct or indirect amendment to this Article, or due to changes in the Plan's status as a Top Heavy Plan. (f) If the Plan's vesting schedule is amended, or if the Plan is amended in any way that directly or indirectly affects the computation of the Participant's nonforfeitable percentage or if the Plan is deemed amended by an automatic change to a top heavy vesting schedule, then each Participant with at least 3 Years of Service as of the expiration date of the election period may elect to have his nonforfeitable percentage computed under the Plan without regard to such amendment or change. Notwithstanding the foregoing, for Plan Years beginning before January 1, 1989, or with respect to Employees who fail to complete at least one (1) Hour of Service in a Plan Year beginning after December 31, 1988, five (5) shall be substituted for three (3) in the preceding sentence. If a Participant fails to make such election, then such Participant shall be subject to the new vesting schedule. the Participant's election period shall commence on the adoption date of the amendment and shall end 60 days after the latest of: (1) the adoption date of the amendment, (2) the effective date of the amendment, or (3) The date the Participant receives written notice of the amendment from the Employer or Administrator. (g) (1) If any Former Participant shall be reemployed by the Employer before a 1-Year Break in Service occurs, he shall continue to participate in the Plan in the same manner as if such termination had not occurred. (2) If any Former Participant shall be reemployed by the Employer before five (5) consecutive 1-Year Breaks in Service, and such Former Participant had received a Service, and such Former Participant had received a distribution of his entire Vested interest prior to his reemployment, his forfeiture account shall be reinstated only if he repays the full amount distributed to him before the earlier of five (5) years after the first date on which the Participant is subsequently reemployed by the Employer or the close of the first period of 5 consecutive 1-Year Breaks in Service commencing after the distribution. If a distribution occurs for any reason other than a separation from service, the time for repayment may not end earlier than five (5) years after the date of separation. In the event the Former Participant does repay the full amount distributed to him, the undistributed portion of the Participant's Account must be restored in full, unadjusted by any gains or losses occurring subsequent to the Anniversary Date or other valuation date preceding his termination. If an employee receives a distribution pursuant to this section and the employee resumes employment covered under this plan, the employee's employer-derived account balance will be restored to the amount on the date of distribution if the employee repays to the plan the full amount of the distribution attributable to employer contributions before the earlier of 5 years after the first date on which the participant is subsequently re-employed by the employer, or the date the participant incurs 5 consecutive 1-year breaks in service following the date of the distribution. If a non-Vested Former Participant was deemed to have received a distribution and such Former Participant is reemployed by the Employer before five (5) consecutive 1-Year Breaks in Service, then such Participant will be deemed to have repaid the deemed distribution as of the date of reemployment. (3) If any Former Participant is reemployed after a 1-Year Break in Service has occurred, Years of Service shall include Years of Service prior to his 1-Year Break in Service subject to the following rules: (i) Any Former Participant who under the Plan does not have a nonforfeitable right to any interest in the Plan resulting from Employer contributions shall lose credits if his consecutive 1-Year Breaks in Service equal or exceed the greater of (A) five (5) or (B) the aggregate number of his pre-break Years of Service; 25 30 (ii) After five (5) consecutive 1-Year Breaks in Service, a Former Participant's Vested Account balance attributable to pre-break service shall not be increased as a result of post-break service: (iii) A Former Participant who is reemployed and who has not had his Years of Service before a 1-Year Break in Service disregarded pursuant to (i) above, shall participate in the Plan as of his date of reemployment: (iv) If a Former Participant completes a Year of Service (a 1-Year Break in Service previously occurred, but employment had not terminated), he shall participate in the Plan retroactively from the first day of the Plan Year during which he completes one (1) Year of Service. (h) In determining Years of Service for purposes of vesting under the Plan, Years of Service shall be excluded as specified in the Adoption Agreement. 6.5 DISTRIBUTION OF BENEFITS (a) (1) Unless otherwise elected as provided below, a Participant who is married on the "annuity starting date" and who does not die before the "annuity starting date" shall receive the value of all of his benefits in the form of a Joint and Survivor Annuity. The Joint and Survivor Annuity is an annuity that commences immediately and shall be equal in value to a single life annuity. Such joint and survivor benefits following the Participant's death shall continue to the spouse during the spouse's lifetime at a rate equal to 50% of the rate at which such benefits were payable to the Participant. This Joint and Survivor Annuity shall be considered the designated qualified Joint and Survivor Annuity and automatic form of payment for the purposes of this Plan. However, the Participant may elect to receive a smaller annuity benefit with continuation of payments to the spouse at a rate of seventy-five percent (75%) or one hundred percent (100%) of the rate payable to a Participant during his lifetime which alternative Joint and Survivor Annuity shall be equal in value to the automatic Joint and 50% Survivor Annuity. An unmarried Participant shall receive the value of his benefit in the form of a life annuity. Such unmarried Participant, however, may elect in writing to waive the life annuity. The election must comply with the provisions of this Section as if it were an election to waive the Joint and Survivor Annuity by a married Participant, but without the spousal consent requirement. The Participant may elect to have any annuity provided for in this Section distributed upon the attainment of the "earliest retirement age" under the Plan. The "earliest retirement age" is the earliest date on which, under the Plan, the Participant could elect to receive retirement benefits. (2) Any election to waive the Joint and Survivor Annuity must be made by the Participant in writing during the election period and be consented to by the Participant's spouse. If the spouse is legally incompetent to give consent, the spouse's legal guardian, even if such guardian is the Participant, may give consent. Such election shall designate a Beneficiary (or a form of benefits) that may not be changed without spousal consent (unless the consent of the spouse expressly permits designations by the Participant without the requirement of further consent by the spouse). Such spouse's consent shall be irrevocable and must acknowledge the effect of such election and be witnessed by a Plan representative or a notary public. Such consent shall not be required if it is established to the satisfaction of the Administrator that the required consent cannot be obtained because there is no spouse, the spouse cannot be located, or other circumstances that may be prescribed by Regulations. The election made by the Participant and consented to by his spouse may be revoked by the Participant in writing without the consent of the spouse at any time during the election period. The number of revocations shall not be limited. Any new election must comply with the requirements of this paragraph. A former spouse's waiver shall not be binding on a new spouse. (3) The election period to waive the Joint and Survivor Annuity shall be the 90 day period ending on the "annuity starting date." (4) For purposes of this Section and Section 6.6, the "annuity starting date" means the first day of the first period for which an amount is paid as an annuity, or, in the case of a benefit not payable in the form of an annuity, the first day on which all event have occurred which entitles the Participant to such benefit. (5) With regard to the election, the Administrator shall provide to the Participant no less than 30 days and no more than 90 days before the "annuity starting date" a written explanation of: (i) the terms and conditions of the Joint and Survivor Annuity, and (ii) the Participant's right to make and the effect of an election to waive the Joint and Survivor Annuity, and (iii) the right of the Participant's spouse to consent to any election to waive the Joint and Survivor Annuity, and (iv) the right of the Participant to revoke such election, and the effect of such revocation. (b) In the event a married Participant duly elects pursuant to paragraph (a)(2) above not to receive his benefit in the form of a Joint and Survivor Annuity, or if such Participant is not married, in the form of a life annuity, the Administrator, pursuant to the election of the Participant, shall direct the distribution to a Participant or his Beneficiary any amount to which he is entitled under the Plan in one or more of the following methods which are permitted pursuant to the Adoption Agreement: (1) One lump-sum payment in cash or in property; (2) Payments over a period certain in monthly, quarterly, semiannual, or annual cash installments. In order to provide such installment payments, the Administrator may direct that the Participant's interest in the Plan be segregated and invested separately, and that the funds in the segregated account be used for the payment of the installments. The period over which such payment is to be made shall not extend beyond the Participant's life expectancy (or the life expectancy of the Participant and his designated Beneficiary); (3) Purchase of or providing an annuity. However, such annuity may not be in any form that will provide for payments over a period extending beyond either the life of the Participant (or the lives of the Participant and his designated Beneficiary) or the life expectancy of the Participant (or the life expectancy of the Participant and his designated Beneficiary). (c) The present value of a Participant's Joint and Survivor Annuity derived from Employer and Employee contributions may not be paid without his written consent if the value exceeds, or has ever exceeded at the time of any prior distribution, $3,500. Further, the spouse of a 26 31 Participant must consent in writing to any immediate distribution. If the value of the Participant's benefit derived from Employer and Employee contributions does not exceed $3,500 and has never exceeded $3,500 at the time of any prior distribution, the Administrator may immediately distribute such benefit without such Participant's consent. No distribution may be made under the preceding sentence after the "annuity starting date" unless the Participant and his spouse consent in writing to such distribution. Any written consent required under this paragraph must be obtained not more than 90 days before commencement of the distribution and shall be made in a manner consistent with Section 6.5(a)(2). (d) Any distribution to a Participant who has a benefit which exceeds, or has ever exceeded at the time of any prior distribution, $3,500 shall require such Participant's consent if such distribution commences prior to the later of his Normal Retirement Age or age 62. With regard to this required consent: (1) No consent shall be valid unless the Participant has received a general description of the material features and an explanation of the relative values of the optional forms of benefit available under the Plan that would satisfy the notice requirements of Code Section 417. (2) The Participant must be informed of his right to defer receipt of the distribution. If a Participant fails to consent, it shall be deemed an election to defer the commencement of payment of any benefit. However, any election to defer the receipt of benefits shall not apply with respect to distributions which are required under Section 6.5(e). (3) Notice of the rights specified under this paragraph shall be provided no less than 30 days and no more than 90 days before the "annuity starting date". (4) Written consent of the Participant to the distribution must not be made before the Participant receives the notice and must not be made more than 90 days before the "annuity starting date". (5) No consent shall be valid if a significant detriment is imposed under the Plan on any Participant who does not consent to the distribution. (e) Notwithstanding any provision in the Plan to the contrary, the distribution of a Participant's benefits, made one or after January 1, 1985, whether under the Plan or through the purchase of an annuity Contract, shall be made in accordance with the following requirements and shall otherwise comply with Code Section 401(a)(9) and the Regulations thereunder (including Regulation Section 1.40(a)(9)-2), the provisions of which are incorporated herein by reference: (1) A Participant's benefits shall be distributed to him not later than April 1st of the calendar year following the later of (i) the calendar year in which the Participant attains age 70 1/2 or (ii) the calendar year in which the Participant retires, provided, however, that this clause (ii) shall not apply in the case of a Participant who is a "five (5) percent owner" at any time during the five (5) Plan Year period ending in the calendar year in which he attains age 70 1/2 or, in the case of a Participant who becomes a "five (5) percent owner" during any subsequent Plan Year, clause (ii) shall no longer apply and the required beginning date shall be the April 1st of the calendar year following the calendar year in which such subsequent Plan Year ends. Alternatively, distributions to a Participant must begin no later than the applicable April 1st as determined under the preceding sentence and must be made over the life of the Participant (or the lives of the Participant and the Participant's designated Beneficiary) or, if benefits are paid in the form of a Joint and Survivor Annuity, the life expectancy of the Participant (or the life expectancies of the Participant and his designated Beneficiary) in accordance with Regulations. For Plan Years beginning after December 31, 1988, clause (ii) above shall not apply to any Participant unless the Participant had attained age 70 1/2 before January 1, 1988 and was not a "five (5) percent owner" at any time during the Plan Year ending with or within the calendar year in which the Participant attained age 66 1/2 or any subsequent Plan Year. (2) Distributions to a Participant and his Beneficiaries shall only be made in accordance with the incidental death benefit requirements of Code Section 401(a)(9)(G) and the Regulations thereunder. Additionally, for calendar years beginning before 1989, distributions may also be made under an alternative method which provides that the ten present value of the payments to be made over the period of the Participant's life expectancy exceeds fifty percent (50%) of the then present value of the total payments to be made to the Participant and his Beneficiaries. (f) For purposes of this Section, the life expectancy of a Participant and a Participant's spouse (other than in the case of a life annuity) shall be redetermined annually in accordance with Regulations if permitted pursuant to the Adoption Agreement. If the Participant or the Participant's spouse may elect whether recalculations will be made, the election, once made, shall be irrevocable. If no election is made by the time distributions must commence, then the life expectancy of the Participant and the Participant's spouse shall not be subject to recalculation. Life expectancy and joint and last survivor expectancy shall be computed using the return multiples in Tables V and VI of Regulation 1.72-9. (g) All annuity Contracts under this Plan shall be non-transferable when distributed. Furthermore, the terms of any annuity Contract purchased and distributed to a Participant or spouse shall comply with all of he requirements of this Plan. (h) Subject to the spouse's right of consent afforded under the Plan, the restrictions imposed by this Section shall not apply if a Participant has, prior to January 1, 1984, made a written designation to have his retirement benefit paid in an alternative method acceptable under Code Section 401(a) as in effect prior to the enactment of the Tax Equity and Fiscal Responsibility Act of 1982. (i) If a distribution is made at a time when a Participant who has not terminated employment is not fully Vested in his Participant's Account and the Participant may increase the Vested percentage in such account: (1) A separate account shall be established for the Participant's interest in the Plan as of the time of the distribution, and (2) At any relevant time the Participant's Vested portion of the separate account shall be equal to an amount ("X") determined by the formula: X equals P(AB plus (RxD)) - (R x D) For purposes of applying the formula: P is the Vested percentage at the relevant time. AB is the account balance at the relevant time. D is the amount of distribution, and R is the ratio of the account balance at the relevant time to the account balance after distribution. 6.6 DISTRIBUTION OF BENEFITS UPON DEATH (a) Unless otherwise elected as provided below, a Vested 27 32 Participant who dies before the annuity starting date and who has a surviving spouse shall have the Pre-Retirement Survivor Annuity paid to his surviving spouse. The Participant's spouse may direct that payment of the Pre-Retirement Survivor Annuity commence within a reasonable period after the Participant's death. If the spouse does not so direct, payment of such benefit will commence at the time the Participant would have attained the later of his Normal Retirement Age or age 62. However, the spouse may elect a later commencement date. Any distribution to the Participant's spouse shall be subject to the rules specified in Section 6.6(h). (b) Any election to waive the Pre-Retirement Survivor Annuity before the Participant's death must be made by the Participant in writing during the election period and shall require the spouse's irrevocable consent in the same manner provided for in Section 6.5(a)(2). Further, the spouse's consent must acknowledge the foregoing, the nonspouse Beneficiary need not be acknowledged, provided the consent of the spouse acknowledges that the spouse has the right to limit consent only to a specific Beneficiary and that the spouse voluntarily elects to relinquish such right. (c) The election period to waive the Pre-Retirement Survivor Annuity shall begin on the first day of the Plan Year in which the Participant attains age 35 and end on the date of the Participant's death. An earlier waiver (with spousal consent) may be made provided a written explanation of the Pre-Retirement Survivor Annuity is given to the Participant and such waiver becomes invalid at the beginning of the Plan Year in which the Participant turns age 35. In the event a Vested Participant separates from service prior to the beginning of the election period, the election period shall begin on the date of such separation from service. (d) With regard to the election, the Administrator shall provide each Participant within the applicable period, with respect to such Participant (and consistent with Regulations), a written explanation of the Pre-Retirement Survivor Annuity containing comparable information to that required pursuant to Section 6.5(a)(5). For the purposes of this paragraph, the term "applicable period" means, with respect to a Participant, whichever of the following periods ends last: (1) The period beginning with the first day of the Plan Year in which the Participant attains age 32 and ending with the close of the Plan Year preceding the Plan Year in which the Participant attains age 35; (2) A reasonable period after the individual becomes a Participant. For this purpose, in the case of an individual who becomes a Participant after age 32, the explanation must be provided by the end of the three-year period beginning with the first day of the first Plan Year for which the individual is a Participant; (3) A reasonable period ending after the Plan no longer fully subsidizes the cost of the Pre-Retirement Survivor Annuity with respect to the Participant; (4) A reasonable period ending after Code Section 401(a)(11) applies to the Participant; or (5) A reasonable period after separation from service in the case of a Participant who separates before attaining age 35. For this purpose, the Administrator must provide the explanation beginning one year before the separation from service and ending one year after separation. (e) The Pre-Retirement Survivor Annuity provided for in this Section shall apply only to Participants who are credited with an Hour of Service on or after August 23, 1984. Former Participants who are not credited with an Hour of Service on or after August 23, 1984 shall be provided with rights to the Pre-Retirement Survivor Annuity in accordance with Section 303(e)(2) of the Retirement Equity Act of 1984. (f) If the value of the Pre-Retirement Survivor Annuity derived from Employer and Employee contributions does not exceed $3,500 and has never exceeded $3,500 at the time of any prior distribution, the Administrator shall direct the immediate distribution of such amount to the Participant's spouse. No distribution may be made under the preceding sentence after the annuity starting date unless the spouse consents in writing. If the value exceeds, or has ever exceeded at the time of any prior distribution, $3,500, an immediate distribution of the entire amount may be made to the surviving spouse, provided such surviving spouse consents in writing to such distribution. Any written consent required under this paragraph must be obtained not more than 90 days before commencement of the distribution and shall be made in a manner consistent with Section 6.5(a)(2). (g) (1) In the event there is an election to waive the Pre-Retirement Survivor Annuity, and for death benefits in excess of the Pre-Retirement Survivor Annuity, such death benefits shall be paid to the Participant's Beneficiary by either of the following methods, as elected by the Participant (or if no election has been made prior to the Participant's death, by his Beneficiary) subject to the rules specified in Section 6.6(h) and the selections made in the Adoption Agreement: (i) One lump-sum payment in cash or in property; (ii) Payment in monthly, quarterly, semi-annual, or annual cash installments over a period to be determined by the Participant or his Beneficiary. After periodic installments commence, the Beneficiary shall have the right to reduce the period over which such periodic installments shall be made, and the cash amount of such periodic installments shall be adjusted accordingly. (iii) If death benefits in excess of the Pre-Retirement Survivor Annuity are to be paid to the surviving spouse, such benefits may be paid pursuant to (i) or (ii) above, or used to purchase an annuity so as to increase the payments made pursuant to the Pre-Retirement Survivor Annuity; (2) In the event the death benefit payable pursuant to Section 6.2 is payable in installments, then, upon the death of the Participant, the Administrator may direct that the death benefit be segregated and invested separately, an that the funds accumulated in the segregated account be used for the payment of the installments. (h) Notwithstanding any provision in the Plan to the contrary, distributions upon the death of a Participant made on or after January 1, 1985, shall be made in accordance with the following requirements and shall otherwise comply with Code Section 401(a)(9) and the Regulations thereunder. (1) If it is determined, pursuant to Regulations, that the distribution of a Participant's interest has begun and the Participant dies before his entire interest has been distributed to him, the remaining portion of such interest shall be distributed at least as rapidly as under the method of distribution selected pursuant to Section 6.5 as of his date of death. (2) If a Participant dies before he has begun to receive any distributions of his interest in the Plan or before distri 28 33 butions are deemed to have begun pursuant to Regulations, then his death benefit shall be distributed to his Beneficiaries in accordance with the following rules subject to the selections made in the Adoption Agreement and Subsections 6.6(h)(3) and 6.6(i) below: (i) The entire death benefit shall be distributed to the Participant's Beneficiaries by December 31st of the calendar year in which the fifth anniversary of the Participant's death occurs; (ii) The 5-year distribution requirement of (i) above shall not apply to any portion of the deceased Participant's interest which is payable to or for the benefit of a designated Beneficiary. In such event, such portion shall be distributed over the life of such designated Beneficiary (or over a period not extending beyond the life expectancy of such designated Beneficiary) provided such distribution begins not later than December 31st of the calendar year immediately following the calendar year in which the Participant died; (iii) However, in the event the Participant's spouse (determined as of the date of the Participant's death) is his designated Beneficiary, the provisions of (ii) above shall apply except that the requirement that distributions commence within one year of the Participant's death shall not apply. In lieu thereof, distributions must commence on or before the later of: (1) December 31st of the calendar year immediately following the calendar year in which the Participant died; or (2) December 31st of the calendar year in which the Participant would have attained age 70 1/2. If the surviving spouse dies before distributions to such spouse begin, then the 5-year distribution requirement of this Section shall apply as if the spouse was the Participant. (3) Notwithstanding subparagraph (2) above, or any selections made in the Adoption Agreement, if a Participant's death benefits are to be paid in the form of a Pre-Retirement Survivor Annuity, then distributions to the Participant's surviving spouse must commence on or before the later of: (1) December 31st of the calendar year immediately following the calendar year in which the Participant died; or (2) December 31st of the calendar year in which the Participant would have attained age 70 1/2. (i) For purposes of Section 6.6(h)(2), the election by a designated Beneficiary to be excepted from the 5-year distribution requirement (if permitted in the Adoption Agreement) must be made no later than December 31st of the calendar year following the calendar year of the Participant's death. Except, however, with respect to a designated Beneficiary who is the Participant's surviving spouse, the election must be made by the earlier of: (1) December 31st of the calendar year immediately following the calendar year in which the Participant died or, if later, the calendar year in which the Participant would have attained age 70 1/2; or (2) December 31st of the calendar year which contains the fifth anniversary of the date of the Participant's death. An election by a designated Beneficiary must be in writing and shall be irrevocable as of the last day of the election period stated herein. In the absence of an election by the Participant or a designated Beneficiary, the 5-year distribution requirement shall apply. (j) For purposes of this Section, the life expectancy of a Participant and a Participant's spouse (other than in the case of a life annuity) shall or shall not be redetermined annually as provided in the Adoption Agreement and in accordance with Regulations. If the Participant or the Participant's spouse may elect, pursuant to the Adoption Agreement, to have life expectancies recalculated, then the election, once made shall be irrevocable. If no election is made by the time distributions must commence, then the life expectancy of the Participant and the Participant's spouse shall not be subject to recalculation. Life expectancy and joint and last survivor expectancy shall be computed using the return multiples in Tables V and VI of Regulation Section 1.72-9. (k) In the event that less than 100% of a Participant's interest in the Plan is distributed to such Participant's spouse, the portion of the distribution attributable to the Participant's Voluntary Contribution Account shall be in the same proportion that the Participant's Voluntary Contribution Account bears to the Participant's total interest in the Plan. (l) Subject to the spouse's right of consent afforded under the Plan, the restrictions imposed by this Section shall not apply if a Participant has, prior to January 1, 1984, made a written designation to have his death benefits paid in an alternative method acceptable under Code Section 401(a) as in effect prior to the enactment of the Tax Equity and Fiscal Responsibility Act of 1982. 6.7 TIME OF SEGREGATION OR DISTRIBUTION Except as limited by Section 6.5 and 6.6 whenever a distribution is to be made, or a series of payments are to commence, on or as of an Anniversary Date, the distribution or series of payments may be made or begun on such date or as soon thereafter as is practicable, but in no event later than 180 days after the Anniversary Date. However, unless a Former Participant elects in writing to defer the receipt of benefits (such election may not result in a death benefit that is more than incidental), the payment of benefits shall begin not later than the 60th day after the close of the Plan Year in which the latest of the following events occurs: (a) the date on which the Participant attains the earlier age of 65 or the Normal Retirement Age specified herein; (b) the 10th anniversary of the year in which the Participant commenced participation in the Plan; or (c) the date the Participant terminates his service with the Employer. Notwithstanding the foregoing, the failure of a Participant and, if applicable, the Participant's spouse, to consent to a distribution pursuant to Section 6.5(d), shall be deemed to be an election to defer the commencement of payment of any benefit sufficient to satisfy this Section. 6.8 DISTRIBUTION FOR MINOR BENEFICIARY In the event a distribution is to be made to a minor, then the Administrator may direct that such distribution be paid to the legal guardian, or if none, to a parent of such Beneficiary or a responsible adult with whom the Beneficiary maintains his residence, or to the custodian for such Beneficiary under the Uniform Gift to Minors Act or Gift to Minors Act, if such is permitted by the laws of the state in which said Beneficiary resides. Such a payment to the legal guardian, custodian or parent of a minor Beneficiary shall fully discharge the Trustee, Employer, and Plan from further liability on account thereof. 6.9 LOCATION OF PARTICIPANT OR BENEFICIARY UNKNOWN In the event that all, or any portion, of the distribution payable to a Participant or his Beneficiary hereunder shall, at the later of the Participant's attainment of age 62 or his Normal Retirement Age, remain unpaid solely by reason of the inability of the Administrator, after sending a registered letter, return receipt requested, to the last known address, and after further diligent effort, to ascertain the whereabouts of such Participant or his Beneficiary, the amount so distributable shall be treated as a Forfeiture pursuant to the Plan. In the event a Participant or Beneficiary is located subsequent to his benefit being reallocated, such benefit shall be restored, first from 29 34 Forfeitures, if any, and then from an additional Employer contribution if necessary. 6.10 PRE-RETIREMENT DISTRIBUTION If elected in the Adoption Agreement, at such time as a Participant shall have attained the age specified in the Adoption Agreement, the Administrator, at the election of the Participant, shall direct the Trustee to distribute up to the entire amount then credited to the accounts maintained on behalf of the Participant. However, no such distribution may be made to any Participant unless his Participant's Account has become fully Vested. In the event that the Administrator makes such a distribution, the Participant shall continue to be eligible to participate in the Plan on the same basis as any other Employee. Any distribution made pursuant to this Section shall be made in a manner consistent with Section 6.5, including but not limited to, all notice and consent requirements required by Code Sections 411(a)(11) and 417 and the Regulations thereunder. Notwithstanding the above, pre-retirement distributions from a Participant's Elective Account and Qualified Non-Elective Account shall not be permitted prior to the Participants attaining 59 1/2 except as otherwise permitted under the terms of the Plan. 6.11 ADVANCE DISTRIBUTION FOR HARDSHIP (a) The Administrator, at the election of the Participant, shall direct the Trustee to distribute to any Participant in any one Plan Year up to the lessor of (1) 100% of his accounts as specified in the Adoption Agreement valued as of the last Anniversary Date or other valuation date or (2) the amount necessary to satisfy the immediate and heavy financial need of the Participant. Any distribution made pursuant to this Section shall be deemed to be made as of the first day of the Plan Year or, if later, the valuation date immediately preceding the date of distribution, and the account from which the distribution is mad shall be reduced accordingly. Withdrawal under this Section shall be authorized only if the distribution is on account of one of the following or any other items permitted by the Internal Revenue Service: (1) Medical expenses described in Code Section 213(d) incurred by the Participant, his spouse, or any of his dependents (as defined in Code Section 152); (2) The purchase (excluding mortgage payments) of a principal residence for the Participant; (3) Payment of tuition and related educational fees for the next 12 months of post-secondary education for the Participant, his spouse, children, or dependents; or (4) The need to prevent the eviction of the Participant from his principal residence or foreclosure on the mortgage of the Participant's principal residence. (b) No such distribution shall be made from the Participant's Account until such Account has become fully Vested. (c) No distribution shall be made pursuant to this Section unless the Administrator, based upon the Participant's representation and such other facts as are known to the Administrator, determines that all of the following conditions are satisfied: (1) The distribution is not in excess of the amount of the immediate and heavy financial need of the Participant (including any amounts necessary to pay any federal, state, or local taxes or penalties reasonably anticipated to result from the distribution); (2) The Participant has obtained all distributions, other than hardship distributions, and all nontaxable loans currently available under all plans maintained by the Employer; (3) The Plan, and all other plans maintained by the Employer, provide that the Participant's elective deferrals and voluntary Employee contributions will be suspended for at least twelve (12) months after receipt of the hardship distribution; and (4) The Plan, and all other plans maintained by the Employer, provide that the Participant may not make elective deferrals for the Participant's taxable year immediately following the taxable year of the hardship distribution in excess of the applicable limit under Code Section 402(g) for such next taxable year less the amount of such Participant's elective deferrals for the taxable year of the hardship distribution. (d) Notwithstanding the above, distributions from the Participant's Elective Account and Qualified Non-Elective Account pursuant to this Section shall be limited solely to the Participant's Deferred Compensation and any income attributable thereto credited to the Participant's Elective Account as of December 31, 1988. (e) Any distribution made pursuant to this Section shall be made in a manner which is consistent with and satisfies the provisions of Section 6.5, including, but not limited to, all notice and consent requirements of Code Sections 411(a)(11) and 417 and the Regulations thereunder. 6.12 LIMITATIONS ON BENEFITS AND DISTRIBUTIONS All rights and benefits, including elections, provided to a Participant in this Plan shall be subject to the rights afforded to any "alternate payee" under a "qualified domestic relations order." Furthermore, a distribution to an "alternate payee" shall be permitted if such distribution is authorized by a "qualified domestic relations order," even if the affected Participant has not reached the "earliest retirement age" under the Plan. For the purposes of this Section, "alternate payee," "qualified domestic relations order" and "earliest retirement age" shall have the meaning set forth under Code Section 414(p). 6.13 SPECIAL RULE FOR NON-ANNUITY PLANS If elected in the Adoption Agreement, the following shall apply to a Participant in a Profit Sharing Plan and to any distribution, made on or after the first day of the first plan year beginning after December 31, 1988, from or under a separate account attributable solely to accumulated deductible employee contributions, as defined in Code Section 72(o)(5)(B), and maintained on behalf of a participant in a money purchase pension plan, (including a target benefit plan): (a) The Participant shall be prohibited from electing benefits in the form of a life annuity; (b) Upon the death of the Participant, the Participant's entire Vested account balances will be paid to his or her surviving spouse, or, if there is no surviving spouse or the surviving spouse has already consented to waive his or her benefit, in accordance with Section 6.6, to his designated Beneficiary; and (c) Except to the extent otherwise provided in this Section and Section 6.5(h), the other provisions of Sections 6.2, 6.5 and 6.6 regarding spousal consent and the forms of distributions shall be inoperative with respect to this Plan. This Section shall not apply to any Participant if it is determined that this Plan is a direct or indirect transferee of a defined benefit plan or money purchase plan, or a target benefit plan, stock bonus or profit sharing plan which would otherwise provide for a life annuity form of payment to the Participant. ARTICLE VII TRUSTEE 7.1 BASIC RESPONSIBILITIES OF THE TRUSTEE The Trustee shall have the following categories of responsibilities: (a) Consistent with the "funding policy and method" determined by the Employer to invest, manage, and control the 30 35 Plan assets subject, however, to the direction of an Investment Manager if the Employer should appoint such manager as to all or a portion of the assets of the Plan; (b) At the direction of the Administrator, to pay benefits required under the Plan to be paid to Participants, or, in the event of their death, to their Beneficiaries; (c) To maintain records of receipts and disbursements and furnish to the Employer and/or Administrator for each Plan Year a written annual report per Section 7.7; and (d) If there shall be more than one Trustee, they shall act by a majority of their number, but may authorize one or more of them to sign papers on their behalf. 7.2 INVESTMENT POWERS AND DUTIES OF THE TRUSTEE (a) The Trustee shall, except as provided in the Adoption Agreement, invest and reinvest the Trust Fund to keep the Trust Fund invested without distinction between principal and income and in such securities or property, real or personal, wherever situated, as the Trustee shall deem advisable, including, but not limited to, stocks, common or preferred, bonds and other evidences of indebtedness or ownership, and real estate or any interest therein. The Trustee shall at all times in making investments of the Trust Fund consider, among other factors, the short and long-term financial needs of the Plan on the basis of information furnished by the Employer. In making such investments, the Trustee shall not be restricted to securities or other property of the character expressly authorized by the applicable law for trust investments; however, the Trustee shall give due regard to any limitations imposed by the Code or the Act so that at all times this Plan may qualify as a qualified Plan and Trust. (b) The Trustee may employ a bank or trust company pursuant to the terms of its usual and customary bank agency agreement, under which the duties of such bank or trust company shall be of a custodial, clerical and record-keeping nature. (c) The Trustee may from time to time transfer to a common, collective, or pooled trust fund maintained by any corporate Trustee hereunder pursuant to Revenue Ruling 81-100, all or such part of the Trust Fund as the Trustee may deem advisable, and such part or all of the Trust Fund so transferred shall be subject to all the terms and provisions of the common, collective, or pooled trust fund which contemplate the commingling for investment purposes of such trust assets with trust assets of other trusts. The Trustee may withdraw from such common, collective, or pooled trust fund all or such part of the Trust Fund as the Trustee may deem advisable. (d) The Trustee, at the direction of the Administrator and pursuant to instructions from the individual designated in the Adoption Agreement for such purpose and subject to the conditions set forth in the Adoption Agreement, shall ratably apply for, own, and pay all premiums on Contracts on the lives of the Participants. Any initial or additional Contract purchased on behalf of a Participant shall have a face amount of not less than $1,000, the amount set forth in the Adoption Agreement, or the limitation of the Insurer, whichever is greater. If a life insurance Contract is to be purchased for a Participant, the aggregate premium for ordinary life insurance for each Participant must be less than 50% of the aggregate contributions and Forfeitures allocated to a Participant's Combined Account. For purposes of this limitation, ordinary life insurance Contracts are Contracts with both non-decreasing death benefits and non-increasing premiums. If term insurance or universal life insurance is purchased with such contributions, the aggregate premium must be 25% or less of the aggregate contributions and Forfeitures allocated to a Participant's Combined Account. If both term insurance and ordinary life insurance are purchased with such contributions, the amount expended for term insurance plus one-half of the premium for ordinary life insurance may not in the aggregate exceed 25% of the aggregate Employer contributions and Forfeitures allocated to a Participant's Combined Account. The Trustee must distribute the Contracts to the Participant or convert the entire value of the Contracts at or before retirement into cash or provide for a periodic income so that no portion of such value may be used to continue life insurance protection beyond retirement. Notwithstanding the above, the limitations imposed herein with respect to the purchase of life insurance shall not apply, in the case of a Profit Sharing Plan, to the portion of a Participant's Account that has accumulated for at least two (2) Plan Years. Notwithstanding anything hereinabove to the contrary, amounts credited to a Participant's Qualified Voluntary Employee Contribution Account pursuant to Section 4.14, shall not be applied to the purchase of life insurance contracts. (e) The Trustee will be the owner of any life insurance Contract purchased under the terms of this Plan. The Contract must provide that the proceeds will be payable to the Trustee; however, the Trustee shall be required to pay over all proceeds of the Contract to the Participant's designated Beneficiary in accordance with the distribution provisions of Article VI. A Participant's spouse will be the designated Beneficiary pursuant to Section 6.2, unless a qualified election has been made in accordance with Sections 6.5 and 6.6 of the Plan, if applicable. Under no circumstances shall the Trust retain any part of the proceeds. However, the Trustee shall not pay the proceeds in a method that would violate the requirements of the Retirement Equity Act, as stated in Article VI of the Plan, or Code Section 401(a)(9) and the Regulations thereunder. 7.3 OTHER POWERS OF THE TRUSTEE The Trustee, in addition to all powers and authorities under common law, statutory authority, including the Act, and other provisions of this Plan, shall have the following powers and authorities, except as provided in the Adoption Agreement, to be exercised in the Trustee's sole discretion: (a) To purchase, or subscribe for, any securities or other property and to retain the same. In conjunction with the purchase of securities, margin accounts may be opened and maintained; (b) To sell, exchange, convey, transfer, grant options to purchase, or otherwise dispose of any securities or other property held by the Trustee, by private contract or at public auction. No person dealing with the Trustee shall be bound to see to the application of the purchase money or to inquire into the validity, expediency, or propriety of any such sale or other disposition, with or without advertisement; (c) To vote upon any stocks, bonds, or other securities; to give general or special proxies or powers of attorney with or without power of substitution; to exercise any conversion privileges, subscription rights or other options, and to make any payments incidental thereto; to oppose, or to consent to, or otherwise participate in, corporate reorganizations or other changes affecting corporate securities, and to delegate discretionary powers, and to pay any assessments or charges in connection therewith; and generally to exercise any of the powers of an owner with respect to stocks, bonds, securities, or other property; (d) To cause any securities or other property to be registered in the Trustee's own name or in the name of one or more 31 36 of the Trustee's nominees and to hold any investments in bearer from, but the books and records of the Trustee shall at all times show that all such investments are part of the Trust Fund: (e) To borrow or raise money for the purposes of the Plan in such amount, and upon such terms and conditions, as the Trustee shall deem advisable; and for any sum so borrowed, to issue a promissory note as Trustee, and to secure the repayment thereof by pledging all, or any art, of the Trust Fund; and no person lending money to the Trustee shall be bound to see to the application of the money lent or to inquire into the validity, expediency, or propriety of any borrowing: (f) To keep such portion of the Trust Fund in cash or cash balances as the Trustee may, from time to time, deem to be in the best interests of the Plan, without liability for interest thereon; (g) To accept and retain for such time as the Trustee may deem advisable any securities or other property received or acquired as Trustee hereunder, whether or not such securities or other property would normally be purchased as investments hereunder; (h) To make, execute, acknowledge, and deliver any and all documents of transfer and conveyance and any and all other instruments that may be necessary or appropriate to carry out the powers herein granted; (i) To settle, compromise, or submit to arbitration any claims, debts, or damages due or owing to or from the Plan, to commence or defend suits or legal or administrative proceedings, and to represent the Plan in all suits and legal and administrative proceedings; (j) To employ suitable agents and counsel and to pay their reasonable expenses and compensation, and such agent or counsel may or may not be agent or counsel for the Employer; (k) To apply for and procure from the Insurer as an investment of the Trust Fund such annuity, or other Contracts (on the life of any Participant) as the Administrator shall deem proper; to exercise, at any time or from time to time, whatever rights and privileges may be granted under such annuity, or other Contracts; to collect, receive, and settle for the proceeds of all such annuity, or other Contracts as and when entitled to do so under the provisions thereof; (l) To invest funds of the Trust in time deposits or savings accounts bearing a reasonable rate of interest in the Trustee's bank: (m) To invest in Treasury Bills and other forms of United States government obligations; (n) To sell, purchase and acquire put or call options if the options are traded on and purchased through a national securities exchange registered under the Securities Exchange Act of 1934, as amended, or, if the options are not traded on a national securities exchange, are guaranteed by a member firm of the New York Stock Exchange: (o) To deposit monies in federally insured savings accounts or certificates of deposit in banks or savings and loan associations; (p) To pool all or any of the Trust Fund, from time to time, with assets belonging to any other qualified employee pension benefit trust created by the Employer or any Affiliated Employer, and to commingle such assets and make joint or common investments and carry joint accounts on behalf of this Plan and such other trust or trusts, allocating undivided shares or interests in such investments or accounts or any pooled assets of the two or more trusts in accordance with their respective interests; (q) To do all such acts and exercise all such rights and privileges, although not specifically mentioned herein, as the Trustee may deem necessary to carry out the purposes of the Plan. (r) Directed Investment Account. The powers granted to the Trustee shall be exercised in the sole fiduciary discretion of the Trustee. However, if elected in the Adoption Agreement, each Participant may direct the Trustee to separate and keep separate all or a portion of his interest in the Plan; and further each Participant is authorized and empowered, in his sole and absolute discretion to give directions to the Trustee in such form as the Trustee may require concerning the investment of the Participant's Directed Investment Account, which directions must be followed by the Trustee subject, however, to restrictions on payment of life insurance premiums. Neither the Trustee nor any other persons including the Administrator or otherwise shall be under any duty to question any such direction of the Participant or to review any securities or other property real or personal, or to make any suggestions to the Participant in connection therewith, and the Trustee shall comply as promptly as practicable with directions given by the Participant hereunder. Any such direction may be of a continuing nature or otherwise and may be revoked by the Participant at any time in such form as the Trustee may require. The Trustee may refuse to comply with any direction from the Participant in the event the Trustee, in its sole and absolute discretion, deems such directions improper by virtue of applicable law, and in such event, the Trustee shall not be responsible or liable for any loss or expense which may result. Any costs and expenses related to compliance with the Participant's directions shall be borne by the Participant's Directed Investment Account. Notwithstanding anything hereinabove to the contrary, the Trustee shall not, at any time after December 31, 1981, invest any portion of a Directed Investment Account in "collectibles" within the meaning of that term as employed in Code Section 408(m). 7.4 LOANS TO PARTICIPANTS (a) If specified in the Adoption Agreement, the Trustee may, in the Trustee's sole discretion, make loans to Participants or Beneficiaries under the following circumstances: (1) loans shall be made available to all Participants and Beneficiaries on a reasonably equivalent basis;(2) loans shall not be made available to Highly Compensated Employees in an amount greater than the amount made available to other Participants; (3) loans shall bear a reasonable rate of interest; (4) loans shall be adequately secured; and (5) shall provide for periodic repayment over a reasonable period of time. (b) Loans shall not be made to any Shareholder-Employee or Owner-Employee unless an exemption for such loan is obtained pursuant to Act Section 408 and further provided that such loan would not be subject to tax pursuant to Code Section 4975. (c) Loans shall not be granted to any Participant that provide for a repayment period extending beyond such Participant's Normal Retirement Date. (d) Loans made pursuant to this Section (when added to the outstanding balance of all other loans made by the Plan to the Participant) shall be limited to the lesser of: (1) $50,000 reduced by the excess (if any) of the highest outstanding balance of loans from the Plan to the Participant during the one year period ending on the day before the date on which such loan is made, over the outstanding balance of loans from the Plan to the 32 37 Participant on the date on which such loan was made, or (2) the greater of (A) one-half (1/2) of the present value of the non-forfeitable accrued benefit of the Employee under the Plan, or (B), if permitted pursuant to the Adoption Agreement, $10,000. For purposes of this limit, all plans of the Employer shall be considered one plan. Additionally, with respect to any loan made prior to January 1, 1987, the $50,000 limit specified in (1) above shall be unreduced. (e) No Participant loan shall take into account the present value of such Participant's Qualified Voluntary Employee Contribution Account. (f) Loans shall provide for level amortization with payments to be made not less frequently than quarterly over a period not to exceed five (5) years. However, loans used to acquire any dwelling unit which, within a reasonable time, is to be used (determined at the time the loan is made) as a principal residence of the Participant shall provide for periodic repayment over a reasonable period of time that may exceed five (5) years. Notwithstanding the foregoing, loans made prior to January 1, 1987 which are used to acquire, construct, reconstruct or substantially rehabilitate any dwelling unit which, within a reasonable period of time is to be used (determined at the time the loan is made) as a principal residence of the Participant or a member of his family (within the meaning of Code Section 267(c)(4)) may provide for periodic repayment over a reasonable period of time that may exceed five (5) years. Additionally, loans made prior to January 1, 1987, may provide for periodic payments which are made less frequently than quarterly and which do not necessarily result in level amortization. (g) An assignment or pledge of any portion of a Participant's interest in the Plan and a loan, pledge, or assignment with respect to any insurance Contract purchased under the Plan, shall be treated as a loan under this Section. (h) Any loan made pursuant to this Section after August 18, 1985 where the Vested interest of the Participant is used to secure such loan shall require the written consent of the Participant's spouse in a manner consistent with Section 6.5(a) provided the spousal consent requirements of such Section apply to the Plan. Such written consent must be obtained within the 90-day period prior to the date the loan is made. Any security interest held by the Plan by reason of an outstanding loan to the Participant shall be taken into account in determining the amount of the death benefit or Pre-Retirement Survivor Annuity. However, no spousal consent shall be required under this paragraph if the total accrued benefit subject to the security is not in excess of $3,500. (i) With regard to any loans granted or renewed on or after the last day of the first Plan Year beginning after December 31, 1988, a Participant loan program shall be established which must include, but need not be limited to, the following: (1) the identity of the person or positions authorized to administer the Participant loan program; (2) a procedure for applying for loans; (3) the basis on which loans will be approved or denied; (4) limitations, if any, on the types and amounts of loans offered, including what constitutes a hardship or financial need if selected in the Adoption Agreement; (5) the procedure under the program for determining a reasonable rate of interest; (6) the types of collateral which may secure a Participant loan; and (7) the events constituting default and the steps that will be taken to preserve plan assets. Such Participant loan program shall be contained in a separate written document which, when properly executed, is hereby incorporated by reference and made a part of this plan. Furthermore, such Participant loan program may be modified or amended in writing from time to time without the necessity of amending this Section of the Plan. 7.5 DUTIES OF THE TRUSTEE REGARDING PAYMENTS At the direction of the Administrator, the Trustee shall, from time to time, in accordance with the terms of the Plan, make payments out of the Trust Fund. The Trustee shall not be responsible in any way for the application of such payments. 7.6 TRUSTEE'S COMPENSATION AND EXPENSES AND TAXES The Trustee shall be paid such reasonable compensation as set forth in the Trustee's fee schedule (if the Trustee has such a schedule) or as agreed upon in writing by the Employer and the Trustee. An individual serving as Trustee who already receives full-time pay from the Employer shall not receive compensation from this Plan. In addition, the Trustee shall be reimbursed for any reasonable expenses, including reasonable counsel fees incurred by it as Trustee. Such compensation and expenses shall be paid from the Trust Fund unless paid or advanced by the Employer. All taxes of any kind and all kinds whatsoever that may be levied or assessed under existing or future laws upon, or in respect of, the Trust Fund or the income thereof, shall be paid from the Trust Fund. 7.7 ANNUAL REPORT OF THE TRUSTEE Within a reasonable period of time after the later of the Anniversary Date or receipt of the Employer's contribution for each Plan Year, the Trustee, or its agent, shall furnish to the Employer and Administrator a written statement of account with respect to the Plan Year for which such contribution was made setting forth: (a) the net income, or loss, of the Trust Fund; (b) the gains, or losses, realized by the Trust Fund upon sales or other disposition of the assets; (c) the increase, or decrease, in the value of the Trust Fund; (d) all payments and distributions made from the Trust Fund; and (e) such further information as the Trustee and/or Administrator deems appropriate. The Employer, forthwith upon its receipt of each such statement of account, shall acknowledge receipt thereof in writing and advise the Trustee and/or Administrator of its approval or disapproval thereof. Failure by the Employer to disapprove any such statement of account within thirty (30) days after its receipt thereof shall be deemed an approval thereof. The approval by the Employer of any statement of account shall be binding as to all matters embraced therein as between the Employer and the Trustee to the same extent as if the account of the Trustee had been settled by judgment or decree in an action for a judicial settlement of its account in a court of competent jurisdiction in which the Trustee, the Employer and all persons having or claiming an interest in the Plan were parties; provided, however, that nothing herein contained shall deprive the Trustee of its right to have its accounts judicially settled if the Trustee so desires. 7.8 AUDIT (a) If an audit of the Plan's records shall be required by the Act and the regulations thereunder for any Plan Year, the Administrator shall direct the Trustee to engage on behalf of all Participants an independent qualified public accountant for that purpose. Such accountant shall, after an audit 33 38 of the books and records of the Plan in accordance with generally accepted auditing standards, within a reasonable period after the close of the Plan Year, furnish to the Administrator and the Trustee a report of his audit setting forth his opinion as to whether any statements, schedules or lists, that are required by Act Section 103 or the Secretary of Labor to be filed with the Plan's annual report, are presented fairly in conformity with generally accepted accounting principles applied consistently. (b) All auditing and accounting fees shall be an expense of and may, at the election of the Administrator, be paid from the Trust Fund. (c) If some or all of the information necessary to enable the Administrator to comply with Act Section 103 is maintained by a bank, insurance company, or similar institution, regulated and supervised and subject to periodic examination by a state or federal agency, it shall transmit and certify the accuracy of that information to the Administrator as provided in Act Section 103(b) within one hundred twenty (120) days after the end of the Plan Year or such other date as may be prescribed under regulations of the Secretary of Labor. 7.9 RESIGNATION, REMOVAL AND SUCCESSION OF TRUSTEE (a) The Trustee may resign at any time by delivering to the Employer, at least thirty (30) days before its effective date, a written notice of his resignation. (b) The Employer may remove the Trustee by mailing by registered or certified mail, addressed to such Trustee at his last known address, at least thirty (30) days before its effective date, a written notice of his removal. (c) Upon the death, resignation, incapacity, or removal of any Trustee, a successor may be appointed by the Employer, and such successor, upon accepting such appointment in writing and delivering same to the Employer, shall, without further act, become vested with all the estate, rights, powers, discretions, and duties of his predecessor with like respect as if he were originally named as a Trustee herein. Until such a successor is appointed, the remaining Trustee or Trustees shall have full authority to act under the terms of the Plan. (d) The Employer may designate one or more successors prior to the death, resignation, incapacity, or removal of a Trustee. In the event a successor is so designated by the Employer and accepts such designation, the successor shall, without further act, become vested with all the estate, rights, powers, discretions, and duties of his predecessor with the like effect as if he were originally named as Trustee herein immediately upon the death, resignation, incapacity, or removal of his predecessor. (e) Whenever any Trustee hereunder ceases to serve as such, he shall furnish to the Employer and Administrator a written statement of account with respect to the portion of the Plan Year during which he served as Trustee. This statement shall be either (i) included as part of the annual statement of account for the Plan Year required under Section 7.7 or (ii) set forth in a special statement. Any such special statement of account should be rendered to the Employer no later than the due date of the annual statement of account for the Plan Year. The procedures set forth in Section 7.7 for the approval by the Employer of annual statements of account shall apply to any special statement of account rendered hereunder and approval by the Employer of any such special statement in the manner provided in Section 7.7 shall have the same effect upon the statement as the Employer's approval of an annual statement of account. No successor to the Trustee shall have any duty or responsibility to investigate the acts or transactions of any predecessor who has rendered all statements of account required by Section 7.7 and this subparagraph. 7.10 TRANSFER OF INTEREST Notwithstanding any other provision contained in this Plan, the Trustee at the direction of the Administrator shall transfer the Vested interest, if any, of such Participant in his account to another trust forming part of a pension, profit sharing, or stock bonus plan maintained by such Participant's new employer and represented by said employer in writing as meeting the requirements of Code Section 401(a), provided that the trust to which such transfers are made permits the transfer to be made. 7.11 TRUSTEE INDEMNIFICATION The Employer agrees to indemnify and save harmless the Trustee against any and all claims, losses, damages, expenses and liabilities the Trustee may incur in the exercise and performance of the Trustee's powers and duties hereunder, unless the same are determined to be due to gross negligence or willful misconduct. 7.12 EMPLOYER SECURITIES AND REAL PROPERTY The Trustee shall be empowered to acquire and hold "qualifying Employer securities" and "qualifying Employer real property," as those terms are defined in the Act. However, no more than 100% of the fair market value of all the assets in the Trust Fund may be invested in "qualifying Employer securities" and "qualifying Employer real property". 7.13 PASSIVE TRUSTEE Notwithstanding any other provisions of this Plan to the contrary and to the extent permitted under applicable law, in the event The First National Bank of Boston is Trustee (or any successor Trustee is appointed by the prototype sponsoring organization), such Trustee shall exercise powers of the Trustee under the Plan only at the direction and upon the instructions of the Plan Administrator and the duties and obligations of The First National Bank of Boston (or any successor Trustee appointed by the prototype sponsoring organization) as Trustee shall be limited to holding title to the Plan assets and all other duties of the Trustee set forth in the Plan shall be the obligation of the Plan Administrator. The provisions of the Plan applicable to The First National Bank of Boston shall apply to any successor appointed by the prototype sponsoring organization. 7.14 DIRECT ROLLOVER (a) This Section applies to distributions made on or after January 1, 1993. Notwithstanding any provision of the Plan to the contrary that would otherwise limit a distributee's election under this Section, a distributee may elect, at the time and in the manner prescribed by the Plan Administrator, to have any portion of an eligible rollover distribution paid directly to an eligible retirement plan specified by the distributee in a direct rollover. (b) An eligible rollover distribution is any distribution of all or any portion of the balance to the credit of the distributee, except that an eligible rollover distribution does not include: any distribution that is one of a series of substantially equal periodic payments (not less frequently than annually) made for the life (or life expectancy) of the distributee or the joint lives (or joint life expectancies) of the distributee and the distributee's designated beneficiary, or for a specified period of ten years or more; and distribution to the extent such distribution is required under section 401(a)(9) of the Code; and the portion of any distribution that is not includible in gross income (determined without regard to the exclusion for net unrealized appreciation with respect to employer securities). (c) An eligible retirement plan is an individual retirement account described in section 408(a) of the Code, an individual retirement annuity described in section 408(b) of the Code, an annuity plan described in section 403(a) of 34 39 the Code, or the qualified trust described in section 401(a) of the Code, that accepts the distributee's eligible rollover distribution. However, in the case of an eligible rollover distribution to the surviving spouse, an eligible retirement plan is an individual retirement account or an individual retirement annuity. (d) A distributee includes an Employee or former Employee. In addition, the Employee's or former Employee's surviving spouse and the Employee's or former Employee's spouse or former spouse who is the alternative payee under a qualified domestic relations order, as defined in section 414(p) of the Code, are distributees with regard to the interest of the spouse or former spouse. (e) A direct rollover is a payment by the Plan to the eligible retirement plan specified by the distributee. ARTICLE VIII AMENDMENT, TERMINATION, AND MERGERS 8.1 AMENDMENT (a) The Employer shall have the right at any time to amend this Plan subject to the limitations of this Section. However, any amendment which affects the rights, duties or responsibilities of the Trustee and Administrator may only be made with the Trustee's and Administrator's written consent. Any such amendment shall become effective as provided therein upon its execution. The Trustee shall not be required to execute any such amendment unless the amendment affects the duties of the Trustee hereunder. (b) The Employer may (1) change the choice of options in the Adoption Agreement, (2) add overriding language in the Adoption Agreement when such language is necessary to satisfy Code Sections 415 or 416 because of the required aggregation of multiple plans, and (3) add certain model amendments published by the Internal Revenue Service which specifically provide that their adoption will not cause the Plan to be treated as an individually designed plan. An Employer that amends the Plan for any other reason, including a waiver of the minimum funding requirement under Code Section 412(d), will no longer participate in this Prototype Plan and will be considered to have an individually designed plan. Furthermore, an Employer may not use this Plan and will be deemed to have an individually designed plan if the Employer does not maintain a product of the sponsor of the Plan or any of its affiliates or subsidiaries. (c) The Employer expressly delegates authority to the sponsoring organization of this Plan, the right to amend this Plan by submitting a copy of the amendment to each Employer who has adopted this Plan after first having received a ruling or favorable determination from the Internal Revenue Service that the Plan as amended qualifies under Code Section 401(a) and the Act. For purposes of this Section, the mass submitter shall be recognized as the agent of the sponsoring organization. If the sponsoring organization does not adopt the amendments made by the mass submitter, it will no longer be identical to or a minor modifier of the mass submitter plan. (d) No amendment to the Plan shall be effective if it authorizes or permits any part of the Trust Fund (other than such part as is required to pay taxes and administration expenses) to be used for or diverted to any purpose other than for the exclusive benefit of the Participants or their Beneficiaries or estates; or causes any reduction in the amount credited to the account of any Participant; or causes or permits any portion of the Trust Fund to revert to or become property of the Employer. (e) Except as permitted by Regulations (including Regulation 1.411(d)-4), no Plan amendment or transaction having the effect of a Plan amendment (such as a merger, plan transfer or similar transaction) shall be effective if it eliminates or reduces any "Section 411(d)(6) protected benefit" or adds or modifies conditions relating to "Section 411(d)(6) protected benefits" the result of which is a further restriction on such benefit unless such protected benefits are preserved with respect to benefits accrued as of the later of the adoption date or effective date of the amendment. "Section 411(d)(6) protected benefits" are benefits described in Code Section 411(d)(6)(A), early retirement benefits and retirement-type subsidies, and optional forms of benefit. 8.2 TERMINATION (a) The Employer shall have the right at any time to terminate the Plan by delivering to the Trustee and Administrator written notice of such termination. Upon any full or partial termination all amounts credited to the affected Participants' Combined Accounts shall become 100% Vested and shall not thereafter be subject to forfeiture, and all unallocated amounts shall be allocated to the accounts of all Participants in accordance with the provisions hereof. (b) Upon the full termination of the Plan, the Employer shall direct the distribution of the assets to Participants in a manner which is consistent with and satisfies the provisions of Section 6.5. Distributions to a Participant shall be made in cash (or in property if permitted in the Adoption Agreement) or through the purchase of irrevocable non-transferable deferred commitments from the Insurer. Except as permitted by Regulations, the termination of the Plan shall not result in the reduction of "Section 411(d)(6) protected benefits" as described in Section 8.1. 8.3 MERGER OR CONSOLIDATION This Plan may be merged or consolidated with, or its assets and/or liabilities may be transferred to any other plan only if the benefits which would be received by a Participant of this Plan, in the event of a termination of the plan immediately after such transfer, merger or consolidation, are at least equal to the benefits the Participant would have received if the Plan had terminated immediately before the transfer, merger or consolidation and such merger or consolidation does not otherwise result in the elimination or reduction of any "Section 411(d)(6) protected benefits" as described in Section 8.1(e). ARTICLE IX MISCELLANEOUS 9.1 EMPLOYER ADOPTIONS (a) Any organization may become the Employer hereunder by executing the Adoption Agreement in form satisfactory to the Trustee, and it shall provide such additional information as the Trustee may require. The consent of the Trustee to act as such shall be signified by its execution of the Adoption Agreement. (b) Except as otherwise provided in this Plan, the affiliation of the Employer and the participation of its Participants shall be separate and apart from that of any other employer and its participants hereunder. 9.2 PARTICIPANT'S RIGHTS This Plan shall not be deemed to constitute a contract between the Employer and any Participant or to be a consideration or an inducement for the employment of any Participant or Employee. Nothing contained in this Plan shall be deemed to give any Participant or 35 40 Employee the right to be retained in the service of the Employer or to interfere with the right of the Employer to discharge any Participant or Employee at any time regardless of the effect which such discharge shall have upon him as a Participant of this Plan. 9.3 ALIENATION (a) Subject to the exceptions provided below, no benefit which shall be payable to any person (including a Participant or his Beneficiary) shall be subject in any manner to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance, or charge, and any attempt to anticipate, alienate, sell, transfer, assign, pledge, encumber, or charge the same shall be void; and no such benefit shall in any manner be liable for, or subject to, the debts, contracts, liabilities, engagements, or torts of any such person, nor shall it be subject to attachment or legal process for or against such person, and the same shall not be recognized except to such extent as may be required by law. (b) This provision shall not apply to the extent a Participant or Beneficiary is indebted to the Plan, for any reason, under any provision of this Plan. At the time a distribution is to be made to or for a Participant's or Beneficiary's benefit, such proportion of the amount to be distributed as shall equal such indebtedness shall be paid to the Plan, to apply against or discharge such indebtedness. Prior to making a payment, however, the Participant or Beneficiary must be given written notice by the Administrator that such indebtedness is to be so paid in whole or part from his Participant's Combined Account. If the Participant or Beneficiary does not agree that the indebtedness is a valid claim against his Vested Participant's Combined Account, he shall be entitled to a review of the validity of the claim in accordance with procedures in Sections 2.12 and 2.13. (c) This provision shall not apply to a "qualified domestic relations order" defined in Code Section 414(p), and those other domestic relations orders permitted to be so treated by the Administrator under the provisions of the Retirement Equity Act of 1984. The Administrator shall establish a written procedure to determine the qualified status of domestic relations orders and to administer distributions under such qualified orders. Further, to the extent provided under a "qualified domestic relations order", a former spouse of a Participant shall be treated as the spouse or surviving spouse for all purposes under the Plan. 9.4 CONSTRUCTION OF PLAN This Plan and Trust shall be construed and enforced according to the Act and the laws of the State or Commonwealth in which the Employer's principal office is located, other than its laws respecting choice of law, to the extent not pre-empted by the Act. 9.5 GENDER AND NUMBER Wherever any words are used herein in the masculine, feminine or neuter gender, they shall be construed as though they were also used in another gender in all cases where they would so apply, and whenever any words are used herein in the singular or plural form, they shall be construed as though they were also used in the other form in all cases where they would so apply. 9.6 LEGAL ACTION In the event any claim, suit, or proceeding is brought regarding the Trust and/or Plan established hereunder to which the Trustee or the Administrator may be a party, and such claim, suit, or proceeding is resolved in favor of the Trustee or Administrator, they shall be entitled to be reimbursed from the Trust Fund for any and all costs, attorney's fees, and other expenses pertaining thereto incurred by them for which they shall have become liable. 9.7 PROHIBITION AGAINST DIVERSION OF FUNDS (a) Except as provided below and otherwise specifically permitted by law, it shall be impossible by operation of the Plan or of the Trust, by termination of either, by power of revocation or amendment, by the happening of any contingency, by collateral arrangement or by any other means, for any part of the corpus or income of any Trust Fund maintained pursuant to the Plan or any funds contributed thereto to be used for, or diverted to, purposes other than the exclusive benefit of Participants, Retired Participants, or their Beneficiaries. (b) In the event the Employer shall make a contribution under a mistake of fact pursuant to Section 403(c)(2)(A) of the Act, the Employer may demand repayment of such contribution at any time within one (1) year following the time of payment and the Trustees shall return such amount to the Employer within the one (1) year period. Earnings of the Plan attributable to the contributions may not be returned to the Employer but any losses attributable thereto must reduce the amount so returned. 9.8 BONDING Every Fiduciary, except a bank or an insurance company, unless exempted by the Act and regulations thereunder, shall be bonded in an amount not less than 10% of the amount of the funds such Fiduciary handles; provided, however, that the minimum bond shall be $1,000 and the maximum bond, $500,000. The amount of funds handled shall be determined at the beginning of each Plan Year by the amount of funds handled by such person, group, or class to be covered and their predecessors, if any, during the preceding Plan Year, or if there is no preceding Plan Year, then by the amount of the funds to be handled during the then current year. The bond shall provide protection to the Plan against any loss by reason of acts of fraud or dishonesty by the Fiduciary alone or in connivance with others. The surety shall be a corporate surety company (as such term is used in Act Section 412(a)(2)), and the bond shall be in a form approved by the Secretary of Labor. Notwithstanding anything in the Plan to the contrary, the cost of such bonds shall be an expense of and may, at the election of the Administrator, be paid from the Trust Fund or by the Employer. 9.9 INSURER'S PROTECTIVE CLAUSE The Insurer who shall issue Contracts hereunder shall not have any responsibility for the validity of this Plan or for the tax or legal aspects of this Plan. The Insurer shall be protected and held harmless in acting in accordance with any written direction of the Trustee, and shall have no duty to see to the application of any funds paid to the Trustee, nor be required to question any actions directed by the Trustee. Regardless of any provision of this Plan, the Insurer shall not be required to take or permit any action or allow any benefit or privilege contrary to the terms of any Contract which it issued hereunder, or the rules of the Insurer. 9.10 RECEIPT AND RELEASE FOR PAYMENTS Any payment to any Participant, his legal representative, Beneficiary, or to any guardian or committee appointed for such Participant or Beneficiary in accordance with the provisions of this Plan, shall, to the extent thereof, be in full satisfaction of all claims hereunder against the Trustee and the Employer. 9.11 ACTION BY THE EMPLOYER Whenever the Employer under the terms of the Plan is permitted or required to do or perform any act or matter or thing, it shall be done and performed by a person duly authorized by its legally constituted authority. 9.12 NAMED FIDUCIARIES AND ALLOCATION OF RESPONSIBILITY The "named Fiduciaries" of this Plan are (1) the Employer, (2) the Administrator, (3) the Trustee, and (4) and Investment Manager appointed hereunder. The named Fiduciaries shall have only those specific powers, duties, responsibilities, and obligations as are specifically given them under the Plan. In general, the Employer shall have the sole responsibility for making the contributions provided 36 41 for under Section 4.1; and shall have the sole authority to appoint and remove the Trustee and the Administrator, to formulate the Plan's "funding policy and method"; and to amend the elective provisions of the Adoption Agreement or terminate, in whole or in part, the Plan. The Administrator shall have the sole responsibility for the administration of the Plan, which responsibility is specifically described in the Plan. The Trustee shall have the sole responsibility of management of the assets held under the Trust, except those assets, the management of which has been assigned to an Investment Manager, who shall be solely responsible for the management of the assets assigned to it, all as specifically provided in the Plan. Each named Fiduciary warrants that any directions given, information furnished, or action taken by it shall be in accordance with the provisions of the Plan, authorizing or providing for such direction, information or action. Furthermore, each named Fiduciary may rely upon any such direction, information or action of another named Fiduciary shall be responsible for the proper exercise of its own powers, duties, responsibilities and obligations under the Plan. No named Fiduciary shall guarantee the Trust Fund in any manner against investment loss or deprecation in asset value. Any person or group may serve in more than one Fiduciary capacity. 9.13 HEADINGS The headings and subheadings of this Plan have been inserted for convenience of reference and are to be ignored in any construction of the provisions hereof. 9.14 APPROVAL BY INTERNAL REVENUE SERVICE (a) Notwithstanding anything herein to the contrary, if, pursuant to a timely application filed by or in behalf of the Plan, the Commissioner of Internal Revenue Service or his delegate should determine that the Plan does not initially qualify as a tax-exempt plan under Code Sections 401 and 501, and such determination is not contested, or if contested, is finally upheld, then if the Plan is a new plan, it shall be void ab initio and all amounts contributed to the Plan, by the Employer, less expenses paid, shall be returned within one year and the Plan shall terminate, and the Trustee shall be discharged from all further obligations. If the disqualification relates to an amended plan, then the Plan shall operate as if it had not been amended and restated. (b) Notwithstanding any provisions to the contrary, except Sections 3.5, 3.6, and 4.1(f), any contribution by the Employer to the Trust Fund is conditioned upon the deductibility of the contribution by the Employer to the Trust Fund is conditioned upon the deductibility of the contribution by the Employer under the Code and, to the extent any such deduction is disallowed, the Employer may within one (1) year following the disallowance of the deduction, demand repayment of such disallowed contribution and the Trustee shall return such contribution within one (1) year following the disallowance. Earnings of the Plan attributable to the excess contribution may not be returned to the Employer, but any losses attributable thereto must reduce the amount so returned. (c) If an Employer's Plan fails to attain or retain qualification, then such Plan will no longer participate in this Prototype Plan and will be considered an individually designed plan. 9.15 UNIFORMITY All provisions of this Plan shall be interpreted and applied in a uniform, nondiscriminatory manner. 9.16 PAYMENT OF BENEFITS Benefits under this Plan shall be paid, subject to Section 6.10 and Section 6.11 only upon death, Total and Permanent Disability, normal or early retirement, termination of employment, or upon Plan Termination. ARTICLE X PARTICIPATING EMPLOYERS 10.1 ELECTION TO BECOME A PARTICIPATING EMPLOYER Notwithstanding anything herein to the contrary, with the consent of the Employer and Trustee, any Affiliated Employer may adopt this Plan and all of the provisions hereof, and participate herein and be known as a Participating Employer, by a properly executed document evidencing said intent and will of such Participating Employer. 10.2 REQUIREMENTS OF PARTICIPATING EMPLOYERS (a) Each Participating Employer shall be required to select the same Adoption Agreement provisions as those selected by the Employer other than the Plan Year, the Fiscal Year, and such other items that must, by necessity, vary among employers. (b) Each such Participating Employer shall be required to use the same Trustee as provided in this Plan. (c) The Trustee may, but shall not be required to, commingle, hold and invest as one Trust Fund all contributions made by Participating Employers, as well as all increments thereof. (d) The transfer of any Participant from or to an Employer participating in this Plan, whether he be an Employee of the Employer or a Participating Employer, shall not affect such Participant's rights under the Plan, and all amounts credited to such Participant's Combined Account as well as his accumulated service time with the transferor or predecessor, and his length of participation in the Plan, shall continue to his credit. (e) Any expenses of the Plan which are to be paid by the Employer or borne by the Trust Fund shall be paid by each Participating Employer in the same proportion that the total amount standing to the credit of all Participants employed by such Employer bears to the total standing to the credit of all Participants. 10.3 DESIGNATION OF AGENT Each Participating Employer shall be deemed to be a part of this Plan; provided, however, that with respect to all of its relations with the Trustee and Administrator for the purpose of this Plan, each Participating Employer shall be deemed to have designated irrevocably the Employer as its agent. Unless the context of the Plan clearly indicates the contrary, the word "Employer" shall be deemed to include each Participating Employer as related to its adoption of the Plan. 10.4 EMPLOYEE TRANSFERS It is anticipated that an Employee may be transferred between Participating Employers, and in the event of any such transfer, the Employee involved shall carry with him his accumulated service and eligibility. No such transfer shall effect a termination of employment hereunder, and the Participating Employer to which the Employee is transferred shall thereupon become obligated hereunder with respect to such Employee in the same manner as was the Participating Employer from whom the Employee was transferred. 10.5 PARTICIPATING EMPLOYER'S CONTRIBUTION AND FORFEITURES Any contribution or Forfeiture subject to allocation during each Plan Year shall be allocated among all Participants of all Participating Employers in accordance with the provisions of this Plan. On the basis of the information furnished by the Administrator, the Trustee shall keep separate books and records concerning the affairs of each Participating Employer hereunder and as to the accounts and credits of the Employees of each Participating Employer. The Trustee may, but need not, register Contracts so as to evidence that a particular Participating Employer is the interested Employer hereunder, but in the event of an Employee transfer from one Participating Employer to another, the employing Employer shall immediately notify the Trustee thereof. 37 42 10.6 AMENDMENT Amendment of this Plan by the Employer at any time when there shall be a Participating Employer hereunder shall only be by the written action of each and every Participating Employer and with the consent of the Trustee where such consent is necessary in accordance with the terms of this Plan. 10.7 DISCONTINUANCE OF PARTICIPATION Except in the case of a Standardized Plan, any Participating Employer shall be permitted to discontinue or revoke its participation in the Plan at any time. At the time of any such discontinuance of revocation, satisfactory evidence thereof and of any applicable conditions imposed shall be delivered to the Trustee. The Trustee shall thereafter transfer, deliver and assign Contracts and other Trust Fund assets allocable to the Participants of such Participating Employer to such new Trustee as shall have been designated by such participating Employer, in the event that it has established a separate pension plan for its Employees provided, however, that no such transfer shall be made if the result is the elimination or reduction of any "Section 411(d)(6) protected benefits" in accordance with Section 8.1(e). If no successor is designated, the Trustee shall retain such assets for the Employees of said Participating Employer pursuant to the provisions of Article VII hereof. In no such event shall any part of the corpus or income of the Trust Fund as it relates to such Participating Employer be used for or diverted for purposes other than for the exclusive benefit of the Employees of such Participating Employer. 10.8 ADMINISTRATOR'S AUTHORITY The Administrator shall have authority to make any and all necessary rules or regulations, binding upon all Participating Employers and all Participants, to effectuate the purpose of this Article. 10.9 PARTICIPATING EMPLOYER CONTRIBUTION FOR AFFILIATE If any Participating Employer is prevented in whole or in part from making a contribution which it would otherwise have made under the Plan by reason of having no current or accumulated earnings or profits, or because such earnings or profits are less than the contribution which it would otherwise have made, then, pursuant to Code Section 404(a)(3)(B), so much of the contribution which such Participating Employer was so prevented from making may be made, for the benefit of the participating employees of such Participating Employer, by other Participating Employers who are members of the same affiliated group within the meaning of Code Section 1504 to the extent of their current or accumulated earnings or profits, except that such contribution by each such other Participating Employer shall be limited to the proportion of its total current and accumulated earnings or profits remaining after adjustment for its contribution to the Plan made without regard to this paragraph which the total prevented contribution bears to the total current and accumulated earnings or profits of all the participating Employers remaining after adjustment for all contributions made to the Plan without regard to this paragraph. A Participating Employer on behalf of whose employees a contribution is made under this paragraph shall not be required to reimburse the contributing Participating Employers. 38 EX-10.9 12 EXHIBIT 10.9 1 EXHIBIT 10.9 [SIGNAL PHARMACEUTICALS, INC. LETTERHEAD] September 6, 1994 U.S. Venture Partners IV, L.P. 2180 Sandhill Road, Suite #300 Menlo Park, Ca Re: MANAGEMENT RIGHTS Gentlemen: This letter will confirm our agreement that pursuant to your purchase of 1,235,715 shares of Series C Preferred Stock of Signal Pharmaceuticals, Inc. (the "Company"), U.S. Venture Partners IV, L.P. ("USVP IV") will be entitled to the following contractual information and management rights, in addition to rights to non-public financial information, inspection rights, and other rights specifically provided to all investors in the current financing: 1) The Company shall provide to USVP IV, within 30 days of the end of each calendar year, a list of all holders of equity interests and rights to acquire equity interests in the Company as of the end of such year, and the type and amount of such securities held by each such holder. 2) USVP IV shall be entitled to consult with and advise management of the Company on significant business issues, including management's proposed annual operating plans, and management will meet with a representative(s) of USVP IV regularly during each year at the Company's facilities at mutually agreeable times for such consultation and advice and to review progress in achieving said plans. 3) USVP IV may examine the books and records of the Company and inspect its facilities and may request information at reasonable times and intervals concerning the general status of the Company's financial condition and operations, provided that access to highly confidential proprietary information and facilities need not be provided. 4) If USVP IV is not represented on the Company's Board of Directors, the Company shall give a representative of USVP IV copies of all notices, minutes, consents, and other material that it provides to its directors; provided, however, that the Company reserves the right to exclude such representative from access to any material or portion thereof if the Company believes upon advice of counsel that such exclusion is reasonably necessary to preserve the attorney-client privilege, to protect highly confidential proprietary information or for other similar reasons. Upon reasonable notice and at a scheduled meeting of the Board or such other time, if any, as the Board may determine in its sole discretion, such representative may address the Board of Directors with respect to USVP IV concerns regarding significant business issues facing the Company. USVP IV agrees, and any representative of USVP IV will agree, to hold in confidence and trust and not use or disclose any confidential information provided to or learned by it in connection with its rights under this letter. 2 The rights described herein shall terminate and be of no further force or effect upon the consummation of the sale of the Company's securities pursuant to a registration statement filed by the Company under the Securities Act of 1933 in connection with the firm commitment underwritten offering of its securities to the general public. The confidentially provisions hereof will survive any such termination. Very truly yours, Signal Pharmaceuticals, Inc. By /s/ ALAN J. LEWIS ------------------------------------- Title President ---------------------------------- AGREED AND ACCEPTED THIS ______ DAY OF _______________________, 19___. U.S. Venture Partners IV, L.P. By /s/ [AUTHORIZED SIGNATURE] -------------------------------- Title ----------------------------- EX-10.10 13 EXHIBIT 10.10 1 EXHIBIT 10.10 [SIGNAL LOGO] September 8, 1994 U.S. Venture Partners IV, L.P. Second Ventures II, L.P. USVP Entrepreneur Partners II, L.P. 2180 Sand Hill Road Suite 300 Menlo Park, CA 94025 Attn: Philip Young Re: Management Rights Ladies and Gentlemen: This letter sets forth our agreement as to certain information rights that Signal Pharmaceuticals, Inc. (the "Company") will provide to each of U.S. Venture Partners IV, L.P., Second Ventures II, L.P., and USVP Entrepreneur Partners II, L.P. (collectively, the "Purchasers") in consideration of the Purchasers' agreement to severally purchase an aggregate of 1,428,572 shares of the Company's Series C Preferred Stock with an aggregate purchase price of $2,000,000.80, pursuant to that certain Series C Preferred Stock Purchase Agreement between the Company and each of the Purchasers of even date herewith (the "Stock Purchase Agreement"). A. Financial Statements and Other Information. Except as otherwise set forth below in this paragraph A and in addition to any other rights the Purchasers may have to receive information, until the earlier of (i) the effective date of the registration statement on Form 8-A for the registration of securities of the Company pursuant to Section 12(b) or 12(g) of the Securities Exchange Act of 1934, as amended (the "1934 Act"), or (ii) the consummation of the Company's initial public offering, the public offering price of which is not less than $12,500,000 in the aggregate, the Company will deliver to each of the Purchasers, for so long as the Purchasers hold an aggregate of at least thirty-three and one-third percent of the shares of the Company's Series C Preferred Stock (or Common Stock issued upon conversion thereof) purchased by such Purchasers pursuant to the Stock Purchase Agreement, the following information. 2 U.S. Venture Partners IV, L.P. Page 2. September 8, 1994 (i) As soon as available but in any event within 60 days after the end of each quarterly accounting period in each fiscal year, unaudited consolidated statements of operations and consolidated cash flows of the Company and its subsidiaries for such quarterly period and for the period from the beginning of the fiscal year to the end of such month, and consolidated balance sheets of the Company and its subsidiaries as of the end of such quarterly period, setting forth in each case comparisons to the annual budget and to the corresponding period in the preceding fiscal year, and all such statements will be prepared in accordance with generally accepted accounting principles, consistently applied (except for the absence of notes and subject to normal year-end adjustments). (ii) No later than thirty (30) days after the occurrence of such actual events, notice of the occurrence of actual events that are determined in good faith by the Company to be substantially materially adverse to the Company and its subsidiaries taken as a whole, including but not limited to, the filing of any material litigation against the Company or its subsidiaries, substantially materially adverse regulatory or legal developments, the commencement of voluntary or involuntary bankruptcy proceedings, natural or other disasters, material changes in management or directors, a change in the independent accounting firm that acts as the Company's auditor as a result of a material dispute between the Company and such accounting firm, and the termination of, or material defaults under, material contracts. Such notice shall include a statement letter from the President or Chief Financial Officer of the Company specifying the nature of such substantially materially adverse events. (iii) Prior to the end of each fiscal year, an annual budget (approved by the Board of Directors) prepared on a monthly, consolidated basis 3 U.S. Venture Partners IV, L.P. Page 3. September 8, 1994 for the Company and its subsidiaries for the succeeding fiscal year (displaying detailed anticipated statements of operations and cash flows and balance sheets), and promptly upon preparation thereof any other significant budgets which the Company prepares and any revisions of such annual or other budgets. (iv) Promptly after transmission thereof, copies of all financial statements, proxy statements, reports and any other written communications which the company sends to its stockholders generally and copies of all registration statements and all regular, special or periodic reports which it files with the SEC or with any securities exchange on which any of its securities are then listed pursuant to the 1934 Act, and, after such releases or statements have been publicly disseminated, copies of all press releases and other statements made available generally by the Company to the public. (v) A notice specifying the terms of all sales of the issuer's securities, promptly following the consummation thereof. Each of the financial statements referred to in this paragraph A will be true and correct in all material respects and will fairly present the Company's consolidated financial position and results of operations as of the dates and for the periods stated therein, subject in the case of the unaudited financial statements to changes resulting from normal year-end audit adjustments (none of which would, alone or in the aggregate, be materially adverse to the Company's financial condition, operating results or business prospects). The Company's obligation to provide to the Purchasers the materials described in clause (iv) and (v) above will continue after the Company is subject to the reporting requirements of the 1934 Act and until the Purchasers no longer hold an aggregate of at least thirty-three and one-third of the shares of the Company's Series C Preferred Stock (or Common Stock issued upon conversion thereof) purchased by such Purchasers pursuant to the Stock Purchase Agreement. 4 U.S. Venture Partners IV, L.P. Page 4. September 8, 1994 B. Inspection of Property. Until the earlier of (i) the effective date of the registration statement on Form 8-A for the registration of securities of the Company pursuant to Section 12(b) or 12(g) of the 1934 Act, or (ii) the consummation of the Company's initial public offering, the public offering price of which is not less than $12,500,000 in the aggregate, and for so long as the Purchasers hold an aggregate of at least thirty-three and one-third percent of the shares of the Company's Series C Preferred Stock (or Common Stock issued upon conversion thereof) purchased by such Purchasers pursuant to the Stock Purchase Agreement, the Company will permit the Purchaser, or any representatives designated by the Purchaser (which representatives must be reasonably acceptable to the Company), upon reasonable notice and during normal business hours and such other times as the Purchaser may reasonably request, to (i) visit and inspect any of the properties of the Company and its subsidiaries, (ii) examine the corporate and financial records of the Company and its subsidiaries and make copies thereof or extracts therefrom, (iii) discuss the affairs, finances and accounts of the Company and its subsidiaries with the directors, senior management and independent accountants of the Company and its subsidiaries, and (iv) consult with and advise the management of the Company and its subsidiaries as to their affairs, finances and accounts. C. Board Visitation Rights. Until the earlier of (i) the effective date of the registration statement on Form 8-A for the registration of securities of the Company pursuant to Section 12(b) or 12(g) of the 1934 Act, or (ii) the consummation of the Company's initial public offering, the public offering price of which is not less than $12,500,000 in the aggregate, and for so long as Purchasers hold an aggregate of at least sixty-six and two-thirds of the shares of the Company's Series C Preferred Stock (or Common Stock issued upon conversion thereof) purchased by such Purchasers pursuant to the Stock Purchase Agreement, the Company shall invite a representative of the Purchasers to attend all meetings of its Board of Directors in a nonvoting observer capacity and, in this respect, shall give such representative copies of all notices, minutes, consents, and other materials that it provides to its directors; provided, however, that such representative shall agree to accept such information in 5 U.S. Venture Partners IV, L.P. Page 5. September 8, 1994 confidence subject to the same restrictions required as to directors and with respect to any information which the Company deems in good faith to be a trade secret or similar confidential information, to enter into a confidentiality agreement mutually acceptable to the Company and such representative which is consistent with the Purchasers' ability to exercise its full legal rights as a shareholder; and provided further, that the Company reserves the right to withhold any information and to exclude such representative from any meeting or portion thereof if access to such information or attendance at such meeting could adversely affect the attorney-client privilege between the Company and its counsel; and, provided further, that the Company reserves the right to schedule such meetings around the availability of the members of the Board of Directors. By countersigning below, each Purchaser hereby agrees that it and they shall be limited to equitable remedies with respect to enforcement hereof and the Company shall have no financial or monetary liability under this Letter Agreement to such Purchaser in connection with a failure by the Company to provide information to such Purchaser in a timely manner (or at all) pursuant to section A(i)-(v) of this Letter Agreement. Each Purchaser further acknowledges that any information provided by the Company to such Purchasers pursuant to this Letter Agreement, or otherwise and designated as confidential, orally or in writing, by the Company, is the confidential and proprietary information of the Company. Each Purchaser hereby agrees (i) to hold such confidential and proprietary information in confidence and to take all necessary precautions to protect such confidential and proprietary information, including, without limitation, all precautions such Purchaser employs with respect to its own confidential materials; (ii) not to divulge such confidential and proprietary information or any information derived therefrom to any third person other than an employee that has a reasonable need to know; and (iii) not to make any use 6 U.S. Venture Partners IV, L.P. Page 6. September 8, 1994 whatsoever at any time of such confidential and proprietary information except to evaluate the status of such Purchaser's investment in the Company. Very truly yours, SIGNAL PHARMACEUTICALS, INC. By: /s/ ALAN J. LEWIS --------------------------------- Title: President -------------------------------- ACCEPTED: USVP ENTREPRENEUR PARTNERS II, L.P. By Presidio Management Group IV, L.P. Its General Partner By: /s/ [AUTHORIZED SIGNATURE] --------------------------------- Its: Attorney-In-Fact -------------------------------- SECOND VENTURES II, L.P. By Presidio Management Group IV, L.P. Its General Partner By: /s/ [AUTHORIZED SIGNATURE] --------------------------------- Its: Attorney-In-Fact -------------------------------- 7 U.S. Venture Partners IV, L.P. Page 7. September 8, 1994 U.S. VENTURE PARTNERS IV, L.P. By Presidio Management Group IV, L.P. Its General Partner By: /s/ [AUTHORIZED SIGNATURE] --------------------------------- Its: Attorney In Fact -------------------------------- EX-10.11 14 EXHIBIT 10.11 1 EXHIBIT 10.11 [SIGNAL LETTERHEAD LOGO] September 8, 1994 Oxford Bioscience Partners L.P., Oxford Bioscience Partners (Bermuda) Limited Partnership, Oxford Bioscience Partners (Adjunct) L.P. 650 Town Center Drive Suite 810 Costa Mesa, CA 92626 Re: Management Rights Ladies and Gentlemen: This letter sets forth our agreement as to certain information rights that Signal Pharmaceuticals, Inc. (the "Company") will provide to each of Oxford Bioscience Partners L.P., Oxford Bioscience Partners (Bermuda) Limited Partnership, Oxford Bioscience Partners (Adjunct) L.P. (collectively, the "Purchasers") in consideration of the Purchasers' agreement to severally purchase an aggregate of 1,428,572 shares of the Company's Series C Preferred Stock with an aggregate purchase price of $2,000,000.80, pursuant to that certain Series C Preferred Stock Purchase Agreement between the Company and each of the Purchasers of even date herewith (the "Stock Purchase Agreement"). A. Financial Statements and Other Information. Except as otherwise set forth below in this paragraph A and in addition to any other rights the Purchasers may have to receive information, until the earlier of (i) the effective date of the registration statement on Form 8-A for the registration of securities of the Company pursuant to Section 12(b) or 12(g) of the Securities Exchange Act of 1934, as amended (the "1934 Act"), or (ii) the consummation of the Company's initial public offering, the public offering price of which is not less than $12,500,000 in the aggregate, the Company will deliver to each of the Purchasers, for so long as the Purchasers hold an aggregate of at least thirty-three and one-third percent of the shares of the Company's Series C Preferred Stock (or Common Stock issued upon conversion thereof) purchased by such Purchasers pursuant to the Stock Purchase Agreement, the following information. 2 Oxford Bioscience Partners Page 2. September 8, 1994 (i) As soon as available but in any event within 60 days after the end of each quarterly accounting period in each fiscal year, unaudited consolidated statements of operations and consolidated cash flows of the Company and its subsidiaries for such quarterly period and for the period from the beginning of the fiscal year to the end of such month, and consolidated balance sheets of the Company and its subsidiaries as of the end of such quarterly period, setting forth in each case comparisons to the annual budget and to the corresponding period in the preceding fiscal year, and all such statements will be prepared in accordance with generally accepted accounting principles, consistently applied (except for the absence of notes and subject to normal year-end adjustments). (ii) No later than thirty (30) days after the occurrence of such actual events, notice of the occurrence of actual events that are determined in good faith by the Company to be substantially materially adverse to the Company and its subsidiaries taken as a whole, including but not limited to, the filing of any material litigation against the Company or its subsidiaries, substantially materially adverse regulatory or legal developments, the commencement of voluntary or involuntary bankruptcy proceedings, natural or other disasters, material changes in management or directors, a change in the independent accounting firm that acts as the Company's auditor as a result of a material dispute between the Company and such accounting firm, and the termination of, or material defaults under, material contracts. Such notice shall include a statement letter from the President or Chief Financial Officer of the Company specifying the nature of such substantially materially adverse events. (iii) Prior to the end of each fiscal year, an annual budget (approved by the Board of Directors) prepared on a monthly, consolidated basis 3 Oxford Bioscience Partners Page 3. September 8, 1994 for the Company and its subsidiaries for the succeeding fiscal year (displaying detailed anticipated statements of operations and cash flows and balance sheets), and promptly upon preparation thereof any other significant budgets which the Company prepares and any revisions of such annual or other budgets. (iv) Promptly after transmission thereof, copies of all financial statements, proxy statements, reports and any other written communications which the company sends to its stockholders generally and copies of all registration statements and all regular, special or periodic reports which it files with the SEC or with any securities exchange on which any of its securities are then listed pursuant to the 1934 Act, and, after such releases or statements have been publicly disseminated, copies of all press releases and other statements made available generally by the Company to the public. (v) A notice specifying the terms of all sales of the issuer's securities, promptly following the consummation thereof. Each of the financial statements referred to in this paragraph A will be true and correct in all material respects and will fairly present the Company's consolidated financial position and results of operations as of the dates and for the periods stated therein, subject in the case of the unaudited financial statements to changes resulting from normal year-end audit adjustments (none of which would, alone or in the aggregate, be materially adverse to the Company's financial condition, operating results or business prospects). The Company's obligation to provide to the Purchasers the materials described in clause (iv) and (v) above will continue after the Company is subject to the reporting requirements of the 1934 Act and until the Purchasers no longer hold an aggregate of at least thirty-three and one-third of the shares of the Company's Series C Preferred Stock (or Common Stock issued upon conversion thereof) purchased by such Purchasers pursuant to the Stock Purchase Agreement. 4 Oxford Bioscience Partners Page 4. September 8, 1994 B. Inspection of Property. Until the earlier of (i) the effective date of the registration statement on Form 8-A for the registration of securities of the Company pursuant to Section 12(b) or 12(g) of the 1934 Act, or (ii) the consummation of the Company's initial public offering, the public offering price of which is not less than $12,500,000 in the aggregate, and for so long as the Purchasers hold an aggregate of at least thirty-three and one-third percent of the shares of the Company's Series C Preferred Stock (or Common Stock issued upon conversion thereof) purchased by such Purchasers pursuant to the Stock Purchase Agreement, the Company will permit the Purchaser, or any representatives designated by the Purchaser (which representatives must be reasonably acceptable to the Company), upon reasonable notice and during normal business hours and such other times as the Purchaser may reasonably request, to (i) visit and inspect any of the properties of the Company and its subsidiaries, (ii) examine the corporate and financial records of the Company and its subsidiaries and make copies thereof or extracts therefrom, (iii) discuss the affairs, finances and accounts of the Company and its subsidiaries with the directors, senior management and independent accountants of the Company and its subsidiaries, and (iv) consult with and advise the management of the Company and its subsidiaries as to their affairs, finances and accounts. C. Board Visitation Rights. Until the earlier of (i) the effective date of the registration statement on Form 8-A for the registration of securities of the Company pursuant to Section 12(b) or 12(g) of the 1934 Act, or (ii) the consummation of the Company's initial public offering, the public offering price of which is not less than $12,500,000 in the aggregate, and for so long as Purchasers hold an aggregate of at least sixty-six and two-thirds of the shares of the Company's Series C Preferred Stock (or Common Stock issued upon conversion thereof) purchased by such Purchasers pursuant to the Stock Purchase Agreement, the Company shall invite a representative of the Purchasers to attend all meetings of its Board of Directors in a nonvoting observer capacity and, in this respect, shall give such representative copies of all notices, minutes, consents, and other materials that it provides to its directors; provided, however, that such representative shall agree to accept such information in 5 Oxford Bioscience Partners Page 5. September 8, 1994 confidence subject to the same restrictions required as to directors and with respect to any information which the Company deems in good faith to be a trade secret or similar confidential information, to enter into a confidentiality agreement mutually acceptable to the Company and such representative which is consistent with the Purchasers' ability to exercise its full legal rights as a shareholder; and provided further, that the Company reserves the right to withhold any information and to exclude such representative from any meeting or portion thereof if access to such information or attendance at such meeting could adversely affect the attorney-client privilege between the Company and its counsel; and, provided further, that the Company reserves the right to schedule such meetings around the availability of the members of the Board of Directors. By countersigning below, each Purchaser hereby agrees that it and they shall be limited to equitable remedies with respect to enforcement hereof and the Company shall have no financial or monetary liability under this Letter Agreement to such Purchaser in connection with a failure by the Company to provide information to such Purchaser in a timely manner (or at all) pursuant to section A(i)-(v) of this Letter Agreement. Each Purchaser further acknowledges that any information provided by the Company to such Purchasers pursuant to this Letter Agreement, or otherwise and designated as confidential, orally or in writing, by the Company, is the confidential and proprietary information of the Company. Each Purchaser hereby agrees (i) to hold such confidential and proprietary information in confidence and to take all necessary precautions to protect such confidential and proprietary information, including, without limitation, all precautions such Purchaser employs with respect to its own confidential materials; (ii) not to divulge such confidential and proprietary information or any information derived therefrom to any third person other than an employee that has a reasonable need to know; and (iii) not to make any use 6 Oxford Bioscience Partners Page 6. September 8, 1994 whatsoever at any time of such confidential and proprietary information except to evaluate the status of such Purchaser's investment in the Company. Very truly yours, SIGNAL PHARMACEUTICALS, INC. By: /s/ ALAN J. LEWIS ------------------------------------ Title: President --------------------------------- ACCEPTED: OXFORD BIOSCIENCE PARTNERS L.P. By: OBP Management L.P. Its: General Partner By: /s/ EDMUND M. OLIVIER ----------------------------------- Edmund M. Olivier Its: General Partner OXFORD BIOSCIENCE PARTNERS (BERMUDA) LIMITED PARTNERSHIP By: OBP Management (Bermuda) Limited Partnership Its: General Partner By: /s/ EDMUND M. OLIVIER ----------------------------------- Edmund M. Olivier Its: General Partner OXFORD BIOSCIENCE PARTNERS (ADJUNCT) L.P. By: OBP Management L.P. Its: General Partner By: /s/ EDMUND M. OLIVIER ----------------------------------- Edmund M. Olivier Its: General Partner EX-10.12 15 EXHIBIT 10.12 1 EXHIBIT 10.12 September 5, 1997 U.S. Venture Partners IV, L.P. 2180 Sand Hill Road, Suite #300 Menlo Park, Ca 94025 RE: MANAGEMENT RIGHTS Gentlemen: This letter will confirm our agreement that pursuant to your purchase of 45,733 shares of Series E Preferred Stock of Signal Pharmaceuticals, Inc. (the "Company"), U.S. Venture Partners IV, L.P. ("USVP IV") will be entitled to the following contractual information and management rights, in addition to rights to non-public financial information, inspection rights, and other rights specifically provided to all investors in the current financing: 1) The Company shall provide to USVP IV, within 30 days of the end of each calendar year, a list of all holders of equity interests and rights to acquire equity interests in the Company as of the end of such year, and the type and amount of such securities held by each such holder. 2) USVP IV shall be entitled to consult with and advise management of the Company on significant business issues, including management's proposed annual operating plans, and management will meet with a representative(s) of USVP IV regularly during each year at the Company's facilities at mutually agreeable times for such consultation and advice and to review progress in achieving said plans. 3) USVP IV may examine the books and records of the Company and inspect its facilities and may request information at reasonable times and intervals concerning the general status of the Company's financial condition and operations, provided that access to highly confidential proprietary information and facilities need not be provided. 4) If USVP IV is not represented on the Company's Board of Directors, the Company shall give a representative of USVP IV copies of all notices, minutes, consents, and other material that it provides to its directors; provided, however, that the Company reserves the right to exclude such representative from access to any material or portion thereof if the Company believes upon advice of counsel that such exclusion is reasonably necessary to preserve the attorney-client privilege, to protect highly confidential proprietary information or for other similar reasons. Upon reasonable notice and at a scheduled meeting of the Board or such other time, if any, as the Board may determine in its sole discretion, such representative may address the Board of Directors with respect to USVP IV concerns regarding significant business issues facing the Company. USVP IV agrees, and any representative of USVP IV will agree, to hold in confidence and trust and not use or disclose any confidential information provided to or learned by it in connection with its rights under this letter. 2 The rights described herein shall terminate and be of no further force or effect upon the consummation of the sale of the Company's securities pursuant to a registration statement filed by the Company under the Securities Act of 1933 in connection with the firm commitment underwritten offering of its securities to the general public. The confidentially provisions hereof will survive any such termination. Very truly yours, Signal Pharmaceuticals, Inc. By /s/ BRADLEY B. GORDON ------------------------------------- Title V.P. Finance, CFO ---------------------------------- AGREED AND ACCEPTED THIS 8 DAY OF September, 1997. U.S. Venture Partners IV, L.P. By -------------------------------- Title ----------------------------- EX-10.13 16 EXHIBIT 10.13 1 EXHIBIT 10.13 SIGNAL PHARMACEUTICALS, INC. AMENDED AND RESTATED INVESTORS' RIGHTS AGREEMENT SEPTEMBER 9, 1997 2 TABLE OF CONTENTS 1. REGISTRATION RIGHTS.................................................................2 1.1 Definitions..................................................................2 1.2 Request for Registration.....................................................3 1.3 Company Registration.........................................................4 1.4 Obligations of the Company...................................................5 1.5 Furnish Information..........................................................6 1.6 Expenses of Demand Registration..............................................6 1.7 Expenses of Company Registration.............................................7 1.8 Underwriting Requirements....................................................7 1.9 Delay of Registration........................................................8 1.10 Indemnification..............................................................8 1.11 Reports Under Securities Exchange Act of 1934...............................11 1.12 Form S-3 Registration.......................................................11 1.13 Assignment of Registration Rights...........................................13 1.14 Limitations on Subsequent Registration Rights...............................13 1.15 "Market Stand-Off" Agreement................................................13 1.16 Termination of Registration Rights..........................................14 2. COVENANTS OF THE COMPANY...........................................................15 2.1 Delivery of Financial Statements............................................15 2.2 Inspection..................................................................15 2.3 Right of First Offer........................................................15 3. MISCELLANEOUS......................................................................17 3.1 Successors and Assigns......................................................17 3.2 Governing Law...............................................................17 3.3 Counterparts................................................................17 3.4 Titles and Subtitles........................................................17 3.5 Notices.....................................................................17 3.6 Expenses....................................................................18 3.7 Amendments and Waivers......................................................18 3.8 Severability................................................................18 3.9 Aggregation of Stock........................................................18 3.10 Termination of Prior Agreement..............................................18 3.11 Regulated Financial Institutions Compliance Obligations.....................18
SCHEDULE A - Schedule of New Investors SCHEDULE B - Schedule of Existing Investors i. 3 AMENDED AND RESTATED INVESTORS' RIGHTS AGREEMENT THIS AMENDED AND RESTATED INVESTORS' RIGHTS AGREEMENT (this "Agreement") is made as of the 9th day of September, 1997, by and between Signal Pharmaceuticals, Inc., a California corporation (the "Company"), the investors listed on Schedule A hereto, each of which is herein referred to as a "New Investor;" a majority of the holders of Series A, Series B and Series C Preferred Stock listed on Schedule B hereto (the "Existing Investors"); and Tanabe Seiyaku Co., Ltd. ("Tanabe"). RECITALS WHEREAS, the Existing Investors hold shares of the Company's Series A, Series B and/or Series C Preferred Stock, respectively, and Tanabe holds shares of the Company's Series D Preferred Stock; and together, the Existing Investors and Tanabe possess certain registration rights, information rights, rights of first offer, and other rights pursuant to an existing Amended and Restated Investors' Rights Agreement dated as of March 31, 1996 between the Company and such Existing Investors and Tanabe (the "Prior Agreement"); and WHEREAS, the Existing Investors and Tanabe are holders of more than 50% of the Registrable Securities of the Company (as defined in the Prior Agreement), and, in order to induce the New Investors to enter into the Series E Preferred Stock Purchase Agreement by and between the Company and each of the New Investors and dated as of the date hereof (the "Series E Stock Purchase Agreement"), the Company, the Existing Investors and Tanabe desire to terminate the Prior Agreement in its entirety and to accept the rights created pursuant hereto in lieu of the rights granted to them under the Prior Agreement, with such Prior Agreement being superseded, rendered void and replaced in its entirety with this Agreement; and WHEREAS, the Company wishes to sell to the New Investors shares of its Series E Preferred Stock pursuant to the Series E Stock Purchase Agreement, and in connection therewith, desires to grant certain rights to the New Investors set forth in this Agreement, and the New Investors wish to receive such rights. 1. 4 NOW, THEREFORE, THE PARTIES HEREBY AGREE AS FOLLOWS: 1. REGISTRATION RIGHTS. The Company covenants and agrees as follows: 1.1 DEFINITIONS. For purposes of this Section 1: (a) The term "Act" means the Securities Act of 1933, as amended. (b) The term "register," "registered," and "registration" refer to a registration effected by preparing and filing a registration statement or similar document in compliance with the Act, and the declaration or ordering of effectiveness of such registration statement or document; (c) The term "Registrable Securities" means the Investor Registrable Securities and the Tanabe Registrable Securities. (d) The term "Investor Registrable Securities" means (1) the Common Stock issuable or issued upon conversion of any Series A Preferred Stock, (2) the Common Stock issuable or issued upon conversion of any Series B Preferred Stock, (3) the Common Stock issuable or issued upon conversion of any Series C Preferred Stock, (4) the Common Stock issuable or issued upon conversion of any Series E Preferred Stock, and (5) any Common Stock of the Company issued as (or issuable upon the conversion or exercise of any warrant, right or other security which is issued as) a dividend or other distribution with respect to, or in exchange for or in replacement of, such Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series E Preferred Stock or Common Stock issuable or issued upon conversion thereof, excluding in all cases, however, any Investor Registrable Securities sold by a person in a transaction in which his rights under this Section 1 are not assigned; (e) The term "Tanabe Registrable Securities" means (1) the Common Stock issuable or issued upon conversion of any Series D Preferred Stock, and (2) any Common Stock of the Company issued as (or issuable upon the conversion or exercise of any warrant, right or other security which is issued as) a dividend or other distribution with respect to, or in exchange for or in replacement of, such Series D Preferred Stock, excluding in all cases, however, any Tanabe Registrable Securities sold by a person in a transaction in which his rights under this Section 1 are not assigned; (f) The number of shares of "Registrable Securities then outstanding" shall be determined by the number of shares of Common Stock then outstanding, and the number of shares of Common Stock issuable pursuant to then exercisable or convertible securities, which are Registrable Securities. 2. 5 (g) The term "Holder" means any person owning or having the right to acquire Registrable Securities or any assignee thereof in accordance with Section 1.13 hereof; and (h) The term "Form S-3" means such form under the Act as in effect on the date hereof or any registration form under the Act subsequently adopted by the Securities and Exchange Commission ("SEC") which permits inclusion or incorporation of substantial information by reference to other documents filed by the Company with the SEC. (i) The term "1934 Act" shall mean the Securities Exchange Act of 1934, as amended. 1.2 REQUEST FOR REGISTRATION. (a) If the Company shall receive at any time after the earlier of (i) August 1, 1997, or (ii) one (1) year after the effective date of the first registration statement for a public offering of securities of the Company (other than a registration statement relating either to the sale of securities to employees of the Company pursuant to a stock option, stock purchase or similar plan or a SEC Rule 145 transaction), a written request from the Holders of at least 40% of the Registrable Securities then outstanding that the Company file a registration statement under the Act covering the registration of the Registrable Securities with an anticipated aggregate offering price, net of underwriting discounts and commissions, of at least $2,000,000, then the Company shall, within ten (10) days of the receipt thereof, give written notice of such request to all Holders and shall, subject to the limitations of subsection 1.2(b), effect as soon as practicable, and in any event shall use its best efforts to effect within 60 days of the receipt of such request, the registration under the Act of all Registrable Securities which the Holders request to be registered within twenty (20) days of the mailing of such notice by the Company in accordance with paragraph 3.5. (b) If the Holders initiating the registration request hereunder ("Initiating Holders") intend to distribute the Registrable Securities covered by their request by means of an underwriting, they shall so advise the Company as a part of their request made pursuant to this Section 1.2 and the Company shall include such information in the written notice referred to in subsection 1.2(a). The underwriter or underwriters will be selected by the Company and shall be reasonably acceptable to a majority in interest of the Initiating Holders. In such event, the right of any Holder to include his Registrable Securities in such registration shall be conditioned upon such Holder's participation in such underwriting and the inclusion of such Holder's Registrable Securities in the underwriting (unless otherwise mutually agreed by a majority in interest of the Initiating Holders and such Holder) to the extent provided herein. All Holders proposing to 3. 6 distribute their securities through such underwriting shall (together with the Company as provided in subsection 1.4(e)) enter into an underwriting agreement in customary form with the underwriter or underwriters selected for such underwriting. Notwithstanding any other provision of this Section 1.2, if the underwriter or underwriters advise the Initiating Holders in writing that marketing factors require a limitation of the number of shares to be underwritten, then the Initiating Holders shall so advise all Holders of Registrable Securities which would otherwise be underwritten pursuant hereto, and the number of shares of Registrable Securities that may be included in the underwriting shall be allocated among all Holders thereof, including the Initiating Holders, in proportion (as nearly as practicable) to the amount of Registrable Securities of the Company owned by each Holder; provided, however, that the number of shares of Registrable Securities to be included in such underwriting shall not be reduced unless all other securities are first entirely excluded from the underwriting. (c) The Company is obligated to effect only two (2) such registrations pursuant to this Section 1.2. (d) Notwithstanding the foregoing, if the Company shall furnish to Holders requesting a registration statement pursuant to this Section 1.2, a certificate signed by the President of the Company stating that in the good faith judgment of the Board of Directors of the Company it would be seriously detrimental to the Company and its shareholders for such registration statement to be filed and it is therefore essential to defer the filing of such registration statement, the Company shall have the right to defer taking action with respect to such filing for a period of not more than 60 days after receipt of the request of the Initiating Holders; provided, however, that the Company may not utilize this right more than once in any twelve month period. 1.3 COMPANY REGISTRATION. If (but without any obligation to do so) the Company proposes to register (including for this purpose a registration effected by the Company for shareholders other than the Holders) any of its stock or other securities under the Act in connection with the public offering of such securities solely for cash (other than a registration relating solely to the sale of securities to participants in a Company stock plan, or a registration on any form which does not include substantially the same information as would be required to be included in a registration statement covering the sale of the Registrable Securities), the Company shall, at such time, promptly give each Holder of Investor Registrable Securities written notice of such registration. Upon the written request of each Holder of Investor Registrable Securities given within twenty (20) days after mailing of such notice by the Company in accordance with Section 3.5, the Company shall, subject to the provisions of Section 1.8, cause to be registered under the Act all of the Investor Registrable Securities that each such Holder has requested to be registered. 4. 7 1.4 OBLIGATIONS OF THE COMPANY. Whenever required under this Section 1 to effect the registration of any Registrable Securities, the Company shall, as expeditiously as reasonably possible: (a) Prepare and file with the SEC a registration statement with respect to such Registrable Securities and use its best efforts to cause such registration statement to become effective, and, upon the request of the Holders of a majority of the Registrable Securities registered thereunder, keep such registration statement effective for up to one hundred twenty (120) days. (b) Prepare and file with the SEC such amendments and supplements to such registration statement and the prospectus used in connection with such registration statement as may be necessary to comply with the provisions of the Act with respect to the disposition of all securities covered by such registration statement. (c) Furnish to the Holders such numbers of copies of a prospectus, including a preliminary prospectus, in conformity with the requirements of the Act, and such other documents as they may reasonably request in order to facilitate the disposition of Registrable Securities owned by them. (d) Use its best efforts to register and qualify the securities covered by such registration statement under such other securities or Blue Sky laws of such jurisdictions as shall be reasonably requested by the Holders, provided that the Company shall not be required in connection therewith or as a condition thereto to qualify to do business or to file a general consent to service of process in any such states or jurisdictions unless the Company is already subject to service in such jurisdiction and except as may be required under the Act. (e) In the event of any underwritten public offering, enter into and perform its obligations under an underwriting agreement, in usual and customary form, with the managing underwriter of such offering. Each Holder participating in such underwriting shall also enter into and perform its obligations under such an agreement. (f) Notify each Holder of Registrable Securities covered by such registration statement at any time when a prospectus relating thereto is required to be delivered under the Act of the happening of any event as a result of which the prospectus included in such registration statement, as then in effect, includes an untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein not misleading in the light of the circumstances then existing. (g) Cause all such Registrable Securities registered pursuant hereto to be listed on each securities exchange or over-the-counter market on which similar securities issued by the Company are then listed. 5. 8 (h) Provide a transfer agent and registrar for all Registrable Securities registered pursuant hereto and a CUSIP number for all such Registrable Securities, in each case not later than the effective date for such Registration. (i) Use its best efforts to furnish, at the request of any Holder requesting registration of Registrable Securities pursuant to this Section 1, on the date that such Registrable Securities are delivered to the underwriters for sale in connection with a registration pursuant to this Section 1, if such securities are being sold through underwriters, or, if such securities are not being sold through underwriters, on the date that the registration statement with respect to such securities becomes effective, (i) an opinion, dated such date, of the counsel representing the Company for the purposes of such registration, in form and substance as is customarily given to underwriters in an underwritten public offering, addressed to the underwriters, if any, and to the Holders requesting registration of Registrable Securities and (ii) a letter dated such date, from the independent certified public accountants of the Company, in form and substance as is customarily given by independent certified public accountants to underwriters in an underwritten public offering, addressed to the underwriters, if any, and to the Holders requesting registration of Registrable Securities. 1.5 FURNISH INFORMATION. (a) It shall be a condition precedent to the obligations of the Company to take any action pursuant to this Section 1 with respect to the Registrable Securities of any selling Holder that such Holder shall furnish to the Company such information regarding itself, the Registrable Securities held by it, and the intended method of disposition of such securities as shall be required to effect the registration of such Holder's Registrable Securities. (b) The Company shall have no obligation with respect to any registration requested pursuant to Section 1.2 or Section 1.12 if, due to the operation of subsection 1.5(a), the anticipated aggregate offering price of the Registrable Securities to be included in the registration does not equal or exceed the anticipated aggregate offering price required to originally trigger the Company's obligation to initiate such registration as specified in subsection 1.2(a) or subsection 1.12(b)(2), whichever is applicable. 1.6 EXPENSES OF DEMAND REGISTRATION. All expenses other than underwriting discounts and commissions incurred in connection with registrations, filings or qualifications pursuant to Section 1.2, including (without limitation) all registration, filing and qualification fees, printers' and accounting fees, fees and disbursements of counsel for the Company and the reasonable fees and disbursements of one counsel for the selling Holders shall be borne by the Company; provided, however, that the Company shall not be required to pay for any expenses of any registration proceeding begun pursuant to 6. 9 Section 1.2 if the registration request is subsequently withdrawn at the request of the Holders of a majority of the Registrable Securities to be registered (in which case all participating Holders shall bear such expenses pro rata based on the number of shares to be registered by participating Holders), unless the Holders of a majority of the Registrable Securities agree to forfeit their right to one demand registration pursuant to Section 1.2; provided further, however, that if at the time of such withdrawal, the Holders have learned of a material adverse change in the condition, business, or prospects of the Company from that known to the Holders at the time of their request and have withdrawn the request with reasonable promptness following disclosure by the Company of such material adverse change, then the Holders shall not be required to pay any of such expenses and shall retain their rights pursuant to Section 1.2. 1.7 EXPENSES OF COMPANY REGISTRATION. The Company shall bear and pay all expenses incurred in connection with any registration, filing or qualification of Investor Registrable Securities with respect to the registrations pursuant to Section 1.3 for each Holder (which right may be assigned as provided in Section 1.13), including (without limitation) all registration, filing, and qualification fees, printers' and accounting fees relating or apportionable thereto and the reasonable fees and disbursements of one counsel for the selling Holders selected by them, but excluding underwriting discounts and commissions relating to the Investor Registrable Securities. 1.8 UNDERWRITING REQUIREMENTS. In connection with any offering involving an underwriting of shares of the Company's capital stock, the Company shall not be required under Section 1.3 to include any of the Holders' securities in such underwriting unless they accept the terms of the underwriting as agreed upon between the Company and the underwriters selected by it (or by other persons entitled to select the underwriters), and then only in such quantity as the underwriters determine in their sole discretion will not jeopardize the success of the offering by the Company. If the total amount of securities, including Investor Registrable Securities, requested by shareholders to be included in such offering exceeds the amount of securities sold other than by the Company that the underwriters determine in their sole discretion is compatible with the success of the offering, then the Company shall be required to include in the offering only that number of such securities, including Investor Registrable Securities, which the underwriters determine in their sole discretion will not jeopardize the success of the offering (the securities so included to be apportioned pro rata among the selling shareholders according to the total amount of securities entitled to be included therein owned by each selling shareholder or in such other proportions as shall mutually be agreed to by such selling shareholders) but in no event shall (i) the amount of securities of the selling Holders included in the offering be reduced unless no other shareholder's securities are included, or (ii) in any event, the amount of securities of the selling Holders included in the offering be reduced below twenty-five percent (25%) of the total amount of securities included in such offering, unless such offering is the initial public offering of 7. 10 the Company's securities in which case the selling shareholders may be excluded if the underwriters make the determination described above and no other shareholder's securities are included or (iii) notwithstanding (i) and (ii) above, any shares being sold by a shareholder exercising a demand registration right similar to that granted in Section 1.2 be excluded from such offering. For purposes of the preceding parenthetical concerning apportionment, for any selling shareholder which is a Holder of Investor Registrable Securities and which is a partnership, corporation, or limited liability company, the partners, retired partners, shareholders and members of such Holder, or the estates and family members of any such partners, retired partners and members and any trusts for the benefit of any of the foregoing persons shall be deemed to be a single "selling shareholder," and any pro rata reduction with respect to such "selling shareholder" shall be based upon the aggregate amount of shares carrying registration rights owned by all entities and individuals included in such "selling shareholder," as defined in this sentence. 1.9 DELAY OF REGISTRATION. No Holder shall have any right to obtain or seek an injunction restraining or otherwise delaying any such registration as the result of any controversy that might arise with respect to the interpretation or implementation of this Section 1. 1.10 INDEMNIFICATION. In the event any Registrable Securities are included in a registration statement under this Section 1: (a) To the extent permitted by law, the Company will indemnify and hold harmless each Holder, any underwriter (as defined in the Act) for such Holder and each person, if any, who controls such Holder or underwriter within the meaning of the Act or the 1934 Act, against any losses, claims, damages, or liabilities (joint or several) to which they may become subject under the Act, or the 1934 Act or other federal or state law, insofar as such losses, claims, damages, or liabilities (or actions in respect thereof) arise out of or are based upon any of the following statements, omissions or violations (collectively a "Violation"): (i) any untrue statement or alleged untrue statement of a material fact contained in such registration statement, including any preliminary prospectus or final prospectus contained therein or any amendments or supplements thereto, (ii) 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 violation or alleged violation by the Company of the Act, the 1934 Act, any state securities law or any rule or regulation promulgated under the Act, or the 1934 Act or any state securities law; and the Company will pay to each such Holder, underwriter or controlling person, as incurred, any legal or other expenses reasonably incurred by them in connection with investigating or defending any such loss, claim, damage, liability, or action; provided, however, that the indemnity agreement contained in this subsection 1.10(a) shall not apply to amounts paid in settlement of any such loss, claim, damage, liability, or action if such settlement is effected without the consent of the Company 8. 11 (which consent shall not be unreasonably withheld), nor shall the Company be liable in any such case for any such loss, claim, damage, liability, or action to the extent that it arises out of or is based upon a Violation which occurs in reliance upon and in conformity with written information furnished expressly for use in connection with such registration by any such Holder, underwriter or controlling person. (b) To the extent permitted by law, each selling Holder will indemnify and hold harmless the Company, each of its directors, each of its officers who has signed the registration statement, each person, if any, who controls the Company within the meaning of the Act, any underwriter, any other Holder selling securities in such registration statement and any controlling person of any such underwriter or other Holder, against any losses, claims, damages, or liabilities (joint or several) to which any of the foregoing persons may become subject, under the Act, or the 1934 Act or other federal or state law, insofar as such losses, claims, damages, or liabilities (or actions in respect thereto) arise out of or are based upon any Violation, in each case to the extent (and only to the extent) that such Violation occurs in reliance upon and in conformity with written information furnished by such Holder expressly for use in connection with such registration; and each such Holder will pay any legal or other expenses reasonably incurred by any person intended to be indemnified pursuant to this subsection 1.10(b), in connection with investigating or defending any such loss, claim, damage, liability, or action; provided, however, that the indemnity agreement contained in this subsection 1.10(b) shall not apply to amounts paid in settlement of any such loss, claim, damage, liability or action if such settlement is effected without the consent of the Holder, which consent shall not be unreasonably withheld; provided, that, in no event shall any indemnity under this subsection 1.10(b) exceed the gross proceeds from the offering received by such Holder. (c) The foregoing indemnity agreements of the Company and Holders are subject to the condition that, insofar as they relate to any Violation made in a preliminary prospectus but eliminated or remedied in the amended prospectus on file with the SEC at the time the registration statement in question becomes effective or the amended prospectus filed with the SEC pursuant to SEC Rule 424(b) (the "Final Prospectus"), such indemnity agreement shall not inure to the benefit of any indemnified party if a copy of the Final Prospectus was furnished to such indemnified party and was not furnished to the person asserting the loss, liability, claim or damage at or prior to the time such Final Prospectus is required to be delivered under the Securities Act if such loss, claim or damage would have been avoided had the indemnified party furnished the Final Prospectus to such person. (d) Promptly after receipt by an indemnified party under this Section 1.10 of notice of the commencement of any action (including any governmental action), such indemnified party will, if a claim in respect thereof is to be made against any 9. 12 indemnifying party under this Section 1.10, deliver to the indemnifying party a written notice of the commencement thereof and the indemnifying party shall have the right to participate in, and, to the extent the indemnifying party so desires, jointly with any other indemnifying party similarly noticed, to assume the defense thereof with counsel mutually satisfactory to the parties; provided, however, that an indemnified party (together with all other indemnified parties which may be represented without conflict by one counsel) shall have the right to retain one separate counsel, with the fees and expenses to be paid by the indemnifying party, if representation of such indemnified party by the counsel retained by the indemnifying party would be inappropriate due to actual or potential differing interests between such indemnified party and any other party represented by such counsel in such proceeding. The failure to deliver written notice to the indemnifying party within a reasonable time of the commencement of any such action, if prejudicial to its ability to defend such action, shall relieve such indemnifying party of any liability to the indemnified party under this Section 1.10, but the omission so to deliver written notice to the indemnifying party will not relieve it of any liability that it may have to any indemnified party otherwise than under this Section 1.10. (e) If the indemnification provided for in this Section 1.10 is held by a court of competent jurisdiction to be unavailable to an indemnified party with respect to any loss, liability, claim, damage, or expense referred to therein, then the indemnifying party, in lieu of indemnifying such indemnified party hereunder, shall contribute to the amount paid or payable by such indemnified party as a result of such loss, liability, claim, damage, or expense in such proportion as is appropriate to reflect the relative fault of the indemnifying party on the one hand and of the indemnified party on the other in connection with the statements or omissions that resulted in such loss, liability, claim, damage, or expense as well as any other relevant equitable considerations. The relative fault of the indemnifying party and of the indemnified party shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission to state a material fact relates to information supplied by the indemnifying party or by the indemnified party and the parties' relative intent, knowledge, access to information, and opportunity to correct or prevent such statement or omission. (f) Notwithstanding the foregoing, to the extent that the provisions on indemnification and contribution contained in the underwriting agreement entered into in connection with the underwritten public offering are in conflict with the foregoing provisions, the provisions in the underwriting agreement shall control. (g) The obligations of the Company and Holders under this Section 1.10 shall survive the completion of any offering of Registrable Securities in a registration statement under this Section 1, and otherwise. 10. 13 1.11 REPORTS UNDER SECURITIES EXCHANGE ACT OF 1934. With a view to making available to the Holders the benefits of Rule 144 promulgated under the Act and any other rule or regulation of the SEC that may at any time permit a Holder to sell securities of the Company to the public without registration or pursuant to a registration on Form S-3, the Company agrees to: (a) make and keep public information available, as those terms are understood and defined in SEC Rule 144, at all times after ninety (90) days after the effective date of the first registration statement filed by the Company for the offering of its securities to the general public; (b) take such action, including the voluntary registration of its Common Stock under Section 12 of the 1934 Act, as is necessary to enable the Holders to utilize Form S-3 for the sale of their Registrable Securities, such action to be taken as soon as practicable after the end of the fiscal year in which the first registration statement filed by the Company for the offering of its securities to the general public is declared effective; (c) file with the SEC in a timely manner all reports and other documents required of the Company under the Act and the 1934 Act; and (d) furnish to any Holder, so long as the Holder owns any Registrable Securities, forthwith upon request (i) a written statement by the Company that it has complied with the reporting requirements of SEC Rule 144 (at any time after ninety (90) days after the effective date of the first registration statement filed by the Company), the Act and the 1934 Act (at any time after it has become subject to such reporting requirements), or that it qualifies as a registrant whose securities may be resold pursuant to Form S-3 (at any time after it so qualifies), (ii) a copy of the most recent annual or quarterly report of the Company and such other reports and documents so filed by the Company, and (iii) such other information as may be reasonably requested in availing any Holder of any rule or regulation of the SEC which permits the selling of any such securities without registration or pursuant to such form. 1.12 FORM S-3 REGISTRATION. In case the Company shall receive (a) from any Holder or Holders of Registrable Securities at any time after the date two (2) years after the effective date of the first registration statement for a public offering of securities of the Company (other than a registration statement relating either to the sale of securities to employees of the Company pursuant to a stock option, stock purchase or similar plan or a SEC Rule 145 transaction) a written request or requests that the Company effect a registration on Form S-3 and any related qualification or compliance with respect to all or a part of the Registrable Securities owned by such Holder or Holders, the Company will: 11. 14 (a) promptly give written notice of the proposed registration, and any related qualification or compliance, to all other Holders; and (b) as soon as practicable, effect such registration and all such qualifications and compliances as may be so requested and as would permit or facilitate the sale and distribution of all or such portion of such Holder's or Holders' Registrable Securities as are specified in such request, together with all or such portion of the Registrable Securities of any other Holder or Holders joining in such request as are specified in a written request given within 15 days after receipt of such written notice from the Company; provided, however, that the Company shall not be obligated to effect any such registration, qualification or compliance, pursuant to this section 1.12: (1) if Form S-3 is not available for such offering by the Holders; (2) if the Holders, together with the holders of any other securities of the Company entitled to inclusion in such registration, propose to sell Registrable Securities and such other securities (if any) at an aggregate price to the public (net of any underwriters' discounts or commissions) of less than $500,000; (3) if the Company shall furnish to the Holders a certificate signed by the President of the Company stating that in the good faith judgment of the Board of Directors of the Company, it would be seriously detrimental to the Company and its shareholders for such Form S-3 Registration to be effected at such time, in which event the Company shall have the right to defer the filing of the Form S-3 registration statement for a period of not more than 60 days after receipt of the request of the Holder or Holders under this Section 1.12; provided, however, that the Company shall not utilize this right more than once in any twelve month period; (4) if the Company has, within the twelve (12) month period preceding the date of such request, already effected a registration on Form S-3 for the Holders pursuant to this Section 1.12; or (5) in any particular jurisdiction in which the Company would be required to qualify to do business or to execute a general consent to service of process in effecting such registration, qualification or compliance unless the Company is already subject to service in such jurisdiction and except as may be required under the Act. (c) Subject to the foregoing, the Company shall file a registration statement covering the Registrable Securities and other securities so requested to be registered as soon as practicable after receipt of the request or requests of the Holders. All expenses incurred in connection with a registration requested pursuant to Section 1.12, including (without limitation) all registration, filing, qualification, printer's and accounting fees and the reasonable fees and disbursements of one counsel for the selling Holder or Holders and counsel for the Company, but excluding any underwriters' discounts or commissions associated with Registrable Securities, shall be borne by the Company. Registrations effected pursuant to this Section 1.12 shall not be counted as demands for registration or registrations effected pursuant to Sections 1.2 or 1.3, respectively. 12. 15 1.13 ASSIGNMENT OF REGISTRATION RIGHTS. The rights to cause the Company to register Registrable Securities pursuant to this Section 1 may be assigned (but only with all related obligations) by a Holder to a transferee or assignee of such securities who, after such assignment or transfer, holds at least twenty percent (20%) of the shares of Registrable Securities originally purchased by such Holder (subject to appropriate adjustment for stock splits, stock dividends, combinations and other recapitalizations), provided the Company is, within a reasonable time after such transfer, furnished with written notice of the name and address of such transferee or assignee and the securities with respect to which such registration rights are being assigned; and provided, further, that such assignment shall be effective only if immediately following such transfer the further disposition of such securities by the transferee or assignee is restricted under the Act. For the purposes of determining the number of shares of Registrable Securities held by a transferee or assignee, the holdings of transferees and assignees of a partnership or limited liability company who are partners, retired partners or members of such partnership or limited liability company (including spouses and ancestors, lineal descendants and siblings of such partners or members or spouses who acquire Registrable Securities by gift, will or intestate succession) shall be aggregated together and with the partnership or limited liability company; provided that all assignees and transferees who would not qualify individually for assignment of registration rights shall have a single attorney-in-fact for the purpose of exercising any rights, receiving notices or taking any action under this Section 1. 1.14 LIMITATIONS ON SUBSEQUENT REGISTRATION RIGHTS. From and after the date of this Agreement, the Company shall not, without the prior written consent of the Holders of a majority of the outstanding Registrable Securities, enter into any agreement with any holder or prospective holder of any securities of the Company which would allow such holder or prospective holder (a) to include such securities in any registration filed under Section 1.2, 1.3 or 1.12 hereof, unless under the terms of such agreement, such holder or prospective holder may include such securities in any such registration only to the extent that the inclusion of his securities will not reduce the amount of the Registrable Securities of the Holders which is included or (b) to make a demand registration which could result in such registration statement being declared effective prior to the earlier of either of the dates set forth in subsection 1.2(a) or within one hundred eighty (180) days of the effective date of any registration effected pursuant to Section 1.2. 1.15 "MARKET STAND-OFF" AGREEMENT. Each Investor hereby agrees that, during the period of duration specified by the Company and an underwriter of common stock or other securities of the Company (not to exceed 180 days), following the effective date of a registration statement of the Company filed under the Act, it shall not, to the extent requested by the Company and such underwriter, directly or indirectly sell, offer to sell, contract to sell (including, without limitation, any short sale), grant any option to 13. 16 purchase or otherwise transfer or dispose of (other than to donees who agree to be similarly bound) any securities of the Company held by it at any time during such period except common stock included in such registration; provided, however, that: (a) such agreement shall be applicable only to the first such registration statement of the Company which covers common stock (or other securities) to be sold on its behalf to the public in an underwritten offering; and (b) all officers and directors of the Company and all other persons with registration rights (whether or not pursuant to this Agreement) enter into similar agreements. In order to enforce the foregoing covenant, the Company may impose stop-transfer instructions with respect to the Registrable Securities of each Investor (and the shares or securities of every other person subject to the foregoing restriction) until the end of such period. 1.16 TERMINATION OF REGISTRATION RIGHTS. No Holder shall be entitled to exercise any right provided for in this Section 1 (i) after seven (7) years following the consummation of the sale of securities pursuant to a registration statement filed by the Company under the Act in connection with the initial firm commitment underwritten offering of its securities to the general public, or (ii) on the closing of the first Company-initiated registered public offering of Common Stock of the Company if all shares of Registrable Securities held or entitled to be held upon conversion by such Holder may immediately be sold under Rule 144 during any 90-day period, or on such date after the closing of the first Company-initiated registered public offering of Common Stock of the Company as all shares of Registrable Securities held or entitled to be held upon conversion by such Holder may immediately be sold under Rule 144 during any 90-day period. 14. 17 2. COVENANTS OF THE COMPANY. 2.1 DELIVERY OF FINANCIAL STATEMENTS. The Company shall deliver to each Investor as soon as practicable, but in any event within ninety (90) days after the end of each fiscal year of the Company, an income statement for such fiscal year, a balance sheet of the Company and statement of shareholder's equity as of the end of such year, and a schedule as to the sources and applications of funds for such year, such year-end financial reports to be in reasonable detail, prepared in accordance with U.S. generally accepted accounting principles ("GAAP"), and audited and certified by independent public accountants of nationally recognized standing selected by the Company. In addition, the Company shall promptly deliver to each Investor each Board of Directors' approved financial plan for the next fiscal year, including delivery of all modifications, revisions or financial plans subsequently approved by the Board of Directors. 2.2 INSPECTION. The Company shall permit each Investor, at such Investor's expense, to visit and inspect the Company's properties, to examine its books and records and to discuss the Company's affairs, finances and accounts with its officers, all at such reasonable times as may be requested by such Investor. 2.3 RIGHT OF FIRST OFFER. Subject to the terms and conditions specified in this paragraph 2.3, the Company hereby grants to each Major Investor (as hereinafter defined) a right of first offer with respect to future sales by the Company of its Shares (as hereinafter defined). For purposes of this Section 2.3, a Major Investor shall mean any Investor who holds not less than 100,000 shares of Series A, Series B, Series C or Series E Preferred Stock in the aggregate. For purposes of this Section 2.3, Investor includes any general partners and affiliates of an Investor. An Investor shall be entitled to apportion the right of first offer hereby granted it among itself and its partners and affiliates in such proportions as it deems appropriate. Each time the Company proposes to sell any shares of, or securities convertible into or exercisable for any shares of, any class of its capital stock ("Shares"), the Company shall first make an offering of such Shares to each Major Investor in accordance with the following provisions: (a) The Company shall deliver a notice ("Notice") to the Major Investors by certified mail or courier of international reputation stating (i) its bona fide intention to offer such Shares, (ii) the number of such Shares to be offered, and (iii) the price and terms, if any, upon which it proposes to offer such Shares. (b) By written notification received by the Company, within 20 calendar days after giving of the Notice, the Major Investor may elect to purchase or obtain, at the price and on the terms specified in the Notice, up to that portion of such Shares which 15. 18 equals the proportion that the number of shares of common stock issued and held, or issuable upon conversion of the Series A, Series B, Series C and Series E Preferred Stock then held, by such Major Investor bears to the total number of shares of common stock of the Company then outstanding (assuming full conversion and exercise of all convertible or exercisable securities) (the "Pro Rata Share"). The Company shall promptly, in writing, inform each Major Investor which purchases all the shares available to it ("Fully-Exercising Investor") of any other Major Investor's failure to do likewise. During the ten-day period commencing after such information is given, each Fully-Exercising Investor shall be entitled to obtain that portion of the Shares for which Major Investors were entitled to subscribe but which were not subscribed for by the Major Investors which is equal to the proportion that the number of shares of common stock issued and held, or issuable upon conversion of Series A, Series B, Series C and Series E Preferred Stock then held, by such Fully-Exercising Investor bears to the total number of shares of common stock issued and held, or issuable upon conversion of the Series A, Series B, Series C and Series E Preferred Stock then held, by all Fully-Exercising Investors who wish to purchase some of the unsubscribed shares. (c) After giving Notice, the Company may, during the 30-day period following the expiration of the 20-day period provided in subsection 2.3(b) hereof, offer the unsubscribed portion of such Shares (including both those Shares that the Investors were entitled to purchase but chose not to purchase and those Shares that the Investors were not entitled to purchase) to any person or persons at a price not less than, and upon terms no more favorable to the offeree than those specified in the Notice. If the Company does not enter into an agreement for the sale of the Shares within such 30-day period, or if such agreement is not consummated within 60 days of the execution thereof, the right provided hereunder shall be deemed to be revived and such Shares shall not be offered unless first reoffered to the Major Investors in accordance herewith. (d) The right of first offer in this paragraph 2.3 shall not be applicable (i) to the issuance or sale of shares of common stock or preferred stock (or options therefor) to employees, directors or consultants for the primary purpose of soliciting or retaining their services, provided that such issuances or sales are first approved by the Company's Board of Directors, (ii) to or after consummation of a bona fide, firmly underwritten public offering of shares of common stock, registered under the Act pursuant to a registration statement on Form S-1, at an offering price of at least $5.00 per share (appropriately adjusted for any stock split, dividend, combination or other recapitalization) and $15,000,000 in the aggregate, (iii) to the issuance of securities pursuant to the conversion or exercise of convertible or exercisable securities (iv) to the issuance of securities in connection with a stock split, stock dividend or other recapitalization of the Company, (v) to the issuance of securities in connection with a bona fide business acquisition of or by the Company, whether by merger, consolidation, sale of assets, sale or exchange of stock or otherwise, (vi) to the issuance of securities 16. 19 approved by the Company's Board of Directors in connection with a transaction with a corporation or other third party which is not primarily in the business of making equity investments that also involves other strategic elements such as, but not by way of limitation, a joint marketing agreement, a license agreement, or a technology development agreement, (vii) to the issuance of stock, warrants or other securities or rights in connection with equipment leasing or bank financing transactions provided such issuances are for other than primarily equity financing purposes, or (viii) to the issuance of stock, warrants or other securities or rights in connection with a bona fide research and development financing transaction with universities and other research institutions upon the approval of the Board of Directors. 3. MISCELLANEOUS. 3.1 SUCCESSORS AND ASSIGNS. Except as otherwise provided herein, the terms and conditions of this Agreement shall inure to the benefit of and be binding upon the respective successors and assigns of the parties (including transferees of any shares of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock, Series E Preferred Stock or any Common Stock issued upon conversion thereof). Nothing in this Agreement, express or implied, is intended to confer upon any party other than the parties hereto or their respective successors and assigns any rights, remedies, obligations, or liabilities under or by reason of this Agreement, except as expressly provided in this Agreement. 3.2 GOVERNING LAW. This Agreement shall be governed by and construed under the laws of the State of California as applied to agreements among California residents entered into and to be performed entirely within California. 3.3 COUNTERPARTS. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. 3.4 TITLES AND SUBTITLES. The titles and subtitles used in this Agreement are used for convenience only and are not to be considered in construing or interpreting this Agreement. 3.5 NOTICES. Unless otherwise provided, any notice required or permitted under this Agreement shall be given in writing and shall be deemed effectively given upon personal delivery or delivery by courier to the party to be notified or upon deposit with the United States Post Office, by registered or certified mail, postage prepaid and addressed to the party to be notified at the address indicated for such party on Schedule A hereto, or at such other address as such party may designate by ten (10) days' advance written notice to the other parties. 17. 20 3.6 EXPENSES. If any action at law or in equity is necessary to enforce or interpret the terms of this Agreement, the prevailing party shall be entitled to reasonable attorneys' fees, costs and necessary disbursements in addition to any other relief to which such party may be entitled. 3.7 AMENDMENTS AND WAIVERS. Any term of this Agreement may be amended and the observance of any term of this Agreement may be waived (either generally or in a particular instance and either retroactively or prospectively), only with the written consent of the Company and the holders of a majority of the Registrable Securities then outstanding; provided, however, that in no event shall any Investor be treated in any respect which is adverse from the treatment of any other Investor hereunder except with the prior written consent of such Investor. Any amendment or waiver effected in accordance with this paragraph shall be binding upon each holder of any Registrable Securities then outstanding, each future holder of all such Registrable Securities, and the Company. In the event of the exercise of a demand registration right pursuant to Section 1.2 hereof, any amendment of Section 1.15 hereof shall only be effective if approved by a majority of the nonparticipating Holders in such registration. 3.8 SEVERABILITY. If one or more provisions of this Agreement are held to be unenforceable under applicable law, such provision shall be excluded from this Agreement and the balance of the Agreement shall be interpreted as if such provision were so excluded and shall be enforceable in accordance with its terms. 3.9 AGGREGATION OF STOCK. All shares of the Preferred Stock held or acquired by affiliated entities or persons shall be aggregated together for the purpose of determining the availability of any rights under this Agreement. 3.10 TERMINATION OF PRIOR AGREEMENT. The Company, the Existing Investors and Tanabe, are holders of at least a majority of the "Registrable Securities" (as defined in the Prior Agreement), and hereby agree that all rights granted and covenants made under the Prior Agreement are hereby waived, released and terminated in their entirety and shall have no further force or effect whatsoever. The rights and covenants provided herein set forth the sole and entire agreement between the Company and the Investors with respect to the subject matter hereof. 3.11 REGULATED FINANCIAL INSTITUTIONS COMPLIANCE OBLIGATIONS. Nothing contianed in this Agreement shall diminish the continuing obligations of any financial institution to comply with applciable requirements of law that such financial institution maintain responsiblity for the disposition of, and control over, its admitted assets, investments and property, including (without limiting the generality of the foregoing) the provisions of Section 1411(b) of the New York Insurance Law, as amended, and as hereinafter from time to time in effect. 18. 21 IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written. SIGNAL PHARMACEUTICALS, INC. By: ------------------------------------- Alan J. Lewis, President INVESTORS: ARES-SERONO S.A. By: ------------------------------------- Its: ------------------------------------ BIOCENTIVE By: ------------------------------------- Its: ------------------------------------ FINSBURY WORLDWIDE PHARMACEUTICAL TRUST, PLC By: ------------------------------------- Its: ------------------------------------ LOMBARD ODIER IMMUNOLOGY FUND By: ------------------------------------- Its: ------------------------------------ SIGNATURE PAGE TO INVESTORS' RIGHTS AGREEMENT 22 NEUROSCIENCE PARTNERS LIMITED PARTNERSHIP By: ------------------------------------- Its: ------------------------------------ NEW YORK LIFE INSURANCE COMPANY By: ------------------------------------- Its: ------------------------------------ PHARMA/WHEALTH By: ------------------------------------- Its: ------------------------------------ THE HEALTH CARE AND BIOTECHNOLOGY VENTURE FUND By: ------------------------------------- Its: ------------------------------------ BAYVIEW INVESTORS LTD. By: ------------------------------------- Its: ------------------------------------ SIGNATURE PAGE TO INVESTORS' RIGHTS AGREEMENT 23 VENROCK ASSOCIATES By: ------------------------------------- Its: ------------------------------------ VENROCK ASSOCIATES II, L.P. By: ------------------------------------- Its: ------------------------------------ KLEINER PERKINS CAUFIELD & BYERS VI By: ------------------------------------- Its: ------------------------------------ ACCEL INVESTORS `93 L.P. By: ------------------------------------- Its: ------------------------------------ ACCEL IV L.P. By: ------------------------------------- Its: ------------------------------------ ACCEL JAPAN L.P. By: ------------------------------------- Its: ------------------------------------ SIGNATURE PAGE TO INVESTORS' RIGHTS AGREEMENT 24 ACCEL KEIRETSU L.P. By: ------------------------------------- Its: ------------------------------------ ELLMORE C. PATTERSON PARTNERS By: ------------------------------------- Its: ------------------------------------ PROSPER PARTNERS By: ------------------------------------- Its: ------------------------------------ INTERWEST INVESTORS V By: ------------------------------------- Its: ------------------------------------ INTERWEST PARTNERS V By: ------------------------------------- Its: ------------------------------------ OXFORD BIOSCIENCE PARTNERS (ADJUNCT) L.P. By: ------------------------------------- Its: ------------------------------------ SIGNATURE PAGE TO INVESTORS' RIGHTS AGREEMENT 25 OXFORD BIOSCIENCE PARTNERS (BERMUDA) L.P. By: ------------------------------------- Its: ------------------------------------ OXFORD BIOSCIENCE PARTNERS L.P. By: ------------------------------------- Its: ------------------------------------ SECOND VENTURES II, L.P. By: ------------------------------------- Its: ------------------------------------ U.S. VENTURES PARTNERS IV, L.P. By: ------------------------------------- Its: ------------------------------------ USVP ENTREPRENEUR PARTNERS II, L.P. By: ------------------------------------- Its: ------------------------------------ HARRY F. HIXSON, JR. SEPARATE PROPERTY TRUST, DATED DECEMBER 15, 1995 By: ------------------------------------- Its: ------------------------------------ SIGNATURE PAGE TO INVESTORS' RIGHTS AGREEMENT 26 VERTICAL FUND ASSOCIATES, L.P. By: ------------------------------------- Its: ------------------------------------ LEHMAN BROTHERS By: ------------------------------------- Its: ------------------------------------ HAMBRECHT & QUIST By: ------------------------------------- Its: ------------------------------------ ROBERTSON, STEPHENS & COMPANY By: ------------------------------------- Its: ------------------------------------ SIGNATURE PAGE TO INVESTORS' RIGHTS AGREEMENT 27 SCHEDULE A TO THE INVESTORS' RIGHTS AGREEMENT Ares-Serono S.A. c/o Ares Services S.A. Attn: Leon R. Bushara 15bis Chemin des Mines 1202 Geneva Switzerland BioCentive c/o Mesco Ltd. Attn: Joel R. Mesznik 122 East 42nd Street 49th Floor New York, NY 10168 Finsbury Worldwide Pharmaceutical Trust, plc c/o Finsbury Asset Management Attn: Barbara Macaulay Alderman's House Alderman's Walk London EC2M 3XR England Lombard Odier Immunology Fund c/o Lombard Odier & Cie Attn: Mlle. Laurence Mauron 11, rue de la Corraterie 1204 Geneva Switzerland Neuroscience Partners Limited Partnership Attn: Michael Callaghan 100 International Boulevard Etobicoke, Ontario Canada M9W 6J6 A-1. 28 New York Life Insurance Company Attn: Dominique Semon 51 Madison Avenue New York, NY 10010 PHARMA/wHEALTH c/o. Mehta and Isaly Attn: Mr. Samuel D. Isaly 41 Madison Avenue 40th Floor New York, NY 10010 The Health Care and Biotechnology Venture Fund Attn: Micahel Callaghan 100 International Boulevard Etobicoke, Ontario Canada M9W 6J6 Bayview Investors Ltd. c/o Robertson Stephens & Co. Attn: John Coquia 555 California Street Suite 2600 San Francisco, CA 94104 Venrock Associates Venrock Associates II, L.P. Attn: Patrick F. Latterell One Maritime Plaza, Suite 1919 San Francisco, CA 94111 Kleiner Perkins Caufield & Byers VI Attn: Brook H. Byers 2750 Sand Hill Road Menlo Park, CA 94025 Accel Investors `93 L.P. Accel IV L.P. Accel Japan L.P. Accel Keiretsu L.P. Ellmore C. Patterson Partners A-2. 29 Prosper Partners Attn: Luke B. Evnin, Ph.D. One Embarcadero Center, Suite 3820 San Francisco, CA 94111 InterWest Investors V InterWest Partners V Attn: Arnold Oronsky, Ph.D. 3000 Sand Hill Road Building 3, Suite 255 Menlo Park, CA 94025 Oxford Bioscience Partners (Adjunct) L.P. Oxford Bioscience Partners (Bermuda) L.P. Oxford Bioscience Partners L.P. Attn: Edmund M. Olivier 650 Town Center Drive, Suite 810 Costa Mesa, CA 92626 Second Ventures II, L.P. U.S. Venture Partners IV, L.P. USVP Entrepreneur Partners II, L.P. Attn: Philip M. Young 2180 Sand Hill Road, Suite 300 Menlo Park, CA 94025 Harry F. Hixson, Jr. Separate Property Trust, Dated December 15, 1995 Attn: Harry F. Hixson, Ph.D. c/o Neuroscience Biosciences Inc. 3050 Science Park Road San Diego, CA 92121-1102 Vertical Fund Associates, L.P. Attn: John Runnells 18 Bank Street Summit, NJ 07901 Lehman Brothers 3 World Financial Center New York, NY 10285 A-3. 30 Hambrecht & Quist One Bush Street San Francisco, CA 94104 Robertson, Stephens & Company 555 California Street Suite 2600 San Francisco, CA 94104 A-4. 31 SCHEDULE B TO THE INVESTORS' RIGHTS AGREEMENT Accel IV L.P. Accel Investors `93 L.P. Accel Japan L.P. Accel Keiretsu L.P. Carl D. Carman Mark D. Carman Fred H. Gage Trust Harry F. Hixson, Jr. Separate Property Trust, Dated December 15, 1995 Georgiana B. Hixson InterWest Partners V InterWest Investors V Kleiner Perkins Caufield & Byers VI KPCB VI Founders Fund Matthew A. Megaro Oxford Bioscience Partners L.P. Oxford Bioscience Partners (Adjunct) L.P. Oxford Bioscience Partners (Bermuda) Limited Partnership Ellmore C. Patterson Partners Prosper Partners Second Ventures II, L.P. B-1 32 U.S. Venture Partners IV, L.P. USVP Entrepreneur Partners II, L.P. Venrock Associates Venrock Associates II, L.P. Inder Verma Vertical Medical Partners, L.P. B-2 EX-10.14 17 EXHIBIT 10.14 1 EXHIBIT 10.14 SIGNAL PHARMACEUTICALS, INC. AMENDMENT TO AMENDED AND RESTATED INVESTORS' RIGHTS AGREEMENT THIS AMENDMENT TO AMENDED AND RESTATED INVESTORS' RIGHTS AGREEMENT (the "Amendment") is entered into as of November 25, 1997, by and among SIGNAL PHARMACEUTICALS, INC., a California corporation (the "Company"), and the undersigned parties (the "Investors") to that certain Amended and Restated Investors' Rights Agreement dated as of September 9, 1997 (the "Agreement") in connection with that certain Series F Preferred Stock Purchase Agreement of even date herewith (the "Stock Purchase Agreement") providing for the issuance and sale of 2,722,513 shares of Series F Preferred Stock to Ares-Serono S.A. (the "Financing"). Capitalized terms contained herein shall have the meanings set forth in the Agreement. WHEREAS, the Company and the Investors desire to amend the Agreement as set forth below; and WHEREAS, the execution of this Amendment by the parties is a condition to the Financing as set forth in Section 5.7 of the Stock Purchase Agreement. NOW, THEREFORE, in consideration of the foregoing premises and the mutual promises set forth below, and for other good and valuable consideration, the receipt of which is hereby acknowledged, the parties to this Amendment agree as follows: 1. The definition of "Investor Registrable Securities" set forth in Section 1.1(d) of the Agreement is hereby amended to read in its entirety as follows: The term "Investor Registrable Securities" means (1) the Common Stock issuable or issued upon conversion of any Series A Preferred Stock, (2) the Common Stock issuable or issued upon conversion of any Series B Preferred Stock, (3) the Common Stock issuable or issued upon conversion of any Series C Preferred Stock, (4) the Common Stock issuable or issued upon conversion of any Series E Preferred Stock, (5) the Common Stock issuable or issued upon conversion of any Series F Preferred Stock, and (6) any Common Stock of the Company issued as (or issuable upon the conversion or exercise of any warrant, right or other security which is issued as) a dividend or other distribution with respect to, or in exchange for or in replacement of, such Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series E Preferred Stock, Series F Preferred Stock or Common Stock issuable or issued upon conversion 1. 2 thereof, excluding in all cases, however, any Investor Registrable Securities sold by a person in a transaction in which his rights under this Section 1 are not assigned. 2. The first paragraph of Section 2.3 of the Agreement is hereby amended to read in its entirety as follows: 2.3 RIGHT OF FIRST OFFER. Subject to the terms and conditions specified in this paragraph 2.3, the Company hereby grants to each Major Investor (as hereinafter defined) a right of first offer with respect to future sales by the Company of its Shares (as hereinafter defined). For purposes of this Section 2.3, a Major Investor shall mean any Investor who holds not less than 100,000 shares of Series A, Series B, Series C, Series E or Series F Preferred Stock in the aggregate. For purposes of this Section 2.3, Investor includes any general partners and affiliates of an Investor. An Investor shall be entitled to apportion the right of first offer hereby granted it among itself and its partners and affiliates in such proportions as it deems appropriate. 3. Section 2.3(b) of the Agreement is hereby amended to read in its entirety as follows: (b) By written notification received by the Company, within 20 calendar days after giving of the Notice, the Major Investor may elect to purchase or obtain, at the price and on the terms specified in the Notice, up to that portion of such Shares which equals the proportion that the number of shares of common stock issued and held, or issuable upon conversion of the Series A, Series B, Series C, Series E and Series F Preferred Stock then held, by such Major Investor bears to the total number of shares of common stock of the Company then outstanding (assuming full conversion and exercise of all convertible or exercisable securities) (the "Pro Rata Share"). The Company shall promptly, in writing, inform each Major Investor which purchases all the shares available to it ("Fully-Exercising Investor") of any other Major Investor's failure to do likewise. During the ten-day period commencing after such information is given, each Fully-Exercising Investor shall be entitled to obtain that portion of the Shares for which Major Investors were entitled to subscribe but which were not subscribed for by the Major Investors which is equal to the proportion that the number of shares of common stock issued and held, or issuable upon conversion of Series A, Series B, Series C, Series E and Series F Preferred Stock then held, by such Fully-Exercising Investor bears to the total number of shares of common stock issued and held, or issuable upon conversion of the Series A, Series B, Series C, Series E and Series F Preferred Stock then held, by all Fully-Exercising Investors who wish to purchase some of the unsubscribed shares. 2. 3 4. Section 3.1 of the Agreement is hereby amended to read in its entirety as follows: 3.1 SUCCESSORS AND ASSIGNS. Except as otherwise provided herein, the terms and conditions of this Agreement shall inure to the benefit of and be binding upon the respective successors and assigns of the parties (including transferees of any shares of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock, Series E Preferred Stock, Series F Preferred Stock or any Common Stock issued upon conversion thereof). Nothing in this Agreement, express or implied, is intended to confer upon any party other than the parties hereto or their respective successors and assigns any rights, remedies, obligations, or liabilities under or by reason of this Agreement, except as expressly provided in this Agreement. 5. This Amendment shall be deemed an amendment to the Agreement and shall become effective when executed by the Company and the holders of at least a majority of the outstanding shares of Registrable Securities as provided for under Section 3.7 of the Agreement. Except as expressly amended pursuant to this Amendment, the Agreement shall continue in full force and effect. 6. This Amendment shall be governed by the laws of the State of California as applicable to contracts entered into and performed entirely within the State of California by residents of California. 7. This Amendment may be executed in counterparts, each of which shall be enforceable against the party actually executing such counterpart, and which together shall constitute one instrument. [The remainder of this page is intentionally left blank] 3. 4 IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written. COMPANY: SIGNAL PHARMACEUTICALS, INC. By: ------------------------------------ Alan J. Lewis, President and Chief Executive Officer INVESTORS: ARES-SERONO S.A. By: ----------------------------------- Its: ----------------------------------- BIOCENTIVE By: ----------------------------------- Its: ----------------------------------- FINSBURY WORLDWIDE PHARMACEUTICAL TRUST, PLC By: ----------------------------------- Its: ----------------------------------- 5 LOMBARD ODIER IMMUNOLOGY FUND By: ----------------------------------- Its: ----------------------------------- NEUROSCIENCE PARTNERS LIMITED PARTNERSHIP By: ----------------------------------- Its: ----------------------------------- NEW YORK LIFE INSURANCE COMPANY By: ----------------------------------- Its: ----------------------------------- PHARMA/WHEALTH By: ----------------------------------- Its: ----------------------------------- THE HEALTH CARE AND BIOTECHNOLOGY VENTURE FUND By: ----------------------------------- Its: ----------------------------------- 6 BAYVIEW INVESTORS LTD. By: ----------------------------------- Its: ----------------------------------- VENROCK ASSOCIATES By: ----------------------------------- Its: ----------------------------------- VENROCK ASSOCIATES II, L.P. By: ----------------------------------- Its: ----------------------------------- KLEINER PERKINS CAUFIELD & BYERS VI By: ----------------------------------- Its: ----------------------------------- ACCEL INVESTORS `93 L.P. By: ----------------------------------- Its: ----------------------------------- ACCEL IV L.P. By: ----------------------------------- Its: ----------------------------------- Signature Page to Amendment to Amended and Restated Investors' Rights Agreement 7 ACCEL JAPAN L.P. By: ----------------------------------- Its: ----------------------------------- ACCEL KEIRETSU L.P. By: ----------------------------------- Its: ----------------------------------- ELLMORE C. PATTERSON PARTNERS By: ----------------------------------- Its: ----------------------------------- PROSPER PARTNERS By: ----------------------------------- Its: ----------------------------------- INTERWEST INVESTORS V By: ----------------------------------- Its: ----------------------------------- INTERWEST PARTNERS V By: ----------------------------------- Its: ----------------------------------- Signature Page to Amendment to Amended and Restated Investors' Rights Agreement 8 OXFORD BIOSCIENCE PARTNERS (ADJUNCT) L.P. By: ----------------------------------- Its: ----------------------------------- OXFORD BIOSCIENCE PARTNERS (BERMUDA) L.P. By: ----------------------------------- Its: ----------------------------------- OXFORD BIOSCIENCE PARTNERS L.P. By: ----------------------------------- Its: ----------------------------------- SECOND VENTURES II, L.P. By: ----------------------------------- Its: ----------------------------------- U.S. VENTURES PARTNERS IV, L.P. By: ----------------------------------- Its: ----------------------------------- USVP ENTREPRENEUR PARTNERS II, L.P. By: ----------------------------------- Its: ----------------------------------- Signature Page to Amendment to Amended and Restated Investors' Rights Agreement 9 HARRY F. HIXSON, JR. SEPARATE PROPERTY TRUST, DATED DECEMBER 15, 1995 By: ----------------------------------- Its: ----------------------------------- VERTICAL FUND ASSOCIATES, L.P. By: ----------------------------------- Its: ----------------------------------- LEHMAN BROTHERS By: ----------------------------------- Its: ----------------------------------- HAMBRECHT & QUIST By: ----------------------------------- Its: ----------------------------------- ROBERTSON, STEPHENS & COMPANY By: ----------------------------------- Its: ----------------------------------- Signature Page to Amendment to Amended and Restated Investors' Rights Agreement 10 HARRY F. HIXSON FAMILY TRUST, DATED 8/25/86 By: ----------------------------------- Its: ----------------------------------- GEORGIANA B. HIXSON ---------------------------------------- TANABE SEIYAKU CO., LTD. By: ----------------------------------- Its: ----------------------------------- VERTICAL MEDICAL PARTNERS L.P. By: ----------------------------------- Its: ----------------------------------- Signature Page to Amendment to Amended and Restated Investors' Rights Agreement EX-10.15 18 EXHIBIT 10.15 1 EXHIBIT 10.15 LOAN AND SECURITY AGREEMENT Agreement No. 30433 Dated as of November 22, 1996 between MMC/GATX PARTNERSHIP NO. I Four Embarcadero Center Suite 2200 San Francisco, CA 94111 as Lender and SIGNAL PHARMACEUTICALS, INC. a California corporation 5555 Oberlin Drive San Diego, California 92121 as Borrower CREDIT AMOUNT: $3,000,000 Treasury Note Maturity: 42 months Loan Margin: 777 basis points Commitment Termination Date: November 30, 1996 The defined terms and information set forth on this cover page are a part of the LOAN AND SECURITY AGREEMENT, dated as of the date first written above (this "Agreement"), entered into by and between MMC/GATX PARTNERSHIP NO. I ("Lender") and the borrower ("Borrower") set forth above. The terms and conditions of this Agreement agreed to between Lender and Borrower are as follows: 2 ARTICLE I INTERPRETATION 1.01. Certain Definitions. Unless otherwise indicated in this Agreement or any other Operative Document, the following terms, when used in this Agreement or any other Operative Document, shall have the following respective meanings: "Borrower's Home State" shall mean the state in which Borrower's principal place of business is located. "Business Day" shall mean any day other than a Saturday, Sunday or public holiday under the laws of California, Illinois or Borrower's Home State or other day on which banking institutions are authorized or obligated to close in California, Illinois or Borrower's Home State. "Claim" has the meaning given to that term in Section 10.03. "Collateral" has the meaning given to that term in Section 5.01. "Commitment Fee" has the meaning given to that term in Section 2.04. "Commitment Termination Date" shall mean the date specified on the cover page of this Agreement. "Credit Amount" shall mean the maximum amount that Lender is committed to lend (if the conditions specified in Schedule 3 are satisfied), which amount is set forth following such term on the cover page of this Agreement. "Current Assets" shall mean the aggregate amount of all of the consolidated assets of Borrower and its Subsidiaries that would, in accordance with GAAP, be classified on a balance sheet as current assets. "Current Liabilities" shall mean the aggregate amount of all of the consolidated liabilities of Borrower and its Subsidiaries that would, in accordance with GAAP, be classified on a balance sheet as current liabilities. "Default" shall mean any event which with the passing of time or the giving of notice or both would become an Event of Default hereunder. "Default Rate" shall mean the per annum rate of interest equal to the Loan Rate plus 6%, but such rate shall in no event be more than the highest rate permitted by applicable law. "Disclosure Schedule" has the meaning set forth in the definition of the term "Permitted Liens." "Environmental Law" shall mean the Resource Conservation and Recovery Act of 1987, the Comprehensive Environmental Response, Compensation and Liability Act, and any other federal, state or local statute, law, ordinance, code, rule, regulation, order or decree (in each case having the force of law) regulating or imposing liability or standards of conduct concerning any Hazardous Material, as now or at any time hereafter in effect. "Equity Securities" of any Person shall mean (a) all common stock, preferred stock, participations, shares, partnership interests or other equity interests in and of such Person (regardless of how designated and whether or not voting or non-voting) and (b) all warrants, options and other rights to acquire any of the foregoing. 1 3 "Event of Default" has the meaning given to that term in Section 9.01. "Funding Date" shall mean the date on which the Loan is made to or on account of Borrower under this Agreement. "GAAP" shall mean generally accepted accounting principles and practices as in effect in the United States of America from time to time, consistently applied. "Hazardous Material" means any hazardous, dangerous or toxic constituent material, pollutant, waste or other substance, whether solid, liquid or gaseous, which is regulated by any federal, state or local governmental authority. "Indebtedness" shall mean, with respect to Borrower or any Subsidiary, the aggregate amount of, without duplication, (a) all obligations of such Person for borrowed money, (b) all obligations of such Person evidenced by bonds, debentures, notes or other similar instruments, (c) all obligations of such Person to pay the deferred purchase price of property or services (excluding trade payables aged less than 180 days), (d) all capital lease obligations of such Person, (e) all obligations or liabilities of others secured by a lien on any asset of such Person, whether or not such obligation or liability is assumed, (f) all obligations or liabilities of others guaranteed by such Person; and (g) any other obligations or liabilities which are required by GAAP to be shown as debt on the balance sheet of such Person. Unless otherwise indicated, the term "Indebtedness" shall include all Indebtedness of Borrower and the Subsidiaries. "Intellectual Property" shall mean all of Borrower's right, title and interest in and to patents, patent rights (and applications therefor), trademarks and service marks (and applications and registrations therefor), inventions, copyrights, mask works (and applications and registrations therefor), trade names, trade styles, software and computer programs, trade secrets, methods, processes, know how, drawings, specifications, descriptions, and all assays, compounds, cell lines, media, plasmids, gene sequences, proteins, vectors, other biological or chemical material to the extent the same are proprietary to Borrower, and all memoranda, notes, and records with respect to any research and development, all whether now owned or subsequently acquired or developed by Borrower and whether in tangible or intangible form or contained on magnetic media readable by machine together with all such magnetic media. The term "Intellectual Property" shall not include the proceeds of Intellectual Property except to the extent such proceeds constitute intellectual property. "Investment" of any Person shall mean any loan or advance of funds by such Person to any other Person (other than advances to employees of such Person for moving and travel expense, drawing accounts and similar expenditures in the ordinary course of business), any purchase or other acquisition of any Equity Securities or Indebtedness of any other Person, any capital contribution by such Person to or any other investment by such Person in any other Person (including, without limitation, any Indebtedness incurred by such Person of the type described in clauses (a) and (b) of the definition of "Indebtedness" on behalf of any other Person); provided, however, that Investments shall not include accounts receivable or other indebtedness owed by customers of such Person which are current assets and arose from sales or non-exclusive licensing (or exclusive licensing within a particular field) in the ordinary course of such Person's business. "Landlord Consent" shall mean a consent in the form of Exhibit C or such other form as Lender may agree to accept. "Lien" shall mean any pledge, bailment, lease, mortgage, hypothecation, conditional sales and title retention agreements, charge, claim, encumbrance or other lien in favor of any Person. 2 4 "Loan" shall mean the loan advanced by Lender to Borrower under this Agreement. "Loan Margin" shall mean the number of basis points set forth following such term on the cover page of this Agreement. "Loan Rate" shall mean, with respect to the Loan, the per annum rate of interest (based on a year of 360 days and actual days elapsed) equal to the sum of (a) the U.S. Treasury note rate of a term equal to the Treasury Note Maturity as quoted in The Wall Street Journal on the date two (2) Business Days prior to the requested Funding Date of the Loan plus (b) the Loan Margin. "Make-Whole Premium" shall mean an amount equal to the greater of (i) zero and (ii) the excess of (x) the sum of the present values, at the date of prepayment of the amount of each remaining scheduled payment of interest on and principal on the Loan, or portion of such payment, which will not be required to be made as a result of such prepayment (each such payment an "Amount Payable") (each such Amount Payable discounted separately at the Treasury Rate plus 100 basis points, determined on the date three (3) Business Days before the date of prepayment, compounded monthly, from the date such Amount Payable would be due), over (y) the principal amount of the Loan to be prepaid. The "Treasury Rate" shall be the yield (as quoted in the "Money Rates" column of The Wall Street Journal on the date which is three (3) Business Days prior to the date of prepayment) on U.S. Treasury securities adjusted to a constant maturity equal to the then remaining number of full months to maturity of the Note. "Note"shall mean the secured promissory note of Borrower substantially in the form of Exhibit A. "Obligations" has the meaning given to that term in Section 5.01. "Operative Documents" shall mean this Agreement, the Note, the Landlord Waiver and Consent(s) and all other documents, instruments and agreements executed and delivered in connection herewith or therewith or in respect of the closing of the transactions contemplated hereby or thereby, excluding the warrant. "Payment Date" means the last day of each calendar month. "Permitted Indebtedness" shall mean and include: (a) Indebtedness of Borrower to Lender; (b) Indebtedness of Borrower secured by Liens described in clause (d) of the definition of Permitted Liens; (c) Indebtedness of Borrower to Subordinated Lenders; (d) Indebtedness arising from the endorsement of instruments in the ordinary course of business; II. Indebtedness existing on the date of this Agreement and disclosed in Borrower's financial statements dated as of September 30, 1996 or on the disclosure schedule attached hereto as Schedule 2 ("Disclosure Schedule"); (f) Indebtedness consisting of bridge loans from borrower's shareholders which are convertible into equity securities upon the closing of the next equity financing or which are to be repaid upon the closing of such equity offering; 3 5 (g) Other Indebtedness of Borrower not exceeding Two Hundred Fifty Thousand Dollars ($250,000) at any time; (h) Extensions, renewals, refinancings, modifications, amendments and restatements of any of the foregoing; provided, that the amount thereof is not increased or the terms thereof are not modified to impose more burdensome terms on the Borrower. "Permitted Investments" shall mean and include: (a) Deposits with commercial banks organized under the laws of the United States or a state thereof to the extent such deposits are fully insured by the Federal Deposit Insurance Corporation; (b) Investments in marketable obligations issued or fully guaranteed by the United States and maturing not more than thirteen (13) months from the date of issuance; and (c) Investments in open market commercial paper rated at least "A1" or "P1" or higher by a national credit rating agency and maturing not more than one (1) year from the creation thereof. (d) Investments pursuant to or arising under currency agreements or interest rate agreements entered into in the ordinary course of business; (e) Investments consisting of deposit accounts of Borrower in which Lender has a perfected security interest; (f) Investments permitted by Borrower's written and then current investment policy, as amended from time to time and approved by Borrower's Board of Directors; provided, that such investment policy and any amendments thereto from time to time have been approved in writing by Lender; (g) Investments existing on the date of this Agreement disclosed on the Schedule; (h) Investments (including debt obligations) received in connection with the bankruptcy or reorganization of customers or suppliers, in each case, if created, acquired or made in the ordinary course of business; (i) Investments consisting of notes receivable of, or prepaid royalties and other credit extensions to customers and suppliers in the ordinary course of business; (j) Other Investments aggregating not in excess of Two Hundred Fifty Thousand Dollars ($250,000) at any time; and (k) Investments consisting of (i) employee relocation loans and other employee loans not for ordinary business purposes, and (ii) loans to employees, officers or directors relating to the purchase of Equity Securities of Borrower, all of which loans described in clauses (i) and (ii) shall not exceed $250,000 in the aggregate (but excluding the relocation loan to Allen Lewis in such calculation). "Permitted Liens" shall mean (a) the Lien created by this Agreement, (b) Liens for fees, taxes, levies, imposts, duties or other governmental charges of any kind which are not yet delinquent or which are being contested in good 4 6 faith by appropriate proceedings which suspend the collection thereof (provided, however, that such proceedings do not involve any substantial danger of the sale, forfeiture or loss of any material portion of the Collateral subject to the Lien hereof and that Borrower has adequately bonded such Lien or reserves sufficient to discharge such Lien have been provided on the books of Borrower), (c) Liens identified on Borrower's financial statements dated as of September 30, 1996 or in the Disclosure Schedule, (d) Liens upon any equipment or other personal property acquired by Borrower to secure (i) the purchase price of such equipment or other personal property or (ii) lease obligations or indebtedness incurred solely for the purpose of financing the acquisition of such equipment or other personal property; provided that (A) such Liens are confined solely to the equipment or other personal property so acquired, and (B) no such Lien shall be created, incurred, assumed or suffered to exist in favor of Borrower's officers, directors or shareholders holding five percent (5%) or more of Borrower's Equity Securities unless such Lien is created, incurred, assumed or suffered to exist on terms no less favorable to Borrower than those available from third parties in arms-length transactions, (e) Liens on and licenses of Borrower's Intellectual Property in connection with a merger, acquisition, joint venture, business, research or development collaboration or similar agreement, (f) Liens granted to Subordinated Lenders, (g) Liens consisting of leases or subleases and licenses and sublicenses granted to others in the ordinary course of Borrower's business not interfering in any material respect with the business of Borrower and any interest or title of a lessor or licensor under any lease or license, as applicable, (h) liens securing claims or demands of materialmen, mechanics, carriers, warehousemen, landlords and other like persons or entities imposed without action of such parties, provided that the payment thereof is not yet required or that Borrower is in good faith contesting such claim or demand, (i) liens incurred or deposits made in the ordinary course of Borrower's business in connection with worker's compensation, unemployment insurance, social security and other like laws, (j) liens arising from judgments, decrees or attachments in circumstances not constituting an Event of Default, (k) liens in favor of customs and revenue authorities arising as a matter of law to secure payment of customs duties in connection with the importation of goods, (l) liens that are not prior to Lender's security interest which constitute rights of set-off of a customary nature; and (m) Liens on Borrower's property or assets created in connection with the refinancing of Indebtedness secured by Permitted Liens on such Property, provided that the amount of Indebtedness secured by any such Lien shall not be increased as a result of such refinancing and no such Lien shall extend to property and assets of Borrower not encumbered prior to any such refinancing. "Person" shall mean and include an individual, a partnership, a corporation, a business trust, a joint stock company, a limited liability company, an unincorporated association or other entity and any domestic or foreign national, state or local government, any political subdivision thereof, and any department, agency, authority or bureau of any of the foregoing. "Prime Rate" shall mean the interest rate per annum publicly announced from time to time by Bank of America NT & SA (or its successor) as its reference rate, but such rate shall in no event be more than the highest interest rate permitted by applicable law. "Subordinated Lenders" shall mean lenders providing subordinated loans to Borrower on terms and conditions (including subordination provisions) reasonably acceptable to Lender. "Subsidiary" shall mean any corporation of which a majority of the outstanding capital stock entitled to vote for the election of directors (otherwise than as the result of a default) is owned by Borrower directly or indirectly through Subsidiaries. "Term" shall mean the period from and after the date hereof until the payment or satisfaction in full of all Obligations under this Agreement and the Note. 5 7 "Treasury Note Maturity" shall mean the period of months set forth following such term on the cover page of this Agreement. "Warrant" shall mean a warrant to purchase securities of Borrower substantially in the form of Exhibit C. 1.02. Headings. Headings in this Agreement and each of the other Operative Documents are for convenience of reference only and are not part of the substance hereof or thereof. 1.03. Plural Terms. All terms defined in this Agreement or any other Operative Document in the singular form shall have comparable meanings when used in the plural form and vice versa. 1.04. Construction. This Agreement is the result of negotiations among, and has been reviewed by, Borrower and Lender and their respective counsel. Accordingly, this Agreement shall be deemed to be the product of all parties hereto, and no ambiguity shall be construed in favor of or against Borrower or Lender. 1.05. Entire Agreement. This Agreement, together with the terms set forth in each of the other Operative Documents, taken together, constitute and, contain the entire agreement of Borrower and Lender and, with regard to their respective subject matters, supersede any and all prior agreements, term sheets, negotiations, correspondence, understandings and communications among the parties, whether written or oral, with respect to their respective subject matters. 1.06. Other Interpretive Provisions. References in this Agreement to "Articles," "Sections," "Exhibits," "Schedules" and "Annexes" are to recitals, articles, sections, exhibits, schedules and annexes herein and hereto unless otherwise indicated. References in this Agreement and each of the other Operative Documents to any document, instrument or agreement shall include (a) all exhibits, schedules, annexes and other attachments thereto, (b) all documents, instruments or agreements issued or executed in replacement thereof, and (c) such document, instrument or agreement, or replacement or predecessor thereto, as amended, modified and supplemented from time to time and in effect at any given time. The words "hereof," "herein" and "hereunder" and words of similar import when used in this Agreement or any other Operative Document shall refer to this Agreement or such other Operative Document, as the case may be, as a whole and not to any particular provision of this Agreement or such other Operative Document, as the case may be. The words "include" and "including" and words of similar import when used in this Agreement or any other Operative Document shall not be construed to be limiting or exclusive. Unless otherwise indicated in this Agreement or any other Operative Document, all accounting terms used in this Agreement or any other Operative Document shall be construed, and all accounting and financial computations hereunder or thereunder shall be computed, in accordance with generally accepted accounting principles as in effect in the United States of America from time to time. ARTICLE II THE CREDIT 2.01. Credit Facility (a) Commitment. On the terms and subject to the conditions hereof and relying upon the representations and warranties herein set forth as and when made or deemed to be made, Lender agrees to make a Loan in the principal amount of Three Million Dollars ($3,000,000). 6 8 (b) Loan Interest Rate. Borrower shall pay interest on the unpaid principal amount of the Loan from the date of the Loan until the Loan is paid in full, at a per annum rate of interest equal to the Loan Rate determined in accordance with the definition of Loan Rate. The Loan Rate applicable to the Loan shall not be subject to change in the absence of manifest error. All computations of interest on the Loan shall be based on a year of 360 days and actual days elapsed. If Borrower pays interest on any Loan which is determined to be in excess of the then legal maximum rate, then that portion of each interest payment representing an amount in excess of the then legal maximum rate shall be deemed a payment of principal and applied against the principal of the Loan. (c) Payments of Principal and Interest. Borrower shall make payments of accrued interest only on the outstanding principal amount of the Loan on each Payment Date through and including May 31, 1997. Thereafter, on each Payment Date, commencing on June 30, 1997, Borrower shall make thirty-five (35) payments of principal equal to $83,333.33 and a final payment of $83,333.45, plus accrued but unpaid interest (at the rate applicable to the Loan) on the unpaid principal balance of the Loan, until the Loan is paid in full. 2.02. Use of Proceeds; the Loan and the Note; Disbursement. (a) Use of Proceeds. The proceeds of the Loan shall be used solely for working capital or general corporate purposes of Borrower including capital investments. (b) The Loan and the Note. The obligation of Borrower to repay the unpaid principal amount of and interest on the Loan shall be evidenced by the Note. Lender may, and is hereby authorized by Borrower to, endorse on a grid annexed to the Note appropriate notations regarding the Loan; provided, however, that the failure to make, or an error in making, any such notation shall not limit or otherwise affect the obligations of Borrower hereunder or under the Note. (c) Disbursement. Subject to the satisfaction of the conditions set forth in this Agreement, Lender shall disburse such Loan by wire transfer to Borrower unless otherwise directed in writing by Borrower. (d) Termination of Commitment to Lend. Notwithstanding anything to the contrary in the Operative Documents, Lender's obligation to lend the undisbursed portion of the Credit Amount to Borrower hereunder shall terminate on the earlier of (i) the occurrence of any Event of Default hereunder which is not cured to Lender's satisfaction prior to the Commitment Termination Date, and (ii) the Commitment Termination Date. (e) Optional Prepayment with Premium. Upon three (3) Business Days' prior written notice to Lender, Borrower may, at its option, at any time, prepay the Loan, either in whole or from time to time in any part of the principal amount thereof equal to $500,000 or more (unless the prepayment consists of the remaining balance o f the Loan), at a prepayment price equal to the principal amount of the Loan so to be prepaid, plus interest accrued thereon through and including the date of such prepayment, plus a premium equal to the Make-Whole Premium. Any prepayment of principal shall be applied pro rata to the scheduled principal payments. 2.03. Other Payment Terms (a) Place and Manner. Borrower shall make all payments due to Lender in lawful money of the United States, in immediately available funds, at the address for payments and in the manner specified in Section 10.05(b). (b) Date. Whenever any payment due hereunder shall fall due on a day other than a Business Day, such payment shall be made on the next succeeding Business Day, and such extension of time shall be included in the computation of interest or fees, as the case may be. (c) Default Rate. If either (i) any amounts required to be paid by Borrower under this Agreement or the Note (including principal or interest payable on any Loan, any fees or other amounts) remain unpaid after such 7 9 amounts are due, or (ii) an Event of Default has occurred and is continuing, Borrower shall pay interest on the outstanding principal balance hereunder from the date due or from the date of the Event of Default, as applicable, until such past due amounts are paid in full or until all Events of Defaults are cured, as applicable, at a per annum rate equal to the Default Rate, such rate to change from time to time as the Prime Rate shall change. All computations of such interest at the Default Rate shall be based on a year of 360 days and actual days elapsed. ARTICLE III REPRESENTATIONS AND WARRANTIES 3.01. Representations and Warrants. Except as set forth in the Disclosure Schedule, Borrower makes the following representations and warranties to Lender as of the date hereof and again on the Funding Date: (a) Organization and Qualification. Borrower is a corporation duly organized, validly existing and in good standing under the laws of its state of incorporation and is duly qualified to do business in Borrower's Home State. Borrower has no Subsidiaries. (b) Authority. Borrower has all necessary corporate power, authority and legal right and has obtained all approvals and consents and has given all notices necessary to execute and deliver this Agreement and the other Operative Documents and to perform the terms hereof and thereof. Borrower has all requisite corporate power and authority to own and operate its properties and to carry on its businesses as now conducted. (c) Conflict with Other Instruments, etc. Neither the execution and delivery of any Operative Document to which Borrower is a party nor the consummation of the transactions therein contemplated nor compliance with the terms, conditions and provisions thereof will conflict with or result in a breach of any of the terms, conditions or provisions of the charter or the bylaws of Borrower or, to its knowledge, any law or any regulation, order, writ, injunction or decree of any court or governmental instrumentality or any material agreement or instrument to which Borrower is a party or by which it or any of its properties is bound or to which it or any of its properties is subject, or constitute a default thereunder or result in the creation or imposition of any Lien, other than Permitted Liens. (d) Title to Properties. Borrower has good and marketable title to the Collateral, free and clear of all Liens, other than Permitted Liens. Borrower has title and ownership of, or is licensed under, all Intellectual Property, with no known infringement of the established rights of others. Borrower has not received any communications alleging that Borrower has violated, or by conducting its business as proposed, would violate any proprietary rights of any other Person. Borrower has no knowledge of any infringement or violation by it of the established intellectual property rights of any third party and, except as set forth on the Disclosure Schedule, has no knowledge of any violation or infringement by a third party of any of its Intellectual Property. The Collateral and the Intellectual Property constitute substantially all of the assets and property of Borrower. Borrower does not own any right, title or interest in or to any real property (except for its interest in tenant improvements and other rights under its real property lease or motor vehicles, other than motor vehicles leased for executives as part of a benefit arrangement. (e) Authorization, Governmental Approvals, etc. The execution and delivery by Borrower of each Operative Document, the granting of the security interest in the Collateral, the issuance of the Warrant, the issuance of the securities into which the Warrant is exercisable, the issuance of any securities into which the securities issuable upon exercise of the Warrant are convertible, and the performance of the obligations herein and therein contemplated have each been duly authorized by all necessary action on the part of Borrower. No authorization, consent, approval, license or exemption of, and no registration, qualification, designation, declaration or filing with, or notice to, any Person is, was or will be necessary to (i) the valid execution and delivery of any Operative Document to which Borrower is a party, (ii) the performance of Borrower's obligations under any Operative Document, or (iii) the 8 10 granting of the security interest in the Collateral, except for filings in connection with the perfection of the security interest in any of the Collateral or the issuance of the Warrant. The Operative Documents have been or will be duly executed and delivered and constitute or will constitute legal, valid and binding obligations of Borrower, enforceable in accordance with their respective terms, except as the enforceability thereof may be limited by bankruptcy, insolvency or other similar laws of general application relating to or affecting the enforcement of creditors' rights or by general principles of equity. (f) Litigation. There are no actions, suits, proceedings or investigations pending or, to the knowledge of Borrower, threatened against or affecting Borrower, or the business or any property or asset owned by it, before any court or governmental department, agency or instrumentality which, if adversely determined, would reasonably be expected to have a material adverse effect on the financial condition, business or operations of Borrower. (g) Disclosure. Neither any Operative Document nor any other agreement, document or certificate furnished by Borrower to Lender, including, without limitation, historical financial statements, contains any untrue statement of a material fact or omits to state a material fact necessary in order to make the statements contained herein and therein not misleading. There is no fact known to Borrower which materially adversely affects, or which would in the future reasonably be expected to materially adversely affect, its ability to perform its obligations under the Operative Documents to which it is a party. (h) Security Interest. Assuming the proper filing of one or more financing statement(s) identifying the Collateral with the proper state and/or local authorities, the security interests in the Collateral granted to Lender pursuant to this Agreement (i) constitute and will continue to constitute first priority security interests (except to the extent any other Permitted Lien may be prior to Lender's Lien under this Agreement) and (ii) are and will continue to be superior and prior to the rights in the Collateral of all other creditors of Borrower (except to the extent of such Permitted Liens). (i) Executive Offices. The principal place of business and chief executive office of Borrower, and the office where Borrower will keep all records and files regarding the Collateral, is set forth on the cover page of this Agreement. ARTICLE IV REPORTING REQUIREMENTS 4.01. Furnishing Reports. Borrower shall furnish to Lender: (a) Financial Statements. So long as Borrower is not subject to the reporting requirements of Section 12 or Section 15 of the Securities and Exchange Act of 1934, as amended, promptly as they are available, unaudited monthly and audited annual financial statements of Borrower and such other financial information as Lender may reasonably request from time to time. From and after such time as Borrower becomes a publicly reporting company, promptly as they are available and in any event: (i) at the time of filing of Borrower's Form 10-K with the Securities and Exchange Commission after the end of each fiscal year of Borrower, the financial statements of Borrower filed with such Form 10-K; and (ii) at the time of filing of Borrower's Form 10-Q with the Securities and Exchange Commission after the end of each of the first three fiscal quarters of Borrower, the financial statements of Borrower filed with such Form 10-Q. (b) Notice of Defaults. As soon as possible, and in any event within five (5) Business Days after the discovery of a Default or Event of Default provide Lender with an Officer's Certificate of Borrower setting forth the facts relating to or giving rise to such Default or Event of Default and the action which Borrower proposes to take with respect thereto. (c) Miscellaneous. Such other information as Lender may reasonably request from time to time. 9 11 ARTICLE V GRANT OF SECURITY INTEREST GENERAL PROVISIONS CONCERNING SECURITY 5.01. Grant of Security Interest. Borrower, in order to secure the payment of the principal and interest with respect to the Loan made pursuant to this Agreement, all other sums due under and in respect hereof and of the Note, including reasonable fees, charges, expenses and attorneys' fees and costs and the performance and observance by Borrower of all other terms, conditions, covenants and agreements herein and in the Note (all such amounts and obligations being herein sometimes called the "Obligations"), does hereby grant to Lender and its successors and assigns a security interest in and to the following property (collectively, the "Collateral"): All right, title, interest, claims and demands of Borrower in and to: (a) All goods and equipment now owned or hereafter acquired, including, without limitation, all laboratory equipment, computer equipment, office equipment, machinery, fixtures, vehicles (including motor vehicles and trailers), and any interest in any of the foregoing, and all attachments, accessories, accessions, replacements, substitutions, additions, and improvements to any of the foregoing, wherever located; (b) All inventory now owned or hereafter acquired, including, without limitation, all merchandise, raw materials, parts, supplies, packing and shipping materials, work in process and finished products including such inventory as is temporarily out of Borrower's custody or possession or in transit and including any returns upon any accounts or other proceeds, including insurance proceeds, resulting from the sale or disposition of any of the foregoing and any documents of title representing any of the above, and Borrower's books relating to any of the foregoing (but specifically excluding from the term "inventory" all items constituting the physical embodiment of intellectual property and media in or on which physical embodiments of intellectual property are actually being stored); (c) All contract rights and general intangibles (except to the extent included within the definition of Intellectual Property or where licensed to or by borrower pursuant to a license that would become void or voidable or which would cause any other license to become void or voidable on the pledge of a security interest in it), now owned or hereafter acquired, including, without limitation, goodwill, license agreements, franchise agreements, blueprints, drawings, purchase orders, customer lists, route lists, infringements, claims, computer programs, computer disks, computer tapes, literature, reports, catalogs, design rights, income tax refunds, payments of insurance and rights to payment of any kind; (d) All now existing and hereafter arising accounts, contract rights, royalties, license rights and all other forms of obligations owing to Borrower arising out of the sale or lease of goods, the licensing of technology or the rendering of services by Borrower, whether or not earned by performance, and any and all credit insurance, guaranties, and other security therefor, as well as all merchandise returned to or reclaimed by Borrower and Borrower's books relating to any of the foregoing; (e) All documents, cash, deposit accounts, investment property, securities, letters of credit, certificates of deposit, instruments and chattel paper now owned or hereafter acquired and Borrower's books relating to the foregoing; (f) Any and all claims, rights and interests in any of the above and all substitutions for, additions and accessions to and proceeds thereof, including, without limitation, insurance, condemnation, requisition or similar payments and proceeds of the sale or licensing of Intellectual Property to the extent such proceeds no longer constitute Intellectual Property; but 10 12 (g) Excluding, all Intellectual Property. The security interest granted in this Section 5.1 shall be subject to the contractual rights of third parties to require funds received by Borrower to be expended in a particular manner. 5.02. Duration of Security Interest. Lender's security interest in the Collateral shall continue until the payment in full and the satisfaction of all Obligations, whereupon such security interest shall terminate. Lender, upon payment in full and the satisfaction of the Obligations, shall execute such further documents and take such further actions as may be necessary to effect the release and/or termination contemplated by this Section 5.02, including duly executing and delivering termination statements for filing in all relevant jurisdictions. 5.03. Possession of Collateral. Except as set forth in Section 5.04, so long as no Event of Default has occurred and is continuing, Borrower shall remain in full possession, enjoyment and control of the Collateral (except only as may be otherwise required by Lender for perfection of its security interest therein) and to manage, operate and use the same and each part thereof with the rights and franchises appertaining thereto; provided, however, that the possession, enjoyment, control and use of the Collateral shall at all times be subject to the observance and performance of the terms of this Agreement. 5.04 Lien Subordination. Lien Subordination. Lender agrees that the Liens granted to it hereunder shall be subordinate to the Liens of existing and future lenders providing equipment financing and tenant improvements and equipment lessors; provided that such Liens are confined solely to the equipment so financed, together with accessions, replacements and the proceeds thereof; and provided, further, that the Obligations hereunder shall not be subordinate in right of payment to any obligations to other lenders or equipment lessors and Lender's rights to exercise remedies hereunder shall not in any way be subordinate to the rights of any such lenders or equipment lessors. Lender agrees to execute and deliver such agreements and documents as may be reasonably requested by Borrower from time to time which set forth the lien subordination described in this Section 5.05 and are reasonably acceptable to Lender. Lender shall have no obligation to execute any agreement or document which would impose obligations, restrictions or lien priority on Lender which are less favorable than those described in this Section 5.05. Borrower may grant additional security interests in the Collateral to Subordinated Lenders. ARTICLE VI AFFIRMATIVE COVENANTS 6.01. Affirmative Covenants (a) Payment of Taxes, etc. Borrower shall pay and discharge all taxes, assessments and governmental charges or levies imposed upon it or upon its income or profits, or upon any properties belonging to it, prior to the date on which penalties attach thereto, and all lawful claims which, if unpaid, might become a Lien upon any of its properties; provided that there shall be no requirement to pay any such tax, assessment, charge, levy or claim (i) which is being contested in good faith and by appropriate proceedings or which presents no risk of seizure, forfeiture, levy or other event which could jeopardize a material portion of the Collateral or (ii) for which payment in full is bonded or reserved in Borrower's financial statements. (b) Inspection Rights. Borrower shall, at any reasonable time and from time to time, upon reasonable notice during normal business hours, permit Lender or any of its agents or representatives to inspect the Collateral, to examine and make copies of and abstracts from the records and books of account of, and visit the properties of, Borrower and to discuss the affairs, finances and accounts of Borrower with any of its officers or directors relating in each case to Lender's capacity as lender and secured party hereunder and with respect to the Collateral. 11 13 (c) Maintenance of Equipment and Similar Assets. Borrower shall keep and maintain all items of equipment and other similar types of personal property that form any significant portion or portions of the Collateral in good operating condition and repair and shall make all necessary replacements thereof and renewals thereto so that the value and operating efficiency thereof shall at all times be maintained and preserved, ordinary wear and tear excepted. Borrower shall not permit any such material item of Collateral to become a fixture to real estate or an accession to other personal property, without the prior written consent of Lender unless a Landlord Consent has been obtained in relation to such real property. Borrower shall not permit any such material item of Collateral to be operated or maintained in violation of any applicable law, statute, rule or regulation except where such violation would not reasonably be expected to have a material adverse effect on the financial condition, business or operations of Borrower. With respect to items of leased equipment (to the extent Lender has any security interest in any residual Borrower's interest in such equipment under the lease), Borrower shall keep, maintain, repair, replace and operate such leased equipment in accordance with the terms of the applicable lease. (d) Insurance. (i) Borrower shall, obtain and maintain for the Term, at its own expense, (x) "all risk" insurance against loss or damage to the Collateral (which need not include earthquake coverage), (y) commercial general liability insurance (including contractual liability, products liability and completed operations coverages) reasonably satisfactory to Lender, and (z) such other insurance against such other risks of loss and with such terms, as shall in each case be reasonably satisfactory to or reasonably required by Lender (as to carriers, amounts and otherwise). The amount of the "all risk" insurance shall be determined to Lender's reasonable satisfaction as of each anniversary date of this Agreement and the appropriate amount of coverage shall be put in effect on the next succeeding renewal or inception date of such insurance. (ii) The deductible with respect to "all-risk" insurance required by clause (x) above and product liability insurance required by clause (y) above shall not exceed $25,000; otherwise there shall be no deductible with respect to any insurance required to be maintained hereunder. The amount of commercial general liability insurance (other than products liability coverage and completed operations insurance) required by clause (y) above shall be at least $2,000,000 per occurrence. The amount of the products liability and completed operations insurance required by clause (y) above shall be at least $2,000,000 per occurrence. Each "all risk" policy shall: (x) name Lender as loss payee, (y) provide for each insurer's waiver of its right of subrogation against Lender, and (z) provide that such insurance (A) shall not be invalidated by any action of, or breach of warranty by, Borrower of a provision of any of its insurance policies, and (B) shall waive set-off, counterclaim or offset against Lender. Each liability policy shall (w) name Lender as an additional insured in the full amount of Lender's liability coverage limits (or the coverage limits of any successor to Lender or such successor's parent which is providing coverage) and (x) provide that such insurance shall have cross-liability and severability of interest endorsements (which shall not increase the aggregate policy limits of Borrower's insurance). All insurance policies shall (y) provide that Borrower's insurance shall be primary without a right of contribution of Lender's insurance, if any, or any obligation on the part of Lender to pay premiums of Borrower, and (z) shall contain a clause requiring the insurer to give Lender at least 30 days' prior written notice of its cancellation (other than cancellation for non-payment for which 10 days' notice shall be sufficient). Borrower shall on or prior to the first Funding Date and prior to each policy renewal, furnish to Lender certificates of insurance or other evidence satisfactory to Lender that such insurance coverage is in effect. Notwithstanding the foregoing, Borrower shall not be required to carry products liability and completed operations insurance until the commencement of clinical trials of Borrower's products, unless during such clinical trials Borrower and Lender are indemnified in a manner satisfactory to Lender by a licensee pharmaceutical company conducting such clinical trials; provided, that, in any case, Borrower shall obtain products liability insurance and completed operations insurance prior to its undertaking any manufacturing or sales activities. 12 14 ARTICLE VII NEGATIVE COVENANTS 7.01. Negative Covenants. So long as the Obligations remain outstanding, without Lender's prior written consent, Borrower shall not: (a) Name; Location of Chief Executive Office and Collateral. Without thirty (30) days prior written notice to Lender, change its chief executive office or principal place of business or remove or cause to be removed from the location set forth on the cover page hereof or move any Collateral to a location other than that set forth on the cover page hereof. (b) Liens on Collateral. Create, incur, assume or suffer to exist any Lien of any kind upon any Collateral, whether now owned or hereafter acquired, except Permitted Liens. (c) Negative Pledge Regarding Intellectual Property. Create, incur, assume or suffer to exist any Lien of any kind upon any Intellectual Property, whether now owned or hereafter acquired, except Permitted Liens and except any residual patent rights associated with patents acquired by or licensed to or by Borrower. (d) Dispositions of Collateral or Intellectual Property. Convey, sell, offer to sell, lease, transfer, exchange or otherwise dispose of (collectively, a "Transfer") all or any part of the Collateral to any Person, other than: (i) transfers of inventory in the ordinary course of business; (ii) transfers of non-exclusive licenses or licenses which are exclusive with respect to a particular field and similar arrangements for the use of the property of Borrower in the ordinary course of business; (iii) transfers of worn-out or obsolete equipment, or (iv) other Transfers not exceeding $100,000 in the aggregate in any fiscal year. It is expressly agreed and understood that the ordinary course of Borrower's business includes entering into agreements and arrangements with third parties for research, development, manufacturing, sale or marketing of products and the licensing of Intellectual Property in connection with such agreements and arrangements. (e) Distributions. (i) Pay any dividends or make any distributions on its Equity Securities; (ii) purchase, redeem, retire, defease or otherwise acquire for value any of its Equity Securities (other than repurchases pursuant to the terms of employee stock purchase plans, employee restricted stock agreements or similar arrangements) in an aggregate amount not to exceed $100,000 in any fiscal year; (iii) return any capital to any holder of its Equity Securities as such; (iv) make any distribution of assets, Equity Securities, obligations or securities to any holder of its Equity Securities as such; or (v) set apart any sum for any such purpose; provided, however, that Borrower may pay dividends payable solely in Common Stock and may convert convertible securities into other securities according to the terms of such securities. (f) Mergers or Acquisitions. Merge or consolidate with or into any other Person or acquire or all or substantially all of the capital stock or assets of another Person unless such merger, consolidation or acquisition is a Permitted Investment; provided, that if Lender does not consent to a transaction otherwise prohibited by this Section 2.01(f), Borrower shall have the right to prepay the Loans pursuant to the provisions of this Agreement. (i) Transactions With Affiliates. Shall enter into any contractual obligation with any affiliate or engage in any other transaction with any affiliate except upon terms at least as favorable to Borrower or such Subsidiary as an arms-length transaction with unaffiliated Persons. 13 15 (j) Maintenance of Accounts. Maintain any deposit accounts or accounts holding securities owned by Borrower except (i) accounts located at Wells Fargo Bank , N.A. and (ii) other accounts with respect to which Lender takes such action as it deems necessary to obtain a perfected security interest in such account. (k) Indebtedness Payments. Prepay, redeem, purchase, defease or otherwise satisfy in any manner prior to the scheduled repayment thereof any Indebtedness for borrowed money (other than amounts due under this Agreement, the Note or Borrower's note with General Electric Capital Corporation) or lease obligations, (ii) amend, modify or otherwise change the terms of any Indebtedness for borrowed money (other than the Obligations) or lease obligations so as to accelerate the scheduled repayment thereof or (iii) repay any notes to officers, directors or shareholders, except bridge loans made in contemplation of an equity offering which are being repaid with the proceeds of such offering. This Section 7.01(k) shall not be deemed to cover draws on a restricted cash account by Borrower's landlord pursuant to documentation existing on the date hereof so long as Borrower does not control such draws. (l) Subsidiaries. Without the prior written consent of Lender, form any Subsidiary. (m) Indebtedness. Create, incur, assume or permit to exist any Indebtedness except Permitted Indebtedness. (n) Investments. Make any Investment except for Permitted Investments. ARTICLE VIII CONDITIONS PRECEDENT 8.01. Closing. At the time of execution and delivery of this Agreement, Borrower shall have duly executed and/or delivered to Lender the items set forth in Part I of Schedule 3. 8.02. Other Conditions. The obligation of Lender to make the Loan shall be subject to the execution and/or delivery to Lender of each of the items set forth in Part I of Schedule 3 and the satisfaction of by Borrower of each condition set forth in Part II of Schedule 3. 8.03. Covenant to Deliver. Borrower agrees (not as a condition but as a covenant) to deliver to Lender each item required to be delivered to Lender as a condition to the Loan, if the Loan is advanced. Borrower expressly agrees that the extension of such Loan prior to the receipt by Lender of any such item shall not constitute a waiver by Lender of Borrower's obligation to deliver such item. ARTICLE IX DEFAULT AND REMEDIES 9.01. Events of Default. An "Event of Default" shall mean the occurrence of one or more of the following described events: (a) Borrower shall (i) default in the payment of principal of or interest on the Loan for five (5) days after the same is due, or (ii) default in the payment of any expense or other amount payable hereunder or thereunder for ten (10) days after receipt of written notice from Lender that the same is due; or (b) Borrower shall breach any provision of Section 7.01 or Section 6.01(d); or 14 16 (c) Borrower shall default in the performance of any covenant, agreement or obligation (other than a covenant, agreement or obligation referred to in, Section 9.01(a) or Section 9.01(b)) contained in any Operative Document (other than the Warrant) and Borrower shall fail to cure within thirty (30) days after receipt of written notice from Lender any default in the performance of any such covenant, agreement or obligation contained therein; or (d) Any representation or warranty made herein or on the Funding Date by Borrower in any Operative Document, or any certificate or financial statement furnished pursuant to the provisions of any Operative Document, shall prove to have been false or misleading in any material respect as of the time made or furnished; or (e) Any Operative Document shall in any material respect cease to be, or Borrower shall assert that any Operative Document is not, a legal, valid and binding obligation of Borrower enforceable in accordance with its terms; or (f) A default shall exist under any agreement with any third party or parties (but excluding Borrower's note due to General Electric Capital Corporation) which consists of the failure to pay any Indebtedness at maturity or which results in a right by such third party or parties, whether or not exercised, to accelerate the maturity of any Indebtedness of Borrower in an amount in excess of Two Hundred Fifty Thousand Dollars ($250,000); or (g) A final judgment or order for the payment of money in excess of Two Hundred Fifty Thousand Dollars ($250,000) (exclusive of amounts covered by insurance issued by an insurer not an affiliate of Borrower) shall be rendered against Borrower and the same shall remain undischarged for a period of thirty (30) days during which execution shall not be effectively stayed, or any judgment, writ, assessment, warrant of attachment, or execution or similar process shall be issued or levied against a substantial part of the property of Borrower and such judgment, writ, or similar process shall not be released, stayed, vacated or otherwise dismissed within thirty (30) days after issue or levy; or (h) a proceeding shall have been instituted in a court of competent jurisdiction seeking a decree or order for relief in respect of Borrower in an involuntary case under any applicable bankruptcy, insolvency or other similar law now or hereafter in effect, or for the appointment of a receiver, liquidator, assignee, custodian, trustee (or similar official) of Borrower or for any substantial part of its property, or for the winding-up or liquidation of its affairs, and such proceeding shall remain undismissed or unstayed and in effect for a period of forty-five (45) consecutive days or such court shall enter a decree or order granting the relief sought in such proceeding; or (i) Borrower shall commence a voluntary case under any applicable bankruptcy, insolvency or other similar law now or hereafter in effect, shall consent to the entry of an order for relief in an involuntary case under any such law, or shall consent to the appointment of or taking possession by a receiver, liquidator, assignee, trustee, custodian (or other similar official) of Borrower or for any substantial part of its property, or shall make a general assignment for the benefit of creditors, or shall fail generally to pay its debts as they become due, or shall take any corporate action in furtherance of any of the foregoing. 9.02. Consequences of Event of Default. (a) If an Event of Default specified under clauses (a) through (g) of Section 9.01 shall occur and be continuing, Lender may (i) declare the Loan, together with interest thereon, plus premium and all other liabilities of Borrower hereunder and under the Note to be immediately due and payable, without presentment, demand, protest or further notice of any kind, all of which are hereby expressly waived, and (ii) terminate its commitment to make the Loan and terminate any commitment to advance money or extend credit to or for the benefit of Borrower pursuant to any other agreement or commitment extended by Lender to Borrower. 15 17 (b) If an Event of Default specified under clause (h) or (i) of Section 9.01 shall occur, then immediately and without notice (i) the Loan, together with interest thereon, plus premium, and all other liabilities of Borrower hereunder and under the other Operative Documents shall automatically become due and payable, without presentment, demand, protest or notice of any kind, all of which are hereby expressly waived, and (ii) Lender's commitment hereunder to make the Loan and any other commitment of Lender to Borrower to advance money or extend credit pursuant to any other agreement or commitment shall be terminated. 9.03. Rights Regarding Collateral. Borrower agrees that when any Event of Default has occurred and is continuing, Lender shall have the rights, options, duties and remedies of a secured party as permitted by law and, in addition to and without limiting the foregoing, Lender may exercise any one or more or all, and in any order, of the remedies herein set forth, including the following: (a) Lender, personally or by agents or attorneys, shall have the right (subject to compliance with any applicable mandatory legal requirements) to require Borrower to assemble the Collateral and make it available to Lender at a place to be designated by Lender or to take immediate possession of the Collateral, or any portion thereof, and for that purpose may pursue the same wherever it may be found, and may enter any of premises of Borrower, with or without notice, demand, process of law or legal procedure, to the extent permitted by applicable law, and search for, take possession of, remove, keep and store the same, or use and operate or lease the same until sold. In furtherance of Lender's rights hereunder, Borrower hereby grants to Lender an irrevocable, non-exclusive license (exercisable without royalty or other payment by Lender) to use, license or sublicense any trademark or trade name in which Borrower now or hereafter has any right, title or interest together with the right of access to all media in which any of the foregoing may be recorded or stored; provided, however, that such license shall only be exercisable in connection with the disposition of Collateral upon Lender's exercise of its remedies as permitted hereunder. (b) Lender may, if at the time such action may be lawful and always subject to compliance with any mandatory legal requirements, either with or without taking possession and either before or after taking possession, without instituting any legal proceedings whatsoever, having first given notice of such sale by registered or certified mail to Borrower once at least ten (10) days prior to the date of such sale, and having first given any other notice which may be required by law, sell and dispose of the Collateral, or any part thereof, at a private sale or at public auction, to the highest bidder, in one lot as an entirety or in separate lots, and either for cash or on credit and on such terms as Lender may determine, and at any place (whether or not it be the location of the Collateral or any part thereof) designated in the notice referred to above. To the extent permitted by applicable law, any such sale or sales may be adjourned from time to time by announcement at the time and place appointed for such sale or sales, or for any such adjourned sale or sales, without further published notice, and Borrower, Lender or the holder or holders of the Note, or of any interest therein, may bid and become the purchaser at any such sale. (c) Lender may proceed to protect and enforce this Agreement and the other Operative Documents by suit or suits or proceedings in equity, at law or in bankruptcy, and whether for the specific performance of any covenant or agreement herein contained or in execution or aid of any power herein granted; or for foreclosure hereunder, or for the appointment of a receiver or receivers for any real property security or any part thereof, or for the recovery of judgment for the Obligations or for the enforcement of any other proper, legal or equitable remedy available under applicable law. 9.04. Effect of Sale. Any sale, whether under any power of sale available to Lender or by virtue of judicial proceedings, shall operate to divest all right, title, interest, claim and demand whatsoever, either at law or in equity, of Borrower in and to the property sold, and shall be a perpetual bar, both at law and in equity, against Borrower, its successors and assigns, and against any and all persons claiming the property sold or any part thereof under, by or through Borrower, its successors or assigns. 16 18 9.05. Application of Collateral Proceeds. The proceeds and/or avails of the Collateral, or any part thereof, and the proceeds and the avails of any remedy hereunder (as well as any other amounts of any kind held by Lender at the time of, or received by Lender after, the occurrence of an Event of Default hereunder) shall be paid to and applied as follows: (a) First, to the payment of reasonable costs and expenses, including all amounts expended to preserve the value of the Collateral, of foreclosure or suit, if any, and of such sale and the exercise of any other rights or remedies, and of all proper fees, expenses, liability and advances, including reasonable legal expenses and attorneys' fees, incurred or made hereunder by Lender; (b) Second, to the payment to Lender of the amount then owing or unpaid on the Note, and in case such proceeds shall be insufficient to pay in full the whole amount so due, owing or unpaid upon the Note, then first, to the unpaid interest thereon, second, to unpaid principal thereof and third to the remaining balance of the Obligations under the Note; such application to be made upon presentation of the Note, and the notation thereon of the payment, if partially paid, or the surrender and cancellation thereof, if fully paid; (c) Third, to the payment of other amounts then payable to Lender under this Agreement or the Note; and (d) Fourth, to the payment of the surplus, if any, to Borrower, its successors and assigns, or to whomsoever may be lawfully entitled to receive the same. 9.06. Reinstatement of Rights. If Lender shall have proceeded to enforce any right under this Agreement the Note or the Landlord Waiver by foreclosure, sale, entry or otherwise, and such proceedings shall have been discontinued or abandoned for any reason or shall have been determined adversely, then and in every such case (unless otherwise ordered by a court of competent jurisdiction), Lender shall be restored to its former position and rights hereunder with respect to the property subject to the security interest created under this Agreement. ARTICLE X MISCELLANEOUS 10.01. Modifications, Amendments or Waivers. The provisions of any Operative Document may be modified, amended or waived only by a written instrument signed by the parties thereto. 10.02. No Implied Waivers; Cumulative Remedies; Writing Required. No delay or failure of Lender in exercising any right, power or remedy hereunder shall affect or operate as a waiver thereof; nor shall any single or partial exercise thereof or any abandonment or discontinuance of steps to enforce such a right, power or remedy preclude any further exercise thereof or of any other right, power or remedy. The rights and remedies hereunder of Lender are cumulative and not exclusive of any rights or remedies which it would otherwise have. Any waiver, permit, consent or approval of any kind or character on the part of Lender of any breach or default under this Agreement or any such waiver of any provision or condition of this Agreement must be in writing and shall be effective only in the specified instance and to the extent specifically set forth in such writing. 10.03. Expenses; Indemnification. Borrower agrees upon demand to pay or reimburse Lender for all liabilities, obligations and out-of-pocket expenses, including reasonable fees and expenses of counsel for Lender, from time to time arising in connection with (i) the documentation, negotiation, execution and delivery of the Operative Documents, but in an amount not to exceed $5,000, and (ii) the enforcement or collection of the Obligations. Borrower shall indemnify, reimburse and hold Lender, each of Lender's partners, and each of their respective successors, assigns, agents, officers, directors, shareholders, servants, agents and employees (each, a "Related 17 19 Party") harmless from and against all liabilities, losses, damages, actions, suits, demands, claims of any kind and nature (including claims relating to environmental discharge, cleanup or compliance), all costs and expenses whatsoever to the extent they may be incurred or suffered by such indemnified party in connection therewith (including reasonable attorneys' fees and expenses), fines, penalties (and other charges of applicable governmental authorities), licensing fees relating to any item of Collateral, damage to or loss of use of property (including consequential or special damages to third parties or damages to Borrower's property), or bodily injury to or death of any person (including any agent or employee of Borrower) (each, a "Claim"), directly or indirectly relating to or arising out of the use of the proceeds of the Loan or otherwise, the falsity of any representation or warranty of Borrower or Borrower's failure to comply with the terms of this Agreement or any other Operative Document during the Term. The foregoing indemnity shall cover, without limitation, (i) any Claim in connection with a design or other defect (latent or patent) in any item of equipment included in the Collateral, (ii) any Claim for infringement of any patent, copyright, trademark or other intellectual property right (but excluding any Claims brought by Lender or its Related Parties other than by way of counterclaim), (iii) any Claim resulting from the presence on or under or the escape, seepage, leakage, spillage, discharge, emission or release of any Hazardous Materials on the premises of Borrower, including any Claims asserted or arising under any Environmental Law, or (iv) any Claim for negligence or strict or absolute liability in tort; provided, however, that Borrower shall not indemnify Lender or any Related Party for any liability incurred by Lender as a direct result of Lender's gross negligence or willful misconduct. Such indemnities shall continue in full force and effect, notwithstanding the expiration or termination of this Agreement, but shall exclude any Claims brought by Lender or its related parties other than by way of counterclaim. Upon Lender's written demand, Borrower shall assume and diligently conduct, at its sole cost and expense, the entire defense of Lender, each of its partners, and each of their respective, agents, employees, directors, officers, shareholders, successors and assigns against any indemnified Claim described in this Section 10.03. Borrower shall not settle or compromise any Claim against or involving Lender without first obtaining Lender's written consent thereto, which consent shall not be unreasonably withheld. 10.04. Damages. NOTWITHSTANDING ANYTHING TO THE CONTRARY CONTAINED IN THIS AGREEMENT OR ANYWHERE ELSE, BORROWER AGREES THAT IT SHALL NOT SEEK FROM LENDER UNDER ANY THEORY OF LIABILITY (INCLUDING ANY THEORY IN TORTS), ANY SPECIAL, INDIRECT, CONSEQUENTIAL OR PUNITIVE DAMAGES. 10.05. Notices; Payments. (a) All notices and other communications given to or made upon any party hereto in connection with this Agreement shall be in writing (including telexed, telecopied or telegraphic communication) and mailed (by certified or registered mail), telexed, telegraphed, telecopied or delivered to the respective parties, as follows: Borrower: At the address set forth on the cover page of this Agreement. Lender: MMC/GATX PARTNERSHIP NO. I c/o GATX Capital Corporation Four Embarcadero Center Suite 2200 San Francisco, California 94111 Telephone No.: 415-955-3200 Telecopier No.: 415-955-3493 Attention: Contract Administration 18 20 with a copy of all financial information to: MEIER MITCHELL & COMPANY 4 Orinda Way, Suite 200B Orinda, California 94563 or in accordance with any subsequent written direction from either party to the other. All such notices and other communications shall, except as otherwise expressly herein provided, be effective when received; or in the case of delivery by messenger or overnight delivery service, when left at the appropriate address. (b) Unless Lender specifies otherwise in writing, all payments shall be made to: MMC/GATX PARTNERSHIP NO. I c/o GATX Capital Corporation, as Agent Box 71316 Chicago, Illinois 60694 10.06. Severability. If any provision of any Operative Document is held invalid or unenforceable to any extent or in any application, the remainder of such Operative Document and all other Operative Documents, or the application of such provision to different Persons or circumstances or in different jurisdictions, shall not be affected thereby. 10.07. Survival. All representations, warranties, covenants and agreements of Borrower contained herein or made in writing in connection herewith shall survive the execution and delivery of the Operative Documents, the making of the Loan hereunder, the granting of security and the issuance of the Note. 10.08. Governing Law. THIS AGREEMENT, THE OTHER OPERATIVE DOCUMENTS AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES HERETO AND THERETO SHALL BE GOVERNED BY AND CONSTRUED AND ENFORCED IN ACCORDANCE WITH THE LAWS OF THE STATE OF CALIFORNIA. ANY ACTION TO ENFORCE THIS AGREEMENT AGAINST BORROWER MAY BE BROUGHT IN CALIFORNIA OR, WITH REGARD TO COLLATERAL, MAY ALSO BE BROUGHT WHEREVER SUCH COLLATERAL IS LOCATED. 10.09. Successors and Assigns. This Agreement and the other Operative Documents shall be binding upon and inure to the benefit of Lender, all future holders of the Note, Borrower and their respective successors and permitted assigns, except that Borrower may not assign or transfer its rights hereunder or any interest herein without the prior written consent of Lender. Lender may sell to any other financial entity that is not a competitor of Borrower (a "Participant") participation interests in Lender's rights under this Agreement and the other Operative Documents; provided that notwithstanding the sale of participations, Lender shall remain solely responsible for the performance of its obligations under this Agreement, Lender shall remain the holder of the Note for all purposes under this Agreement and Borrower shall continue to deal solely and directly with Lender in connection with this Agreement and the other Loan Documents. Lender may disclose the Operative Documents and any other financial or other information relating to Borrower or any Subsidiary to any potential Participant, provided that such Participant agrees to protect the confidentiality of such documents and information using the same measures that it uses to protect its own confidential information. 10.10. Counterparts. This Agreement may be executed in any number of counterparts and by different parties hereto on separate counterparts, each of which, when so executed and delivered, shall be an original, but all such counterparts shall together constitute one and the same instrument. 10.11. Further Assurances. Borrower will, at its own expense, from time to time do, execute, acknowledge and deliver all further acts, deeds, conveyances, transfers and assurances, and all financing and continuation statements and similar notices, reasonably necessary or proper for the perfection of the security interest being herein provided for in the Collateral, whether now owned or hereafter acquired. 19 21 10.12. Power of Attorney in Respect of the Collateral. Borrower does hereby irrevocably appoint Lender (which appointment is coupled with an interest), the true and lawful attorney-in-fact of Borrower with full power of substitution, for it and in its name (a) to perform (but Lender shall not be obligated to and shall incur no liability to Borrower or any third party for failure to perform) any act which Borrower is obligated by this Agreement to perform, (b) to ask, demand, collect, receive, receipt for, sue for, compound and give acquittance for any and all rents, issues, profits, avails, distributions, income, payment draws and other sums in which a security interest is granted under Section 5.01 with full power to settle, adjust or compromise any claim thereunder as fully as if Lender were Borrower itself, (c) to receive payment of and to endorse the name of Borrower to any items of Collateral (including checks, drafts and other orders for the payment of money) that come into Lender's possession or under Lender's control, (d) to make all demands, consents and waivers, or take any other action with respect to, the Collateral, (e) in Lender's discretion, to file any claim or take any other action or institute proceedings, either in its own name or in the name of Borrower or otherwise, which Lender may reasonably deem necessary or appropriate to protect and preserve the right, title and interest of Lender in and to the Collateral, and (f) to otherwise act with respect thereto as though Lender were the outright owner of the Collateral; provided, however, that the power of attorney herein granted shall be exercisable only upon the occurrence and during the continuation of an Event of Default. Borrower agrees to reimburse Lender upon demand for all reasonable costs and expenses, including reasonable attorneys' fees and expenses, which Lender may incur while acting as Borrower's attorney in fact hereunder, all of which costs and expenses are included within the Obligations. 10.13 Confidentiality. All information (other than periodic reports filed by Borrower with the Securities and Exchange Commission) disclosed by Borrower to Lender in writing or through inspection pursuant to this Agreement shall be considered confidential. Lender agrees to use the same degree of care to safeguard and prevent disclosure of such confidential information as Lender uses with its own confidential information, but in any event no less than a reasonable degree of care. Lender shall not disclose such information to any third party (other than Lender's or Lender's partner's attorneys and auditors subject to the same confidentiality obligation set forth herein) and shall use such information only for purposes of evaluation of its investment in Borrower and the exercise of Lender's rights and the enforcement of its remedies under this Agreement and the other Operative Agreements. The obligations of confidentiality shall not apply to any information that (a) was known to the public prior to disclosure by Borrower under this Agreement, (b) becomes known to the public through no fault of Lender, (c) is disclosed to Lender by a third party' having a legal right to make such disclosure, or (d) is independently developed by Lender. 20 22 IN WITNESS WHEREOF, the parties hereto, by their officers thereunto duly authorized, have executed this Agreement as of the day and year first above written. SIGNAL PHARMACEUTICALS, INC. By: /s/ BRAD GORDON --------------------------------------------- Name: Brad Gordon ------------------------------------------- Title: V.P. Finance, CFO ------------------------------------------ MMC/GATX PARTNERSHIP NO. I By: Meier Mitchell & Company, as general partner By: /s/ JAMES V. MITCHELL --------------------------------------------- Name: James V. Mitchell ------------------------------------------- Title: Seretary ------------------------------------------ 21 23 SCHEDULES 1 Funding Certificate 2 Disclosure Schedule 3 Conditions Precedent EXHIBITS A Form of Secured Promissory Note B Form of Landlord Consent C Form of Warrant D Form of Opinion of Counsel 24 FUNDING CERTIFICATE The undersigned, Bradley B. Gordon, being the duly elected and acting Vice President Finance, CFO of SIGNAL PHARMACEUTICALS, INC., a California corporation ("Borrower"), does hereby certify to MMC/GATX Partnership No. I, in connection with that certain Loan and Security Agreement dated as of November 22, 1996, (the "Loan Agreement"; with other capitalized terms used below having the meanings ascribed thereto in the Loan Agreement) that: 1. The representations and warranties made by Borrower in Article III of the Loan Agreement and in the other Operative Documents are true and correct as of the date hereof. 2. No event or condition has occurred and is continuing that would constitute a Default or an Event of Default under the Loan Agreement or any other Operative Document. 3. Borrower is in compliance with the covenants and requirements contained in Articles IV, VI and VII of the Loan Agreement. 4. All conditions referred to in Article VIII of the Loan Agreement to the making of the Loan to be made on or about the date hereof have been satisfied. 5. No material adverse change in the general affairs, management, results of operations, condition (financial or otherwise) or prospects of Borrower, whether or not arising from transactions in the ordinary course of business, has occurred. Dated: December 2, 1996 SIGNAL PHARMACEUTICALS, INC. By: /s/ BRAD GORDON ----------------------------------- Name: Brad Gordon --------------------------------- Title: V.P. Finance, CFO -------------------------------- 25 SCHEDULE 2 DISCLOSURE SCHEDULE 26 SCHEDULE 3 CONDITIONS PRECEDENT PART I: At the time of execution and delivery of this Agreement, there shall also have been duly executed and delivered to Lender: (a) The Warrant; (b) A Landlord Consent, from the owner of each building in which Collateral is anticipated to be located; (c) A favorable opinion of counsel for Borrower, dated as of the closing date, in the form attached hereto as Exhibit D; (d) Copies, certified by the Secretary, Assistant Secretary or Chief Financial Officer of Borrower as of the closing date, of Borrower's charter documents and bylaws and of all documents evidencing corporate action taken by Borrower authorizing the execution, delivery and performance of the Operative Documents to which Borrower is a party, in form and substance satisfactory to Lender and its counsel; (e) Good standing certificate from Borrower's state of incorporation and the state in which Borrower's principal place of business is located, together with certificates of the applicable governmental authorities that Borrower is in compliance with the franchise tax laws of each such state, each dated as of a recent date; (f) Evidence of the insurance coverage required by Section 6.01(d) of this Agreement; (g) All necessary consents of shareholders and other third parties with respect to the execution, delivery and performance of this Agreement, the Warrant, the Note and the other Operative Documents; and (h) Form UCC-1 Financing Statements, duly executed by Borrower, or other documents, and Borrower shall have taken such actions, if any, as Lender shall reasonably determine are necessary or desirable to perfect and protect its security interest in the Collateral; (i) Notices of Security Interest to Depository Banks in the forms provided by Lender; and (k) All other documents as Lender shall have reasonably requested. PART II On or prior to the Funding Date of the Loan, each of the items set forth in Part I of this Schedule 3 shall have been delivered to Lender and the following conditions shall have been satisfied or waived by Lender: (a) Borrower shall have provided to Lender such documents, instruments and agreements as Lender shall reasonably request to evidence the perfection and priority of the security interests granted to Lender pursuant to Article V; (b) No Event of Default or Default shall have occurred and be continuing; (c) Borrower shall have duly executed and delivered to Lender the Note; (d) In Lender's sole discretion, there shall not have occurred any material adverse change in the general affairs, management, results of operations, condition (financial or otherwise) or prospects of Borrower, whether or not arising from transactions in the ordinary course of business, and there shall not have 27 occurred since the date first written on the cover page of this Agreement any material adverse deviation by Borrower from the business plan of Borrower presented to and not disapproved by Lender; (e) The representations and warranties contained in this Agreement and the other Operative Documents to which Borrower is a party shall be true and correct in all material respects as if made on such Funding Date; (f) Each of the Operative Documents remains in full force and effect; and (g) The Funding Date of the Loan shall not be later than the Commitment Termination Date. 28 EXHIBIT A SECURED PROMISSORY NOTE $3,000,000 Dated: November 22, 1996 FOR VALUE RECEIVED, the undersigned, SIGNAL PHARMACEUTICALS, INC. ("Borrower"), a California corporation, HEREBY PROMISES TO PAY to the order of MMC/GATX PARTNERSHIP NO. I, a California general partnership ("Lender") the principal amount of Three Million Dollars ($3,000,000) or such lesser amount as shall equal the outstanding principal balance of the Loan made by Lender to Borrower pursuant to the Loan and Security Agreement referred to below (the "Loan Agreement"), and to pay all other amounts due with respect to the Loan on the dates and in the amounts set forth in the Loan Agreement. The principal amount of this Note shall be payable in thirty-five (35) consecutive monthly installments of $83,333.33 per month and a final installment of $83,333.45 on the last day of each month commencing on June 30, 1997. All unpaid principal and interest shall, in any event, be payable no later than May 31, 2000 Interest on the unpaid principal amount of this Note from the date of this Note until such principal amount is paid in full shall accrue at the Loan Rate or, if applicable, the Default Rate. The Loan Rate for this Note is % per annum (based on a year of 360 days and actual days elapsed). All accrued interest shall be payable on the last day of each calendar month, commencing November 30, 1996. Whenever any payment due hereunder shall fall on a day other than a Business Day, such payment shall be made on the next succeeding Business Day, and such extension of time shall be included in the computation of interest or fees, as the case may be. Principal, interest and all other amounts due with respect to the Loan, are payable in lawful money of the United States of America to Lender as follows: GATX Capital Corporation, P.O. Box 71316, Chicago, Illinois 60694, in immediately available funds. The Loan made by Lender to Borrower and the interest rate applicable thereto, and all payments made with respect thereto, shall be recorded by Lender by Lender on its books. Attached hereto is an amortization schedule showing the scheduled payments of principal and interest. This Note is the Note referred to in, and is entitled to the benefits of, the Loan and Security Agreement, dated as of November 22, 1996, between Borrower and Lender. The Loan Agreement, among other things, (a) provides for the making of a secured Loan by Lender to Borrower in the principal amount first above mentioned, and (b) contains provisions for acceleration of the maturity hereof upon the happening of certain stated events. Borrower may, at its option, prepay the Loan evidenced by this Note, either in whole or from time to time in any part of the principal amount thereof equal to $500,000 or more, at a prepayment price equal to the principal amount of the Loan so to be prepaid, plus interest accrued thereon through and including the date of such prepayment, plus the premium set forth in the Loan Agreement. If the maturity of the Loan is accelerated under the Loan Agreement, Borrower shall pay to Lender, in addition to principal, interest and all other amounts due with respect to the Loan, as liquidated damages for loss of Lender's benefit of the bargain and not as a penalty, an amount equal to the premium payable if the Loan were prepaid on the date of such acceleration. This Note and the obligation of Borrower to repay the unpaid principal amount of the Loan, interest on the Loan and all other amounts due Lender under the Loan Agreement is secured under the Loan Agreement. Presentment for payment, demand, notice of protest and all other demands and notices of any kind in connection with the execution, delivery, performance and enforcement of this Note are hereby waived. A-1 29 Borrower shall pay all reasonable fees and expenses, including, without limitation, reasonable attorneys' fees and costs, incurred by Lender in the enforcement or attempt to enforce any of Borrower's obligations hereunder not performed when due. This Note shall be governed by, and construed and interpreted in accordance with, the laws of the State of California. IN WITNESS WHEREOF, Borrower has caused this Note to be duly executed by one of its officers thereunto duly authorized on the date hereof. SIGNAL PHARMACEUTICALS, INC. By: ------------------------------------- Name: ----------------------------------- Title: ---------------------------------- A-2 30 LOAN INTEREST RATE AND PAYMENTS OF PRINCIPAL Principal Scheduled Date Amount Interest Rate Payment Amount Notation By ---- ------ ------------- -------------- ----------- A-3 31 EXHIBIT B LANDLORD'S WAIVER AND CONSENT 32 RECORDING REQUESTED BY AND WHEN RECORDED RETURN TO: MMC/GATX PARTNERSHIP NO. I c/o GATX CAPITAL CORPORATION, Agent Four Embarcadero Center, Suite 2200 San Francisco, CA 94111 Attn: Contract Administration - -------------------------------------------------------------------------------- LANDLORD'S WAIVER AND CONSENT THIS LANDLORD'S WAIVER AND CONSENT (this "Waiver"), dated as of ________ ____________________, 1996, is executed by and between ("Landlord") and MMC/GATX PARTNERSHIP NO. I, a California general partnership ("Lender"). RECITALS A. Landlord and SIGNAL PHARMACEUTICALS, INC. ("Tenant") are parties to a ______________ [Lease Agreement], dated as of ____________________, 199___ (together with any other agreement between Landlord and Tenant relating to the Premises, as defined below, all as amended from time to time, to be referred to herein collectively as the "Lease"), pursuant to which Landlord has leased to Tenant that certain real property commonly known as ___________________________, and more particularly described in Attachment 1 hereto (the "Premises"). B. Tenant and Lender intend to or have entered into a Loan and Security Agreement dated as of November 22, 1996 (the "Loan Agreement") pursuant to which Lender has agreed or will agree to make a loan to Tenant from time to time secured by certain assets (the "Assets") which will be located on the Premises. AGREEMENT NOW, THEREFORE, in consideration of the above recitals and for other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, Landlord and Lender hereby agree as follows: 1. Waiver and Consent. Landlord hereby does irrevocably waive, disclaim and relinquish and assign to Lender any and all rights to impose, receive, assert or enforce any lien, encumbrance, charge, security interest, ownership interest, claim or demand of any kind against or involving the Assets, whether arising by common law, statute or consensually (under the Lease or otherwise) and whether now in existence or hereafter created, including, but not limited to, those for rent or other right of payment. This waiver, disclaimer, relinquishment and assignment shall survive the termination of the Lease. Landlord further agrees that (a) neither the Assets nor any item thereof shall become part of, or otherwise be or become a fixture attached to, the Premises, notwithstanding the manner of the Assets' annexation, the Assets' adaptability to the uses and purposes for which the Premises are used, and the intentions of the party making the annexation; (b) the Assets (or any item thereof) may be repossessed by Lender; (c) in connection with such repossession or otherwise, Lender, and any of its agents and employees, may enter upon the Premises for the purposes of preparing for transport, disassembling, dismantling, loading and/or removing the Assets (or any item thereof); and (d) the right of Lender to enter the Premises and the other rights granted to Lender in this Waiver shall not terminate until up to thirty (30) days after Lender receives written notice from Landlord of the termination of the Lease; provided, that if Lender exercises its rights hereunder, for any such period after the termination of the Lease, Lender shall pay to Landlord a pro rated rental payment for the space in which the Assets are located (at the last monthly rate payable by Tenant) for the period until the Assets are removed. B-1 33 2. Costs. Lender agrees to indemnify and hold the Landlord harmless from any out-of-pocket costs incurred by Landlord for any physical damage to the Premises caused by Lender solely from the exercise of its rights under clauses (b) or (c) of Paragraph 1 above. 3. Lease Defaults. Landlord further agrees to provide Lender with telephonic confirmation of any default or event of default under the Lease upon inquiry by Lender. 4. Landlord's Representations and Warranties. Landlord hereby warrants and represents to Lender that (a) Landlord is the lessor under the Lease; (b) there are no other agreements between the parties affecting or relating to the Premises; (c) Landlord has all requisite power and authority to execute and deliver this Waiver and no consents from any third party are required to do so; (d) no event of default (nor any event which with the passage of time would constitute an event of default) has occurred under the Lease; (e) there exists no litigation affecting title to the Premises or any adverse claim with respect to the Premises of which Landlord has received notice; and (f) there is no condemnation proceeding pending with respect to any part of the Premises, nor any threat thereof, of which the Landlord has received notice. 5. Miscellaneous. This Waiver and all rights hereby granted to Lender hereunder shall remain in effect so long as there are any obligations owing by Tenant under the Loan Agreement or any present or future agreement between Tenant and Lender which involves the Assets. All the terms and provisions of this Waiver shall be binding on and inure to the benefit of the respective successors and assigns of Landlord and Lender. The rights and benefits of this Waiver may be assigned or transferred by Lender or to third parties who may become the lender, directly or indirectly, to Tenant. Lender shall provide subsequent written notice to Landlord and Tenant of the assignment or transfer. Headings in this Waiver are for convenience of reference only and are not part of the substance hereof. This Waiver shall be governed by and construed in accordance with the laws of the State of California. IN WITNESS WHEREOF, Landlord and Lender have executed this Waiver as of the date and year first written above. LANDLORD: By: ____________________________________________ Name: __________________________________________ Title: _________________________________________ LENDER: MMC/GATX PARTNERSHIP NO. I By: Meier Mitchell & Company, as general partner By: ____________________________________________ Name: __________________________________________ Title: _________________________________________ B-2 34 ATTACHMENT 1 LEGAL DESCRIPTION OF PREMISES [To Be Provided By Tenant] 35 State of _____________________ ) ) County of ____________________ ) On __________________________, 199___ before me, the undersigned, personally appeared _,_______________________________ personally known to me (or proved to me on the basis of satisfactory evidence) to be the person(s) whose name(s) is/are subscribed to the within instrument and acknowledged to me that he/she/they executed the same in his/her/their authorized capacity(is), and that by his/her/their signature(s) on the instrument the person(s), or the entity upon behalf of which the person(s) acted, executed the instrument. WITNESS my hand and official seal. Signature __________________________________ (Seal) State of _____________________ ) ) County of ____________________ ) On __________________________, 199___ before me, the undersigned, personally appeared _,_______________________________ personally known to me (or proved to me on the basis of satisfactory evidence) to be the person(s) whose name(s) is/are subscribed to the within instrument and acknowledged to me that he/she/they executed the same in his/her/their authorized capacity(is), and that by his/her/their signature(s) on the instrument the person(s), or the entity upon behalf of which the person(s) acted, executed the instrument. WITNESS my hand and official seal. Signature __________________________________ (Seal) 36 EXHIBIT C WARRANT C-1 37 EXHIBIT D FORM OF OPINION OF COUNSEL November 22, 1996 MMC/GATX Partnership No. I c/o GATX Capital Corporation, Agent Four Embarcadero Center Suite 2200 San Francisco, California 94111 Gentlemen: We have acted as counsel for SIGNAL PHARMACEUTICALS, INC. (the "Borrower") in connection with (i) the execution of the Loan and Security Agreement of even date herewith (the "Loan") between Borrower and MMC/GATX Partnership No. I ("Lender"), (ii) the issuance of a warrant to purchase 250,000 shares of Borrower's Series Preferred Stock (the "Warrant") and (iii) the transactions contemplated thereby. This opinion is being rendered to you pursuant to Section 8.01 of the Loan Agreement. Capitalized terms not otherwise defined in this opinion have the meaning given them in the Loan Agreement. In connection with this opinion and our representation, we have examined originals, or copies certified or otherwise identified to our satisfaction, of the following: (i) The Loan Agreement; (ii) The Warrant and exhibits thereto dated as of November 22, 1996, issued by Borrower to Lender; (iii) The Note dated as of November 22, 1996; (iv) The Restated Articles of Incorporation and the Bylaws of Borrower, each as in effect on the date hereof; (v) The certificate of an officer of Borrower as to certain factual matters ("Officer Certificate"); (vi) Certificates issued by the Secretary of State of the State of _________________________ dated _______________________, 199_____, certifying the good standing of Borrower; (vi) Such other documents, records, and certificates as we have deemed necessary or appropriate as a basis for the opinions hereafter expressed. The Loan Agreement, the Note and the Warrant are hereinafter referred to as the "Transaction Documents." In such examinations we have assumed the genuineness of all signatures, the authenticity of all documents submitted to us as originals and the conformity to originals of all documents submitted to us as certified, facsimile, telecopied or photostatic copies thereof. As to certain matters of fact material to our opinion, we have relied upon the Officer Certificate and upon your representations in the Transaction Documents. As used in this opinion, the expression "to the best of our knowledge," means the actual present knowledge or belief of those attorneys in our firm who have or who are currently representing Borrower. We have not undertaken any independent investigation to determine the existence or nonexistence of other facts, and no inference as to our knowledge of the existence or nonexistence of other facts should be drawn from the fact of this firm's representation of Borrower in connection with the Transaction Documents. D-1 38 Based upon and subject to the foregoing and subject to the qualifications contained herein, we are of the opinion that: (a) Borrower is a corporation duly organized, validly existing and in good standing under the laws of the State of California. (b) Borrower has the requisite corporate power and authority to execute, deliver and perform the Transaction Documents and to issue the Warrant. All action on the part of Borrower, its directors and its shareholders necessary for the authorization, execution, delivery and performance of the Transaction Documents, has been taken. The Transaction Documents have been duly executed and delivered by an authorized officer of Borrower. (c) The execution, delivery and performance of the Transaction Documents do not conflict with or violate any provision of Borrower's Restated Articles of Incorporation or Bylaws or of applicable law and, to the best of our knowledge, do not conflict with or constitute a default under any provision of any judgment, writ, decree, order or material agreement, indenture, or instrument to which Borrower is a party or by which it is bound. (d) The Transaction Documents constitute legal, valid and binding obligations of Borrower, enforceable in accordance with their respective terms. To our knowledge, no filing need be made with any governmental authority with respect to the Transaction Documents in connection with an exemption from state usury laws or in connection with any other matter. (e) The Series Preferred Stock issuable upon exercise of the Warrant have been duly authorized and reserved for issuance upon such exercise, and when issued in accordance with the terms of the Warrant, will be duly authorized, validly issued, fully paid and non-assessable. (f) The shares of Common Stock issuable upon conversion of the Series Preferred Stock into which the Warrant is convertible, have been duly authorized and reserved and for issuance, when so issued in accordance with the terms of Borrower's Restated Articles of Incorporation, will be validly issued, fully paid and non-assessable. The opinions set forth above are subject to the following additional qualifications, assumptions, limitations and exceptions: (A) The effect of bankruptcy, insolvency, reorganization, fraudulent conveyance, moratorium and other similar laws relating to or affecting the rights and remedies of creditors generally. (B) Limitations imposed by general equitable principles upon the specific enforceability of any of the provisions of the Transaction Documents and upon the availability of injunctive relief or other equitable remedies. (C) We express no opinion as to the enforceability of any choice of law provision in the documents. (D) We express no opinion as to the compliance or noncompliance with applicable antifraud statutes under the rules and regulations of state and federal securities laws concerning the issuance of the Warrant. (E) We express no opinion herein concerning any law other than the law of the State of California [the general corporate law of the State of Delaware] and the federal laws of the United States of America. This opinion is furnished to you solely for your benefit and may not be relied upon by any other person (other than assignees of any of your rights) without our prior written consent, which consent shall not be unreasonably withheld or delayed. Very truly yours, ---------------------------------------- D-2 EX-10.16 19 EXHIBIT 10.16 1 EXHIBIT 10.16 THIS WARRANT AND THE SHARES ISSUABLE HEREUNDER HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED OR ANY STATE SECURITIES LAWS. NO SALE OR DISPOSITION MAY BE EFFECTED WITHOUT (i) EFFECTIVE REGISTRATION STATEMENTS RELATED THERETO, (ii) AN OPINION OF COUNSEL OR OTHER EVIDENCE, REASONABLY SATIS-FACTORY TO THE COMPANY, THAT SUCH REGISTRATIONS ARE NOT REQUIRED, (iii) RECEIPT OF NO-ACTION LETTERS FROM THE APPROPRIATE GOVERN-MENTAL AUTHORITIES, OR (iv) OTHERWISE COMPLYING WITH THE PROVISIONS OF SECTION 7 OF THIS WARRANT. SIGNAL PHARMACEUTICALS, INC. WARRANT TO PURCHASE 250,000 SHARES OF SERIES C-1 PREFERRED STOCK THIS CERTIFIES THAT, for value received, MMC/GATX PARTNERSHIP NO. I and its assignees are entitled to subscribe for and purchase 250,000 shares of the fully paid and nonassessable Series C-1 Preferred Stock (as adjusted pursuant to Section 4 hereof, the "Shares") of SIGNAL PHARMACEUTICALS, INC., a California corporation (the "Company"), at the price of $2.10 per share (such price and such other price as shall result, from time to time, from the adjustments specified in Section 4 hereof is herein referred to as the "Warrant Price"), subject to the provisions and upon the terms and conditions hereinafter set forth. As used herein, (a) the term "Series Preferred" shall mean the Company's presently authorized Series C-1 Preferred Stock, and any stock into or for which such Series C-1 Preferred Stock may hereafter be converted or exchanged, (b) the term "Date of Grant" shall mean November 22, 1996, and (c) the term "Other Warrants" shall mean any other warrants issued by the Company in connection with the transaction with respect to which this Warrant was issued, and any warrant issued upon transfer or partial exercise of this Warrant. The term "Warrant" as used herein shall be deemed to include Other Warrants unless the context clearly requires otherwise. 1. Term. The purchase right represented by this Warrant is exercisable, in whole or in part, at any time and from time to time from the Date of Grant through the tenth anniversary of the Date of Grant; provided, however, that if the Company's initial public offering ("IPO") of its Common Stock effected pursuant to a Registration Statement on Form S-1 or Form SB-2 (or their respective successors) filed under the Securities Act of 1933, as amended (the "Act") occurs after the fifth anniversary of the Date of Grant and prior to the tenth anniversary of the Date of Grant, then this Warrant shall be exercisable through the fifth anniversary of the effective date of such initial public offering. 2. Method of Exercise; Payment; Issuance of New Warrant. Subject to Section 1 hereof, the purchase right represented by this Warrant may be exercised by the holder hereof, in whole or in part and from time to time, at the election of the holder hereof, by (a) the surrender of this Warrant (with the notice of exercise substantially in the form attached hereto as Exhibit A duly completed and executed) at the principal office of the Company and by the payment to the Company, by certified or bank check, or by wire transfer to an account designated by the Company (a "Wire Transfer") of an amount equal to the then applicable Warrant Price multiplied by the number of Shares then being purchased, or (b) if in connection with a registered public offering of the Company's securities, the surrender of this Warrant (with the notice of exercise form attached hereto as Exhibit A-1 duly completed and executed) at the principal office of the Company together with notice of arrangements reasonably satisfactory to the Company for payment to the Company either by certified or bank check or by Wire Transfer from the proceeds of the sale of shares to be sold by the holder in such public offering of an amount equal to the then applicable Warrant Price per 2 share multiplied by the number of Shares then being purchased by the holder hereof or (c) exercise of the right provided for in Section 10.3 hereof. The person or persons in whose name(s) any certificate(s) representing shares of Series Preferred shall be issuable upon exercise of this Warrant shall be deemed to have become the holder(s) of record of, and shall be treated for all purposes as the record holder(s) of, the shares represented thereby (and such shares shall be deemed to have been issued) immediately prior to the close of business on the date or dates upon which this Warrant is exercised. In the event of any exercise of the rights represented by this Warrant, certificates for the shares of stock so purchased shall be delivered to the holder hereof as soon as possible and in any event within thirty (30) days after such exercise and, unless this Warrant has been fully exercised or expired, a new Warrant representing the portion of the Shares, if any, with respect to which this Warrant shall not then have been exercised shall also be issued to the holder hereof as soon as possible and in any event within such thirty-day period. 3. Stock Fully Paid; Reservation of Shares. All Shares that may be issued upon the exercise of the rights represented by this Warrant will, upon issuance pursuant to the terms and conditions herein, be fully paid and nonassessable, and free from all taxes, liens and charges with respect to the issue thereof. During the period within which the rights represented by this Warrant may be exercised, the Company will at all times have authorized, and reserved for the purpose of the issue upon exercise of the purchase rights evidenced by this Warrant, a sufficient number of shares of its Series Preferred to provide for the exercise of the rights represented by this Warrant and a sufficient number of shares of its Common Stock to provide for the conversion of the Series Preferred into Common Stock. 4. Adjustment of Warrant Price and Number of Shares. The number and kind of securities purchasable upon the exercise of this Warrant and the Warrant Price shall be subject to adjustment from time to time upon the occurrence of certain events, as follows: (a) Reclassification or Merger. In case of any reclassification or change of securities of the class issuable upon exercise of this Warrant (other than a change in par value, or from par value to no par value, or from no par value to par value, or as a result of a subdivision or combination), or in case of any merger of the Company with or into another corporation (other than a merger with another corporation in which the Company is the acquiring and the surviving corporation and which does not result in any reclassification or change of outstanding securities issuable upon exercise of this Warrant), or in case of any sale of all or substantially all of the assets of the Company, the Company, or such successor or purchasing corporation, as the case may be, shall duly execute and deliver to the holder of this Warrant a new Warrant with a term ending on the same date as specified for this Warrant (in form and substance satisfactory to the holder of this Warrant), so that the holder of this Warrant shall have the right to receive, at a total purchase price not to exceed that payable upon the exercise of the unexercised portion of this Warrant, and in lieu of the shares of Series Preferred theretofore issuable upon exercise of this Warrant, the kind and amount of shares of stock, other securities, money and property receivable upon such reclassification, change or merger by a holder of the number of shares of Series Preferred purchasable under this Warrant immediately prior to such reclassification, change or merger. Such new Warrant shall provide for adjustments that shall be as nearly equivalent as may be practicable to the adjustments provided for in this Section 4 and, in the case of a new Warrant issuable after conversion of the authorized shares of the Series Preferred into shares of Common Stock or after the amendment of the terms of the antidilution protection of the Series Preferred, shall provide for antidilution protection that shall be as nearly equivalent as may be practicable to the antidilution provisions applicable to the Series Preferred on the Date of Grant. The provisions of this subparagraph (a) shall similarly apply to successive reclassifications, changes, mergers and transfers. -2- 3 Notwithstanding the foregoing, such antidilution protection shall in no event provide superior rights, preferences and privileges with regard to the Series Preferred than the antidilution protection accorded to any then currently designated series of preferred stock. (b) Subdivision or Combination of Shares. If the Company at any time while this Warrant remains outstanding and unexpired shall subdivide or combine its outstanding shares of Series Preferred, the Warrant Price shall be proportionately decreased in the case of a subdivision or increased in the case of a combination, effective at the close of business on the date the subdivision or combination becomes effective. (c) Stock Dividends and Other Distributions. If the Company at any time while this Warrant is outstanding and unexpired shall (i) pay a dividend with respect to Series Preferred payable in Series Preferred, or (ii) make any other distribution with respect to Series Preferred (except any distribution specifically provided for in Sections 4(a) and 4(b)), of Series Preferred, then the Warrant Price shall be adjusted, from and after the date of determination of shareholders entitled to receive such dividend or distribution, to that price determined by multiplying the Warrant Price in effect immediately prior to such date of determination by a fraction (i) the numerator of which shall be the total number of shares of Series Preferred outstanding immediately prior to such dividend or distribution, and (ii) the denominator of which shall be the total number of shares of Series Preferred outstanding immediately after such dividend or distribution. (d) Adjustment of Number of Shares. Upon each adjustment in the Warrant Price, the number of Shares of Series Preferred purchasable hereunder shall be adjusted, to the nearest whole share, to the product obtained by multiplying the number of Shares purchasable immediately prior to such adjustment in the Warrant Price by a fraction, the numerator of which shall be the Warrant Price immediately prior to such adjustment and the denominator of which shall be the Warrant Price immediately thereafter. (e) Antidilution Rights. The other antidilution rights applicable to the Shares of Series Preferred purchasable hereunder are set forth in the Company's Articles of Incorporation, as amended through the Date of Grant, a true and complete copy of which is attached hereto as Exhibit B (the "Charter"). Such antidilution rights shall not be restated, amended, modified or waived in any manner which would adversely affect the Series Preferred relative to any other currently designated series of the Company's preferred stock without such holder's prior written consent. The Company shall promptly provide the holder hereof with any restatement, amendment, modification or waiver of the Charter promptly after the same has been made. 5. Notice of Adjustments. Whenever the Warrant Price or the number of Shares purchasable hereunder shall be adjusted pursuant to Section 4 hereof, the Company shall make a certificate signed by its chief financial officer setting forth, in reasonable detail, the event requiring the adjustment, the amount of the adjustment, the method by which such adjustment was calculated, and the Warrant Price and the number of Shares purchasable hereunder after giving effect to such adjustment, and shall cause copies of such certificate to be mailed (without regard to Section 13 hereof, by first class mail, postage prepaid) to the holder of this Warrant. In addition, whenever the conversion price or conversion ratio of the Series Preferred shall be adjusted, the Company shall make a certificate signed by its chief financial officer setting forth, in reasonable detail, the event requiring the adjustment, the amount of the adjustment, the method by -3- 4 which such adjustment was calculated, and the conversion price or ratio of the Series Preferred after giving effect to such adjustment, and shall cause copies of such certificate to be mailed (without regard to Section 13 hereof, by first class mail, postage prepaid) to the holder of this Warrant. 6. Fractional Shares. No fractional shares of Series Preferred will be issued in connection with any exercise hereunder, but in lieu of such fractional shares the Company shall make a cash payment therefor based on the fair market value of the Series Preferred on the date of exercise as reasonably determined in good faith by the Company's Board of Directors. 7. Compliance with Act; Disposition of Warrant or Shares of Series Preferred. (a) Compliance with Act. The holder of this Warrant, by acceptance hereof, agrees that this Warrant, and the shares of Series Preferred to be issued upon exercise hereof and any Common Stock issued upon conversion thereof are being acquired for investment and that such holder will not offer, sell or otherwise dispose of this Warrant, or any shares of Series Preferred to be issued upon exercise hereof or any Common Stock issued upon conversion thereof except under circumstances which will not result in a violation of the Act or any applicable state securities laws. Upon exercise of this Warrant, unless the Shares being acquired are registered under the Act and any applicable state securities laws or an exemption from such registration is available, the holder hereof shall confirm in writing that the shares of Series Preferred so purchased (and any shares of Common Stock issued upon conversion thereof) are being acquired for investment and not with a view toward distribution or resale in violation of the Act or applicable state securities laws and shall confirm such other matters related thereto as may be reasonably requested by the Company. This Warrant and all shares of Series Preferred issued upon exercise of this Warrant and all shares of Common Stock issued upon conversion thereof (unless registered under the Act and any applicable state securities laws) shall be stamped or imprinted with a legend in the following form: "THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY STATE SECURITIES LAWS. THEY MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF A REGISTRATION STATEMENT IN EFFECT WITH RESPECT TO THE SECURITIES UNDER SUCH ACT OR AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED OR UNLESS SOLD PURSUANT TO RULE 144 OF SUCH ACT OR OTHERWISE COMPLYING WITH THE PROVISIONS OF SECTION 7 OF THE WARRANT UNDER WHICH THESE SECURITIES WERE ISSUED, DIRECTLY OR INDIRECTLY." Said legend shall be removed by the Company, upon the request of a holder, at such time as the restrictions on the transfer of the applicable security shall have terminated. In addition, in connection with the issuance of this Warrant, the holder specifically represents to the Company by acceptance of this Warrant as follows: (1) The holder is aware of the Company's business affairs and financial condition, and has acquired information about the Company sufficient to reach an informed and knowledgeable decision to acquire this Warrant. The holder is acquiring this Warrant for its own account for investment purposes only and not with a view to, or for the resale in connection with, any "distribution" thereof in violation of the Act, and the holder has no present intention of selling or engaging in any public distribution of the same except pursuant to registration under the Act or exemption therefrom. -4- 5 (2) The holder understands that this Warrant has not been registered under the Act in reliance upon a specific exemption therefrom, which exemption depends upon, among other things, the bona fide nature of the holder's investment intent as expressed herein. (3) The holder is an "accredited investor" within the meaning of Rule 501 of Regulation D promulgated under the Act. (4) The holder acknowledges that investment in this Warrant and the Shares to issued upon exercise hereof involves a high degree of risk and represents that it is able, without materially impairing its financial condition to hold this Warrant and such Shares for an indefinite period of time and to suffer a complete loss of its investment. (5) The holder further understands that this Warrant must be held indefinitely unless subsequently registered under the Act and qualified under any applicable state securities laws, or unless exemptions from registration and qualification are otherwise available. The holder is aware of the provisions of Rule 144, promulgated under the Act. (b) Disposition of Warrant or Shares. With respect to any offer, sale or other disposition of this Warrant or any shares of Series Preferred acquired pursuant to the exercise of this Warrant prior to registration of such Warrant or shares, the holder hereof agrees to give written notice to the Company prior thereto, describing briefly the manner thereof, together with a written opinion of such holder's counsel, or other evidence, if reasonably requested by the Company, to the effect that such offer, sale or other disposition may be effected without registration or qualification (under the Act as then in effect or any federal or state securities law then in effect) of this Warrant or such shares of Series Preferred or Common Stock and indicating whether or not under the Act certificates for this Warrant or such shares of Series Preferred to be sold or otherwise disposed of require any restrictive legend as to applicable restrictions on transferability in order to ensure compliance with such law. Promptly upon receiving such written notice and reasonably satisfactory opinion or other evidence, if so requested, the Company, as promptly as practicable but no later than fifteen (15) days after receipt of the written notice, shall notify such holder that such holder may sell or otherwise dispose of this Warrant or such shares of Series Preferred or Common Stock, all in accordance with the terms of the notice delivered to the Company. If a determination has been made pursuant to this Section 7(b) that the opinion of counsel for the holder or other evidence is not reasonably satisfactory to the Company, the Company shall so notify the holder promptly with details thereof after such determination has been made. Notwithstanding the foregoing, this Warrant or such shares of Series Preferred or Common Stock may, as to such federal laws, be offered, sold or otherwise disposed of in accordance with Rule 144 or 144A under the Act, provided that the Company shall have been furnished with such information as the Company may reasonably request to provide a reasonable assurance that the provisions of Rule 144 or 144A have been satisfied. Each certificate representing this Warrant or the shares of Series Preferred thus transferred (except a transfer pursuant to Rule 144 or 144A) shall bear a legend as to the applicable restrictions on transferability in order to ensure compliance with such laws, unless in the aforesaid opinion of counsel for the holder as approved by the Company, such legend is not required in order to ensure compliance with such laws. The Company may issue stop transfer instructions to its transfer agent in connection with such restrictions. (c) Applicability of Restrictions. Neither any restrictions of any legend described in this Warrant nor the requirements of Section 7(b) above shall apply to any transfer of, or grant of a security -5- 6 interest in, this Warrant (or the Series Preferred or Common Stock obtainable upon exercise thereof) or any part hereof (i) to a partner of the holder if the holder is a partnership, (ii) to a partnership of which the holder is a partner, or (iii) to any affiliate of the holder if the holder is a corporation; provided, however, in any such transfer, if applicable, the transferee shall agree in writing to be bound by the terms of this Warrant as if an original signatory hereto. 8. Rights as Shareholders; Information. No holder of this Warrant, as such, shall be entitled to vote or receive dividends or be deemed the holder of Series Preferred or any other securities of the Company which may at any time be issuable on the exercise hereof for any purpose, nor shall anything contained herein be construed to confer upon the holder of this Warrant, as such, any of the rights of a shareholder of the Company or any right to vote for the election of directors or upon any matter submitted to shareholders at any meeting thereof, or to receive notice of meetings, or to receive dividends or subscription rights or otherwise until this Warrant shall have been exercised and the Shares purchasable upon the exercise hereof shall have become deliverable, as provided herein. Notwithstanding the foregoing, the Company will transmit to the holder of this Warrant such information, documents and reports (i) as set forth on Exhibit C attached hereto prior to the Company's IPO and (ii) as are generally distributed to the holders of any class or series of the securities of the Company concurrently with the distribution thereof to the shareholders after the Company's IPO. 9. Registration Rights. The Company grants registration rights to the holder of this Warrant for any Common Stock of the Company obtained upon conversion of the Series Preferred, that are the same as the registration rights granted to the investors in that certain Amended and Restated Investors' Rights Agreement dated as of March 31, 1996 (the "Registration Rights Agreement"), with the following exceptions and clarifications: (1) The holder will have no demand registration rights as set forth in Section 1.2 of the Registration Rights Agreement. (2) The holder will be subject to the same provisions regarding indemnification as contained in the Registration Rights Agreement. (3) The registration rights are assignable by the holder of this Warrant to the extent such assignment is not inconsistent with Section 7 hereof and Section 1.13 of the Registration Rights Agreement. (4) The holder shall be subject to the "Market Stand-off" provisions of Section 1.15 of the Registration Rights Agreement. 10. Additional Rights. 10.1 Secondary Sales. The Company will promptly provide the holder of this Warrant with notice of any offer (of which it has knowledge) to acquire from the Company's security holders more than ten percent (10%) of the total voting power of the Company. 10.2 Mergers. The Company shall provide the holder of this Warrant with at least twenty (20) days' notice of the terms and conditions of any of the following potential transactions: (i) the sale, lease, -6- 7 exchange, conveyance or other disposition of all or substantially all of the Company's property or business, or (ii) its merger into or consolidation with any other corporation (other than a wholly-owned subsidiary of the Company), or any transaction (including a merger or other reorganization) or series of related transactions, in which more than 50% of the voting power of the Company is disposed of. 10.3 Right to Convert Warrant into Stock: Net Issuance. (a) Right to Convert. In addition to and without limiting the rights of the holder under the terms of this Warrant, the holder shall have the right to convert this Warrant or any portion thereof (the "Conversion Right") into shares of Series Preferred (or Common Stock if the Series Preferred has been converted into Common Stock) as provided in this Section 10.3 at any time or from time to time during the term of this Warrant. Upon exercise of the Conversion Right with respect to a particular number of shares subject to this Warrant (the "Converted Warrant Shares"), the Company shall deliver to the holder (without payment by the holder of any exercise price or any cash or other consideration) (X) that number of shares of fully paid and nonassessable Series Preferred (or Common Stock if the Series Preferred has been converted into Common Stock) equal to the quotient obtained by dividing the value of this Warrant (or the specified portion hereof) on the Conversion Date (as defined in subsection (b) hereof), which value shall be determined by subtracting (A) the aggregate Warrant Price of the Converted Warrant Shares immediately prior to the exercise of the Conversion Right from (B) the aggregate fair market value of the Converted Warrant Shares issuable upon exercise of this Warrant (or the specified portion hereof) on the Conversion Date (as herein defined) by (Y) the fair market value of one share of Series Preferred (or Common Stock if the Series Preferred has been converted into Common Stock) on the Conversion Date (as herein defined). Expressed as a formula, such conversion (assuming the Series Preferred has been converted into Common Stock) shall be computed as follows: X = B - A ----- Y Where: X = the number of shares of Common Stock that may be issued to holder Y = the fair market value of one share of Common Stock A = the aggregate Warrant Price (i.e., Converted Warrant Shares x Warrant Price) B = the aggregate fair market value (i.e., fair market value x Converted Warrant Shares) No fractional shares shall be issuable upon exercise of the Conversion Right, and, if the number of shares to be issued determined in accordance with the foregoing formula is other than a whole number, the Company shall pay to the holder an amount in cash equal to the fair market value of the resulting fractional share on the Conversion Date (as hereinafter defined). For purposes of Section 9 of this Warrant, shares -7- 8 issued pursuant to the Conversion Right shall be treated as if they were issued upon the exercise of this Warrant. (b) Method of Exercise. The Conversion Right may be exercised by the holder by the surrender of this Warrant at the principal office of the Company together with a written statement specifying that the holder thereby intends to exercise the Conversion Right and indicating the number of shares subject to this Warrant which are being surrendered (referred to in Section 10.3(a) hereof as the Converted Warrant Shares) in exercise of the Conversion Right. Such conversion shall be effective upon receipt by the Company of this Warrant together with the aforesaid written statement, or on such later date as is specified therein (the "Conversion Date"), and, at the election of the holder hereof, may be made contingent upon the closing of the sale of the Company's Common Stock to the public in a public offering pursuant to a Registration Statement under the Act (a "Public Offering"). Certificates for the shares issuable upon exercise of the Conversion Right and, if applicable, a new warrant evidencing the balance of the shares remaining subject to this Warrant, shall be issued as of the Conversion Date and shall be delivered to the holder within thirty (30) days following the Conversion Date. Any conversion from Series Preferred to Common Stock shall be in the ratio of one (1) share of Common Stock for each share of Series Preferred (as adjusted herein and in the Charter). On the Date of Grant, each share of the Series Preferred represented by this Warrant is convertible into one share of Common Stock. (c) Determination of Fair Market Value. For purposes of this Section 10.3, "fair market value" of a share of Series Preferred (or Common Stock if the Series Preferred has been automatically converted into Common Stock) as of a particular date (the "Determination Date") shall mean: (i) If the Conversion Right is exercised in connection with and contingent upon a Public Offering, and if the Company's Registration Statement relating to such Public Offering ("Registration Statement") has been declared effective by the SEC, then the initial "Price to Public" specified in the final prospectus with respect to such offering. (ii) If the Conversion Right is not exercised in connection with and contingent upon a Public Offering, then as follows: (A) If traded on a securities exchange, the fair market value of the Common Stock shall be deemed to be the average of the closing prices of the Common Stock on such exchange over the 30-day period ending five business days prior to the Determination Date, and the fair market value of the Series Preferred shall be deemed to be such fair market value of the Common Stock multiplied by the number of shares of Common Stock into which each share of Series Preferred is then convertible; (B) If traded over-the-counter, the fair market value of the Common Stock shall be deemed to be the average of the closing bid prices of the Common Stock over the 30-day period ending five business days prior to the Determination Date, and the fair market value of the Series Preferred shall be deemed to be such fair market value of the Common Stock multiplied by the number of shares of Common Stock into which each share of Series Preferred is then convertible; and -8- 9 (C) If there is no public market for the Common Stock, then fair market value shall be determined in good faith by the Company' Board of Directors. 10.4 Exercise Prior to Expiration. To the extent this Warrant is not previously exercised as to all of the Shares subject hereto, and if the fair market value of one share of the Series Preferred is greater than the Warrant Price then in effect, this Warrant shall be deemed automatically exercised pursuant to Section 10.3 above (even if not surrendered) immediately before its expiration. For purposes of such automatic exercise, the fair market value of one share of the Series Preferred upon such expiration shall be determined pursuant to Section 10.3(c). To the extent this Warrant or any portion thereof is deemed automatically exercised pursuant to this Section 10.4, the Company agrees to promptly notify the holder hereof of the number of Shares, if any, the holder hereof is to receive by reason of such automatic exercise. 11. Representations and Warranties. The Company represents and warrants to the holder of this Warrant as follows: (a) This Warrant has been duly authorized and executed by the Company and is a valid and binding obligation of the Company enforceable in accordance with its terms, subject to laws of general application relating to bankruptcy, insolvency and the relief of debtors and the rules of law or principles at equity governing specific performance, injunctive relief and other equitable remedies; (b) The Shares have been duly authorized and reserved for issuance by the Company and, when issued in accordance with the terms hereof, will be validly issued, fully paid and non-assessable; (c) The rights, preferences, privileges and restrictions granted to or imposed upon the Series Preferred and the holders thereof are as set forth in the Charter, as amended to the Date of the Grant, a true and complete copy of which has been delivered to the original holder of this Warrant and is attached hereto as Exhibit B; (d) The shares of Common Stock issuable upon conversion of the Shares have been duly authorized and reserved for issuance by the Company and, when issued in accordance with the terms of the Charter will be validly issued, fully paid and nonassessable; (e) The execution and delivery of this Warrant are not, and the issuance of the Shares upon exercise of this Warrant in accordance with the terms hereof will not be, inconsistent with the Company's Charter or by-laws, do not and will not contravene any law, governmental rule or regulation, judgment or order applicable to the Company, and do not and will not conflict with or contravene any provision of, or constitute a default under, any indenture, mortgage, contract or other instrument of which the Company is a party or by which it is bound or require the consent or approval of, the giving of notice to, the registration or filing with or the taking of any action in respect of or by, any Federal, state or local government authority or agency or other person, except for the filing of notices pursuant to federal and state securities laws, which filings will be effected by the time required thereby; and (f) There are no actions, suits, audits, investigations or proceedings pending or, to the knowledge of the Company, threatened against the Company in any court or before any governmental commission, board or authority which, if adversely determined, will have a material adverse effect on the ability of the Company to perform its obligations under this Warrant. -9- 10 12. Modification and Waiver. This Warrant and any provision hereof may be changed, waived, discharged or terminated only by an instrument in writing signed by the party against which enforcement of the same is sought. 13. Notices. Any notice, request, communication or other document required or permitted to be given or delivered to the holder hereof or the Company shall be delivered, or shall be sent by certified or registered mail, postage prepaid, to each such holder at its address as shown on the books of the Company or to the Company at the address indicated therefor on the signature page of this Warrant. 14. Binding Effect on Successors. This Warrant shall be binding upon any corporation succeeding the Company by merger, consolidation or acquisition of all or substantially all of the Company's assets, and the obligations of the Company set forth in Section 8 hereof and the rights, preferences and privileges set forth in the Charter relating to the Series Preferred issuable upon the exercise or conversion of this Warrant shall survive the exercise, conversion and termination of this Warrant and all of the covenants and agreements of the Company shall inure to the benefit of the successors and assigns of the holder hereof. The Company will, at the time of the exercise or conversion of this Warrant, in whole or in part, upon request of the holder hereof but at the Company's expense, acknowledge in writing its continuing obligation to the holder hereof in respect of any rights (including, without limitation, any right to registration of the Shares) to which the holder hereof shall continue to be entitled after such exercise or conversion in accordance with this Warrant; provided, that the failure of the holder hereof to make any such request shall not affect the continuing obligation of the Company to the holder hereof in respect of such rights. 15. Lost Warrants or Stock Certificates. The Company covenants to the holder hereof that, upon receipt of evidence reasonably satisfactory to the Company of the loss, theft, destruction or mutilation of this Warrant or any stock certificate and, in the case of any such loss, theft or destruction, upon receipt of an indemnity reasonably satisfactory to the Company, or in the case of any such mutilation upon surrender and cancellation of such Warrant or stock certificate, the Company will make and deliver a new Warrant or stock certificate, of like tenor, in lieu of the lost, stolen, destroyed or mutilated Warrant or stock certificate. 16. Descriptive Headings. The descriptive headings of the several paragraphs of this Warrant are inserted for convenience only and do not constitute a part of this Warrant. The language in this Warrant shall be construed as to its fair meaning without regard to which party drafted this Warrant. 17. Governing Law. This Warrant shall be construed and enforced in accordance with, and the rights of the parties shall be governed by, the laws of the State of California. 18. Survival of Representations, Warranties and Agreements. All representations and warranties of the Company and the holder hereof contained herein shall survive the Date of Grant, the exercise or conversion of this Warrant (or any part hereof) or the termination or expiration of rights hereunder. All agreements of the Company and the holder hereof contained herein shall survive indefinitely until, by their respective terms, they are no longer operative. 19. Remedies. In case any one or more of the covenants and agreements contained in this Warrant shall have been breached, the holders hereof (in the case of a breach by the Company), or the Company (in the case of a breach by a holder), may proceed to protect and enforce their or its rights either -10- 11 by suit in equity and/or by action at law, including, but not limited to, an action for damages as a result of any such breach and/or an action for specific performance of any such covenant or agreement contained in this Warrant. 20. No Impairment of Rights. The Company will not, by amendment of its Charter or through any other means, avoid or seek to avoid the observance or performance of any of the terms of this Warrant, but will at all times in good faith assist in the carrying out of all such terms and in the taking of all such action as may be necessary or appropriate in order to protect the rights of the holder of this Warrant against impairment. 21. Severability. The invalidity or unenforceability of any provision of this Warrant in any jurisdiction shall not affect the validity or enforceability of such provision in any other jurisdiction, or affect any other provision of this Warrant, which shall remain in full force and effect. 22. Recovery of Litigation Costs. If any legal action or other proceeding is brought for the enforcement of this Warrant, or because of an alleged dispute, breach, default, or misrepresentation in connection with any of the provisions of this Warrant, the successful or prevailing party or parties shall be entitled to recover reasonable attorneys' fees and other costs incurred in that action or proceeding, in addition to any other relief to which it or they may be entitled. 23. Entire Agreement; Modification. This Warrant constitutes the entire agreement between the parties pertaining to the subject matter contained in it and supersedes all prior and contemporaneous agreements, representations, and undertakings of the parties, whether oral or written, with respect to such subject matter. SIGNAL PHARMACEUTICALS, INC. By [SIG] ------------------------------------ Title V.P. Finance, CFO ---------------------------------- Address: 5555 Oberlin Drive San Diego, California 92121 -11- 12 EXHIBIT A NOTICE OF EXERCISE To: SIGNAL PHARMACEUTICALS, INC. 1. The undersigned hereby: [ ] elects to purchase _______ shares of Series C-1 Preferred Stock of SIGNAL PHARMACEUTICALS, INC. pursuant to the terms of the attached Warrant, and tenders herewith payment of the purchase price of such shares in full, or [ ] elects to exercise its net issuance rights pursuant to Section 10.3 of the attached Warrant with respect to Shares of Series C-1 Preferred Stock. 2. Please issue a certificate or certificates representing said shares in the name of the undersigned or in such other name or names as are specified below: ----------------------------- (Name) ----------------------------- ----------------------------- (Address) 3. The undersigned represents that the aforesaid shares are being acquired for the account of the undersigned for investment and not with a view to, or for resale in connection with, the distribution thereof and that the undersigned has no present intention of distributing or reselling such shares, all except as in compliance with applicable securities laws. ---------------------------------------- (Signature) - ---------------- (Date) 13 EXHIBIT A-1 NOTICE OF EXERCISE To: SIGNAL PHARMACEUTICALS, INC. (the "Company") 1. Contingent upon and effective immediately prior to the closing (the "Closing") of the Company's public offering contemplated by the Registration Statement on Form S___, filed _____ __, 19__, the undersigned hereby: [ ] elects to purchase __ shares of Series C-1 Preferred Stock of the Company (or such lesser number of shares as may be sold on behalf of the undersigned at the Closing) pursuant to the terms of the attached Warrant, or [ ] elects to exercise its net issuance rights pursuant to Section 10.3 of the attached Warrant with respect to ___ Shares of Series C-1 Preferred Stock. 2. Please deliver to the custodian for the selling shareholders a stock certificate representing such ________ shares. 3. The undersigned has instructed the custodian for the selling shareholders to deliver to the Company $________ or, if less, the net proceeds due the undersigned from the sale of shares in the aforesaid public offering. If such net proceeds are less than the purchase price for such shares, the undersigned agrees to deliver the difference to the Company prior to the Closing. ---------------------------------------- (Signature) - ---------------- (Date) 14 EXHIBIT B CHARTER 15 EXHIBIT C Information to be provided to the holder prior to the Company's initial public offering (as described in the Warrant): (i) As soon as available but in any event within 30 days after the end of each monthly accounting period in each fiscal year, unaudited consolidated statements of operations and consolidated cash flows of the Company and its subsidiaries for such monthly period, and consolidated balance sheets of the Company and its subsidiaries as of the end of such monthly period. (ii) Prior to the end of each fiscal year, a summary of an annual budget (approved by the Board of Directors) prepared on a monthly, consolidated basis for the Company and its subsidiaries for the succeeding fiscal year (displaying detailed anticipated statements of operations and cash flows and balance sheets), and promptly upon preparation thereof any other summaries of significant budgets which the Company prepares and any revisions of such annual or other budgets. EX-10.17 20 EXHIBIT 10.17 1 EXHIBIT 10.17 SECURED PROMISSORY NOTE $3,000,000 Dated: December 2, 1996 FOR VALUE RECEIVED, the undersigned, SIGNAL PHARMACEUTICALS, INC. ("Borrower"), a California corporation, HEREBY PROMISES TO PAY to the order of MMC/GATX PARTNERSHIP NO. I, a California general partnership ("Lender") the principal amount of Three Million Dollars ($3,000,000) or such lesser amount as shall equal the outstanding principal balance of the Loan made by Lender to Borrower pursuant to the Loan and Security Agreement referred to below (the "Loan Agreement"), and to pay all other amounts due with respect to the Loan on the dates and in the amounts set forth in the Loan Agreement. The principal amount of this Note shall be payable in thirty-five (35) consecutive monthly installments of $83,334.00 per month and a final installment of $83,310.00 on the last day of each month commencing on June 30, 1997. All unpaid principal and interest shall, in any event, be payable no later than May 31, 2000. Interest on the unpaid principal amount of this Note from the date of this Note until such principal amount is paid in full shall accrue at the Loan Rate or, if applicable, the Default Rate. The Loan Rate for this Note is 13.6% per annum (based on a year of 360 days and actual days elapsed). All accrued interest shall be payable on the last day of each calendar month, commencing December 31, 1996. Whenever any payment due hereunder shall fall on a day other than a Business Day, such payment shall be made on the next succeeding Business Day, and such extension of time shall be included in the computation of interest or fees, as the case may be. Principal, interest and all other amounts due with respect to the Loan, are payable in lawful money of the United States of America to Lender as follows: GATX Capital Corporation, P.O. Box 71316, Chicago, Illinois 60694, in immediately available funds. The Loan made by Lender to Borrower and the interest rate applicable thereto, and all payments made with respect thereto, shall be recorded by Lender by Lender on its books. Attached hereto is an amortization schedule showing the scheduled payments of principal and interest. This Note is the Note referred to in, and is entitled to the benefits of, the Loan and Security Agreement, dated as of November 22, 1996, between Borrower and Lender. The Loan Agreement, among other things, (a) provides for the making of a secured Loan by Lender to Borrower in the principal amount first above mentioned, and (b) contains provisions for acceleration of the maturity hereof upon the happening of certain stated events. Borrower may, at its option, prepay the Loan evidenced by this Note, either in whole or from time to time in any part of the principal amount thereof equal to $500,000 or more, at a prepayment price equal to the principal amount of the Loan so to be prepaid, plus interest accrued thereon through and including the date of such prepayment, plus the premium set forth in the Loan Agreement. If the maturity of the Loan is accelerated under the Loan Agreement, Borrower shall pay to Lender, in addition to principal, interest and all other amounts due with respect to the Loan, as liquidated damages for loss of Lender's benefit of the bargain and not as a penalty, an amount equal to the premium payable if the Loan were prepaid on the date of such acceleration. This Note and the obligation of Borrower to repay the unpaid principal amount of the Loan, interest on the Loan and all other amounts due Lender under the Loan Agreement is secured under the Loan Agreement. Presentment for payment, demand, notice of protest and all other demands and notices of any kind in connection with the execution, delivery, performance and enforcement of this Note are hereby waived. -13- 2 Borrower shall pay all reasonable fees and expenses, including, without limitation, reasonable attorneys' fees and costs, incurred by Lender in the enforcement or attempt to enforce any of Borrower's obligations hereunder not performed when due. This Note shall be governed by, and construed and interpreted in accordance with, the laws of the State of California. IN WITNESS WHEREOF, Borrower has caused this Note to be duly executed by one of its officers thereunto duly authorized on the date hereof. SIGNAL PHARMACEUTICALS, INC. By: /s/ BRAD GORDON ----------------------------------- Name: Brad Gordon ----------------------------------- Title: V.P. Finance, CFO ----------------------------------- EX-10.18 21 EXHIBIT 10.18 1 EXHIBIT 10.18 SIGNAL PHARMACEUTICALS, INC. SERIES E PREFERRED STOCK PURCHASE AGREEMENT SEPTEMBER 9, 1997 2 TABLE OF CONTENTS 1. PURCHASE AND SALE OF STOCK...................................................1 1.1 Sale and Issuance of Series E Preferred Stock................................1 1.2 Closing......................................................................1 (a) First Closing.........................................................1 1.3 Subsequent Sale of Series E Preferred Stock..................................1 2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY................................2 2.1 Organization, Good Standing and Qualification................................2 2.2 Capitalization and Voting Rights.............................................2 (a) Preferred Stock.......................................................2 (b) Common Stock..........................................................2 (c) Other Rights..........................................................2 2.3 Subsidiaries.................................................................3 2.4 Authorization................................................................3 2.5 Valid Issuance of Preferred and Common Stock.................................3 2.6 Governmental Consents........................................................4 2.7 Litigation...................................................................4 2.8 Proprietary Information Agreements...........................................5 2.9 Patents and Trademarks.......................................................5 2.10 Compliance with Other Instruments............................................5 2.11 Agreements; Action...........................................................6 2.12 Related-Party Transactions...................................................7 2.13 Permits......................................................................7 2.14 Environmental and Safety Laws................................................7 2.15 Manufacturing and Marketing Rights...........................................8 2.16 Disclosure...................................................................8 2.17 Registration Rights..........................................................8 2.18 Corporate Documents..........................................................8 2.19 Title to Property and Assets.................................................8 2.20 Qualified Small Business.....................................................8 2.21 Financial Statements.........................................................9 2.22 Changes......................................................................9 2.23 Employee Benefit Plans......................................................10 2.24 Tax Returns, Payments and Elections.........................................10 2.25 Insurance...................................................................10 2.26 Minute Books................................................................10 2.27 Labor Agreements and Actions................................................11 2.28 Section 83(b) Elections.....................................................11 2.29 Real Property Holding Company...............................................11
i. 3 TABLE OF CONTENTS (CONTINUED) 3. REPRESENTATIONS AND WARRANTIES OF THE INVESTORS.............................12 3.1 Authorization...............................................................12 3.2 Purchase Entirely for Own Account...........................................12 3.3 Disclosure of Information...................................................12 3.4 Investment Experience.......................................................12 3.5 Accredited Investor.........................................................13 3.6 Restricted Securities.......................................................13 3.7 Further Limitations on Disposition..........................................13 3.8 Legends.....................................................................13 4. CALIFORNIA COMMISSIONER OF CORPORATIONS.....................................14 4.1 Corporate Securities Law....................................................14 5. CONDITIONS OF EACH INVESTOR'S OBLIGATION AT THE CLOSINGS....................14 5.1 Representations and Warranties..............................................14 5.2 Performance.................................................................14 5.3 Compliance Certificate......................................................14 5.4 Qualifications..............................................................14 5.5 Proceedings and Documents...................................................15 5.6 Board of Directors..........................................................15 5.7 Opinion of Company Counsel..................................................15 5.8 Investors' Rights Agreement.................................................15 6. CONDITIONS OF THE COMPANY'S OBLIGATIONS AT THE CLOSINGS.....................15 6.1 Representations and Warranties..............................................15 6.2 Payment of Purchase Price...................................................15 6.3 Qualification...............................................................15 7. MISCELLANEOUS...............................................................16 7.1 Survival of Warranties......................................................16 7.2 Successors and Assigns......................................................16 7.3 Governing Law...............................................................16 7.4 Counterparts................................................................16 7.5 Expenses....................................................................16 7.6 Titles and Subtitles........................................................16 7.7 Notices.....................................................................16 7.8 Finder's Fee................................................................17 7.9 Amendments and Waivers......................................................17
ii. 4 TABLE OF CONTENTS (CONTINUED) 7.10 Severability................................................................17 7.11 Aggregation of Stock........................................................17 7.12 Regulated Financial Institutions Compliance Obligations.....................17
iii. 5 TABLE OF CONTENTS SCHEDULE A - Schedule of Investors SCHEDULE B - Schedule of Exceptions EXHIBIT A - Amended and Restated Articles of Incorporation EXHIBIT B - Amended and Restated Investors' Rights Agreement EXHIBIT C - Proprietary Information and Inventions Agreement EXHIBIT D - Form of Opinion of Cooley Godward LLP iv. 6 STOCK PURCHASE AGREEMENT THIS STOCK PURCHASE AGREEMENT is made as of the 9th day of September, 1997, by and between Signal Pharmaceuticals, Inc., a California corporation (the "Company"), and the investors listed on Schedule A hereto (individually an "Investor" and collectively the "Investors"). THE PARTIES HEREBY AGREE AS FOLLOWS: 1. PURCHASE AND SALE OF STOCK. 1.1 SALE AND ISSUANCE OF SERIES E PREFERRED STOCK. (a) The Company shall adopt and file with the Secretary of State of California, and the Secretary of State of California shall accept on or before the First Closing (as defined below), the Amended and Restated Articles of Incorporation in the form attached hereto as Exhibit A. (b) Subject to the terms and conditions of this Agreement, each Investor agrees, severally and not jointly, to purchase at a Closing (as defined below) under this Agreement, and the Company agrees to sell and issue to the Investors at a Closing, that number of shares of the Company's Series E Preferred Stock set forth opposite each Investor's name on Schedule A hereto for a price of $1.91 for each share of Series E Preferred Stock. 1.2 CLOSING. (a) FIRST CLOSING. The initial purchase and sale of the Series E Preferred Stock shall take place at the offices of Cooley Godward LLP, 4365 Executive Drive, Suite 1100, San Diego, California 92121, at 4:30 P.M. on September 9, 1997, or at such other time and place as the Company and the Investors agree orally or in writing (which time and place are designated as the "First Closing"). At the First Closing and each subsequent Closing, the Company shall deliver to each Investor purchasing at the First Closing or such subsequent Closing, a certificate representing the shares of Series E Preferred Stock which each Investor is purchasing against delivery to the Company by each Investor of a wire transfer or check in the amount of the purchase price therefor payable to the Company's order. 1.3 SUBSEQUENT SALE OF SERIES E PREFERRED STOCK. Subject to the terms and conditions of this Agreement, the Company may sell, on or before October 31, 1997, up to the balance of the Company's authorized but unissued Series E Preferred Stock to such persons as the Company may determine at the same price per share as the Series E Preferred Stock purchased and sold at the First Closing. Any such sale (each, a 1. 7 "Closing") shall be upon the same terms and conditions as those contained herein, and such persons or entities shall become parties to this Agreement and that certain Amended and Restated Investors' Rights Agreement of even date herewith, by and among the Company and the Investors, the form of which is attached hereto as Exhibit B (the "Investors' Rights Agreement"), and shall have the rights and obligations of an Investor hereunder and thereunder. 2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company hereby represents and warrants to the Investors that, except as set forth on a Schedule of Exceptions attached hereto as Schedule B, specifically identifying the relevant subparagraph hereof, which exceptions shall be deemed to be representations and warranties as if made hereunder: 2.1 ORGANIZATION, GOOD STANDING AND QUALIFICATION. The Company is a corporation duly organized, validly existing and in good standing under the laws of the State of California and has all requisite corporate power and authority to carry on its business as now conducted and as proposed to be conducted. The Company is duly qualified to transact business and is in good standing in each jurisdiction in which the failure so to qualify would have a material adverse effect on its business or properties. 2.2 CAPITALIZATION AND VOTING RIGHTS. The authorized capital of the Company consists, or will consist prior to the First Closing, of: (a) PREFERRED STOCK. 21,747,131 shares of Preferred Stock (the "Preferred Stock"), of which 2,626,892 shares have been designated Series A Preferred Stock, all of which are issued and outstanding, of which 2,875,000 shares have been designated Series B Preferred Stock, all of which are issued and outstanding, of which 8,791,433 shares have been designated Series C Preferred Stock, of which 8,791,432 are issued and outstanding, of which 250,000 shares have been designated Series C-1 Preferred Stock, all of which are subject to issued and outstanding warrants, of which 732,601 shares have been designated Series D Preferred Stock, of which 500,000 shares are issued and outstanding, and of which 6,471,205 shares have been designated Series E Preferred Stock, up to all of which will be sold pursuant to this Agreement. The rights, privileges and preferences of the Series A, Series B, Series C, Series C-1, Series D and Series E Preferred Stock will be as stated in the Company's Amended and Restated Articles of Incorporation attached hereto as Exhibit A. (b) COMMON STOCK. 30,000,000 shares of common stock ("Common Stock"), of which 2,437,065 shares are issued and outstanding. (c) OTHER RIGHTS. Except for (A) the conversion privileges of the Series A Preferred Stock, the Series B Preferred Stock, the Series C Preferred Stock, the 2. 8 Series C-1 Preferred Stock, the Series D Preferred Stock and the Series E Preferred Stock sold pursuant to this Agreement, (B) 2,500,000 shares of Common Stock reserved for issuance pursuant to the Company's 1993 Stock Option Plan, of which 1,468,391 shares are subject to outstanding options and of which 993,565 shares are issued and outstanding, (C) 550,000 shares of Common Stock reserved for issuance pursuant to the Company's 1993 Founders' Stock Option Plan, 159,000 of which are subject to outstanding options and of which 373,000 shares are issued and outstanding, and (D) 1,000,000 shares of Common Stock reserved for issuance pursuant to the Company's 1997 Stock Option Plan, of which 610,070 shares are subject to outstanding options and none of which are issued and outstanding, there are not outstanding any options, warrants, rights (including conversion or preemptive rights) or agreements for the purchase or acquisition from the Company of any shares of its capital stock. The Company is not a party or subject to any agreement or understanding, and, to the Company's knowledge, there is no agreement or understanding between any persons and/or entities, which affects or relates to the voting or giving of written consents with respect to any security or by a director of the Company. The only price-based anti-dilution rights held by any securityholder of the Company are those held by Tanabe Seiyaku Co., Ltd. ("Tanabe") pursuant to that certain Stock Purchase Agreement dated March 31, 1996 between the Company and Tanabe, and those set forth in the Company's Amended and Restated Articles of Incorporation filed pursuant to Section 1.1(a) hereof. 2.3 SUBSIDIARIES. The Company does not presently own or control, directly or indirectly, any interest in any other corporation, association, or other business entity. 2.4 AUTHORIZATION. All corporate action on the part of the Company, its officers, directors and shareholders necessary for the authorization, execution and delivery of this Agreement, the Investors' Rights Agreement, the performance of all obligations of the Company hereunder and thereunder and the authorization, issuance (or reservation for issuance) and delivery of the Series E Preferred Stock being sold hereunder, the Common Stock issuable upon conversion of the Series E Preferred Stock has been taken or will be taken prior to the First Closing, and this Agreement and Investors' Rights Agreement constitute valid and legally binding obligations of the Company, enforceable in accordance with their respective terms, except (i) as limited by applicable bankruptcy, insolvency, reorganization, moratorium, and other laws of general application affecting enforcement of creditors' rights generally, (ii) as limited by laws relating to the availability of specific performance, injunctive relief, or other equitable remedies and (iii) to the extent the indemnification provisions contained in the Investors' Rights Agreement may be limited by applicable federal or state securities laws. 2.5 VALID ISSUANCE OF PREFERRED AND COMMON STOCK. 3. 9 (a) The shares of Series E Preferred Stock which are being purchased by the Investors hereunder, when issued, sold and delivered in accordance with the terms hereof for the consideration expressed herein, will be duly and validly issued, and, based in part upon the representations of the Investors in this Agreement, will be issued in compliance with all applicable federal and state securities laws and such shares of Series E Preferred Stock will be fully paid and non-assessable. The Common Stock issuable upon conversion of the Series E Preferred Stock purchased under this Agreement has been duly and validly reserved for issuance and, upon issuance in accordance with the terms of the Amended and Restated Articles of Incorporation, shall be duly and validly issued, fully paid and nonassessable, and issued in compliance with all applicable securities laws, as presently in effect, of the United States and each of the states whose securities laws govern the issuance of any of the Series E Preferred Stock hereunder. (b) The outstanding shares of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock and Common Stock are all duly and validly authorized and issued, fully paid and nonassessable, and were issued in compliance with all applicable federal and state securities laws. The outstanding warrants to purchase Series C-1 Preferred Stock were duly and validly authorized and issued, and the shares of Series C-1 Preferred Stock underlying such warrants have been duly and validly reserved for issuance. 2.6 GOVERNMENTAL CONSENTS. No consent, approval, order or authorization of, or registration, qualification, designation, declaration or filing with, any federal, state, local or provincial governmental authority on the part of the Company is required in connection with the consummation of the transactions contemplated by this Agreement, except for the filing of a Form D pursuant to Regulation D promulgated under the Securities Act of 1933, as amended, which filing will be effected within 15 days of the sale of the Series E Preferred Stock hereunder, and any other filings that must be made after the Closing, which will be filed in a timely manner. 2.7 LITIGATION. There is no action, suit, proceeding or investigation pending or, to the Company's knowledge, currently threatened against the Company which questions the validity of this Agreement, the Investors' Rights Agreement, or the right of the Company to enter into either of them, or to consummate the transactions contemplated hereby or thereby, or which might result, either individually or in the aggregate, in any material adverse changes in the assets, condition, affairs or prospects of the Company, financially or otherwise, or any change in the current equity ownership of the Company, nor is the Company aware that there is any basis for the foregoing. The foregoing includes, without limitation, actions pending or threatened involving the prior employment of any of the Company's employees, their use in connection with the Company's business of any information or techniques allegedly proprietary to any of their former employers, or their obligations under any agreements with prior employers. The 4. 10 Company is not a party or subject to the provisions of any order, writ, injunction, judgment or decree of any court or government agency or instrumentality. There is no action, suit, proceeding or investigation by the Company currently pending or which the Company intends to initiate. 2.8 PROPRIETARY INFORMATION AGREEMENTS. Each employee, officer and consultant of the Company has executed a Proprietary Information and Inventions Agreement in the form set forth on Exhibit C hereto. The Company, after reasonable investigation, is not aware that any of its employees, officers or consultants are in violation thereof, and the Company will use its best efforts to prevent any such violation. 2.9 PATENTS AND TRADEMARKS. To the best of its knowledge, the Company has sufficient title and ownership of all patents, trademarks, service marks, tradenames, copyrights, trade secrets, information, proprietary rights and processes necessary for its business as now conducted, and believes it will be able to develop such intellectual property such that it can operate its business as proposed to be conducted, without any conflict with or infringement of the rights of others. The Schedule of Exceptions contains a complete list of patents and pending patent applications by the Company, as well as all licenses, collaborative agreements, development agreements, distribution agreements and similar agreements. The Company has not received any communications alleging, nor does the Company have any knowledge, that the Company has violated or, by conducting its business as proposed, would violate any of the patents, trademarks, service marks, tradenames, copyrights or trade secrets or other proprietary rights of any other person or entity. The Company is not aware that any of its employees is obligated under any contract (including licenses, covenants or commitments of any nature) or other agreement, or subject to any judgment, decree or order of any court or administrative agency, that would interfere with the use of his best efforts to promote the best interests of the Company or that would conflict with the Company's business as proposed to be conducted. Neither the execution nor delivery of this Agreement, nor the Investors' Rights Agreement, nor the carrying on of the Company's business by the employees of the Company, nor the conduct of the Company's business as proposed, will, to the Company's knowledge, conflict with or result in a breach of the terms, conditions or provisions of, or constitute a default under, any contract, covenant or instrument under which any of such employees is now obligated. The Company does not believe it is or will be necessary to utilize any inventions of any of its employees (or people it currently intends to hire) made prior to their employment by the Company. 2.10 COMPLIANCE WITH OTHER INSTRUMENTS. The Company is not in violation or default of any provisions of its Amended and Restated Articles of Incorporation or Bylaws or of any instrument, judgment, order, writ, decree, license, agreement or contract to which it is a party or by which it is bound or, to its knowledge, of any provision of federal or state statute, rule or regulation applicable to the Company. To the Company's 5. 11 knowledge, no other party to any license, contract or other agreement to which the Company is a party is in breach, default or violation thereof and, to the Company's knowledge, no facts exist which could constitute such a breach, default or violation. The execution, delivery and performance by the Company of this Agreement or the Investors' Rights Agreement and the consummation of the transactions contemplated hereby and thereby will not result in any such violation or be in conflict with or constitute, with or without the passage of time and giving of notice, either a default under any such provision, instrument, judgment, order, writ, decree or contract or an event which results in the creation of any lien, charge or encumbrance upon any assets of the Company or the suspension, revocation, impairment, forfeiture, or nonrenewal of any material permit, license, authorization, or approval applicable to the Company, its business or operations or any of its assets or properties, except that the foregoing may be limited by (i) applicable bankruptcy, insolvency, reorganization, moratorium, and other laws of general application affecting enforcement of creditors' rights generally, (ii) laws relating to the availability of specific performance, injunctive relief, or other equitable remedies, and (iii) with respect to indemnification provisions contained in the Investors' Rights Agreement, applicable federal or state securities laws. The Company has not performed any act, or failed to perform any act, which would result in the Company's loss of any right granted under any license, collaboration, joint venture or other agreement. 2.11 AGREEMENTS; ACTION. (a) Except for agreements explicitly contemplated hereby and by the Investors' Rights Agreement, there are no agreements, understandings or proposed transactions between the Company and any of its officers, directors, affiliates, or any affiliate thereof. (b) There are no agreements, understandings, instruments, contracts, proposed transactions, judgments, orders, writs or decrees to which the Company is a party or by which it is bound which may involve obligations (contingent or otherwise) of, or payments to, the Company in excess of $50,000. (c) The Company has not (i) declared or paid any dividends, or authorized or made any distribution upon or with respect to any class or series of its capital stock, (ii) incurred any indebtedness for money borrowed or any other liabilities individually in excess of $10,000 (except for trade credit incurred in the ordinary course of business) or, in the case of indebtedness and/or liabilities individually less than $10,000, in excess of $50,000 in the aggregate (except for trade credit incurred in the ordinary course of business), (iii) made any loans or advances to any person, other than ordinary advances for travel expenses or (iv) sold, exchanged or otherwise disposed of any of its assets or rights. 6. 12 (d) For the purposes of subsections (b) and (c) above, all indebtedness, liabilities, agreements, understandings, instruments, contracts and proposed transactions involving the same person or entity (including persons or entities the Company has reason to believe are affiliated therewith) shall be aggregated for the purpose of meeting the individual minimum dollar amounts of such subsections. (e) The Company is not a party to and is not bound by any contract, agreement or instrument, or subject to any restriction under its Amended and Restated Articles of Incorporation or Bylaws, which adversely affects its business as now conducted or as proposed to be conducted, its properties or its financial condition. (f) The Company has not engaged in the past three (3) months in any discussion (i) with any corporation or corporations regarding the consolidation or merger of the Company with or into any such corporation or corporations, (ii) with any corporation, partnership, association or other business entity or any individual regarding the sale, conveyance or disposition of all or substantially all of the assets of the Company, (iii) with any corporation, partnership, association or other business entity or any individual regarding any transaction or series of related transactions in which more than fifty percent (50%) of the voting power of the Company would be disposed of, or (iv) regarding any other form of acquisition, liquidation, dissolution or winding up of the Company or its assets. 2.12 RELATED-PARTY TRANSACTIONS. No employee, officer or director of the Company or member of his or her immediate family is indebted to the Company, nor is the Company indebted (or committed to make loans or extend or guarantee credit) to any of them. To the best of the Company's knowledge, none of such persons has any direct or indirect ownership interest in any firm or corporation with which the Company is affiliated or with which the Company has a business relationship, or any firm or corporation that competes with the Company, except that employees, officers or directors of the Company and members of their immediate families may own less than 5% of the outstanding stock in publicly traded companies that may compete with the Company (except that persons or entities that are affiliated with venture capital investment firms or other accredited investment institutions shall have no such 5% ownership limitations). No member of the immediate family of any officer or director of the Company is directly or indirectly interested in any material contract with the Company. 2.13 PERMITS. The Company has all franchises, permits, licenses, and any similar authority necessary for the conduct of its business as now being conducted by it, the lack of which could materially and adversely affect the business, properties, prospects, or financial condition of the Company and believes it can obtain, without undue burden or expense, any similar authority for the conduct of its business as planned 7. 13 to be conducted. The Company is not in default in any material respect under any of such franchises, permits, licenses, or other similar authority. 2.14 ENVIRONMENTAL AND SAFETY LAWS. To the best of its knowledge, the Company is not in violation of any applicable statute, law, or regulation relating to the environment or occupational health and safety, and to the best of its knowledge, no material expenditures are or will be required in order to comply with any such existing statute, law or regulation. 2.15 MANUFACTURING AND MARKETING RIGHTS. The Company has not granted rights to manufacture, produce, assemble, license, market or sell its products to any other person and is not bound by any agreement that affects the Company's exclusive right to develop, manufacture, assemble, distribute, market or sell its products. 2.16 DISCLOSURE. The Company has fully provided each Investor with all the information which such Investor has requested for deciding whether to purchase the Series E Preferred Stock and all information which the Company believes is reasonably necessary to enable such Investor to make such decision. Neither this Agreement, the Investors' Rights Agreement, nor any other statements or certificates made or delivered in connection herewith or therewith when taken together contains any untrue statement of a material fact or omits to state a material fact necessary to make the statements herein or therein not misleading. 2.17 REGISTRATION RIGHTS. Except as provided in the Investors' Rights Agreement, the Company has not granted or agreed to grant any registration rights, including piggyback rights, to any person or entity. 2.18 CORPORATE DOCUMENTS. Except for amendments necessary to satisfy representations and warranties or conditions contained herein (the form of which amendments has been approved by the Investors), the Amended and Restated Articles of Incorporation and Bylaws of the Company are in the form previously provided to the Investors. 2.19 TITLE TO PROPERTY AND ASSETS. The Company owns its property and assets free and clear of all mortgages, liens, loans and encumbrances, except such encumbrances and liens which arise in the ordinary course of business and do not materially impair the Company's ownership or use of such property or assets. With respect to the property and assets it leases, the Company is in compliance with such leases and, to the best of its knowledge, holds a valid leasehold interest free of any liens, claims or encumbrances. 2.20 QUALIFIED SMALL BUSINESS. The Company represents and warrants to the Investors that it qualifies as a "Qualified Small Business" as defined Section 1202(d) of the Internal Revenue Code of 1986, as amended (the "Code"). The Company covenants 8. 14 that so long as it reasonably believes that the Series E Preferred Stock (and/or Conversion Shares) held by Investors or a transferee would qualify as Qualified Small Business Stock as defined in Section 1202(c) of the Code it will timely file all reports or filings with the Internal Revenue Service required of a Qualified Small Business. 2.21 FINANCIAL STATEMENTS. The Company has delivered to each Investor its audited Financial Statements at December 31, 1996 and unaudited financial statements for each of the two quarters ending June 30, 1997 (the "Financial Statements"). The Financial Statements have been prepared in accordance with generally accepted accounting principles ("GAAP") applied on a consistent basis throughout the periods indicated and with each other, except that unaudited Financial Statements may not contain all footnotes required by GAAP. The Financial Statements are complete and correct in all material respects and fairly present the financial condition and results of operations of the Company as of the dates and for the periods indicated therein, subject in the case of the unaudited Financial Statements to normal year-end audit adjustments. Except as set forth in the Financial Statements, the Company has no liabilities, contingent or otherwise, other than (i) liabilities incurred in the ordinary course of business subsequent to the date of the Financial Statements and (ii) obligations under contracts and commitments incurred in the ordinary course of business and not required under generally accepted accounting principles to be reflected in the Financial Statements, which, in both cases, individually or in the aggregate, are not material to the financial condition or operating results of the Company. 2.22 CHANGES. Since June 30, 1997 there has not been: (a) any change in the assets, liabilities, financial condition or operating results of the Company, except changes which have not been, in the aggregate, materially adverse; (b) any damage, destruction or loss, whether or not covered by insurance, materially and adversely affecting the assets, properties, financial condition, operating results, prospects or business of the Company (as such business is presently conducted and as it is proposed to be conducted); (c) any waiver by the Company of a valuable right or of a material debt owed to it; (d) any satisfaction or discharge of any lien, claim or encumbrance or payment of any obligation by the Company, except which is not material to the assets, properties, financial condition, operating results or business of the Company (as such business is presently conducted and as it is proposed to be conducted); 9. 15 (e) any change or amendment to a material contract or arrangement by which the Company or any of its assets or properties is bound or subject; (f) any material change in any compensation arrangement or agreement with any employee or consultant; (g) any sale, assignment or transfer of any patents, trademarks, copyrights, trade secrets or other intangible assets; (h) any resignation or termination of employment of any officer, key employee or consultant of the Company; and the Company does not know of any impending resignation or termination of employment of any such officer, employee or consultant; or (i) to the Company's knowledge, any other event or condition of any character which might materially and adversely affect the assets, properties, financial condition, operating results or business of the Company (as such business is presently conducted and as it is proposed to be conducted). 2.23 EMPLOYEE BENEFIT PLANS. The Company does not have any Employee Benefit Plan as defined in the Employee Retirement Income Security Act of 1974. 2.24 TAX RETURNS, PAYMENTS AND ELECTIONS. The Company has filed all tax returns and reports as required by law. These returns and reports are true and correct in all material respects. The Company has paid all taxes and other assessments due, except those contested by it in good faith which are listed in the Schedule of Exceptions. The provisions for taxes as set forth in the Financial Statements is adequate for taxes due or accrued as of the date thereof. The Company has not elected pursuant to the Code, to be treated as a Subchapter S corporation or a collapsible corporation pursuant to Section 341(f) or Section 1362(a) of the Code, nor has it made any other elections pursuant to the Code (other than elections which relate solely to methods of accounting, depreciation or amortization) which would have a material effect on the Company, its financial condition, its business as presently conducted or proposed to be conducted or any of its properties or material assets. Since the date of the Financial Statements, the Company has made adequate provisions on its books of account for all taxes, assessments and governmental charges with respect to its business, properties and operations for such period. 2.25 INSURANCE. The Company has in full force and effect fire and casualty insurance policies, with extended coverage, sufficient in amount (subject to reasonable deductibles) to allow it to replace any of its properties that might be damaged or destroyed. The Company has in full force and effect errors and omissions insurance in amounts customary for companies similarly situated. 10. 16 2.26 MINUTE BOOKS. The minute books of the Company contain a complete summary of all meetings of directors and shareholders since the time of incorporation and reflect all transactions referred to in such minutes accurately in all material respects. 2.27 LABOR AGREEMENTS AND ACTIONS. The Company is not bound by or subject to (and none of its assets or properties is bound by or subject to) any written or oral, express or implied, contract, commitment or arrangement with any labor union, and no labor union has requested or, to the knowledge of the Company, has sought to represent any of the employees, representatives or agents of the Company. There is no strike or other labor dispute involving the Company pending, or to the knowledge of the Company threatened, which could have a material adverse effect on the assets, properties, financial condition, operating results, or business of the Company (as such business is presently conducted and as it is proposed to be conducted), nor is the Company aware of any labor organization activity involving its employees. The Company is not aware that any officer or key employee, or that any group of key employees, intends to terminate their employment with the Company, nor does the Company have a present intention to terminate the employment of any of the foregoing. Subject to general principles related to wrongful termination of employees, the employment of each officer and employee of the Company is terminable at the will of the Company. The Company has complied in all material respects with all applicable state and federal equal employment opportunity and other laws related to employment. 2.28 SECTION 83(B) ELECTIONS. To the best of the Company's knowledge, elections and notices pursuant to Section 83(b) of the Code and any analogous provisions of applicable state tax laws have been timely filed by all individuals who have purchased shares of the Company's Common Stock which are subject to vesting or other risk of forfeiture. 2.29 REAL PROPERTY HOLDING COMPANY. The Company is not a "United States real property holding corporation" (as that term is defined in Treasury Regulation section 1.897-2(b)). If at any time in the future the Company shall become a "United States real property holding corporation," the Company shall, as promptly as practicable, notify each foreign Investor of such change in status. Within 30 days after receipt of a request from a foreign investor, the Company shall prepare and deliver to such foreign Investor the statement required under Treasury Regulation section 1.897-2(h)(l)(i) and either or both of the following documents: (i) an affidavit in conformance with the requirements of Section 1445(b)(3) of the Code or (ii) a notarized statement, executed by an officer having actual knowledge of the facts, that the shares of Company stock held by such foreign Investor are of a class that is regularly traded on an established securities market, within the meaning of Section 1445(b)(6) of the Code. If the Company is unable to provide either document described in (i) or (ii) above, if requested, it shall promptly notify such foreign Investor in writing of the reasons for such inability. Finally, upon the 11. 17 request of a foreign Investor and without regard to whether either document described in (i) or (ii) above has been requested, the Company shall cooperate fully with the efforts of such foreign Investor to obtain a "qualifying statement," within the meaning of Section 1445(b)(4) of the Code, or such other documents as would excuse a transferee of a foreign Investor's interest from withholding of income tax imposed pursuant to Section 1445(a) of the Code. 3. REPRESENTATIONS AND WARRANTIES OF THE INVESTORS. Each Investor, severally and not jointly, hereby represents and warrants that: 3.1 AUTHORIZATION. This Agreement constitutes its valid and legally binding obligation, enforceable in accordance with its terms, except (i) as limited by applicable bankruptcy, insolvency, reorganization, moratorium, and other laws of general application affecting enforcement of creditors' rights generally, (ii) as limited by laws relating to the availability of specific performance, injunctive relief, or other equitable remedies and (iii) to the extent the indemnification provisions contained in the Investors' Rights Agreement may be limited by applicable federal or state securities laws. 3.2 PURCHASE ENTIRELY FOR OWN ACCOUNT. This Agreement is made with each Investor in reliance upon such Investor's representation to the Company, which by such Investor's execution of this Agreement Investors hereby confirm that the Series E Preferred Stock to be received by Investors will be acquired for investment for Investor's own account, not as a nominee or agent, and not with a view to the resale or distribution of any part thereof, and that such Investor has no present intention of selling, granting any participation in, or otherwise distributing the same. By executing this Agreement, each Investor further represents that such Investor does not have any contract, undertaking, agreement or arrangement with any person to sell, transfer or grant participations to such person or to any third person, with respect to any of the Series E Preferred Stock. Each Investor represents that it has full power and authority to enter into this Agreement. 3.3 DISCLOSURE OF INFORMATION. Each Investor believes it has received all the information it considers necessary or appropriate for deciding whether to purchase the Series E Preferred Stock. Each Investor further represents that it has had an opportunity to ask questions and receive answers from the Company regarding the terms and conditions of the offering of the Series E Preferred Stock. The foregoing, however, does not limit or modify the representations and warranties of the Company in Section 2 of this Agreement or the right of each Investor to rely thereon. 3.4 INVESTMENT EXPERIENCE. Each Investor is an investor in securities of companies in the development stage and acknowledges that it is able to fend for itself, can bear the economic risk of its investment and has such knowledge and experience in financial or business matters that it is capable of evaluating the merits and risks of the 12. 18 investment in the Series E Preferred Stock. If other than an individual, each Investor also represents it has not been organized for the purpose of acquiring the Series E Preferred Stock. 3.5 ACCREDITED INVESTOR. Each Investor is an "accredited investor" within the meaning of SEC Rule 501 of Regulation D under the Act, as presently in effect. 3.6 RESTRICTED SECURITIES. Each Investor understands that the shares of Series E Preferred Stock it is purchasing are characterized as "restricted securities" under the federal securities laws inasmuch as they are being acquired from the Company in a transaction not involving a public offering and that under such laws and applicable regulations such securities may be resold without registration under the Securities Act of 1933, as amended (the "Act"), only in certain limited circumstances. In this connection, each Investor represents that it is familiar with SEC Rule 144, as presently in effect, and understands the resale limitations imposed thereby and by the Act. 3.7 FURTHER LIMITATIONS ON DISPOSITION. Without in any way limiting the representations set forth above, Investors further agree not to make any disposition of all or any portion of the Series E Preferred Stock unless: (a) the disposition is made as part of a firmly underwritten public offering of the Company's stock, or (b) until the transferee has agreed in writing for the benefit of the Company to be bound by this Section 3 and Section 7 hereof, and the Investors' Rights Agreement and the (i) Investors shall have notified the Company of the proposed disposition and shall have furnished the Company with a detailed statement of the circumstances surrounding the proposed disposition, and (ii) if reasonably requested by the Company, Investors shall have furnished the Company with an opinion of counsel, reasonably satisfactory to the Company, that such disposition will not require registration of such shares under the Act. It is agreed that the Company will not require opinions of counsel for transactions made pursuant to Rule 144 except in unusual circumstances. (c) Notwithstanding the provisions of (a) and (b) above, no such public offering or opinion of counsel shall be necessary for a transfer by an Investor which is a partnership or limited liability company to a partner of such partnership, a retired partner of such partnership who retires after the date hereof or a member of such limited liability company, or to the estate of any such partner, retired partner or member, or the transfer by gift, will or intestate succession of any partner or member to his spouse or to the siblings, lineal descendants or ancestors of such partner or member or his spouse, if the transferee agrees in writing to be subject to the terms hereof to the same extent as if he were an original Investor hereunder. 13. 19 3.8 LEGENDS. It is understood that the certificates evidencing the Series E Preferred Stock may bear the following legend: "These securities have not been registered under the Securities Act of 1933, as amended (the "Act"). They may not be sold, offered for sale, pledged or hypothecated in the absence of a registration statement in effect with respect to the securities under such Act or an opinion of counsel reasonably satisfactory to the Company that such registration is not required or unless sold pursuant to Rule 144 of such Act." 4. CALIFORNIA COMMISSIONER OF CORPORATIONS. 4.1 CORPORATE SECURITIES LAW. THE SALE OF THE SECURITIES WHICH ARE THE SUBJECT OF THIS AGREEMENT HAS NOT BEEN QUALIFIED WITH THE COMMISSIONER OF CORPORATIONS OF THE STATE OF CALIFORNIA AND THE ISSUANCE OF SUCH SECURITIES OR THE PAYMENT OR RECEIPT OF ANY PART OF THE CONSIDERATION FOR SUCH SECURITIES PRIOR TO SUCH QUALIFICATION IS UNLAWFUL, UNLESS THE SALE OF SECURITIES IS EXEMPT FROM SUCH QUALIFICATION. THE RIGHTS OF ALL PARTIES TO THIS AGREEMENT ARE EXPRESSLY CONDITIONED UPON SUCH QUALIFICATION BEING OBTAINED, UNLESS THE SALE IS SO EXEMPT. 5. CONDITIONS OF EACH INVESTOR'S OBLIGATION AT THE CLOSINGS. The obligations of each Investor under subsection 1.1(b) of this Agreement are subject to the fulfillment on or before the First Closing and each subsequent Closing, as applicable, of each of the following conditions, the waiver of which shall not be effective against any Investor who does not consent in writing thereto: 5.1 REPRESENTATIONS AND WARRANTIES. The representations and warranties of the Company contained in Section 2 shall be true on and as of the First Closing and each subsequent Closing, as applicable, with the same effect as though such representations and warranties had been made on and as of the date of such closing. 5.2 PERFORMANCE. The Company shall have performed and complied with all agreements, obligations and conditions contained in this Agreement that are required to be performed or complied with by it on or before such closing. 5.3 COMPLIANCE CERTIFICATE. The President of the Company shall deliver to each Investor at the First Closing or such subsequent Closing, as applicable, a certificate certifying that the conditions specified in Sections 5.1, 5.2, 5.4, 5.6 and 5.8 have been fulfilled and stating that there shall have been no adverse change in the business, affairs, operations, properties, assets or condition of the Company since the date of the Financial Statements. 14. 20 5.4 QUALIFICATIONS. All authorizations, approvals, or permits, if any, of any governmental authority or regulatory body of the United States or of any state that are required in connection with the lawful issuance and sale of the Series E Preferred Stock pursuant to this Agreement shall be duly obtained and effective as of the First Closing or any subsequent Closing, as applicable (except for such as may be properly obtained subsequent to such closing). 5.5 PROCEEDINGS AND DOCUMENTS. All corporate and other proceedings in connection with the transactions contemplated at the First Closing and each subsequent Closing, as applicable, and all documents incident thereto shall be reasonably satisfactory in form and substance to each Investor, and the Investor shall have received all such counterpart original and certified or other copies of such documents as they may reasonably request. 5.6 BOARD OF DIRECTORS. At the time of the First Closing and each subsequent Closing, the directors of the Company shall be John Walker, Brook Byers, Luke Evnin, Harry Hixson, Jr., Patrick Latterell, Alan Lewis and Arnold Oronsky. 5.7 OPINION OF COMPANY COUNSEL. Each Investor shall have received from Cooley Godward LLP, counsel for the Company, an opinion, dated as of the First Closing and each subsequent Closing, as applicable, in the form attached hereto as Exhibit D. 5.8 INVESTORS' RIGHTS AGREEMENT. The Company and Investors shall have entered into the Investors' Rights Agreement in the form attached hereto as Exhibit B. 6. CONDITIONS OF THE COMPANY'S OBLIGATIONS AT THE CLOSINGS. The obligations of the Company to each Investor under this Agreement are subject to the fulfillment on or before the First Closing and each subsequent Closing, as applicable, of each of the following conditions by the Investors purchasing at such Closing: 6.1 REPRESENTATIONS AND WARRANTIES. The representations and warranties of each Investor contained in Section 3 shall be true on and as of the First Closing and any subsequent Closing, as applicable, with the same effect as though such representations and warranties had been made on and as of such closing. 6.2 PAYMENT OF PURCHASE PRICE. Each Investor shall have delivered the purchase price specified in Section 1.1(b). 6.3 QUALIFICATION. All authorizations, approvals, or permits, if any, of any governmental authority or regulatory body of the United States or of any state that are required in connection with the lawful issuance and sale of the Series E Preferred Stock pursuant to this Agreement shall be duly obtained and effective as of such closing (except for such as may be properly obtained subsequent to such closing). 15. 21 7. MISCELLANEOUS. 7.1 SURVIVAL OF WARRANTIES. The warranties, representations and covenants of the Company and each Investor contained in or made pursuant to this Agreement shall survive the execution and delivery of this Agreement and the First Closing and all subsequent Closings hereunder and shall in no way be affected by any investigation of the subject matter thereof made by or on behalf of the Investors or the Company. 7.2 SUCCESSORS AND ASSIGNS. Except as otherwise provided herein, the terms and conditions of this Agreement shall inure to the benefit of and be binding upon the respective successors and assigns of the parties (including transferees of any shares of Series E Preferred Stock sold hereunder or any Common Stock issued upon conversion of such Series E Preferred Stock). Nothing in this Agreement, express or implied, is intended to confer upon any party other than the parties hereto or their respective successors and assigns any rights, remedies, obligations, or liabilities under or by reason of this Agreement, except as expressly provided in this Agreement. 7.3 GOVERNING LAW. This Agreement shall be governed by and construed under the laws of the State of California as applied to agreements among California residents entered into and to be performed entirely within California. 7.4 COUNTERPARTS. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. 7.5 EXPENSES. If the Closing is effected, the Company shall, at the First Closing, reimburse the reasonable fees of special counsel for the Investors, not to exceed $15,000.00, and shall, upon receipt of a bill therefor, reimburse the reasonable out of pocket expenses of such counsel. In addition, at each subsequent Closing, the Company shall reimburse the reasonable fees of special counsel to the Investors, provided all such fees for the First Closing and any subsequent Closings in the aggregate do not exceed $15,000.00. If any action at law or in equity is necessary to enforce or interpret the terms of this Agreement, the Investors' Rights Agreement or the Amended and Restated Articles of Incorporation, the prevailing party shall be entitled to reasonable attorneys' fees, costs and necessary disbursements in addition to any other relief to which such party may be entitled. 7.6 TITLES AND SUBTITLES. The titles and subtitles used in this Agreement are used for convenience only and are not to be considered in construing or interpreting this Agreement. 7.7 NOTICES. Unless otherwise provided, any notice required or permitted under this Agreement shall be given in writing and shall be deemed effectively given upon 16. 22 personal delivery or delivery by courier to the party to be notified or upon deposit with the United States Post Office, by registered or certified mail, postage prepaid and addressed to the party to be notified at the address indicated for such party on Schedule A hereto, or at such other address as such party may designate by ten (10) days' advance written notice to the other parties. 7.8 FINDER'S FEE. Each party represents that it neither is nor will be obligated for any finders' fee or commission in connection with this transaction, except for the Company's obligation to pay to Lehman Brothers Inc., Hambrecht & Quist LLC and Robertson, Stephens & Company LLC (collectively, the "Agents") a placement fee of 9% of the gross proceeds received by the Company from the sale of the Series E Preferred Stock, of which two-thirds will be payable in cash and one-third will be payable in Series E Preferred Stock at the same price as the Series E Preferred Stock sold at the Closing (the "Placement Fee"). The Company agrees to indemnify and hold harmless each Investor from any liability for any commission or compensation in the nature of a finders' fee (and the costs and expenses of defending against such liability or asserted liability) for which the Company or any of its officers, employees or representatives is responsible, including, but not limited to, the Placement Fee to be paid to the Agents. Each Investor, severally and not jointly, agrees to indemnify and to hold harmless the Company from any liability for any commission or compensation in the nature of a finders' fee (and the costs and expenses of defending against such liability or asserted liability) for which such Investor or any of its officers, partners, employees, or representatives is responsible. 7.9 AMENDMENTS AND WAIVERS. Except as provided in Section 5 of this Agreement, any term of this Agreement may be amended and the observance of any term of this Agreement may be waived (either generally or in a particular instance and either retroactively or prospectively), only with the written consent of the Company and the holders of a majority of the Common Stock issued or issuable upon conversion of the Series E Preferred Stock. Any amendment or waiver effected in accordance with this paragraph shall be binding upon each holder of any securities purchased under this Agreement at the time outstanding (including securities into which such securities are convertible), each future holder of all such securities, and the Company. 7.10 SEVERABILITY. If one or more provisions of this Agreement are held to be unenforceable under applicable law, such provision shall be excluded from this Agreement and the balance of the Agreement shall be interpreted as if such provision were so excluded and shall be enforceable in accordance with its terms. 17. 23 7.11 AGGREGATION OF STOCK. All shares of the Series E Preferred Stock held or acquired by affiliated entities or persons shall be aggregated together for the purpose of determining the availability of any rights under this Agreement. 7.12 REGULATED FINANCIAL INSTITUTIONS COMPLIANCE OBLIGATIONS. Nothing contained in this Agreement shall diminsh the continuing obligations of any financial institution to comply with applicable requirements of law that such financial institution maintain responsibility for the disposition of, and control over, its admitted assets, investments and property, including (without limiting the generality of the foregoing) the provisions of Section 1411(b) of the New York Insurance Law, as amended, and as hereinafter from time to time in effect. 18. 24 IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written. SIGNAL PHARMACEUTICALS, INC. By: ----------------------------------- Alan J. Lewis, President INVESTORS: ARES-SERONO S.A. By: ----------------------------------- Its: ----------------------------------- BIOCENTIVE By: ----------------------------------- Its: ----------------------------------- FINSBURY WORLDWIDE PHARMACEUTICAL TRUST, PLC By: ----------------------------------- Its: ----------------------------------- LOMBARD ODIER IMMUNOLOGY FUND By: ----------------------------------- Its: ----------------------------------- SIGNATURE PAGE TO STOCK PURCHASE AGREEMENT 25 NEUROSCIENCE PARTNERS LIMITED PARTNERSHIP By: ----------------------------------- Its: ----------------------------------- NEW YORK LIFE INSURANCE COMPANY By: ----------------------------------- Its: ----------------------------------- PHARMA/WHEALTH By: ----------------------------------- Its: ----------------------------------- THE HEALTH CARE AND BIOTECHNOLOGY VENTURE FUND By: ----------------------------------- Its: ----------------------------------- BAYVIEW INVESTORS LTD. By: ----------------------------------- Its: ----------------------------------- SIGNATURE PAGE TO STOCK PURCHAASE AGREEMENT 26 VENROCK ASSOCIATES By: ----------------------------------- Its: ----------------------------------- VENROCK ASSOCIATES II, L.P. By: ----------------------------------- Its: ----------------------------------- KLEINER PERKINS CAUFIELD & BYERS VI By: ----------------------------------- Its: ----------------------------------- ACCEL INVESTORS `93 L.P. By: ----------------------------------- Its: ----------------------------------- ACCEL IV L.P. By: ----------------------------------- Its: ----------------------------------- ACCEL JAPAN L.P. By: ----------------------------------- Its: ----------------------------------- SIGNATURE PAGE TO STOCK PURCHASE AGREEMENT 27 ACCEL KEIRETSU L.P. By: ----------------------------------- Its: ----------------------------------- ELLMORE C. PATTERSON PARTNERS By: ----------------------------------- Its: ----------------------------------- PROSPER PARTNERS By: ----------------------------------- Its: ----------------------------------- INTERWEST INVESTORS V By: ----------------------------------- Its: ----------------------------------- INTERWEST PARTNERS V By: ----------------------------------- Its: ----------------------------------- OXFORD BIOSCIENCE PARTNERS (ADJUNCT) L.P. By: ----------------------------------- Its: ----------------------------------- SIGNATURE PAGE TO STOCK PURCHASE AGREEMENT 28 OXFORD BIOSCIENCE PARTNERS (BERMUDA) L.P. By: ----------------------------------- Its: ----------------------------------- OXFORD BIOSCIENCE PARTNERS L.P. By: ----------------------------------- Its: ----------------------------------- SECOND VENTURES II, L.P. By: ----------------------------------- Its: ----------------------------------- U.S. VENTURES PARTNERS IV, L.P. By: ----------------------------------- Its: ----------------------------------- USVP ENTREPRENEUR PARTNERS II, L.P. By: ----------------------------------- Its: ----------------------------------- SIGNATURE PAGE TO STOCK PURCHASE AGREEMENT 19. 29 HARRY F. HIXSON, JR. SEPARATE PROPERTY TRUST, DATED DECEMBER 15, 1995 By: ----------------------------------- Its: ----------------------------------- VERTICAL FUND ASSOCIATES, L.P. By: ----------------------------------- Its: ----------------------------------- SIGNATURE PAGE TO STOCK PURCHASE AGREEMENT 30 SCHEDULE A Schedule of Investors
NUMBER INVESTORS AMOUNT INVESTED OF SHARES Ares-Serono S.A. $1,883,836.82 986,302 c/o Ares Services S.A. Attn: Leon R. Bushara 15bis Chemin des Mines 1202 Geneva Switzerland BioCentive $999,999.60 523,560 c/o Mesco Ltd. Attn: Joel R. Mesznik 122 East 42nd Street 49th Floor New York, NY 10168 Finsbury Worldwide $999,999.60 523,560 Pharmaceutical Trust, plc c/o Finsbury Asset Management Attn: Barbara Macaulay Alderman's House Alderman's Walk London EC2M 3XR England Lombard Odier Immunology Fund $3,000,000.71 1,570,681 c/o Lombard Odier & Cie Attn: Mlle. Laurence Mauron 11, rue de la Corraterie 1204 Geneva Switzerland
1. 31
NUMBER INVESTORS AMOUNT INVESTED OF SHARES Neuroscience Partners Limited Partnership $999,999.60 523,560 Attn: Michael Callaghan 100 International Boulevard Etobicoke, Ontario Canada M9W 6J6 New York Life Insurance Company $1,499,999.40 785,340 Attn: Dominique Semon 51 Madison Avenue New York, NY 10010 PHARMA/wHEALTH $999,999.60 523,560 c/o. Mehta and Isaly Attn: Mr. Samuel D. Isaly 41 Madison Avenue 40th Floor New York, NY 10010 The Health Care and Biotechnology Venture Fund $499,999.80 261,780 Attn: Micahel Callaghan 100 International Boulevard Etobicoke, Ontario Canada M9W 6J6 Bayview Investors Ltd. $116,160.47 60,817 c/o Robertson Stephens & Co. Attn: John Coquia 555 California Street, Suite 2600 San Francisco, CA 94104 Venrock Associates $ 83,027.70 43,470 Venrock Associates II, L.P. 110,059.93 57,623 Attn: Patrick F. Latterell One Maritime Plaza, Suite 1919 San Francisco, CA 94111
2. 32
NUMBER INVESTORS AMOUNT INVESTED OF SHARES Kleiner Perkins Caufield & Byers VI $ 193,087.63 101,093 Attn: Brook H. Byers 2750 Sand Hill Road Menlo Park, CA 94025 Accel Investors `93 L.P. $ 7,143.40 3,740 Accel IV L.P. 161,614.65 84,615 Accel Japan L.P. 15,448.08 8,088 Accel Keiretsu L.P. 3,476.20 1,820 Ellmore C. Patterson Partners 4,247.84 2,224 Prosper Partners 1,157.46 606 Attn: Luke B. Evnin, Ph.D. One Embarcadero Center, Suite 3820 San Francisco, CA 94111 InterWest Investors V $ 947.36 496 InterWest Partners V 150,525.19 78,809 Attn: Arnold Oronsky, Ph.D. 3000 Sand Hill Road Building 3, Suite 255 Menlo Park, CA 94025 Oxford Bioscience Partners (Adjunct) L.P. $ 20,196.34 10,574 Oxford Bioscience Partners (Bermuda) L.P. 17,543.35 9,185 Oxford Bioscience Partners L.P. 63,242.01 33,111 Attn: Edmund M. Olivier 650 Town Center Drive, Suite 810 Costa Mesa, CA 92626 Second Ventures II, L.P. $ 10,602.41 5,551 U.S. Venture Partners IV, L.P. 87,350.03 45,733 USVP Entrepreneur Partners II, L.P. 3,029.26 1,586 Attn: Philip M. Young 2180 Sand Hill Road, Suite 300 Menlo Park, CA 94025
3. 33
NUMBER INVESTORS AMOUNT INVESTED OF SHARES Harry F. Hixson, Jr. Separate Property Trust, $ 42,058.20 22,020 Dated December 15, 1995 Attn: Harry F. Hixson, Ph.D. c/o Neuroscience Biosciences Inc. 3050 Science Park Road San Diego, CA 92121-1102 Vertical Fund Associates, L.P. $ 25,244.47 13,217 Attn: John Runnells 18 Bank Street Summit, NJ 07901 TOTAL 11,999,997.11 6,282,721
4. 34 SCHEDULE B Schedule of Exceptions 35 EXHIBIT A Amended and Restated Articles of Incorporation 36 EXHIBIT B Amended and Restated Investors' Rights Agreement 37 EXHIBIT C Proprietary Information and Inventions Agreement 38 EXHIBIT D Form of Opinion of Cooley Godward LLP EX-10.19 22 EXHIBIT 10.19 1 EXHIBIT 10.19 SIGNAL PHARMACEUTICALS, INC. SERIES F PREFERRED STOCK PURCHASE AGREEMENT NOVEMBER 25, 1997 2 TABLE OF CONTENTS 1. PURCHASE AND SALE OF STOCK...................................................1 1.1 Sale and Issuance of Series F Preferred Stock................................1 1.2 Closing......................................................................1 2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY................................1 2.1 Organization, Good Standing and Qualification................................2 2.2 Capitalization and Voting Rights.............................................2 2.3 Subsidiaries.................................................................3 2.4 Authorization................................................................3 2.5 Valid Issuance of Preferred and Common Stock.................................3 2.6 Governmental Consents........................................................4 2.7 Litigation...................................................................4 2.8 Proprietary Information Agreements...........................................4 2.9 Patents and Trademarks.......................................................4 2.10 Compliance with Other Instruments............................................5 2.11 Agreements; Action...........................................................6 2.12 Related-Party Transactions...................................................7 2.13 Permits......................................................................7 2.14 Environmental and Safety Laws................................................7 2.15 Manufacturing and Marketing Rights...........................................7 2.16 Disclosure...................................................................7 2.17 Registration Rights..........................................................8 2.18 Corporate Documents..........................................................8 2.19 Title to Property and Assets.................................................8 2.20 Qualified Small Business.....................................................8 2.21 Financial Statements.........................................................8 2.22 Changes......................................................................9 2.23 Employee Benefit Plans......................................................10 2.24 Tax Returns, Payments and Elections.........................................10 2.25 Insurance...................................................................10 2.26 Minute Books................................................................10 2.27 Labor Agreements and Actions................................................10 2.28 Section 83(b) Elections.....................................................11 2.29 Real Property Holding Company...............................................11 3. REPRESENTATIONS AND WARRANTIES OF THE INVESTOR..............................11 3.1 Authorization...............................................................11 3.2 Purchase Entirely for Own Account...........................................12 3.3 Disclosure of Information...................................................12 3.4 Investment Experience.......................................................12
i. 3 TABLE OF CONTENTS (CONTINUED) 3.5 Accredited Investor.........................................................12 3.6 Restricted Securities.......................................................12 3.7 Further Limitations on Disposition..........................................13 3.8 Legends.....................................................................13 4. CALIFORNIA COMMISSIONER OF CORPORATIONS.....................................14 4.1 Corporate Securities Law....................................................14 5. CONDITIONS OF THE INVESTOR'S OBLIGATION AT THE CLOSING......................14 5.1 Representations and Warranties..............................................14 5.2 Performance.................................................................14 5.3 Compliance Certificate......................................................14 5.4 Qualifications..............................................................14 5.5 Proceedings and Documents...................................................14 5.6 Board of Directors..........................................................14 5.7 Investors' Rights Amendment.................................................14 5.8 Opinion of Company Counsel..................................................15 6. CONDITIONS OF THE COMPANY'S OBLIGATIONS AT THE CLOSING......................15 6.1 Representations and Warranties..............................................15 6.2 Payment of Purchase Price...................................................15 6.3 Qualification...............................................................15 7. ADDITIONAL AGREEMENT........................................................15 7.1 Standstill Provisions.......................................................15 8. MISCELLANEOUS...............................................................17 8.1 Survival of Warranties......................................................17 8.2 Successors and Assigns......................................................17 8.3 Governing Law...............................................................17 8.4 Counterparts................................................................17 8.5 Attorneys' Fees.............................................................17 8.6 Titles and Subtitles........................................................17 8.7 Notices.....................................................................17 8.8 Finder's Fee................................................................18 8.9 Amendments and Waivers......................................................18 8.10 Severability................................................................19 8.11 Aggregation of Stock........................................................19
ii. 4 TABLE OF CONTENTS SCHEDULE A - Schedule of Exceptions EXHIBIT A - Amended and Restated Articles of Incorporation EXHIBIT B - Amendment to Amended and Restated Investors' Rights Agreement EXHIBIT C - Proprietary Information and Inventions Agreement EXHIBIT D - Form of Opinion of Cooley Godward LLP iii. 5 STOCK PURCHASE AGREEMENT THIS STOCK PURCHASE AGREEMENT is made as of the 25th day of November, 1997, by and between Signal Pharmaceuticals, Inc., a California corporation (the "Company"), and Ares-Serono S.A., a Swiss company (the "Investor"). THE PARTIES HEREBY AGREE AS FOLLOWS: 1. PURCHASE AND SALE OF STOCK. 1.1 SALE AND ISSUANCE OF SERIES F PREFERRED STOCK. (a) The Company shall adopt and file with the Secretary of State of California, and the Secretary of State of California shall accept on or before the Closing (as defined below), the Amended and Restated Articles of Incorporation in the form attached hereto as Exhibit A. (b) Subject to the terms and conditions of this Agreement, the Investor agrees to purchase at the Closing (as defined below) under this Agreement, and the Company agrees to sell and issue to the Investor at the Closing, 2,722,513 shares of the Company's Series F Preferred Stock for an aggregate price of $8,200,000.72. 1.2 CLOSING. The purchase and sale of the Series F Preferred Stock shall take place at the offices of Cooley Godward LLP, 4365 Executive Drive, Suite 1100, San Diego, California 92121, at 1:00 P.M. on December 1, 1997, or at such other time and place as the Company and the Investor agree orally or in writing (which time and place are designated as the "Closing"). At the Closing, the Company shall deliver to the Investor a certificate representing the shares of Series F Preferred Stock which the Investor is purchasing against delivery to the Company by the Investor of a wire transfer in the amount of the purchase price therefor payable to the Company's order. The Investor shall also become a party to that certain Amendment to Amended and Restated Investors' Rights Agreement of even date herewith, by and among the Company, the Investor and certain other investors of the Company, the form of which is attached hereto as Exhibit B (the "Investors' Rights Amendment"), which Investors' Rights Amendment shall amend the Company's Amended and Restated Investors' Rights Agreement as in effect immediately prior to the Closing (the "Investors' Rights Agreement"), and the Investor shall have the rights and obligations of an Investor thereunder. 2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company hereby represents and warrants to the Investor that, except as set forth on a Schedule of Exceptions attached hereto as Schedule A, specifically identifying the relevant subparagraph hereof, which exceptions shall be deemed to be representations and warranties as if made hereunder: 1. 6 2.1 ORGANIZATION, GOOD STANDING AND QUALIFICATION. The Company is a corporation duly organized, validly existing and in good standing under the laws of the State of California and has all requisite corporate power and authority to carry on its business as now conducted and as proposed to be conducted. The Company is duly qualified to transact business and is in good standing in each jurisdiction in which the failure so to qualify would have a material adverse effect on its business or properties. 2.2 CAPITALIZATION AND VOTING RIGHTS. The authorized capital of the Company consists, or will consist prior to the Closing, of: (a) PREFERRED STOCK. 24,453,931 shares of Preferred Stock (the "Preferred Stock"), of which 2,626,892 shares have been designated Series A Preferred Stock, all of which are issued and outstanding, of which 2,875,000 shares have been designated Series B Preferred Stock, all of which are issued and outstanding, of which 8,791,432 shares have been designated Series C Preferred Stock, all of which are issued and outstanding, of which 250,000 shares have been designated Series C-1 Preferred Stock, all of which are subject to issued and outstanding warrants, of which 732,601 shares have been designated Series D Preferred Stock, all of which are issued and outstanding, of which 6,455,493 shares have been designated Series E Preferred Stock, all of which shares are issued and outstanding, and of which 2,722,513 shares have been designated Series F Preferred Stock, all of which will be sold pursuant to this Agreement. The rights, privileges and preferences of the Series A, Series B, Series C, Series C-1, Series D, Series E and Series F Preferred Stock will be as stated in the Company's Amended and Restated Articles of Incorporation attached hereto as Exhibit A. (b) COMMON STOCK. 35,000,000 shares of common stock ("Common Stock"), of which 2,449,131 shares are issued and outstanding. (c) OTHER RIGHTS. Except for (A) the conversion privileges of the Series A Preferred Stock, the Series B Preferred Stock, the Series C Preferred Stock, the Series C-1 Preferred Stock, the Series D Preferred Stock, the Series E Preferred Stock and the Series F Preferred Stock sold pursuant to this Agreement, (B) 2,500,000 shares of Common Stock reserved for issuance pursuant to the Company's 1993 Stock Option Plan, of which 1,446,008 shares are subject to outstanding options and of which 1,005,631 shares are issued and outstanding, (C) 550,000 shares of Common Stock reserved for issuance pursuant to the Company's 1993 Founders' Stock Option Plan, 159,000 of which are subject to outstanding options and of which 373,000 shares are issued and outstanding, (D) 1,000,000 shares of Common Stock reserved for issuance pursuant to the Company's 1997 Stock Option Plan, of which 795,820 shares are subject to outstanding options and none of which are issued and outstanding, and (E) 250,000 shares of Series C-1 Preferred Stock reserved for issuance upon the exercise of issued and outstanding warrants, there are not outstanding any options, warrants, rights (including conversion or 2. 7 preemptive rights) or agreements for the purchase or acquisition from the Company of any shares of its capital stock. The Company is not a party or subject to any agreement or understanding, and, to the Company's knowledge, there is no agreement or understanding between any persons and/or entities, which affects or relates to the voting or giving of written consents with respect to any security or by a director of the Company. 2.3 SUBSIDIARIES. The Company does not presently own or control, directly or indirectly, any interest in any other corporation, association, or other business entity. 2.4 AUTHORIZATION. All corporate action on the part of the Company, its officers, directors and shareholders necessary for the authorization, execution and delivery of this Agreement, the Investors' Rights Amendment, the performance of all obligations of the Company hereunder and thereunder and the authorization, issuance (or reservation for issuance) and delivery of the Series F Preferred Stock being sold hereunder and the Common Stock issuable upon conversion of the Series F Preferred Stock has been taken or will be taken prior to the Closing, and this Agreement and Investors' Rights Amendment constitute valid and legally binding obligations of the Company, enforceable in accordance with their respective terms, except (i) as limited by applicable bankruptcy, insolvency, reorganization, moratorium, and other laws of general application affecting enforcement of creditors' rights generally, (ii) as limited by laws relating to the availability of specific performance, injunctive relief, or other equitable remedies and (iii) to the extent the indemnification provisions contained in the Investors' Rights Agreement may be limited by applicable federal or state securities laws. 2.5 VALID ISSUANCE OF PREFERRED AND COMMON STOCK. (a) The shares of Series F Preferred Stock which are being purchased by the Investor hereunder, when issued, sold and delivered in accordance with the terms hereof for the consideration expressed herein, will be duly and validly issued, and, based in part upon the representations of the Investor in this Agreement, will be issued in compliance with all applicable federal and state securities laws and such shares of Series F Preferred Stock will be fully paid and non-assessable. The Common Stock issuable upon conversion of the Series F Preferred Stock purchased under this Agreement has been duly and validly reserved for issuance and, upon issuance in accordance with the terms of the Amended and Restated Articles of Incorporation, shall be duly and validly issued, fully paid and nonassessable, and issued in compliance with all applicable securities laws, as presently in effect, of the United States and each of the states whose securities laws govern the issuance of any of the Series F Preferred Stock hereunder. (b) The outstanding shares of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock, Series E Preferred Stock and Common Stock are all duly and validly authorized and issued, fully paid and 3. 8 nonassessable, and were issued in compliance with all applicable federal and state securities laws. The outstanding warrants to purchase Series C-1 Preferred Stock were duly and validly authorized and issued, and the shares of Series C-1 Preferred Stock underlying such warrants have been duly and validly reserved for issuance. 2.6 GOVERNMENTAL CONSENTS. No consent, approval, order or authorization of, or registration, qualification, designation, declaration or filing with, any federal, state, local or provincial governmental authority on the part of the Company is required in connection with the consummation of the transactions contemplated by this Agreement, except for the filing of a Form D pursuant to Regulation D promulgated under the Securities Act of 1933, as amended, which filing will be effected within 15 days of the sale of the Series F Preferred Stock hereunder, and any other filings that must be made after the Closing, which will be filed in a timely manner. 2.7 LITIGATION. There is no action, suit, proceeding or investigation pending or, to the Company's knowledge, currently threatened against the Company which questions the validity of this Agreement, the Investors' Rights Amendment, or the right of the Company to enter into either of them, or to consummate the transactions contemplated hereby or thereby, or which might result, either individually or in the aggregate, in any material adverse changes in the assets, condition, affairs or prospects of the Company, financially or otherwise, or any change in the current equity ownership of the Company, nor is the Company aware that there is any basis for the foregoing. The foregoing includes, without limitation, actions pending or threatened involving the prior employment of any of the Company's employees, their use in connection with the Company's business of any information or techniques allegedly proprietary to any of their former employers, or their obligations under any agreements with prior employers. The Company is not a party or subject to the provisions of any order, writ, injunction, judgment or decree of any court or government agency or instrumentality. There is no action, suit, proceeding or investigation by the Company currently pending or which the Company intends to initiate. 2.8 PROPRIETARY INFORMATION AGREEMENTS. Each employee, officer and consultant of the Company has executed a Proprietary Information and Inventions Agreement in the form set forth on Exhibit C hereto. The Company, after reasonable investigation, is not aware that any of its employees, officers or consultants are in violation thereof, and the Company will use its best efforts to prevent any such violation. 2.9 PATENTS AND TRADEMARKS. To the best of its knowledge, the Company has sufficient title and ownership of all patents, trademarks, service marks, tradenames, copyrights, trade secrets, information, proprietary rights and processes necessary for its business as now conducted, and believes it will be able to develop such intellectual property such that it can operate its business as proposed to be conducted, without any 4. 9 conflict with or infringement of the rights of others. The Schedule of Exceptions contains a complete list of patents and pending patent applications by the Company, as well as all licenses, collaborative agreements, development agreements, distribution agreements and similar agreements. The Company has not received any communications alleging, nor does the Company have any knowledge, that the Company has violated or, by conducting its business as proposed, would violate any of the patents, trademarks, service marks, tradenames, copyrights or trade secrets or other proprietary rights of any other person or entity. The Company is not aware that any of its employees is obligated under any contract (including licenses, covenants or commitments of any nature) or other agreement, or subject to any judgment, decree or order of any court or administrative agency, that would interfere with the use of his best efforts to promote the best interests of the Company or that would conflict with the Company's business as proposed to be conducted. Neither the execution nor delivery of this Agreement, nor the Investors' Rights Amendment, nor the carrying on of the Company's business by the employees of the Company, nor the conduct of the Company's business as proposed, will, to the Company's knowledge, conflict with or result in a breach of the terms, conditions or provisions of, or constitute a default under, any contract, covenant or instrument under which any of such employees is now obligated. The Company does not believe it is or will be necessary to utilize any inventions of any of its employees (or people it currently intends to hire) made prior to their employment by the Company. 2.10 COMPLIANCE WITH OTHER INSTRUMENTS. The Company is not in violation or default of any provisions of its Amended and Restated Articles of Incorporation or Bylaws or of any instrument, judgment, order, writ, decree, license, agreement or contract to which it is a party or by which it is bound or, to its knowledge, of any provision of federal or state statute, rule or regulation applicable to the Company. To the Company's knowledge, no other party to any license, contract or other agreement to which the Company is a party is in breach, default or violation thereof and, to the Company's knowledge, no facts exist which could constitute such a breach, default or violation. The execution, delivery and performance by the Company of this Agreement or the Investors' Rights Amendment and the consummation of the transactions contemplated hereby and thereby will not result in any such violation or be in conflict with or constitute, with or without the passage of time and giving of notice, either a default under any such provision, instrument, judgment, order, writ, decree or contract or an event which results in the creation of any lien, charge or encumbrance upon any assets of the Company or the suspension, revocation, impairment, forfeiture, or nonrenewal of any material permit, license, authorization, or approval applicable to the Company, its business or operations or any of its assets or properties, except that the foregoing may be limited by (i) applicable bankruptcy, insolvency, reorganization, moratorium, and other laws of general application affecting enforcement of creditors' rights generally, (ii) laws relating to the availability of specific performance, injunctive relief, or other equitable remedies, 5. 10 and (iii) with respect to indemnification provisions contained in the Investors' Rights Agreement, applicable federal or state securities laws. The Company has not performed any act, or failed to perform any act, which would result in the Company's loss of any right granted under any license, collaboration, joint venture or other agreement. 2.11 AGREEMENTS; ACTION. (a) Except for agreements explicitly contemplated hereby, by the Investors' Rights Amendment and by the Investors Rights Agreement, there are no agreements, understandings or proposed transactions between the Company and any of its officers, directors, affiliates, or any affiliate thereof. (b) There are no agreements, understandings, instruments, contracts, proposed transactions, judgments, orders, writs or decrees to which the Company is a party or by which it is bound which may involve obligations (contingent or otherwise) of, or payments to, the Company in excess of $50,000. (c) The Company has not (i) declared or paid any dividends, or authorized or made any distribution upon or with respect to any class or series of its capital stock, (ii) incurred any indebtedness for money borrowed or any other liabilities individually in excess of $10,000 (except for trade credit incurred in the ordinary course of business) or, in the case of indebtedness and/or liabilities individually less than $10,000, in excess of $50,000 in the aggregate (except for trade credit incurred in the ordinary course of business), (iii) made any loans or advances to any person, other than ordinary advances for travel expenses or (iv) sold, exchanged or otherwise disposed of any of its assets or rights. (d) For the purposes of subsections (b) and (c) above, all indebtedness, liabilities, agreements, understandings, instruments, contracts and proposed transactions involving the same person or entity (including persons or entities the Company has reason to believe are affiliated therewith) shall be aggregated for the purpose of meeting the individual minimum dollar amounts of such subsections. (e) The Company is not a party to and is not bound by any contract, agreement or instrument, or subject to any restriction under its Amended and Restated Articles of Incorporation or Bylaws, which adversely affects its business as now conducted or as proposed to be conducted, its properties or its financial condition. (f) The Company has not engaged in the past three (3) months in any discussion (i) with any corporation or corporations regarding the consolidation or merger of the Company with or into any such corporation or corporations, (ii) with any corporation, partnership, association or other business entity or any individual regarding the sale, conveyance or disposition of all or substantially all of the assets of the Company, 6. 11 (iii) with any corporation, partnership, association or other business entity or any individual regarding any transaction or series of related transactions in which more than fifty percent (50%) of the voting power of the Company would be disposed of, or (iv) regarding any other form of acquisition, liquidation, dissolution or winding up of the Company or its assets. 2.12 RELATED-PARTY TRANSACTIONS. No employee, officer or director of the Company or member of his or her immediate family is indebted to the Company, nor is the Company indebted (or committed to make loans or extend or guarantee credit) to any of them. To the best of the Company's knowledge, none of such persons has any direct or indirect ownership interest in any firm or corporation with which the Company is affiliated or with which the Company has a business relationship, or any firm or corporation that competes with the Company, except that employees, officers or directors of the Company and members of their immediate families may own less than 5% of the outstanding stock in publicly traded companies that may compete with the Company (except that persons or entities that are affiliated with venture capital investment firms or other accredited investment institutions shall have no such 5% ownership limitations). No member of the immediate family of any officer or director of the Company is directly or indirectly interested in any material contract with the Company. 2.13 PERMITS. The Company has all franchises, permits, licenses, and any similar authority necessary for the conduct of its business as now being conducted by it, the lack of which could materially and adversely affect the business, properties, prospects, or financial condition of the Company and believes it can obtain, without undue burden or expense, any similar authority for the conduct of its business as planned to be conducted. The Company is not in default in any material respect under any of such franchises, permits, licenses, or other similar authority. 2.14 ENVIRONMENTAL AND SAFETY LAWS. To the best of its knowledge, the Company is not in violation of any applicable statute, law, or regulation relating to the environment or occupational health and safety, and to the best of its knowledge, no material expenditures are or will be required in order to comply with any such existing statute, law or regulation. 2.15 MANUFACTURING AND MARKETING RIGHTS. The Company has not granted rights to manufacture, produce, assemble, license, market or sell its products to any other person and is not bound by any agreement that affects the Company's exclusive right to develop, manufacture, assemble, distribute, market or sell its products. 2.16 DISCLOSURE. The Company has fully provided the Investor with all the information which the Investor has requested for deciding whether to purchase the Series F Preferred Stock and all information which the Company believes is reasonably 7. 12 necessary to enable the Investor to make such decision. Neither this Agreement, the Investors' Rights Amendment, nor any other statements or certificates made or delivered in connection herewith or therewith when taken together contains any untrue statement of a material fact or omits to state a material fact necessary to make the statements herein or therein not misleading. 2.17 REGISTRATION RIGHTS. Except as provided in the Investors' Rights Agreement, the Company has not granted or agreed to grant any registration rights, including piggyback rights, to any person or entity. 2.18 CORPORATE DOCUMENTS. Except for amendments necessary to satisfy representations and warranties or conditions contained herein (the form of which amendments has been approved by the Investor), the Amended and Restated Articles of Incorporation and Bylaws of the Company are in the form previously provided to the Investor. 2.19 TITLE TO PROPERTY AND ASSETS. The Company owns its property and assets free and clear of all mortgages, liens, loans and encumbrances, except such encumbrances and liens which arise in the ordinary course of business and do not materially impair the Company's ownership or use of such property or assets. With respect to the property and assets it leases, the Company is in compliance with such leases and, to the best of its knowledge, holds a valid leasehold interest free of any liens, claims or encumbrances. 2.20 QUALIFIED SMALL BUSINESS. The Company represents and warrants to the Investor that it qualifies as a "Qualified Small Business" as defined Section 1202(d) of the Internal Revenue Code of 1986, as amended (the "Code"). The Company covenants that so long as it reasonably believes that the Series F Preferred Stock (and/or Conversion Shares) held by the Investor or a transferee would qualify as Qualified Small Business Stock as defined in Section 1202(c) of the Code it will timely file all reports or filings with the Internal Revenue Service required of a Qualified Small Business. 2.21 FINANCIAL STATEMENTS. The Company has delivered to the Investor its audited Financial Statements at December 31, 1996 and unaudited financial statements for each of the three quarters ending September 30, 1997 (the "Financial Statements"). The Financial Statements have been prepared in accordance with generally accepted accounting principles ("GAAP") applied on a consistent basis throughout the periods indicated and with each other, except that unaudited Financial Statements may not contain all footnotes required by GAAP. The Financial Statements are complete and correct in all material respects and fairly present the financial condition and results of operations of the Company as of the dates and for the periods indicated therein, subject in the case of the unaudited Financial Statements to normal year-end audit adjustments. Except as set forth in the Financial Statements, the Company has no liabilities, contingent 8. 13 or otherwise, other than (i) liabilities incurred in the ordinary course of business subsequent to the date of the Financial Statements and (ii) obligations under contracts and commitments incurred in the ordinary course of business and not required under generally accepted accounting principles to be reflected in the Financial Statements, which, in both cases, individually or in the aggregate, are not material to the financial condition or operating results of the Company. 2.22 CHANGES. Since September 30, 1997 there has not been: (a) any change in the assets, liabilities, financial condition or operating results of the Company, except changes which have not been, in the aggregate, materially adverse; (b) any damage, destruction or loss, whether or not covered by insurance, materially and adversely affecting the assets, properties, financial condition, operating results, prospects or business of the Company (as such business is presently conducted and as it is proposed to be conducted); (c) any waiver by the Company of a valuable right or of a material debt owed to it; (d) any satisfaction or discharge of any lien, claim or encumbrance or payment of any obligation by the Company, except which is not material to the assets, properties, financial condition, operating results or business of the Company (as such business is presently conducted and as it is proposed to be conducted); (e) any change or amendment to a material contract or arrangement by which the Company or any of its assets or properties is bound or subject; (f) any material change in any compensation arrangement or agreement with any employee or consultant; (g) any sale, assignment or transfer of any patents, trademarks, copyrights, trade secrets or other intangible assets; (h) any resignation or termination of employment of any officer, key employee or consultant of the Company; and the Company does not know of any impending resignation or termination of employment of any such officer, employee or consultant; or (i) to the Company's knowledge, any other event or condition of any character which might materially and adversely affect the assets, properties, financial 9. 14 condition, operating results or business of the Company (as such business is presently conducted and as it is proposed to be conducted). 2.23 EMPLOYEE BENEFIT PLANS. The Company does not have any Employee Benefit Plan as defined in the Employee Retirement Income Security Act of 1974. 2.24 TAX RETURNS, PAYMENTS AND ELECTIONS. The Company has filed all tax returns and reports as required by law. These returns and reports are true and correct in all material respects. The Company has paid all taxes and other assessments due, except those contested by it in good faith which are listed in the Schedule of Exceptions. The provisions for taxes as set forth in the Financial Statements is adequate for taxes due or accrued as of the date thereof. The Company has not elected pursuant to the Code to be treated as a Subchapter S corporation or a collapsible corporation pursuant to Section 341(f) or Section 1362(a) of the Code, nor has it made any other elections pursuant to the Code (other than elections which relate solely to methods of accounting, depreciation or amortization) which would have a material effect on the Company, its financial condition, its business as presently conducted or proposed to be conducted or any of its properties or material assets. Since the date of the Financial Statements, the Company has made adequate provisions on its books of account for all taxes, assessments and governmental charges with respect to its business, properties and operations for such period. 2.25 INSURANCE. The Company has in full force and effect fire and casualty insurance policies, with extended coverage, sufficient in amount (subject to reasonable deductibles) to allow it to replace any of its properties that might be damaged or destroyed. The Company has in full force and effect errors and omissions insurance in amounts customary for companies similarly situated. 2.26 MINUTE BOOKS. The minute books of the Company contain a complete summary of all meetings of directors and shareholders since the time of incorporation and reflect all transactions referred to in such minutes accurately in all material respects. 2.27 LABOR AGREEMENTS AND ACTIONS. The Company is not bound by or subject to (and none of its assets or properties is bound by or subject to) any written or oral, express or implied, contract, commitment or arrangement with any labor union, and no labor union has requested or, to the knowledge of the Company, has sought to represent any of the employees, representatives or agents of the Company. There is no strike or other labor dispute involving the Company pending, or to the knowledge of the Company threatened, which could have a material adverse effect on the assets, properties, financial condition, operating results, or business of the Company (as such business is presently conducted and as it is proposed to be conducted), nor is the Company aware of any labor organization activity involving its employees. The Company is not aware that any officer 10. 15 or key employee, or that any group of key employees, intends to terminate their employment with the Company, nor does the Company have a present intention to terminate the employment of any of the foregoing. Subject to general principles related to wrongful termination of employees, the employment of each officer and employee of the Company is terminable at the will of the Company. The Company has complied in all material respects with all applicable state and federal equal employment opportunity and other laws related to employment. 2.28 SECTION 83(B) ELECTIONS. To the best of the Company's knowledge, elections and notices pursuant to Section 83(b) of the Code and any analogous provisions of applicable state tax laws have been timely filed by all individuals who have purchased shares of the Company's Common Stock which are subject to vesting or other risk of forfeiture. 2.29 REAL PROPERTY HOLDING COMPANY. The Company is not a "United States real property holding corporation" (as that term is defined in Treasury Regulation section 1.897-2(b)). If at any time in the future the Company shall become a "United States real property holding corporation," the Company shall, as promptly as practicable, notify the Investor of such change in status. Within 30 days after receipt of a request from the Investor, the Company shall prepare and deliver to the Investor the statement required under Treasury Regulation section 1.897-2(h)(l)(i) and either or both of the following documents: (i) an affidavit in conformance with the requirements of Section 1445(b)(3) of the Code or (ii) a notarized statement, executed by an officer having actual knowledge of the facts, that the shares of Company stock held by the Investor are of a class that is regularly traded on an established securities market, within the meaning of Section 1445(b)(6) of the Code. If the Company is unable to provide either document described in (i) or (ii) above, if requested, it shall promptly notify the Investor in writing of the reasons for such inability. Finally, upon the request of the Investor and without regard to whether either document described in (i) or (ii) above has been requested, the Company shall cooperate fully with the efforts of the Investor to obtain a "qualifying statement," within the meaning of Section 1445(b)(4) of the Code, or such other documents as would excuse a transferee of the Investor's interest from withholding of income tax imposed pursuant to Section 1445(a) of the Code. 3. REPRESENTATIONS AND WARRANTIES OF THE INVESTOR. The Investor hereby represents and warrants that: 3.1 AUTHORIZATION. This Agreement constitutes its valid and legally binding obligation, enforceable in accordance with its terms, except (i) as limited by applicable bankruptcy, insolvency, reorganization, moratorium, and other laws of general application affecting enforcement of creditors' rights generally, (ii) as limited by laws relating to the availability of specific performance, injunctive relief, or other equitable 11. 16 remedies and (iii) to the extent the indemnification provisions contained in the Investors' Rights Agreement may be limited by applicable federal or state securities laws. 3.2 PURCHASE ENTIRELY FOR OWN ACCOUNT. This Agreement is made with the Investor in reliance upon the Investor's representation to the Company, which by the Investor's execution of this Agreement the Investor hereby confirms, that the Series F Preferred Stock to be received by the Investor will be acquired for investment for the Investor's own account, not as a nominee or agent, and not with a view to the resale or distribution of any part thereof, and that the Investor has no present intention of selling, granting any participation in, or otherwise distributing the same. By executing this Agreement, the Investor further represents that the Investor does not have any contract, undertaking, agreement or arrangement with any person to sell, transfer or grant participations to such person or to any third person, with respect to any of the Series F Preferred Stock. The Investor represents that it has full power and authority to enter into this Agreement. 3.3 DISCLOSURE OF INFORMATION. The Investor believes it has received all the information it considers necessary or appropriate for deciding whether to purchase the Series F Preferred Stock. The Investor further represents that it has had an opportunity to ask questions and receive answers from the Company regarding the terms and conditions of the offering of the Series F Preferred Stock. The foregoing, however, does not limit or modify the representations and warranties of the Company in Section 2 of this Agreement or the right of the Investor to rely thereon. 3.4 INVESTMENT EXPERIENCE. The Investor is an investor in securities of companies in the development stage and acknowledges that it is able to fend for itself, can bear the economic risk of its investment and has such knowledge and experience in financial or business matters that it is capable of evaluating the merits and risks of the investment in the Series F Preferred Stock. The Investor also represents it has not been organized for the purpose of acquiring the Series F Preferred Stock. 3.5 ACCREDITED INVESTOR. The Investor is an "accredited investor" within the meaning of SEC Rule 501 of Regulation D under the Act, as presently in effect. 3.6 RESTRICTED SECURITIES. The Investor understands that the shares of Series F Preferred Stock it is purchasing are characterized as "restricted securities" under the federal securities laws inasmuch as they are being acquired from the Company in a transaction not involving a public offering and that under such laws and applicable regulations such securities may be resold without registration under the Securities Act of 1933, as amended (the "Act"), only in certain limited circumstances. In this connection, the Investor represents that it is familiar with SEC Rule 144, as presently in effect, and understands the resale limitations imposed thereby and by the Act. 12. 17 3.7 FURTHER LIMITATIONS ON DISPOSITION. Without in any way limiting the representations set forth above, the Investor further agrees not to make any disposition of all or any portion of the Series F Preferred Stock unless: (a) the disposition is made as part of a firmly underwritten public offering of the Company's stock, or (b) until the transferee has agreed in writing for the benefit of the Company to be bound by this Section 3 and Section 8 hereof, and the Investors' Rights Amendment and the (i) Investor shall have notified the Company of the proposed disposition and shall have furnished the Company with a detailed statement of the circumstances surrounding the proposed disposition, and (ii) if reasonably requested by the Company, the Investor shall have furnished the Company with an opinion of counsel, reasonably satisfactory to the Company, that such disposition will not require registration of such shares under the Act. It is agreed that the Company will not require opinions of counsel for transactions made pursuant to Rule 144 except in unusual circumstances. (c) Notwithstanding the provisions of (a) and (b) above, no such public offering or opinion of counsel shall be necessary for a transfer by (i) an Investor which is a partnership or limited liability company to a partner of such partnership, a retired partner of such partnership who retires after the date hereof or a member of such limited liability company, or to the estate of any such partner, retired partner or member, or the transfer by gift, will or intestate succession of any partner or member to his spouse or to the siblings, lineal descendants or ancestors of such partner or member or his spouse, or (ii) an Investor which is an entity to any corporation, firm, partnership or other entity that controls, is controlled by or is under common control with the Investor, so long as the transferee agrees in writing to be subject to the terms hereof to the same extent as if he were the original Investor hereunder. For purposes of this Section 3.7(c), "control" shall mean the ownership, whether direct or indirect, of fifty percent (50%) or more of the equity having the power to vote on or otherwise direct the affairs of the entity. 3.8 LEGENDS. It is understood that the certificates evidencing the Series F Preferred Stock may bear the following legend: "These securities have not been registered under the Securities Act of 1933, as amended (the "Act"). They may not be sold, offered for sale, pledged or hypothecated in the absence of a registration statement in effect with respect to the securities under such Act or an opinion of counsel reasonably satisfactory to the Company that such registration is not required or unless sold pursuant to Rule 144 of such Act." 13. 18 4. CALIFORNIA COMMISSIONER OF CORPORATIONS. 4.1 CORPORATE SECURITIES LAW. The sale of the securities which are the subject of this Agreement is exempt from qualification with the Commissioner of Corporations of the State of California. 5. CONDITIONS OF THE INVESTOR'S OBLIGATION AT THE CLOSING. The obligations of the Investor under subsection 1.1(b) of this Agreement are subject to the fulfillment on or before the Closing of each of the following conditions: 5.1 REPRESENTATIONS AND WARRANTIES. The representations and warranties of the Company contained in Section 2 shall be true on and as of the Closing, with the same effect as though such representations and warranties had been made on and as of the date of the Closing. 5.2 PERFORMANCE. The Company shall have performed and complied with all agreements, obligations and conditions contained in this Agreement that are required to be performed or complied with by it on or before the Closing. 5.3 COMPLIANCE CERTIFICATE. The President of the Company shall deliver to the Investor at the Closing a certificate certifying that the conditions specified in Sections 5.1, 5.2, 5.4, 5.6 and 5.7 have been fulfilled and stating that there shall have been no adverse change in the business, affairs, operations, properties, assets or condition of the Company since the date of the Financial Statements. 5.4 QUALIFICATIONS. All authorizations, approvals, or permits, if any, of any governmental authority or regulatory body of the United States or of any state that are required in connection with the lawful issuance and sale of the Series F Preferred Stock pursuant to this Agreement shall be duly obtained and effective as of the Closing (except for such as may be properly obtained subsequent to the Closing). 5.5 PROCEEDINGS AND DOCUMENTS. All corporate and other proceedings in connection with the transactions contemplated at the Closing, and all documents incident thereto shall be reasonably satisfactory in form and substance to the Investor, and the Investor shall have received all such counterpart original and certified or other copies of such documents as it may reasonably request. 5.6 BOARD OF DIRECTORS. At the time of the Closing, the directors of the Company shall be John Walker, Brook Byers, Luke Evnin, Harry Hixson, Jr., Patrick Latterell, Alan Lewis and Arnold Oronsky. 5.7 INVESTORS' RIGHTS AMENDMENT. The Company and the Investor shall have entered into the Investors' Rights Amendment in the form attached hereto as Exhibit B. 14. 19 5.8 OPINION OF COMPANY COUNSEL. The Investor shall have received from Cooley Godward LLP, counsel for the Company, an opinion, dated as of the Closing, in the form attached hereto as Exhibit D. 6. CONDITIONS OF THE COMPANY'S OBLIGATIONS AT THE CLOSING. The obligations of the Company to the Investor under this Agreement are subject to the fulfillment on or before the Closing of each of the following conditions by the Investor: 6.1 REPRESENTATIONS AND WARRANTIES. The representations and warranties of the Investor contained in Section 3 shall be true on and as of the Closing, with the same effect as though such representations and warranties had been made on and as of the Closing. 6.2 PAYMENT OF PURCHASE PRICE. The Investor shall have delivered the purchase price specified in Section 1.1(b). 6.3 QUALIFICATION. All authorizations, approvals, or permits, if any, of any governmental authority or regulatory body of the United States or of any state that are required in connection with the lawful issuance and sale of the Series F Preferred Stock pursuant to this Agreement shall be duly obtained and effective as of the Closing (except for such as may be properly obtained subsequent to the Closing). 7. ADDITIONAL AGREEMENT. 7.1 STANDSTILL PROVISIONS. During the period commencing on the date of consummation of the sale of the Company's Common Stock in an initial public offering in which the requirements for the automatic conversion of the Company's Preferred Stock set forth in Article III, Section B(4)(a)(ii)(A) or (B) of the Amended and Restated Articles of Incorporation, as they may be amended from time to time, are satisfied in accordance with the terms of the Amended and Restated Articles of Incorporation (a "Qualifying IPO"), and ending on the later of (a) the fifth anniversary of the Qualifying IPO or (b) the first anniversary after all research support is terminated under the Research, Development and License Agreement dated of even date herewith between the Company and Ares Trading S.A., the Investor shall not, and shall cause its affiliates not to, in any manner, singly or as part of a partnership, limited partnership, syndicate or other "Group" (within the meaning of Section 13(d)(3) of the Securities Exchange Act of 1934, as amended), directly or indirectly, acquire, or offer or agree to acquire, record ownership or beneficial ownership of any shares of capital stock of the Company, any securities convertible into or exchangeable for capital stock or any other right to acquire capital stock from the Company or any other person, without the prior written consent of the Company; provided, however, that the restrictions on Investor under this Section 7.1 shall not be applicable to: 15. 20 (a) a tender offer for the Company's securities formally initiated by the Investor following formal initiation of a tender offer for a controlling interest of the Company's outstanding voting securities made by a third party (the "Third-Party Tender Offer"); provided, however, that the Investor's right to commence a tender offer under this subparagraph shall cease immediately upon (i) the withdrawal, termination or cessation of any such Third-Party Tender Offer if the Investor has not formally commenced a tender offer pursuant to this Section 7.1(a) prior to such withdrawal, termination or cessation of such Third-Party Tender Offer, or (ii) the withdrawal, termination or cessation of any such tender offer made by the Investor pursuant to this Section 7.1(a), unless a Third-Party Tender Offer has been formally commenced that has not been withdrawn, terminated or otherwise ceased. (For purposes of this subparagraph 7.1(a) and subparagraph 7.1(c) below, "control" or "controlling" shall mean the ownership, whether direct or indirect, of fifty percent (50%) or more of the equity having the power to vote on or otherwise direct the affairs of another entity); (b) an acquisition of the Company's securities which does not cause the ratio of (i) (x) the total number of shares of the Company's capital stock held by the Investor and any of its affiliates, to (y) the total number of outstanding shares of the Company's capital stock, to exceed (ii) such ratio as it was calculated immediately following the Qualifying IPO; provided, however, that in no event shall such ratio be required to equal an amount less than ten percent (10%); (c) with respect to any acquisition not otherwise exempt from the restrictions on Investor under Section 7.1 by virtue of subparagraph 7.1(b), an acquisition of the Company's securities by an entity in which the Investor or any of its affiliates is a stockholder, partner or a member so long as (i) such entity does not control, is not controlled by and is not under common control with the Investor or any of its affiliates, and (ii) to the extent that the Investor or any of its affiliates has direct voting control with respect to any of the capital stock of the Company owned or held by such entity, the Investor or its affiliates, as applicable, will vote such shares or cause such shares to be voted in accordance with the recommendations of the Company's Board of Directors; or (d) with respect to any acquisition not otherwise exempt from the restrictions on Investor under Section 7.1 by virtue of subparagraph 7.1(b), an acquisition of the Company's securities as a result of the combination of Investor or any of its affiliates with, or the acquisition by Investor or any of its affiliates of, any other entity as long as any such securities so acquired are voted in accordance with the recommendations of the Company's Board of Directors. 16. 21 8. MISCELLANEOUS. 8.1 SURVIVAL OF WARRANTIES. The warranties, representations and covenants of the Company and the Investor contained in or made pursuant to this Agreement shall survive the execution and delivery of this Agreement and the Closing hereunder and shall in no way be affected by any investigation of the subject matter thereof made by or on behalf of the Investor or the Company. 8.2 SUCCESSORS AND ASSIGNS. Except as otherwise provided herein, the terms and conditions of this Agreement shall inure to the benefit of and be binding upon the respective successors and assigns of the parties (including transferees of any shares of Series F Preferred Stock sold hereunder or any Common Stock issued upon conversion of such Series F Preferred Stock). Nothing in this Agreement, express or implied, is intended to confer upon any party other than the parties hereto or their respective successors and assigns any rights, remedies, obligations, or liabilities under or by reason of this Agreement, except as expressly provided in this Agreement. 8.3 GOVERNING LAW. This Agreement shall be governed by and construed under the laws of the State of California as applied to agreements among California residents entered into and to be performed entirely within California. 8.4 COUNTERPARTS. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. 8.5 ATTORNEYS' FEES. If any action at law or in equity is necessary to enforce or interpret the terms of this Agreement, the Investors' Rights Amendment or the Amended and Restated Articles of Incorporation, the prevailing party shall be entitled to reasonable attorneys' fees, costs and necessary disbursements in addition to any other relief to which such party may be entitled. 8.6 TITLES AND SUBTITLES. The titles and subtitles used in this Agreement are used for convenience only and are not to be considered in construing or interpreting this Agreement. 8.7 NOTICES. Unless otherwise provided, any notice required or permitted under this Agreement shall be given in writing and shall be deemed effectively given upon personal delivery or delivery by courier to the party to be notified or upon delivery by the United States Post Office, by registered or certified mail, postage prepaid and addressed to the party to be notified at the following address, or at such other address, as such party may designate by ten (10) days' advance written notice to the other parties: 17. 22 If to Investor: Ares-Serono S.A. 1267 Coinsins VD Switzerland Telephone: 41-22-364-2838 Facsimile: 41-22-364-2839 With a Copy to: Ares-Serono International S.A. 15 bis, chemin des Mines 1202 Geneva Switzerland Telephone: 41-22-738-8000 Facsimile: 41-22-739-3070 If to Company: Signal Pharmaceuticals, Inc. 5555 Oberlin Drive San Diego, CA 92121 Attn: Chief Financial Officer Telephone: (619) 558-7500 Facsimile: (619) 558-7513 With a Copy to: Cooley Godward LLP 4365 Executive Drive, Suite 1100 San Diego, CA 92121 Attn: Frederick T. Muto, Esq. Telephone: (619) 550-6000 Facsimile: (619) 453-3555 8.8 FINDER'S FEE. Each party represents that it neither is nor will be obligated for any finders' fee or commission in connection with this transaction. Each party agrees to indemnify and hold harmless the other party from any liability for any commission or compensation in the nature of a finders' fee (and the costs and expenses of defending against such liability or asserted liability) for which the first party or any of its officers, employees or representatives is responsible. 8.9 AMENDMENTS AND WAIVERS. Any term of this Agreement may be amended and the observance of any term of this Agreement may be waived (either generally or in a particular instance and either retroactively or prospectively), only with the written consent of the Company and the holders of a majority of the Common Stock issued or issuable upon conversion of the Series F Preferred Stock. Any amendment or waiver effected in accordance with this paragraph shall be binding upon each holder of any securities 18. 23 purchased under this Agreement at the time outstanding (including securities into which such securities are convertible), each future holder of all such securities, and the Company. 8.10 SEVERABILITY. If one or more provisions of this Agreement are held to be unenforceable under applicable law, such provision shall be excluded from this Agreement and the balance of the Agreement shall be interpreted as if such provision were so excluded and shall be enforceable in accordance with its terms. 8.11 AGGREGATION OF STOCK. All shares of the Series F Preferred Stock held or acquired by affiliated entities or persons shall be aggregated together for the purpose of determining the availability of any rights under this Agreement. 19. 24 IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written. SIGNAL PHARMACEUTICALS, INC. By: _____________________________________ Alan J. Lewis, President and Chief Executive Officer ARES-SERONO, S.A. By: _____________________________________ Name: ___________________________________ Title: __________________________________ SIGNATURE PAGE TO STOCK PURCHASE AGREEMENT 25 SCHEDULE A Schedule of Exceptions 26 EXHIBIT A Amended and Restated Articles of Incorporation 27 EXHIBIT B Amendment to Amended and Restated Investors' Rights Agreement 28 EXHIBIT C Proprietary Information and Inventions Agreement 29 EXHIBIT D Form of Opinion of Cooley Godward LLP EX-10.20 23 EXHIBIT 10.20 1 EXHIBIT 10.20 FIRST AMENDMENT TO NOTE DATED JUNE 14, 1994 This First Amendment (the "First Amendment") to the Promissory Note (the "Note") dated June 14, 1994 executed by Alan J. Lewis ("Maker") in favor of Signal Pharmaceuticals, Inc. (the "Company") in the amount of $250,000.000, a copy of which is attached hereto as Exhibit A, is made as of May 14, 1998. Capitalized terms used but not otherwise defined in this First Amendment shall have the meanings given such terms in the Note. The Maker hereby agrees that, effective as of the date hereof, the Note shall be amended as follows: 1. The fourth paragraph of the Note is hereby deleted in its entirety. 2. The fifth paragraph of the Note is hereby amended to read in its entirety as follows: "The entire unpaid principal, together with accrued interest, shall be amortized over the five (5) years following the Repayment Commencement Date, with monthly payments commencing July 14, 1999." Except as specifically amended by this First Amendment, the terms and conditions of the Note shall remain in full force and effect. /s/ ALAN J. LEWIS ------------------------------------ ALAN J. LEWIS, MAKER Agreed to and accepted this 14th day of May, 1998: SIGNAL PHARMACEUTICALS, INC. By: /s/ BRADLEY B. GORDON --------------------------------------- Bradley B. Gordon Chief Financial Officer and Corporate Secretary EXHIBIT A - Note Secured by Security Agreement dated June 14, 1994 2 EXHIBIT A NOTE SECURED BY SECURITY AGREEMENT $250,000.00 June 14, 1994 San Diego, California FOR VALUE RECEIVED, the undersigned Maker promises to pay to Signal Pharmaceuticals, Inc. (the "Company"), at its principal offices at 5555 Oberlin Drive, San Diego, California 92121 or order the principal sum of Two Hundred Fifty Thousand dollars ($ 250,000.00), together with accrued interest on the unpaid principal balance. Beginning on (i) a date five (5) years from the date of this note (the "Repayment Commencement Date") or (ii) the date Maker's employment with the Company is terminated for any reason whatsoever, interest shall accrue, during each calendar month or any portion thereof for which this note remains outstanding, at the per annum rate equal to 7.52% (the minimum rate of interest required, as of the execution date of this note, to avoid the imputation or imposition of interest under the Internal Revenue Code). Accrued interest shall be compounded annually. The proceeds of the loan evidenced by this note shall be applied solely to the purchase of Maker's principal residence in Rancho Santa Fe, California. If, at any time, the Company consummates an Initial Public Offering (an "IPO"), all unpaid principal and accrued interest shall become payable in one lump sum sixty (60) days after shares of the Company's Common Stock sufficient to pay such principal and interest may be sold by Maker in the public market without restriction imposed by the Company, the Company's underwriters or federal or state securities laws; provided, however, that failure to make such payment shall not be deemed a default under this note until a date one year and one day after the closing of an IPO. Subject to the foregoing paragraph, in the event that the Company shall not have closed an IPO on or before the Repayment Commencement Date, then the entire unpaid principal, together with accrued interest, shall become payable and shall be amortized over the period of five (5) years following the Repayment Commencement Date. Payment shall be made in lawful tender of the United States and shall be credited first to the accrued interest then due and payable and the remainder applied to principal. Prepayment of principal, together with accrued interest, may be made at any time without penalty. 3 The entire unpaid principal sum of this note, together with accrued and unpaid interest to date, shall at the election of the holder of this note become immediately due and payable upon one or more of the following events: 1. the death of the Maker; 2. six (6) months after any termination of the employment of the Maker with the Company for any reason whatsoever; 3. the disposition of all or substantially all of the assets or fifty percent (50%) or more of the outstanding voting stock of the Company by means of sale, merger, reorganization or liquidation; or 4. the insolvency of the Maker, the commission of any act of bankruptcy by the Maker, the execution by the Maker of a general assignment for the benefit of creditors, the filing by or against the Maker of any petition in bankruptcy or any petition for relief under the provisions of the federal bankruptcy act or any other state or federal law for the relief of debtors and the continuation of such petition without dismissal for a period of fifteen (15) days or more, or the appointment of a receiver or trustee to take possession of the property or assets of the Maker. The benefits of the interest arrangements under this note are not transferable by Maker and are conditioned on the future performance of substantial services by the Maker. For purposes of applying the provisions of this note, the Maker shall be considered to remain in the employ of the Company for so long as the Maker renders services as a full-time employee of the Company or one or more of its 50%-or-more owned (directly or indirectly) subsidiaries. The Maker certifies that he reasonably expects to be entitled to and will itemize deductions for Federal income tax purposes for each year the note is outstanding. Payment of this note is secured by a Security Agreement executed on this date by the Maker, but the Maker shall remain personally liable for payment of this note and assets of the Maker, other than the collateral under the Security Agreement, may be applied to the satisfaction of the Maker's obligations hereunder, it being understood by the Maker that no action shall be taken against Maker personally until the Company has used its best efforts to collect on this note or to obtain satisfaction of Maker's obligations hereunder pursuant to the Security Agreement. If action is instituted to collect this note, the Maker promises to pay all costs and expenses, including reasonable attorneys' fees, incurred in connection with such action. 2. 4 The Maker hereby waives notice of default, presentment or demand for payment, protest or notice of nonpayment or dishonor and all other notices or demands relative to this instrument. This note shall be construed in accordance with the laws of the State of California. /s/ ALAN J. LEWIS, MAKER ---------------------------------------- Alan J. Lewis, Maker 3. EX-10.21 24 EXHIBIT 10.21 1 EXHIBIT 10.21 SECURITY AGREEMENT THIS SECURITY AGREEMENT (the "Agreement") is made and dated this 14th day of June 1994, by and between SIGNAL PHARMACEUTICALS, INC. ("Secured Party") and Alan J. Lewis ("Borrower"). RECITALS A. In order to allow Borrower to purchase a residence, Secured Party has accepted the promissory note of Borrower in the amount of two hundred fifty thousand dollars ($250,000), dated concurrently herewith (the "Note"), pursuant to which Secured Party has agreed to lend $250,000 to Borrower on the terms and subject to the conditions set forth therein. All terms not otherwise defined herein are used with the same meaning as set forth in the Note. B. As security for the payment and performance of its obligations to Secured Party under the Note and under this Security Agreement, it is the intent of Borrower to grant to Secured Party and to create a security interest in certain property of Borrower, as hereinafter provided. AGREEMENT NOW, THEREFORE, in consideration of the above Recitals and for other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, Secured Party and Borrower hereby agree as follows: 1. Stock Pledge. As security for payment and performance of the obligations of Borrower to Secured Party described in Paragraph 2 below (collectively and severally, the "Obligations"), Borrower hereby assigns and pledges to Secured Party all shares of the Common Stock of Signal Pharmaceuticals, Inc. now or hereafter owned by Borrower (the "Pledged Shares"). Borrower shall deliver the Pledged Shares and a duly endorsed collateral stock power relating to the Pledged Shares to Secured Party and Secured Party hereby acknowledges receipt of the Pledged Shares and the endorsed collateral stock power. Secured Party shall hold the Pledged Shares as security for repayment of the Note in full. (a) During the term of this pledge, all cash dividends paid in respect of the Pledged Shares shall be delivered to Secured Party and applied to payment of the Note and all stock dividends shall be delivered to and held by Secured Party as though they were Pledged Shares (hereafter, collectively, the "Shares"). 2 (b) During the term of this pledge, Borrower shall have all voting rights, if any, with respect to the Pledged Shares or any other shares held by Secured Party pursuant to this Agreement on all matters on which such shares may from time to time be voted. (c) Upon payment in full of the indebtedness evidenced by the Note, Secured Party shall surrender the Pledged Shares to Borrower. Upon payment in part of the indebtedness evidenced by the Note, and upon consent of Secured Party to be given or withheld in the exercise of Secured Party's absolute discretion, Secured Party shall surrender such Pledged Shares to Borrower as Secured Party authorizes. 2. Obligations. The Obligations of Borrower secured by this Security Agreement shall consist of the debt, obligations and liabilities of Borrower to Secured Party arising out of, connected with or related to the Note and this Security Agreement and all amendments or extensions or renewals of the Note, and/or this Security Agreement, whether now existing or hereafter arising, voluntary or involuntary, whether or not jointly owed with others, direct or indirect, absolute or contingent, liquidated or unliquidated, and whether or not from time to time decreased or extinguished and later increased, created or incurred. 3. Additional Representations and Warranties. Borrower hereby represents and warrants that except as heretofore disclosed to Secured Party in writing, Borrower is the owner of the Shares and such other property as to which Borrower may grant Secured Party a security interest pursuant to Paragraph 7 hereof (hereafter, collectively, the "Collateral") (or, in the case of after-acquired Collateral, at the time Borrower acquires rights in the Collateral, will be the owner thereof) and that, no other person has (or, in the case of after-acquired Collateral, at the time Borrower acquires rights therein, will have) any right, title, claim or interest (by way of security interest or other lien or charge or otherwise) in, against or to the Collateral. 4. Covenants of Borrower. Borrower hereby agrees (a) to do all acts that may be necessary to maintain, preserve and protect the Collateral and Secured Party's interest in the Collateral; (b) not to use or permit any Collateral to be used unlawfully or in violation of any provision of this Security Agreement, or any applicable statute, regulation or ordinance or any policy of insurance covering the Collateral; (c) to pay promptly when due all taxes, assessments, charges, encumbrances and liens now or hereafter imposed upon or affecting any Collateral; (d) to procure, execute and deliver from time to time any endorsements, assignments, financing statements and other writing deemed necessary or appropriate by Secured Party to perfect, maintain and protect its security interest hereunder and the priority thereof and to deliver promptly to Secured Party all originals of Collateral or proceeds consisting of chattel paper or instruments; (e) to appear in and defend any action or proceeding which may affect its title to or Secured Party's interest in the Collateral; (f) if Secured Party gives value to enable Borrower to acquire rights in or the use of any Collateral, to use such value for such purpose; (g) to keep separate, accurate and 2. 3 complete records of the Collateral and to provide Secured Party with such records and such other reports and information relating to the Collateral as Secured Party may request from time to time; and (h) not to surrender or lose possession of (other than to Secured Party), sell, encumber, lease, rent, or otherwise dispose of or transfer any Collateral or right or interest therein, and, notwithstanding any provision of the Agreement, to keep the Collateral free of all levies and security interests or other liens or charges except those approved in writing by Secured Party. 5. Authorized Action By Secured Party. Borrower hereby irrevocably appoints Secured Party as its attorney-in-fact to do (but Secured Party shall not be obligated to and shall incur no liability to Borrower or any third party for failure so to do) any act which Borrower is obligated by this Security Agreement to do, and to exercise such rights and powers as Borrower might exercise with respect to the Collateral, including, without limitation, the right to (a) collect by legal proceedings or otherwise and endorse, receive and receipt for all dividends, interest, payments, proceeds and other sums and property now or hereafter payable on or on account of the Collateral; (b) enter into any extension, reorganization, deposit, merger, consolidation or other agreement pertaining to, or deposit, surrender, accept, hold or apply other property in exchange for the Collateral; (c) insure, process and preserve the Collateral; (d) transfer the Collateral to its own or its nominee's name; and (e) make any compromise or settlement, and take any action it deems advisable, with respect to the Collateral. Borrower agrees to reimburse Secured Party upon demand for any costs and expenses, including, without limitation, attorneys' fees, Secured Party may incur while acting as Borrower's attorney-in-fact hereunder, all of which costs and expenses are included in the Obligations secured hereby. It is further agreed and understood between the parties hereto that such care as Secured Party gives to the safekeeping of its own property of like kind shall constitute reasonable care of the Collateral when in Secured Party's possession; provided, however, that Secured Party shall not be required to make any presentment, demand or protest, or give any notice and need not take any action to preserve any rights against any prior party or any other person in connection with the Obligations or with respect to the Collateral. 6. Default and Remedies. The occurrence of one or more of the following events shall constitute an event of default under this Agreement: (a) failure of Borrower to pay when due under the Note principal or accrued interest; (b) the occurrence of any event of default specified in the Note; (c) the failure of Borrower to perform any obligation imposed upon Borrower by reason of this Agreement; or (d) the breach of any warranty of the Borrower contained in this Agreement. Upon the occurrence of any such event of default, Secured Party may, at its option, and without notice to or demand on Borrower and in addition to all rights and remedies available to Secured Party under the Agreement, declare the Note to become immediately due and payable and do any of the following: (a) transfer record ownership of the Shares to itself and receive, endorse and give receipt for, or collect by legal proceedings or otherwise, dividends or other distributions made or paid with respect to the Shares; (b) sell, lease or otherwise dispose of any Collateral at one or more public or private sales, whether or not such Collateral is present 3. 4 at the place of sale, for cash or credit or future delivery, on such terms and in such manner as Secured Party may determine; and (c) apply any proceeds realized from the disposition of the Collateral pursuant to the power of sale hereby granted to Secured Party first to the payment of expenses incurred by Secured Party in connection with the disposition, and the balance to the payment of the Note. Any surplus proceeds shall be paid over to the Borrower. 7. Deemed Insecure. In the event and at such time as Secured Party reasonably deems the security interest in the Shares granted pursuant to Paragraph 2 of this Agreement to be insufficient to secure payment and performance of the Obligations, Secured Party may, pursuant to the terms of this Agreement, require Borrower and Borrower hereby agrees (a) to grant Secured Party a security interest in such additional property as Secured Party in its sole discretion may designate; and (b) to procure, execute and deliver any endorsements, assignments, financing statements and any other writing or instrument deemed necessary and appropriate by Secured Party to perfect, maintain and protect its security interest in such additional property and the priority thereof. Such additional property shall be considered Collateral for all purposes of this Agreement. 8. Cumulative Rights. The rights, powers and remedies of Secured Party under this Security Agreement shall be in addition to all rights, powers and remedies given to Secured Party by virtue of any statute or rule of law, the Note or any other agreement, all of which rights, powers and remedies shall be cumulative and may be exercised successively or concurrently without impairing Secured Party's security interest in the Collateral. 9. Waiver. Any forbearance or failure to delay by Secured Party in exercising any right, power or remedy shall not preclude the further exercise thereof and every right, power or remedy of Secured Party shall continue in full force and effect until such right, power or remedy is specifically waived in a writing executed by Secured Party. Borrower waives any right to require Secured Party to proceed against any person or to exhaust any Collateral or to pursue any remedy in Secured Party's power. 10. Setoff. Borrower agrees that Secured Party may exercise its rights of setoff with respect to the Obligations in the same manner as if the Obligations were unsecured. 11. Binding Upon Successors. All rights of Secured Party under this Security Agreement shall inure to the benefit of its successors and assigns, and all obligations of Borrower shall bind its heirs, executors, administrators, successors and assigns. 12. Entire Agreement: Severability. This Security Agreement contains the entire security agreement between Secured Party and Borrower. If any of the provisions of this Security Agreement shall be held invalid or unenforceable, this Security Agreement 4. 5 shall be construed as if not containing those provisions and the rights and obligations of the parties hereto shall be construed and enforced accordingly. 13. References. The singular includes the plural. If more than one executes this Security Agreement, the term Borrower shall be deemed to refer to each of the undersigned as well as to all of them and their obligations and agreements hereunder shall be joint and several. If any of the undersigned is a married person, recourse may be had against his or her separate property for the Obligations. 14. Choice of Law. This Security Agreement shall be construed in accordance with and governed by the laws of the State of California, and, where applicable and except as otherwise defined herein, terms used herein shall have the meanings given them in the California Uniform Commercial Code. 15. Notice. Any written notice, consent or other communication provided for in this Security Agreement shall be delivered or sent by registered U.S. mail, with postage prepaid, to the following addresses: Secured Party: Signal Pharmaceuticals, Inc. 5555 Oberlin Drive San Diego, California 92121 with a copy to: J. Stephan Dolezalek Brobeck, Phleger & Harrison Two Embarcadero Place 2200 Geng Road Palo Alto, California 94303 Borrower: Alan J. Lewis c/o Signal Pharmaceuticals, Inc. 5555 Oberlin Drive San Diego, California 92121 Such addresses may be changed by written notice given as provided herein. /s/ ALAN J. LEWIS ---------------------------------------- Borrower 5. EX-10.22 25 EXHIBIT 10.22 1 EXHIBIT 10.22 [SIGNAL PHARMACEUTICALS, INC. LETTERHEAD] December 8, 1993 Alan Lewis Ph.D. 5 Shara Lane Pennington, NJ 08534 Dear Alan: Signal Pharmaceuticals, Inc. ("Signal" or the "Company") is pleased to offer you the position of President and Director. Your employment with Signal will commence on February 1, 1994. We would expect that you would spend three to four days at Signal in the intervening period and attend the Board of Directors Meeting on January 19, 1994. Your base salary will be $225,000 annually, less all required withholding for taxes and social security. A bonus of 25% of salary will be awarded based upon performance against measurable, mutually agreed upon goals. Individual goals will be assigned specific percent weighting. Thus if all goals were met a bonus of up to 150% (of the 25%) would exist. For calendar year 1994 Signal will guarantee a minimum bonus of $25,000. Signal will offer you a signing bonus of $50,000. The bonus must be returned to Signal if you leave voluntarily before the end of the first year (February 1, 1995). In addition, under Signal's 1993 Long-Term Incentive Plan (the "Plan"), the Company will offer you an opportunity to option or purchase outright 450,000 (four hundred fifty thousand) shares of SPI Common Stock at the current fair market value of $0.10/share. Under the Plan, one-tenth (10%) of the shares will vest on your first day of employment, one-tenth (10%) will vest on the first day of your thirteenth month of employment. The remaining shares will vest in equal quarterly installments over a four year period. Note that the initial grant of 10% of the option or purchase must be returned to the Company if you leave voluntarily before the end of the first year (February 1, 1995). 2 Alan Lewis, Ph.D. December 08, 1993 page 2 An additional bonus option of 150,000 (one hundred fifty thousand) shares at $0.10/share will be granted and vest as described above. This bonus option is contingent upon you being appointed the Chief Executive Officer of Signal. The criteria for appointment to the CEO position would be successful performance against 1994 and 1995 incentive bonus goals mutually agreed upon with the Board of Directors. All shares in Signal are subject to our standard purchase agreement. Signal shares will not be marketable until such time as an initial public offering has been successfully completed, and the "lock-up" period has elapsed. While the company is privately held, the company maintains a first right of refusal on any potential sale of shares which you own. Signal will reimburse you for relocation expenses involved in moving your family to the San Diego area. Signal will also reimburse you for a house hunting trip for you and your family. You will be eligible for the standard Company benefits. Signal reserves the right to modify compensation and benefits from time to time as it deems necessary. Signal will reimburse you for the rental cost of a furnished townhouse or equivalent until such time as your family has relocated and you have permanent housing. Signal will pay this rental cost until September 1, 1994 if necessary. Signal will reimburse you for one round trip air fare per month to visit your family in New Jersey prior to their move to San Diego. Signal will assist you with the financing of a home purchase. The specifics will depend upon your investigation of the local real estate market. For example, Signal will loan you up to $300,000 for the purchase of a family residence in the San Diego area. This loan would be interest bearing only for the first five years at the lowest interest rate permissible by the IRS. The loan could be extended for an additional five years and fully amortized over those five years at the lowest interest rate permissible by the IRS. If you visit Signal during the end of December, Signal will reimburse you for round-trip travel expenses to San Diego for you and your family. You employment agreement is for one year. Your employment is renewable on an annual basis. 3 Alan Lewis, Ph.D. December 08, 1993 page 3 You will be asked to sign an Employee's Proprietary Information and Inventions Agreement. In addition, you will be expected to abide by the Company rules and regulations as described in the Company handbook. The employment terms in this letter supersede any other agreements or promises made to you. As required by law, this offer is subject to satisfactory proof of your right to wok in the United States. This offer will expire on Saturday December 11, 1993. Please indicate your acceptance of this offer by signing one of the originals and returning it to me. Please fax a signed copy to me at (619)-456-4041. Brook, Luke, Pat and I look forward to working with you and helping build Signal into a successful public pharmaceutical company. Sincerely, /s/ HARRY F. HIXSON, JR. - -------------------------- Harry F. Hixson, Jr. Director ACCEPTED BY: /s/ ALAN J. LEWIS - -------------------------- 1-4-94 - -------------------------- Date: EX-10.23 26 EXHIBIT 10.23 1 [SIGNAL PHARMACEUTICALS, INC. LETTERHEAD] EXHIBIT 10.23 March 4, 1994 David W. Anderson, Ph.D. 14446 Trailwind Drive Poway, CA 92064 Dear David: Signal Pharmaceuticals, Inc. ("Signal" or the "Company") is pleased to offer you the position of Vice President, Drug Discovery and Preclinical Development reporting to Alan J. Lewis (President). Your employment with Signal will commence on March 24. Your starting salary will be $165,000 annually, less all required withholding for taxes and social security. In addition Signal is offering a one time signing bonus of $25,000 to help you quickly make the transition to join us. You will be eligible for the standard Company benefits. Signal reserves the right to modify compensation and benefits from time to time as it deems necessary, In addition, under Signal's 1993 Long-Term Incentive Plan (the "Plan"), the Company will offer you an opportunity to purchase outright 200,000 shares of SPI Common Stock at the current fair market value, subject to approval by the Compensation Committee of the Board of Directors. Under the Plan, one-fifth (20%) of the shares will vest on the first day of your thirteenth month of employment. The remaining shares will vest in equal quarterly installments over a four year period. The invested shares will be subject to repurchase by the company at their cost to you, should you leave the company before all shares have vested. In addition, all shares issued under the Plan are subject to certain limitations on the sale and use of the stock, Your employment is for an indefinite term. In other words, the employment relationship is "at will," and either you or SPI has the right to terminate that employment relationship at any time. 2 David W. Anderson,Ph.D. March 4, 1994 page 2 You will be required to sign an Employee's Proprietary Information and Inventions Agreement before your employment begins. In addition, you will be expected to abide by the Company rules and regulations as described in the Company handbook. The employment terms in this letter supersede any other agreements or promises made to you. As required by law, this offer is subject to satisfactory proof of your right to work in the United States. Please indicate your acceptance of this offer by signing one of the originals and returning it to me by the close of business on Wednesday, March 8, 1994, at which time this offer will lapse. We have enjoyed our meetings with you and we look forward to your joining the Signal team. We feel that your experience and enthusiasm can make a substantial contribution to the success of Signal. Sincerely, /s/ ALAN LEWIS (LJC) Alan J. Lewis, Ph.D. President ACCEPTED BY: /s/ DAVID W. ANDERSON - --------------------------------------- David W. Anderson 3/8/94 - --------------------------------------- Date: EX-10.24 27 EXHIBIT 10.24 1 [SIGNAL PHARMACEUTICALS, INC. LETTERHEAD] EXHIBIT 10.24 August 18, 1994 Bradley B. Gordon P.O. Box 9173 Rancho Santa Fe, CA 92067 Dear Brad: Signal Pharmaceuticals, Inc. ("Signal" or the "Company") is pleased to offer you the position of Vice President Finance and Chief Financial Officer, reporting to the President. Your employment with Signal will commence on August 29, 1994. Your base salary will be $130,000 annually, less all required withholding for taxes, social security and other required deductions. A bonus of up to 20% of salary will be awarded based upon performance against measurable, mutually agreed upon goals. Individual goals will be assigned specific percent weighting. In addition, under Signal's 1993 Long-Term Incentive Plan (the "Plan"), the Company will offer you an option to purchase 150,000 (one hundred and fifty thousand) shares of SPI Common Stock at fair market value (currently 10 cents a share). Under the Plan, one-fifth (20%) of the shares will vest on the first day of your thirteenth month of employment. The remaining shares will vest 5% per quarter over the next four years. All shares in Signal are subject to our standard purchase agreement. Signal shares will not be marketable until such time as an initial public offering has been successfully completed, and the "lock-up" period has elapsed. While the company is privately held, the company maintains a first right of refusal on any potential sale of shares which you own. You will be eligible for the standard Company benefits. Signal reserves the right to modify compensation and benefits from time to time as it deems necessary. Your employment is "at will," however to cover the unlikely event that your employment is terminated in the first year without cause, we will offer you 2 Brad Gordon August 18, 1994 page 2 continued salary for a maximum of 6 months or until you find a new job, if sooner. Under this circumstance you will vest shares according to the number of months worked at the company. After the first year, the maximum salary continuance will be 3 months. If you choose to leave at your own will or you are terminated for cause there will be no salary continuation. You will be asked to sign an Employee's Proprietary Information and Inventions Agreement. In addition, you will be expected to abide by the Company rules and regulations as described in the Company handbook. The employment terms in this letter supersede any other agreements or promises made to you. As required by law, this offer is subject to satisfactory proof of your right to work in the United States. Please indicate your acceptance of this offer by signing one of the originals and returning it to me. Please fax a signed copy to me at (619)558-7513 Due to the importance of this position we must receive a speedy acceptance to this offer. If we have not received a signed acceptance from you prior to 5pm California time on Monday, August 22, 1994, this offer will expire and we will have to move forward with the other candidates. Brad we are very excited about the prospect of your joining the Signal team and hope you are pleased with this attractive offer. Please call me if you have any additional questions. Sincerely, /s/ ALAN J. LEWIS Alan J. Lewis President ACCEPTED BY: /s/ BRADLEY B. GORDON ---------------------------------------- 8-22-94 ---------------------------------------- Date: EX-10.25 28 EXHIBIT 10.25 1 [SIGNAL PHARMACEUTICALS, INC. LETTERHEAD] EXHIBIT 10.25 June 13, 1995 Carl. F. Bobkowski P.O. Box 9664 Rancho Santa Fe, CA 92067 Dear Carl: It is my pleasure to offer you the position of Executive Vice President at Signal Pharmaceuticals, Inc. This letter ("Letter Agreement") will serve to confirm the offer of the terms of your employment with Signal Pharmaceuticals, Inc. ("Signal" or the "Company"), such employment to begin June 13, 1995. If the terms discussed below are acceptable to you, please sign this Letter Agreement where indicated and return it to me at the above address. 1. Duties and Obligations. Your position at the Company will be Executive Vice President Corporate Development of the Company. In that capacity, you will be responsible for all corporate, product and clinical development as well as all commercial operations of the Company. You will report to and follow the instructions of the President of the Company. You agree that to the best of your ability and experience you will at all times loyally and conscientiously perform all of the duties and obligations required of and from you pursuant to the express and implicit terms hereof, and to the reasonable satisfaction of the Company. 2. Compensation. a. Salary. You will be paid a monthly salary of $14,583.33 less applicable withholdings ($175,000 annually; 2 hereafter "Salary"). The Company will reimburse all reasonable business expenses that are incurred in the ordinary course of business and in accordance with the Company's policies as in effect from time to time. You may also be entitled to increases in your salary in accordance with the Company's policy and as are adopted and approved by the Board of Directors from time to time. b. Bonus. In the event that the Company closes a corporate partnering transaction during the first year of your employment (or series of transactions) in which the total amount to be received by the Company equals at least $25 million (including all up-front fees, equity investments and milestones, but not royalties), then you will be awarded a bonus of 25% of your annual salary. A 30% bonus will be paid if the total value of such transactions equal or exceed $35 million. Subsequent bonus plans will be designed annually and will be performance based. c. Severance. In the event that the Company determines that you have not made sufficient progress toward the Company's business development goals after completion of 9 months of employment and the Company terminates your employment, then the Company will agree to provide you with a severance payment of 3 additional months of salary and non-salary benefits. d. Non-Salary Benefits. You will be eligible for corporate benefits such as health and disability insurance, vacation, etc. as provided for by the Company. e. Equity. i) You will be granted an option, under Signal's 1993 Stock Option Plan (the "Plan"), to purchase 170,000 shares of the Company's Common Stock at the fair market value on the date of grant. The option will be immediately exercisable; provided, however, that the Company will have a repurchase right with respect to such shares which will lapse and the option will vest as to 20% of the shares upon completion of 12 full months of employment and as to the remaining shares at a rate of 5% per quarter over the next four years. ii) Subject to amendment of the Plan, you will be granted an additional option to purchase 100,000 shares of the Company's Common Stock at the fair market value on the date 3 of grant. The option will be immediately exercisable; provided, however, that subject to (A), below, the Company's repurchase right with respect to the shares will lapse and the option will vest as to 25% of the shares upon completion of 15 full months of employment and as to the remaining shares at the rate of 5% per quarter over the next 3 3/4 years. A) In the event that the Company has not closed a corporate partnering transaction (or series of transactions) in which the total amount to be received by the Company equals at least $25 million (including all up-front fees, equity investments and milestone payments, but not royalties) within 9 months of the date of your employment, then the option described in section (e)(iii) shall, if not previously exercised, be canceled as to 25% of the shares, or if the option was previously exercised, then up to 25% of the shares so purchased shall be repurchasable by the Company at cost. If such a transaction has not been closed within 12 months of the date of your employment, then the option will be canceled or the shares will become repurchasable, as applicable, as to an additional 25% of the shares. If such a transaction has not been closed within 15 months of the date of your employment, then the option will be canceled or the shares will become repurchasable, as applicable, as to the remaining 50% of the shares. iii) Subject to amendment of the Plan, you will be granted an additional option to purchase 50,000 shares of the Company's Common Stock at the fair market value on the date of grant. The option will be immediately exercisable; provided, however, that subject to (A), below, the Company's repurchase right with respect to the shares will lapse and the shares will vest as to 40% of the shares upon completion of 24 full months of employment and as to the remaining shares at the rate of 5% per quarter over the next 3 years. A) In the event that the Company has not closed a second corporate partnering transaction (or series of transactions) in which the total amount to be received by the Company equals at least $10 million (including all up-front fees, R & D support, equity investments but, not royalties and milestone payments) within 24 months of the date of your employment, then the option shall, if not previously exercised, be canceled in its 4 entirety, or if the option was previously exercised, then the shares so purchased shall be repurchasable by the Company at cost. iv) The terms of each of the foregoing otpions will be reflected in a definitive Stock Option Agreement between you and the Company. 3. Term. a) Notwithstanding anything in this Agreement to the contrary, employment with the Company is "at will," not for a specific term, and can be terminated by you or by the Company at any time for any reason, with or without cause, subject to the termination provisions set forth herein. Any contrary representations which may have been made or which may be made to you are superseded by this offer. b) In the event that your employment is terminated by the Company then you will immediately resign from all positions with the Company. c) Except as specifically set forth in Section 2(c) hereof, in the event that you resign or your employment is terminated by the Company, the Company's obligations hereunder will immediately terminate. 4. Devotion of Entire Business Time to the Company's Business. a) During the term of your employment, you will devote all of your business time and attention to the business of the Company and the Company will be entitled to all of the benefits and profits arising from or incident to all such work, services and advice. b) During the term of your employment, prior to rendering any services of a commercial or professional nature to any person or organization, whether for compensation or otherwise, you will notify the President and the Board of Directors of the Company. c) During the term of your employment, you will not, directly or indirectly, either as an employee, employer, 5 consultant, agent, principal, partner, stockholder, corporate officer, director, or in any other individual or representative capacity, engage or participate in any business that is competitive in any manner whatsoever with the business of the Company. 5. Proprietary Information and Inventions Agreement; Outside Activities. Your acceptance of this offer is contingent upon the execution of the Company's Proprietary Information and Inventions Agreement, a copy of which will be provided for your review and execution prior to the commencement of your employment. 6. Approvals. The terms of this Letter Agreement is subject to the approval of the Company's Board of Directors and to applicable legal and accounting requirements. If you accept this offer, the terms described in this Letter Agreement will be the terms of your employment. Any additions or modifications of these terms would have to be in writing and signed by yourself and an authorized officer of the Company. The terms of this offer and the Proprietary Information and Inventions Agreement must be agreed to as a condition of your employment. To accept this offer, please sign below. We look forward to working with you to make Signal a success. If there are any aspects of our offer which you would like clarified, please let me know. Very truly yours, /s/ ALAN J. LEWIS Alan J. Lewis, Ph.D. I accept this offer on the foregoing terms. /s/ CARL F. BOBKOSKI - ---------------------------------------- Carl F. Bobkoski - ---------------------------------------- EX-10.26 29 EXHIBIT 10.26 1 EXHIBIT 10.26 SIGNAL PHARMACEUTICALS CONSULTING AGREEMENT This CONSULTING AGREEMENT (the "Agreement") is made as of April 1, 1996 (the "Effective Date") by and between Signal Pharmaceuticals, Inc., a California corporation (the "Company"), and John Walker ("Walker"). WHEREAS, Walker was previously appointed a director of the Company on June 8, 1995, and in connection with such appointment, Walker was awarded an option to purchase 50,000 shares of the Company's Common Stock. WHEREAS, the Company has now appointed Walker as its Chairman of the Board and the Company desires to have Walker provide additional services to the Company while acting as its Chairman. THEREFORE, THE PARTIES AGREE AS FOLLOWS: 1. Description of Services. The Company hereby retains Walker as a consultant to the Company, and Walker hereby agrees to act in such capacities and to perform such services as are reasonably requested by the Company (the "Services"). The Services are expected to consist of one full day per month on-site at the Company for Company related matters and sufficient phone time to deal with Company issues in addition to regular attendance at Board meetings. This scope may be amended from time to time as the Company expands the Services, by mutual agreement of the parties hereto. 2. Term and Expiration. (a) Term. This Agreement will become effective as of the Effective Date and remain so long as Walker remains the Chairman of the Board of the Company. (b) Termination. Either party may terminate the Agreement at any time with thirty (30) days written notice. 3. Compensation. (a) Cash. For all Services provided hereunder, the Company will pay Walker at a per diem rate of $1,000.00 for each day of on-site activities requested by the Company. 2 (b) Equity. (i) The Company shall grant to Walker, subject to approval by the Company's Board of Directors, a non-qualified option to purchase 50,000 shares of the Company's Common Stock (the "Stock Option"), all of which shall be exercisable at the fair market value of the Company's Common Stock, as determined by the Company's Board of Directors, on the Grant Date. The Stock Option shall have a term of ten (10) years measured from the Grant Date and shall be subject to vesting as follows: 1/60 of the option shares shall vest on the last day of each month following the Grant Date such that Walker shall acquire a fully vested interest in such 50,000 shares on the date five (5) years from the Grant Date. Upon any termination of Walker's role as Chairman of the Board of Directors, any unvested stock options shall revert back to the Company. 4. Expenses. The Company will reimburse Walker for reasonable lodging, meal and travel expenses incurred by Walker when the Company's business needs require that such Services be performed outside of the San Diego area. Requests for reimbursement must be in a form acceptable to the Company. 5. Notices. Any notice required or permitted hereunder will be given in writing and will be deemed effectively given as follows: (a) upon personal delivery; (b) three (3) days after deposit in the United States mail by certified or registered mail (return receipt requested); (c) one (1) business day after its deposit with any return receipt express courier (prepaid); or (d) one (1) business day after transmission by rapifax or telecopier, addressed to the other party at its address (or facsimile number, in the case of transmission by telecopier) as shown below its signature to this Agreement, or to such other address as such party may designate in writing from time to time to the other party. 6. Governing Law; Severability. This Agreement will be construed and enforced in accordance with the internal laws of the State of California, excluding that body of laws pertaining to conflict of laws. If any provision of this Agreement is determined by a court of law to be illegal or unenforceable, then such provision will be enforced to the maximum extent possible and the other provisions will remain in full force and effect. 2. 3 IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first written above. COMPANY SIGNAL PHARMACEUTICALS, INC. 5555 Oberlin Drive San Diego, CA 92121 By: /s/ ALAN LEWIS ------------------------------------- Alan Lewis, President WALKER NAME: John Walker ----------------------------------------- (Signature) 3. EX-10.27 30 EXHIBIT 10.27 1 EXHIBIT 10.27 LEASE by and between SORRENTO VALLEY BUSINESS PARK ("Landlord") and SIGNAL PHARMACEUTICALS, INC. ("Tenant") For the 10,417 SF Premises at 5555 Oberlin Drive, San Diego, CA 92121 Multiple Tenant Modified Net Multiple Building Project 2 TABLE OF CONTENTS Page ---- 1. PARTIES ......................................................... 1 2. PREMISES ........................................................ 1 3. LEASE TERM ...................................................... 1 4. RENT ............................................................ 1 5. CONDITION OF PREMISES ........................................... 2 6. USE ............................................................. 2 7. ASSIGNMENT AND SUBLETTING ....................................... 4 8. ALTERATIONS ..................................................... 7 9. REPAIR AND MAINTENANCE .......................................... 8 10. UTILITIES AND SERVICES .......................................... 11 11. REAL PROPERTY TAXES ............................................. 11 12. INSURANCE ....................................................... 13 13. DAMAGE OR DESTRUCTION ........................................... 15 14. NOTICES ......................................................... 16 15. DEFAULT ......................................................... 17 16. SURRENDER OF THE PREMISES ....................................... 20 17. ATTORNEYS' FEES ................................................. 20 18. LIENS ........................................................... 20 19. RENTAL ADJUSTMENT ............................................... 21 20. SUBORDINATION ................................................... 21 21. MORTGAGEE PROTECTION ............................................ 21 22. CONDEMNATION .................................................... 21 23. HOLDING OVER .................................................... 22 24. ENTRY BY LANDLORD ............................................... 22 25. ESTOPPEL CERTIFICATES ........................................... 23 26. TRANSFER OF THE PREMISES BY LANDLORD ............................ 23 27. LANDLORD'S RIGHT TO PERFORM TENANT'S COVENANTS .................. 23 28. TENANT'S REMEDY ................................................. 24 29. SECURITY DEPOSIT ................................................ 24 30. FINANCIAL COVENANTS ............................................. 24 31. PARKING ......................................................... 24 32. QUIET ENJOYMENT ................................................. 25 33. MODIFICATIONS FOR LENDER ........................................ 25 34. SIGNS ........................................................... 25 35. ACCEPTANCE ...................................................... 25 36. RECORDING ....................................................... 25 37. QUITCLAIM ....................................................... 25 38. BROKERS ......................................................... 25 39. GENERAL ......................................................... 26 3 EXHIBIT A DIAGRAM OF PREMISES EXHIBIT B LEGAL DESCRIPTION EXHIBIT C WORK LETTER AGREEMENT EXHIBIT D COMMENCEMENT DATE MEMORANDUM EXHIBIT E TENANT IMPROVEMENT PLAN EXHIBIT F FIRST REFUSAL AREA ADDENDUM 4 LEASE SUMMARY Lease Date: April 30, 1993 Landlord: Sorrento Valley Business Park, a California Limited Partnership Address of Landlord The Courson Company 2882 Sand Hill Road Suite 250 Menlo Park, CA 94025 Tenant: Signal Pharmaceuticals, Inc. Contact: Mark D. Carman, Ph.D. Telephone: (619)756-9827 Jacqueline Johnson, Ph.D. Premises: 10,417 Square Feet Building Address: 5555 Oberlin Drive, Suite 100 City: San Diego County: San Diego Tenant's Building Percentage: 44.74% Tenant's Project Percentage: 9.96% Anticipated Commencement Date: October 1, 1993 Term: Eighty-four (84) months Initial Monthly Rent: $16,146.35/month Security Deposit: $16,146.35 Broker: CB Commercial Real Estate Group, Inc. 5 LEASE (MULTIPLE TENANT MODIFIED NET) PARTIES 1. THIS LEASE (the "Lease"), dated April 30, 1993, is entered into by and between Sorrento Valley Business Park, a limited partnership ("Landlord"), whose address is 2882 Sand Hill Road, Suite 250, Menlo Park, CA 94025 and Signal Pharmaceuticals, Inc., a California corporation ("Tenant"). PREMISES 2. Landlord hereby leases to Tenant and Tenant hereby leases from Landlord those certain premises consisting of approximately 10,417 rentable square feet, as shown on Exhibit A attached hereto (the "Premises") , located in a one-story building (the "Building") commonly known as 5555 Oberlin Drive, Suite 100, San Diego, California 92121. The Premises are located on that real property commonly known as Sorrento Valley Business Park (the "Project") , and more particularly described in Exhibit B attached hereto, which includes four buildings, adjacent parking areas, landscaping, and related improvements. Tenant's right to use the Outside Areas of the Project shall be a right in common with other tenants of the Project. For purposes of this Lease, "Outside Areas" shall mean all areas and facilities within the Project except for the Building and the other buildings located within the Project, including, but not limited to, parking areas, access and perimeter roads, sidewalks, landscaped areas, service areas, trash disposal facilities, and similar areas, subject to the reasonable rules and regulations and changes therein from time to time made by Landlord governing the use of the outside Areas. LEASE 3. A. TERM. Except as set forth in the Letter Agreement by and TERM between Signal Pharmaceutical Inc. and the Landlord and dated July 2, 1993 and July 7, 1993, respectively (the "Letter Agreements"). The term of this Lease shall be a period of seven (7) years and zero (0) months commencing on the Commencement Date, hereinafter referred to as "Term" including any extensions hereunder. B. COMMENCEMENT DATE. The Commencement Date of the Lease shall be the earlier to occur of (i) the date Tenant begins to use the Premises for the conduct of its business therein, or (ii) December 1, 1993 ("Commencement Date"), which latter date may be adjusted by events of "Landlord Delay" or "Force Majeure" (as defined in the work letter agreement attached hereto as Exhibit C). C. COMMENCEMENT DATE MEMORANDUM. When the actual Commencement Date is determined, the parties shall execute a Commencement Date Memorandum setting forth such date in the form shown in Exhibit D. D. Deleted. E. EARLY ENTRY. At any time after the execution of this Lease, provided that Tenant shall not be in default hereunder beyond any applicable cure period, Tenant and Tenant's representatives may enter the Premises to install tenant improvements, trade fixtures and equipment in the Premises, and the date of such installation or work shall not be deemed the Commencement Date of the Lease or constitute possession of the Premises for purposes of this Lease; provided, however, that Tenant's use of the Premises during said period of time shall be at Tenant's sole risk and subject to all the terms and provisions applicable to Tenant under this Lease, except for the payment of Monthly Rent and Additional Rent, which shall commence on the Commencement Date. F. Deleted. RENT 4. A. MONTHLY RENT. Tenant shall pay to Landlord, in lawful money of the United States, for each calendar month of the Term, 1 6 Monthly Rent in the amount of Sixteen Thousand One Hundred Forty-Six and 35/100ths Dollars ($16,146.35), subject to adjustment as provided in Paragraph 19, in advance, on the first day of each calendar month, without abatement, deduction, claim, offset, prior notice or demand, except as otherwise expressly provided herein. B. ADDITIONAL RENT. All monies required to be paid by Tenant under this Lease, including, without limitation, repair and maintenance charges pursuant to Paragraph 9, Real Property Taxes pursuant to Paragraph 11, and insurance premiums and deductibles pursuant to Paragraph 12, shall be deemed Additional Rent. The term "Rent" as used herein shall refer to Monthly Rent plus any Additional Rent. C. PRORATIONS. If the Commencement Date is not the first (1st) day of a month, or if the termination date of this Lease is not the last day of a month, a prorated installment of Monthly Rent based on a thirty (30) day month shall be paid for the fractional month during which the Lease commences or terminates. CONDITION 5. By taking possession of the Premises, Tenant shall be deemed OF to have accepted the Premises in good, clean and completed condition PREMISES and repair, subject to all applicable laws, codes and ordinances. Tenant acknowledges that neither Landlord nor its authorized agents, partners, subsidiaries, directors, officers, and employees ("Agents") have made any representations or warranties as to the suitability or fitness of the Premises for the conduct of Tenant's business or for any other purpose, nor has Landlord or its Agents agreed to undertake any Alterations (as defined below in Paragraph 8) or construct any Tenant Improvements to the Premises except as expressly provided in this Lease. USE 6. A. TENANT'S USE. Tenant shall use the Premises solely for office, warehouse and biotechnology research (including animal research and a pilot plant manufacturing facility) as permitted in the current MlB zoning and shall not use the Premises for any other purpose, without the prior written consent of Landlord. B. CC&R'S. Tenant agrees that the Premises are subject and subordinate to those certain covenants, conditions and restrictions recorded at Series/Instrument #80-317016, of the Official Records of San Diego County, California, on September 29, 1980, a copy of which Tenant acknowledges has been delivered to it (the "CC&R's"). Tenant acknowledges that it has read the CC&R's and knows the contents thereof. Throughout the term, Tenant shall faithfully and timely perform and comply with the CC&R's and any modification or amendments thereto provided to Tenant, including the payment by Tenant of any periodic or special dues or assessments against the Premises. C. COMPLIANCE. (i) Tenant shall not use the Premises in a manner which will in any way conflict with any law, statute, zoning restriction, ordinance or governmental law, rule, regulation or requirement of duly constituted public authorities now in force or which may hereafter be in force, or the requirements of the Board of Fire Underwriters or other similar body now or hereafter constituted relating to or affecting Tenant's use or occupancy of the Premises. Tenant shall not commit any public or private nuisance or any other act or thing which might or would disturb the quiet enjoyment of any other tenant of Landlord or any occupancy of nearby property. Tenant shall place no loads upon the floors, walls or ceilings in excess of the maximum designed load determined by Landlord or which endanger the structure; nor place any harmful liquids in the drainage systems; nor dump or store (except to the extent such storage is provided for in 2 7 subparagraph (iv) below) waste materials or refuse or allow such to remain outside the Building proper, except in the enclosed trash areas provided. Tenant shall not store or permit to be stored or otherwise placed any other materials of any nature whatsoever outside the Building. Tenant shall, at its own cost and expense, promptly and properly observe and comply with, including the making by Tenant of any Alteration (as defined in Paragraph 8 below) to the Premises or any change to the Tenant Improvements prior to the Commencement Date, all present and future orders, regulations, directions, rules, laws, ordinances, and requirements of all governmental authorities (including, without limitation, state, municipal, county and federal governments and their departments, bureaus, boards and officials) arising from the use or occupancy of, or applicable to Tenant's use of, the Premises. (ii) Tenant shall, at Tenant's sole cost and expense, take all action, including required Alterations necessary to comply with the requirements of the Americans With Disabilities Act of 1990 (the "ADA") , which shall arise from Tenant's specific use of the Premises, or any installations in the Premises, including without limitation the improvements to be provided under the Work Letter Agreement, or required by a breach of any of Tenant's covenants or agreements under this Lease, whether or not such requirements shall now be in effect or hereafter enacted. Landlord shall perform any work necessary for the Outside Areas to comply with Title III of the ADA, to the extent such work is not Tenant's obligation pursuant to the preceding sentence. The cost of any such work for which Landlord is obligated shall be included within the Outside Area Expenses. (iii) In particular, Tenant, at its sole cost, shall comply with all laws relating to the storage, use, generation, transportation, disposal and release of hazardous, toxic or radioactive matter, including those materials identified in Sections 66680 through 66685 of Title 22 of the California Administrative Code, Division 4, Chapter 30 ("Title 22"), as they may be amended from time to time (collectively, "Toxic Materials"). If Tenant does store, use, generate, transport or dispose of any Toxic Materials (except for the use or storage of usual and customary amounts of usual office and janitorial supplies), Tenant shall notify Landlord in writing at least ten (10) days prior to their first appearance on the Premises. Tenant shall be solely responsible for and shall. defend with counsel reasonably satisfactory to Landlord, protect, indemnify and hold Landlord and its Agents harmless from and against all claims, costs and liabilities, including attorneys' fees and costs, arising out of or in connection with Tenant's storage, use, generation, transportation, disposal or release of Toxic Materials, including without limitation, any such claims, costs, damages and liabilities, including attorneys' fees and costs, arising out of or in connection with any investigation, testing, removal, clean-up and/or restoration services, work, materials and equipment necessary to return the Premises, the Project and/or any other property of whatever nature to their condition existing prior to Tenant's or its Agents' use, storage, generation, transport, disposal or release of the Toxic Materials in, on or around the Premises or the Project, and to otherwise satisfactorily investigate and remediate the contamination arising therefrom. Tenant's obligations hereunder shall survive the termination of this Lease. If at any time during or after the term of this Lease, as it may be extended, Tenant becomes aware of any inquiry, investigation, administrative proceeding, or judicial proceeding by any governmental agency regarding the storage, use or disposition of any Toxic Materials by Tenant or its Agents on or about the Premises or the Project, Tenant shall within five (5) days after first learning of such inquiry, investigation or proceeding give Landlord written notice advising Landlord of same. Notwithstanding the foregoing, Landlord shall indemnify, defend by counsel reasonably satisfactory to Tenant, 3 8 protect and hold Tenant harmless from and against all claims, costs and liabilities, including attorneys' fees and costs, arising directly out of the use, generation, storage or disposal of Toxic Materials by Landlord. Landlord's obligations pursuant to the foregoing indemnity shall survive the termination of this Lease. (iv) At Tenant's sole cost and expense, Tenant may place no more than two (2) temporary, removable, no larger than five foot by eight foot (5' x 8') storage containers ("Containers") in an Enclosure (defined below) located within an area, designated by Landlord and comprising no more than two parking spaces behind the Premises, on and subject to the terms and conditions of this Lease (including without limitation Paragraph 6.C(iii) above), together with the following additional terms and conditions with which Tenant shall comply at its sole cost: (a) the Containers and Enclosure shall be designed, constructed, installed, maintained, used, replaced (if necessary), and repaired in a good, clean and neat condition and appearance, strictly in full compliance with all present and hereinafter enacted Requirements (as hereinafter defined); (b) the Containers shall be enclosed by a structure the design, construction, materials and placement of which must be approved in advance by Landlord (the "Enclosure"); (c) the design, construction and installation of the Containers and Enclosure shall be done by contractors approved by Landlord in accordance with plans and specifications prepared at Tenant's expense and subject to Landlord's written approval; (d) upon the expiration or earlier termination of this Lease, Tenant shall remove the Containers and Enclosure, repair any damage to the Project occasioned by installation or removal of same and restore the area in which such Containers and Enclosure were placed to the condition existing prior to placement thereof; and (e) Tenant shall obtain all necessary approvals, authorizations and permits for the design, construction, installation, use, maintenance and removal of the Containers and Enclosure (including, without limitation, any approvals, authorizations and permits required by the City and the County of San Diego and the CC&R's), and shall provide Landlord with true and complete copies of such approvals, authorizations and permits. Tenant represents, warrants and covenants that the design, construction and installation of the Containers and Enclosure and the use of same for the storage of any and all materials stored by Tenant is and at all times shall be in full compliance with the highest standards of the industry pertaining to storage of such materials and with all laws, rules, regulations, directions, ordinances, orders and requirements of all governmental authorities, the Board of Fire Underwriters or any successor or similarly constituted body, and any covenants, conditions and restrictions affecting the Premises, Building or Project (collectively, the "Requirements"). ASSIGN- 7. A. LANDLORD IS CONSENT. Tenant shall not enter into a MENT AND Sublet (defined below) without Landlord's prior written consent SUB- which consent shall not be unreasonably withheld or delayed. Any LETTING attempted or purported Sublet without Landlord's prior written consent shall be void and confer no rights upon any third person and, at Landlord's election, shall terminate this Lease. if Tenant attempts to Sublet without Landlord's prior written consent, Landlord may accept rent from the purported Subtenant (defined below) and apply such rent against Tenant's rental obligation under this Lease. No such acceptance of rent shall be deemed an express or implied waiver of Tenant's breach of this Paragraph 7.A unless such waiver is in writing and signed by Landlord, and Landlord reserves all rights and remedies arising with respect to such breach by Tenant, including, without limitation, the right to terminate the Lease. Such acceptance of rent shall not be construed to constitute a consent to the purported Sublet or to give the purported Subtenant a right of possession with respect to the Premises. 4 9 B. SUBLET FORM. Each Sublet to which Landlord has consented shall be by an instrument in writing in a form satisfactory to Landlord, and shall be executed by Tenant and Subtenant. Each Subtenant shall agree in writing, for the benefit of Landlord, to assume, to be bound by, and to perform the terms, conditions, and covenants of this Lease to be performed by Tenant. Notwithstanding anything contained herein, Tenant shall not be released from personal liability for the performance of each term, condition and covenant of this Lease by reason of Landlord's consent to a Sublet unless Landlord specifically grants such release in writing. C. NO WAIVER. Consent by Landlord to one such Sublet shall not be deemed to be a consent to any subsequent Sublet. D. INFORMATION TO BE FURNISHED. If Tenant desires at any time to Sublet the Premises or any portion thereof, it shall first notify Landlord of its desire to do so and shall submit in writing to Landlord: (i) the name of the proposed Subtenant; (ii) the nature of the proposed Subtenant's business to be carried on in the Premises; (iii) the terms and provisions of the proposed Sublet and a copy of the proposed Sublet agreement and related agreements; (iv) such financial information, including financial statements, as Landlord may reasonably request concerning the proposed Subtenant. E. LANDLORD'S ALTERNATIVES. Tenant acknowledges that the terms of this Lease, including Rent, have been based on the understanding that Tenant shall physically occupy the Premises for the entire Term. Therefore, at any time within ten (10) business days after Landlord's receipt of the information specified in Paragraph 7.D., Landlord may, by written notice to Tenant, elect: (i) to Sublet from Tenant for Landlord's own account the Premises or the portion thereof so proposed to be Sublet by Tenant, upon the same terms as those offered to the proposed Subtenant but otherwise upon the form of this Lease, in which event this Lease shall continue in full force and effect and Landlord shall have the right to further Sublet the Premises or portion thereof to any person, including without limitation Tenant's proposed Subtenant, upon any terms desired by Landlord; (ii) if Landlord provides Tenant with a Limited Release Agreement as provided below, to lease for Landlord's own account the Premises or the portion thereof so proposed to be Sublet by Tenant to any person, including without limitation Tenant's proposed Subtenant, upon any terms desired by Landlord, in which event this Lease shall continue in full force and effect (subject to the Limited Release Agreement and Landlord's leasing rights under this election) ; (iii) to consent to the Sublet by Tenant; or (iv) to refuse its consent to the Sublet. If Landlord fails to elect any of the alternatives set forth in Paragraph 7.E.(i) through Paragraph 7.E.(iv) above within the ten (10) business day period, it shall be deemed that Landlord has refused its consent to the Sublet. If Landlord elects to proceed with Paragraph 7.E.(ii), and to lease the Premises or portion thereof proposed to be Sublet by Tenant on its own account, Landlord and Tenant shall enter into a Limited Release Agreement whereby Tenant is relieved of any liability, including the payment of Rent, with respect to such portion of the Premises leased by Landlord until the term of such lease expires or is terminated. Upon the expiration of the lease between Landlord and the new tenant for such released space, providing this Lease Term is still in effect, Landlord shall return possession of the released space to Tenant in substantially the same condition, normal wear and tear excepted, it was in when Landlord completed any alterations for its leasing of the Premises, and Tenant shall resume all its obligations under this Lease with respect to such space, including, without limitation, the payment of Rent attributable to such space. 5 10 If Landlord proceeds with Paragraph 7.E.(iii) and consents to the Sublet, Tenant may thereafter enter into a valid Sublet of the Premises or portion thereof, upon the terms and conditions and with the proposed Subtenant set forth in the information furnished by Tenant to Landlord pursuant to Paragraph 7.D., subject, however, at Landlord's election, to the condition that fifty percent (50%) of any excess of the Subrent (defined below) over the Rent required to be paid by Tenant hereunder shall be paid to Landlord. Any such Subrent to be paid to Landlord pursuant hereto shall be payable to Landlord as and with the Monthly Rent payable to Landlord hereunder pursuant to Paragraph 4.A. F. PRORATION. If a portion of the Premises is Sublet, the pro rata share of the Rent attributable to such partial area of the Premises shall be determined by Landlord by dividing the Rent payable by Tenant hereunder by the total leasable square footage of the Premises and multiplying the resulting quotient (the per square foot rent) by the number of square feet of the Premises which are Sublet. G. EXECUTED COUNTERPART. No Sublet shall be valid nor shall any Subtenant take possession of the Premises until an executed counterpart of the Sublet agreement has been delivered to Landlord. H. DEFINITIONS. The following terms as used herein shall have the following meanings: (i) SUBLET. Any transfer, sublet, assignment, license or concession agreement, change of ownership, including, without limitation, a transfer of the beneficial ownership or effective voting control of Tenant from the person(s) having effective voting control as of Tenant's execution of this Lease (if Tenant is a corporation), the resignation or cessation of a general partner (if Tenant is a partnership) and a merger or consolidation of Tenant, any mortgage, or hypothecation of this Lease or the Tenant's interest in the Lease or in and to all or a portion of the Premises. If Tenant is a corporation the stock of which is publicly traded, no transfer of Tenant's stock shall be deemed to be a Sublet. (ii) SUBRENT. Any consideration of any kind received, or to be received, by Tenant from a Subtenant if such sums are related to Tenant's interest in this Lease or in the Premises. As to any Sublet which is a transfer of voting control or beneficial ownership of Tenant, Subrent shall include any payment or other consideration received by Tenant's shareholders or owners in connection with such transfer (including, but not limited to, bonus money and payments (in excess of book value) for Tenant's assets including its trade fixtures, equipment and other personal property, goodwill, general intangibles, and any capital stock or other equity ownership of Tenant), up to the bonus value of the Lease as represented by the present value of the difference between (i) fair market rent at the time of the Sublet, and (ii) the Rent specified in the Lease. (iii) SUBTENANT. The person or entity with whom a Sublet agreement is proposed to be or is made. (iv) ASSIGNMENT AND SUBLETTING to AFFILIATE. Notwithstanding the foregoing, Tenant may without the consent of Landlord assign this Lease or sublet all or any part of the Premises to a parent or subsidiary of Tenant or affiliate under common ownership with Tenant, or to a corporation or other entity or persons succeeding to substantially all of the assets of Tenant as a result of consolidation or merger, or to a corporation or other entity which acquires substantially all of the assets of Tenant, provided, however, that (a) no such assignment or subletting shall result in Tenant being released or 6 11 discharged from any liability under the Lease, (b) the proposed assignee or subtenant agrees in writing to be bound by all of the terms and conditions of this Lease, and (c) the use proposed by the proposed assignee or subtenant is, in the reasonable judgment of Landlord, consistent with the first class nature of the Building and shall not result in excessive wear or repairs to the Premises. ALTER- 8. A. PERMITTED ALTERATIONS. Tenant shall not make or permit ATIONS any Alterations in, on or about the Premises without the prior written consent of Landlord (which shall not be unreasonably withheld or delayed) and according to plans and specifications approved in writing by Landlord, which consent shall not be unreasonably withheld or delayed. For purposes of this Lease, "Alterations" shall mean any alterations, additions or improvements made in, on or about the Premises after the Commencement Date, including, but not limited to, lighting, heating, ventilating, air conditioning, electrical, partitioning, fixtures, drapery and carpentry installations; provided, however, that Tenant, at Tenant's sole cost and expense, may install its necessary trade fixtures, equipment and furniture in the Premises without Landlord's consent, provided that such items are installed and are removable without damage to the Project or to any of its electrical, mechanical or plumbing systems, and such alterations do not cost more than $10,000.00 each. Notwithstanding the foregoing, Landlord may withhold Landlord's consent in its sole discretion (including, without limitation, on wholly aesthetic grounds) to any: (i) alterations to the exterior or structural component of the Building, including, without limitation, exterior walls and roof of the Building; and (ii) alterations visible from outside the Building, including Outside Areas. All alterations shall be installed at: Tenant's sole expense, in compliance with all applicable laws and the CC&R's by Landlord's contractor, shall be done in a good and workmanlike manner conforming in quality and design with the Premises existing as of the Commencement Date, and shall not diminish the value of the Premises. Landlord shall have the right to require that all Alterations shall be of first class quality consistent with the quality of the Project. All alterations made by Tenant, or by Landlord at Tenant's expense, shall at the termination or expiration of the Lease become the property of Landlord and shall remain upon and be surrendered with the Premises; provided, however, that Landlord may, at its option, require that Tenant, at Tenant's expense, remove any or all nonstructural Alterations installed by Tenant, or by Landlord at Tenant's expense, and return the Premises to their condition as of the Commencement Date of this Lease, normal wear and tear excepted and subject to the provisions of Paragraph 13. If requested by Tenant, Landlord shall inform Tenant at the time Landlord consents to the Alteration as to whether or not the Alteration in question must be removed from the Premises upon the expiration or earlier termination of the Lease. Notwithstanding any other provision of this Lease, Tenant shall be solely responsible for the maintenance and repair of any and all Alterations to the Premises made by Tenant, or by Landlord at Tenant's expense. B. NOTICE. Tenant shall give Landlord written notice of Tenant's intention to perform work on the Premises which might result in any claim of lien at least ten (10) business days prior to the commencement of such work to enable Landlord to post and record a Notice of Nonresponsibility or other notice deemed proper before the commencement of any such work. If Tenant fails to cause any lien filed against the Premises in connection with any work performed or claimed to have been performed by or at the direction of Tenant to be released of record by payment or posting of a proper bond acceptable to Landlord within ten (10) days from the date of filing, then Landlord may do so at Tenant's expense and Tenant shall reimburse Landlord for such amount as Additional Rent. Such reimbursement shall include all sums disbursed, incurred or deposited by Landlord, including 7 12 Landlord's costs, expenses and reasonable attorneys' fees with interest thereon at the Interest Rate from the date of payment by Landlord. REPAIR AND MAINTE- 9. A. BUILDING. NANCE (i) LANDLORD'S OBLIGATIONS. Landlord shall keep in good order, condition and repair the structural parts of the Building, which structural parts include only the foundation, exterior walls (excluding the interior of all walls and the exterior and interior of all windows, doors, plateglass, showcases and interior ceiling), heating, ventilating and air conditioning systems ("HVAC"), roof and subflooring of the Building, except for any damage thereto caused by, the negligence or willful acts or omissions of Tenant or its Agents, or by reason of the failure of Tenant to perform or comply with any terms, conditions or covenants in this Lease, or caused by Alterations made by Tenant or its Agents. Landlord shall also maintain and repair all utility lines and installations serving the Premises at the date hereof to the extent they exist on the Project but outside the Premises, except for any damage thereto caused by the negligence or willful acts or omissions of Tenant or its Agents, or by reason of the failure of Tenant to perform or comply with any terms, conditions or covenants in this Lease, or caused by Alterations made by Tenant or its Agents. It is an express condition precedent to all obligations of Landlord to repair and maintain that Tenant shall have notified Landlord in writing of the need for such repairs or maintenance. (ii) TENANT'S OBLIGATIONS. Tenant shall at all times and at its own expense clean, keep and maintain in good, safe and sanitary order, condition and repair every part of the Premises which is not within Landlord's obligation pursuant to Paragraph 9.A.(i). Tenant's repair and maintenance obligations shall include, without limitation, all plumbing and sewage facilities within the Premises, fixtures, interior walls, floors, ceilings, windows, store front, doors, entrances, plateglass, showcases, skylights, all electrical facilities and equipment, including lighting fixtures serving the Premises, lamps, fans and any exhaust equipment and systems, any automatic fire extinguisher equipment within the Premises, electrical motors and all other appliances and equipment of every kind and nature located in, upon or about the Premises. However unless the necessity for such repair arises out of the acts or omissions of Tenant or its Agents, Tenant shall not be obligated under this paragraph to repair: (i) damage for which Landlord is reimbursed under any insurance policy carried by Landlord under this Lease for which Tenant pays a prorata share of the premiums; (ii) damage caused by the negligence or willful misconduct of Landlord or Landlord's agents, employees or contractors; or (iii) damage the repair of which is paid for under the Outside Area Expenses. All glass, both interior and exterior, is at the sole risk of Tenant, and any broken glass shall promptly be replaced by Tenant and at Tenant's expense with glass of the same kind, size and quality. If any condition arises in the Premises or the Project which may be unsafe or dangerous to persons or property in the Project, Tenant shall immediately notify Landlord of such condition, regardless of whether the obligation to repair such condition is Tenant's obligation or Landlord's obligation. Tenant shall, at its own expense, provide, install and maintain in good condition all of its trade fixtures, furniture, equipment and other personal property ("Tenant's Personal Property") required in the conduct of its business in the Premises. B. OUTSIDE AREAS AND COMMON EXPENSES. (i) LANDLORD'S OBLIGATIONS. Landlord shall maintain all outside Areas in good order, condition and repair. The manner in which such areas shall be maintained and the expenditures therefor shall be at the reasonable discretion of 8 13 Landlord. Landlord shall at all times have exclusive control of the Outside Areas and may at any time temporarily close any part thereof, exclude and restrain anyone from any part thereof, except the bona fide customers, employees and invitees of Tenant who use the Outside Areas in accordance with the rules and regulations as Landlord may from time to time promulgate, and may change the configuration or location of the Outside Areas. In exercising any such rights, Landlord shall make a reasonable effort to minimize any disruption of Tenant's business. Landlord shall have the right to reconfigure the parking area and ingress and egress to and from the parking area, and to modify the directional flow of traffic in the parking area from time to time during the term of this Lease, provided that Landlord continues to provide the parking provided in Paragraph 31 of this Lease. (ii) TENANT TO PAY OUTSIDE AREA EXPENSES AND COMMON EXPENSES. Tenant shall pay, as Additional Rent, Tenant's Project Percentage of all reasonable costs and expenses as; may be paid or incurred by Landlord in maintaining, operating and repairing the Outside Areas (the "Outside Area Expenses") during the Term. The Outside Area Expenses shall include, without limitation, CC&R assessments and dues, and the cost of labor, materials, supplies and services used or consumed in maintaining, operating and repairing the Outside Areas, including without limitation, the following: (a) Maintaining and repairing landscaping and sprinkler systems, together with all charges for water used in the Outside Areas of the Project; (b) Maintaining and repairing concrete walkways and paved parking areas; (c) Maintaining and repairing signs and site lighting in the Project; (d) Pest control, exterior janitorial, exterior window washing, sweeping services, and Building and Project security; and (e) A management fee equal to five percent (5%) of the total Outside Area Expenses, Real Property Taxes and insurance costs for the Project. Tenant may, at its sole expense, contract for or provide its own interior janitorial service. If Tenant does not contract for or otherwise provide for its own interior janitorial services, then Landlord may provide such services and the costs thereof may be included within Outside Area Expenses. The following shall not constitute Outside Area Expenses: 1. Legal fees, brokerage commissions, advertising costs and other related expenses incurred in connection with the leasing by Landlord of the Project; 2. Structural repairs of a capital nature; 3. Damage the cost repair of which is reimbursed to Landlord under any insurance policy carried by Landlord under this Lease in connection with the Project; 4. Damage and repairs necessitated by the negligence or willful misconduct of Landlord or Landlord's employees, agents or contractors; 5. Executive salaries of Landlord; 9 14 6. Salaries of service personnel to the extent such service personnel perform services not attributable to management, operation, repair or maintenance of the Project; 7. Landlord's general overhead expenses not related to the Project; 8. Payments of principal or interest on any mortgage or other encumbrance including ground lease payments and points, commissions and legal fees associated with financing; 9. Depreciation; 10. Legal fees, accountants' fees and expenses incurred in connection with disputes with Tenant or other tenants or occupants of the Project or associated with the enforcement of any leases; 11. Costs, including permits, license and inspection fees incurred in renovating or otherwise improving, decorating, painting or altering space for other tenants in the Project; 12. The cost of any service provided to Tenant or other tenants of the Project for which Landlord is reimbursed; 13. Charitable or political contributions; 14. Interest, penalties or other costs arising out of Landlord's failure to make timely payments of its obligations; 15. Costs incurred in advertising and promotional activities for the Project; 16. Outside Area Expenses charged Landlord by any of its affiliates for goods and services provided to the Project shall not exceed the prevailing costs thereof that would be charged to Landlord by non-affiliated parties; 17. Repairs, alterations, additions, improvements or replacements to the Project made to comply with requirements of applicable governmental law in effect as of the date of this Lease, except for those repairs, alterations, additions, improvements or replacements for which Tenant is otherwise responsible under this Lease, and except for those arising out of or necessitated by Tenant's use, or any alterations or tenant improvements made by or for Tenant; 18. Damage and repairs attributable to condemnation, fire or other casualty for which Landlord is reimbursed by condemnation or insurance proceeds; and 19. The cost or expense of testing for, removal, transportation or storage of Toxic Materials (as defined above), except to the extent arising out of the storage, use, generation, transportation, disposal, or release of Toxic: Materials by Tenant, or its contractors, employees or invitees. (iii) MONTHLY PAYMENTS. From and after the Commencement Date, Tenant shall pay to Landlord on the first day of each calendar month of the Term an amount estimated by Landlord to be the monthly Outside Area Expenses. The foregoing estimated monthly charge may be adjusted by Landlord at the end of any calendar quarter on the basis of Landlord's experience and reasonably anticipated costs. Any such adjustment shall be effective as of the calendar month next succeeding receipt by Tenant of written notice of such adjustment. (iv) ACCOUNTING. Within one hundred twenty (120) days following the end of each calendar year Landlord shall furnish Tenant a reasonably detailed statement of the actual outside Area 10 15 Expenses for the calendar year and the payments made by Tenant with respect to such period. If Tenant's payments for the, Outside Area Expenses do not equal the amount of the actual Outside Area Expenses, Tenant shall pay Landlord the deficiency within twenty (20) days after receipt of such statement. If Tenant's payments exceed the actual Outside Area Expenses, Landlord shall either offset the excess against the Outside Area Expenses next thereafter to become due to Landlord, or shall refund the amount of the overpayments to Tenant, in cash, as Landlord shall elect. There shall be appropriate adjustments of the Outside Area Expenses as of the Commencement Date and expiration of the Term. If Tenant shall dispute any amounts set forth in the statement of actual Outside Area Expenses, Tenant shall have the right not later than ninety (90) days following receipt of such statement to cause Landlord's books and records with respect to the preceding calendar year to be audited by an accountant mutually acceptable to Landlord and Tenant. The Outside Area Expenses shall be appropriately adjusted on the basis of such audit. Tenant shall pay the cost and expense of such audit, unless such audit discloses a liability for a refund by Landlord to Tenant in excess of five percent (5%) of the payments previously made by Tenant for such calendar year, in which event Landlord shall pay the cost and expenses of such audit. C. WAIVER. Tenant waives the provisions of Sections 1941 and 1942 of the California Civil Code and any similar or successor law regarding Tenant's right to make repairs and deduct the expenses of such repairs from the Rent due under this Lease. UTILITIES 10. A. TENANT'S OBLIGATIONS. Tenant shall be responsible for AND and shall pay promptly charges for gas, electricity, telephone, SERVICES refuse pickup, janitorial service, and all other utilities, materials and services furnished directly to or used by Tenant in, on or about the Premises during the Term, together with any taxes thereon. Landlord shall not be liable in damages or otherwise for any failure or interruption of any utility service or other service furnished to the Premises, except that resulting from the gross negligence or willful misconduct of Landlord. No such failure or interruption shall entitle Tenant to terminate this Lease or withhold Rent or other sums due hereunder. B. TENANT TO PAY BUILDING COMMON EXPENSES. Tenant shall pay, as Additional Rent, Tenant's Building Percentage of (i) all reasonable costs and expenses as may be paid or incurred by Landlord in maintaining, operating and repairing the HVAC, and (ii) the domestic water used in the Building. Tenant shall pay any such amounts pursuant to the procedure described in Paragraphs 9.B(iii) and (iv) above. If any of the utilities or services described above are not separately metered or are contracted for by the Landlord, the cost of such utilities or services shall be deemed Building Expenses and Tenant shall pay Tenant's Building Percentage of such items. REAL 11. A. PAYMENT BY TENANT. On or before April 1 and December 1 PROP- of each calendar year during the Term, Tenant shall pay to ERTY Landlord, as Additional Rent, Tenant's Project Percentage of all TAXES Real Property Taxes as set forth on the county assessor's tax statement for the Project. Landlord shall give Tenant at least fifteen (15) days' prior written notice of the amount so due. Upon Landlord's receipt of the Real Property Tax payment from Tenant, Landlord shall pay the taxes to the County. If Tenant fails to pay the Real Property Taxes on or before April 1 and December 1, respectively, Tenant shall pay to Landlord any penalty incurred by such late payment. Tenant shall pay any Real Property Tax not included within the County tax assessor's tax statement at least ten (10) days after being billed for same by Landlord. If Tenant shall fail to pay any Real Property Tax payment on time, such overdue amount and any penalty due hereunder shall bear interest at the Interest Rate until Paid. For 11 16 purposes of this Lease, "Interest Rate" shall mean five percent (5%) per annum, plus the greater of (i) the Federal Reserve Bank rate, specified in Article 15, Section 1 of the California Constitution, prevailing on the 25th day of the month preceding execution of this Lease (it being understood that this Lease is not a contract to make a loan or forbearance), or (ii) such Federal Reserve Bank rate prevailing on the 25th day of the month preceding the date any defaulted payment was due. The foregoing dates for payment are based on the dates currently established by the County as the dates on which Real Property Taxes become delinquent if not paid. If such delinquency dates change, the dates on which Tenant must pay such taxes shall be at least ten (10) days prior to the delinquency dates. B. REAL PROPERTY TAXES. For purposes of this Lease, Real Property Taxes shall mean any form of assessment, license, fee, rent tax, levy, penalty (if a result of Tenant's delinquency) , or tax of any nature imposed upon or with respect to the Premises or the Project or any part thereof (other than net income, estate, succession, inheritance, transfer or franchise taxes) (collectively "tax"), imposed by any authority having the direct or indirect power to tax, or by any city, county, state or federal government or any improvement or other district or division thereof, whether such tax is: (i) determined by the area of the Premises or Project or any part thereof or the rent and other sums payable hereunder by Tenant or by other tenants, including, but not limited to, any gross income or excise tax levied by any of the foregoing authorities with respect to receipt of such rent or other sums due under this Lease; (ii) levied or assessed upon any legal or equitable interest of Landlord in the Project or the Premises or any part thereof; (iii) levied or assessed upon this transaction or any document to which Tenant is a party creating or transferring any interest in the Premises; (iv) levied or assessed in lieu of, in substitution for, or in addition to, existing or additional taxes imposed on or with respect to the Project or the Premises, whether or not now customary or within the contemplation of the parties; or (v) surcharged against the parking area. Notwithstanding the foregoing, the following shall not constitute Real Property Taxes for the purposes of this Lease: (1) any state, local, federal, personal or corporate income tax of Landlord; (2) any estate or inheritance taxes; (3) any franchise, succession or transfer taxes, and (4) interest on taxes or penalties resulting from Landlord's failure to pay its taxes and not directly caused by Tenant's delinquency. The reasonable cost and expenses of contesting the amount or validity of any of the foregoing taxes shall be included in Real Property Taxes. Real Property Taxes shall also include all new and increased assessments, taxes, fees, levies and charges may be imposed by governmental agencies for such purposes as fire protection, street, sidewalk, road, utility construction and maintenance, refuse removal, libraries, street lighting, police services, and for other governmental services, or any gross or net rental income tax. C. TAX ON IMPROVEMENTS. Without limiting the generality of Paragraph 11.B. hereof, Tenant shall pay any increase in Real Property Taxes resulting from any and all Alterations and Tenant Improvements of any kind whatsoever placed in, on or about the Premises for the benefit of, at the request of, or by Tenant. D. PRORATION. Tenant's liability to pay Real Property Taxes shall be prorated on the basis of a 365-day year to account for any fractional portion of a fiscal tax year included at the commencement or expiration of the Term. With respect to any assessments which may be levied against or upon the Premises, or which under the laws then in force may be evidenced by improvement bonds or other bonds or may be paid in annual installments, only the amount of the annual installment due each year (with appropriate proration for any partial year) and interest due 12 17 thereon shall be included within the computation of the annual Real Property Taxes levied against the Premises for such year. E. PAYMENT ON EXPIRATION OF TERM. If this Lease terminates on a date earlier than the end of a fiscal tax year, Landlord shall deliver to Tenant a statement setting forth the amount of Real Property Taxes to be paid by Tenant adjusted to the date of termination which shall be paid within five (5) days of such receipt. F. PERSONAL PROPERTY TAXES. Tenant shall pay prior to delinquency all taxes assessed or levied against Tenant's Personal Property in, on or about the Premises or elsewhere. When possible, Tenant shall cause its Personal Property to be assessed and billed separately from the real or personal property of Landlord. INSURANCE 12. A. INDEMNIFICATION. Tenant hereby agrees to defend (with attorneys acceptable to Landlord), indemnify and, hold harmless Landlord and its Agents from and against any and all damage, loss, liability or expense including, without limitation, attorneys' fees and legal costs suffered directly or by reason of any claim, suit or judgment brought by or in favor of any person or persons for damage, loss or expense due to, but not limited to, bodily injury and property damage sustained by such person or persons which arises out of, is occasioned by or is in any way attributable to the use or occupancy of the Premises or any part thereof and adjacent areas by the Tenant, the acts or omissions of the Tenant or its Agents, except to the extent caused by the sole negligence or willful misconduct of Landlord or its Agents. Notwithstanding the foregoing, Landlord shall indemnify, defend and hold Tenant harmless from and against any damage, loss, liability, or expense, including without limitation reasonable attorneys' fees resulting from the negligence or willful misconduct of Landlord or its Agents. In no event, however, shall Landlord be liable to Tenant for any lost profits or consequential damages. B. TENANT'S INSURANCE. Tenant agrees to maintain in full force and effect at all times during the Term, at its own expense, for the protection of Tenant and Landlord, as their interests may appear, policies of insurance issued by a responsible carrier or carriers acceptable to Landlord which afford the following coverages: (i) Worker's compensation -- Statutory limits. (ii) Employer's liability -- Not less than one Hundred Thousand and no/100ths Dollars ($100,000.00). (iii) comprehensive general liability insurance including blanket contractual liability broad form property damage, personal injury, completed operations, products liability, fire damage legal, in an amount not less than Three Million and no/100ths Dollars ($3,000,000.00) combined single limit for both bodily injury and property damage naming Landlord and its Agents as additional insureds. (iv) "All Risk" property insurance (including, without limitation, vandalism, malicious mischief, inflation endorsement, sprinkler leakage endorsement, and boiler and machinery coverage) on Tenant's Personal Property located on or in the Premises, and any Alterations constructed or installed on the Premises by Tenant or by Landlord at Tenant's expense. Such insurance shall be in the full amount of the replacement cost, as the same may from time to time increase as a result of inflation or otherwise, and shall be in a form providing coverage comparable to the coverage provided in the standard ISO All-Risk form now or hereafter in effect. As long as this Lease is in effect, the proceeds of such policy shall be used for the repair or 13 18 replacement of such items so insured. Landlord shall have no interest in the insurance upon Tenant's Personal Property. C. BUILDING INSURANCE. During the Term Landlord shall maintain "All Risk" property insurance (including, at Landlord's option, earthquake and flood coverage, inflation endorsement, sprinkler leakage endorsement, and boiler and machinery coverage) covering the Project and the Premises, excluding coverage of all Tenant's Personal Property on or in the Premises, but including the Project and any Tenant Improvements. Such insurance shall also include insurance against loss of rents on an "All Risk" basis, including, at Landlord's option, earthquake and flood, in an amount equal to the Monthly Rent and Additional Rent, and any other sums payable under the Lease, for a period of twelve (12) months commencing on the date of loss. Such insurance shall name Landlord and its Agents as named insureds and include a lender's loss payable endorsement in favor of Landlord's lender (Form 438 BFU Endorsement or successor form). Tenant shall reimburse Landlord for Tenant's Project Percentage of the costs of such policies and any deductible amounts paid by Landlord under such policies, annually or upon such other periodic basis as Landlord shall elect, within ten (10) days of the date of receipt of a statement for the same, as Additional Rent. If the insurance premiums are increased after the Commencement Date due to an increase in premium rates, due to an increase in the valuation of the Premises or their replacement cost, due to additional or modified coverages, Tenant shall pay Tenant's Project Percentage of such increase within ten (10) days of notice of such increase. Tenant shall pay the entire increase in premium rates caused by Tenant's use of the Premises. D. DEDUCTIBLES. Any deductibles in connection with those items set forth in Paragraph 12.B. must be approved in writing by Landlord prior to issuance of such policies. E. CERTIFICATES. Tenant shall deliver to Landlord at least thirty (30) days prior to the time such insurance is first required to be carried by Tenant, and thereafter at least thirty (30) days prior to expiration of each such policy, certificates of insurance evidencing the above coverage with limits not less than those specified above. The certificates shall expressly provide that the interest of Landlord therein shall not be affected by any breach of Tenant of any policy provision for which such certificates evidence coverage. Further, all certificates shall expressly provide that no less than thirty (30) days' prior written notice shall be given Landlord in the event of cancellation of the coverages evidenced by such certificates. F. INCREASED COVERAGE. Deleted. G. CO-INSURER. If, on account of the failure of Tenant to comply with the foregoing provisions, Landlord is adjudged a coinsurer by its insurance carrier, then, any loss or damage Landlord shall sustain by reason thereof, including attorneys' fees and costs, shall be borne by Tenant and shall be immediately paid by Tenant upon receipt of a bill therefor and evidence of such loss. H. NO LIMITATION OF LIABILITY. Landlord and its Agents make no representation that the limits of liability specified to be carried by Tenant under this Lease are adequate to protect Tenant or that the limits of liability for insurance carried by Landlord will be equal to the full replacement value of the items insured. If Tenant believes that any such insurance coverage is insufficient, Tenant shall provide, at its own expense, such additional insurance as Tenant deems adequate. I. INSURANCE REQUIREMENTS. All such insurance shall be in a form satisfactory to Landlord and shall be carried with 14 19 companies that have a general policyholder's rating of not less than "A" and a financial rating of not less than Class "X" in the most current edition of Best's Insurance Reports; shall provide that such policies shall not be subject to material alteration or cancellation except after at least thirty (30) days' prior written notice to Landlord; and shall be primary as to Landlord. The policy or policies, or duly executed certificates for them, together with satisfactory evidence of payment of the premium thereon, shall be deposited with Landlord prior to the Commencement Date, and upon renewal of such policies, not less than thirty (30) days prior to the expiration of the term of such coverage. If Tenant fails to procure and maintain the insurance required hereunder, or fails to provide Landlord with the policy, policies or duly executed certificates thereof required hereunder, Landlord may, but shall not be required to, order such insurance at Tenant's expense and Tenant's reimbursement to Landlord for such amounts shall be deemed Additional Rent. Such reimbursement shall include all sums disbursed, incurred or deposited by Landlord including Landlord's costs, expenses and reasonable attorneys' fees with interest thereon at the Interest Rate. J. LANDLORD'S DISCLAIMER. Landlord and its Agents shall not be liable for any loss or damage to persons or property resulting from fire, explosion, falling plaster, glass, tile or sheetrock, steam, gas, electricity, water or rain which may leak from any part of the Premises or the Project, or from the pipes, appliances or plumbing works therein or from the roof, street or subsurface or whatsoever, unless caused by or due to the sole negligence or willful acts of Landlord or Landlord's Agents. Landlord and its Agents shall not be liable for interference with the light, air, or any latent defect in the Premises or the Project. Tenant shall give prompt written notice to Landlord in case of a casualty, accident or repair needed in the Premises. K. WAIVER OF SUBROGATION. Landlord and Tenant each hereby waive all rights of recovery against the other on account of loss and damage occasioned to such waiving party for its property or the property of others under its control to the extent that such loss or damage is insured against under any insurance policies which may be in force at the time of such loss or damage. Tenant and Landlord shall, upon obtaining policies of insurance required hereunder, give notice to the insurance carrier that the foregoing mutual waiver of subrogation is contained in this Lease and Tenant and Landlord shall cause each insurance policy obtained by such party to provide that the insurance company waives all right of recovery by way of subrogation against either Landlord or Tenant in connection with any damage covered by such policy. DAMAGE OR 13. A. LANDLORD'S OBLIGATION TO REBUILD. If the Premises are DESTRUC- damaged or destroyed, Landlord shall promptly and diligently repair TION the Premises unless it has the right to terminate this Lease as provided herein and it elects to so terminate. B. RIGHT TO TERMINATE. Landlord shall have the right to terminate this Lease in the event any of the following events occurs: (i) Net insurance proceeds (after deducting the cost of recovery of such proceeds) are not available to pay one hundred percent (100%) of the cost of such repair, excluding the deductible for which Tenant shall be responsible; (ii) The Premises or the Building cannot, with reasonable diligence, be fully repaired by Landlord within 120 days after the date of the damage or destruction; or (iii) The Premises or the Building cannot be safely repaired because of the presence of hazardous factors, including, 15 20 but not limited to, earthquake faults, radiation, chemical waste and other similar dangers. If Landlord elects to terminate this Lease, Landlord may give Tenant written notice of its election to terminate within thirty (30) days after such damage or destruction, and this Lease shall terminate fifteen (15) days after the date Tenant receives such notice. If Landlord elects not to terminate the Lease, Landlord shall promptly, following the date of such damage or destruction, commence the process of obtaining necessary permits and approvals, and shall commence repair of the Premises or the Building as soon as practicable and thereafter prosecute the same diligently to completion, in which event this Lease will continue in full force and effect. All insurance proceeds from insurance under Paragraph 12.B, excluding proceeds for Tenant's Personal Property, shall be disbursed and paid to Landlord, If the Premises is damaged or destroyed and cannot with reasonable diligence be repaired or restored within one hundred eighty (180) days after the date of the damage or destruction, then Tenant may terminate this Lease by giving Landlord written notice of such election. C. LIMITED OBLIGATION TO REPAIR. Landlord's obligation, should it elect or be obligated to repair or rebuild, shall be limited to the basic Building and the Tenant Improvements, if insurance proceeds are made available to Landlord therefor, and Tenant shall, at its expense, replace or fully repair all Tenant's Personal Property and any Alterations installed by Tenant and existing at the time of such damage or destruction. D. ABATEMENT OF RENT. Rent shall be temporarily abated proportionately, during any period when, by reason of such damage or destruction, there is substantial interference with Tenant's use of the Premises, having regard to the extent to which Tenant may be required to discontinue Tenant's use of the Premises. Such abatement shall commence upon such damage or destruction and end upon substantial completion by Landlord of the repair or reconstruction which Landlord is obligated or undertakes to do, or, if earlier, when Tenant's use of the Premises is no longer substantially interfered with as a consequence of such damage. Tenant shall not be entitled to any compensation or damages from Landlord for loss of the use of the Premises, damage to Tenant's Personal Property or any inconvenience occasioned by such damage, repair or restoration. Tenant hereby waives the provisions of Section 1932, Subdivision 2, and Section 1933, Subdivision 4, of the California Civil Code, and the provisions of any similar law hereinafter enacted. E. DAMAGE NEAR END OF TERM. Anything herein to the contrary notwithstanding, if the Premises are destroyed or damaged during the last twelve (12) months of the Term and the cost of the repair exceeds ten percent (10%) of the replacement cost of the Building, then Landlord or Tenant may, at its option, cancel and terminate this Lease as of the date of the occurrence of such damage. If Landlord or Tenant does not elect to so terminate this Lease, the repair of such damage shall be governed by Paragraphs 13.A., or 13.B., as the case may be. If this Lease is terminated, Landlord may keep all the insurance proceeds resulting from such damage, except for those proceeds payable under policies obtained by Tenant which specifically insure Tenant's Personal Property. F. REPLACEMENT COST. The reasonable determination in good faith by Landlord of the estimated cost of repair of any damage, of the replacement cost, or of the time period required for repair shall be conclusive for the purposes of this paragraph. NOTICES 14. Any notice or demand required or desired to be given under this Lease shall be in writing and shall be personally delivered to the address herein provided for the addressee, or in lieu of 16 21 personal delivery may be given by air courier or other commercial delivery service which guarantees overnight delivery, or messenger, or by express or regular mail. Notice given by mail (other than express mail) shall be effective on the day when such notice was deposited in the United States mail (as determined by the postmark or, if there is no postmark, then by other competent evidence), registered or certified, and postage prepaid, addressed to the party to be served, regardless of whether receipt therefor is given by the addressee. Notice by any other manner shall be deemed given when received at the address herein provided for the addressee. After the Commencement Date, the address of Tenant shall be the address of the Premises, provided that either party may change its address by giving notice of same in accordance with this paragraph. DEFAULT 15. A. TENANT'S DEFAULT. A default under this Lease by Tenant shall exist if any of the following events shall occur: (i) If Tenant shall have failed to pay Rent or any other sum required to be paid hereunder when due; provided, however, that Landlord shall exercise no remedies provided in Paragraph 15.B below for such default unless Tenant fails to cure such default within five (5) days after Landlord gives Tenant written notice of such default, and Landlord shall have the right to require Tenant to remit all future payments by certified check after the second such cure of a default by Tenant; or (ii) If Tenant shall have failed to perform any term, covenant or condition of this Lease except (a) those requiring the payment of money and (b) those defaults set forth in this Paragraph 15.A. below, and Tenant shall have failed to cure such breach within thirty (30) days after written notice from Landlord where such breach could reasonably be cured within such thirty (30) day period; provided, however, that where such failure could not reasonably be cured within the thirty (30) day period, that Tenant shall not be in default if it has commenced such performance within the thirty (30) day period and diligently thereafter prosecutes the same to completion; or (iii) If Tenant shall have assigned its assets for the benefit of its creditors; or (iv) If the sequestration or attachment of or execution on any material part of Tenant's Personal Property essential to the conduct of Tenant's business shall have occurred, and Tenant shall have failed to obtain a return or release of such Personal Property within thirty (30) days thereafter, or prior to sale pursuant to such sequestration, attachment or levy, whichever is earlier; or (v) If Tenant shall have abandoned or vacated the Premises, which shall be conclusively presumed if Tenant leaves the Premises closed or unoccupied by any individuals on the Premises doing business on behalf of Tenant (as observed by Landlord) continuously for twenty (20) days; or (vi) If a court shall have made or entered any decree or order other than under the bankruptcy laws of the United States adjudging Tenant to be insolvent; or approving as properly filed a petition seeking reorganization of Tenant; or directing a winding up or liquidation of Tenant and such decree or order shall have continued for a period of thirty (30) days; or (vii) If Tenant shall have failed to comply with the provisions of Paragraphs 20, 25 or 30; or (viii) If Tenant shall have Sublet the Premises or a portion thereof without Landlord's prior written consent; or 17 22 (ix) If Tenant shall have created or maintained a nuisance or hazard, or unsightly condition on the Premises or which affects the Outside Areas, which continues unabated for more than 24 hours. Any notice by Landlord under this Paragraph shall be sufficient if it informs Tenant of the general nature of Tenant's failure to perform Tenant's obligations hereunder. Any notice given by Landlord pursuant to Paragraph 15.A(i) above which is served in compliance with Paragraph 14 of this Lease shall be deemed to satisfy the requirements of California Code of Civil Procedure Section 1161, and under Code of Civil Procedure Section 1162 regarding the manner of giving notice, and acknowledges that no further notice shall be required prior to Landlord's exercise of the remedies specified in Paragraph 15.B or any other remedies provided by law. B. REMEDIES. Upon a default, Landlord shall have the following remedies, in addition to all other rights and remedies provided by law or otherwise provided in this Lease, to which Landlord may resort cumulatively or in the alternative, and without notice to Tenant where no cure period is, provided for Tenant's breach: (i) Landlord may continue this Lease in full force and effect, and this Lease shall continue in full force and effect as long as Landlord does not terminate this Lease, and Landlord shall have the right to collect Rent when due and enforce other obligations of Tenant hereunder. (ii) Landlord may terminate Tenant's right to possession of the Premises at any time by giving written notice to that effect, and relet the Premises or any part thereof. Tenant shall be liable immediately to Landlord for all costs Landlord incurs in reletting the Premises or any part thereof, including, without limitation, broker's commissions, expenses of cleaning and redecorating the Premises required by the reletting and like costs. Reletting may be for a period shorter or longer than the remaining term of this Lease. No act by Landlord other than giving written notice to Tenant shall terminate this Lease. Acts of maintenance, efforts to relet the Premises or the appointment of a receiver on Landlord's initiative to protect Landlord's interest under this Lease shall not constitute a termination of Tenant's right to possession. On termination, Landlord has the right to remove all Tenant's Personal Property and store same at Tenant's cost and to recover from Tenant as damages: (a) The worth at the time of award of unpaid Rent and other sums due and payable which had been earned at the time of termination; plus (b) The worth at the time of award of the amount by which the unpaid Rent and other sums due and payable which would have been earned or payable after termination until the time of award exceeds the amount of such Rent loss that Tenant Proves could have been reasonably avoided; plus (c) The worth at the time of award of the amount by which the unpaid Rent and other sums due and payable for the balance of the Term after the time of award exceeds the amount of such Rent loss that Tenant proves could be reasonably avoided; plus (d) Any other amount necessary which is to compensate Landlord for all the detriment proximately caused by Tenant's failure to perform Tenant's obligations under this Lease, or which, in the ordinary course of things, would be likely to result therefrom, including, without limitation, any costs or expenses incurred by Landlord: (i) in retaking 18 23 possession of the Premises; (ii) in maintaining, repairing, preserving, restoring, replacing, cleaning, altering or rehabilitating the Premises or any portion thereof, including such acts for reletting to a new tenant or tenants; (iii) for leasing commissions; or (iv) for any other costs necessary or appropriate to relet the Premises; plus (e) At Landlord's election, such other amounts in addition to or in lieu of the foregoing as may be permitted from time to time by the laws of the State of California. The "worth at the time of award" of the amounts referred to in Paragraphs 15.B.(ii)(a) and 15.B.(ii)(b) is computed by allowing interest at the Interest Rate on the unpaid Rent and other sums due and payable from the termination date through the date of award. The "worth at the time of award" of the amount referred to in Paragraph 15.B.(ii)(c) is computed by discounting such amount at the discount rate of the Federal Reserve Bank of San Francisco at the time of award plus one percent (1%). Tenant waives redemption or relief from forfeiture under California Code of Civil Procedure Sections 1174 and 1179, or under any other present or future law, in the event Tenant is evicted or Landlord takes possession of the Premises by reason of any default of Tenant hereunder. (iii) Landlord may, with or without terminating this Lease, re-enter the Premises and remove all persons and property from the Premises; such property may be removed and stored in a public warehouse or elsewhere at the cost of and for the account of Tenant. No re-entry or taking possession of the Premises by Landlord pursuant to this paragraph shall be construed as an election to terminate this Lease unless a written notice of such intention is given to Tenant. In addition to the above remedies, Landlord shall have all rights under the Uniform Commercial Code of a secured party with respect to Tenant's Personal Property in which a security interest is granted. C. LATE CHARGES. Tenant acknowledges that late payment by Tenant to Landlord of Rent and other charges provided for under this Lease will cause Landlord to incur costs not contemplated by this Lease, the exact amount of such costs being extremely difficult or impracticable to fix. Such costs include, but are not limited to, processing and accounting charges, and late charges that may be imposed on Landlord by the terms of any encumbrance and notes secured by any encumbrance covering the Premises, or late charges and penalties due to late payment of Real Property Taxes due on the Premises. Therefore, if any installment of Rent or any other charge due from Tenant is not received by Landlord within three (3) days of the due date, Tenant shall pay to Landlord an additional sum equal to five percent (5%) of the amount overdue as a late charge for every month or portion thereof that the Rent or other charges remain unpaid, whether or not Landlord has given Tenant written notice of the non-receipt of the Rent or other charges or has exercised any remedy herein provided for default by Tenant. The parties agree that this late charge represents a fair and reasonable estimate of the costs that Landlord will incur by reason of the late payment by Tenant. Acceptance of any late charge shall not constitute a waiver of Tenant's default with respect to the overdue amount, nor prevent Landlord from exercising any of the other rights and remedies available to Landlord. D. LANDLORD'S DEFAULT. Landlord shall not be deemed to be in default in the performance of any obligation required to be performed by it hereunder unless and until it has failed to perform such obligation within thirty (30) days after receipt of written notice by Tenant to Landlord specifying the nature of such default; provided, however, that if the nature of Landlord's obligation is such that more than thirty (30) days are required for its performance, then Landlord shall not be deemed to be in 19 24 default if it shall commence such performance within such thirty (30) day period and thereafter diligently prosecute the same to completion. SURRENDER 16. Upon the expiration or earlier termination of the term, Tenant OF THE shall surrender the Premises to Landlord in its condition existing PREMISES as of the Commencement Date, normal wear and tear and fire or other casualty not caused by Tenant excepted, with all interior walls repaired and repainted if marked or damaged, all carpets shampooed and cleaned, and all floors cleaned and waxed, all to the reasonable satisfaction of Landlord. Tenant shall remove from the Premises all of Tenant's Alterations required to be removed pursuant to Paragraph 8 and all Tenant's Personal Property, and shall repair any damage and perform any restoration work caused by such removal. If Tenant is then in default, Tenant shall only remove such Alterations and Tenant's Personal Property as specified in written notice from Landlord to Tenant. If Tenant fails to remove such Alterations and Tenant's Personal Property, and such failure continues after the termination of this Lease or after Tenant has abandoned or surrendered the Premises, Landlord may retain such property and, at Landlord's option, may apply it toward the satisfaction of Tenant's obligations under this Lease, and all rights of Tenant with respect to the property shall cease, or Landlord may place all or any portion of such property in public storage for Tenant's account. Tenant shall be liable to Landlord for the reasonable costs of removal of any such Alterations and Tenant's Personal Property and storage and transportation costs of same, and the cost of repairing and restoring the Premises, together with interest at the Interest Rate from the date of expenditure by Landlord. If the Premises are not so surrendered at the termination of this Lease, Tenant shall indemnify Landlord and its Agents against all loss or liability resulting from delay by Tenant in so surrendering the Premises, including, without limitation, any claims made by any succeeding tenant, losses to Landlord due to lost opportunities to lease to succeeding tenants, and attorneys' fees and costs. ATTORNEYS' 17. If either party brings any action or legal proceeding for FEES damages for an alleged breach of any provisions of this Lease, to recover Rent, or other sums due, to terminate the tenancy of the Premises or to enforce, protect or establish any term, condition or covenant of this Lease or right of either party, the prevailing party shall be entitled to recover as a part of such action or proceedings, or in a separate action brought for that purpose, reasonable attorneys' fees and costs. Notwithstanding the foregoing and in addition thereto, Landlord shall be entitled to immediate receipt from Tenant for each breach hereof of such reasonable attorneys' fees, but not less than Fifty and no/100ths Dollars ($50.00), as may be incurred in connection with each notice or demand delivered to Tenant pursuant to Paragraph 15. Tenant agrees that such sums constitute reimbursement to Landlord only of the reasonable costs to Landlord of the preparation and delivery of each notice caused by Tenant's breach hereunder. LIENS 18. Tenant shall keep the Premises and the Project free from any liens arising out of any work performed, materials furnished or obligations incurred by or on behalf of Tenant and hereby indemnifies and holds Landlord and its Agents harmless from all liability and cost, including attorneys' fees and costs, in connection with or arising out of any such lien or claim of lien. Tenant shall cause any such lien imposed to be released of record by payment or posting of a proper bond acceptable to Landlord within ten (10) days after the earlier of imposition of the lien or written request by Landlord. 20 25 RENTAL 19. As of the commencement of the second lease year measured from ADJUST- the lease commencement date, the base Monthly Rental provided in MENT Paragraph 4.A. hereof shall be adjusted annually by multiplying the base monthly rental in effect immediately prior to such adjustment by 1.05. The base rent in months 13-24 shall be $1.63/s.f.; months 25-36 shall be $1.71/s.f.; months 37-48 shall be $1.79/s.f.; months 49-60 shall be $1.88/s.f.; months 61-72 shall be $1.98/s.f.; and months 73-84 shall be $2.08/s.f. SUBORDI- 20. A. DOCUMENTATION. This Lease is subject and subordinate to all NATION ground and underlying leases, mortgages and deeds of trust (collectively "Encumbrances") which now or may hereafter affect the Premises, to the CC&R's and to all renewals, modifications, consolidations, replacements and extensions thereof; provided, however, if the holder or holders of any such Encumbrance ("Holder") shall require that this Lease be prior and superior thereto, within ten (10) days of written request of Landlord to Tenant, Tenant shall execute, have acknowledged and deliver any and all documents or instruments, which Landlord or Holder reasonably deems necessary or desirable for such purposes. Landlord shall have the right to cause this Lease to be and become and remain subject and subordinate to any and all Encumbrances which are now or may hereafter be executed covering the Premises or any renewals, modifications, consolidations, replacements or extensions thereof, for the full amount of all advances made or to be made thereunder and without regard to the time or character of such advances, together with interest thereon and subject to all the terms and provisions thereof; provided only, that in the event of termination of any such ground or underlying lease or upon the foreclosure of any such mortgage or deed of trust, so long as Tenant is not in default, Holder shall agree not to disturb Tenant's tenancy as long as Tenant shall pay the Rent and observe and perform all the provisions of this Lease to be observed and performed by Tenant. Within ten (10) days after Landlord's written request, Tenant shall execute any and all documents required by Landlord or the Holder required to effectuate such subordination to make this Lease subordinate to any lien of the Encumbrance. B. ATTORNMENT. Notwithstanding anything to the contrary set forth in this paragraph, Tenant hereby attorns and agrees to attorn to any entity purchasing or otherwise acquiring the Premises at any sale or other proceeding or pursuant to the exercise of any other rights, powers or remedies under such Encumbrance. MORTGAGEE 21. In the event of any default on the part of Landlord, Tenant PROTEC- will give written notice as provided in Paragraph 14 to any TION beneficiary of a deed of trust or mortgagee of a mortgage covering the Premises, and shall offer such beneficiary or mortgagee a reasonable opportunity to cure the default, but in no event more than ninety (90) days from the date of delivery of written notice of such default from Tenant. CONDEMNA- 22. A. TOTAL TAKING - TERMINATION. If title to all of the Premises TION or so much thereof is taken for any public or quasi-public use under any statute or by right of eminent domain so that reconstruction of the Premises will not, in Landlord's reasonable opinion, result in the Premises being reasonably suitable for Tenant's continued occupancy for the uses and purposes permitted by this Lease, this Lease shall terminate as of the date that possession of the Premises or part thereof be taken. B. PARTIAL TAKING. If any part of the Premises is taken and the remaining part is reasonably suitable for Tenant's continued occupancy for the purposes and uses permitted by this Lease, this Lease shall, as to the part so taken, terminate as of the date that possession of such part of the Premises is taken and the Rent and other sums payable hereunder shall be reduced in the same proportion that the floor area of the portion of the 21 26 Premises so taken (less any addition thereto by reason of any reconstruction) bears to the original floor area of the Premises. Landlord shall, at its own cost and expense, make all necessary repairs or alterations to the Premises so as to make the portion of the Premises not taken a complete architectural unit. Such work shall not, however, exceed the scope of the work done by Landlord in originally constructing the Premises, or require Landlord to expend sums in excess of the net proceeds of such condemnation or taking. Rent and other sums payable hereunder shall be temporarily abated during such restoration proportionately in the degree to which Tenant's use of the Premises is impaired. Each party hereby waives the provisions of Section 1265.130 of the California Code of Civil Procedure allowing either party to petition the Superior Court to terminate this Lease in the event of a partial taking of the Premises. C. NO APPORTIONMENT OF AWARD. No award for any partial or entire taking shall be apportioned. Tenant assigns to Landlord its interest in any award which may be made in such taking or condemnation, together with any and all rights of Tenant arising in or to the same or any part thereof. Nothing contained herein shall be deemed to give Landlord any interest in or require Tenant to assign to Landlord any separate award made to Tenant for the taking of Tenant's Personal Property, for the interruption of Tenant's business, or its moving costs, or for the loss of its goodwill. D. TEMPORARY TAKING. No temporary taking of the Premises shall terminate this Lease or give Tenant any right to any abatement of Rent. Any award made to Tenant by reason of such temporary taking shall belong entirely to Tenant and Landlord shall not be entitled to share therein. Each party agrees to execute and deliver to the other all instruments that may be required to effectuate the provisions of this paragraph. E. SALE UNDER THREAT OF CONDEMNATION. A sale by Landlord to any authority having the power of eminent domain, either under threat of condemnation or while condemnation proceedings are pending, shall be deemed a taking under the power of eminent domain for all purposes of this paragraph. HOLDING 23. If Tenant remains in possession of all or any part of the OVER Premises after the expiration of the Term, with the express or implied consent of Landlord, such tenancy shall be month-to-month only and shall not constitute a renewal or extension for any further term. In such event, Monthly Rent shall be increased to an amount equal to one hundred fifty percent (150%) of the Monthly Rent payable by Tenant prior to the expiration of the Term and any other sums due hereunder shall be payable in the amount and at the times specified in this Lease. Such month-to-month tenancy shall be subject to every other term, condition, and covenant contained herein. ENTRY BY 24. Tenant shall permit Landlord and its Agents to enter the LANDLORD Premises at all reasonable times with reasonable notice, except for emergencies in which case no notice shall be required, to inspect the same, to post Notices of Nonresponsibility and similar notices and "For Sale" signs, to show the! Premises to interested parties such as prospective lenders and purchasers, to make necessary Alterations or repairs, to discharge Tenant's obligations hereunder when Tenant has failed to do so within a reasonable time (but no less than the time period described in paragraph 15A(ii)) after written notice from Landlord, and at any reasonable time within one hundred and eighty (180) days prior to the expiration of the Term, or at any time during the Term hereof if Tenant is in default hereunder, to place upon the Premises ordinary "For Lease" signs and to show the Premises to prospective tenants. The above rights are subject to security regulations imposed upon Tenant by any governmental agency, it being understood that Tenant will advise Landlord in writing as 22 27 to such security regulations, and to the requirement that Landlord shall at all times act in a manner to avoid unreasonable interference with Tenant's business. Landlord shall not be liable to Tenant for any entry permitted hereunder unless the loss or damage to Tenant therefrom is the direct result of the negligence or willful misconduct of Landlord or Landlord's Agents, and provided that in no case shall Landlord be responsible to Tenant for any lost profits, damage to Tenant's business, or any other consequential damages. Landlord's entry shall not be construed to be a forcible or unlawful entry into, or a detainer of, the Premises. ESTOPPEL 25. Tenant shall have ten (10) days following written request by CERTIFI- Landlord to: CATES (i) Execute and deliver to Landlord any documents, including estoppel certificates, in the form prepared by Landlord (a) certifying that this Lease is unmodified and in full force and effect or, if modified, stating the nature of such modification and certifying that this Lease, as so modified, is in full force and effect and the date to which the Rent and other charges are paid in advance, if any, and (b) acknowledging that there are not, to Tenant's knowledge, any uncured defaults on the part of Landlord, or, if there are uncured defaults on the part of the Landlord, stating the nature of such uncured defaults, and (c) certifying any other matters pertaining to this Lease as to which Tenant has actual knowledge and as may be reasonably required either by a lender making a loan to Landlord to be secured by deed of trust or mortgage covering the Premises or a purchaser of the Premises from Landlord. Tenant's failure to deliver an estoppel certificate within ten (10) days after delivery of Landlord's written request therefor shall be conclusive upon Tenant (a) that this Lease is in full force and effect, without modification except as may be represented by Landlord, (b) that there are now no uncured defaults in Landlord's performance and (c) that no Rent has been paid in advance. (ii) Deliver to Landlord the most current financial statements of Tenant, and financial statements of the two (2) years prior to such current financial statements, including current and past balance sheets and profit and loss statements, all prepared in accordance with generally accepted accounting principles consistently applied. If Tenant has any financial statements for such periods as to which a certified public accountant has expressed an opinion, Tenant shall provide such statements to Landlord. TRANSFER 26. In the event of any conveyance of the Premises and assignment OF THE by Landlord of this Lease, Landlord shall be and is hereby entirely PREMISES released from all liability under any and all of its covenants and BY obligations contained in or derived from this Lease occurring after LANDLORD the date of such conveyance and assignment. LAND- 27. If Tenant shall at any time fail to make any payment or LORD'S perform any other act on its part to be made or performed under this RIGHT TO Lease within any applicable cure period provided herein, Landlord PERFORM may, but shall not be obligated to and without waiving or releasing TENANT'S Tenant from any obligation of Tenant under this Lease, make such COVENANTS payment or perform such other act to the extent Landlord may deem desirable, and in connection therewith, pay reasonable expenses and employ counsel. To compensate Landlord for its administrative and direct expenses of such performance, Tenant shall pay 105% of all sums so paid by Landlord and all penalties, interest and costs in connection therewith, together with interest thereon at the Interest Rate from the date of payment by Landlord to the date of payment thereof by Tenant to Landlord, plus collection costs and attorneys' fees, within 23 28 twenty (20) days of request therefor by Landlord. Landlord shall have the same rights and remedies for the nonpayment thereof as in the case of default in the payment Of Rent. TENANT'S 28. If Landlord shall fail to perform any covenant, term, or REMEDY condition Of this Lease upon Landlord's part to be performed, Tenant shall be required to deliver to Landlord written notice of the same. If, as a consequence of such default, Tenant shall recover a money judgment against Landlord, such judgment shall be satisfied only out of the proceeds of sale received upon execution of such judgment and levied thereon against the right, title and interest of Landlord in the Project and out of Rent or other income from such property receivable by Landlord or out of consideration received by Landlord from the sale or other disposition of all or any part of Landlord's right, title or interest in the Project, and neither Landlord nor its Agents shall be liable for any deficiency. SECURITY 29. Tenant has deposited with Landlord the sum of Sixteen Thousand DEPOSIT One Hundred Forty-Six and 35/100ths Dollars ($16,146.35) as the Security Deposit for the full and faithful performance of every provision of this Lease to be performed by Tenant. Title to the Security Deposit has been transferred to Landlord subject only to Tenant's right to the return of the Security Deposit as set forth below. If Tenant defaults with respect to any provision of this Lease, Tenant's right to the return of the Security Deposit shall terminate to the extent of any payments due hereunder, and Landlord may apply all or any part of the Security Deposit for the payment of any Rent or other sum in default, the repair of such damage to the Premises or the payment of any other amount which Landlord may spend or become obligated to spend by reason of Tenant's default or to compensate Landlord for any other loss or damage which Landlord may suffer by reason of Tenant's default to the full extent permitted by law. If any portion of the Security Deposit is so applied, Tenant shall, within ten (10) days after written demand therefor, deposit cash with Landlord in an amount sufficient to restore the Security Deposit to its original amount. Landlord shall not be required to keep the Security Deposit separate from its general funds, and Tenant shall not be entitled to interest on the Security Deposit. If Tenant is not otherwise in default, the Security Deposit or any balance thereof shall be returned to Tenant at its last address known to Landlord within thirty (30) days of termination of the Lease. FINANCIAL 30. Tenant represents and warrants that all financial information COVENANTS provided by Tenant to Landlord prior to execution of this Lease is true and complete and fairly represents the actual financial condition of Tenant as of the date specified therein. Tenant agrees that any misrepresentation to Landlord as to Tenant's financial condition, or any failure to provide financial information required to be provided by Tenant hereunder shall constitute a default under this Lease. Tenant agrees that in the event that Tenant fails to perform any obligation of Tenant hereunder, or if Tenant commits any act or omission or is the subject of any information which, in the judgment of Landlord, raises any reasonable question as to whether Tenant's financial condition has materially changed for the worse since the execution of this Lease or whether Tenant will have sufficient financial resources to meet its obligations under this Lease and its financial obligations generally, then Tenant shall within ten (10) days after receipt of a written request from Landlord furnish Landlord with any financial information requested by Landlord and reasonably available to Tenant. PARKING 31. Tenant shall be provided on a non-exclusive basis and at no additional cost with forty-one (41) nonreserved automobile parking spaces in the Project's parking facilities. Tenant agrees not to overburden the parking facilities and to cooperate 24 29 with Landlord and other tenants in the use of the parking facilities. Landlord reserves the right in its absolute discretion to determine whether the parking facilities are becoming crowded and to allocate and assign parking spaces among Tenant and the other tenants, or to impose validated parking restrictions or parking charges. QUIET 32. Landlord covenants that Tenant, upon performing the terms, ENJOY- conditions and covenants of this Lease, shall have quiet and MENT peaceful possession of the Premises as against any person claiming the same by, through or under Landlord. MODIFI- 33. If, in connection with obtaining financing for the Premises or CATIONS any portion thereof, Landlord's lender shall request reasonable FOR modification to this Lease as a condition to such financing, Tenant LENDER shall not unreasonably withhold, delay or defer its consent thereto, provided such modifications do not materially adversely affect Tenant's rights hereunder, or increase the amount of Rent to be paid by Tenant hereunder. SIGNS 34. Landlord shall provide for Tenant an exterior Tenant identification sign located on the Premises. Tenant shall not maintain a Tenant identification sign in any other location in, on or about the Premises and shall not display or erect any other Tenant identification sign, display or other advertising material that is visible from the exterior of the Building. The size, design, color and other physical aspects of the Tenant identification sign shall be subject to the Landlord's written approval prior to installation, which shall not be unreasonably withheld or delayed, giving due regard to the Building's architecture and color scheme, the CC&R's, and any appropriate municipal or other governmental approvals. The cost of the sign, its installation, maintenance and removal expense shall be Tenant's sole expense. If Tenant fails to maintain its sign, or if Tenant fails to remove its sign upon termination of this Lease, Landlord may do so at Tenant's expense and Tenant shall reimburse Landlord for such amounts as Additional Rent. Such reimbursement shall include all sums disbursed, incurred or deposited by Landlord including Landlord's costs, expenses and reasonable attorneys' fees with interest thereon from the date of such expenditure at the Interest Rate. ACCEP- 35. Delivery of this Lease, duly executed by Tenant, together with TANCE payment of the Monthly Rent for the first month of this Lease and the Security Deposit required hereunder, constitutes an offer to lease the Premises, and under no circumstances shall such delivery and payment be deemed to create an option or reservation to lease the Premises for the benefit of Tenant. This Lease shall only become effective and binding upon full execution hereof by Landlord and delivery of a signed copy to Tenant. If Landlord declines said offer, any such payments shall be returned to Tenant. RECORDING 36. Neither party shall record this Lease nor a short form memorandum thereof. QUITCLAIM 37. Upon any termination of this Lease, Tenant shall, at Landlord's request, execute, have acknowledged and deliver to Landlord a quitclaim deed of the Premises. BROKERS 38. Except as disclosed in the Lease Summary attached hereto, Landlord and Tenant represent and warrant to each other that it has had no dealings with any real estate broker or agent in connection with the negotiation of this Lease and that it knows of no real estate broker or agent who is or might be entitled to a commission in connection with this Lease. Landlord and Tenant agree to indemnify and hold harmless each other, and Landlord's Agents, from and against any and all liabilities or expenses, including reasonable attorneys' fees and costs, arising out of or 25 30 in connection with claims made by any broker or individual for commissions or fees resulting from the execution of this Lease. GENERAL 39. A. CAPTIONS. The captions and headings used in this Lease are for the purpose of convenience only and shall not be construed to limit or extend the meaning of any part of this Lease. B. EXECUTED COPY. Any fully executed copy of this Lease shall be deemed an original for all purposes. C. SEPARABILITY. In case any one or more of the provisions contained herein, except for the payment of Rent, shall for any reason be held to be invalid, illegal or unenforceable in any respect, such invalidity, illegality, or unenforceability shall not affect any other provision of this Lease, but this Lease shall be construed as if such invalid, illegal or unenforceable provision had not been contained herein. D. CHOICE OF LAW. This Lease shall be construed and enforced in accordance with the laws of the State of California. The language in all parts of this Lease shall in all cases be construed as a whole according to its fair meaning and not strictly for or against either Landlord or Tenant. E. GENDER; SINGULAR, PLURAL. When the context of this Lease requires, the neuter gender includes the masculine, the feminine, a partnership or corporation or joint venture, and the singular includes the plural. F. BINDING EFFECT. The covenants and agreement contained in this Lease shall be binding on the parties hereto and on their respective successors and assigns to the extent this Lease is assignable. G. WAIVER. No covenant, term or condition of this Lease shall be deemed to have been waived by Landlord unless such waiver is in writing and signed by Landlord. The waiver by Landlord of any breach of any term, condition or covenant of this Lease shall not be deemed to be a waiver of such provision or any subsequent breach of the same or any other term, condition or covenant of this Lease. Landlord shall have the right to accept Monthly Rent and other payments due from Tenant hereunder with knowledge of a preceding breach of this Lease, and no such acceptance shall be deemed an express or implied waiver of such breach unless such waiver is in writing and signed by Landlord. No further reservation of rights shall be required of Landlord under this Lease to reserve all rights and remedies of Landlord arising with respect to such preceding breach. H. NON-LIABILITY OF LIMITED PARTNERS. Tenant acknowledges that Landlord is a California limited partnership ("Partnership"). Tenant further acknowledges that it is aware that, under the California Revised Limited Partnership Act, limited partners are not liable for any obligations of the Partnership. Accordingly, Tenant agrees to look only to the Partnership and its general partners for the collection of any monies which may become due under it, and that it will not assert any claim against the limited partners of the Partnership by reason this Lease. I. ENTIRE AGREEMENT. Except as set forth in the Letter Agreements, (_____, ____). This Lease is the entire agreement between the parties, and this Lease expressly supersedes all prior negotiations, representations and agreements of the parties respecting the Premises or the Project. Except as set forth in the Letter Agreements, (_____, ____). There are no agreements or representations between the parties except as expressed herein. Except as set forth in the Letter Agreements, (_____, ____). Except as otherwise provided herein, no subsequent change or addition to this Lease shall be binding unless in writing and signed by the parties hereto. 26 31 J. AUTHORITY. If Tenant is a corporation or a partnership, each individual executing this Lease on behalf of said corporation or partnership, as the case may be, represents and warrants that he is duly authorized to execute and deliver this Least on behalf of said entity in accordance with its corporate bylaws, statement of partnership or certificate of limited partnership, as the case may be, and that this Lease is binding upon said entity in accordance with its terms. Landlord, at its option, may require a copy of such written authorization to enter into this Lease. The failure of Tenant to deliver the same to Landlord within ten (10) business days of Landlord's written request therefor shall be deemed a default under this Lease. If Landlord is a corporation or a partnership, each individual executing this Lease on behalf of said corporation or partnership, as the case may be, represents and warrants that he is duly authorized to execute and deliver this Lease on behalf of said entity in accordance with its corporate bylaws, statement of partnership or certificate of limited partnership, as the case may be, and that this Lease is binding upon said entity in accordance with its terms. Tenant, at its option, may require a copy of such written authorization to enter into this Lease. The failure of Landlord to deliver the same to Tenant within ten (10) business days of Tenant's written request therefore shall be deemed a default under this Lease. K. EXHIBITS. All exhibits, amendments, riders and addenda attached hereto are hereby incorporated herein and made a part hereof. L. LEASE SUMMARY. The Lease Summary attached to this Lease is intended to provide general information only. In the event of any inconsistency between the Lease Summary and the specific provisions of this Lease, the specific provisions of this Lease shall prevail. M. SURVIVAL. Landlord's and Tenant's covenants shall survive termination of this Lease where reasonably appropriate to accomplish the purpose thereof. N. TIME. Time is of the essence for the performance of each term, condition and covenant of this Lease. 0. NO JURY TRIAL. Landlord and Tenant hereby waive their respective right to trial by jury of any cause of action, claim, counterclaim or cross-complaint in any action, proceeding and/or hearing brought by either Landlord against Tenant or Tenant against Landlord on any matter whatsoever arising out of, or in any way connected with, this Lease, the relationship of Landlord and Tenant, Tenant's use or occupancy of the Premises, or any claim of injury or damage, or the enforcement of any remedy under any law, statute, or regulation, emergency or otherwise, now or hereafter in effect. THIS LEASE is effective as of the date the last signatory necessary to execute the Lease shall have executed this Lease. TENANT: Dated: 7/19/93 SIGNAL PHARMACEUTICALS, INC., ----------------- a California corporation By: /s/ MARK D. CARMAN ------------------------------------ Its: V.P. Operations ------------------------------- By: ------------------------------------ Its: ------------------------------- 27 32 LANDLORD: Dated: 7/3/93 SORRENTO VALLEY BUSINESS PARK, ---------------- a California limited partnership By: /s/ ROBERT COURSON ------------------------------------ Its: General Partners ------------------------------- By: ------------------------------------ Its: ------------------------------- 28 33 THE PREMISES [MAP DIAGRAM] EXHIBIT A 34 THE PROJECT [MAP DIAGRAM] EXHIBIT B 35 THE PROJECT [MAP DIAGRAM] EXHIBIT B 36 EXHIBIT "C" WORK LETTER AGREEMENT 1. Tenant's Work. Tenant at its cost (subject to Landlord's contribution provided in Paragraph 3 below) shall perform tenant improvement work for the Premises in accordance with plans and specifications approved by Landlord and Tenant. Tenant's work shall include, without limitation, all design and space planning work, all interior partitions, interior doors, corridor entrance doors, cabinets, lock sets and latch sets, electrical outlets, telephone outlets, light fixtures, heating ventilation and air conditioning distribution ducting and heat pumps, plumbing, any fire protection system other than Landlord's existing sprinkler system, any modifications to Landlord's sprinkler system, floor coverings, perimeter and interior wall surfaces, and Building Standard window coverings. 2. Standards for Tenant's Work. Tenant's work shall be completed pursuant to the following provisions: (a) Tenant shall prepare and submit to Landlord two (2) sets of final plans and specifications showing the architectural design of the Premises, including the basic mechanical system and electrical system within the Premises, plumbing, partitions and doors, complete fixturing information, and material selections and finishes. Within five (5) working days after receipt of such final plans and specifications, Landlord shall approve or suggest modifications to such final plans and specifications. Landlord shall not unreasonably refuse or delay approval of Tenant's final plans and specifications. Tenant may object to any of the suggested modifications by notice to Landlord within five (5) working days after receipt of such suggested modifications, and unless Tenant so objects such suggested modifications shall be deemed approved by Tenant. Tenant shall also submit all proposed change orders in writing (with sufficient detail to enable Landlord to understand the nature of the proposed change) to Landlord for Landlord's prior written approval, which shall not be unreasonably refused or delayed. Landlord's consent shall not be required for any change order for work costing less than Five Thousand Dollars ($5,000.00), provided that there are no more than five (5) such change orders in any thirty (30) day period. Any proposed change order shall be deemed approved by Landlord unless Landlord disapproves same within three (3) business days after the proposed change order is received by Landlord, provided that Tenant's notice requesting approval of such change order clearly notifies Landlord that the proposed change order shall be deemed approved if not disapproved within such three (3) business day period. The individuals to whom Tenant shall submit plans and specifications for approval shall be Robert E. Courson, with a copy to Cindy Jacob, and the individual to whom Landlord shall communicate regarding plans and specifications shall be either Jackie Johnson or Bruce Birch. While Landlord has the right to approve the plans and specifications, Landlord's sole interest in doing so is to protect the Building and Landlord's interests. Accordingly, Tenant shall not rely on Landlord's approvals and Landlord shall not be the guarantor of, nor in any way responsible for, the accuracy or correctness of any such plans and specifications, or the compliance thereof with applicable laws, and Landlord shall incur no liability of any kind by reason of granting any such approvals. (b) Tenant shall complete all work in accordance with the final plans and specifications approved by Landlord. Tenant shall make no alterations, additions, or reinforcements to the structure of the Building except as specifically approved by Landlord in such final plans and specifications. Tenant, at its expense, shall procure all building and other permits required for completion of Tenant's work. Tenant agrees that all work done by Tenant and its contractors and subcontractors shall be performed in full compliance with all laws, rules, orders, permits, ordinances, directions, regulations and requirements of all governmental agencies, offices, and departments having jurisdiction, including without limitation applicable provisions pertaining to use of hazardous or toxic materials during construction, and in full compliance with rules, orders, directions, regulations and requirements of any insurance underwriting 37 board, inspection bureau or insurance carrier insuring the Premises or Building. (c) At least thirty (30) days before commencement of construction, Tenant shall submit to Landlord the names and addresses of the general, mechanical, and electrical contractors which Tenant intends to engage for construction of Tenant's improvements, the commencement date of construction, and the estimated date of completion of construction. Landlord shall have the right to enter the Premises at any time to post any notice of nonresponsibility or other notice on the Premises during Tenant's construction. All contractors and subcontractors retained by Tenant shall be subject to the approval of Landlord, which shall not be unreasonably refused or delayed. Landlord hereby consents that Tenant may employ David Begent & Co. as general contractor. All contractors retained by Tenant shall be bondable, licensed contractors, possessing good labor relations and capable of performing quality workmanship and working in harmony with Landlord's general contractor and other contractors. (d) During the course of construction, Tenant shall maintain builder's risk insurance in form and content satisfactory to Landlord. Tenant's insurance shall name Landlord as an additional insured and shall provide that it may not be canceled or amended without twenty (20) days prior written notice to Landlord. At least ten (10) days prior to commencement of construction, Tenant shall provide Landlord with a certificate of such insurance and evidence of any required bonds in form satisfactory to Landlord. Tenant or Tenant's contractor shall provide to Landlord a surety bond issued by a company acceptable to Landlord guaranteeing performance of its construction obligations and payment for all work and materials to be provided to the job. (e) Tenant's work shall be completed with reasonable diligence and in such a manner as not to interfere with the use or enjoyment of other portions of the Building or common areas by Landlord or other tenants. Tenant's contractors shall provide and pay for all temporary power, water, and other utility facilities as required in connection with the construction of Tenant's improvements. Tenant's contractors shall provide their own, dumpster for collection and disposition of construction debris, which shall be located at a location approved by Landlord, and all construction debris from Tenant's construction shall be disposed of in Tenant's contractor's dumpster and not in trash facilities for the Project. Tenant's contractor's construction material, tools, equipment, and debris shall be stored only within the Premises, or in areas designated for that purpose by Landlord. Work space exterior to the Premises shall be available only in the discretion of Landlord. Tenant's work shall be subject to the inspection of Landlord and Landlord's architect and general contractor during the course of construction. (f) Tenant shall indemnify and hold harmless Landlord for any and all claims arising from Tenant's work as provided in Paragraph 12.A and Paragraph 18 of the Lease. Tenant's construction contracts shall include a similar indemnification from its contractors for the benefit of Landlord. Tenant shall pay for all damage to the Building, the Project, or appurtenant areas or equipment, as well as all damage to tenants or occupants thereof or their property caused by Tenant, its agents, employees, contractors, licensees, or invitees. Tenant acknowledges that Tenant's obligation set forth in Paragraph 18 of the Lease to keep the Building and Premises free of all liens shall include, but not be limited to, an obligation at Tenant's expense to obtain and record a release bond as provided in Section 3143 of the California Civil Code or other provision of law, as requested by Landlord. (g) Tenant shall be solely responsible for the adequacy in all respects of the final plans and specifications, including without limitation compliance with all governmental requirements, compatibility with the Building shell, and any special requirements of Tenant's proposed improvements, equipment or machines with respect to ambient temperatures, electrical use or current, water availability or otherwise. Tenant acknowledges that in connection with obtaining Landlord's approval of the final plans and specifications, Tenant may provide Landlord with certain information regarding its specific needs relating to the Premises in 38 developing plans and specifications for its improvements and that Tenant may provide some of its own equipment for installation in the Premises. Tenant further acknowledges that Landlord will make no independent review of any such information and that Landlord does not warrant, either expressly or impliedly, the adequacy of the plans and specifications for the said improvements, or the adequacy of Tenant's improvements or Tenant's equipment for Tenant's intended purpose. (h) All improvements made pursuant hereto shall during the term of this Lease, as it may be extended, constitute the property of Tenant. Upon expiration or termination of this Lease, however, unless Landlord shall require the removal or consent in writing to the removal thereof by Tenant, all such improvements shall remain in place and the ownership thereof shall revert to Landlord. 3. Landlord's Contribution. Landlord shall contribute to the cost of Tenant's Work an improvement allowance ("Allowance") in an amount equal to Five Hundred Thousand Dollars ($500,000). Any and all costs associated with Tenant's Work in excess of such contribution shall be paid by Tenant. Landlord's contribution shall be paid on behalf of Tenant directly to Tenant's architect or Tenant's general contractor as the case may be. Payments by Landlord shall be made not more often than monthly and shall be made on the basis of billings for work completed which are approved by Tenant and submitted to Landlord together with evidence reasonably satisfactory to Landlord of completion of the work for which the billing is submitted. Payments to Tenant's general contractor shall be made on a percentage of work completed basis (that is, for example, upon completion of 20% of Tenant's total work Tenant shall be entitled to 20% of Landlord's contribution to the cost of such work) pursuant to the standard procedures for percentage of completion disbursements using forms adopted by the American Institute of Architects or other procedures required by Landlord, each payment to be made within twenty (20) days after presentation to Landlord of the following: (a) A certificate of Tenant's general contractor showing the percentage of Tenant's work which has been completed pursuant to the approved plans and specifications, or other evidence satisfactory to Landlord that the specified percentage of the improvements have been completed pursuant to the approved plans and specifications. (b) Evidence of payment by Tenant of the portion, if any, of such progress payment to be made by Tenant. (c) Partial waivers to date of all mechanic's and materialmen's liens of any kind (which may be conditional upon payment as to the work currently invoiced but shall be unconditional as to all previously invoiced work) in form and substance satisfactory to Landlord and Landlord's construction lender. (d) Any other documentation reasonably required by Landlord. Before commencement of Tenant's construction, the total cost of construction, and Landlord's contribution as a percentage of such total cost ("Landlord's Percentage"), shall be determined by Landlord, with the total job cost as the denominator and Landlord's contribution as the numerator. In no event shall any payment to Tenant's architect or any construction progress payment by Landlord exceed Landlord's Percentage of the total progress billing submitted by Tenant's contractor. Landlord shall withhold ten percent of the Allowance until completion of all of Tenant's work and the lien-free expiration of the time for the filing of any mechanics' liens claimed or which might be filed on account of any work ordered by Tenant or its contractors or subcontractors. The cost of any change orders shall be paid by Tenant to the extent the cost thereof is not included within the Allowance. If any change order materially changes the total cost of construction, Landlord's Percentage shall be redetermined by Landlord and Landlord's disbursements shall thereafter be made in such amounts that the aggregate Landlord's disbursements do not exceed the aggregate amount required under the 39 foregoing procedure. Tenant shall be liable for that portion of all taxes levied against its improvements. 4. Adjustment of Commencement Date. The Commencement Date shall be delayed by one (1) business day for each business day of actual delay in the design or construction of the tenant improvement work that is caused by any Force Majeure Delay or Landlord Delay. "Force Majeure Delay" shall mean any actual delay which is attributable to any: (i) actual, industry-wide strike, lockout or other labor or industrial disturbance, civil disturbance, act of the public enemy, war, riot, sabotage, blockade, or embargo; (ii) earthquake, fire, hurricane, tornado, flood, explosion, or other casualty beyond the control of the party for whom performance is required or of its contractors or other representatives. No Force Majeure Delay shall be deemed to have occurred unless and until the party claiming such Force Majeure Delay has provided written notice to the other party specifying the action or inaction that such notifying party contends constitutes a Force Majeure Delay. If such action or inaction is not cured within two (2) business days after receipt of such notice, then a Force Majeure Delay, as set forth in such notice, shall be deemed to have occurred commencing as of the date after such notice was received and continuing for the number of days the substantial completion of the Premises was in fact delayed as a direct result of such action or inaction. "Landlord Delay" as used in this Agreement shall mean actual delay in the design or construction of the Tenant Improvement Work directly attributable to Landlord's failure to approve or disapprove the tenant improvement plans within the time periods provided in paragraph 2 (a) hereof. No Landlord Delay shall be deemed to have occurred unless and until Tenant has given written notice to Landlord specifying the action or inaction which Tenant contends constitutes a Landlord delay. If such action or inaction is not cured within two (2) business days after Landlord's receipt of such notice, then a Landlord Delay, as set forth in such notice, shall be deemed to have occurred commencing as of the date after Landlord receives such notice and continuing for the number of days substantial completion of the Premises was in fact delayed as a direct result of such action or inaction. 5. No Fee to Landlord. Except as otherwise provided herein, Landlord shall receive no fee for supervision, profit, overhead or general conditions in connection with the tenant improvements work. 6. No Miscellaneous Charges. Neither Tenant nor its contractor shall be charged by Landlord for parking (to the extent parking is available) or for the use of electricity, water or HVAC during the construction of the tenant improvements. 40 EXHIBIT D COMMENCEMENT DATE MEMORANDUM LANDLORD: SORRENTO VALLEY BUSINESS PARK, a limited partnership TENANT: SIGNAL PHARMACEUTICALS, INC., a California corporation LEASE DATE: April 30, 1993 PREMISES: 5555 Oberlin Drive, Suite 100 San Diego, California Pursuant to Paragraph 3.C. of the above referenced Lease, the Commencement Date is hereby established as ___________________________, 19___. LANDLORD: SORRENTO VALLEY BUSINESS PARK, a California limited partnership By: /s/ ROBERT COURSON ------------------------------------- Its: General Partner --------------------------------- By: ------------------------------------- Its: --------------------------------- TENANT: SIGNAL PHARMACEUTICALS, INC., a California corporation By: /s/ MARK D. CARMAN ------------------------------------- Its: V.P. Operations --------------------------------- By: ------------------------------------- Its: --------------------------------- 41 EXHIBIT "E" TENANT IMPROVEMENT PLAN [PRELIMINARY FLOOR PLAN] 42 EXHIBIT F [PREMISE MAP DIAGRAM] 43 ADDENDUM TO LEASE THIS IS AN ADDENDUM TO THAT CERTAIN LEASE ("LEASE") DATED APRIL 30, 1993, BY AND BETWEEN SORRENTO VALLEY BUSINESS PARK, A CALIFORNIA LIMITED PARTNERSHIP ("LANDLORD"), AND SIGNAL PHARMACEUTICALS, INC., A CALIFORNIA CORPORATION ("TENANT"), WITH RESPECT TO THOSE CERTAIN PREMISES LOCATED AT 5555 OBERLIN DRIVE, SUITE 100, IN THE CITY OF SAN DIEGO, COUNTY OF SAN DIEGO, STATE OF CALIFORNIA. The terms of this Addendum are hereby incorporated into and made a part of the Lease, and shall supersede any inconsistent provisions of the Lease. Capitalized terms not otherwise defined herein shall have the meanings attributed thereto in the Lease. 1. Option to Extend. Landlord hereby grants to Tenant the option to renew this lease for two (2) additional consecutive terms of three (3) years each. The base monthly rent payable for each year of each option term exercised shall be adjusted annually, commencing with the commencement of the first extended term, by multiplying the base monthly rent payable for the last month prior to such adjustment, by 1.05. All other terms and conditions of the original Lease shall be the same, except that Tenant will not be provided any tenant improvement dollars or free rent for extending the term of their Lease. This extension is only valid provided that the Tenant is not in default under the Lease at the time the option is exercised, and at any such time from Tenant's exercise of the option to the commencement date of the option term. This option must be exercised by written notice to Landlord, accompanied by a payment of first month's rental for the extended term, no earlier than one hundred eighty (180) days, and no later than one hundred twenty (120) days prior to the expiration of the applicable term of the Lease. The option granted in this paragraph shall be terminated and of no further force and effect if at any time provided herein for the exercise of the option by Tenant, any federal, state or local law or regulation invalidates or modifies any provision of the option. Tenant shall have no right to extend the term of the lease beyond the additional terms set forth above. 2. Right of First Refusal. Landlord hereby grants to Tenant a right of first refusal, on the terms and conditions herein set forth, on the office area in the Building adjacent to the Premises comprising approximately 4,585 rentable square feet, and identified on Exhibit F hereto as the "First Refusal Area". If, during the term of this Lease, Landlord reasonably expects that any portion of the First Refusal Area shall become available for lease (as hereinafter defined) , Landlord shall offer to lease such area to Tenant at the then prevailing rental rate and terms and conditions then offered by Landlord for new leases of comparable space within the Building, as follows: Landlord shall give Tenant written notice describing the additional area available for lease ("Additional Area" hereafter), and stating the terms and conditions (including anticipated availability date) upon which the Additional Area is offered for lease to Tenant. Within five (5) business days after such notice is given, Tenant may accept such offer by written notice to Landlord accompanied by payment of one month's rental. Office area subject to this paragraph shall be deemed to become available upon expiration or other termination of a lease to another tenant covering the First Refusal Area or any part of it, taking into account any renewals or extensions of such lease or new lease of such office area to such existing tenant, and vacation of such office area by such tenant. Notwithstanding any provisions of this paragraph, it is understood and agreed that the right of refusal to lease all or any part of First Refusal Area set forth in this paragraph shall at Landlord's option terminate and be of no further force or effect if: A. Landlord gives Tenant a written notice of the availability of all or any part of the First Refusal Area, and Tenant does not notify Landlord, in writing, of Tenant's acceptance of such area when and as hereinabove provided, time being of the essence. B. At any time that any portion of the First Refusal Area becomes or is available until an "Amendment to Lease" is executed, Tenant is in default in the performance of any of 44 the covenants, conditions or agreements to be performed under this Lease; C. At any time provided herein for exercise of the right of refusal by Tenant, any federal, state, or local law or regulation invalidates or modifies any provision of the foregoing right of first refusal. It is understood and agreed that if Tenant fails to exercise its right of refusal as to any area which becomes available to lease pursuant to this paragraph, the right of refusal shall terminate completely as to the entire First Refusal Area and this paragraph shall be of no further force or effect. It is further understood and agreed that if part, but not all, of the First Refusal Area becomes available to lease under this paragraph, and Tenant exercises its right to lease such area as herein provided, the right of refusal granted herein shall remain in effect as to the remainder of the First Refusal Area until such area becomes available to lease as provided herein. D. The original term of the Lease expires or is terminated. 3. Additional Security. As additional security for the performance of Tenant's obligations under this Lease, in addition to the cash security deposit provided by Tenant pursuant to Paragraph 29 of the Lease, Tenant shall upon execution of this Lease deposit with Landlord an irrevocable standby letter of credit ("Letter of Credit") in the face amount of One Hundred Fifty Thousand Dollars ($150,000) issued by a financial institution reasonably acceptable to Landlord in form acceptable to Landlord, which shall permit Landlord to draw any amount necessary to compensate Landlord for a breach of Tenant on the sole condition that Landlord deliver to such institution a signed statement by Landlord certifying that Tenant has breached an obligation under this Lease. The term of the Letter of Credit shall be renewed annually, and, subject to the remaining provisions of this paragraph, Tenant shall deliver to Landlord at least 30 business days before such Letter of Credit is scheduled to expire a renewal or replacement thereof in terms and amount identical to the initial Letter of Credit. Landlord shall be entitled to draw the entire amount of the Letter of Credit if Tenant should fail to renew or replace the Letter of Credit prior to its expiration. If Tenant shall have faithfully observed and performed all of the terms and conditions of this Lease, then, at the end of the twenty-fourth (24th) month of the Lease term, Tenant shall be entitled to replace the existing Letter of Credit with a Letter of Credit in the face amount of one Hundred Thousand Dollars ($100,000) and otherwise upon the same terms of the initial Letter of Credit. Thereafter, and subject to the same condition that Tenant shall have faithfully observed and performed under the Lease, Tenant may, at the end of the thirty-sixth (36th) month of the Lease term, substitute a Letter of Credit in the amount of Fifty Thousand Dollars ($50,000), and, ten (10) business days after the end of the forty-eighth (48th) month of the Lease term, subject to the same condition that Tenant shall have faithfully observed and performed under the Lease, Tenant may permit the Letter of Credit to expire without replacement. 4. Annual Cap on Controllable Outside Area Expenses. The amount payable by Tenant under this Lease as Tenant's Project Percentage of controllable Outside Area Expenses shall not increase by more than five percent (5%) per annum during the Lease term. 5. Subordination, Non-Disturbance, Attornment Agreement. Landlord shall use its commercially reasonable efforts to obtain and provide to Tenant prior to occupancy of the Premises a Subordination, Non-Disturbance and Attornment Agreement from Landlord's lender. [SIG] [SIG] - ------------------------------ ------------------------------- LANDLORD'S INITIALS TENANT'S INITIALS 45 Letter Agreement July 2, 1993 Mr. Robert Courson 2882 Sand Hill Road Suite 250 Menlo Park, CA 94025 Dear Bob: As we have agreed, Signal will sign the lease that we have negotiated over the past several weeks (a copy of which is attached as Exhibit A). As Dr. Johnson has discussed with you, we have not yet closed on the total amount of the A2 round. Accordingly, our financial position is temporarily impaired. Signal will post its Letter of Credit upon closing the remainder of the A2 round; however, this will not occur for 60 days. Based on your conversation with Dr. Johnson, the following interim plan will serve as a basis for our ongoing relationship: 1. Signal Pharmaceuticals, Inc. will sign the Lease by and between Sorrento Valley Business Park and Signal Pharmaceuticals for the 10,417 sq. ft. premises at 5555 Oberlin Drive, San Diego, CA 92121 (a copy of which is attached as Exhibit A) (the "Lease"). It is expressly understood and acknowledged by both parties, however, that the terms of the Lease are subordinate to the further terms set forth in this Letter Agreement. 2. Signal will assume all financial responsibility for the planning and permitting process which will start immediately upon your signing the contract with McGraw Baldwin Architectural Firm. 46 Mr. Robert Courson Page 2. July 2, 1993 3. During this 60 day period which will commence July 5, 1993, Signal will be moving ahead with planning and permitting (at our expense) but will not start any actual tenant improvements. 4. At the posting of the $150,000.00 Letter of Credit (the "Letter of Credit"), the tenant improvements can begin. TI payments will be made as detailed in the Lease with The Courson Company and Signal paying on a formula based on $500,000.00 of TI money from Courson Co. and the remainder (approximately $189,000.00) from Signal Pharmaceuticals. 5. Signal Pharmaceuticals expects to begin paying rent on December 1, 1993 as outlined in the Lease. 6. With respect to obligations incurred as a result of the signing of the Lease, the total liability incurred by Signal Pharmaceuticals or those associated with Signal over this interim 60 day period is the Security Deposit of $16,146.35. This Security Deposit is enclosed. In the event that Signal is for any reason unable to post the Letter of Credit within such interim 60 day period, the parties will negotiate in good faith with respect to whether they should continue their relationship under the Lease. In the event that the parties are unable to reach agreement with respect thereto, the Lease and this Letter Agreement will terminate and neither party shall have any further liability or obligation with respect to the Lease or this Letter Agreement. Thank you for your cooperation. Sincerely, SIGNAL PHARMACEUTICALS, INC. /s/ LUKE EVNIN ------------------------------ Luke Evnin, President and Chief Executive Officer ACKNOWLEDGED AND AGREED: /s/ ROBERT COURSON - ------------------------------ Mr. Robert Courson Sorrento Valley Business Park 47 [HOFFMAN, FINNEY & KLINEDINST LETTERHEAD] July 7, 1993 VIA FEDERAL EXPRESS Jacqueline Johnson, Ph.D. Signal Pharmaceuticals, Inc. 11545 Sorrento Valley Road, Suite 315 San Diego, CA 92121 RE: Lease of Premises at 5555 Oberlin Drive, San Diego, California 92121 Dear Dr. Johnson: As we discussed this morning, enclosed please find four counterparts of the Lease and Letter Agreement between Sorrento Valley Business Park and Signal Pharmaceuticals, Inc. and one original of the Architect's Agreement dated June 21, 1993, all of which have been signed by Sorrento Valley Business Park. As a follow-up to your discussions with Bob Courson, these documents are executed and being delivered to you by the Landlord subject to the following understanding: 1. Signal Pharmaceuticals is presently unable to post the required letter of credit. You have advised the Landlord that you are now in the process of finalizing a license agreement which will trigger the release of financing that will enable you to post the $150,000.00 letter of credit as required under Paragraph 3 of the Addendum. You mentioned to me this morning that you expect this process to take less than the 60 day period ("Contingency Period") indicated in the Letter Agreement. 2. References to "The Courson Company" are hereby deemed replaced with "Sorrento Valley Business Park" in each place they occur in the Letter Agreement. 3. Notwithstanding anything to the contrary in the Lease or Letter Agreement, if for any reason Signal Pharmaceuticals fails to deliver to Landlord the letter 48 Jacqueline Johnson, Ph.D. July 7, 1993 Page 2 of credit on or before September 5, 1993 then Landlord may retain the Security Deposit, Signal will provide Landlord with all plans, specifications and permits developed and obtained or in process, and, at Landlord's option, Landlord may terminate the Lease with no liability whatsoever to Signal, including, without limitation, any liability or obligation respecting any amounts incurred by Signal in connection with the Premises, for its tenant improvement costs, or otherwise. 4. Notwithstanding anything to the contrary in Paragraph 4 of the Letter Agreement, Signal Pharmaceuticals shall be responsible for all costs associated with the improvement work in excess of the Allowance. 5. Notwithstanding Paragraph 5 of the Letter Agreement, rent shall be paid starting with the earlier of December 1, 1993, or the date Tenant begins to use the Premises for the conduct of its business, as provided in the Lease. 6. Paragraph 6 of the Letter Agreement is hereby deemed deleted. 7. Notwithstanding execution of the Architect Agreement (Proposal for Professional Services dated June 21, 1993, Project 93482) by Landlord, if the Lease is terminated by Landlord pursuant to this letter, the Architect Agreement shall thereupon be void and of no further force and affect. All costs and expenses incurred in connection therewith during the Contingency Period shall be Signal's sole responsibility, and the Architect shall look solely to Signal for payment thereof. Signal shall obtain the Architect's confirmation of this provision, to be signified by the Architect's execution of this letter in the space provided below. Please countersign four counterparts of the enclosed photocopy of this letter, obtain the Architect's signature below, 49 Jacqueline Johnson, Ph.D. July 7, 1993 Page 3 and return two original execution counterparts of the Lease, and the July 2 and this letter agreement to my attention at your earliest convenience. Please call me if you have any questions. Very truly yours, /s/ CHARLES P. SANDEL ---------------------- Charles P. Sandel CPS/nlh Enclosure AGREED: Signal Pharmaceuticals, Inc. By: [SIG] ------------------------------- Its: Vice President Operations ------------------------------- AGREED as to Paragraph 76 above: McGraw/Baldwin Architects By: [SIG] ------------------------------- Its: Principal ------------------------------- 50 [HOFFMAN, FINNEY & KLINEDINST LETTERHEAD] July 19, 1993 Jacqueline Johnson, Ph.D. Signal Pharmaceuticals, Inc. 11545 Sorrento Valley Road, Suite 315 San Diego, CA 92121 RE: LEASE OF PREMISES AT 5555 OBERLIN DRIVE Dear Dr. Johnson: I have not yet received countersigned copies of the Lease, and the July 2, and July 7 letter agreements regarding the captioned Premises. Please telephone me at your earliest convenience. Very truly yours, /s/ CHARLES P. SANDEL -------------------------- Charles P. Sandel CPS/psl 51 [HOFFMAN, FINNEY & KLINEDINST LETTERHEAD] July 7, 1993 VIA FEDERAL EXPRESS Jacqueline Johnson, Ph.D. Signal Pharmaceuticals, Inc. 11545 Sorrento Valley Road, Suite 315 San Diego, CA 92121 RE: LEASE OF PREMISES AT 5555 OBERLIN DRIVE, SAN DIEGO, CALIFORNIA 92121 Dear Dr. Johnson: As we discussed this morning, enclosed please find four counterparts of the Lease and Letter Agreement between Sorrento Valley Business Park and Signal Pharmaceuticals, Inc. and one original of the Architect's Agreement dated June 21, 1993, all of which have been signed by Sorrento Valley Business Park. As a follow-up to your discussions with Bob Courson, these documents are executed and being delivered to you by the Landlord subject to the following understanding: 1. Signal Pharmaceuticals is presently unable to post the required letter of credit. You have advised the Landlord that you are now in the process of finalizing a license agreement which will trigger the release of financing that will enable you to post the $150,000.00 letter of credit as required under Paragraph 3 of the Addendum. You mentioned to me this morning that you expect this process to take less than the 60 day period ("Contingency Period") indicated in the Letter Agreement. 2. References to "The Courson Company" are hereby deemed replaced with "Sorrento Valley Business Park" in each place they occur in the Letter Agreement. 3. Notwithstanding anything to the contrary in the Lease or Letter Agreement, if for any reason Signal Pharmaceuticals fails to deliver to Landlord the letter 52 Jacqueline Johnson, Ph.D. July 7, 1993 Page 2 of credit on or before August 15, 1993, then Landlord may retain the Security Deposit, Signal will provide Landlord with all plans, specifications and permits developed and obtained or in process, and, at Landlord's option, Landlord may terminate the Lease with no liability whatsoever to Signal, including, without limitation, any liability or obligation respecting any amounts incurred by Signal in connection with the Premises, for its tenant improvement costs, or otherwise. 4. Notwithstanding anything to the contrary in Paragraph 4 of the Letter Agreement, Signal Pharmaceuticals shall be responsible for all costs associated with the improvement work in excess of the Allowance. 5. Notwithstanding Paragraph 5 of the Letter Agreement, rent shall be paid starting with the earlier of December 1, 1993, or the date Tenant begins to use the Premises for the conduct of its business, as provided in the Lease. 6. Paragraph 6 of the Letter Agreement is hereby deemed deleted. 7. Notwithstanding execution of the Architect Agreement (Proposal for Professional Services dated June 21, 1993, Project 93482) by Landlord, if the Lease is terminated by Landlord pursuant to this letter, the Architect Agreement shall thereupon be void and of no further force and effect. All costs and expenses incurred in connection therewith during the Contingency Period shall be Signal's sole responsibility, and the Architect shall look solely to Signal for payment thereof. Signal shall obtain the Architect's confirmation of this provision, to be signified by the Architect's execution of this letter in the space provided below. Please countersign four counterparts of the enclosed photocopy of this letter, obtain the Architect's signature below, 53 Jacqueline Johnson, Ph.D. July 7, 1993 Page 3 and return two original execution counterparts of the Lease, and the July 2 and this letter agreement to my attention at your earliest convenience. Please call me if you have any questions. Very truly yours, /s/ CHARLES P. SANDEL -------------------------- Charles P. Sandel CPS/nlh Enclosure AGREED: Signal Pharmaceuticals, Inc. By: /s/ [SIG] -------------------------------- Its: V.P. Operations ------------------------------- AGREED as to Paragraph 7 above: McGraw/Baldwin Architects By: [SIG] -------------------------------- Its: Principal ------------------------------- 54 SIGNAL PHARMACEUTICALS INC. 11545 Sorrento Valley Rd. Ste. 315 San Diego, CA 92121 Charles P. Sandel Hoffman, Finney & Klinedinst Attorneys at Law 351 California St. San Francisco, CA 94104 55 FIRST AMENDMENT TO LEASE This First Amendment to Lease ("Amendment") dated as of November 4, 1994 is entered into by and between Sorrento Valley Business Park, a California limited partnership ("Landlord") , and Signal Pharmaceuticals, Inc., a California corporation ("Tenant"), and is made with reference to the following facts: Recitals A. Landlord and Tenant previously entered into a Lease dated April 30, 1993 ("Lease") pursuant to which Tenant has leased from Landlord certain premises consisting of approximately 10,417 rentable square feet and sometimes referred to as Suite 100 ("Existing Premises"), located in a building at 5555 Oberlin Drive, San Diego, California 92121 ("Building"). Unless otherwise indicated, capitalized terms herein shall have the same meanings as in the Lease. B. Tenant desires to lease additional space in the Building consisting of approximately 4,341 rentable square feet, as updated (down from 4,585 rentable sq. ft.) and sometimes referred to as Suite 114 ("New Premises"), pursuant to the right of first refusal set forth in paragraph 2 of the Addendum to Lease also dated April 30, 1993 ("Addendum"). Unless otherwise expressly indicated in this Amendment, any reference herein to the Lease shall be deemed to refer to both the Lease and the Addendum. C. Landlord and Tenant desire to amend the Lease to provide for the New Premises, an extension of the Lease term and certain other matters, all as set forth below. NOW, THEREFORE, the parties hereby agree as follows: 1. New Premises and Its Term. Landlord hereby leases to Tenant and Tenant hereby leases from Landlord the New Premises, the location of which is indicated on the diagram of the Building attached hereto as Exhibit 1. The term of such lease of the New Premises shall be for a period of six (6) years ("6-Year Term"), commencing on the earlier to occur of (i) substantial completion of the "Tenant Improvements" (described in paragraph 7 below) or (ii) February 1, 1995 (which earlier date is hereinafter referred to as the "Extension Commencement Date"). When the actual Extension Commencement Date is determined, the parties shall execute a memorandum setting forth such date which shall be attached to this Amendment at that time. 2. Extension of Term for Existing Premises. The expiration date of the term for Tenant's lease of the Existing Premises shall be extended to coincide with the expiration date of the term for the New Premises. Accordingly, the term of the lease of the Existing Premises shall likewise expire at the end of the 6-Year Term. 3. Base Monthly Rent. Beginning on and as of the Extension Commencement Date and continuing thereafter throughout the 6-Year Term, the Tenant shall pay to Landlord as minimum Monthly Rent for the entire Premises (consisting of both the Existing Premises and New Premises) for each calendar month, the amount of $25,158.15 ($1.70 per square foot) per month, subject to adjustment as provided below, in advance, on the first day of each calendar month during the 6-Year Term. Such Monthly Rent for the entire Premises is calculated and allocated as follows: (1) $16,953.66 Monthly Rent for the Existing Premises (10,417 rentable sq. ft. @ $1.63); and (2) $8,204.49 Monthly Rent for the New Premises (4,341 rentable sq. ft. @ $1.89). Monthly Rent for any partial month shall be prorated and paid in advance on the Extension Commencement Date. 4. Rental Adjustments for Existing Premises. The base Monthly Rent for the Existing Premises shall continue to be adjusted during the 6-Year Term in the same manner as provided in Paragraph 19 of the Lease. Accordingly, as of the beginning of the second lease year measured from the Extension Commencement Date, the base Monthly Rent for the Existing Premises shall be adjusted annually by multiplying the base Monthly Rent (for the Existing Premises) in effect immediately prior to such adjustment by 1.05. For example, the base Monthly Rent for the Existing Premises for the second lease year of the 6-Year Term shall be $17,801.34 ($16,953.66 x 1.05) per month. - 1 - 56 5. CPI Adjustment for New Premises. The base Monthly Rent for the New Premises shall be adjusted upwards (but not downwards) at the beginning of each lease year during the 6-Year Term commencing with the second lease year of the 6-Year Term (hereinafter called the "Adjustment Date"), based upon and in direct proportion to any increase in the Consumer Price Index (1988 Revised CPI for Urban Wage Earners and Clerical Workers - Los Angeles - Anaheim - Riverside All Items - 1982-84 = 100) established by the United States Department of Labor, Bureau of Labor Statistics, or any similar successor index established by any other agency of the United States Government, measured by the difference between the Index for the month in which the 6-Year Term begins and the Index for the month of the Adjustment Date. The calculation of such increase in Monthly Rent shall be made by multiplying the initial base Monthly Rent for the New Premises ($8,204.49) by a fraction whose denominator is the Index for the month in which the 6-Year Term begins and whose numerator is the Index for the month of the Adjustment Date. Following the publication of such Index for the month of the Adjustment Date, Landlord shall calculate and notify Tenant of the amount of the base Monthly Rent payable per month for the New Premises, as so adjusted (hereinafter called the "Adjusted Rent") during said lease year. Pending receipt by Tenant of such calculation and notice from Landlord, Tenant shall continue to pay, in advance, the same base Monthly Rent per month as paid during the prior lease year for the New Premises. Upon receipt of such calculation and notice, Tenant shall commence to pay the Adjusted Rent per month, and shall also pay such additional amount as may be necessary to increase the base Monthly Rent payments already made during said period to the amount of the Adjusted Rent, so that said increase shall be effective retroactively from the Adjustment Date. Provided, however, in no event shall the percentage increase as determined herein be less than 4% nor more than 6% from one lease year to the next. 6. Additional Rent. Any base Monthly Rents specified above are exclusive of all further or additional rents for the 6-Year Term, which rents the Tenant shall also be obligated to pay in accordance with the Lease and this Amendment. Provided further, for the 6-Year Term, the percentages chargeable to Tenant for "Additional Rent" (as referred to in the Lease) shall be as follows: Tenant's Building Percentage - 64.54% Tenant's Project Percentage - 14.12% For the 6-Year Term, the amount payable by Tenant as Tenant's Project Percentage (14.12%) of controllable Outside Area Expenses shall not increase by more than 5% per annum during the 6-Year Term. 7. Tenant Improvements for New Premises. The Landlord shall contribute to the cost of the proposed tenant improvements in the New Premises as further described on Exhibit 2 hereto ("Tenant Improvements") an allowance in the aggregate sum of up to $284,034.89. Any and all costs associated with the Tenant Improvements in excess of such contribution by Landlord shall be paid by Tenant. Tenant shall promptly cause to be prepared plans and specifications for such Tenant Improvements in accordance with the Work Letter Agreement attached hereto as Exhibit 3 and incorporated by reference herein. 8. Letter of Credit. The $150,000 Letter of Credit referred to in paragraph 3 of the Addendum shall remain on deposit with Landlord and shall continue to be renewed annually by Tenant (at least 30 business days before any expiration thereof) in the full face amount of $150,000 without any reduction, except as otherwise provided immediately below. If Tenant shall have faithfully observed and performed all of the terms and conditions of the Lease (including this Amendment), then, at the end of the fifty-second (52nd) month of the 6-Year Term, the Tenant shall be entitled to replace the existing Letter of Credit with a Letter of Credit in the face amount of $100,000 and otherwise upon the same terms as the initial Letter of Credit. Thereafter, and subject to the same condition that Tenant shall have faithfully observed and performed under the Lease (including this Amendment), Tenant may, at the end of the sixty-second (62nd) month of the 6-Year Term, substitute a Letter of Credit in the amount of $50,000 and otherwise upon the same terms as the initial Letter of Credit. Additionally, when the existing Letter of Credit is next renewed, the incorrect reference therein to "Lease Agreement dated July 19, 1993", shall be corrected to read "Lease dated April 30, 1993". Except as otherwise - 2 - 57 provided in this paragraph 8, all provisions of paragraph 3 of the Addendum shall continue to apply to the Letter of Credit, which may be drawn upon by Landlord as provided in such paragraph of the Addendum. None of the provisions of the Addendum have been modified or otherwise affected by this Amendment except as specifically provided herein. 9. Right of First Offer On Additional Space (Suites 116 and 120). Reference is made to certain additional space in the Building consisting of approximately 8,341 rentable square feet sometimes referred to as Suite 116 (2,560 rentable sq. ft.) and Suite 120 (5,781 rentable sq. ft.) as further indicated on the diagram attached as Exhibit 1 ("Additional Premises") . The Additional Premises is leased by Landlord to Mizuho USA, Inc. ("Mizuho") who is now in possession thereof. If prior to any termination or expiration of the Lease the Landlord receives notice from Mizuho or otherwise itself reasonably determines that Mizuho intends by a date certain to vacate the Additional Premises, the Landlord shall promptly give written notice to Tenant specifying the basic terms and conditions ("Landlord's Offer") under which Landlord would then be willing to lease the Additional Premises to Tenant. Tenant may accept or reject Landlord's Offer by giving written notice to Landlord at any time prior to the expiration of thirty (30) days ("30-Day Period") immediately following the date on which Landlord gives its written notice specifying the Landlord's Offer. If Tenant does not so accept Landlord's Offer within the 30-Day Period and/or if Tenant does not give any written notice to Landlord prior to the expiration of the 30-Day Period, the Landlord's Offer shall be deemed withdrawn, rejected and revoked. In such event, Landlord shall not have any further obligation to Tenant of any kind relating to or concerning the Additional Premises and Landlord may then or thereafter market or otherwise use the Additional Premises in any manner as Landlord may desire in its sole and absolute discretion. 10. Prior Exercise of Right of First Refusal for New Premises. Tenant acknowledges that it has exercised its right of first refusal to lease the space in the Building which is the New Premises. Accordingly, paragraph 2 of the Addendum is hereby cancelled and shall be of no further force or effect. 11. Change of Landlord's Address. For the purpose of giving any notice or demand to Landlord under the Lease (including this Amendment), the Landlord's address is hereby changed to and designated as: Sorrento Valley Business Park, c/o Pardee Brothers, 8530 Wilshire Boulevard, Suite 509, Beverly Hills, California 90211, Attn: Hoyt S. Pardee. 12. Full Force and Effect. The Lease, as modified herein, shall be and remain in full force and effect. All of the terms and provisions set forth in the Lease shall apply to the New Premises except as otherwise indicated in this Amendment. Without limiting the generality of the foregoing and except as otherwise indicated herein, the term "Premises" as used in the Lease shall be deemed to include both the Existing Premises and the New Premises. 13. Counterparts. This Amendment may be executed in counterparts each of which shall be deemed an original and all of which shall constitute one and the same agreement. IN WITNESS WHEREOF, the parties have executed this Amendment as of the date set forth above. "Tenant": "Landlord": SIGNAL PHARMACEUTICALS, INC., SORRENTO VALLEY BUSINESS PARK, a California corporation a California limited partnership By HSP Sorrento, Inc. a Cal. corp. By /s/ BRADLEY B. GORDON General Partner -------------------------- Title V.P. Finance, CFO By [SIG] ----------------------- ------------------------------------ Title President ---------------------------------- - 3 - 58 [PREMISE MAP DIAGRAM] EXHIBIT 1 59 TENANT IMPROVEMENTS FOR NEW PREMISES (Suite 114) Tenant Improvements per plans and specifications dated 10/13/94 prepared and submitted by David Begent & Co. (DBC) Tenant Improvements to be provided are outlined as follows: Architecture & Engineering (DBC) $ 25,000 * Fees & Permits 15,000 * Base Construction Contract (DBC) 306,982 Lyline (millwork) 63,379 Protection One (fire-life safety) 3,990 ------- TOTAL TENANT IMPROVEMENTS $414,351
* current estimates EXHIBIT 2 60 WORK LETTER AGREEMENT 1. Tenant's Work. Tenant at its cost (subject to Landlord's contribution provided in Paragraph 3 below) shall perform tenant improvement work for the New Premises in accordance with plans and specifications approved by Landlord and Tenant. Tenant's work shall include, without limitation, all design and space planning work, all interior partitions, interior doors, corridor entrance doors, cabinets, lock sets and latch sets, electrical outlets, telephone outlets, light fixtures, heating ventilation and air conditioning distribution ducting and heat pumps, plumbing, any fire protection system other than Landlord's existing sprinkler system, any modifications to Landlord's sprinkler system, floor coverings, perimeter and interior wall surfaces, and Building Standard window coverings. 2. Standards for Tenant's Work. Tenant's work shall be completed pursuant to the following provisions: (a) Tenant shall prepare and submit to Landlord two (2) sets of final plans and specifications showing the architectural design of the New Premises, including the basic mechanical system and electrical system within the New Premises, plumbing, partitions and doors, complete fixturing information, and material selections and finishes. Within five (5) working days after receipt of such final plans and specifications, Landlord shall approve or suggest modifications to such final plans and specifications. Landlord shall not unreasonably refuse or delay approval of Tenant's final plans and specifications. Tenant may object to any of the suggested modifications by notice to Landlord within five (5) working days after receipt of such suggested modifications, and unless Tenant so objects such suggested modifications shall be deemed approved by Tenant. Tenant shall also submit all proposed change orders in writing (with sufficient detail to enable Landlord to understand the nature of the proposed change) to Landlord for Landlord's prior written approval, which shall not be unreasonably refused or delayed. Landlord's consent shall not be required for any change order for work costing less than Five Thousand Dollars ($5,000), provided that there are no more than five (5) such change orders in any thirty (30) day period. Any proposed change order shall be deemed approved by Landlord unless Landlord disapproves same within three (3) business days after the proposed change order is received by Landlord, provided that Tenant's notice requesting approval of such change order clearly notifies Landlord that the proposed change order shall be deemed approved if not disapproved within such three (3) business day period. The individuals to whom Tenant shall submit plans and specifications for approval shall be Elizabeth A. Gallagher, with a copy to Hoyt S. Pardee, and the individual to whom Landlord shall communicate regarding plans and specifications shall be either Jackie Johnson or Bruce Birch. While Landlord has the right to approve the plans and specifications, Landlord's sole interest in doing so is to protect the Building and Landlord's interests. Accordingly, Tenant shall not rely on Landlord's approvals and Landlord shall not be the guarantor of, nor in any way responsible for, the accuracy or correctness of any such plans and specifications, or the accuracy or correctness of any such plans and specifications, or the compliance thereof with applicable laws, and Landlord shall incur no liability of any kind by reason of granting any such approvals. (b) Tenant shall complete all work in accordance with the final plans and specifications approved by Landlord. Tenant shall make no alterations, additions, or reinforcements to the structure of the Building except as specifically approved by the Landlord in such final plans and specifications. Tenant, at its expense, shall procure all building and other permits required for completion of Tenant's work. Tenant agrees that all work done by Tenant and its contractors and subcontractors shall be performed in full compliance with all laws, rules, orders, permits, ordinances, directions, regulations and requirements of all governmental agencies, offices and departments having jurisdiction, including without limitation applicable provisions pertaining to use of hazardous or toxic materials during construction, and in full compliance with rules, orders, directions, EXHIBIT 3 61 regulations and requirements of any insurance underwriting board, inspection bureau or insurance carrier insuring the New Premises or Building. (c) Tenant shall immediately submit to Landlord the names and addresses of the general, mechanical, and electrical contractors which Tenant intends to engage for construction of Tenant's improvements, the commencement date of construction, and the estimated date of completion of construction. Landlord shall have the right to enter the New Premises at any time to post any notice of nonresponsibility or other notice on the New Premises during Tenant's construction. All contractors and subcontractors retained by Tenant shall be subject to the approval of Landlord, which shall not be unreasonably refused or delayed. Landlord hereby consents that Tenant may employ David Begent & Co. as general contractor. All contractors retained by Tenant shall be bondable, licensed contractors, possessing good labor relations and capable of performing quality workmanship and working in harmony with Landlord's general contractor and other contractors. (d) During the course of construction, Tenant shall maintain builder's risk insurance in form and content satisfactory to Landlord. Tenant's insurance shall name Landlord as an additional insured and shall provide that it may not be canceled or amended without twenty (20) days prior written notice to Landlord. Prior to commencement of construction, Tenant shall provide Landlord with a certificate of such insurance and evidence of any required bonds in form satisfactory to Landlord. (e) Tenant's work shall be completed with reasonable diligence and in such a manner as not to interfere with the use or enjoyment of other portions of the Building or common areas by Landlord or other tenants. Tenant's contractors shall provide and pay for all temporary power, water, and other utility facilities as required in connection with the construction of Tenant's improvements. Tenant's contractors shall provide their own dumpster for collection and disposition of construction debris, which shall be located at a location approved by Landlord, and all construction debris from Tenant's construction shall be disposed of in Tenant's contractor's dumpster and not in trash facilities for the Project. Tenant's contractor's construction material, tools, equipment, and debris shall be stored only within the New Premises, or in areas designated for that purpose by Landlord. Work space exterior to the New Premises shall be available only in the discretion of Landlord. Tenant's work shall be subject to the inspection of Landlord and Landlord's architect and general contractor during the course of construction. (f) Tenant shall indemnify and hold harmless Landlord for any and all claims arising from Tenant's work as provided in Paragraph 12.A and Paragraph 18 of the Lease. Tenant's construction contracts shall include a similar indemnification from its contractors for the benefit of Landlord. Tenant shall pay for all damage to the Building, the Project, or appurtenant areas or equipment, as well as all damage to tenants or occupants thereof or their property caused by Tenant, its agents, employees, contractors, licensees, or invitees. Tenant acknowledges that Tenant's obligation set forth in Paragraph 18 of the Lease to keep the Building and Premises (including the New Premises) free of all liens shall include, but not be limited to, an obligation at Tenant's expense to obtain and record a release bond as provided in Section 3143 of the California Civil Code or other provision of law, as requested by Landlord. (g) Tenant shall be solely responsible for the adequacy in all respects of the final plans and specifications, including without limitation compliance with all governmental requirements, compatibility with the Building shell, and any special requirements of Tenant's proposed improvements, equipment or machines with respect to ambient temperatures, electrical use or current, water availability or otherwise. Tenant acknowledges that in connection with obtaining Landlord's approval of the final plans and specifications, Tenant may provide Landlord with certain information regarding its specific needs relating to the New Premises in developing plans and specifications for its improvements and that Tenant may Provide some of its own equipment for installation in the New Premises. Tenant further acknowledges that Landlord will make no independent review of any such information and that Landlord does not warrant, either expressly or impliedly, the adequacy of the plans and specifications for the said - 2 - 62 improvements, or the adequacy of Tenant's improvements or Tenant's equipment for Tenant's intended purpose. (h) All improvements made pursuant hereto shall during the term of this Lease, as it may be extended, constitute the property of Tenant. Upon expiration or termination of this Lease, however, unless Landlord shall require the removal or consent in writing to the removal thereof by Tenant, all such improvements shall remain in place and the ownership thereof shall revert to Landlord. (i) Tenant shall provide Landlord with a complete copy of "as built" construction drawings at the completion of the tenant improvement work. 3. Landlord's Contribution. Landlord shall contribute to the cost of Tenant's work for the New Premises an improvement allowance ("Allowance") in an amount equal to $284,034.89. Any and all costs associated with Tenant's work in excess of such Allowance shall be paid by Tenant. The Allowance shall be paid directly to Tenant as reimbursement to it for such costs actually paid by Tenant, as further specified below. Payments by Landlord shall be made not more often than monthly and shall be made on the basis of billings for work completed which are approved and paid by Tenant and submitted to Landlord together with evidence reasonably satisfactory to Landlord of completion of the work for which the billing is submitted and Tenant's prior payment thereof. For each such billing Landlord shall pay to Tenant as reimbursement to it an amount equal to sixty-nine and one-tenth percent (69.1%) of the full amount of such billing previously paid by Tenant (but in no event more than the aggregate sum of $284,034.89 as and for the Allowance), each payment to be made within twenty (20) days after presentation to Landlord of the following: (a) A certificate of Tenant's general contractor showing the portion of Tenant's work which has theretofore been completed pursuant to the approved plans and specifications or other evidence satisfactory to Landlord specifying the portion of the improvements theretofore completed pursuant to the approved plans and specifications. (b) Evidence of prior payment by Tenant of the full amount of such billing. (c) Partial waivers to date of all mechanic's and materialmen's liens of any kind (which may be conditional upon payment as to the work currently invoiced but shall be unconditional as to all previously invoiced work) in form and substance satisfactory to Landlord. (d) Any other documentation reasonably required by Landlord. Landlord shall withhold ten percent of the Allowance until completion of all of Tenant's work and the lien-free expiration of the time for the filing of any mechanics' liens claimed or which might be filed on account of any work ordered by Tenant or its contractors or subcontractors. The cost of any change orders shall be paid by Tenant without any reimbursement to the extent the cost thereof is not included within the Allowance. Tenant shall be liable for that portion of all taxes levied against its improvements. 4. Adjustment of Extension Commencement Date. The Extension Commencement Date shall be delayed by one (1) business day for each business day of actual delay in the design or construction of the tenant improvement work for the New Premises that is caused by any Force Majeure Delay. "Force Majeure Delay" shall mean any actual delay which is attributable to any: (i) actual, industry-wide strike, lockout or other labor or industrial disturbance, civil disturbance, act of the public enemy, war, riot, sabotage, blockade, or embargo; (ii) earthquake, fire, hurricane, tornado, flood, explosion, or other casualty beyond the control of the party for whom performance is required or of its contractors or other representatives. No Force Majeure Delay shall be deemed to have occurred unless and until the party claiming such Force Majeure Delay has provided written notice to the other party specifying the action or inaction that such notifying party contends constitutes a Force Majeure Delay. If such action or inaction is not cured within two (2) business days after receipt of such notice, then a Force Majeure Delay, as set forth in such notice, shall be deemed to have - 3 - 63 occurred commencing as of the date after such notice was received and continuing for the number of days the substantial completion of the tenant improvement work for the New Premises was in fact delayed as a direct result of such action or inaction. 5. No Fee to Landlord. Except as otherwise provided herein, Landlord shall receive no fee for supervision, profit, overhead or general conditions in connection with the tenant improvement work. 6. No Miscellaneous Charges. Neither Tenant nor its contractor shall be charged by Landlord for parking (to the extent parking is available) or for the use of electricity, water or HVAC during construction of the tenant improvements for the New Premises. - 4 - 64 SECOND AMENDMENT TO LEASE This Second Amendment to Lease ("Amendment") dated as of May 31, 1996 is entered into by and between Sorrento Valley Business Park, a California limited partnership ("Landlord") , and Signal Pharmaceuticals, Inc., a California corporation ("Tenant") , and is made with reference to the following facts: Recitals A. Landlord and Tenant previously entered into a Lease dated April 30, 1993 ("Lease") pursuant to which Tenant has leased from Landlord certain premises consisting of approximately 10,417 rentable square feet and sometimes referred to as Suite 100 ("Existing Premises"), located in a building at 5555 Oberlin Drive, San Diego, California 92121 ("Building") . Landlord and Tenant previously executed the First Amendment to Lease dated November 4, 1994, pursuant to which Tenant has leased from Landlord approximately 4,341 square feet and sometimes referred to as Suite 114 ("New Premises") . Unless otherwise indicated, capitalized terms herein shall have the same meanings as in the Lease. B. Tenant desires to lease additional space in the Building consisting of approximately 8,341 rentable square feet, and sometimes referred to as Suites 116 and 120 ("Additional Premises"), pursuant to the right of first offer set forth in paragraph 9 of the First Amendment to Lease dated November 4, 1994. Unless otherwise expressly indicated in this Amendment, any reference herein to the Lease shall be deemed to refer to both the Lease and the First Amendment to Lease. C. Landlord and Tenant desire to amend the Lease to provide for the Additional Premises. NOW, THEREFORE, the parties hereby agree as follows: 1. Additional Premises and Its Term. Landlord hereby leases to Tenant and Tenant hereby leases from Landlord the Additional Premises, the location of which is indicated on the diagram of the Building attached hereto as Exhibit 1. The term of such lease of the Additional Premises shall be for a period of fifty-six (56) months, commencing June 1, 1996 and ending January 31, 2001 (the "56-Month Term"). 2. Base Monthly Rent for Additional Premises. Tenant shall pay to Landlord as minimum Monthly Rent including all annual rental adjustments for the Additional Premises for each calendar month, payable monthly in advance, the following: a. Except as hereinafter provided, no base rent shall be payable during the period commencing June 1, 1996 through September 30 , 1996. b. $4,170.50 ($0.50 NNN per square foot) per month commencing October 1, 1996 through December 31, 1996. c. $13,429.01 ($1.61 NNN per square foot) per month commencing January 1, 1997 through December 31, 1997. d. $13,929.47 ($1.67 NNN per square foot) per month commencing January 1, 1998 through December 31, 1998. e. $14,513.34 ($1.74 NNN per square foot) per month commencing January 1, 1999 through December 1999. f. $15,097.21 ($1.81 NNN per square foot) per month commencing January 1, 2000 through December 31, 2000. g. $15,681.08 ($1.88 NNN per square foot) for the month commencing January 1, 2001 through January 31, 2001. 3. Additional Rent. Any base Monthly Rents specified above are exclusive of all further or additional rents for the 56-month Term, which rents the Tenant shall also be obligated to pay in accordance with the Lease and this Amendment. Provided further, for the 56-month Term, the percentages chargeable to Tenant for "Additional Rent" (as referred to in the Lease) for the Additional Premises shall be as follows: - 1 - 65 Tenant's Building Percentage - 100% Tenant's Project Percentage - 22.13% For the 56-month Term, the amount payable by Tenant as Tenant's Project Percentage (22.13%) of controllable Outside Area Expenses shall not increase by more than 5% per annum during the 56-month Term. 4. Tenant Improvements for New Premises. After September 30, 1996, the Landlord shall contribute to the cost of the proposed tenant improvements in the Additional Premises ("Tenant Improvements") an allowance in the aggregate sum of up to $300,000.00. Any and all costs associated with the Tenant Improvements in excess of such contribution by Landlord shall be paid by Tenant. Tenant shall cause to be prepared plans and specifications for such Tenant Improvements in accordance with the Work Letter Agreement attached hereto as Exhibit 2 and incorporated by reference herein. 5. Letter of Credit. The $150,000 Letter of Credit on deposit with Landlord shall secure Tenant's obligations under this Second Amendment to Lease. 6. Prior Exercise of Right of First Refusal for Additional Premises. Tenant acknowledges that it has exercised its right of first refusal to lease the space in the Building which is the Additional Premises. Accordingly, paragraph 9 of the First Amendment to Lease is hereby canceled and shall be of no further force or effect. 7. Right to Terminate. Notwithstanding anything herein contained to the contrary, Tenant shall have the right to cancel and terminate the Lease as to the Additional Premises only on or before September 30, 1996 in the event, and only in the event, that Tenant's second strategic partnership in inflammation (the "Strategic Partnership") is not consummated by said date. Such right of termination shall be exercised, if at all, by notice in writing to Landlord, which notice shall be certified by an officer of Tenant that the Strategic Partnership has not been consummated. If such written notice is not received by Landlord on or before September 30, 1996, this right to terminate shall be deemed to have been waived, and Tenant shall be bound by the provisions of this Amendment. In the event that Tenant exercises such right of termination, Tenant shall vacate the Additional Premises within thirty (30) days of the date of such notice, and Tenant shall pay to Landlord as rent for the Additional Premises the sum of $5,922.11 ($.71 NNN per square foot) per month commencing June 1, 1996 to the date that Tenant vacates the Additional Premises. Rent for any partial month shall be prorated. 8. Full Force and Effect. The Lease, as modified herein, shall be and remain in full force and effect. All of the terms and provisions set forth in the Lease shall apply to the Additional Premises except as otherwise indicated in this Amendment. Without limiting the generality of the foregoing and except as otherwise indicated herein, the term "Premises" as used in the Lease shall be deemed to include both the Existing Premises, the New Premises, and the Additional Premises. 9. Counterparts. This Amendment may be executed in counterparts each of which shall be deemed an original and all of which shall constitute one and the same agreement. - 2 - 66 IN WITNESS WHEREOF, the parties have executed this Amendment as of the date set forth above. "Tenant": "Landlord": SIGNAL PHARMACEUTICALS, INC., SORRENTO VALLEY BUSINESS PARK, a California corporation a California limited partnership By HSP Sorrento, Inc. a Cal. corp. By /s/ BRADLEY B. GORDON 6-17-96 General Partner ------------------------------ Title V.P. Finance, CFO By [SIG] --------------------------- -------------------------------- Title Vice President ----------------------------- - 3 - 67 [PREMISE MAP DIAGRAM] 68 WORK LETTER AGREEMENT 1. Tenant's Work. Tenant at its cost (subject to Landlord's contribution provided in Paragraph 3 below) shall perform tenant improvement work for the New Premises in accordance with plans and specifications approved by Landlord and Tenant. Tenant's work shall include, without limitation, all design and space planning work, all interior partitions, interior doors, corridor entrance doors, cabinets, lock sets and latch sets, electrical outlets, telephone outlets, light fixtures, heating ventilation and air conditioning distribution ducting and heat pumps, plumbing, any fire protection system other than Landlord's existing sprinkler system, any modifications to Landlord's sprinkler system, floor coverings, perimeter and interior wall surfaces, and Building Standard window coverings. 2. Standards for Tenant's Work. Tenant's work shall be completed pursuant to the following provisions: (a) Tenant shall prepare and submit to Landlord two (2) sets of final plans and specifications showing the architectural design of the New Premises, including the basic mechanical system and electrical system within the New Premises, plumbing, partitions and doors, complete fixturing information, and material selections and finishes. Within five (5) working days after receipt of such final plans and specifications, Landlord shall approve or suggest modifications to such final plans and specifications. Landlord shall not unreasonably refuse or delay approval of Tenant's final plans and specifications. Tenant may object to any of the suggested modifications by notice to Landlord within five (5) working days after receipt of such suggested modifications, and unless Tenant so objects such suggested modifications shall be deemed approved by Tenant. Tenant shall also submit all proposed change orders in writing (with sufficient detail to enable Landlord to understand the nature of the proposed change) to Landlord for Landlord's prior written approval, which shall not be unreasonably refused or delayed. Landlord's consent shall not be required for any change order for work costing less than Five Thousand Dollars ($5,000), provided that there are no more than five (5) such change orders in any thirty (30) day period. Any proposed change order shall be deemed approved by Landlord unless Landlord disapproves same within three (3) business days after the proposed change order is received by Landlord, provided that Tenant's notice requesting approval of such change order clearly notifies Landlord that the proposed change order shall be deemed approved if not disapproved within such three (3) business day period. The individuals to whom Tenant shall submit plans and specifications for approval shall be Elizabeth A. Gallagher, with a copy to Hoyt S. Pardee, and the individual to whom Landlord shall communicate regarding plans and specifications shall be either Jackie Johnson or Bruce Birch. While Landlord has the right to approve the plans and specifications, Landlord's sole interest in doing so is to protect the Building and Landlord's interests. Accordingly, Tenant shall not rely on Landlord's approvals and Landlord shall not be the guarantor of, nor in any way responsible for, the accuracy or correctness of any such plans and specifications, or the accuracy or correctness of any such plans and specifications, or the compliance thereof with applicable laws, and Landlord shall incur no liability of any kind by reason of granting any such approvals. (b) Tenant shall complete all work in accordance with the final plans and specifications approved by Landlord. Tenant shall make no alterations, additions, or reinforcements to the structure of the Building except as specifically approved by the Landlord in such final plans and specifications. Tenant, at its expense, shall procure all building and other permits required for completion of Tenant's work. Tenant agrees that all work done by Tenant and its contractors and subcontractors shall be performed in full compliance with all laws, rules, orders, permits, ordinances, directions, regulations and requirements of all governmental agencies, offices and departments having jurisdiction, including without limitation applicable provisions pertaining to use of hazardous or toxic materials during construction, and in full compliance with rules, orders, directions, EXHIBIT 2 69 regulations and requirements of any insurance underwriting board, inspection bureau or insurance carrier insuring the New Premises or Building. (c) Tenant shall immediately submit to Landlord the names and addresses of the general, mechanical, and electrical contractors which Tenant intends to engage for construction of Tenant's improvements, the commencement date of construction, and the estimated date of completion of construction. Landlord shall have the right to enter the New Premises at any time to post any notice of nonresponsibility or other notice on the New Premises during Tenant's construction. All contractors and subcontractors retained by Tenant shall be subject to the approval of Landlord, which shall not be unreasonably refused or delayed. Landlord hereby consents that Tenant may employ David Begent & Co. as general contractor. All contractors retained by Tenant shall be bondable, licensed contractors, possessing good labor relations and capable of performing quality workmanship and working in harmony with Landlord's general contractor and other contractors. (d) During the course of construction, Tenant shall maintain builder's risk insurance in form and content satisfactory to Landlord. Tenant's insurance shall name Landlord as an additional insured and shall provide that it may not be canceled or amended without twenty (20) days prior written notice to Landlord. Prior to commencement of construction, Tenant shall provide Landlord with a certificate of such insurance and evidence of any required bonds in form satisfactory to Landlord. (e) Tenant's work shall be completed with reasonable diligence and in such a manner as not to interfere with the use or enjoyment of other portions of the Building or common areas by Landlord or other tenants. Tenant's contractors shall provide and pay for all temporary power, water, and other utility facilities as required in connection with the construction of Tenant's improvements. Tenant's contractors shall provide their own dumpster for collection and disposition of construction debris, which shall be located at a location approved by Landlord, and all construction debris from Tenant's construction shall be disposed of in Tenant's contractor's dumpster and not in trash facilities for the Project. Tenant's contractor's construction material, tools, equipment, and debris shall be stored only within the New Premises, or in areas designated for that purpose by Landlord. Work space exterior to the New Premises shall be available only in the discretion of Landlord. Tenant's work shall be subject to the inspection of Landlord and Landlord's architect and general contractor during the course of construction. (f) Tenant shall indemnify and hold harmless Landlord for any and all claims arising from Tenant's work as provided in Paragraph 12.A and Paragraph 18 of the Lease. Tenant's construction contracts shall include a similar indemnification from its contractors for the benefit of Landlord. Tenant shall pay for all damage to the Building, the Project, or appurtenant areas or equipment, as well as all damage to tenants or occupants thereof or their property caused by Tenant, its agents, employees, contractors, licensees, or invitees. Tenant acknowledges that Tenant's obligation set forth in Paragraph 18 of the Lease to keep the Building and Premises (including the New Premises) free of all liens shall include, but not be limited to, an obligation at Tenant's expense to obtain and record a release bond as provided in Section 3143 of the California Civil Code or other provision of law, as requested by Landlord. (g) Tenant shall be solely responsible for the adequacy in all respects of the final plans and specifications, including without limitation compliance with all governmental requirements, compatibility with the Building shell, and any special requirements of Tenant's proposed improvements, equipment or machines with respect to ambient temperatures, electrical use or current, water availability or otherwise. Tenant acknowledges that in connection with obtaining Landlord's approval of the final plans and specifications, Tenant may provide Landlord with certain information regarding its specific needs relating to the New Premises in developing plans and specifications for its improvements and that Tenant may provide some of its own equipment for installation in the New Premises. Tenant further acknowledges that Landlord will make no independent review of any such information and that Landlord does not warrant, either expressly or impliedly, the adequacy of the plans and specifications for the said 2 70 improvements, or the adequacy of Tenant's improvements or Tenant's equipment for Tenant's intended purpose. (h) All improvements made pursuant hereto shall during the term of this Lease, as it may be extended, constitute the property of Tenant. Upon expiration or termination of this Lease, however, unless Landlord shall require the removal or consent in writing to the removal thereof by Tenant, all such improvements shall remain in place and the ownership thereof shall revert to Landlord. (i) Tenant shall provide Landlord with a complete copy of "as built" construction drawings at the completion of the tenant improvement work. 3. Landlord's Contribution. Landlord shall contribute to the cost of Tenant's work for the New Premises an improvement allowance ("Allowance") in an amount equal to $300,000.00. Any and all costs associated with Tenant's work in excess of such Allowance shall be paid by Tenant. The Allowance shall be paid directly to Tenant as reimbursement to it for such costs actually paid by Tenant, as further specified below. Payments by Landlord shall be made not more often than monthly and shall be made on the basis of billings for work completed which are approved and paid by Tenant and submitted to Landlord together with evidence reasonably satisfactory to Landlord of completion of the work for which the billing is submitted and Tenant's prior payment thereof. For each such billing, Landlord shall pay to Tenant as reimbursement to it a fraction of the full amount of such billing previously paid by Tenant of which $300,000.00 is the denominator and the total cost of the Tenant Improvements is the numerator (but in no event more than the aggregate sum of $300,000.00 as and for the Allowance) , each payment to be made within twenty (20) days after presentation to Landlord of the following (a) A certificate of Tenant's general contractor showing the portion of Tenant's work which has theretofore been completed pursuant to the approved plans and specifications or other evidence satisfactory to Landlord specifying the portion of the improvements theretofore completed pursuant to the approved plans and specifications. (b) Evidence of prior payment by Tenant of the full amount of such billing. (c) Partial waivers to date of all mechanic's and materialmen's liens of any kind (which may be conditional upon payment as to the work currently invoiced but shall be unconditional as to all previously invoiced work) in form and substance satisfactory to Landlord. (d) Any other documentation reasonably required by Landlord. Landlord shall withhold ten percent of the Allowance until completion of all of Tenant's work and the lien-free expiration of the time for the filing of any mechanics' liens claimed or which might be filed on account of any work ordered by Tenant or its contractors or subcontractors. The cost of any change orders shall be paid by Tenant without any reimbursement to the extent the cost thereof is not included within the Allowance. Tenant shall be liable for that portion of all taxes levied against its improvements. 4. No Fee to Landlord. Except as otherwise provided herein, Landlord shall receive no fee for supervision, profit, overhead or general conditions in connection with the tenant improvement work. 5. No Miscellaneous Charges. Neither Tenant nor its contractor shall be charged by Landlord for parking (to the extent parking is available) or for the use of electricity, water or HVAC during construction of the tenant improvements for the New Premises. 3 EX-10.28 31 EXHIBIT 10.28 1 EXHIBIT 10.28 [DUPONT LOGO] MASTER LEASE AGREEMENT Dated and effective as of July 8, 1993 ("Effective Date"), this MASTER LEASE AGREEMENT ("Agreement") is entered into by and between E.I. Dupont de Nemours & Co., a Delaware corporation with offices at Barley Mill Plaza 24-2224, Wilmington, Delaware 19880-0024, (together with any successor or assignee, "Lessor") and the Lessee indicated below (together with any successor or permitted assignee, "Lessee"). LESSEE: LEGAL NAME: Signal Pharmaceuticals, Inc. TRADE NAME (if any): ADDRESS: 5555 Oberlin Dr San Diego, CA 92121 CONTACT AND TELEPHONE: Mark Carman 619-558-7500 LEGAL ENTITY Type: Corporation State of Organization: CA Date of Establishment: 7-24-92 LEASE TERMS AND CONDITIONS: 1. LEASING. Subject to the terms of this Agreement, Lessor agrees to lease to Lessee and Lessee agrees to lease from Lessor the equipment (collectively, the "Equipment" and individually a "unit of Equipment") described in any equipment schedule (a "Schedule") signed by Lessee and approved by Lessor. Each Schedule will incorporate all the terms of this Agreement and will constitute a separate agreement for lease of the Equipment (each, a "Lease"). With respect to each Lease, capitalized terms not defined in this Agreement will have the meanings stated in the applicable Schedule. Unless it purchases the Equipment under Section 14 ("Options"), Lessee does not have any right or interest in the Equipment except as a lessee. This Agreement is effective from the Effective Date, and will continue until all Leases have terminated or expired. 2. NET LEASE. EACH LEASE IS A NET LEASE. LESSEE IS UNCONDITIONALLY OBLIGATED TO PAY MONTHLY RENT AND OTHER AMOUNTS DUE UNDER SUCH LEASE REGARDLESS OF ANY DEFECT OR DAMAGE TO EQUIPMENT, OR LOSS OF POSSESSION, USE OR DESTRUCTION FROM ANY CAUSE WHATSOEVER. LESSEE'S OBLIGATIONS CONTINUE UNTIL SPECIFICALLY TERMINATED AS PROVIDED IN SUCH LEASE. LESSEE IS NOT ENTITLED TO ANY ABATEMENT, REDUCTION, RECOUPMENT, DEFENSE, OR SET-OFF AGAINST MONTHLY RENT OR OTHER AMOUNTS DUE TO LESSOR OR ITS ASSIGNEE, WHETHER ARISING OUT OF SUCH LEASE OR OUT OF LESSOR'S STRICT LIABILITY OR NEGLIGENCE, FROM ANY THIRD PARTY, OR OTHERWISE. 3. PURCHASE OF EQUIPMENT. Lessor is not obligated to purchase or lease a unit of Equipment unless before the Last Funding Date: (i) Lessor receives from Lessee a fully signed and completed Agreement, a Schedule, and such other documents as Lessor may require; (ii) Lessor has received from Supplier clear and unencumbered title to the Equipment; and (iii) there is no Default (Section 13). Provided no Default has occurred, Lessor appoints Lessee as its agent to inspect and accept the Equipment from Supplier simultaneously with acceptance of the Equipment for lease hereunder. Unless Lessee advises Lessor in writing to the contrary within ten (10) days after the date of installation, the Equipment shall be considered to have been irrevocably accepted by Lessee for all purposes as of the date of installation. For each Schedule, Lessee irrevocably authorizes Lessor to adjust the Equipment Price and Total Price by no more than fifteen percent (15%) to account for equipment change orders or returns, invoicing errors and similar matters, and agrees to any resulting adjustments in the TRANSACTION TERMS stated in the applicable Schedule. Lessor will send Lessee a written notice stating the final Equipment Price, Total Price and TRANSACTION TERMS, if different from those stated in the applicable Schedule. 4. TERM AND RENT. (a) The Initial Term begins on the acceptance by the Lessee of the Equipment (a "Lease Commencement Date"), and continues for the Initial Term stated in the applicable Schedule. The Monthly Rent accrues from the Lease Commencement Date. Monthly Rent is payable on the same day of each month as the Lease Commencement Date. If Monthly Rent is not paid within ten (10) days of its due date, Lessee agrees to pay a late charge of ten cents (10 cents) per dollar on, and in addition to, such Monthly Rent, but not exceeding the lawful maximum, if any. Advance Rent, if any, is applied to the first Monthly Rent due and then to the final Monthly Rents or, at Lessor's option, to the payment of any overdue obligation of Lessee. Lessor is not required to: (i) refund any Advance Rent or Monthly Rent; (ii) pay any interest on Advance Rent; or (iii) keep Advance Rent in a separate account. (b) Lessee agrees that the Monthly Rent and Advance Rent have been calculated on the assumption that the effective corporate income tax rate (exclusive of any minimum tax rate) for Lessor will be 35%. If Lessor is not taxed at such tax rate during the Initial Term because of Congressional enactment of any law, Lessor has the right to increase the Monthly Rent and Advance Rent and adjust the Casualty Value (Section 8) in such a manner as will both (i) take into account that such assumption is no longer correct and (ii) preserve Lessor's after tax economic yields and cash flows. A change in the Monthly Rent, Advance Rent, or Casualty Value is effective on the effective date of such law. (c) At the end of the term of a Lease, or in the event of a Default, until Lessee has complied with Section 6(d) ("Use, Operation, Return of Equipment") or has purchased the Equipment pursuant to Section 14 ("Option"), Lessee shall pay Lessor Monthly Rent, as liquidated damages for lost rentals and not as a penalty, such payment to be computed on a daily basis (with one day's rent being 1/30th of the Monthly Rent) until the Equipment is returned or purchased. Lessee's obligations and all other provisions of this Lease continue until such time. (d) Notwithstanding anything to the contrary contained herein, during the first thirty (30) days from and after the Lease Commencement Date (the "Satisfaction Guaranteed Period"), Lessee may terminate the Lease for any reason, provided that: (i) Lessor receives written notice of Lessee's intent to terminate the lease prior to the end of the Satisfaction Guaranteed Period, and (ii) Lessee makes the Equipment available to Lessor no later than five (5) days after the date of such notice in the condition required by Section 6(d)(i). Upon Lessee's compliance with these conditions, Lessor shall refund any Monthly Rent previously paid by Lessee and Lessee shall have no further obligation as to the Equipment. 5. TAXES. Lessee agrees to pay promptly as additional rent all license and registration fees and all taxes (excluding taxes on Lessor's net income) together with penalties and interest (collectively, "Taxes") assessed against Lessor, Lessee, the applicable Lease, the Equipment, the purchase (including purchase by Lessee), sale, ownership, delivery, leasing, possession, use, operation or return of the Equipment or its proceeds (such additional rent, together with Monthly Rent and Advance Rent is hereinafter collectively referred to as "Rent"). Where permitted by applicable law, except for Type A Leases, Lessee will report all Taxes. Lessee will reimburse Lessor on demand for any Taxes paid by Lessor. Lessee Initials [SIG] -------- 1 2 6. USE, OPERATION, RETURN OF EQUIPMENT. (a) Lessee agrees at its own expense to: (i) maintain the Equipment in condition suitable for certification by the manufacturer (if certification is available) and in any event in good operating condition; (ii) use the Equipment solely for business purposes, in the manner for which it was intended and in compliance with all applicable laws and manufacturer requirements or recommendations; (iii) pay all expenses, fines, and penalties related to the use, operation, condition or maintenance of the Equipment; and (iv) comply with all license and copyright requirements of any software ("Software") used in connection with the Equipment. (b) Lessee agrees not to attach to the Equipment any accessory, equipment or device not leased from Lessor unless it is easily removable without damaging the Equipment. Lessee agrees to pay all costs for parts, alterations, and additions to the Equipment (including those required by law), all of which will become the property of Lessor. lessee agrees not to install any Equipment or Software, if any, inside any other personal property. Lessor and Lessee intend that the Equipment is to remain personal property of Lessor. (c) Provided that there is no Default (Section 13), Lessee is authorized on behalf of Lessor to enforce in its own name (and at its own expense) any warranty, indemnity or right to damages related to the Equipment which Lessor has against the Supplier. (d) At the end of the term of a Lease, or in the event of a Default, Lessee agrees, at its own expense and risk, (i) to pay for any repairs required to place the Equipment in the same condition as when received by Lessee, reasonable wear and tear excepted; (ii) without unreasonable delay, to cause the Equipment to be disassembled, deinstalled, inspected, tested and crated in accordance with manufacturer recommendations, if any; and (iii) to deliver the Equipment, freight prepaid, to a carrier selected by Lessor for shipment to a location selected by Lessor. 7. DISCLAIMER. LESSEE AGREES THAT: (1) LESSOR'S ASSIGNEE IS NOT THE MANUFACTURER OR SUPPLIER OF THE EQUIPMENT OR THE REPRESENTATIVE OF EITHER; (2) LESSOR'S ASSIGNEE IS NOT REQUIRED TO ENFORCE ANY MANUFACTURER'S WARRANTIES ON BEHALF OF ITSELF OR OF LESSEE; (3) LESSOR'S ASSIGNEE IS NOT OBLIGATED TO INSPECT THE EQUIPMENT (4) OTHER THAN AS EXPRESSLY DELIVERED TO LESSEE, LESSOR AND LESSOR'S ASSIGNEE DO NOT MAKE, AND HAS NOT MADE, ANY WARRANTY OR REPRESENTATION, EITHER EXPRESS OR IMPLIED, AS TO THE DESIGN, COMPLIANCE WITH SPECIFICATIONS, OPERATION OR CONDITION OF, OR AS TO THE QUALITY OF THE MATERIAL OR WORKMANSHIP AS TO THE EQUIPMENT; (5) LESSOR AND LESSOR'S ASSIGNEE DO NOT MAKE ANY WARRANTY OF MERCHANTABILITY OR FITNESS FOR ANY PARTICULAR PURPOSE OF, OR AS TO TITLE TO, OR ANY OTHER REPRESENTATION OR WARRANTY, EXPRESS OR IMPLIED, WITH RESPECT TO THE EQUIPMENT. LESSEE FURTHER AGREES THAT NEITHER LESSOR NOR LESSOR'S ASSIGNEE SHALL BE LIABLE FOR ANY LIABILITY, LOSS OR DAMAGE CAUSED DIRECTLY OR INDIRECTLY BY THE EQUIPMENT OR BY ITS INADEQUACY OR BY ANY EQUIPMENT DEFECT, OR ANY FAILURE TO PROVIDE MAINTENANCE SERVICES, WHETHER OR NOT LESSOR OR ITS ASSIGNEE HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH LIABILITY, LOSS OR DAMAGE. NEITHER LESSOR NOR LESSOR'S ASSIGNEE SHALL HAVE ANY LIABILITY TO LESSEE OR ANY OTHER PERSON WITH RESPECT TO ANY OF THE FOLLOWING, REGARDLESS OF ANY NEGLIGENCE OF LESSOR: (1) THE USE, OPERATION OR PERFORMANCE OF THE EQUIPMENT; (2) ANY INTERRUPTION OF SERVICE, LOSS OF BUSINESS OR ANTICIPATED PROFITS OR CONSEQUENTIAL DAMAGES; OR (3) THE DELIVERY, SERVICING, MAINTENANCE, REPAIR, IMPROVEMENT OR REPLACEMENT OF THE EQUIPMENT. 8. LOSS OR DAMAGE; CASUALTY VALUE. Lessee assumes the risk of any disappearance of or damage to any part of the Equipment from any cause whatsoever. Within ten (10) days of learning of any condemnation or other circumstance where the Equipment is, in Lessee's reasonable opinion, irreparably damaged or permanently unfit for use ("Casualty") Lessee will provide Lessor full details of the Casualty and will pay Lessor an amount equal to (i) the sum of all future Monthly Rents payable for the Equipment under the applicable Lease, with each such payment discounted to its net present value at a simple interest rate equal to six percent (6%) per annum (or if not permitted by applicable law, the lowest permitted rate) from the due date of each such payment to the Monthly Rate payment date immediately preceding the date of the Casualty; plus an amount equal to the Casualty Value Percentage of the Total Price of the Equipment ("Casualty Value"); plus (ii) any other amounts due under the applicable Lease. Monthly Rent will continue to accrue without abatement until Lessor receives the Casualty Value and all other amounts (including Monthly Rent payments) then due under the applicable Lease, at which time the Lease will terminate. At Lessor's request, Lessee agrees to sell the Equipment on an "AS IS, WHERE IS" basis without representation or warranty, and to remit to Lessor any sales or insurance proceeds received (less any sums paid by Lessee as Casualty Value). 9. INSURANCE. Lessee agrees, at its own expense, to keep the Equipment insured with companies acceptable to Lessor and to maintain primary coverage consisting of (i) actual cash value all risk insurance on the Equipment, naming Lessor as loss payee and (ii) single limit public liability and property damage insurance of not less than $300,000 per occurrence (or such other amounts as Lessor may require by notice to Lessee) naming Lessee as insured and Lessor as additional insured. The insurance will provide for not less than thirty (30) days notice to Lessor of material changes in or cancellation of the policy. Premiums for all such insurance will be prepaid. Lessee will deliver evidence of such insurance to Lessor upon request, and will promptly provide to Lessor all information pertinent to any occurrence which may become the basis of a claim. Lessee will not make claim adjustments with insurers except with Lessor's prior written consent. 10. REPRESENTATIONS AND WARRANTIES OF LESSEE. Lessee represents and warrants to Lessor that as of the date of each Lease and of each Certificate of Acceptance: (a) Lessee has adequate power and capacity to enter into the Lease, any documents relative to the purchase of the Equipment leased under such Lease and any other documents required to be delivered in connection with this Lease (collectively, the "Documents"); the Documents have been duly authorized, executed and delivered by Lessee and constitute valid, legal and binding agreements, enforceable in accordance with their terms; there are no proceedings presently pending or threatened against Lessee which will impair its ability to perform under the Lease; and all information supplied to Lessor is accurate and complete. (b) Lessee's entering into the Lease and leasing the Equipment does not and will not: (i) violate any judgment, order, or law applicable to the Lease, Lessee or Lessee's certificate of incorporation or by-laws (if Lessee is a corporation) or Lessee's partnership agreement (if Lessee is a partnership); or (ii) result in the creation of any lien, security interest or other encumbrance upon the Equipment. (c) All financial data of Lessee or of any consolidated group of companies of which Lessee is a member ("Lessee Group"), delivered to Lessor have been prepared in accordance with generally accepted accounting principles applied on a consistent basis with prior periods and fairly present the financial position and results from operations of Lessee, or of the Lessee Group, as of the stated date and period(s). Since the date of the most recently delivered financial data, there has been no material adverse change in the financial or operating condition of Lessee or of the Lessee Group. (d) If Lessee is a corporation or partnership, it is and will be validly existing and in good standing under laws of the state of its incorporation or organization; the persons signing the Lease are acting with the full authority of its board of directors or partners (if Lessee is a partnership) and hold the offices indicated below their signatures, which are genuine. 11. LESSEE'S AGREEMENTS. (a) LESSEE AGREES THAT IT WILL KEEP THE EQUIPMENT FREE AND CLEAR FROM ALL CLAIMS, LIENS AND ENCUMBRANCES AND WILL NOT ASSIGN, SUBLET, OR GRANT A SECURITY INTEREST IN THE EQUIPMENT OR IN THIS LEASE WITHOUT LESSOR'S PRIOR WRITTEN CONSENT. If and to the extent that the lease is deemed a security agreement under the Uniform Commercial Code, and otherwise for precautionary purposes only, Lessee grants Lessor a first priority security interest in its interest in the Equipment and in all Equipment leased pursuant to any schedule. Such security interest shall secure lessee's obligations with respect to all schedules, leases and agreements between Lessee and Lessor. Lessee will notify Lessor in writing, with full particulars, within ten (10) days after it learns of the attachment of any lien to any Equipment and of the Equipment's location. (b) Lessee will not relocate any unit of Equipment from the Equipment Location stated on a Schedule without the prior written approval of Lessor (which shall not be unreasonably withheld). Lessee agrees to notify Lessor immediately in writing of any change in Lessee's corporate or business name or in the location of its chief executive office. (c) If this is a Type A Lease, Lessee will not take or fail to take any action which Lessor determines will result in the disqualification of any Equipment for, or the recapture of, all or any portion of the accelerated cost recovery deductions permitted by the Internal Revenue Code of 1986, as amended. Lessee will indemnify Lessor for any loss in Lessor's after tax economic yields and cash flows caused by Lessee's acts or failures to act. 2 3 (d) Lessor may inspect the Equipment during normal business hours. At Lessor's request, Lessee will attach identifying labels supplied by Lessor showing Lessor's ownership in a prominent position on each unit of Equipment. (e) Within one hundred twenty (120) days of the close of each fiscal year of Lessee, Lessee will deliver to lessor Lessee's balance sheet and profit and loss statement, certified by a recognized firm of certified public accountants. Upon request, Lessee will deliver to Lessor duplicate copies of Lessee's most recent quarterly financial report. 12. INDEMNIFICATION. Lessee agrees to indemnify, defend and keep harmless Lessor, its agents, successors and assigns, from and against any all losses, damages, penalties, claims and actions, including legal expenses, arising out of or in connection with (1) the selection, manufacture, purchase, acceptance or rejection of Equipment, the ownership of Equipment during the term of a Lease, and the delivery, lease, possession, maintenance, use, condition, return or operation of equipment or (ii) the condition of Equipment sold or disposed of after or as a result of use by Lessee or any permitted sublessee of Lessee. 13. DEFAULT. (a) Lessor may declare a Lease in default (a "Default") if, with respect to such Lease: (i) Lessor has not received Monthly Rent or any other Rent (Sections 5 and 15) within ten (10) days after its due date; or (ii) lessee or any guarantor violates any other term of a lease or any term of a guaranty and fails to correct such violation within ten (10) days after written notice from Lessor; or (iii) Lessee violates the terms of any license or agreement for Software; or (iv) Lessee or any guarantor becomes insolvent, is liquidated or dissolved, stops doing business or assigns its rights or property for the benefit of creditors; or (v) a petition is filed by or against Lessee or any guarantor under Title 11 of the United States Code or any successor or similar law; or (vi) (for individuals) Lessee or any guarantor dies or a guardian is appointed for Lessee's or guarantor's person; or (vii) Lessee (or any affiliate) is in default of or fails to fulfill the terms of any other agreement between Lessee and Lessor or any affiliate of either. (b) At any time after a Default, Lessor may declare a default under any other Lease or agreement between Lessee (and any affiliate) and Lessor or its affiliate. Lessor may also enter, with or without legal process, any premises and take possession of the Equipment. Immediately after a Default, Lessee will pay to Lessor, as liquidated damages for loss of a bargain and not as a penalty, an amount equal to the sum of (i) all Rents, including Monthly Rent, and other sums (e.g. late charges, indemnification, liens) then due under each Lease; plus (ii) the Casualty Value of the Equipment, calculated as of the Monthly Rent payment date immediately preceding the Default; together with interest on such sum accruing to the date of payment at the Overdue Rate (Section 15). After a Default, at the request of Lessor, Lessee will return the Equipment as required by Section 6. Lessor may, but is not required to, sell or lease the Equipment in bulk or in individual pieces. If the Lessor intends to sell the Equipment, it may do so in a public or private sale and is not required to give notice of such sale. The Equipment need not be displayed at the sale. Lessor may, without paying rent or providing insurance, use the Equipment Location to store the Equipment or conduct any sale. The proceeds of any sale or lease will be applied in the following order of priorities: (1) to pay all of Lessor's expenses in taking, removing, holding, repairing and disposing of Equipment; then (2) to pay any late charges and interest accrued at the Overdue Rate; then (3) to pay accrued but unpaid Monthly Rent together with any unpaid Casualty Value, Rent, interest and all other due but unpaid sums (including any indemnification and sums due under other Leases or agreements in default). Any remaining proceeds will reimburse Lessee for payments which it made to reduce the amounts owed to Lessor in the preceding sentence. Lessor will keep any excess. If the proceeds of any sale or lease are not enough to pay the amounts owed to Lessor under this Section. Lessee will pay the deficiency. (c) Lessor's remedies for Default may be exercised instead of or in addition to each other or any other legal or equitable remedies. Lessor has the right to set-off any sums received from any source (including insurance proceeds) against Lessee's obligations under each Lease. Lessee waives its right to object to the notice of the time or place of sale or lease and to the manner and place of any advertising. Lessee waives any defense based on statutes of limitations or laches in actions for damages. Lessor's waiver of any Default is not a waiver of its rights with respect to a different or later Default. 14. OPTION. (a) LEASE TYPE A ONLY: So long as no Default has occurred, Lessee has the option (i) to purchase all but not less than all of the equipment under a Lease at the end of the Initial Term on an AS-IS-WHERE-IS basis without representation or warranty, for a cash purchase price equal to the Equipment's Fair Market Value (plus any applicable sales taxes) determined as of the end of the Initial Term; or (ii) to extend the Initial Term of a Lease at the then Fair Market Rental of the Equipment. Lessee must give irrevocable written notice at least sixty (60) days before the end of the Initial Term to Lessor that it will purchase the Equipment or extend the Initial Term. If the Lease is renewed, the Lessee's obligations (other than the amount of Monthly Rent to be paid) will remain unchanged. "Fair Market Value" or "Fair Market Rental" means the price or rental which a willing buyer or lessee (who is neither a lessee in possession nor a used equipment dealer) would pay for the Equipment in an arm's length transaction to a willing seller or lessor who is under no compulsion to sell or lease the Equipment. In determining "Fair Market Value" or "Fair Market Rental": (i) the Equipment is assumed to have been maintained and returned as required by the Lease; (ii) in the case of any installed equipment, the Equipment will be valued on an installed basis; and (iii) cost of removal from the equipment's current location will not be included. (b) LEASE TYPE B ONLY: So long as no Default has occurred, Lessee may purchase all but not less than all the Equipment under a Lease on a "AS IS, WHERE IS" basis, without representation or warranty, at the end of the Initial Term for a price equal to the Option Price (plus applicable sales tax) stated on a Schedule. Unless the Option Price is $1.00, Lessee must give Lessor irrevocable written notice at least thirty (30) days before the end of the Initial Term that it will purchase the Equipment. 15. ASSIGNMENT. Lessor may, without notice to Lessee, assign its interest in this Lease, its right to receive Monthly Rent and other sums due hereunder and its rights in the Equipment. If requested, Lessee agrees to acknowledge, in writing, any assignment. LESSEE AGREES TO SUCH ASSIGNMENT, AND FURTHER AGREES THAT, BY SUCH ASSIGNMENT: (1) THE ASSIGNEE SHALL NOT BE CHARGEABLE WITH OR ASSUME ANY OF THE OBLIGATIONS OR LIABILITIES OF LESSOR, AND (2) THE ASSIGNEE SHALL HAVE ALL THE RIGHTS AND DISCRETIONS OF LESSOR UNDER THE LEASE, INCLUDING BUT NOT LIMITED TO THE RIGHT TO ISSUE OR RECEIVE ALL NOTICES OR REPORTS, TO GIVE ALL CONSENTS, TO RECEIVE TITLE TO THE EQUIPMENT AND TO EXERCISE ALL REMEDIES THEREUNDER, AND (3) LESSEE SHALL, IN ACCORDANCE WITH THE TERMS OF THIS LEASE AND ON INSTRUCTION FROM LESSOR, PAY ASSIGNEE ALL RENTS AND OTHER AMOUNTS DUE UNDER THIS LEASE AS AND WHEN DUE, WITHOUT DEDUCTION OR OFFSET, NOTWITHSTANDING ANY CLAIM LESSEE MAY HAVE AGAINST LESSOR, OR RELATIVE TO THE EQUIPMENT, OR ANY OTHER CLAIM OF LESSEE ARISING PRIOR TO THE ASSIGNMENT, AND (4) LESSEE WILL NOT ASSERT THE ASSIGNEE ANY DEFENSE, CLAIM, COUNTERCLAIM, OR SET-OFF ON ACCOUNT OF BREACH OF WARRANTY, BREACH OF SERVICE AGREEMENT OR OTHERWISE IN ANY ACTION FOR RENT OR POSSESSION BROUGHT BY LESSOR'S ASSIGNEE, AND WILL SETTLE ALL WARRANTY, MECHANICAL, SERVICE, OR OTHER CLAIMS WITH RESPECT TO THE EQUIPMENT DIRECTLY WITH THE LESSOR AND THAT ASSIGNEE SHALL NOT BE LIABLE FOR SUCH SERVICE OR OTHER CLAIMS. Lessee may assign this Lese only with the prior written consent of Lessor or its assignee. 16. MISCELLANEOUS. (a) LEASE TYPE B ONLY: Lessee agrees that for income tax purposes only, Lessor is treating Lessee as owner of the Equipment and that Lessee has not received tax advice from Lessor or the Supplier. By signing this Lease, Lessee agrees to pay a lease charge and lease charge rate. The total lease charge is equal to (i) the Monthly Rent multiplied by the number of months in the Initial Term, plus (ii) the Option Price, minus (iii) the Total Price. The lease charge portion of the Monthly Rent payments may be determined by applying to the Total Price of the Equipment the rate which will amortize such Total Price (adjusting for any Advance Rent) down to the Option Price at a constant rate over the Initial Term by payment of the Monthly Rent. The lease charge rate is the constant rate referred to in the preceding sentence. If this transaction were re-characterized as a financing, no lease charge, late charge, or post maturity interest charge is intended to exceed the maximum amount of time price differential or interest, as applicable, permitted to be charged or collected by applicable law. If this transaction were re-characterized as a financing and one or more of such charges exceed such maximum, then such charges will be reduced to the legally permitted maximum charge and any excess charge will be used to reduce the initial value of the Equipment or refunded. (b) Time is of the essence of each Lease. Lessor's failure at any time to require that Lessee strictly perform its obligations under any Lease will not prevent Lessor from later requiring such performance. Lessee agrees, upon Lessor's request, to sign any document presented by Lessor from time to time to protect Lessor's rights in the Equipment. LESSEE AND LESSOR EACH WAIVE ALL RIGHTS TO TRIAL BY JURY IN ANY LITIGATION ARISING FROM OR RELATED TO A 4 LEASE. Lessee also agrees to pay Lessor's attorneys' fees and out-of-pocket expenses in protecting or enforcing its rights under a Lease. Lessee will pay attorney's fees and costs of collection, up to the amount permitted by law. Lessor and Lessee agree that legal fees and costs up to twenty percent (20%) of the amount then due under this Lease are reasonable. (c) All required notices will be considered to have been given if sent by registered or certified mail or overnight courier service to the Lessor at the address stated above and to the Lessee at its address stated in the Lease, or at such other place as such addressee may have designated in writing. (d) Each Lease constitutes the entire agreement of the parties with respect to the lease of the Equipment and supersedes and incorporates all prior oral or written agreements or statements. So long as there is no Default, Lessor shall not interfere with Lessee's quiet enjoyment of Equipment. If a provision of a Lease is declared invalid under law, the affected provision will be considered omitted or modified to conform to applicable law. All other provisions will remain in full force and effect. (e) If Lessee fails to comply with any provision of a Lease, Lessor has the right, but is not obligated, to have such provision brought into compliance. This right is in addition to the Lessor's right to declare a Default. All expenses incurred by Lessor in bringing about such compliance will be considered Rent which is due to Lessor within five (5) days after the date Lessor sends to Lessee a written request for payment. (f) All overdue payments will bear interest at the Overdue Rate, which is the lower of twenty percent (20%) per annum or the maximum rate allowed by law. Interest will accrue daily until payment in full is received. (g) All of Lessor's rights (including indemnity rights) under a Lease survive the Lease's expiration or termination, and are enforceable by Lessor, its successors and assigns. THIS AGREEMENT AND ANY SCHEDULE AND ANNEXES THERETO CONSTITUTE THE ENTIRE AGREEMENT OF THE PARTIES WITH RESPECT TO THE SUBJECT MATTER HEREOF. THIS AGREEMENT IS EFFECTIVE AS OF THE EFFECTIVE DATE UPON SIGNING BY BOTH LESSOR AND LESSEE. A LEASE MAY NOT BE CHANGED EXCEPT BY WRITTEN AGREEMENT SIGNED BY AN AUTHORIZED REPRESENTATIVE OF THE PARTY AGAINST WHOM IT IS TO BE ENFORCED. LESSEE IRREVOCABLY AUTHORIZES LESSOR TO PREPARE AND SIGN ON BEHALF OF LESSEE ANY INSTRUMENT NECESSARY OR EXPEDIENT FOR FILING, RECORDING OR PERFECTING THE INTEREST OF LESSOR IN EACH LEASE, THE RELATED EQUIPMENT AND THE PROCEEDS OF BOTH. LESSOR: LESSEE: E.I. Dupont de Nemours & Co. Signal Pharmaceuticals, Inc. By: /s/ KIMBERLY FOX By: /s/ MARK D. CARMAN -------------------------------- --------------------------------- Kimberly Fox Mark D. Carman - ------------------------------------ ------------------------------------ (Print or Type Name) (Print or Type Name) Senior Program Admin. V.P. Operations - ------------------------------------ ------------------------------------ (Print or Type Title) (Print or Type Title) Date of Execution: 12-27-93 Date of Execution: 12-15-93 ----------------- ----------------- SOCIAL SECURITY OR TAXPAYER IDENTIFICATION NO: EIN: 94-3174286 5 [DUPONT LOGO] Schedule No. 001 MASTER LEASE AGREEMENT EFFECTIVE DATE: JULY 8, 1993 THIS SCHEDULE ("Schedule") incorporates all of the terms of the above Master Lease Agreement ("Agreement"). This Schedule and the Agreement as it relates to this Schedule constitutes a lease ("Lease") for the equipment described below ("Equipment") between E.I. Dupont de Nemours & Co., ("Lessor") and the Lessee indicated below. All terms used and not defined in this Schedule have the definitions stated in the Agreement. A. LESSEE: LEGAL NAME: Signal Pharmaceuticals, Inc. TRADE NAME (if any): ADDRESS: 11545 Sorrento Valley Road, Suite 315 San Diego, CA 92121 LEGAL ENTITY - Type: Corporation State of Organization: CA Date of Establishment: 7-24-92 B. SUPPLIER: E. I. DUPONT DE NEMOURS & CO. MEDICAL PRODUCTS DEPT. BARLEY MILL PLAZA WILMINGTON DE 19880 C. EQUIPMENT LOCATION: Street Address: 11545 Sorrento Valley Road, Suite 315 County: City, State Zip: San Diego, CA 92121 D. DESCRIPTION OF EQUIPMENT: Medical Equipment
EQUIPMENT TYPE/MODEL NUMBER OF SERIAL/ID NUMBERS UNITS Cost - -------------------- --------- ---- Ultra Centrifuge 1 $73,576.40 Superspeed Centrifuge 1 Clinical Centrifuge 1 Equipment Price: $73,576.40 ---------- Sales Tax: $ 5,702.17 ---------- Freight: $ ---------- Installation: $ ---------- Other _____________________: $ ---------- Total Price: $79,278.57 ---------- E. TRANSACTION TERMS: Lease Type (check one): _____ A (Tax Lease, ______-year property; all Sections other than 14(b) and 16(a) apply) X B (Lease Purchase all Sections other than 4(b), 11(c) and 14(a) apply). ----- Monthly Rent: $ See Section F Advance Rent: $ Sales Tax: $ Sales Tax: $ Total Monthly Rent: $ Total Advance Rent: $ Initial Term (No. of Months): 060 Casualty Value Percentage: $ 0% Last Funding Date: 12-31-93 Lease Type B Option Price: $ 1.00
6 F. ADDITIONAL TERMS (IF ANY): 24 payments @ $947.54, 36 payments @ $2,316.12 ------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- LESSOR: E.I. DUPONT DE NEMOURS & CO. LESSEE: SIGNAL PHARMACEUTICALS, INC. By: /s/ KIMBERLY FOX By: /s/ MARK D. CARMAN --------------------------------- ------------------------------------ Kimberly Fox Mark D. Carman - ------------------------------------- ---------------------------------------- (Print or Type Name) (Print or Type Name) Senior Program Admin. V.P. Operations - ------------------------------------- ---------------------------------------- (Print or Type Title) (Print or Type Title) Date of Approval: 12/27/93 Date of Execution: 12/15/93 - ------------------------------------- ---------------------------------------- SOCIAL SECURITY or TAXPAYER IDENTIFICATION NO.: EIN: 94-3174286 ------------------- EX-10.29 32 EXHIBIT 10.29 1 EXHIBIT 10.29 MASTER EQUIPMENT LEASE Under this Master Equipment Lease (the "Lease"), dated as of September 1, 1993, Phoenix Leasing Incorporated ("Lessor") hereby leases to Signal Pharmaceuticals, Inc. ("Lessee"), and Lessee hereby leases from Lessor, the equipment (herein called "Equipment") which is described on the schedule attached hereto or any subsequently-executed schedule entered into by Lessor and Lessee and which incorporates this Lease by reference. Any such schedules shall hereinafter individually be referred to as a "Schedule" and collectively be referred to as the "Schedules." Lessor hereby leases the Equipment to Lessee upon the following terms and conditions: 1. TERM OF AGREEMENT. The term of this Lease begins on the date set forth above and shall continue thereafter and be in effect so long as and at any time any Schedule entered into pursuant to this Lease is in effect. The Initial Term and rent payable with respect to each leased item of Equipment shall be as set forth in and as stated in the respective Schedule(s). The terms of each Schedule hereto are subject to all conditions and provisions of this Lease as may at any time be amended. 2. NON-CANCELLABLE LEASE. This Lease and any Schedule cannot be cancelled or terminated except as expressly provided herein. This Lease (including all Schedules to this Lease) constitutes a net lease and Lessee agrees that its obligations to pay all rent and other sums payable hereunder (and under any Schedule) and the rights of Lessor and assignee in and to such rent and other sums, are absolute and unconditional and are not subject to any abatement, reduction, setoff, defense, counterclaim or recoupment due or alleged to be due to, or by reason of, any past, present or future claims which Lessee may have against Lessor, any assignee, the manufacturer or seller of the Equipment, or against any person for any reason whatsoever. 3. LESSOR COMMITMENT. So long as no Event of Default or event which with the giving of notice or passage of time, or both, could become an Event of Default has occurred or is continuing, Lessor agrees to lease to Lessee the groups of Equipment described on each Schedule, subject to the following conditions: (i) that in no event shall Lessor be obligated to lease Equipment to Lessee hereunder where the aggregate purchase price of all Equipment leased to Lessee hereunder would exceed $1,000,000 no more than $100,000 of which may be non-standard equipment and soft costs (such non-standard equipment and soft costs may not, at any time, constitute greater than 10% of the then aggregate funding amounts); (ii) the amount of Equipment purchased by Lessor at any one time shall be at least equal to $50,000 except for a final advance which may be less than $50,000; (iii) Lessor shall not be obligated to purchase Equipment hereunder after May 1, 1994; (iv) all Lease documentation required by Lessor has been executed by Lessee or provided by Lessee no later than October 1, 1993; (v) the equipment described on the Schedule is acceptable to Lessor; (vi) with respect to each funding Lessee has provided to Lessor each of the closing documents described in Exhibit A hereto (which documents shall be in form and substance acceptable to Lessor) and which list may be modified for each subsequent funding; (vii) there is no material adverse change in Lessee's condition, financial or otherwise and Lessee so certifies, from (yy) the date of the most recent financial statements delivered by Lessee to Lessor prior to execution of this Lease, to (zz) the date of the proposed lease of the Equipment; (viii) Lessee is performing according to its business plan dated July 20, 1993 ("Business Plan"), as may be amended from time to time in form and substance acceptable to Lessor; (ix) Lessor or its agent has inspected and placed identification labels on the Equipment; (x) Lessee shall offer to Lessor all lease transactions for Equipment contemplated by Lessee during the commitment period of this Lease; however if Lessor declines to finance any such transaction or Lessee and Lessor cannot agree upon terms, then Lessee shall be free to seek such financing from -1- 2 any other third party; and (xi) Lessor has received in form and substance acceptable to Lessor: (a) Lessee's interim financial statements signed by a financial officer of Lessee; (b) evidence of Lessee's receipt of $2,100,000 equity; and (c) evidence of Lessee's $699,500 cash position as of July 31, 1993. 4. NO WARRANTIES BY LESSOR. (a) Lessee has selected both (i) the Equipment and (ii) the suppliers (herein called "Vendor") from whom Lessor is to purchase the Equipment. LESSOR MAKES NO WARRANTY EXPRESS OR IMPLIED AS TO ANY MATTER WHATSOEVER, INCLUDING THE CONDITION OF THE EQUIPMENT, ITS MERCHANTABILITY OR ITS FITNESS FOR ANY PARTICULAR PURPOSE, AND AS TO LESSOR, LESSEE LEASES THE EQUIPMENT "AS IS" AND WITH ALL FAULTS. (b) If the Equipment is not properly installed, does not operate as represented or warranted by Vendor or is unsatisfactory for any reason, Lessee shall make any claim on account thereof solely against Vendor and shall, nevertheless, pay Lessor all rent payable under this Lease, Lessee hereby waiving any such claims as against Lessor. Lessor hereby agrees to assign to Lessee solely for the purpose of making and prosecuting any said claim, to the extent assignable, all of the rights which Lessor has against Vendor for breach of warranty or other representation respecting the Equipment. Lessor shall have no responsibility for delay or failure to fill the order. (c) Lessee understands and agrees that neither the Vendor nor any salesman or other agent of the Vendor is an agent of Lessor. No salesman or agent of Vendor is authorized to waive or alter any term or condition of this Lease, and no representations as to the Equipment or any other matter by the Vendor shall in any way affect Lessee's duty to pay the rent and perform its other obligations as set forth in this Lease. (d) Lessee hereby requests Lessor to purchase Equipment from Vendor and to lease Equipment to Lessee on the terms and conditions of the Lease set forth herein. (e) Lessee hereby authorizes Lessor to insert in this Lease and each Schedule hereto the serial numbers and other identification data of the Equipment when determined by Lessor. 5. LESSEE'S REPRESENTATIONS AND WARRANTIES. Lessee represents and warrants that (a) it is a corporation in good standing under the laws of the state of its incorporation, and duly qualified to do business in each state where the Equipment will be located; (b) it has full authority to execute and deliver this Lease and perform the terms hereof, and this Lease has been duly authorized and constitutes valid and binding obligations of Lessee enforceable in accordance with its terms; (c) this Lease will not contravene any law, regulation or judgment affecting Lessee or result in any breach of any agreement or other instrument binding on Lessee; (d) no consent of Lessee's shareholders or holder of any indebtedness, or filing with, or approval of, any governmental agency or commission, is a condition to the performance of the terms hereof; (e) there is no action or proceeding pending or threatened against Lessee before any court or administrative agency which might have a materially adverse effect on the business, financial condition or operations of Lessee; (f) no deed of trust, mortgage or third party interest arising through Lessee will attach to the Equipment or the Lease; (g) the Equipment will remain at all times under applicable law, removable personal property, free and clear of any lien or encumbrance in favor of Lessee or any other person, notwithstanding the manner in which the Equipment may be attached to any real property; and (h) all credit, financial and any other information submitted to Lessor herewith or any other time is true and correct. 6. EQUIPMENT ORDERING. Lessee shall be responsible for all packing, rigging, transportation and installation charges for the Equipment and Lessor may separately invoice Lessee for such charges. Lessee has selected the Equipment itself and shall arrange for delivery of Equipment so that it can be accepted in accordance with Section 7 hereof. Lessee hereby agrees to indemnify and hold Lessor harmless from any claims, -2- 3 liabilities, costs and expenses, including reasonable attorneys' fees, incurred by Lessor arising out of any purchase orders or assignments executed by Lessor with respect to any Equipment or services relating thereto. 7. LESSEE ACCEPTANCE. Lessee shall return to Lessor the signed and dated Acceptance Notice attached to each Schedule hereto (a) acknowledging the Equipment has been received, installed and is ready for use and (b) accepting it as satisfactory in all respects for the purposes of this Lease. Lessor is authorized to fill in the Rent Start Date on each Schedule in accordance with the foregoing. 8. LOCATION; INSPECTION; LABELS. Equipment shall be delivered to and shall not be removed from the Equipment "Location" shown on each Schedule without Lessor's prior written consent. Lessor shall have the right to inspect Equipment at any reasonable time. Lessee shall be responsible for all labor, material and freight charges incurred in connection with any removal or relocation of such Equipment which is requested by the Lessee and consented to by Lessor, as well as for any charges due to the installation or moving of the Equipment. The rental payments shall continue during any period in which the Equipment is in transit during a relocation. Lessor or its agent shall mark and label Equipment, which labels shall state Equipment is owned by Lessor, and Lessee shall keep such labels on the Equipment as labeled by Lessor or its agent. 9. EQUIPMENT MAINTENANCE. (a) General. Lessee will locate or base each item of Equipment where designated in an Acceptance Notice and will reasonably permit Lessor to inspect such item of Equipment and its maintenance records. Lessee will at its sole expense comply with all applicable laws, rules, regulations, requirements and orders with respect to the use, maintenance, repair, condition, storage and operation of each item of Equipment. Except as required herein, Lessee will not make any addition or improvement to any item of Equipment that is not readily removable without causing material damage to any item or impairing its original value or utility. Any addition or improvement that is so required or cannot be so removed will immediately become the property of Lessor. (b) Service and Repair. With respect to computer equipment, Lessee has entered into, and will maintain in effect, Vendor's standard maintenance contract or another contract satisfactory to Lessor for a period equal to the term of each Schedule and extensions thereto which provides for the maintenance of the Equipment and repairs and replacement parts thereof in good condition and working order, all in accordance with the terms of such maintenance contract. Lessee shall have the Equipment certified for the Vendor's standard maintenance agreement prior to delivery to Lessor upon expiration of this Lease. With respect to any other Equipment, Lessee will, at its sole expense, maintain and service, and repair any damage to, each item of Equipment in a manner consistent with prudent industry practice and Lessee's own practice so that such item of Equipment is at all times (i) in the same condition as when delivered to Lessee, except for ordinary wear and tear, (ii) in good operating order for the function intended by its manufacturer's warranties and recommendations. 10. LOSS OR DAMAGE. Lessee assumes the entire risk of loss to the Equipment through use, operation or otherwise. Lessee hereby indemnifies and holds harmless Lessor from and against all claims, loss of rental payments, costs, damages, and expenses relating to or resulting from any loss, damage or destruction of the Equipment, any such occurrence being hereinafter called a "Casualty Occurrence." On the first rental payment date following such Casualty Occurrence, or, if there is no such rental payment date, thirty (30) days after such Casualty Occurrence, Lessee shall (i) repair the Equipment, returning it to good operating condition or (ii) replace the Equipment with identical equipment in good condition and repair, the title to which shall vest in Lessor and which thereafter shall be subject to the terms of this Lease; or (iii) pay to Lessor (a) any -3- 4 unpaid amounts relating to such Equipment due Lessor under this Lease up to the date of the Casualty Occurrence, and (b) a sum equal to the Casualty Value as set forth in the Casualty Value table attached to each Schedule hereto for such Equipment. Upon the making of such payment, the term of this Lease as to each unit of Equipment with respect to which the Casualty Value was paid shall terminate. 11. GENERAL INDEMNITY. Lessee will protect, indemnify and save harmless Lessor from and against all liabilities, obligations, claims, damages, penalties, causes of action, costs and expenses, imposed upon or incurred by or asserted against Lessor or any assignee of Lessor by Lessee or any third party by reason of the occurrence or existence (or alleged occurrence or existence) of any act or event relating to or caused by the Equipment, including but not limited to, consequential or special damages of any kind, or any failure on the part of Lessee to perform or comply with any of the terms of this Lease. In the event that any action, suit or proceeding is brought against Lessor by reason of any such occurrence, Lessee, upon request of Lessor, will at Lessee's expense resist and defend such action, suit or proceeding or cause the same to be resisted and defended by counsel designated and approved by Lessor. Lessee's obligations under this Section 11 shall survive the expiration of this Lease with respect to acts or events occurring or alleged to have occurred prior to the return of the Equipment to Lessor at the end of the Lease term. 12. INSURANCE. Lessee at its expense shall keep the Equipment insured for the entire term and any extensions of this Lease against all risks for the value of the Equipment and in no event for less than the Casualty Value of such Equipment as specified on Exhibit C. Such insurance shall contain insurer's agreement to give thirty (30) days written notice to Lessor before cancellation or material change of any policy of insurance, and shall provide for (a) loss payable endorsement to Lessor or any assignee of Lessor, and (b) public liability and property damage insurance in an amount not less than $1,000,000, naming Lessor as additional insured. Lessee will provide Lessor and any assignee of Lessor with a certificate of insurance from the insurer evidencing Lessor's or such assignee's interest in the policy of insurance. Such insurance shall cover any Casualty Occurrence to any unit of Equipment. Notwithstanding anything in Section 10 or this Section 12 to the contrary, this Lease and Lessee's obligations hereunder and under each Schedule shall remain in full force and effect with respect to any unit of Equipment which is not subject to a Casualty Occurrence. If Lessee fails to provide or maintain insurance as required herein, Lessor shall have the right, but shall not be obligated to obtain such insurance. In that event, Lessee shall pay to Lessor the cost thereof. 13. TAXES. Lessee agrees to reimburse Lessor for, (or pay directly if instructed by Lessor), and agrees to indemnify and hold Lessor harmless from, all fees (including, but not limited to, license, documentation, recording and registration fees), and all sales, use, gross receipts, personal property, occupational, value added or other taxes, levies, imposts, duties, assessments, charges, or withholdings of any nature whatsoever, together with any penalties, fines, additions, to tax, or interest thereon (all of the foregoing being hereafter referred to as "Impositions") except same as may be attributable to Lessor's income, arising at any time prior to or during the term of this Lease, or upon termination or early termination of this Lease and levied or imposed upon Lessor directly or otherwise by any Federal, state or local government in the United States or by any foreign country or foreign or international taxing authority upon or with respect to (i) the Equipment, (ii) the exportation, importation, registration, purchase, ownership, delivery, leasing, possession, use, operation, storage, maintenance, repair, return, sale, transfer of title, or other disposition thereof, (iii) the rentals, receipts, or earnings arising from the Equipment, or any disposition of the rights to such rentals, receipts, or earnings, (iv) any payment pursuant to this Lease, and (v) this Lease or the transaction -4- 5 or any part thereof. Lessee's obligations under this Section 13 shall survive the expiration of this Lease with respect to acts or events occurring or alleged to have occurred prior to the return of the Equipment to Lessor at the end of the Lease term. 14. PAYMENT BY LESSOR. If Lessee shall fail to make any payment or perform any act required hereunder, then Lessor may, but shall not be required to, after such notice to Lessee as is reasonable under the circumstances, make such payment or perform such act with the same effect as if made or performed by Lessee. Lessee will upon demand reimburse Lessor for all sums paid and all costs and expenses incurred in connection with the performance of any such act. 15. SURRENDER OF EQUIPMENT. Upon termination or expiration of this Lease, with respect to each group of Equipment, Lessee will forthwith surrender the Equipment to Lessor delivered in as good order and condition as originally delivered, reasonable wear and tear excepted. Lessor may, at its sole option, arrange for removal and transportation of the Equipment provided that Lessee's obligations under Sections 10, 11 and 12 shall not be released. Lessee shall bear all expenses of returning (which include, but are not limited to, the de-installation, insurance, packaging and transportation of) the Equipment to Lessor's location or other location within the continental United States as Lessor may request. In the event Lessee fails to return the Equipment as directed above, all obligations of Lessee under this Lease, including rental payments, shall remain in full force and effect until Lessee returns the Equipment to Lessor. 16. ASSIGNMENT. WITHOUT LESSOR'S PRIOR WRITTEN CONSENT, LESSEE SHALL NOT (a) ASSIGN, TRANSFER, PLEDGE, HYPOTHECATE OR OTHERWISE DISPOSE OF THIS LEASE, EQUIPMENT, OR ANY INTEREST THEREIN, OR (b) SUBLET OR LEND EQUIPMENT OR PERMIT IT TO BE USED BY ANYONE OTHER THAN LESSEE OR LESSEE'S EMPLOYEES. LESSOR MAY ASSIGN THIS LEASE OR GRANT A SECURITY INTEREST IN ANY OR ALL EQUIPMENT, OR BOTH, IN WHOLE OR IN PART TO ONE OR MORE ASSIGNEES OR SECURED PARTIES WITHOUT NOTICE TO LESSEE. If Lessee is given notice of such assignment it agrees to acknowledge receipt thereof in writing and Lessee shall execute such additional documentation as Lessor's assignee shall require. Each such assignee and/or secured party shall have all of the rights, but none of the obligations, of Lessor under this Lease, unless such assignee or secured party expressly agrees to assume such obligations in writing. Lessee shall not assert against any assignee and/or secured party any defense, counterclaim or offset that Lessee may have against Lessor. Notwithstanding any such assignment, and providing no Event of Default has occurred and is continuing, Lessor, or its assignees, secured parties, or their agents or assigns, shall not interfere with Lessee's right to quietly enjoy use of Equipment subject to the terms and conditions of this Lease. Subject to the foregoing, this Lease inures to the benefit of and is binding upon the successors and assignees of the parties hereto. 17. DEFAULT. (a) Event of Default. Any of the following events or conditions shall constitute an "Event of Default" hereunder: (i) Lessee's failure to pay any monies due to Lessor hereunder or under any Schedule beyond the tenth (10th) business day after the same is due; (ii) Lessee's failure to materially comply with its obligations under Section 12 or Section 16; (iii) Lessee's failure to comply with or perform any term, covenant, condition, warranty or representation of this Lease or any Schedule hereto or under any other agreement between Lessee and Lessor if such failure to comply or perform is not cured by Lessee within ten (10) days of receipt of notice thereof; (iv) seizure of the Equipment under legal process; (v) the filing by or against Lessee of a petition for reorganization or liquidation under the Bankruptcy Code or any amendment thereto or under any other insolvency law providing for the relief of debtors; (vi) the voluntary or involuntary making of an assignment of a substantial portion of its assets by Lessee, or any guarantor under any guaranty executed in connection with this Lease ("Guaranty"), for -5- 6 the benefit of its creditors, the appointment of a receiver or trustee for Lessee or any Guarantor for any of Lessee's or Guarantor's assets, the institution by or against Lessee or any Guarantor of any formal or informal proceeding for dissolution, liquidation, settlement of claims against or winding up of the affairs of Lessee or any Guarantor; or (vii) the making by Lessee or any Guarantor of a transfer of all or a material portion of Lessee's or Guarantor's assets or inventory not in the ordinary course of business. (b) Remedies. If any Event of Default shall have occurred: (i) Lessor may proceed by appropriate court action or actions either at law or in equity to enforce performance by Lessee, of the applicable covenants of this Lease, or to recover damages therefor; or (ii) Lessee will on the next rent payment date following the Event of Default, pay to Lessor as liquidated damages which the parties agree are fair and reasonable under the circumstances existing at the time this Lease is entered into, and not as a penalty, an amount equal to the Casualty Value of the Equipment set forth in Exhibit C together with any rent or other amounts past due and owing by Lessee hereunder; or (iii) Lessor may, without notice to or demand upon Lessee; (a) Take possession of the Equipment and lease the same or any portion thereof, for such period, amount, and to such entity as Lessor shall elect. The proceeds of such lease will be applied by Lessor (A) first, to pay all costs and expenses, including reasonable legal fees and disbursements, incurred by Lessor as a result of the default and the exercise of its remedies with respect thereto, (B) second, to pay Lessor an amount equal to any unpaid rent or other amounts past due and payable plus the Casualty Value, to the extent not previously paid by Lessee, and (C) third, to reimburse Lessee for the Casualty Value to the extent previously paid. Any surplus remaining thereafter will be retained by Lessor. (b) Take possession of the Equipment and sell the same or any portion thereof at public or private sale and without demand or notice of intention to sell. The proceeds of such sale will be applied by Lessor (A) first, to pay all costs and expenses, including reasonable legal fees and disbursements, incurred by Lessor as a result of the default and the exercise of its remedies with respect thereto, (B) second, to pay Lessor an amount equal to any unpaid rent or other amounts past due and payable plus the Casualty Value, to the extent not previously paid by Lessee, and (C) third, to reimburse Lessee for the Casualty Value to the extent previously paid by Lessee. Any surplus remaining thereafter will be retained by Lessor. (c) Take possession of the Equipment and hold and keep idle the same or any portion thereof. Lessee agrees to pay reasonable internal and out-of-pocket costs of Lessor related to the exercise of its remedies, including direct costs of its in-house counsel and out-of-pocket legal fees and expenses. At Lessor's request, Lessee shall assemble the Equipment and make it available to Lessor at such location in the continental United States as Lessor may designate. Lessee waives any right it may have to redeem the Equipment. Repossession of any or all Equipment shall not terminate this Lease or any Schedule unless Lessor notifies Lessee in writing. Any amount required to be paid but not paid under this Section shall be increased by a service charge of 1.5% per month, or -6- 7 the highest rate of interest permitted by applicable law, whichever is less, accruing from the date the Casualty Value or other amounts are payable hereunder until such amounts are paid. Except as otherwise set forth in this Agreement, none of the above remedies is intended to be exclusive, but each is cumulative and in addition to any other remedy available to Lessor, and all may be enforced separately or concurrently. In addition to the foregoing remedies, if an Event of Default hereunder shall have occurred and be continuing for a period of 10 business days without cure, Lessee shall promptly provide Lessor with copies of the minutes of each meeting of Lessee's board of directors or any committee thereof and copies of each written consent taken by the board or such committees. 18. LATE PAYMENTS. A service charge of 1.5% per month, or the highest service charge permitted by applicable law, whichever is less, shall be paid by Lessee to Lessor on all funds owed Lessor by Lessee. If such funds have not been received by Lessor at Lessor's place of business or by Lessor's designated agent by the date such funds are due under this Lease, Lessor shall bill Lessee for such charges. Lessee acknowledges that invoices for rentals due hereunder are sent by Lessor for Lessee's convenience only. Lessee's non-receipt of an invoice will not relieve Lessee of its obligation to make rent payments hereunder. 19. LESSOR'S EXPENSE. Lessee shall pay Lessor all costs and expenses including reasonable attorney's fees and the fees of the collection agencies, incurred by Lessor in enforcing any of the terms, conditions or provisions hereof. 20. OWNERSHIP; PERSONAL PROPERTY. The Equipment shall be and remain personal property of Lessor, and Lessee shall have no right, title or interest therein or thereto except as expressly set forth in this Lease, notwithstanding the manner in which it may be attached or affixed to real property, and upon termination or expiration of the Lease term, Lessee shall have the duty and Lessor shall have the right to remove the Equipment from the premises where the same be located whether or not affixed or attached to the real property or any building, at the cost and expense of Lessee. 21. ALTERATIONS; ATTACHMENTS. No alterations or attachments shall be made to the Equipment without Lessor's prior written consent, which shall not be given for changes that will affect the reliability and utility of the Equipment or which cannot be removed without damage to the Equipment, or which in any way affect the value of the Equipment for purposes of resale or re-lease. 22. FINANCING STATEMENT. Lessee will execute financing statements pursuant to the Uniform Commercial Code. 23. MISCELLANEOUS. (a) Lessee shall provide Lessor with such corporate resolutions, financial statements, opinions of counsel and other documents as Lessor shall request from time to time. (b) Lessee represents that the Equipment is being leased hereunder for business purposes. (c) Time is of the essence with respect to this Lease. (d) Lessee shall keep its books and records in accordance with generally accepted accounting principles and practices consistently applied and shall deliver to Lessor its annual audited financial statements, unaudited monthly financial statements to include any financial information given to Lessee's Board of Directors, and signed by an officer of Lessee and such other unaudited financial statements as may be reasonably requested by -7- 8 Lessor. (e) Any action by Lessee against Lessor for any default by Lessor under this Lease, including breach of warranty or indemnity, shall be commenced within one (1) year after any such cause of action accrues. 24. NOTICES. All notices hereunder shall be in writing, by registered mail, and shall be directed, as the case may be, to Lessor at 2401 Kerner Boulevard, San Rafael, California 94901, Attention: Lease Administration and to Lessee at 11545 Sorrento Valley Road, Suite 315, San Diego, California 92121, Attention: President. 25. ENTIRE AGREEMENT. Lessee acknowledges that Lessee has read this Lease, understands it and agrees to be bound by its terms, and further agrees that it and each Schedule constitute the entire agreement between Lessor and Lessee with respect to the subject matter hereof and supersedes all previous agreements, promises, or representations. The terms and conditions hereof shall prevail notwithstanding any variance with the terms of any purchase order submitted by the Lessee with respect to any Equipment covered hereby. 26. AMENDMENT. This Lease may not be changed, altered or modified except by an instrument in writing signed by an officer of the Lessor and the Lessee. 27. WAIVER. Any failure of Lessor to require strict performance by Lessee or any waiver by Lessor of any provision herein shall not be construed as a consent or waiver of any other breach of the same or any other provision. 28. SEVERABILITY. If any provision of this Lease is held invalid, such invalidity shall not affect any other provisions hereof. 29. JURISDICTION AND WAIVER OF JURY TRIAL. This Lease shall be governed by and construed under the laws of the State of California. It is agreed that exclusive jurisdiction and venue for any legal action between the parties arising out of this Lease shall be in the Superior Court for Marin County, California, or, in cases where Federal diversity jurisdiction is available, in the United States District Court for the Northern District of California. LESSEE, TO THE EXTENT IT MAY LAWFULLY DO SO, HEREBY WAIVES ITS RIGHT TO TRIAL BY JURY IN ANY ACTION BROUGHT ON OR WITH RESPECT TO THIS LEASE, ANY SCHEDULE, OR ANY AGREEMENT EXECUTED IN CONNECTION HEREWITH. 30. NATURE OF TRANSACTION. Lessor makes no representation whatsoever, express or implied, concerning the legal character of the transaction evidenced hereby, for tax or any other purpose. 31. SECURITY INTEREST. (a) One executed copy of the Lease will be marked "Original" and all other counterparts will be duplicates. To the extent, if any, that this Lease constitutes chattel paper (as such term is defined in the Uniform Commercial Code as in effect in any applicable jurisdiction) no security interest in the lease may be created in any documents other than the "Original." (b) There shall be only one original of each Schedule and it shall be marked "Original," and all other counterparts will be duplicates. To the extent, if any, that any Schedule(s) to this Lease constitutes chattel paper (or as such term is defined in the Uniform Commercial Code as in effect in any applicable jurisdiction) no security interest in any Schedule(s) may be created in any documents other than the "Original." 32. SUSPENSION OF OBLIGATIONS. The obligations of Lessor hereunder will be suspended to the extent that it is hindered or prevented from complying therewith because of labor disturbances, including but not limited to strikes and lockouts, acts of God, -8- 9 fires, storms, accidents, failure of the manufacturer to deliver any item of Equipment, governmental regulations or interference, or any cause whatsoever not within the sole and exclusive control of Lessor. 33. COMMITMENT FEE. Lessee has paid to Lessor a commitment fee ("Fee") of $10,000. The Fee shall be applied by Lessor first to reimburse Lessor for all out-of-pocket UCC search costs incurred by Lessor, and then proportionally to the first and second months' rent for each Schedule hereunder in the proportion that the purchase price of the Equipment leased pursuant to the Schedule bears to Lessor's entire commitment. However, the portion of the Fee which is not applied to rental shall be non-refundable except if Lessor defaults in its obligations pursuant to Section 3. 37. FINANCE LEASE. The parties agree that this lease is a "Finance Lease" as defined by section 10-103(a)(7) of the California Commercial Code (Cal.Com.C.). Lessee acknowledges either (a) that Lessee has reviewed and approved any written Supply Contract (as defined by Cal.Com.C. Section 10-103(a)(25)) covering Equipment purchased from the "Supplier" (as defined by Cal.Com.C. Section 10-103(a)(24)) thereof for lease to Lessee or (b) that Lessor has informed or advised Lessee, in writing, either previously or by this Lease of the following: (i) the identity of the Supplier; (ii) that the Lessee may have rights under the Supply Contract; and (iii) that the Lessee may contact the Supplier for a description of any such rights Lessee may have under the Supply Contract. Lessee hereby waives any rights and remedies Lessee may have under Cal.Com.C. Sections 10-508 through 522. IN WITNESS WHEREOF, the parties hereto have executed this Lease. PHOENIX LEASING INCORPORATED SIGNAL PHARMACEUTICAL, INC. By: [SIG] By: /s/ MARK D. CARMAN ----------------------------- ------------------------------------- Title: V.P. Title: V.P. Operations & Corp. Develop. -------------------------- ---------------------------------- Exhibit A - Closing Memorandum -9- 10 Exhibit A to MASTER EQUIPMENT LEASE Dated September 1, 1993 CLOSING MEMORANDUM 1. Duly Executed Equipment Lease marked "Original." 2. Duly Executed Schedule marked "Original." 3. Duly Executed Certificate of Acceptance. 5. Insurance Certificates. 6. Resolutions of Lessee's Board of Directors/Incumbency Certificate. 7. Consent to Removal of Personal Property. 8. Purchase Agreement Assignment (if applicable). 9. UCC Financing Statements. 10. Bill of Sale (for Sale-Leaseback Equipment) (if applicable). 11. UCC search. 12. Equipment List, in form and substance satisfactory to Lessor. 13. Certificate of Chief Financial Officer as to the existence of no defaults and as to there being no material adverse change in the condition, financial or otherwise, of the Lessee. -10- 11 ACCEPTANCE NOTICE SCHEDULE 1 Reference is made to the Master Equipment Lease dated as of September 1, 1993 between Phoenix Leasing Incorporated as Lessor and Signal Pharmaceuticals, Inc. as Lessee (the "Lease"). Lessee confirms that the following Equipment has been received, installed and is ready for use by Lessee. The Equipment is satisfactory in all respects for the purposes of this Lease as of the date Lessee executes this Notice below.
Description of Equipment (quantity, model Purchase Mfr./ and serial number) Price Rent Vendor Location - ------------------ -------- ---- ------ -------- Total: $ $
THE LEASE MAY NOT BE CHANGED, ALTERED OR MODIFIED EXCEPT BY AN INSTRUMENT IN WRITING SIGNED BY AN OFFICER OF LESSOR AND A DULY AUTHORIZED REPRESENTATIVE OF LESSEE. IN WITNESS WHEREOF, Lessee has executed this Acceptance Notice as of November 1, 1993. SIGNAL PHARMACEUTICALS, INC. By: /s/ Mark D. Carman ------------------------------------ Name: MARK D. CARMAN ---------------------------------- Title: V.P. OPERATIONS --------------------------------- EX-10.30 33 EXHIBIT 10.30 1 EXHIBIT 10.30 CUSTOMER NO. 1093 MASTER LEASE AGREEMENT Lessor: TRANSAMERICA BUSINESS CREDIT CORPORATION RIVERWAY II WEST OFFICE TOWER WEST HIGGINS ROSEMONT, ILLINOIS 60018 Lessee: SIGNAL PHARMACEUTICALS, INC. 5555 OBERLIN DRIVE SAN DIEGO, CALIFORNIA 92121 The lessor pursuant to this Master Lease Agreement ("Agreement") dated as of January 1, 1998, is Transamerica Business Credit Corporation ("Lessor"). All equipment, together with all present and future additions, parts, accessories, attachments, substitutions, repairs, improvements, and replacements thereof or thereto, which are the subject of a Lease (as defined in the next sentence) shall be referred to as "Equipment." Simultaneous with the execution and delivery of this Agreement, the parties are entering into one or more Lease Schedules (each, a "Schedule") which refer to and incorporate by reference this Agreement, each of which constitutes a lease (each, a "Lease") for the Equipment specified therein. Additional details pertaining to each Lease are specified in the applicable Schedule. Each Schedule that the parties hereafter enter into shall constitute a Lease. Lessor and Lessee have no obligation to enter into any additional leases with, or extend any future financing to, the other party. 1. LEASE. Subject to and upon all of the terms and conditions of this Agreement and each Schedule, Lessor hereby agrees to lease to Lessee and Lessee hereby agrees to lease from Lessor the Equipment for the Term (as defined in Paragraph 2 below) thereof. The timing and financial scope of Lessor's obligation to enter into Leases hereunder are limited as set forth in the Commitment Letter executed by Lessor and Lessee, dated as of November 14, 1997 and attached hereto as Exhibit A (the "Commitment Letter"). 2. TERM. Each Lease shall be effective and the term of each Lease ("Term") shall commence on the commencement date specified in the applicable Schedule and, unless sooner terminated (as hereinafter provided), shall expire at the end of the term specified in such Schedule; provided, however, that obligations due to be performed by Lessee during the Term shall continue until they have been performed in full. Schedules will only be executed after the delivery of the Equipment to Lessee or upon completion of deliveries of items of such Equipment with aggregate cost of not less than $50,000. 3. RENT. Lessee shall pay as rent to Lessor, for use of the Equipment during the Term or Renewal Term (as defined in Paragraph 8), rental payments equal to the sum of all rental payments including, without limitation, security deposits, advance rents, and interim rents payable in the amounts and on the dates specified in the applicable Schedule ("Rent"). If any Rent or other amount payable by Lessee is not paid within five days after the day on which it becomes payable, Lessee will pay on demand, as a late charge, an amount equal to 5% of such unpaid Rent or other amount but only to the extent permitted by applicable law. All payments provided for herein shall be payable to Lessor at its address specified above, or at any other place designated by Lessor. 4. LEASE NOT CANCELABLE; LESSEE'S OBLIGATIONS ABSOLUTE. No Lease may be canceled or terminated except as expressly provided herein. Upon receipt of funding from Lessor, Lessee's obligation to pay all Rent due or to become due hereunder shall be absolute and unconditional and shall not be subject to any delay, reduction, set-off, defense, counterclaim, or recoupment for any reason whatsoever, including any failure of the Equipment or any representations by the manufacturer or the vendor thereof. If the Equipment is unsatisfactory for any reason, Lessee shall make any claim solely against the manufacturer or the vendor thereof and shall, nevertheless, pay Lessor all Rent payable hereunder. 2 5. SELECTION AND USE OF EQUIPMENT. Lessee agrees that it shall be responsible for the selection and use of, and results obtained from, the Equipment and any other associated equipment or services. 6. WARRANTIES. LESSOR MAKES NO REPRESENTATION OR WARRANTY, EXPRESS OR IMPLIED, AS TO ANY MATTER WHATSOEVER, INCLUDING, WITHOUT LIMITATION, THE DESIGN OR CONDITION OF THE EQUIPMENT OR ITS MERCHANTABILITY, SUITABILITY, QUALITY, OR FITNESS FOR A PARTICULAR PURPOSE, AND HEREBY DISCLAIMS ANY SUCH WARRANTY. LESSEE SPECIFICALLY WAIVES ALL RIGHTS TO MAKE A CLAIM AGAINST LESSOR FOR BREACH OF ANY WARRANTY WHATSOEVER. LESSEE LEASES THE EQUIPMENT "AS IS." IN NO EVENT SHALL LESSOR HAVE ANY LIABILITY, NOR SHALL LESSEE HAVE ANY REMEDY AGAINST LESSOR, FOR ANY LIABILITY, CLAIM, LOSS, DAMAGE, OR EXPENSE CAUSED DIRECTLY OR INDIRECTLY BY THE EQUIPMENT OR ANY DEFICIENCY OR DEFECT THEREOF OR THE OPERATION, MAINTENANCE, OR REPAIR THEREOF OR ANY CONSEQUENTIAL DAMAGES AS THAT TERM IS USED IN SECTION 2-719(3) OF THE MODEL UNIFORM COMMERCIAL CODE, AS AMENDED FROM TIME TO TIME ("UCC"). Lessor grants to Lessee the benefits of any and all warranties made available by the manufacturer or the vendor of the Equipment to the extent assignable. 7. DELIVERY. Lessor hereby appoints Lessee as Lessor's agent for the sole and limited purpose of accepting delivery of the Equipment from each vendor thereof. Lessee shall pay any and all delivery and installation charges. Lessor shall not be liable to Lessee for any delay in, or failure of, delivery of the Equipment. 8. RENEWAL. So long as no Event of Default or event which, with the giving of notice, the passage of time, or both, would constitute an Event of Default, shall have occurred and be continuing, or the Lessee shall not have exercised its purchase option under Paragraph 9 hereof, each Lease will automatically renew for a term specified in the applicable Schedule (the "Renewal Term") on the terms and conditions of this Agreement or as set forth in such Schedule; provided, however, that Obligations due to be performed by the Lessee during the Renewal Term shall continue until they have been performed in full. 9. PURCHASE OPTION. So long as no Event of Default or event which, with the giving of notice, the passage of time, or both, would constitute an Event of Default, shall have occurred and be continuing, Lessee may, upon written notice to Lessor received at least sixty days before the expiration of a Term, purchase all, but not less than all, the Equipment covered by the applicable Lease on the date specified therefor in the applicable Schedule ("Purchase Date"). The purchase price for such Equipment shall be its fair market value as set forth in the applicable Schedule determined on an "In-place, In-use" basis, as mutually agreed by Lessor and Lessee, or, if they cannot agree, as determined by an independent appraiser selected by Lessor and approved by Lessee, which approval will not be unreasonably delayed or withheld. Lessee shall pay the cost of any such appraisal. So long as no Event of Default or event which, with the giving of notice, the passage of time, or both, would constitute an Event of Default shall have occurred and be continuing, Lessee may, upon written notice to Lessor received at least sixty days prior to the expiration of the Renewal Term, purchase all, but not less than all, the Equipment covered by the applicable Schedule by the last date of the Renewal Term (the "Alternative Purchase Date") at a purchase price equal to its then fair market value on an "In-place, In-use" basis. On the Purchase Date or the Alternative Purchase Date, as the case may be, for any Equipment, Lessee shall pay to Lessor the purchase price, together with all sales and other taxes applicable to the transfer of the Equipment and any other amount payable and arising hereunder, in immediately available funds, whereupon Lessor shall transfer to Lessee, without recourse or warranty of any kind, express or implied, all of Lessor's right, title, and interest in and to such Equipment on an "As Is, Where Is" basis. 10. OWNERSHIP; INSPECTION; MARKING; FINANCING STATEMENTS. Lessee shall affix to the Equipment any labels supplied by Lessor and reasonably acceptable to Lessee indicating ownership of such Equipment. The Equipment is and shall be the sole property of Lessor. Lessee shall have no right, title, or interest therein, except as lessee under a Lease. The Equipment is and shall at all times be and remain personal property and shall not become a fixture. Lessee shall obtain and record such instruments and take such steps as may be necessary to prevent any person from acquiring any rights in the Equipment by reason of the Equipment being claimed or deemed to be real property. Upon request by Lessor, Lessee shall obtain and deliver to Lessor valid and effective waivers, in recordable form, by the owners, landlords, and mortgagees of the real property upon which the Equipment is located or certificates of Lessee that it is the owner of such real property or that such real property is 2 3 neither leased nor mortgaged. Lessee shall make the Equipment and its maintenance records available for inspection by Lessor at reasonable times and upon reasonable notice. Lessee shall execute and deliver to Lessor for filing any UCC financing statements or similar documents Lessor may reasonably request. 11. EQUIPMENT USE. Lessee agrees that the Equipment will be operated by competent, qualified personnel in connection with Lessee's business for the purpose for which the Equipment was designed and in accordance with applicable operating instructions, laws, and government regulations, and that Lessee shall use reasonable precautions to prevent loss or damage to the Equipment from fire and other hazards. Lessee shall procure and maintain in effect all orders, licenses, certificates, permits, approvals, and consents required by federal, state, or local laws or by any governmental body, agency, or authority in connection with the delivery, installation, use, and operation of the Equipment. 12. MAINTENANCE. Lessee, at its sole cost and expense, shall keep the Equipment in a suitable environment as specified by the manufacturer's guidelines or the equivalent, shall meet all recertification requirements, and shall maintain the Equipment in its original condition and working order, ordinary wear and tear excepted. At the reasonable request of Lessor, Lessee shall furnish all proof of maintenance. 13. ALTERATION; MODIFICATIONS; PARTS. Lessee may materially alter or modify the Equipment only with the prior written consent of Lessor. Any alteration shall be removed and the Equipment restored to its normal, unaltered condition at Lessee's expense (without damaging the Equipment's originally intended function or its value) prior to its return to Lessor. Any part installed in connection with warranty or maintenance service or which cannot be removed in accordance with the preceding sentence shall be the property of Lessor. 14. RETURN OF EQUIPMENT. Except for Equipment that has suffered a Casualty Loss (as defined in Paragraph 15 below) and is not required to be repaired pursuant to Paragraph 15 below or Equipment purchased by Lessee pursuant to Paragraph 9 above, upon the expiration of the Renewal Term of a Lease, or upon demand by Lessor pursuant to Paragraph 22 below, Lessee shall contact Lessor for shipping instructions and, at Lessee's own risk, immediately return the Equipment, freight prepaid, to a location in the continental United States specified by Lessor. At the time of such return to Lessor, the Equipment shall (i) be in the operating order, repair, and condition as required by or specified in the original specifications and warranties of each manufacturer and vendor thereof, ordinary wear and tear excepted, (ii) meet applicable recertification requirements, and (iii) be capable of being promptly assembled and operated by a third party purchaser or third party lessee without further repair, replacement, alterations, or improvements, and in accordance and compliance with any and all statutes, laws, ordinances, rules, and regulations of any governmental authority or any political subdivision thereof applicable to the use and operation of the Equipment. Except as otherwise provided under Paragraph 9 hereof, at least sixty days before the expiration of the Renewal Term, Lessee shall give Lessor notice of its intent to return the Equipment at the end of such Renewal Term. During the sixty-day period prior to the end of a Term or the Renewal Term, Lessor and its prospective purchasers or lessees shall have, upon not less than two business days' prior notice to Lessee and during normal business hours, or at any time and without prior notice upon the occurrence and continuance of an Event of Default, the right of access to the premises on which the Equipment is located to inspect the Equipment, and Lessee shall cooperate in all other respects with Lessor's remarketing of the Equipment. The provisions of this Paragraph 14 are of the essence of the Lease, and upon application to any court of equity having jurisdiction in the premises, Lessor shall be entitled to a decree against Lessee requiring specific performance of the covenants of Lessee set forth in this Paragraph 14. If Lessee fails to return the Equipment when required, the terms and conditions of the Lease shall continue to be applicable and Lessee shall continue to pay Rent until the Equipment is received by Lessor. 15. CASUALTY INSURANCE; LOSS OR DAMAGE. Lessee will maintain, at its own expense, liability and property damage insurance relating to the Equipment, insuring against such risks as are customarily insured against on the type of equipment leased hereunder by businesses in which Lessee is engaged in such amounts, in such form, and with insurers satisfactory to Lessor; provided, however, that the amount of insurance against damage or loss shall not be less than the greater of (a) the replacement value of the Equipment and (b) the stipulated loss value of the Equipment specified in the applicable Schedule ("Stipulated Loss Value"). Each liability insurance policy shall provide coverage (including, without limitation, personal injury coverage) of not less 3 4 than $1,000,000 for each occurrence, and shall name Lessor as an additional insured; and each property damage policy shall, with respect to the Equipment, name Lessor as sole loss payee and all policies shall contain a clause requiring the insurer to give Lessor at least thirty days' prior written notice of any alteration in the terms or cancellation of the policy. Lessee shall furnish to Lessor a copy of each insurance policy (with endorsements) or other evidence satisfactory to Lessor that the required insurance coverage is in effect; provided, however, Lessor shall have no duty to ascertain the existence of or to examine the insurance policies to advise Lessee if the insurance coverage does not comply with the requirements of this Paragraph. If Lessee fails to insure the Equipment as required, Lessor shall have the right but not the obligation to obtain such insurance, and the cost of the insurance shall be for the account of Lessee due as part of the next due Rent. Lessee consents to Lessor's release, upon its failure to obtain appropriate insurance coverage, of any and all information necessary to obtain insurance with respect to the Equipment or Lessor's interest therein. Until the Equipment is returned to and received by Lessor as provided in Paragraph 14 above, Lessee shall bear the entire risk of theft or destruction of, or damage to, the Equipment including, without limitation, any condemnation, seizure, or requisition of title or use ("Casualty Loss"). No Casualty Loss shall relieve Lessee from its obligations to pay Rent except as provided in clause (b) below. When any Casualty Loss occurs, Lessee shall immediately notify Lessor and, at the option of Lessee, shall promptly (a) place such Equipment in good repair and working order; or (b) pay Lessor an amount equal to the Stipulated Loss Value of such Equipment and all other amounts (excluding Rent) payable by Lessee hereunder, together with any applicable late charge on such amounts at a rate per annum equal to the rate imputed in the Rent payments hereunder (as reasonably determined by Lessor) from the date of the Casualty Loss through the date of payment of such amounts, whereupon Lessor shall transfer to Lessee, without recourse or warranty (express or implied), all of Lessor's interest, if any, in and to such Equipment on an "AS IS, WHERE IS" basis. The proceeds of any insurance payable with respect to the Equipment shall be applied, at the option of Lessee, either towards (i) repair of the Equipment or (ii) payment of any of Lessee's obligations hereunder. Lessee hereby appoints Lessor as Lessee's attorney-in-fact to make claim for, receive payment of, and execute and endorse all documents, checks or drafts issued with respect to any Casualty Loss under any insurance policy relating to the Equipment. 16. TAXES. Lessee shall pay when due, and indemnify and hold Lessor harmless from, all sales, use, excise, and other taxes, charges, and fees (including, without limitation, income, franchise, business and occupation, gross receipts, licensing, registration, titling, personal property, stamp and interest equalization taxes, levies, imposts, duties, charges, or withholdings of any nature), and any fines, penalties, or interest thereon, imposed or levied by any governmental body, agency, or tax authority upon or in connection with the Equipment, its purchase, ownership, delivery, leasing, possession, use, or relocation of the Equipment or otherwise in connection with the transactions contemplated by each Lease or the Rent thereunder, excluding taxes on or measured by the net income of Lessor, except where such charges result directly from Lessor's gross negligence or willful misconduct. Upon request, Lessee will provide proof of payment. Unless Lessor elects otherwise, Lessee will pay all property taxes on the Equipment. Lessee shall timely prepare and file all reports and returns which are required to be made with respect to any obligation of Lessee under this Paragraph 16. Lessee shall, to the extent permitted by law, cause all billings of such fees, taxes, levies, imposts, duties, withholdings, and governmental charges to be made to Lessor in care of Lessee. Upon request, Lessee will provide Lessor with copies of all such billings. 17. LESSOR'S PAYMENT. If Lessee fails to perform its obligations under Paragraph 15 or 16 above, or Paragraph 23 below, Lessor shall have the right, after notice, to substitute performance, in which case Lessee shall immediately reimburse Lessor therefor. 18. GENERAL INDEMNITY. Each Lease is a net lease. Therefore, Lessee shall indemnify Lessor and its successors and assigns against, and hold Lessor and its successors and assigns harmless from, any and all claims, actions, damages, obligations, liabilities, and all costs and expenses, including, without limitation, legal fees incurred by Lessor or its successors and assigns arising out of each Lease including, without limitation, the purchase, ownership, delivery, lease, possession, maintenance, condition, use, or return of the Equipment, or arising by operation of law, except that Lessee shall not be liable for any claims, actions, damages, obligations, and costs and expenses determined by an order of a court of competent jurisdiction to have occurred as a result of the gross negligence or willful misconduct of Lessor or its successors and assigns. Lessee agrees that upon written notice by Lessor of the assertion of any claim, action, damage, obligation, liability, or lien, Lessee shall assume full responsibility for the defense thereof, provided that Lessor's failure to give such notice shall not 4 5 limit or otherwise affect its rights hereunder. Any payment pursuant to this Paragraph (except for any payment of Rent) shall be of such amount as shall be necessary so that, after payment of any taxes required to be paid thereon by Lessor, including taxes on or measured by the net income of Lessor, the balance will equal the amount due hereunder. The provisions of this Paragraph with regard to matters arising during a Lease shall survive the expiration or termination of such Lease. 19. ASSIGNMENT BY LESSEE. Lessee shall not, without the prior written consent of Lessor, (a) assign, transfer, pledge, or otherwise dispose of any Lease or Equipment, or any interest therein; (b) sublease or lend any Equipment or permit it to be used by anyone other than Lessee and its employees; or (c) move any Equipment from the location specified for it in the applicable Schedule, except that Lessee may move Equipment to another location within the United States provided that Lessee has delivered to Lessor (A) prior written notice thereof and (B) duly executed financing statements and other agreements and instruments (all in form and substance satisfactory to Lessor) necessary or, in the opinion of the Lessor, desirable to protect Lessor's interest in such Equipment. Notwithstanding anything to the contrary in the immediately preceding sentence, Lessee may keep any Equipment consisting of motor vehicles or rolling stock at any location in the United States. 20. ASSIGNMENT BY LESSOR. Lessor may assign its interest or grant a security interest in any Lease and the Equipment individually or together, in whole or in part. If Lessee is given written notice of any such assignment, it shall immediately make all payments of Rent and other amounts hereunder directly to such assignee. Each such assignee shall have all of the rights of Lessor under each Lease assigned to it. Lessee shall not assert against any such assignee any set-off, defense, or counterclaim that Lessee may have against Lessor or any other person. 21. DEFAULT; NO WAIVER. Lessee or any guarantor of any or all of the obligations of Lessee hereunder (together with Lessee, the "Lease Parties") shall be in default under each Lease upon the occurrence of any of the following events (each, an "Event of Default"): (a) Lessee fails to pay within two business days after notice of failure to pay when due any amount required to be paid by Lessee under or in connection with any Lease; (b) any of the Lease Parties fails to perform any other provision under or in connection with a Lease or violates any of the covenants or agreements of such Lease Party under or in connection with a Lease; (c) any representation made or financial information delivered or furnished by any of the Lease Parties under or in connection with a Lease shall prove to have been inaccurate in any material respect when made; (d) any of the Lease Parties makes an assignment for the benefit of creditors, whether voluntary or involuntary, or consents to the appointment of a trustee or receiver, or if either shall be appointed for any of the Lease Parties or for a substantial part of its property without its consent and, in the case of any such involuntary proceeding, such proceeding remains undismissed or unstayed for forty-five days following the commencement thereof; (e) any petition or proceeding is filed by or against any of the Lease Parties under any Federal or State bankruptcy or insolvency code or similar law and, in the case of any such involuntary petition or proceeding, such petition or proceeding remains undismissed or unstayed for forty-five days following the filing or commencement thereof, or any of the Lease Parties takes any action authorizing any such petition or proceeding; (f) any of the Lease Parties fails to pay when due any indebtedness for borrowed money or under conditional sales or installment sales contracts or similar agreements, leases, or obligations evidenced by bonds, debentures, notes, or other similar agreements or instruments to any creditor (including Lessor under any other agreement) after any and all applicable cure periods therefor shall have elapsed; (g) any judgment rendered by a court of competent jurisdiction shall be rendered against any of the Lease Parties which shall remain unpaid or unstayed for a period of sixty days; (h) any of the Lease Parties shall dissolve, liquidate, wind up or cease its business, sell or otherwise dispose of all or substantially all of its assets, or make any material change in its basic lines of business; (i) any of the Lease Parties shall amend or modify its name, unless such Lease Party delivers to Lessor, within thirty days after any such proposed amendment or modification, written notice of such amendment or modification and within ten days before such amendment or modification delivers executed financing statements (in form and substance satisfactory to the Lessor); (j) any of the Lease Parties shall merge or consolidate with any other entity or make any material change in its capital structure, in each case without Lessor's prior written consent, which shall not be unreasonably withheld; (k) any of the Lease Parties shall suffer any loss or suspension of any material license, permit, or other right or asset necessary to the profitable conduct of its business, fail generally to pay its debts as they mature, or call a meeting for purposes of compromising its debts; (l) any of the Lease Parties shall deny or disaffirm its obligations hereunder or under any of the documents delivered in connection herewith; (m) there is a change, which change does not result from the sale of newly issued securities 5 6 to investors, in more than 35% of the ownership of any equity interests of any of the Lease Parties on the date hereof or more than 35% of such interests become subject to any contractual, judicial or statutory lien, charge, security interest, or encumbrance; or (n) any of the Lease Parties suffers a material adverse change in the business, prospects, operations, results of operations, assets, liabilities, or condition (financial or otherwise). 22. REMEDIES. Upon the occurrence and continuation of an Event of Default, Lessor shall have the right, in its sole discretion, to exercise any one or more of the following remedies: (a) terminate each Lease; (b) declare any and all Rent and other amounts then due and any and all Rent and other amounts to become due under each Lease (collectively, the "Lease Obligations") immediately due and payable; (c) take possession of any or all items of Equipment, wherever located, without demand, notice, court order, or other process of law, and without liability for entry to Lessee's premises, for damage to Lessee's property, or otherwise; (d) demand that Lessee immediately return any or all Equipment to Lessor in accordance with Paragraph 14 above, and, for each day that Lessee shall fail to return any item of Equipment, Lessor may demand an amount equal to the Rent payable for such Equipment in accordance with Paragraph 14 above; (e) lease, sell, or otherwise dispose of the Equipment in a commercially reasonable manner, with or without notice and on public or private bid; (f) recover the following amounts from the Lessee (as damages, including reimbursement of costs and expenses, liquidated for all purposes and not as a penalty): (i) all costs and expenses of Lessor reimbursable to it hereunder, including, without limitation, expenses of disposition of the Equipment, legal fees, and all other amounts specified in Paragraph 23 below; (ii) an amount equal to the sum of (A) any accrued and unpaid Rent through the later of (1) the date of the applicable default, (2) the date that Lessor has obtained possession of the Equipment, or (3) such other date as Lessee has made an effective tender of possession of the Equipment to Lessor (the "Default Date") and (B) if Lessor resells or re-lets the Equipment, Rent at the periodic rate provided for in each Lease for the additional period that it takes Lessor to resell or re-let all of the Equipment; (iii) the present value of all future Rent reserved in the Leases and contracted to be paid over the unexpired Term of the Leases discounted at five percent compound interest; (iv) the reversionary value of the Equipment as of the expiration of the Term of the applicable Lease as set forth on the applicable Schedule, discounted at five percent compound interest; and (v) any indebtedness for Lessee's indemnity under Paragraph 18 above, plus a late charge at the rate specified in Paragraph 3 above, less the amount received by Lessor, if any, upon sale or re-let of the Equipment; and (g) exercise any other right or remedy to recover damages or enforce the terms of the Leases. Upon the occurrence and continuance of an Event of Default or an event which with the giving of notice or the passage of time, or both, would result in an Event of Default, Lessor shall have the right, whether or not Lessor has made any demand or the obligations of Lessee hereunder have matured, to appropriate and apply to the payment of the obligations of Lessee hereunder all security deposits and other deposits (general or special, time or demand, provisional or final) now or hereafter held by and other indebtedness or property now or hereafter owing by Lessor to Lessee. Lessor may pursue any other rights or remedies available at law or in equity, including, without limitation, rights or remedies seeking damages, specific performance, and injunctive relief. Any failure of Lessor to require strict performance by Lessee, or any waiver by Lessor of any provision hereunder or under any Schedule, shall not be construed as a consent or waiver of any other breach of the same or of any other provision. Any amendment or waiver of any provision hereof or under any Schedule or consent to any departure by Lessee herefrom or therefrom shall be in writing and signed by Lessor. No right or remedy is exclusive of any other provided herein or permitted by law or equity. All such rights and remedies shall be cumulative and may be enforced concurrently or individually from time to time. 23. LESSOR'S EXPENSE. Lessee shall pay Lessor on demand all costs and expenses (including legal fees and expenses) incurred in connection with the preparation, execution and delivery of this Agreement and any other agreements and transactions contemplated hereby, which expenses shall not exceed $2,500 without the written consent of Lessee and all costs and expenses in protecting and enforcing Lessor's rights and interests in each Lease and the equipment, including, without limitation, legal, collection, and remarketing fees and expenses incured by Lessor in enforcing the terms, conditions, or provisions of each Lease or upon the occurrence and continuation of an Event of Default. 24. LESSEE'S WAIVERS. To the extent permitted by applicable law, Lessee hereby waives any and all rights and remedies conferred upon a lessee by Sections 2A-508 through 2A-522 of the UCC. To the extent permitted by applicable law, Lessee also hereby waives any rights now or hereafter conferred by statute or otherwise which may require Lessor to sell, lease, or otherwise use any Equipment in mitigation of Lessor's damages as set forth in Paragraph 22 above or which may otherwise limit or modify any of Lessor's rights 6 7 or remedies under Paragraph 22. Any action by Lessee against Lessor for any default by Lessor under any Lease shall be commenced within one year after any such cause of action accrues. 25. NOTICES; ADMINISTRATION. Except as otherwise provided herein, all notices, approvals, consents, correspondence, or other communications required or desired to be given hereunder shall be given in writing and shall be delivered by overnight courier, hand delivery, or certified or registered mail, postage prepaid, if to Lessor, then to Transamerica Technology Finance Division, 76 Batterson Park Road, Farmington, Connecticut 06032, Attention: Assistant Vice President, Lease Administration, with a copy to Lessor at Riverway II, West Office Tower, 9399 West Higgins Road, Rosemont, Illinois 60018, Attention: Legal Department, if to Lessee, then to Signal Pharmaceuticals, Inc., 5555 Oberlin Drive, San Diego, California 92121, Attention: Vice President Finance or such other address as shall be designated by Lessee or Lessor to the other party. All such notices and correspondence shall be effective when received. 26. REPRESENTATIONS. Lessee represents and warrants to Lessor that (a) Lessee is duly organized, validly existing, and in good standing under the laws of the State of its incorporation; (b) the execution, delivery, and performance by Lessee of this Agreement are within Lessee's powers, have been duly authorized by all necessary action, and do not and will not contravene (i) Lessee's organizational documents or (ii) any law, regulation, rule, or contractual restriction binding on or affecting Lessee; (c) no authorization or approval or other action by, and no notice to or filing with, any governmental authority or regulatory body is required for the due execution, delivery, and performance by Lessee of this Agreement; (d) each Lease constitutes the legal, valid, and binding obligations of Lessee enforceable against Lessee in accordance with its terms; (e) the cost of each item of Equipment does not exceed the fair and usual price for such type of equipment purchased in like quantity and reflects all discounts, rebates, and allowances for the Equipment (including, without limitation, discounts for advertising, prompt payment, testing, or other services) given to the Lessee by the manufacturer, supplier, or any other person; and (f) all information supplied by Lessee to Lessor in connection herewith is correct and does not omit any material statement necessary to insure that the information supplied is not misleading. 27. FURTHER ASSURANCES. Lessee, upon the request of Lessor, will execute, acknowledge, record, or file, as the case may be, such further documents and do such further acts as may be reasonably necessary, desirable, or proper to carry out more effectively the purposes of this Agreement. Lessee hereby appoints Lessor as its attorney-in-fact to execute on behalf of Lessee and authorizes Lessor to file without Lessee's signature any UCC financing statements and amendments Lessor deems advisable. 28. FINANCIAL STATEMENTS. Lessee shall deliver to Lessor: (a) as soon as available, but not later than 120 days after the end of each fiscal year of Lessee and its consolidated subsidiaries, the consolidated balance sheet, income statement, and statements of cash flows and shareholders equity for Lessee and its consolidated subsidiaries (the "Financial Statements") for such year, reported on by independent certified public accountants without an adverse qualification; and (b) as soon as available, but not later than 60 days after the end of each of the first three fiscal quarters in any fiscal year of Lessee and its consolidated subsidiaries, the unaudited Financial Statements for such fiscal quarter, together with a certification duly executed by a responsible officer of Lessee that such Financial Statements have been prepared in accordance with generally accepted accounting principles and are fairly stated in all material respects (subject to normal year-end audit adjustments). Lessee shall also deliver to Lessor as soon as available copies of all press releases and other similar communications issued by Lessee. 29. CONSENT TO JURISDICTION. Lessee irrevocably submits to the jurisdiction of any Illinois state or federal court sitting in Illinois for any action or proceeding arising out of or relating to this Agreement or the transactions contemplated hereby, and Lessee irrevocably agrees that all claims in respect of any such action or proceeding may be heard and determined in such Illinois state or federal court. 30. WAIVER OF JURY TRIAL. LESSEE AND LESSOR IRREVOCABLY WAIVE ALL RIGHT TO TRIAL BY JURY IN ANY ACTION, PROCEEDING, OR COUNTERCLAIM ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY. 31. FINANCE LEASE. Lessee and Lessor agree that each Lease is a "Finance Lease" as 7 8 defined by Section 2A-103(g) of the UCC. Lessee acknowledges that Lessee has reviewed and approved each written Supply Contract (as defined by UCC 2A-103(y)) covering Equipment purchased from each "Supplier" (as defined by UCC 2A-103(x)) thereof. 32. NO AGENCY. Lessee acknowledges and agrees that neither the manufacturer or supplier, nor any salesman, representative, or other agent of the manufacturer or supplier, is an agent of Lessor. No salesman, representative, or agent of the manufacturer or supplier is authorized to waive or alter any term or condition of this Agreement or any Schedule and no representation as to the Equipment or any other matter by the manufacturer or supplier shall in any way affect Lessee's duty to pay Rent and perform its other obligations as set forth in this Agreement or any Schedule. 33. GOVERNING LAW; SEVERABILITY. EACH LEASE SHALL BE GOVERNED BY THE LAWS OF THE STATE OF ILLINOIS WITHOUT GIVING EFFECT TO THE CONFLICT OF LAW PRINCIPLES THEREOF. IF ANY PROVISION SHALL BE HELD TO BE INVALID OR UNENFORCEABLE, THE VALIDITY AND ENFORCEABILITY OF THE REMAINING PROVISIONS SHALL NOT IN ANY WAY BE AFFECTED OR IMPAIRED. LESSEE ACKNOWLEDGES THAT LESSEE HAS READ THIS AGREEMENT AND THE SCHEDULE HERETO, UNDERSTANDS THEM, AND AGREES TO BE BOUND BY THEIR TERMS AND CONDITIONS. FURTHER, LESSEE AND LESSOR AGREE THAT THIS AGREEMENT, THE SCHEDULES DELIVERED IN CONNECTION HEREWITH FROM TIME TO TIME, AND THE COMMITMENT LETTER ARE THE COMPLETE AND EXCLUSIVE STATEMENT OF THE AGREEMENT BETWEEN THE PARTIES, SUPERSEDING ALL PROPOSALS OR PRIOR AGREEMENTS, ORAL OR WRITTEN, AND ALL OTHER COMMUNICATIONS BETWEEN THE PARTIES RELATING TO THE SUBJECT MATTER HEREOF. SHOULD THERE EXIST ANY INCONSISTENCY BETWEEN THE TERMS OF THE COMMITMENT LETTER AND THIS AGREEMENT, THE TERMS OF THIS AGREEMENT SHALL PREVAIL. IN WITNESS WHEREOF, the parties hereto have executed or caused this Agreement to be duly executed by their duly authorized officers as of the date first written above. SIGNAL PHARMACEUTICALS, INC. By: /s/ BRADLEY B. GORDON --------------------------------- Name: Bradley E. Gordon --------------------------------- Title: Federal Tax ID: 94-3174286 TRANSAMERICA BUSINESS CREDIT CORPORATION By: /s/ GARY P. MORO --------------------------------- Name: Gary P. Moro --------------------------------- Title: Vice President 8 EX-10.31 34 EXHIBIT 10.31 1 EXHIBIT 10.31 SORRENTO VALLEY BUSINESS PARK LEASE SUITE 100 From HUB PROPERTIES TRUST a Maryland Real Estate Investment Trust To SIGNAL PHARMACEUTICALS, INC. a California Corporation 5626 Oberlin Drive San Diego, California 92121 2 Table of Contents. ARTICLE 1 Reference Data....................................................................1 1.1 Introduction and Subjects Referred To.........................................1 ARTICLE 2 Premises and Term.................................................................2 2.1 Premises......................................................................2 2.2 Term..........................................................................3 2.3 Termination Option............................................................3 ARTICLE 3 Commencement and Condition .......................................................3 3.1 Commencement Date...............................................................3 3.2 Condition of Premises...........................................................3 ARTICLE 4 Rent and Other Charges............................................................4 4.1 The Annual Fixed Rent...........................................................4 4.2 Additional Rent.................................................................4 4.3 Real Estate Taxes.............................................................5 4.4 Personal Property Taxes.........................................................6 4.5 Operating Costs.................................................................6 4.6 Insurance.......................................................................9 4.7 Utilities......................................................................11 4.8 Late Payment of Rent...........................................................12 4.9 Security Deposit...............................................................12 ARTICLE 5 Landlord's Covenants.............................................................14 5.1 Heat and Air-Conditioning......................................................14 5.2 Water..........................................................................14 5.3 Cleaning.......................................................................14 5.4 Lighting.......................................................................15 5.5 Repairs........................................................................15 5.6 Repair Cost Waiver.............................................................16 5.7 Interruption...................................................................16 5.8 Outside Services...............................................................16 5.9 Access to Building.............................................................17 5.10 Insurance.....................................................................17 ARTICLE 6 Tenant's Additional Covenants....................................................17 6.1 Perform Obligations............................................................17 6.2 Use............................................................................17 6.3 Repair and Maintenance.........................................................18 6.4 Compliance with Law............................................................18 6.5 Indemnification................................................................19 6.6 Landlord's Right to Enter......................................................19 6.7 Personal Property at Tenant's Risk.............................................20 6.8 Payment of Landlord's Cost of Enforcement......................................20 6.9 Yield Up.......................................................................20 6.10 Rules and Regulations.........................................................21 6.11 Estoppel Certificate..........................................................21 6.12 Landlord's Expenses Re Consents...............................................21 6.13 Financial Information.........................................................21 6.14 Assignment and Subletting.....................................................22 6.15 Nuisance....................................................................25 6.16 Equipment; Floor Load.........................................................26
3 -ii- 6.17 Electricity...................................................................26 6.18 Installations, Alterations or Additions.......................................26 6.19 Signs.........................................................................28 6.20 Hazardous Materials...........................................................28 ARTICLE 7 Casualty or Taking...............................................................30 7.1 Termination....................................................................30 7.2 Restoration....................................................................31 7.3 Award..........................................................................31 7.4 Termination Waiver.............................................................32 ARTICLE 8 Defaults.........................................................................32 8.1 Default of Tenant..............................................................32 8.2 Remedies.......................................................................33 8.3 Remedies Cumulative............................................................35 8.4 Landlord's Right to Cure Defaults..............................................35 8.5 Holding Over...................................................................36 8.6 Effect of Waivers of Default...................................................36 8.7 No Waiver, etc.................................................................36 8.8 No Accord and Satisfaction.....................................................36 ARTICLE 9 Rights of Holders................................................................37 9.1 Rights of Mortgagees or Ground Lessors.........................................37 9.2 Modifications..................................................................38 ARTICLE 10 Miscellaneous Provisions........................................................38 10.1 Notices.......................................................................38 10.2 Quiet Enjoyment; Landlord's Right to Make Alterations, Etc...................................................................39 10.3 Lease Not to be Recorded......................................................40 10.4 Assignment of Rents and Transfer of Title; Limitation of Landlord's Liability...............................................40 10.5 Landlord's Default............................................................41 10.6 Notice to Mortgagee and Ground Lessor.........................................41 10.7 Building or Complex Name Change...............................................42 10.8 Parking.......................................................................42 10.9 Brokerage.....................................................................42 10.10 Applicable Law and Construction..............................................42 The Exhibits listed below are incorporated in this Lease by reference and are to be construed as a part of this Lease. EXHIBIT A. Plan showing the Premises. EXHIBIT B. Rules and Regulations. EXHIBIT C. Alterations Requirements. EXHIBIT D. Contractor's Insurance Requirements. EXHIBIT E. Clerk's Certificate.
4 ARTICLE 1 Reference Data 1.1 Introduction and Subjects Referred To This is a lease (this "Lease") entered into by and between HUB PROPERTIES TRUST, a Maryland real estate investment trust ("Landlord") and SIGNAL PHARMACEUTICALS, INC., a California corporation ("Tenant"). Each reference in this Lease to any of the following terms or phrases shall be construed to incorporate the corresponding definition stated in this Section 1.1. Date of this Lease: January __, 1998 Complex: The four (4) buildings (the "Buildings") of the Sorrento Valley Business Park and the parking facilities and all other appurtenances, and the land parcels on which they are located and the sidewalks adjacent thereto, hereinafter referred to collectively as the "Complex". Building: That certain building in the Complex, known as 5626 Oberlin Drive, San Diego, California 92121 (the "Building"). Premises: A portion of the first (1st) floor of the Building substantially as shown on Exhibit A hereto and known as Suite 100. Commencement Date: January 1, 1998. Original Term: Six (6) years, commencing as of the Commencement Date and expiring December 31, 2003. Annual Fixed Rent:
Annual Monthly Lease Year Fixed Rent Payment ---------- ---------- ------- 1 $117,590.40 $ 9,799.20 2 $256,085.76 $21,340.48 3 $261,312.00 $21,776.00 4 $267,844.80 $22,320.40 5 $280,910.40 $23,409.20 6 $287,443.20 $23,953.60
Lease Year: The twelve (12) month period commencing on the Commencement Date and ending on the day immediately preceding the first anniversary of the Commencement Date and each succeeding 5 -2- twelve (12) month period thereafter during the term of this Lease. Tenant's Percentage: Ten and 41/100 percent (10.41%). Other Lease: That certain lease between Sorrento Valley Business Park, a California limited partnership and Tenant dated as of April 30, 1993, as amended by First Amendment to Lease dated November 4, 1994, Second Amendment to Lease dated May 31, 1996 and letter agreement dated the Date of this Lease. Permitted Uses: Offices and laboratories for biotechnology research and development, subject to the provisions of Section 6.2. Commercial General Liability Insurance Limits: $4,000,000 per occurrence (combined single limit) for property damage, bodily and personal injury and death. Original Address of Landlord: c/o M&P Partners Limited Partnership 400 Centre Street Newton, MA 02158 Attn: John Mannix Telephone #: (617) 928-1300 Original Address of Tenant: 5555 Oberlin Drive San Diego, CA 92121 Security Deposit: $21,340.48. ARTICLE 2 Premises and Term 2.1 Premises. Landlord hereby leases to Tenant and Tenant hereby leases from Landlord, subject to and with the benefit of the terms, covenants, conditions and provisions of this Lease, the Premises, excluding exterior faces of exterior walls, the common lobbies, hallways, stairways, stairwells, elevator shafts and other common areas, and the escalators, elevators, pipes, ducts, conduits, wires and appurtenant fixtures and other common 6 -3- facilities serving the common areas, the Premises and the premises of other tenants in the Building. Tenant shall have, as appurtenant to the Premises, rights to use, in common with others, subject to reasonable rules of general applicability to tenants of the Building from time to time made by Landlord of which Tenant is given notice: (a) the common lobbies, hallways and stairways of the Building, (b) the common escalators, elevators, pipes, ducts, conduits, wires and appurtenant fixtures and other common facilities serving the Premises, (c) common walkways and driveways (if any) necessary for access to the Building, and (d) if the Premises include less than all of the rentable area of any floor of the Building, the common toilets and other common facilities located on such floor. 2.2 Term. The term of this Lease shall be for a period beginning on the Commencement Date (as hereinafter defined) and continuing for the Original Term and any extension thereof in accordance with the provision of this Lease, unless sooner terminated as hereinafter provided. The Original Term and any extension thereof in accordance with the provisions of this Lease is hereinafter referred to as the "term". 2.3 Termination Option. Provided there shall exist no Default of Tenant, Tenant may elect to terminate the term of this Lease effective as of December 31, 1998 by giving notice to Landlord of such election, which notice shall be accompanied by (i) Tenant's check to the order of Landlord in the amount of $52,500.00 (the "Termination Payment") and (ii) any plans and specifications Tenant may have relating to the Premises, on or at any time prior to November 30, 1998 (the "Election Date"). If Tenant shall fail to give such notice or to have paid the Termination Payment or to have delivered such plans and specifications by the Election Date, however, this Lease shall continue in full force and effect and Tenant shall have no further option to terminate this Lease under this Section 2.3, it being agreed that time is of the essence with respect to the exercise of Tenant's rights hereunder. ARTICLE 3 Commencement and Condition 3.1 Commencement Date. The Commencement Date shall be January 1, 1998. 3.2 Condition of Premises. The Premises are leased in "as is" condition, Tenant acknowledging that it has fully investigated and become fully familiar with the condition of the Premises and that Landlord has made no warranties or representations as to the condition of the Premises. Landlord 7 -4- shall, however, comply with its obligations under Section 5.6 hereof. ARTICLE 4 Rent and Other Charges 4.1 The Annual Fixed Rent. Tenant agrees to pay to Landlord's Agent, or as otherwise directed by Landlord, commencing on the Commencement Date, without offset, abatement (except as provided in Article 7), deduction or demand, the Annual Fixed Rent. Such Annual Fixed Rent shall be payable in equal monthly installments, in advance, on the first day of each and every calendar month during the term of this Lease, at the Original Address of Landlord, or at such other place as Landlord shall from time to time designate by notice, by check drawn on a domestic bank. Annual Fixed Rent for any partial month shall be prorated on a daily basis, and if Annual Fixed Rent commences on a day other than the first day of a calendar month, the first payment which Tenant shall make to Landlord shall be payable on the date Annual Fixed Rent commences and shall be equal to a proportionate part of the monthly installment of Annual Fixed Rent for the partial month in which Annual Fixed Rent commences plus the installment of Annual Fixed Rent for the succeeding calendar month. "Index" shall mean the Consumer Price Index for Urban Wage Earners and Clerical Workers, Los Angeles-Anaheim-Riverside, All Items, 1982-1984=100, (or the Consumer Price Index for the smallest geographic area for which includes Los Angeles-Anaheim-Riverside. The Index is presently published by the Bureau of Labor Statistics of the United States Department of Labor. In the event publication of the Index ceases, the computation of the Annual Fixed Rent due from Tenant during each year of the term with respect to which the Index is to be applied shall be computed upon the basis of whatever index published by the United States Department of Labor at that time is most nearly comparable as a measure of general changes in price levels for the area in which the Property is located. In the event that the Index ceases to use 1982-84=100 as the basis of calculation, then the Index shall be converted to the amount(s) that would have resulted had the manner of calculating the Index in effect at the Date of this Lease not been altered. Any decrease in the Index shall not cause Annual Fixed Rent to be reduced. 4.2 Additional Rent. Tenant covenants and agrees to pay Tenant's Percentage of Taxes and Operating Costs as provided below, and all other charges and amounts payable by or due from Tenant to Landlord (all such amounts referred to in this sentence being "Additional Rent"). 8 -5- 4.3 Real Estate Taxes. Tenant shall pay to Landlord, as Additional Rent, an amount ("Tenant's Tax Share") equal to Tenant's Percentage of the Taxes (as hereinafter defined) due (or estimated to be due by governmental authority) for any fiscal tax period (a "Tax Year") during the term hereof. Except as otherwise provided in the immediately following paragraph, Tenant shall pay Tenant's Tax Share to Landlord at least ten (10) days prior to the date or dates within any year during the term hereof that the same, or any fractional share thereof, shall be due and payable to any governmental authority responsible for collection of same (as stated in a written notice to Tenant given at least twenty (20) days prior to the date or dates any such payment shall be due, which notice shall set forth the manner of computation of any Tenant's Tax Share due from Tenant), except that such payment shall be made to Landlord not later than ten (10) days after such notice to Tenant, if such notice is given subsequent to the date twenty days prior to the date the same is due and payable as aforesaid. At Landlord's election, Tenant shall pay to Landlord, as Additional Rent on the first day of each calendar month during the term but otherwise in the manner provided for the payment of Annual Fixed Rent, estimated payments on account of Tenant's Tax Share, such monthly amounts to be sufficient to provide Landlord by the time Tax payments are due or are to be made by Landlord a sum equal to Tenant's Tax Share, as reasonably estimated by Landlord from time to time on account of Taxes for the then current Tax Year. If the total of such monthly remittances for any Tax Year is greater than Tenant's Tax Share for such Tax Year, Landlord shall credit such overpayment against Tenant's subsequent obligations on account of Taxes (or promptly refund such overpayment if the term of this Lease has ended and Tenant has no further obligations to Landlord); if the total of such remittances is less than Tenant's Tax Share for such Tax Year, Tenant shall pay the difference to Landlord within ten (10) days after being so notified in writing by Landlord. If, after Tenant shall have made all payments due to Landlord pursuant to this Section 4.3, Landlord shall receive a refund of any portion of Taxes as a result of an abatement of such Taxes by legal proceedings, settlement or otherwise (without either party having any obligation to undertake any such proceed ings), Landlord shall pay or credit to Tenant Tenant's Percentage of that percentage of the refund (after first deducting any reasonably incurred expenses, including attorneys', consultants' and appraisers' fees, incurred in connection with obtaining any such refund) which equals the percentage of the applicable Tax Year included in the term hereof, provided however, in no event shall Tenant be entitled to receive more than the sum of payments actually made by Tenant on account of Taxes with respect to such Tax Year or to receive any payment if Taxes for any Tax Year are less than Base Taxes. 9 -6- In the event that the Commencement Date shall occur or the term of this Lease shall expire or be terminated during any Tax Year, or should the Tax Year or period of assessment of real estate taxes be changed or be more or less than one (1) year, or should Tenant's Percentage be modified during any Tax Year due to a change in the rentable area of the Building and/or the Premises or otherwise, as the case may be, then the amount of Tenant's Tax Share which may be otherwise payable by Tenant as provided in this Section 4.3 shall be appropriately apportioned and adjusted. The term "Taxes" shall mean all taxes, assessments, excises and other charges and impositions which are general or special, ordinary or extraordinary, foreseen or unforeseen, of any kind or nature which are levied, assessed or imposed at any time during the term by any governmental authority upon or against the Complex, or taxes in lieu thereof, and additional types of taxes to supplement real estate taxes due to legal limits imposed thereon. If, at any time during the term of this Lease, any tax or excise on rents or other taxes, however described, are levied or assessed against Landlord with respect to the rent reserved hereunder, either wholly or partially in substitution for, or in addition to, real estate taxes then assessed or levied on the Complex, such tax or excise on rents shall be included in Taxes; however, Taxes shall not include franchise, estate, inheritance, succession, capital levy, income or excess profits taxes assessed on Landlord. Taxes also shall include all court costs, attorneys', consultants' and accountants' fees, and other reasonably incurred expenses incurred by Landlord contesting Taxes through and including all appeals. Taxes shall include any estimated payment made by Landlord on account of a fiscal tax period for which the actual and final amount of taxes for such period has not been determined by the governmental authority as of the date of any such estimated payment. 4.4 Personal Property Taxes. Tenant shall pay all taxes charged, assessed or imposed upon the personal property of Tenant in or upon the Premises. 4.5 Operating Costs. Tenant shall pay to Landlord, as Additional Rent, an amount ("Tenant's Operating Cost Share") equal to Tenant's Percentage of Operating Costs (as hereinafter defined) paid or incurred by Landlord in any twelve-month period established by Landlord (an "Operating Year"). Except as otherwise provided in the immediately following paragraph Tenant shall pay Tenant's Operating Cost Share to Landlord within twenty (20) days from the date Landlord shall furnish to Tenant an itemized statement thereof, prepared, allocated and computed in accordance with then prevailing customs and practices of the real estate industry in the San Diego area, consistently applied. At the election of Landlord, Tenant shall pay to Landlord, as Additional Rent on the first day of each calendar month during the term but otherwise in the manner provided for the payment of 10 -7- Annual Fixed Rent, estimated payments on account of Tenant's Operating Cost Share, such monthly amounts to be sufficient to provide to Landlord, by the end of each Operating Year, a sum equal to Tenant's Operating Cost Share for such Operating Year, as reasonably estimated by Landlord from time to time during such Operating Year. If, at the expiration of each Operating Year in respect of which monthly installments of Tenant's Operating Cost Share shall have been made as aforesaid, the total of such monthly remittances is greater than the actual Tenant's Operating Cost Share for such Operating Year, Landlord shall credit such overpayment against Tenant's subsequent obligations on account of Operating Costs (or promptly refund such overpayment if the term of this Lease has ended and Tenant has no further obligation to Landlord); if the total of such remittances is less than Tenant's Operating Cost Share for such Operating Year, Tenant shall pay the difference to Landlord within ten (10) days after being so notified by Landlord. In the event that the Commencement Date shall occur or the term of this Lease shall expire or be terminated during any Operating Year or Tenant's Percentage shall be modified during any Operating Year due to a change in the rentable area of the Building and/or the Premises or otherwise, as the case may be, then the amount of Tenant's Operating Cost Share which may be payable by Tenant as provided in this Section 4.5 shall be appropriately apportioned and adjusted. The term "Operating Costs" shall include, without limitation, all reasonable costs and expenses as may be paid or incurred by Landlord in maintaining, operating and repairing the common areas and facilities of the Complex during the Term, including, without limitation, CC&R assessments and dues, and the cost of labor, materials, supplies and services used or consumed in maintaining operating and repairing the common areas and facilities, including without limitation, the following: (a) maintaining and repairing landscaping and sprinkler systems, together with all charges for water and sewer service used in the common areas of the Complex; (b) maintaining and repairing concrete walkways and paved parking areas; (c) maintaining and repairing signs and site lighting in the Complex; (d) pest control, exterior janitorial, exterior window washing, sweeping services, and buildings and Complex security; (e) all electricity and other utilities supplied to the common areas of the Complex; (f) all costs of insurance maintained by Landlord; 11 -8- (g) legal fees except as excluded below; and (h) a management fee equal to five percent (5%) of the total Operating Costs and Taxes. Tenant may, at its sole expense, contract for or provide its own interior janitorial service. If Tenant does not contract for or otherwise provide for its own interior janitorial services, then Landlord may provide such services and the costs thereof may be included within Operating Costs. The following shall not constitute Operating Costs: 1. Brokerage commissions, advertising costs and other related expenses incurred in connection with the leasing by Landlord of the Complex; 2. Structural repairs of a capital nature; 3. Damage, the cost to repair which is reimbursed to Landlord under any insurance policy carried by Landlord under this Lease in connection with the Complex; 4. Damage and repairs necessitated by the negligence or willful misconduct of Landlord or Landlord's employees, agents or contractors; 5. Executive salaries of Landlord; 6. Salaries of service personnel to the extent such service personnel performs services not attributable to management, operation, repair or maintenance of the Complex; 7. Landlord's general overhead expenses not related to the Complex; 8. Payments of principal or interest on any mortgage or other encumbrance including ground lease payments and points, commissions and legal fees associated with financing; 9. Depreciation; 10. Legal fees, accountants' fees and expenses incurred in connection with disputes with Tenant or other tenants or occupants of the Complex or associated with the enforcement of any leases; 11. Costs, including permits, license and inspection fees incurred in renovating or otherwise improving, decorating, painting or altering space for other tenants in the Complex; 12 -9- 12. The cost of any service provided to Tenant or other tenants of the Complex for which Landlord is reimbursed; 13. Charitable or political contributions; 14. Interest, penalties or other costs arising out of Landlord's failure to make timely payments of its obligations; 15. Costs incurred in advertising and promotional activities for the Complex; 16. Costs charged Landlord by any of its affiliates for goods and services provided to the Complex to the extent in excess of the prevailing costs thereof that would be charged to Landlord by non-affiliated parties; 17. Except as otherwise provided in Section 6.2, repairs, alterations, additions, improvements or replacements to the Complex made to comply with requirements of applicable governmental law in effect as of the Date of this Lease, except for those repairs, alterations, additions, improvements or replacements for which Tenant is otherwise responsible under this Lease, and except for those arising out of or necessitated by Tenant's use (excluding reasonable wear and tear), or any alterations or tenant improvements made by or for Tenant; 18. Damage and repairs attributable to condemnation, fire and other casualty for which Landlord is reimbursed by condemnation or insurance proceeds; and 19. The cost or expense of testing for, removal, transportation or storage of Hazardous Materials, except to the extent arising out of the storage, use, generation, transportation, disposal, or release of Hazardous Materials by Tenant, or its contractors, employees or invitees. 4.6 Insurance. Tenant shall, at its expense, take out and maintain, from the date upon which Tenant first enters the Premises for any reason, and throughout the term and thereafter so long as Tenant is in occupancy of any part of the Premises, the following insurance: (a) Commercial general liability insurance, including bodily injury and property damage (on an occurrence basis and on a 1988 ISO CGL form or its equivalent or otherwise in the broadest form available, including without limitation, broad form contractual liability, fire, legal liability, independent contractor's hazard and, upon commencement of commercial product production, completed operations coverage) under which Tenant is named as an insured and Landlord and Landlord's Agent (and the holder of any mortgage on the Building or the Complex, as set out in a notice from time to time) are named as additional insureds as their interests may appear, in an amount which shall, at the 13 -10- beginning of the term, be at least equal to the Commercial General Liability Insurance Limit, and, which, from time to time during the term, shall be for such higher limits, if any, as are customarily carried in the area in which the Premises are located at property comparable to the Premises and used for similar purposes; (b) Worker's compensation insurance with statutory limits covering all of Tenant's employees working on the Premises; and (c) So-called "all-risk" property insurance on a "replacement cost" basis with an agreed value endorsement covering all Tenant's furniture, furnishings, fixtures and equipment and other personal property and all improvements and betterments to the Premises performed at Tenant's expense. All such policies shall contain a clause confirming that such policy and the coverage evidenced thereby shall be primary with respect to any insurance policies carried by Landlord and shall be obtained from responsible companies qualified to do business and in good standing in the State of California, which companies shall have a general policy holder's rating in Best's of at least A-VIII. A copy of each paid-up policy evidencing such insurance (appropriately authenticated by the insurer) or a certificate of the insurer, certifying that such policy has been issued, providing the coverage required by this Section and containing provisions specified herein, shall be delivered to Landlord prior to the commencement of the term of this Lease and, upon renewals, not less than thirty (30) days prior to the expiration of such coverage. Tenant agrees to furnish Landlord with certificates evidencing all such insurance prior to the beginning of the term hereof. Tenant shall procure and pay for renewals of such insurance from time to time before the expiration thereof, and Tenant shall deliver to Landlord and any additional insured such renewal policy or a certificate thereof at least thirty (30) days prior to expiration of any existing policy. Each such policy shall be non-cancellable and not materially changed with respect to the interest of Landlord and such mortgagees of the Building or the Complex (and others that are in privity of estate with Landlord of which Landlord provides notice to Tenant from time to time) without at least ten (10) days' prior written notice thereto. Any insurance required of Tenant under this Lease may be furnished by Tenant under a blanket policy carried by it provided that such blanket policy shall reference the Premises, and shall guarantee a minimum limit available for the Premises equal to the insurance amounts required in this Lease. Landlord may, at any time, and from time to time, inspect and/or copy any and all insurance policies required to be procured by Tenant hereunder. Landlord and Tenant shall each endeavor to secure an appropriate clause in, or an endorsement upon, each property damage insurance policy obtained by it and covering the Building, 14 -11- the Premises or the personal property, fixtures and equipment located therein or thereon, pursuant to which the respective insurance companies waive subrogation or permit the insured, prior to any loss, to agree with a third party to waive any claim it might have against said third party. The waiver of subrogation or permission for waiver of any claim hereinbefore referred to shall extend to the agents of each party and its employees and, in the case of Tenant, shall also extend to all other persons and entities occupying or using the Premises by, through or under Tenant. If and to the extent that such waiver or permission can be obtained only upon payment of an additional charge then the party benefiting from the waiver or permission shall pay such charge upon demand, or shall be deemed to have agreed that the party obtaining the insurance coverage in question shall be free of any further obligations under the provisions hereof relating to such waiver or permission from such insurance companies. Subject to the foregoing provisions of this Section 4.6, and insofar as may be permitted by the terms of the insurance policies carried by it, each party hereby releases the other with respect to any claim which it might otherwise have against the other party for loss, damage or destruction of or to its property to the extent such damage is or would be covered by policies of insurance required by this Lease to be carried by the respective parties hereunder. In addition, Tenant agrees to exhaust any and all claims against its insurer(s) prior to commencing an action against Landlord for any property loss, except for any loss or damage to property due to the gross negligence or willful misconduct of Landlord or its agents or employees. 4.7 Utilities. Tenant shall pay for the cost of all charges for electricity, telephone and other utilities or services not supplied by Landlord pursuant to Article 5, whether designated as a charge, tax, assessment, fee or otherwise, all such charges to be paid as the same from time to time become due. Except as otherwise provided in this Section 4.7 or Article 5, it is understood and agreed that Tenant shall make its own arrangements for the installation or provision of all utilities and services and that Landlord shall be under no obligation to furnish any utilities to the Premises. Tenant acknowledges that Annual Fixed Rent does not include the cost of providing such utilities and services to the Premises. If the utility company serving the Premises shall agree to separate metering of Tenant's electricity consumption in the Premises, such electricity usage may (at Landlord's option) be separately metered. If Tenant's electricity consumption shall be separately metered for all or any portion of the Premises at any time during the term hereof, then, for those portions of the Premises that are separately metered, Tenant shall pay all bills for such 15 -12- electricity promptly to the utility company furnishing the same. If Tenant's electricity consumption is not separately metered in all or any portion of the Premises during all or any portion of the term, Tenant shall reimburse Landlord for the costs incurred by Landlord (including any associated fees and expenses reasonably incurred by Landlord) in supplying electricity to those portions of the Premises which are not separately metered, within ten (10) days of Landlord's invoice therefor. 4.8 Late Payment of Rent. If any installment of Annual Fixed Rent or Additional Rent is paid after the date the same was due, it shall bear interest (as Additional Rent) from the date due at the Default Rate (as defined in Section 8.4). Absent specific provision to the contrary, all Additional Rent shall be due and payable in full ten (10) days after demand by Landlord. 4.9 Security Deposit. Upon execution of this Lease, Tenant shall deposit with Landlord the Security Deposit. The Security Deposit shall be held by Landlord as security for the faithful performance of all the terms of this Lease to be observed and performed by Tenant. The Security Deposit shall not be mortgaged, assigned, transferred or encumbered by Tenant and any such act on the part of Tenant shall be without force and effect and shall not be binding upon Landlord. If the Annual Fixed Rent or Additional Rent payable hereunder shall be overdue and unpaid or should Landlord make any payment on behalf of the Tenant, or Tenant shall fail to perform any of the terms of this Lease, then Landlord may, at its option, upon not less than three (3) days' prior notice to Tenant, but without prejudice to any other remedy which Landlord may have on account thereof, appropriate and apply the entire Security Deposit or so much thereof as may be necessary to compensate Landlord toward the payment of Annual Fixed Rent, Additional Rent or other sums or loss or damage sustained by Landlord due to such breach by Tenant; and Tenant shall forthwith upon demand restore the Security Deposit to the original sum deposited. So long as Tenant shall not be in default of its obligations under this Lease, Landlord shall return the Security Deposit, or so much thereof as shall have not theretofore been applied in accordance with the terms of this Section 4.9, to Tenant promptly following the expiration or earlier termination of the term of this Lease and the surrender of possession of the Premises by Tenant to Landlord in accordance with the terms of this Lease. While Landlord holds the Security Deposit, Landlord shall have no obligation to pay interest on the same and shall have the right to commingle the same with Landlord's other funds. If Landlord conveys Landlord's interest under this Lease, the Security Deposit, or any part thereof not previously applied, shall be turned over by Landlord to Landlord's grantee, and Tenant shall look solely to such grantee for proper application of the Security Deposit in accordance with the terms of this Section 4.9 and the return thereof in accordance herewith. The holder of a 16 -13- mortgage on the Property shall not be responsible to Tenant for the return or application of the Security Deposit, whether or not it succeeds to the position of Landlord hereunder, unless such holder actually receives the Security Deposit. In addition, at the expiration of the term of the Other Lease, Tenant shall deliver to Landlord a letter of credit (the "Letter of Credit"), which shall (a) be unconditional and irrevocable and otherwise in form and substance satisfactory to Landlord; (b) be at all times in the amount of $150,000, and shall permit multiple draws without a corresponding reduction in the amount of the Letter of Credit; (c) be issued by a commercial bank reasonably acceptable to Landlord from time to time; (d) be made payable to, and expressly transferable and assignable at no charge by, the owner from time to time of the Property (which transfer/assignment shall be conditioned only upon the execution by such owner of a written document in connection with such transfer/assignment; (e) be payable at sight upon presentment to a local branch of the issuer of a simple sight draft accompanied by a certificate of Landlord stating that Tenant is in default under this Lease, and the amount that Landlord is owed (or is permitted to draw) in connection therewith; and (f) shall either expire sixty (60) days following the expiration of the term of this Lease, or be replaced not less than thirty (30) days prior to the expiration of the then current Letter of Credit so that the original Letter of Credit or a replacement thereof shall be in full force and effect throughout the Term of this Lease and for a period of sixty (60) days thereafter. Tenant shall deliver to Landlord any replacement Letter of Credit not less than thirty (30) days prior to the expiration of the then current Letter of Credit. Notwithstanding anything in this Lease to the contrary, any grace period or cure periods which are otherwise applicable under Section 8.1, hereof, shall not apply to any of the foregoing, and, specifically, if Tenant fails to comply with the requirements of subsection (f) above, Landlord shall have the immediate right to draw upon the Letter of Credit in full and hold the proceeds thereof as a cash security deposit until such breach or default shall be cured by Tenant. Each Letter of Credit shall be issued by a commercial bank that has a credit rating with respect to certificates of deposit, short term deposits or commercial paper of at least P-2 (or equivalent) by Moody's Investor Service, Inc., or at least A-2 (or equivalent) by Standard & Poor's Corporation. If the issuer's credit rating is reduced below P-2 (or equivalent) by Moody's Investor Service, Inc., or at least A-2 (or equivalent) by Standard & Poor's Corporation, or if the financial condition of the issuer changes in any other materially adverse way, then Landlord shall have the right to require that Tenant obtain from a different issuer a substitute Letter of Credit that complies in all respects with the requirements of this Section, and Tenant's failure to obtain such substitute Letter of Credit within ten (10) days after Landlord's written demand therefor (with no other notice, or grace or cure period being applicable thereto) shall entitle 17 -14- Landlord to immediately draw upon the existing Letter of Credit in full, without any further notice to Tenant until such substitute Letter of Credit is provided. ARTICLE 5 Landlord's Covenants 5.1 Heat and Air-Conditioning. Landlord shall furnish heat and air-conditioning ("HVAC") to the Premises (reserving the right, at any time, to change energy sources) sufficient to maintain the Premises at comfortable temperatures for the Permitted Uses and shall furnish ventilation to the Premises in accordance with all legal requirements and in a fashion consistent with similar space used for purposes similar to the Premises, subject to all federal, state and municipal regulations. In the event Tenant makes any alterations, locates an excessive number of persons or heat-generating equipment in, or makes any other use of the Premises which overloads the capacity of the Building HVAC systems or in any other way interferes with such system's ability to perform adequately its proper functions, supplementary systems or alterations may, if and as needed, at Landlord's option, upon reasonable prior notice to Tenant be provided by Landlord, at Tenant's expense. 5.2 Water. Landlord shall furnish water for ordinary drinking, lavatory and toilet facilities. If Tenant uses a disproportionate amount of water as compared to other tenants of the Building, Landlord may assess a reasonable charge for the additional water so used, or install a water meter and thereby measure Tenant's water consumption for all purposes. In the latter event, Tenant shall pay the cost of the meter and the reasonable cost of installation thereof and shall keep such meter and installation equipment in good working order and repair. Tenant agrees to pay for water consumed, as shown on such meter, together with the sewer charge based on such meter charges, as and when bills are rendered, and if Tenant shall fail to make such payment, Landlord may pay such charges and collect the same from Tenant as Additional Rent. 5.3 Cleaning. Landlord shall provide cleaning to the Premises and the common areas of the Building in accordance with standards generally prevailing throughout the term hereof in comparable buildings in the San Diego area used for similar purposes. Tenant shall pay to Landlord on demand the actual costs incurred by Landlord for (a) extra cleaning work in the Premises required because of carelessness, indifference, misuse or neglect on the part of Tenant or its subtenants or its or their employees or visitors, and (b) removal from the Premises and the Building of any refuse and rubbish of Tenant in excess of that ordinarily accumulated in medical research and development office and laboratory occupancy, including, without limitation, 18 -15- kitchen refuse, or at times other than Landlord's standard cleaning times. Notwithstanding the foregoing, Landlord shall not be required to clean any portions of the Premises used for preparation, serving or consumption of food or beverages or other special purposes if same require greater or more difficult cleaning work than office areas, and Tenant agrees, at Tenant's expense, to retain Landlord's cleaning contractor to perform such extra cleaning, provided that the charges of such cleaning contractor shall be commercially reasonable. Landlord, its cleaning contractor and their respective employees shall have access to the Premises after 6:00 p.m. and before 8:00 a.m. and shall have the right to use, without charge therefor, all light, power and water in the Premises reasonably required to clean the Premises as required hereunder. Notwithstanding anything contained herein to the contrary, Landlord shall have no obligation to collect or dispose of any (a) Hazardous Materials (as hereinafter defined) or any radioactive, volatile, highly flammable, explosive or toxic or hazardous materials, (b) needles, syringes, lancets, similar sharp objects or contaminated glassware, (c) blood products, (d) body fluids, (e) human or animal tissue and (f) any materials identified in California Administrative Code Sections 66680-66685 et seq., any item identified in clauses (a) through (f), above, hereinafter referred to as "Excepted Waste". Tenant agrees that title to and liability for any Excepted Waste shall remain with Tenant, even if Landlord collects and/or disposes of any such Excepted Waste. 5.4 Lighting. Landlord shall purchase and install, at Tenant's expense, all lamps, tubes, bulbs, starters and ballasts for lighting fixtures in the Premises; and shall provide lighting to public and common areas of the Building. 5.5 Repairs. Except as otherwise expressly provided herein, Landlord shall make such repairs and replacements to the roof, exterior walls, floor slabs and other structural components of the Building, and to the common areas and facilities of the Building (including any plumbing, electrical, HVAC equipment, elevators and any other common equipment or systems in the Building) as may be necessary to keep them in good repair and condition (exclusive of equipment installed by Tenant and except for those repairs required to be made by Tenant pursuant to Section 6.3 and repairs or replacements occasioned by any act or negligence of Tenant, its servants, agents, customers, contractors, employees, invitees, or licensees). In no event shall Landlord ever be liable or accountable to Tenant for loss of light or view occasioned by alteration or construction of buildings or structures adjacent to the Building or the Complex. Landlord shall provide maintenance and landscaping to the exterior common areas of the Building in accordance with 19 -16- standards generally prevailing throughout the term hereof in comparable office buildings in the San Diego area. 5.6 Repair Cost Waiver. Tenant hereby waives all rights it would otherwise have under California Civil Code Sections 1932(1) and 1942(a), or any successor statutes, to deduct repair costs from rent or terminate this Lease as a result of any failure by Landlord to perform its maintenance or repair obligations. 5.7 Interruption. Landlord shall be under no responsibility or liability for failure, interruption or unavailability of any services, facilities, utilities, repairs or replacements or inability to provide access or inability to perform any other obligation under this Lease caused by breakage, accident, fire, flood or other casualty, strikes or other labor trouble, order or regulation of or by any governmental authority, inclement weather, repairs, inability to obtain or shortages of supplies, labor or materials, war, civil commotion or other emergency, transportation difficulties or due to any act or neglect of Tenant or Tenant's servants, agents, employees or licensees or for any other cause beyond the reasonable control of Landlord, and in no event for any indirect or consequential damages to Tenant; and failure or omission on the part of Landlord to furnish any of same for any of the reasons set forth in this paragraph shall not be construed as an eviction of Tenant, actual or constructive, nor entitle Tenant to an abatement of rent, nor render the Landlord liable in damages, nor release Tenant from prompt fulfillment of any of its covenants under this Lease. Landlord shall, however, with due regard given to the effect on Tenant's business, use all commercially reasonable efforts to minimize, to the extent practical, the duration and extent of any such failure, interruption, unavailability or inability to provide such services, facilities and utilities. Landlord reserves the right temporarily to stop the services of the HVAC, plumbing, electrical or other utilities, systems or facilities in the Building when necessary from time to time by reason of accident or emergency, or for repairs, alterations, replacements or improvements which in the reasonable judgment of Landlord are desirable or necessary, until such repairs, alterations, replacements or improvements shall have been completed. Landlord shall use reasonable efforts to give to Tenant at least ten (10) days' notice if service is to be stopped and to schedule such interruption at nights or on weekends, except in cases of emergency. 5.8 Outside Services. In the event Tenant wishes to provide outside services for the Premises over and above those services to be provided by Landlord as set forth herein, Tenant shall first obtain the prior approval of Landlord (which approval shall not be unreasonably withheld or delayed provided that Tenant agrees that it shall not be unreasonable for Landlord to 20 -17- designate a sole provider of a given service for all tenants of the Building or Complex) for the installation and/or utilization of such services. ("Outside services" shall include, but shall not be limited to, cleaning services, television, so-called "canned music" services, security services, catering services and the like). In the event Landlord approves the installation and/or utilization of such services, such installation and utilization shall be at Tenant's sole cost, risk and expense. 5.9 Access to Building. Tenant acknowledges that Tenant is responsible for providing security to the Premises following Tenant's entry onto the Premises for any reason and for its own personnel whenever located therein. Subject to the foregoing, Landlord shall, at all times, retain the right to control and prevent such access by all persons whose presence, in the reasonable discretion of Landlord, may jeopardize the safety, protection, character, reputation and interests of the Building and its tenants or occupants. Landlord shall in no case be liable for damages resulting from any error with regard to the admission or exclusion of any person from the Building. 5.10 Insurance. Landlord shall carry (i) full replacement cost property insurance (exclusive of footings and foundations, any betterments or improvements performed by Tenant and subject to reasonable deductibles on the Building) in at least the amount of coverage sufficient to prevent the application of co-insurance provisions, and (ii) general liability insurance in an amount consistent with that carried by other landlords of similar properties in the San Diego metropolitan area. ARTICLE 6 Tenant's Additional Covenants 6.1 Perform Obligations. Tenant shall, at all times during the term and such further time as Tenant (or any entity claiming, whether in accordance with this Lease or otherwise, by, through or under Tenant) occupies the Premises or any part thereof, comply with all of the terms, provisions, covenants and conditions on the part of Tenant to be performed under this Lease. Without limiting the generality of the foregoing, Tenant shall perform promptly all of the obligations of Tenant set forth in this Lease, including, without limitation, the obligation to pay when due the Annual Fixed Rent and Additional Rent and all other amounts which by the terms of this Lease are to be paid by Tenant. 6.2 Use. Tenant shall use the Premises only for the Permitted Uses and only to the extent permitted by zoning and other land use ordinances and regulations, and for no other purpose and from time to time to procure and maintain all 21 -18- licenses and permits necessary therefor and for any other use or activity conducted at the Premises, at Tenant's sole expense. Tenant acknowledges that the Premises are subject and subordinate to those certain covenants, conditions and restrictions recorded at Series/Instrument #80-317016, of the Official Records of San Diego County, California, on September 29, 1980, a copy of which Tenant acknowledges has been delivered to it (the "CC&R's"). Tenant acknowledges that it has read the CC&R's and knows the contents thereof. Throughout the term, Tenant shall faithfully and timely perform and comply with the CC&R's and any modification or amendments thereto provided to Tenant, including the payment by Tenant of any periodic or special dues or assessments against the Premises. Tenant shall, at Tenant's sole cost and expense, take all action, including any alterations necessary to comply with the requirements of the Americans With Disabilities Act of 1990 (the "ADA"), which shall arise from Tenant's use of the Premises, or any installations in the Premises, or required by a breach of any of Tenant's covenants or agreements under this Lease, whether or not such requirements shall now be in effect or hereafter enacted. Landlord shall perform any work necessary for the common areas of the Complex to comply with Title III of the ADA, to the extent such work is not Tenant's obligation pursuant to the preceding sentence. The cost of any such work for which Landlord is obligated shall be included as an Operating Cost. 6.3 Repair and Maintenance. Subject to Landlord's obligations under Section 5.5, Tenant shall maintain the Premises in neat and clean order and condition and shall perform all repairs to the Premises and all fixtures, systems and equipment therein (including Tenant's equipment and other personal property) as are necessary to keep them in good and clean working order, appearance and condition, reasonable use and wear thereof and damage by fire or by unavoidable casualty only excepted and shall replace any damaged or broken glass in windows and doors of the Premises (except glass in the exterior walls of the Building) with glass of the same quality as that damaged or broken. 6.4 Compliance with Law. Tenant shall (a) make all repairs alterations, additions or replacements to the Premises required by any law or ordinance or any order or regulation of any public authority, but only to the extent either arising out of Tenant's particular use of the Premises and not applicable generally to properties used for office and laboratory purposes or arising out of any work performed by Tenant, (b) keep the Premises equipped with all safety appliances so required, but only to the extent either arising out of Tenant's particular use of the Premises and not applicable generally to properties used for office and laboratory purposes or arising out of any work performed by Tenant; and (c) shall comply with the orders and regulations of all governmental authorities with respect to zoning, building, 22 -19- fire, health and other codes, regulations, ordinances or laws applicable to the Premises and any use being conducted therein and any work being performed by Tenant. Notwithstanding the foregoing, Tenant may defer compliance with any of the foregoing if (i) the validity of any such law, ordinance, order or regulation shall be contested by Tenant in good faith and by ap propriate legal proceedings, (ii) Landlord shall not be subject to any fine or charge or other cost, expense or liability, (iii) neither the Complex nor any portion thereof shall be subject to being condemned or vacated, (iv) neither the Complex nor any portion thereof shall be subject to any lien or encumbrance and (v) Tenant first gives Landlord appropriate assurance or security against any loss, cost or expense on account thereof. 6.5 Indemnification. Tenant shall save Landlord harmless, and shall exonerate and indemnify Landlord from and against any and all claims, liabilities or penalties asserted by or on behalf of any person, firm, corporation or public authority on account of nuisance or injury, death, damage or loss to person or property in or upon the Premises and/or the Complex arising out of the use or occupancy of the Premises by Tenant or by any person claiming by, through or under Tenant (including, without limitation, all patrons, employees, contractors, vendors, suppliers and customers of Tenant), or arising out of labor disputes with Tenant's employees or strikes, picketing or other similar actions, or on account of or based upon anything whatsoever done on or occurring in the Premises except (and then only to the extent not subject to the provisions of the last paragraph of Section 4.6) if the same were caused by the gross negligence or willful misconduct of Landlord, its agents, servants or employees. In respect of all of the foregoing, Tenant shall, except to the extent due to the gross negligence or willful misconduct of Landlord, its agents, servants or employees, indemnify Landlord (and such others as are in privity of estate with Landlord) from and against all costs, expenses (including, without limitation, reasonable attorneys' fees), and liabilities reasonably incurred in or in connection with any such claim, action or proceeding brought thereon; and, in case of any action or proceeding brought against Landlord by reason of any such claim, Tenant, upon notice from Landlord and at Tenant's expense, shall resist or defend such action or proceeding and employ counsel therefor reasonably satisfactory to Landlord. 6.6 Landlord's Right to Enter. Tenant hereby grants to Landlord and its agents and invitees the right to enter into and examine the Premises at reasonable times and to show the Premises to prospective lessees, lenders, partners and purchasers and others having a bonafide interest in the Premises, and to make such repairs, alterations and improvements and to perform such testing and investigation as Landlord shall reasonably determine to make or perform, and, during the last six (6) months prior to the expiration of this Lease, to keep affixed in suitable places notices of availability of the Premises. Except in instances 23 -20- posing an imminent threat to life or property and except for any entry pursuant to the performance of Landlord's obligations under Article 5, Landlord shall give Tenant reasonable notice prior to making any entry onto the Premises provided however notwithstanding Section 10.1 to the contrary, such notice may be made orally. 6.7 Personal Property at Tenant's Risk. Tenant hereby assumes all risk of loss, damage or destruction to all furnishings, fixtures, equipment, effects and property of every kind, nature and description brought to the Premises or installed in the Premises by or on behalf of Tenant or any person claiming by, through or under Tenant. If the whole or any part thereof shall be destroyed or damaged by fire, water or otherwise, or by the leakage or bursting of water pipes, steam pipes, or other pipes, by theft or from any other cause, Tenant shall hold harmless and indemnify Landlord from and against any and all injury, loss, damage or liability to Tenant and all other persons or entities arising out of said loss or damage, except that Landlord shall in no event be indemnified or held harmless or exonerated from any liability to Tenant or to any other person or entity, for any injury, loss, damage or liability to the extent prohibited by law or arising from the gross negligence or willful misconduct of Landlord or its agents, servants or invitees, subject however (to the extent not prohibited by law) to the provisions of Section 4.6. 6.8 Payment of Landlord's Cost of Enforcement. Tenant shall pay on demand such expenses, including, without limitation, reasonable attorneys' fees, reasonably incurred by Landlord in enforcing any obligation of Tenant under this Lease or in curing any default by Tenant under this Lease as provided in Section 8.4. 6.9 Yield Up. At the expiration or earlier termination of the term of this Lease Tenant shall (a) surrender all keys to the Premises; (b) remove all of its trade fixtures and personal property in the Premises; (c) remove such installations made by it as Landlord may request and any such installations or improvements made by Tenant at its expense during the term of this Lease which Tenant shall desire to remove and all Tenant's signs wherever located; (d) repair all damage caused by such removal and (e) yield up the Premises (including all installations and improvements made by Tenant except for such installations or improvements as Tenant shall remove or as Landlord shall request Tenant to remove), broom clean and in the same good order and repair in which Tenant is obliged to keep and maintain the Premises by the provisions of this Lease. Any property not so removed shall be deemed abandoned and may be removed and disposed of by Landlord in such manner as Landlord shall determine and Tenant shall pay Landlord the entire cost and expense reasonably incurred by it in effecting such removal and disposition and in making any incidental repairs and replacements 24 -21- to the Premises and for use and occupancy during the period after the expiration or earlier termination of the term of this Lease and prior to the performance by Tenant of its obligations under this Section 6.9. Tenant shall further indemnify Landlord against all loss, cost and damage resulting from Tenant's failure or delay in surrendering the Premises as above provided. 6.10 Rules and Regulations. Tenant shall observe and abide by the Rules and Regulations of the Building set forth as Exhibit B, as the same may from time to time be amended, revised or supplemented (the "Rules and Regulations"). Tenant shall further be responsible for compliance with the Rules and Regulations by the employees, servants, agents and visitors of Tenant. The failure of Landlord to enforce any of the Rules and Regulations against Tenant, or against any other tenant or occupant of the Building, shall not be deemed to be a waiver of such Rules and Regulations. Tenant shall be liable for all injuries or damages sustained by Landlord or by other tenants, occupants or invitees of the Building to the extent arising by reason of any breach of the Rules or Regulations by Tenant or by Tenant's agents or employees, and not due to the negligence or other wrongful conduct of Landlord or its agents, servants or employees. 6.11 Estoppel Certificate. Upon not less than ten (10) days' prior written request by Landlord, Tenant shall execute, acknowledge and deliver to Landlord a statement in writing certifying that this Lease is unmodified and in full force and effect and that Tenant has no defenses, offsets or counterclaims against its obligations to pay the Annual Fixed Rent and Additional Rent and any other charges and to perform its other covenants under this Lease (or, if there have been any modifica tions, that this Lease is in full force and effect as modified and stating the modifications and, if there are any defenses, offsets or counterclaims, setting them forth in reasonable detail), the dates to which the Annual Fixed Rent and Additional Rent and other charges have been paid, and any other matter pertaining to this Lease. Any such statement delivered pursuant to this Section 6.11 may be relied upon by any prospective purchaser or mortgagee of the Building or the Complex, or any prospective assignee of such mortgage. 6.12 Landlord's Expenses Re Consents. Tenant shall reimburse Landlord, as Additional Rent, promptly on demand for all reasonable legal, engineering and other professional services expenses incurred by Landlord in connection with all requests by Tenant for consent or approval hereunder. Upon request by Tenant, Landlord shall give to Tenant an estimate of such expenses. 6.13 Financial Information. Tenant shall provide Landlord with such information as to Tenant's financial condition and/or organizational structure as Landlord or the holder of any mortgage of the Building or the Complex requires, within fifteen 25 -22- days of request. Landlord agrees (i) not to disclose such information except as is required by law or necessary or appropriate for the enforcement of this Lease or the present or future financing of the Building or Complex and (ii) to use all reasonable efforts to respect the confidentiality of such information. 6.14 Assignment and Subletting. Tenant shall not assign or transfer this Lease, or any interests herein, or sublet the Premises or any part thereof, or any right or privilege appurtenant thereto, or suffer any other person (the agents and servants of Tenant excepted) to occupy or use the Premises, or any portion thereof, without first obtaining the written consent of Landlord. Tenant acknowledges that the use restrictions set forth in Section 6.2, among other provisions, are material to Landlord in considering any assignment or sublet. Notwithstanding the foregoing, Tenant may, without the need for Landlord's consent, assign its interest in this Lease (a "Permitted Assignment") to (i) any corporation or entity which is a successor to Tenant either by merger or consolidation, (ii) a purchaser of all or substantially all of Tenant's assets or (iii) a corporation or other entity which shall (A) control, (B) be under the control of, or (C) be under common control with, Tenant (the term "control" meaning ownership, directly or indirectly, of at least fifty-one percent (51%) of the outstanding voting stock of a corporation, or other equivalent equity and control interest if Tenant or such other entity is not a corporation) (an entity described in clause (iii) above being referred to herein as an "Affiliate"), so long as (I) the principal purpose of such assignment is not the acquisition of Tenant's interest in this Lease (except if such assignment is made for a valid intracorporate business purpose to an Affiliate) and is not made to circumvent the provisions of this Section 6.14, (II) except if pursuant to clause (i) above, Tenant shall promptly furnish Landlord with fully executed counterparts of any such assignment after consummation thereof which assignment shall include an agreement by the assignee, in form reasonably satisfactory to Landlord, to be bound by all of the terms of this Lease, and (III) there shall not be a Default of Tenant at the effective date of such assignment. Tenant shall also be permitted, without the need for Landlord's consent, to enter into any sublease with any Affiliate provided that such sublease shall expire upon any event pursuant to which the sublessee thereunder shall cease to be an Affiliate. Any assignment to an Affiliate may, at Landlord's election, be deemed void if during the term of this Lease Tenant shall cease to control such assignee. In the event Tenant shall have entered into a sublease with an Affiliate and thereafter such sublessee shall cease to be an Affiliate, then the provisions of the following two paragraphs of this Section 6.14 shall apply as if the term of such sublease were to commence as of the date of the change of status as an Affiliate. 26 -23- In the event that Tenant shall intend to enter into any sublease or assignment which requires Landlord's consent, then Tenant shall, not sooner than one hundred twenty (120) days, and not later than sixty (60) days, prior to the proposed effective date of such sublease or assignment, give Landlord notice of such intent, identifying the proposed subtenant or assignee, all of the terms and conditions of the proposed sublease or assignment and such other information as the Landlord may reasonably request. Landlord may elect (a) to terminate this Lease if Tenant intends to assign this Lease, or to sublease more than fifty percent (50%) of the Premises or (b) to exclude from the Premises the portion thereof to be sublet if such portion is fifty percent (50%) or less of the Premises, by giving notice to Tenant of such election not later than thirty (30) days after receiving notice of such intent from Tenant. If Landlord shall give such notice within such thirty (30) day period, upon the later to occur of (A) the proposed date of commencement of such proposed sublease or assignment, or (B) the date which is thirty (30) days after Landlord's notice, this Lease shall terminate or the Premises shall be reduced to exclude the portion of the Premises intended for subletting, in which case Annual Fixed Rent and Tenant's Percentage shall be correspondingly reduced. If Landlord shall give its consent, Tenant may enter into such sublease or assignment on the terms and conditions set forth in such notice from Tenant within the following one hundred and twenty (120) days. If Tenant shall not enter into such sublease or assignment within such following one hundred and twenty (120) day period and shall still desire to enter into any sublease or assignment, or if Tenant shall change the terms and conditions thereof following the date of Tenant's notice to Landlord, the first sentence of this paragraph shall again become applicable. If Landlord shall not elect to terminate this Lease pursuant to the preceding paragraph, then Landlord shall not unreasonably withhold its consent to an assignment or subletting, provided that the proposed assignee or subtenant (i) is reasonably satisfactory to Landlord with respect to credit considerations, (ii) will use the Premises for the Permitted Uses set forth in Section 1.1 hereof, and (iii) will not use the Premises for a purpose or in a manner which is inconsistent with Landlord's commitments to other tenants in the Complex, (iv) shall assume all obligations of Tenant under this Lease and shall be and remain jointly and severally liable with Tenant for the performance of all of the terms, covenants, conditions, and agreements to be performed by Tenant under the terms of this Lease. Any sublease of all or any portion of the Premises shall provide that it is subject and subordinate to this Lease and to the matters to which this Lease is or shall be subject or subordinate, and that in the event of termination of this Lease or reentry or dispossession of Tenant by Landlord under this Lease, Landlord may, at its option, elect to continue such 27 -24- sublease in effect as a direct lease between Landlord and Tenant and such subtenant shall thereupon attorn to Landlord pursuant to the then executory provisions of such sublease, except that neither Landlord nor any mortgagee of the Property, as holder of a mortgage or as Landlord under this Lease if such mortgagee succeeds to that position, shall (a) be liable for any act or omission of Tenant under such sublease, (b) be subject to any credit, counterclaim, offset or defense which theretofore accrued to such subtenant against Tenant, or (c) be bound by any previous modification of such sublease or by any previous prepayment of more than one (1) month's rent, (d) be bound by any covenant of Tenant to undertake or complete any construction of the Premises or any portion thereof, (e) be required to account for any security deposit of the subtenant other than any security deposit actually received by Landlord, (f) be bound by any obligation to make any payment to such subtenant or grant any credits, (g) be responsible for any monies owing by Landlord to the credit of Tenant or (h) be required to remove any person occupying the Premises or any part thereof; and such sublease shall provide that the subtenant thereunder shall, at the request of Landlord, execute a suitable instrument in confirmation of such agreement to attorn. The provisions of this paragraph shall not be deemed a waiver of the provisions set forth in the first paragraph of this Section 6.14. No subletting or assignment shall in any way impair the continuing primary liability of Tenant hereunder, and no consent to any subletting or assignment in a particular instance shall be deemed to be a waiver of the obligation to obtain the Landlord's written approval in the case of any other subletting or assignment. The joint and several liability of Tenant named herein and any immediate and remote successor in interest of Tenant (by assignment or otherwise), and the due performance of the obligations of this Lease on Tenant's part to be performed or observed, shall not in any way be discharged, released or impaired by any (a) agreement which modifies any of the rights or obligations of the parties under this Lease, (b) stipulation which extends the time within which an obligation under this Lease is to be performed, (c) waiver of the performance of an obligation required under this Lease, or (d) failure to enforce any of the obligations set forth in this Lease. No assignment, subletting or occupancy shall affect the Permitted Uses. Any subletting, assignment or other transfer of Tenant's interest in this Lease in contravention of this Section 6.14 shall be voidable at Landlord's option. Tenant shall not occupy any space in the Building (by assignment, sublease or otherwise) other than the Premises. If the rent and other sums (including, without limitation, all monetary payments plus the reasonable value of any services performed or any other thing of value given by any assignee or subtenant in consideration of such assignment or sublease), either initially or over the term of any assignment or sublease, 28 -25- payable by such assignee or subtenant on account of an assignment or sublease of all or any portion of the Premises exceed the sum of Annual Fixed Rent plus Additional Rent called for hereunder with respect to the space assigned or sublet, Tenant shall pay to Landlord as Additional Rent fifty percent (50%) of such excess payable monthly at the time for payment of Annual Fixed Rent. Nothing in this paragraph shall be deemed to abrogate the provisions of this Section 6.14 and Landlord's acceptance of any sums pursuant to this paragraph shall not be deemed a granting of consent to any assignment of this Lease or sublease of all or any portion of the Premises. Following Landlord's consent, or refusal to consent, to any assignment or sublease, Tenant shall pay Landlord, upon demand, a reasonable charge to cover Landlord's administrative costs in connection therewith, plus the amount of Landlord's out-of-pocket costs reasonably incurred including Landlord's reasonable attorneys fees. Landlord may accept rent from any person other than Tenant pending approval or disapproval of any assignment. Neither a delay in the approval or disapproval of such assignment nor the acceptance of rent shall constitute a waiver or estoppel of Lessor's right to exercise its remedies for the breach of any of the terms or conditions of this Section 6.14. A consent to one assignment, transfer, subletting, occupation or use by any other person shall not be deemed to be a consent to any subsequent assignment, transfer, subletting, occupation or use by another person. Any such subsequent assignment, transfer, subletting, occupation or use without such consent hereunder shall be void, and shall, at the option of Landlord, terminate this Lease. Landlord's acceptance of any name for listing on the Building directory or any Building signs will not be deemed, nor will it substitute for, Landlord's consent, as required by this Lease, to any sublease, assignment, or other occupancy of the Premises. Tenant shall not assign, mortgage, pledge, hypothecate or encumber its interests hereunder as security for any obligation or otherwise, and any such assignment, mortgage, pledge, hypothecation or encumbrance in violation of this provision shall, at Landlord's option (exercised in Landlord's sole and absolute discretion), be void. 6.15 Nuisance. Tenant shall not injure, deface or otherwise harm the Premises; nor commit any nuisance; nor permit in the Premises any vending machine (except such as is used for the sale of merchandise to employees of Tenant) or inflammable fluids or chemicals (except such as are customarily used in connection with standard office and biotechnology research equipment); nor permit any cooking to such extent as requires special exhaust venting; nor permit the emission of any objectionable noise or odor; nor make, allow or suffer any waste of the Premises; nor make any use of the Premises which is 29 -26- improper, offensive or contrary to any law or ordinance or which will invalidate or increase the premiums for any of Landlord's insurance or which is liable to render necessary any alteration or addition to the Building which Landlord shall not have approved in accordance with Section 6.1.8; nor conduct any auction, fire, "going out of business" or bankruptcy sales. 6.16 Equipment; Floor Load. Tenant shall not place a load upon any floor of the Premises exceeding the lesser of the floor load capacity which such floor was designed to carry or that which is allowed by law. Business machines and equipment which emit vibration, noise or other emissions shall be placed and maintained by Tenant at Tenant's expense in settings sufficient to absorb and prevent vibration, noise and all other emissions. If any safe, machinery, heavy equipment, freight, or fixtures requires special handling, Tenant agrees to employ only persons suitably trained and experienced to do said work, and that all work in connection therewith shall comply with applicable laws and regulations. Any such moving shall be at the sole risk and hazard of Tenant and Tenant hereby agrees to exonerate, indemnify and save Landlord harmless against and from any liability, loss, injury, claim or suit resulting directly or indirectly from such moving. To the extent such moving shall involve loading docks or other common areas or facilities of the Building, Tenant shall schedule such moving at such times as Landlord shall reasonably designate. 6.17 Electricity. Tenant shall not connect to the electrical distribution system serving the Premises a total load exceeding the lesser of the capacity of such system or the maximum load permitted from time to time under applicable governmental regulations. The capacity of the electrical distribution system serving the Premises shall be the lesser of (i) the capacity of the branch of the system serving the Premises exclusively or (ii) the allocation to the Premises of the capacity of the system serving the entire Building, Landlord and Tenant agreeing that such capacity shall be allocated equally over the entire rentable area of the Building. 6.18 Installations, Alterations or Additions. Tenant shall make no installations, alterations or additions in, to or on the Premises and shall not permit the making of any holes in the walls, partitions, ceilings or floors without on each occasion obtaining the prior consent of Landlord, and then only pursuant to plans and specifications approved by Landlord in advance in each instance. Notwithstanding the foregoing, Landlord's consent shall not be required for the performance by Tenant of any alteration, addition or improvement to the Premises that shall not be visible from the exterior of the Premises, shall not affect the mechanical, electrical, plumbing, heating, ventilation, life safety or air-conditioning systems of the Building or any structural or other common areas or elements of the Building (such alterations, additions and improvements being 30 -27- "Nonstructural Alterations") and shall not exceed $50,000 in cost, provided however Tenant shall not perform any Nonstructural Alterations without giving Landlord reasonable prior notice thereof, together with all plans and specifications (if any). All work to be performed to the Premises by Tenant (a) shall be performed in a good and workmanlike manner by contractors approved in advance by Landlord and in compliance with the provisions of Exhibit C and all applicable zoning, building, fire, health and other codes, regulations, ordinances and laws, (b) shall be made at Tenant's sole cost and expense (except as hereinafter provided) and at such times and in such a manner as Landlord may from time to time designate, and (c) shall become part of the Premises and the property of Landlord without being deemed Additional Rent for tax purposes, Landlord and Tenant agreeing that Tenant shall be treated as the owner for tax purposes until the expiration or earlier termination of the term hereof, subject to Landlord's rights pursuant to Section 6.9 to require Tenant to remove the same at or prior to the expiration or earlier termination of the term hereof. Tenant shall pay promptly when due the entire cost of any work to the Premises so that the Premises, Building and Complex shall at all times be free of liens for labor and materials, and, at Landlord's request, Tenant shall furnish to Landlord a bond or other security acceptable to Landlord assuring that any such work will be completed in accordance with the plans and specifications theretofore approved by Landlord and assuring that the Premises will remain free of any mechanics' lien or other encumbrances that may arise out of such work. Prior to the commencement of any such work, and throughout and until completion thereof, Tenant shall maintain, or cause to be maintained, the insurance required by Exhibit D, all with coverage limits as stated therein or such higher limits as shall be reasonably required by Landlord. In addition, Tenant shall save Landlord harmless and indemnified from all injury, loss, claims or damage to any person or property occasioned by or arising out of such work. Whenever and as often as any mechanic's or materialmen's lien shall have been filed against the Building or the Complex based upon any act of Tenant or of anyone claiming through Tenant, Tenant shall within three (3) days of notice from Landlord to Tenant take such action by bonding, deposit or payment as will remove or satisfy the lien. Landlord or its representatives shall have the right to post, and keep posted upon the Premises, notices of non-responsibility or such other notices which Landlord may deem to be proper for the protection of Landlord's interest in the Premises and the Building. Tenant, before the commencement of any work from which a mechanic's or materialmen's lien may arise, shall give to Landlord written notice of Tenant's intention to commence such work in sufficient time to enable Landlord to post such notices. 31 -28- If Tenant shall, having first received Landlord's prior approval, make any leasehold improvement to the Premised during the term, then provided this Lease is in effect and Tenant shall not have exercised its right to elect to terminate the term of this Lease pursuant to Section 2.3, Landlord shall, within thirty (30) days after request by Tenant following completion of such work and delivery to Landlord of a certificate of occupancy for the entire Premises and lien waivers from all of Tenant's contractors and subcontractors, make a one-time payment to Tenant in the amount equal to the lesser of the cost of such work as shown by such contractor invoices or $544,400. Tenant shall not, at any time, directly or indirectly, employ or permit the employment of any contractor, mechanic or laborer in the Premises, if such employment will interfere or cause any conflict with other contractors, mechanics or laborers engaged in the construction, maintenance or operation of the Building by Landlord, Tenant or others. In the event of any such interference or conflict, Tenant, upon demand of Landlord, shall cause all contractors, mechanics or laborers causing such interference or conflict to leave the Building immediately. 6.19 Signs. Tenant shall not paint or place any signs or place any curtains, blinds, shades, awnings, aerials, or the like, visible from outside the Premises. Landlord will not unreasonably withhold consent for signs or lettering on or adjacent to the entry doors to the Premises provided such signs conform to building standards adopted by Landlord and Tenant has submitted to Landlord a plan or sketch of the sign to be placed on such entry doors. Landlord agrees, however, to maintain a tenant directory in the lobby of the Building in which will be placed Tenant's name and the location of the Premises in the Building. Tenant shall not install any signs on the exterior of the Building. However, if a monument sign now or hereafter located at the entrance of the parking area serving the Building includes the names of the tenants of the Building, Tenant's name or the name under which it operates as of the Date of this Lease shall be placed on such sign. 6.20 Hazardous Materials. Tenant shall not (a) introduce on or transfer to or store on the Premises, the Building or the Complex or use on the Premises, any Hazardous Materials (as hereinafter defined), except such Hazardous Materials in such amounts as are reasonably necessary for the conduct of the Permitted Uses, and then only in compliance with all Environmental and Health Laws (as hereinafter defined) and the terms and conditions of recommendations, policies or requirements of any insurer of the Building of Complex ("Insurance Conditions"); (b) dump, flush or otherwise dispose of any Hazardous Materials into the drainage, sewage or waste disposal systems serving the Premises, the Building or the Complex, except in compliance with Environmental and Health Laws and Insurance Conditions; (c) release, spill or dispose of any Hazardous 32 -29- Materials in or on the Premises, the Building or the Complex, or (d) transfer any Hazardous Materials from the Premises to any other location (except the transfer of such Hazardous Materials expressly permitted to be used on the Premises from the Premises for disposal and then only in compliance with all Environmental and Health Laws and Insurance Conditions). Tenant agrees that if it or anyone claiming under it shall transfer to the Premises, store, use or dispose (except to the extent expressly permitted above), generate, release, threaten release or spill, any Hazardous Materials, it shall forthwith remove the same, at its sole cost and expense, in the manner provided by all applicable Environmental and Health Laws, regardless of when such Hazardous Materials shall be discovered. Furthermore, Tenant shall pay any fines, penalties or other assessments imposed by any governmental agency with respect to any such Hazardous Materials and shall forthwith repair and restore any portion of the Premises, the Building or the Complex which it shall disturb in so removing any such Hazardous Materials to the condition which existed prior to Tenant's disturbance thereof. Tenant agrees to deliver promptly to Landlord any notices, orders or similar documents received from any governmental agency or official concerning any violation of any Environmental and Health Laws or with respect to any Hazardous Materials affecting the Premises, the Building or the Complex. In addition, Tenant shall, within ten (10) days of receipt, accurately complete any questionnaires from Landlord or other informational requests relating to Tenant's use of the Premises and, in particular, to Tenant's use, generation, storage and/or disposal of Hazardous Materials at, to, or from the Premises. For purposes of this Lease, the term "Hazardous Materials" shall mean and include any Excepted Waste (as defined in Section 5.3 of this Lease), asbestos and asbestos-containing materials, air pollutants or contaminants, crude and refined oil and the products and by-products of oil and petroleum, radioactive, biological, medical or infectious wastes or materials, and any other toxic or hazardous wastes, materials and substances which are defined, determined or identified as a hazardous substance or hazardous waste, extremely hazardous waste, infectious waste, non-RCRA waste, retrograde material, restricted hazardous waste, volatile organic compound, waste or similarly defined, determined or identified in any Environmental and Health Laws, or in any judicial or administrative interpretation of Environmental and Health Laws. "Environmental and Health Laws" shall mean any and all present and future federal, state, county and municipal or other local statutes, laws, regulations, ordinances, rules, judgments, orders, decrees, codes, plans, injunctions, permits, concessions, grants, franchises, licenses, agreements or other governmental 33 -30- restrictions applicable to the Complex relating to Hazardous Materials or the environment or to emissions, discharges or releases or threatened releases of Hazardous Materials into the environment, including, without limitation, into the ambient air, surface water, ground water or in, on or under any land, or otherwise relating to the manufacture, processing, distribution, use, treatment, storage, release or threatened release, disposal, transport or handling of Hazardous Materials or the cleanup or other remediation thereof. Environmental and Health Laws include, without limitation, the following: the Comprehensive Environmental Response, Compensation and Liability At of 1980, as amended (42 U.S.C. Section 9601 et. seq.), the Hazardous Materials Transportation Act, as amended (49 U.S.C. Section 1801 et seq.), the Resource Conservation and Recovery Act of 1976, as amended (42 U.S.C. Section 6901 et seq.), the California Safe Drinking Water and Toxic Enforcement Act of 1986 (Health and Safety Code Section 25249.5 et seq.), the California Hazardous Waste Control Act (Health and Safety Code Section 25100 et seq.) The obligations of Tenant contained in this Section 6.21 shall survive the expiration or termination of this Lease. ARTICLE 7 Casualty or Taking 7.1 Termination. If: (i) the Building is substantially damaged by fire or casualty (the term "substantially damaged" meaning for the purposes of this paragraph only at least thirty (30) percent of the rentable area of the Building, or any portion of a common area or facility necessary for the efficient operation of the Building is damaged to such an extent that the repair of the same in the ordinary course could not be expected to be completed within one year of the fire or other casualty; or (ii) any material part of the Building is permanently taken by any exercise of eminent domain or is condemned (the term "material part" meaning (A) at least thirty (30) percent of the rentable area of the Building or (B) convenient access or (C) any portion of a common area or facility necessary for the efficient operation of the Building is so taken or condemned) for a period of at least all or substantially all of the remainder of the term of this Lease (the "Remainder") then Landlord shall have the right to terminate this Lease by giving notice to Tenant of its election so to do within ninety (90) days after either the occurrence of such casualty or the effective date of such taking or condemnation (as applicable), whereupon this Lease shall terminate thirty (30) days after the date of such notice with the same force and effect as if such date were the date on which this Lease were to expire by effluxion of time. In the event that (i) the Premises or any common areas of the Complex necessary for Tenant's use and enjoyment of the 34 -31- Premises are substantially damaged by fire or casualty (the term "substantially damaged" meaning for purposes of this paragraph only damage to at least thirty (30) percent of the Premises to such an extent that repair of the same in the ordinary course could not be expected to be completed within one year of the fire or other casualty) or (ii) at least thirty (30) percent of the Premises is taken for the Remainder by any exercise of eminent domain, then in either case Tenant shall have the right to terminate this Lease by giving notice of its desire to do so to Landlord within thirty (30) days after such damage or taking, and on the date thirty (30) days after the giving of such notice, this Lease shall terminate with the same force and effect as if such day were the date on which this Lease were to expire by effluxion of time. Notwithstanding the foregoing to the contrary, Tenant shall have no right to terminate this Lease pursuant to this Section 7.1 due to a fire or other casualty if the cause thereof was due to the negligence or other wrongful conduct of Tenant or any agent, employee or invitee of Tenant or any sublessee or other occupant permitted on the Premises by Tenant. 7.2 Restoration. If this Lease shall not be terminated pursuant to Section 7.1, this Lease shall continue in force and a just proportion of the Annual Fixed Rent and Additional Rent on account of Operating Costs and Taxes shall be suspended or abated until the Premises (excluding any improvements to the Premises made at Tenant's expense), or what may remain thereof, shall be put by Landlord in proper condition for use. Landlord covenants to perform such repairs with reasonable diligence and to the extent permitted by the net proceeds of insurance recovered or damages awarded for such taking, destruction or damage and subject to zoning and building laws or ordinances then in existence. "Net proceeds of insurance recovered or damages awarded" refers to the gross amount of such insurance or damages actually made available to Landlord (and not retained by any Superior Lessor or Superior Mortgagee) less the reasonable expenses of Landlord incurred in connection with the collection of the same, including without limitation, fees and expenses for legal and appraisal services. 7.3 Award. Irrespective of the form in which recovery may be had by law, all rights to damages or compensation shall belong to Landlord in all cases. Tenant hereby grants to Landlord all of Tenant's rights to such damages and covenants to deliver such further assignments thereof as Landlord may from time to time request. Nothing contained herein shall be construed to prevent Tenant from prosecuting in any condemnation proceedings a claim for the value of any of Tenant's removable personal property and business machines and equipment installed in the Premises by Tenant at Tenant's expense and which are subject to a Taking (if such an award is available to Tenant) and for relocation expenses, if such a claim shall not affect the amount of 35 -32- compensation otherwise recoverable by Landlord from the Taking authority. 7.4 Termination Waiver. Tenant waives the provisions of California Civil Code Sections 1932(2) and 1933(4) (and all similar or successor statutes) which relate to the termination of leases when the thing leased is destroyed, and agrees that such event shall be governed by the terms of this Lease. ARTICLE 8 Defaults 8.1 Default of Tenant. The occurrence of any one or more of the following shall constitute a "Default of Tenant" under this Lease: (a) The failure by Tenant to make any payment of Annual Fixed Rent, Additional Rent or any other payment required to be made by Tenant hereunder (collectively, "Rent"), as and when due, where such failure shall continue for seven (7) days after notice thereof from Landlord to Tenant; provided, however, that any such notice shall be in lieu of, and not in addition to, any notice required under California Code of Civil Procedure Section 1161. (b) The failure by Tenant to observe or perform any of the express or implied covenants or provisions of this Lease to be observed and performed by Tenant, other than as specified in subsection (a) above, where such failure shall continue for a period of thirty (30) days after written notice thereof from Landlord to Tenant; provided, however, that any such notice shall be in lieu of, and not in addition to, any notice required under California Code of Civil Procedure Section 1161; provided, further, that if the nature of Tenant's default is such that more than thirty (30) days are reasonably required for its cure, then Tenant shall not be deemed to be in default if Tenant shall commence such cure within such thirty (30) day period and thereafter diligently prosecute such cure to completion within sixty (60) days from the date of such notice from Landlord. (c) An assignment by Tenant or any guarantor of Tenant for the benefit of creditors. (d) The taking by execution or levy of Tenant's leasehold interest. (e) The filing of a lien or other involuntary encumbrance against Tenant's leasehold interest or Tenant's other property, including said leasehold interest, or against the property of any guarantor of Tenant, which filing shall not be 36 -33- discharged within thirty (30) days after Tenant receives notice thereof. (f) The filing of a petition by Tenant or any guarantor of Tenant for liquidation, or for reorganization or an arrangement under any provision of any bankruptcy law or code as then in force and effect. (g) The filing of an involuntary petition under any of the provisions of any bankruptcy law or code against Tenant or any guarantor of Tenant and such involuntary petition shall not be dismissed within sixty (60) days thereafter. (h) The appointment of a custodian, receiver or similar agent shall be authorized or appointed to take charge of all or substantially all of the assets of Tenant or any guarantor of Tenant. (i) The dissolution or liquidation (except in connection with a transaction permitted pursuant to the second paragraph of Section 6.14) of Tenant or any guarantor of Tenant or the adoption of any plan or the commencement of any proceeding, the result of which is or is intended to include the dissolution or liquidation of Tenant or any guarantor of Tenant. (j) The entry of an order in any proceeding by or against Tenant or any guarantor of Tenant decreeing or permitting the dissolution of Tenant or any guarantor of Tenant or the winding up of its affairs. (k) The occurrence of a default by Tenant under the Other Lease, Tenant hereby also agreeing that a Default of Tenant under this Lease shall be deemed a default of Tenant under the Other Lease, affording Landlord all of the remedies available under Section 15 B of the Other Lease. 8.2 Remedies. In the event of a Default of Tenant, in addition to all other rights or remedies Landlord may have, Landlord, acting through its employees, agents or servants, may terminate this Lease by notice to Tenant in the manner provided in Section 10.1. In addition to all other rights or remedies Landlord may have, in the event of a Default of Tenant, Landlord shall have the immediate right to re-enter and repossess the Premises. Should Landlord elect to re-enter as herein provided, or should Landlord take possession pursuant to legal proceedings or pursuant to any notice provided by law, and should Landlord elect to terminate this Lease, Landlord may recover from Tenant: (1) The worth at the time of the award of the unpaid Rent which is due, owing and unpaid by Tenant to Landlord at the time of termination; and 37 -34- (2) The worth at the time of the award of the amount by which the unpaid Rent which would have been earned after termination until the time of the award exceeds the amount of the rent loss Tenant proves could have been reasonably avoided; and (3) The worth at the time of the award of the amount by which the unpaid Rent for the balance of the Term after the time of award exceeds the amount of rental loss which Tenant proves could be reasonably avoided; and (4) All other amounts necessary to compensate Landlord for all the detriment proximately caused by Tenant's failure to perform its obligations under this Lease or which in the ordinary course of events are likely to result therefrom including all costs (including attorneys' fees) of recovering possession of the Premises, removing persons or property from the Premises, repairs, brokers' fees, advertising and alterations to the Premises in connection with reletting the Premises; and (5) At Landlord's election, other amounts in addition to or in lieu of the above as may be permitted from time to time by applicable law. All computations of the worth at the time of amounts recoverable by Landlord under clauses (1), (2) and (4) above shall be computed by allowing interest at the Default Rate (as defined in Section 8.4). The worth at the time of award recoverable by Landlord under clause (3) above shall be computed by discounting the amount otherwise recoverable by Landlord at the discount rate of the Federal Reserve Bank of San Francisco plus one percent (1%). If Landlord takes possession of the Premises pursuant to legal proceedings or pursuant to any notice provided by applicable law, and if Landlord does not elect to terminate this Lease, Landlord may from time to time, without terminating this Lease, recover all Rent as it becomes due and, at Landlord's election, relet the Premises or any part of the Premises upon such terms, at such rent, upon such conditions and for such a period of time as Landlord in its sole discretion may deem advisable. Landlord shall also have the right to make such alterations, repairs and decorations in the Premises as Landlord in its sole judgment considers advisable and necessary for the purpose of reletting the Premises; and the making of such alterations, repairs and decorations shall not operate or be construed to release Tenant from liability hereunder as aforesaid. Landlord shall apply to any unpaid amounts due Landlord hereunder the net proceeds, if any, of any reletting of the Premises, after deducting all expenses in connection therewith, including, without limitation, all repossession costs, brokerage commissions, legal expenses, attorneys' fees, advertising, expenses of employees, alteration costs and expenses of preparing the Premises for such reletting. Tenant hereby 38 -35- waives all right to receive all or any portion of the net proceeds of any such reletting. Landlord shall in no event be liable for failure to relet the Premises, or, in the event that the Premises are relet, for failure to collect the rent under such reletting. In the event that Tenant should breach this Lease, Landlord may, at it option, enforce all of its rights and remedies under this Lease, including the right to recover the Rent as it becomes due hereunder. Additionally, Landlord shall be entitled to recover from Tenant all costs of maintenance and preservation of the Premises, and all costs, including attorneys' fees, to protect the Premises and Landlord's interest under this Lease. At any time after a Default of Tenant occurs, Landlord may re-enter the Premises and remove all persons and property from the Premises; such property may be removed and stored in a public warehouse or elsewhere at the cost of and for the account of Tenant. No re-entry into the Premises by Landlord pursuant to this paragraph shall be construed as an election to terminate this Lease unless a written notice of such intention is given to Tenant. To the fullest extent permitted by law, Tenant hereby waives all rights of redemption or relief from forfeiture under California Civil Procedure Sections 1174 and 1179, or under any other present or future law, in the event Tenant is evicted or Landlord takes possession of the Premises by reason of any Default of Tenant. 8.3 Remedies Cumulative. Any and all rights and remedies which Landlord may have under this Lease, and at law and equity (including without limitation actions at law for direct, indirect, special and consequential (foreseeable and unforeseeable) damages, for Tenant's failure to comply with its obligations under this Lease shall be cumulative and shall not be deemed inconsistent with each other, and any two or more of all such rights and remedies may be exercised at the same time insofar as permitted by law. 8.4 Landlord's Right to Cure Defaults. At any time with or without notice, Landlord shall have the right, but shall not be required, to pay such sums or do any act which requires the expenditure of monies which may be necessary or appropriate by reason of the failure or neglect of Tenant to comply with any of its obligations under this Lease (irrespective of whether the same shall have ripened into a Default of Tenant), and in the event of the exercise of such right by Landlord, Tenant agrees to pay to Landlord forthwith upon demand, as Additional Rent, all such sums including reasonable attorneys fees, together with interest thereon at a rate (the "Default Rate") equal to the greater of 6% over the Prime Rate or twelve percent (12%) per annum, but in no event in excess of the maximum rate of interest 39 -36- then permitted to be agreed to by the parties under applicable law. "Prime Rate" shall mean the annual floating rate of interest, determined daily and expressed as a percentage from time to time announced by the largest national or state-chartered banking institution in the state or district in which the Complex is located as its "prime" or "base" rate. If, at any time, both the largest national and state-chartered banking institutions having their principal offices in the City of San Diego, shall cease to announce such a floating rate, Prime Rate shall mean a rate of interest, determined daily, which is two (2) percentage points above the 14-day moving average closing trading price of 90-day Treasury Bills. 8.5 Holding Over. Any holding over by Tenant after the expiration or early termination of the term of this Lease shall be treated as a daily tenancy at sufferance at a rate equal to 1.75 times the greater of the fair market rental value for the Premises on a month-to-month basis or the Annual Fixed Rent in effect immediately prior to the expiration or earlier termination of the term plus Additional Rent and other charges herein provided (prorated on a daily basis). Tenant shall also pay to Landlord all damages, direct and/or consequential (foreseeable and unforeseeable), sustained by reason of any such holding over. Otherwise, such holding over shall be on the terms and conditions set forth in this Lease as far as applicable. 8.6 Effect of Waivers of Default. Any consent or permission by Landlord to any act or omission by Tenant shall not be deemed to be consent or permission by Landlord to any other similar or dissimilar act or omission and any such consent or permission in one instance shall not be deemed to be consent or permission in any other instance. 8.7 No Waiver, etc. The failure of Landlord or Tenant to seek redress for violation of, or to insist upon the strict performance of, any covenant or condition of this Lease shall not be deemed a waiver of such violation nor prevent a subsequent act, which would have originally constituted a violation, from having all the force and effect of an original violation. The receipt by Landlord of rent with knowledge of the breach of any covenant of this Lease shall not be deemed to have been a waiver of such breach by Landlord, or by Tenant, unless such waiver be in writing signed by the party to be charged. No consent or waiver, express or implied, by Landlord or Tenant to or of any breach of any agreement or duty shall be construed as a waiver or consent to or of any other breach of the same or any other agreement or duty. 8.8 No Accord and Satisfaction. No acceptance by Landlord of a lesser sum than the Annual Fixed Rent, Additional Rent or any other charge then due shall be deemed to be other than on account of the earliest installment of such rent or charge due, nor shall any endorsement or statement on any check or any letter 40 -37- accompanying any check or payment as rent or other charge be deemed an accord and satisfaction, and Landlord may accept such check or payment without prejudice to Landlord's right to recover the balance of such installment or pursue any other remedy in this Lease provided. ARTICLE 9 Rights of Holders 9.1 Rights of Mortgagees or Ground Lessors. This Lease, and all rights of Tenant hereunder, are and shall be subject and subordinate to any ground or master lease, and all renewals, extensions, modifications and replacements thereof, and to all mortgages, which may now or hereafter affect the Building or the Complex and/or any such lease, whether or not such mortgages shall also cover other lands and/or buildings and/or leases, to each and every advance made or hereafter to be made under such mortgages, and to all renewals, modifications, replacements and extensions of such leases and such mortgages and all consolidations of such mortgages. This Section shall be self-operative and no further instrument of subordination shall be required. In confirmation of such subordination, Tenant shall promptly execute, acknowledge and deliver any instrument that Landlord, the lessor under any such lease or the holder of any such mortgage or any of their respective successors in interest may reasonably request to evidence such subordination. Any lease to which this Lease is subject and subordinate is herein called "Superior Lease" and the lessor of a Superior Lease or its successor in interest, at the time referred to, is herein called "Superior Lessor"; and any mortgage to which this Lease is subject and subordinate, is herein called "Superior Mortgage" and the holder of a Superior Mortgage is herein called "Superior Mortgagee". If any Superior Lessor or Superior Mortgagee or the nominee or designee of any Superior Lessor or Superior Mortgagee shall succeed to the rights of Landlord under this Lease, whether through possession or foreclosure action or delivery of a new lease or deed, or otherwise, then at the request of such party so succeeding to Landlord's rights (herein called "Successor Landlord") and upon such Successor Landlord's written agreement to accept Tenant's attornment, Tenant shall attorn to and recognize such Successor Landlord as Tenant's landlord under this Lease and shall promptly execute and deliver any instrument that such Successor Landlord may reasonably request to evidence such attornment. Upon such attornment, this Lease shall continue in full force and effect as a direct lease between the Successor Landlord and Tenant upon all of the terms, conditions and covenants as are set forth in this Lease, except that the Successor Landlord (unless formerly the landlord under this Lease) shall not be (a) liable in any way to Tenant for any act 41 -38- or omission, neglect or default on the part of Landlord under this Lease, (b) responsible for any monies owing by or on deposit with Landlord to the credit of Tenant, (c) subject to any counterclaim or setoff which theretofore accrued to Tenant against Landlord, (d) bound by any modification of this Lease subsequent to such Superior Lease or Superior Mortgage, or by any previous prepayment of Annual Fixed Rent or Additional Rent for more than one (1) month, which was not approved in writing by the Successor Landlord, (e) liable to the Tenant beyond the Successor Landlord's interest in the Complex and the rents, income, receipts, revenues, issues and profits issuing from the Complex, (f) responsible for the performance of any work to be done by Landlord under this Lease to render the Premises ready for occupancy by the Tenant, or (g) required to remove any person occupying the Premises or any part thereof, except if such person claims by, through or under the Successor Landlord. Tenant agrees at any time and from time to time to execute a suitable instrument in confirmation of Tenant's agreement to attorn, as aforesaid. 9.2 Modifications. If any Superior Lessor or Superior Mortgagee shall require any modification(s) of this Lease, Tenant shall, at Landlord's request, promptly execute and deliver to Landlord such instruments effecting such modification(s) as Landlord shall require, provided that such modification(s) do not adversely affect in any material respect any of Tenant's rights or increase any of Tenant's obligations under this Lease. In addition, and notwithstanding Section 9.1 to the contrary, any Superior Lessor or Superior Mortgagee may, at its option, subordinate the Superior Lease or Superior Mortgage of which it is the lessor or holder to this Lease by giving Tenant ten (10) days prior written notice of such election, whereupon this Lease shall, irrespective of dates of execution, delivery and recording, be superior to such Superior Lease or Superior Mortgage and no other documentation shall be necessary to effect such change. ARTICLE 10 Miscellaneous Provisions 10.1 Notices. All notices, requests, demands, consents, approvals or other communications to or upon the respective parties hereto shall be in writing and delivered by hand or mailed by certified or registered mail, return receipt requested, or a nationally recognized courier service that provides a receipt for delivery such as Federal Express, United Parcel Service or U.S. Postal Service Express Mail and shall be effective on the date delivered (or the first date such delivery is attempted and refused) in writing to the party to which such notice, request, demand, consent, approval or other communication is required or permitted to be given or made under this Lease, 42 -39- addressed if intended for Landlord, to the Original Address of Landlord set forth in Section 1.1 of this Lease with a copy by regular mail to Warren M. Heilbronner, Esq., Sullivan & Worcester LLP, One Post Office Square, Boston, Massachusetts 02109 (or to such other address or addresses as may from time to time hereafter be designed by Landlord by like notice); and if intended for Tenant, addressed to Tenant at the Original Address of Tenant set forth in Section 1.1 of this Lease until the Commencement Date and thereafter to the Premises and in either case with a copy to Frederick Muto, Esq., Cooley, Godward, 4365 Executive Drive, Suite 1100, San Diego, CA 92121 (or to such other address or addresses as may from time to time hereafter be designated by Tenant by like notice). Notices from Landlord may be given by Landlord's Agent, if any, or Landlord's attorney. 10.2 Quiet Enjoyment; Landlord's Right to Make Alterations, Etc. Landlord agrees that, upon Tenant's paying the rent and performing and observing the agreements, conditions and other provisions on its part to be performed and observed, Tenant shall and may peaceably and quietly have, hold and enjoy the Premises during the term hereof without any manner of hindrance or molestation from Landlord or anyone claiming under Landlord, subject, however, to the terms of this Lease; provided, however, Landlord reserves the right at any time and from time to time, without the same constituting breach of Landlord's covenant of quiet enjoyment or an actual or constructive eviction, and without Landlord incurring any liability to Tenant or otherwise affecting Tenant's obligations under this Lease, to make such changes, alterations, improvements, repairs or replacements in or to the interior and exterior of the Building (including the Premises) and the fixtures and equipment thereof, and in or to the Building or the Complex, or properties adjacent thereto, as Landlord may deem necessary or desirable, and to change (provided that there be no unreasonable obstruction of the right of access to the Premises by Tenant and that Landlord use commercially reasonable efforts to minimize, to the extent practical, any interference with the conduct of business at the Premises) the arrangement and/or location of entrances or passageways, doors and doorways, corridors, elevators, or other common areas of the Building and the Complex. Landlord shall give Tenant reasonable prior notice of any alterations which shall adversely affect Tenant in any material respect. Without incurring any liability to Tenant, Landlord may permit access to the Premises and open the same, whether or not Tenant shall be present, upon any demand of any receiver, trustee, assignee for the benefit of creditors, sheriff, marshal or court officer Landlord reasonably believes is entitled to such access for the purpose of taking possession of, or removing, Tenant's property or for any other lawful purpose (but this provision and any action by Landlord hereunder shall not be deemed a recognition by Landlord that the person or official making such demand has any right or interest in or to this Lease, 43 -40- or in or to the Premises), or upon demand of any representative of the fire, police, building, sanitation or other department of the city, state or federal governments. 10.3 Lease Not to be Recorded. Tenant agrees that it will not record this Lease. Both parties shall, upon the request of either, execute and deliver a notice or short form of this Lease in such form, if any, as may be acceptable for recording with the land records of the governmental entity responsible for keeping such records. In no event shall such document set forth the rent or other charges payable by Tenant pursuant to this Lease; and any such document shall expressly state that it is executed pursuant to the provisions contained in this Lease and is not intended to vary the terms and conditions of this Lease. 10.4 Assignment of Rents and Transfer of Title; Limitation of Landlord's Liability. With reference to any assignment by Landlord of Landlord's interest in this Lease, or the rents payable hereunder, whether absolute or conditional in nature or otherwise, which assignment is made to the holder of a mortgage on property which includes the Premises, Tenant agrees that the execution thereof by Landlord, and the acceptance thereof by the holder of such mortgage shall never be treated as an assumption by such holder of any of the obligations of Landlord hereunder unless such holder shall, by notice sent to Tenant, specifically otherwise elect and that, except as aforesaid, such holder shall be treated as having assumed Landlord's obligations hereunder (subject to the limitations set forth in Section 9.1) only upon foreclosure of such holder's mortgage and the taking of possession of the Premises. The term "Landlord" as used in this Lease, so far as covenants or obligations to be performed by Landlord are concerned, shall be limited to mean and include only the owner or owners at the time in question of Landlord's interest in the Complex, and in the event of any transfer or transfers of such title to said property, Landlord (and in case of any subsequent transfers or conveyances, the then grantor) shall be concurrently freed and relieved from and after the date of such transfer or conveyance, without any further instrument or agreement, of all liability with respect to the performance of any covenants or obligations on the part of Landlord contained in this Lease thereafter to be performed, it being intended hereby that the covenants and obligations contained in this Lease on the part of Landlord, shall, subject as aforesaid, be binding on Landlord, its successors and assigns, only during and in respect of their respective period of ownership of such interest in the Complex. Notwithstanding the foregoing, in no event shall the acquisition of Landlord's interest in the Building or the Complex by a purchaser which, simultaneously therewith, leases Landlord's entire interest in the Building or the Complex back to Landlord or the seller thereof be treated as an assumption by operation of law or otherwise, of Landlord's obligations hereunder. Tenant 44 -41- shall look solely to such seller-lessee, and its successors from time to time in title, for performance of Landlord's obligations hereunder. The seller-lessee, and its successors in title, shall be the Landlord hereunder unless and until such purchaser expressly assumes in writing the Landlord's obligations hereunder. Tenant, its successors and assigns, shall not assert nor seek to enforce any claim for breach of this Lease against any of Landlord's assets other than Landlord's interest in the Complex, and Tenant agrees to look solely to such interest for the satisfaction of any liability or claim against Landlord under this Lease, it being specifically agreed that in no event whatsoever shall Landlord (which term shall include, without limitation, any general or limited partner, trustees, beneficiaries, officers, directors, or stockholders of Landlord) ever be personally liable for any such liability. 10.5 Landlord's Default. Landlord shall not be deemed to be in default in the performance of any of its obligations hereunder unless it shall fail to perform such obligations and such failure shall continue for a period of thirty (30) days or such additional time as is reasonably required to correct any such default after written notice has been given by Tenant to Landlord specifying the nature of Landlord's alleged default. Tenant shall have no right to terminate this Lease for any default by Landlord hereunder and no right, for any such default, to offset or counterclaim against any rent due hereunder. In no event shall Landlord ever be liable to Tenant for any punitive damages or for any loss of business or any other indirect, special or consequential damages suffered by Tenant from whatever cause. Where provision is made in this Lease for Landlord's consent and Tenant shall request such consent and Landlord shall fail or refuse to give such consent, Tenant shall not be entitled to any damages for any withholding by Landlord of its consent, it being intended that Tenant's sole remedy shall be an action for specific performance or injunction (and reimbursement of Tenant's reasonable legal fees and other out-of-pocket expenses incurred in successfully obtaining a final, unappealable injunction against Landlord), and that such remedy shall be available only in those cases where Landlord is expressly required not to withhold its consent unreasonably. 10.6 Notice to Mortgagee and Ground Lessor. After receiving notice from any person, firm or other entity that it holds a mortgage which includes the Premises as part of the mortgaged premises, or that it is the ground lessor under a lease with Landlord, as ground lessee, which includes the Premises as part of the demised premises, no notice from Tenant to Landlord shall be effective unless and until a copy of the same is given to such holder or ground lessor, and the curing of any of 45 -42- Landlord's defaults by such holder or ground lessor shall be treated as performance by Landlord. 10.7 Building or Complex Name Change. Landlord shall have the right to change the name of the Building or the Complex at any time and Tenant expressly waives any and all claims for damages against Landlord resulting therefrom. 10.8 Parking. So long as this Lease is in force and effect, Landlord shall maintain a ratio of 3.28 space(s) in the parking areas in the Complex for every 1,000 rentable square feet located within the Complex. All parking shall be provided without charge on an unreserved un-assigned basis. 10.9 Brokerage. Tenant warrants and represents that it has dealt with no broker in connection with the consummation of this Lease other than Irving Hughes Group, Inc., and in the event of any brokerage claims or liens against Landlord or the Property predicated upon or arising out of prior dealings with Tenant including any claim or lien by Irving Hughes Group, Inc. (which commission Tenant agrees to pay in full), Tenant agrees to defend the same and indemnify and hold Landlord harmless against any such claim, and to discharge any such lien. 10.10 Applicable Law and Construction. This Lease shall be governed by and construed in accordance with the laws of the state or district in which the Complex is located and if any provisions of this Lease shall to any extent be invalid, the remainder of this Lease shall not be affected thereby. Tenant expressly acknowledges and agrees that Landlord has not made and is not making, and Tenant, in executing and delivering this Lease, is not relying upon, any warranties, representations, promises or statements, except to the extent that the same are expressly set forth in this Lease or in any other written agreement which may be made between the parties concurrently with the execution and delivery of this Lease and which shall expressly refer to this Lease. All understandings and agreements heretofore made between the parties are merged in this Lease and any other such written agreement(s) made concurrently herewith, which alone fully and completely express the agreement of the parties and which are entered into after full investigation, neither party relying upon any statement or representation not embodied in this Lease or any other such written agreement(s) made concurrently herewith. This Lease may be amended, and the provisions hereof may be waived or modified, only by instruments in writing executed by Landlord and Tenant. The titles of the several Articles and Sections contained herein are for convenience only and shall not be considered in construing this Lease. The submission of this document for examination and negotiation does not constitute an offer to lease, or a reservation of, or option for, the Premises, and Tenant shall have no right to the Premises hereunder until the execution and delivery hereof by both Landlord and Tenant. Except as herein 46 -43- otherwise provided, the terms hereof shall be binding upon and shall inure to the benefit of the successors and assigns, respectively, of Landlord and Tenant and, if Tenant shall be an individual, upon and to his heirs, executors, administrators, successors and assigns. If two or more persons are named as Tenant herein, each of such persons shall be jointly and severally liable for the obligations of the Tenant hereunder, and Landlord may proceed against any one without first having com menced proceedings against any other of them. Each term and each provision of this Lease to be performed by Tenant shall be construed to be both an independent covenant and a condition and time is of the essence with respect to the exercise of any of Tenant's rights under this Lease. The reference contained to successors and assigns of Tenant is not intended to constitute a consent to assignment of Tenant. Except as otherwise set forth in this Lease, any obligations of Tenant (including, without limitation, rental and other monetary obligations, repair obligations and obligations to indemnify Landlord), shall survive the expiration or earlier termination of this Lease, and Tenant shall immediately reimburse Landlord for any expense incurred by Landlord in curing Tenant's failure to satisfy any such obligation (notwithstanding the fact that such cure might be effected by Landlord following the expiration or earlier termination of this Lease). WITNESS the execution hereof under seal on the day and year first above written. Landlord: HUB PROPERTIES TRUST By: /s/ DAVID J. HEGARTY -------------------------------- David J. Hegarty, President Tenant: SIGNAL PHARMACEUTICALS, INC. By: [SIG] -------------------------------- 47 EXHIBIT A [GRAPHIC] 48 EXHIBIT B RULES AND REGULATIONS 1. The sidewalks, entrances, passages, corridors, vestibules, halls, elevators or stairways in or about the Building shall not be obstructed by Tenant or used by Tenant for any purpose other than for access to the Premises and the common areas. 2. Tenant shall not place objects against glass partitions, doors or windows which would be unsightly from the Building corridor or from the exterior of the Building. No signs, advertisements, placards, pictures, names, notices, or lettering shall be exhibited, inscribed, painted or fixed by Tenant on any window or part of the outside or inside of the Building or the Complex without the prior consent of Landlord. 3. All window coverings shall be of a uniform shape, color, material and design as prescribed by Landlord. 4. Tenant shall not place a load upon any floor of the Building exceeding the lesser of the floor load which such floor was designed to carry or that allowed by law. 5. Tenant shall not waste electricity or water in the Build ing and shall cooperate fully with Landlord to assure the most effective operation of the Building HVAC system. 6. No additional or different locks or bolts shall be affixed on doors by Tenant without reasonable prior notice to Landlord. Tenant shall return all keys to Landlord upon termination of Tenant's lease. Tenant shall not allow peddlers, solicitors or beggars in the Building. 7. Tenant shall not use the Premises so as to cause any increase above normal insurance premiums on the Building. 8. No vehicles or animals (except a seeing-eye dog) shall be brought into or kept in or about the Premises. No space in the Building shall be used for manufacturing (as opposed to development) or for the sale of merchandise of any kind at auction or for storage thereof preliminary to such sale. 9. Tenant shall not engage or pay any employees of the Building without approval from the Landlord. Tenant shall not employ any persons other than the janitor or employees of Landlord for the purpose of cleaning Premises without the prior written consent of Landlord. 10. All removals from the Building or the carrying in or out of the Premises of any freight, furniture or bulky matter of any description which removal involves loading docks or other common areas or facilities of the Building must take place at such time and in such manner as Landlord may determine from time to time. 49 -2- Landlord reserves the right to inspect all freight to be brought into the Building and to exclude from the Building all freight which violates any of the rules and regulations or provisions of Tenant's lease. Heavy objects shall, if considered necessary by Landlord, stand on reinforcing plates of such thickness and size as is necessary to properly distribute the weight. Landlord will not be responsible for loss of or damage to any such property from any cause and all damage done to the Building by moving or maintaining any such property shall be repaired at the sole cost and expense of Tenant. 11. Tenant shall cooperate with Landlord in minimizing loss and risk thereof from fire and associated perils. 12. Tenant shall, at Tenant's expense, provide artificial light and electric current for the Landlord and/or its contractors, agents and employees during the making of repairs, alterations, additions or improvements in or to the demised premises. 13. The water and wash closets and other plumbing fixtures shall not be used for any purposes other than those for which they were designed and constructed and no sweepings, rubbish, rags, acid or like substance shall be deposited therein. All damages resulting from any misuse of the fixtures shall be borne by Tenant. Any equipment or apparatus within the Premises, including, without limitation, x-ray effluent drains, shall be maintained by Tenant throughout the term hereof, at Tenant's sole cost and expense. 14. Tenant may request HVAC service outside of Normal Building Operating Hours by submitting a request in writing to the Building Manager's office by noon of the preceding workday. 15. Landlord reserves the right to establish, modify and enforce parking rules and regulations. 16. All refuse from the Premises shall be disposed of in accordance with the requirements established therefor by Landlord and no dumpster shall be overloaded by Tenant. 17. A Building directory will be provided for the display of the name and location of the Tenant named on the Lease and Landlord reserves the right to exclude any other names therefrom. Tenant shall be entitled to initial listings on the directory for each Tenant indicated on the Lease. Additional listings thereafter, if approved in writing by Landlord, shall be at the sole cost and expense of the Tenant. Landlord's acceptance of any name for listing on the building directory will not be deemed, nor will it substitute for, Landlord's consent, as required by this Lease, to any sublease, assignment, or other occupancy of the demised Premises. All orders for directory listings should be given to Landlord in writing by Tenant. No 50 -3- oral orders, changes, additions or deletions shall be accepted by Landlord. 18. Landlord will direct electricians and telephone installers as to where and how electrical and telephone wires are to be installed by Tenant except where Landlord has previously reviewed and approved such plans. No boring or cutting for wires will be allowed without the written consent of the Landlord. 19. There shall not be used in any space, or in the public halls of the Building, either by any Tenant or others, any hand trucks except those equipped with rubber tires and side guards. 20. No air conditioning or heating unit or other similar apparatus shall be installed or used by any Tenant without the prior written consent of Landlord, which consent shall not be unreasonably withheld or delayed provided that such installation or use shall not affect the HVAC system or its operation, or any other mechanical, electrical, plumbing or structural element or system of the Building. 21. All doors opening onto public corridors and stairwells shall be kept closed as required by state and local fire codes, except when being used for ingress and egress, and shall be securely locked by Tenant before leaving the Premises. 22. No cooking shall be done or permitted by Tenant on the Premises and no vending machines of any description shall be installed, maintained or operated upon the Premises without the prior written consent of Landlord. 23. No smoking is allowed in the Building (including the Premises) or any other building or structure in the Complex. 24. No Tenant shall make, or permit to be made, any unseemly or disturbing noises or disturb or interfere with occupants of the Complex, Buildings or Premises or those having business with them by the use of any musical instrument, radio, stereo, television or in any other way. 25. The requirements of Tenant to which it is entitled hereunder will be attended to only upon application at the Building office. Employees of Landlord shall not perform any work or do anything outside of their regular duties unless under special written instructions from Landlord, and no employee will admit any person (Tenant or otherwise) to any office, or sign acceptance of delivery for any Tenant, without written specific instructions from Tenant. 26. Landlord shall furnish restroom supplies for public area restrooms only. Tenant shall purchase supplies for any toilet rooms within such Tenant's Premises and shall not be allowed to supply its private toilet areas from Building supplies. 51 -4- 27. Landlord reserves the right at any time to rescind, alter or waive any rule or regulation at any time prescribed for the Building and to impose additional rules and regulations when in its judgment reasonably exercised Landlord deems it necessary, desirable or proper for its best interest and for the best interest of tenants and other occupants and invitees thereof. No alteration or waiver of any rule or regulation in favor of one Tenant shall operate as an alteration or waiver in favor of any other Tenant. Landlord shall not be responsible to any Tenant for the non-observance or violation by any other Tenant however resulting of any rules or regulations at any time prescribed for the Building. In the event of any conflict between these Rules and Regulations, or any further or modified rules and regulations from time to time issued by Landlord, and the Lease provisions, the Lease provisions shall govern and control. 52 EXHIBIT C ALTERATIONS REQUIREMENTS A. General 1. All alterations, installations or improvements ("Alterations") to be made by Tenant in, to or about the Premises shall be made in accordance with the requirements of this Exhibit and by contractors or mechanics approved by Landlord, which approval shall not be unreasonably withheld or delayed. 2. Tenant shall, prior to the commencement of any Alterations, submit for Landlord's written approval, complete plans of the Premises, or of the floor on which the Alterations are to occur, including mechanical, electrical, plumbing and architectural drawings. Drawings are to be complete with full details and specifications for all of the Alterations and shall be stamped by an architect licensed in the state or district in which the Complex is located certifying compliance with building codes. 3. The proposed Alterations must comply with the building code in effect for the City of San Diego and the requirements, rules and regulations and any governmental agencies having jurisdiction. 4. No work shall be permitted to commence without the Landlord being furnished with a valid permit from the building department and/or other agencies having jurisdiction in the City of San Diego. 5. All demolition, removals or other categories of work that may inconvenience other tenants or disturb Building operations, must be scheduled and performed before or after Building hours (unless Landlord agrees otherwise) and Tenant shall provide the Building manager with at least 24 hours' notice prior to proceeding with such work. 6. All inquiries, submissions, approvals and all other matters shall be processed through the Building manager. B. Prior to Commencement of Work 1. Tenant shall submit to the Building manager a request to perform the Alterations. The request shall include the following enclosures: (i) A list of Tenant's contractors and/or subcontractors for Landlord's approval. (ii) Three complete sets of plans and specifications properly stamped by a registered architect or 53 -2- professional engineer certifying compliance with applicable building codes. (iii) A properly executed building permit application form. (iv) Four executed copies of the Insurance Requirements agreement in the form set forth in Exhibit D from Tenant's contractor and if requested by Landlord, from the contractor's subcontractors. (v) Contractor's and subcontractor's insurance certificates including an indemnity in accordance with the Insurance Requirements agreement. 2. Landlord will return the following to Tenant: (i) Plans approved or returned with comments (Such approval or comments shall not constitute a waiver of Building Department approval or approval of other governmental agencies). (ii) Two fully executed copies of the Insurance Requirements agreement. 3. Tenant shall obtain a building permit from the building department and necessary permits from other governmental agencies. Tenant shall be responsible for keeping current all permits. Tenant shall submit copies of all approved plans and permits to Landlord and shall post the original building permit on the Premises prior to the commencement of any work. All Alterations shall be subject to reasonable supervision and inspection by Landlord's representative. Such supervision and inspection shall be at Tenant's sole expense and Tenant shall pay Landlord's reasonable charges for such supervision and inspection. Landlord shall notify Tenant if it estimates that the expense of supervision and inspection for any project shall exceed $1,000, if Tenant shall first request such estimate. C. Requirements and Procedures 1. All structural and floor loading requirements shall be subject to the prior approval of Landlord's structural engineer. 2. All mechanical (HVAC, plumbing and sprinkler) and electrical requirements shall be subject to the approval of Landlord's mechanical and electrical engineers. When necessary, Landlord will require engineering and shop drawings, which drawings must be approved by Landlord before work is started. Drawings are to be prepared by Tenant and all approvals shall be obtained by Tenant. 54 -3- 3. Elevator service for construction work shall be charged to Tenant at standard Building rates. Prior arrangements for elevator use shall be made with the Building manager by Tenant. No material or equipment shall be carried under or on top of elevators. If an operating engineer is required by any union regulations, such engineer shall be paid for by Tenant. 4. If shutdown of risers and mains for electrical, HVAC, sprinkler and plumbing work is required, such work shall not be undertaken without prior approval of Landlord. No work will be performed in Building mechanical equipment rooms without Landlord's approval and, if required by Landlord, under Landlord's supervision. 5. Tenant's contractor shall: (i) have a superintendent or foreman on the Premises at all times; (ii) police the job at all times, continually keeping the Premises orderly; (iii) maintain cleanliness and protection of all areas, including elevators and lobbies; (iv) protect the front and top of all peripheral HVAC units and thoroughly clean them at the completion of work; (v) block off supply and return grills, diffusers and ducts to keep dust from entering into the Building HVAC system; and (vi) avoid the disturbance of other tenants. 6. If Tenant's contractor is negligent in any of its responsibilities, Tenant shall be charged for any necessary or appropriate corrective work. 7. All equipment and installations must be equal to the Building standards. Any deviation from such standards will be permitted only if indicated or specified on the plans and specifications and approved by Landlord. 8. A properly executed air balancing report signed by a professional engineer shall be submitted to Landlord upon the completion of all HVAC work. 9. Upon completion of the Alterations, Tenant shall submit to Landlord the final Department of Building and Safety 55 -4- permit card and final approval by all other governmental agencies having jurisdiction. 10. Tenant shall submit to Landlord a final "as-built" set of sepia drawings showing all items of Alterations in full detail. 11. Additional and differing provisions in the Lease, if any, will be applicable and will take precedence. 56 EXHIBIT D CONTRACTOR'S INSURANCE REQUIREMENTS Building: Tenant: Premises: The undersigned contractor or subcontractor ("Contractor") has been hired by the tenant or occupant (hereinafter called "Tenant") of the Building named above or by Tenant's contractor to perform certain work ("Work") for Tenant in the Premises identified above. Contractor and Tenant have requested the undersigned landlord ("Landlord") to grant Contractor access to the Building and its facilities in connection with the performance of the Work and Landlord agrees to grant such access to Contractor upon and subject to the following terms and conditions: 1. Contractor agrees to indemnify and save harmless the Landlord, and if Landlord is a general or limited partnership each of the partners thereof, and if Landlord is a nominee trust the trustee(s) and all beneficiaries thereof, and all of their respective officers, employees and agents, from and against any claims, demands, suits, liabilities, losses and expenses, including reasonable attorneys' fees, arising out of or in connection with the Work (and/or imposed by law upon any or all of them) because of personal injuries, including death, at any time resulting therefrom and loss of or damage to property, including consequential damages, whether such injuries to person or property are claimed to be due to negligence of the Contractor, Tenant, Landlord or any other party entitled to be indemnified as aforesaid except to the extent specifically prohibited by law or where such losses and expenses arise from the gross negligence or willful misconduct of Landlord or its agents or servants (and any such prohibition shall not void this agreement but shall be applied only to the minimum extent required by law). 2. Contractor shall provide and maintain at its own expense, until completion of the Work, the following insurance: (a) Workmen's Compensation and Employers Liability Insurance covering each and every workman employed in, about or upon the Work, as provided for in each and every statute applicable to Workmen's Compensation and Employers' Liability Insurance. (b) Commercial General Liability Insurance including coverages for Protective and Contractual Liability (to 57 -2- specifically include coverage for the indemnification clause of this agreement) for not less than the following limits: Bodily Injury: $2,000,000 per person $2,000,000 per occurrence Property Damage: $2,000,000 per occurrence $2,000,000 aggregate
(c) Commercial Automobile Liability Insurance (covering all owned, non-owned and/or hired motor vehicles to be used in connection with the Work) for not less than the following limits: Bodily Injury: $2,000,000 per person $2,000,000 per occurrence Property Damage: $2,000,000 per occurrence.
Contractor shall furnish a certificate from its insurance carrier or carriers to the Building office before commencing the Work, showing that it has complied with the above requirements regarding insurance and providing that the insurer will give Landlord ten (10) days' prior written notice of the cancellation of any of the foregoing policies. 3. Contractor shall require all of its subcontractors engaged in the Work to provide the following insurance: (a) Commercial General Liability Insurance including Protective and Contractual Liability coverages with limits of liability at least equal to the limits stated in paragraph 2(b). (b) Commercial Automobile Liability Insurance (covering all owned, non-owned and/or hired motor vehicles to be used in connection with the Work) with limits of liability at least equal to the limits stated in paragraph 2(c). Upon the request of Landlord, Contractor shall require all of its subcontractors engaged in the Work to execute an Insurance Requirements agreement in the same form as this Agreement. Agreed to and executed this day of , 19 . ---- ------------- -- Contractor: Landlord: BY: ----------------------------------- BY: ----------------------------------- 58 EXHIBIT E CLERK'S CERTIFICATE I, Brad Gordon, the duly elected and acting [Secretary/Clerk] of Signal Pharmaceuticals California, a corporation (the "Corporation"), hereby certify that: (A) at a meeting of the board of directors of the Corporation held on November 4, 1997 in accordance with law and the Bylaws of the Corporation the following resolutions were duly adopted: VOTED: a. To approve a lease of approximately 10,888 rentable square feet of space for terms of 6 years with respect to Suite 100 in the building commonly known as 5626 Oberlin Drive in San Diego, which lease grants the Corporation an option to extend the term for n/a terms of n/a years each, substantially in the form of the draft presented at this meeting, a copy of which shall be placed on file in the office of the [Secretary/Clerk] and be incorporated by reference in this vote; b. To authorize Brad Gordon and Alan Lewis, or any one of them (each hereinafter referred to as a "Signatory"), to execute and deliver in the name and on behalf of the Corporation the above-described lease and to execute and deliver all other documents, agreements and instruments, including, without limitation, notices of lease, and to take all other actions with respect to the foregoing which any Signatory, in such Signatory's discretion, shall determine to be necessary or appropriate to effect or secure the transactions contemplated herein, the execution and delivery of any of the foregoing or the taking of any such action to be conclusive evidence of such Signatory's determination and of the Signatory's authority so to do granted by this vote; (B) as of this date the following individuals are duly elected and qualified officers of the Corporation holding at this date, the offices specified next to their names and the signature next to each such name is such individual's true signature. NAME OFFICE SIGNATURE Bradley Gordon CFO /s/ BRAD GORDON - ----------------------- -------------------- ------------------------- Alan J. Lewis President/CEO /s/ ALAN LEWIS - ----------------------- -------------------- ------------------------- Carl F. Bobkoski E.V.P /s/ CARL BOBKOSKI - ----------------------- -------------------- ------------------------- David Anderson V.P. R&D /s/ DAVID ANDERSON - ----------------------- -------------------- ------------------------- (C) The form of lease attached to this Certificate is the form referred to in the foregoing vote. 59 -2- (D) The resolutions set forth above are unmodified and continue to be in full force and effect and the Corporation has adopted no other resolutions in respect of the subject matter thereof. In witness whereof, I have hereunto set my hand and affixed the seal of the Corporation this day of , 19 . [SIG] ---------------------------------------- [Secretary/Clerk] [SEAL] EX-10.32 35 EXHIBIT 10.32 1 *** Text Omitted and Filed Separately Confidential Treatment Requested Under 17 C.F.R. Sections 200.80, 200.83 and 230.406. EXHIBIT 10.32 EXCLUSIVE LICENSE AGREEMENT between THE REGENTS OF THE UNIVERSITY OF CALIFORNIA and SIGNAL PHARMACEUTICALS, INC. for [***] UC Case No. [***] [***] UC Case Nc. [***] and [***] UC Case No. [***] ***Confidential Treatment Requested 2 TABLE OF CONTENTS
Article No. Title Page RECITALS.............................................................1 1. DEFINITIONS..........................................................3 2. EXCLUSIVE GRANT......................................................5 3. SUBLICENSES..........................................................6 4. LICENSE-ISSUE FEE....................................................7 5. EARNED ROYALTIES AND MILESTONE PAYMENTS..............................7 6. DUE DILIGENCE.......................................................12 7. PROGRESS AND ROYALTY REPORTS........................................15 8. BOOKS AND RECORDS...................................................16 9. LIFE OF THE AGREEMENT...............................................17 10. TERMINATION BY THE REGENTS..........................................17 11. TERMINATION BY LICENSEE.............................................18 12. DISPOSITION OF LICENSED PRODUCTS ON HAND UPON TERMINATION.......................................19 13. USE OF NAMES AND TRADEMARKS.........................................19 14. LIMITED WARRANTY....................................................19 15. PATENT PROSECUTION AND MAINTENANCE..................................21 16. PATENT MARKING......................................................23 17. PATENT INFRINGEMENT.................................................24 18. INDEMNIFICATION.....................................................26 19. NOTICES.............................................................27 20. ASSIGNABILITY.......................................................28 21. LATE PAYMENTS.......................................................28 22. WAIVER..............................................................28 23. FAILURE TO PERFORM..................................................29 24. GOVERNING LAWS......................................................29 25. PREFERENCE FOR UNITED STATES INDUSTRY...............................29 26. FOREIGN GOVERNMENT APPROVAL OR REGISTRATION................................................29 27. EXPORT CONTROL LAWS.................................................30 28. SECRECY.............................................................30 29. MISCELLANEOUS.......................................................32
3 UC Case Nos. 92-116, 93-173 and 93-179 EXCLUSIVE LICENSE AGREEMENT for [***] THIS LICENSE AGREEMENT (the "Agreement") is made and is effective this 26TH day of October , 1993 by and between THE REGENTS OF THE UNIVERSITY OF CALIFORNIA, a California corporation having its statewide administrative offices at 300 Lakeside Drive, 22nd Floor, Oakland, California 94612-3550, hereinafter referred to as "The Regents", and Signal Pharmaceuticals, Inc., a California corporation having a principal place of business at 11545 Sorrento Valley Road, Suite 315, San Diego, California 92121, hereinafter referred to as the "Licensee". RECITALS WHEREAS, certain inventions, generally characterized as methods for the [***] and testing drugs therewith (UC Case No. [***]), [***] (UC Case No. [***]), and [***] U.C. Agreement Control Number 93-04-0786 ***Confidential Treatment Requested 4 [***] (UC Case No. [***]), hereinafter collectively referred to as the "Inventions", were made in the course of research at the University of California, San Diego by [***] (UC Case No. [***]), [***] (UC Case No. [***]), and [***] (UC Case No. [***]) and are covered by Regents' Patent Rights as defined below; WHEREAS, the Licensee entered into Secrecy Agreements (U.C. Control Nos. 92-20-0437) with The Regents effective September 7, 1992, for the purpose of evaluating the Inventions; WHEREAS, the development of the Inventions was sponsored at least in part by the following organizations, and as a consequence this license in certain respects is subject to overriding obligations to third party sponsoring organizations: (a) [***] (b) [***] (c) [***] WHEREAS, the Licensee is a "small business firm" as defined in 15 U.S.C. 632; WHEREAS, The Regents is desirous that the Inventions be developed and utilized to the fullest extent so that the benefits can be enjoyed by the general public; WHEREAS, the Licensee is desirous of obtaining certain rights from The Regents for the commercial development, use, and sale of the Inventions, and The Regents is willing to grant such rights; 2 ***Confidential Treatment Requested 5 WHEREAS, both parties recognize and agree that royalties due hereunder will be paid on both pending patent applications and issued patents; and WHEREAS, both parties recognize and agree that royalties due hereunder will be paid on products developed through the use of Regents' Technology Rights and the Licensee is willing to pay such royalties in exchange for the early access to The Regents' technology granted by this license, regardless of whether or not some or all of The Regents' technology may have been published or may become published; WHEREAS, The Regents previously entered into Letters of Intent dated [***] (U.C. Control No. [***]), and [***] (U.C. Control No. [***]), with the Licensee for UC Case No. [***] and UC Case No. [***], which has been combined into UC Case No. [***], and for UC Case No. [***] and UC Case No. [***]; - - 00 0 00 - - the parties agree as follows: 1. DEFINITIONS 1.1 "Regents' Patent Rights" means patent rights assigned to The Regents to any subject matter claimed in or covered by any of the following: Pending U.S. Patent Application Serial No. [***], entitled [***], by [***], filed [***]; pending U.S. Patent Application Serial No. [***] filed on [***], under the title [***], by [***]; and pending U.S. Patent Application Serial No.[***] 3 ***Confidential Treatment Requested 6 filed on [***], under the title "[***]", by [***]; and continuing applications thereof including divisions and substitutions but including continuation-in-part applications which contain claims supported in the original application; any patents issuing on said application or continuing applications including reissues; and any corresponding foreign applications or patents. 1.2 "Licensed Product" means any material either that is covered by Regents' Patent Rights, that is identified or produced by the Licensed Method, or that the use or sale of which would constitute, but for the license granted to the Licensee pursuant to this Agreement, an infringement of any pending or issued claim within Regents' Patent Rights. 1.3 "Licensed Method" means any method that is covered by Regents' Patent Rights or Regents' Technology Rights, the use of which would constitute, but for the license granted to the Licensee pursuant to this Agreement, an infringement of any claim within Regents' Patent Rights or a misuse of Regents' Technology Rights. 1.4 "Net Sales" means the total of the gross invoice prices of Licensed Products sold by the Licensee, an Affiliate, or a sublicensee, less the sum of the following actual and customary deductions where applicable: cash, trade, or quantity discounts; sales, use, tariff, import/export duties or other excise taxes imposed upon particular sales; transportation charges and allowances or credits to customers because of rejections, breakage or returns. 1.5 "Affiliate" means any corporation or other business entity in which the Licensee owns or controls, directly or indirectly, at least fifty percent (50%) of the outstanding stock or other voting nights entitled to elect directors; provided, however, that in 4 ***Confidential Treatment Requested 7 any country where the local law shall not permit foreign equity participation of at least 50%, then an "Affiliate" shall include any company in which the Licensee shall own or control, directly or indirectly, the maximum percentage of such outstanding stock or voting rights permitted by local law. 1.6 "Regents' Technology Rights" means The Regents' interest in know how and embodiments of know how relating to Regents' Patents Rights, whether or not covered by Regents' Patent Rights, for example, unpublished patent applications, notebooks, data, protocols, cell lines and other Biological Materials (as defined below) which pertain to and/or are necessary for the exercise of the rights granted herein. Regents' Technology Rights includes such know how as may be transferred from time to time to personnel of the Licensee during on site visits to the laboratories of the inventors named herein. 1.7 "[***]" means Regents' Patent Rights and Regents' Technology Rights relating to [***] and [***] as identified herein. 1.8 "[***] Technologies" means Regents' Patent Rights and Regents' Technology Rights relating to [***] as identified herein. 2. EXCLUSIVE GRANT 2.1 Subject to the limitations set forth in this Agreement, The Regents hereby grants to the Licensee a world-wide license under Regents' Patent Rights and Regents' Technology Rights to make, have made, use, and sell Licensed Products and to practice Licensed Methods. 5 ***Confidential Treatment Requested 8 2.2 Except as otherwise provided herein, the License granted in section 2.1 shall be exclusive for the life of the Agreement and shall be for all fields of use, except that the Licensee's license under Regents' Technology Rights shall be Limited to such uses as are necessary for identifying, making, using, or selling Licensed Products. 2.3 The license granted hereunder shall be subject to all the applicable provisions of any License to the United States Government executed by The Regents. The license granted hereunder shall be subject to the overriding obligations to the U.S. Government set forth in 35 U.S.C. 200-212 and applicable governmental implementing regulations. 2.4 The Regents expressly reserves the right to use the Inventions and associated technology for educational and research purposes. 3. SUBLICENSES 3.1 The Regents also grants to the Licensee the right to issue sublicenses to third parties to make, have made, use, and sell Licensed Products and to practice Licensed Method, provided the Licensee has current exclusive rights thereto under this Agreement. To the extent applicable, such sublicenses shall include all of the rights of and obligations due to The Regents (and, if applicable, the United States Government) that are contained in this Agreement. 3.2 The Licensee shall provide The Regents with a copy of each sublicense issued hereunder; collect and Guarantee payment of all royalties due The Regents from sublicensees, and summarize and deliver all reports due The Regents from sublicensees. 6 9 3.3 Upon termination of this Agreement for any reason, The Regents, at its sole discretion, shall determine whether any or all sublicenses shall be canceled or assigned to The Regents. 4. LICENSE-ISSUE FEE 4.1 The Licensee agrees to pay to The Regents a LICENSE-ISSUE FEE of [***] plus issuance of [***] shares of common stock in accordance with the Shareholders Agreement which is appended hereto as Appendix A and made a part of this Agreement (the Shareholders Agreement) within seven days after the execution of this Agreement. The Licensee shall also, at the same time pay to The Regents extension fees in the amount of [***] in accordance with the Letter of Intent dated September 16, 1992 (U.C. Control No. 92-30-0436). 4.2 These fees are non-refundable and are not an advance against royalties. 5. EARNED ROYALTIES AND MILESTONE PAYMENTS 5.1 (a) The Licensee shall also pay to The Regents an EARNED ROYALTY of [***] of the Net Sales of Licensed Products, provided that the earned royalty shall be [***] of Net Sales of a Licensed Product if Net Sales of the Licensed Product are less than [***] per year in any given calendar year of sales. 7 ***Confidential Treatment Requested 10 5.1(b) Any earned royalty due under Paragraph 5.1(a) shall be reduced by [***] in the event that a Licensed Product is not covered by Regents' Patent Rights but is covered by or developed from Regents' Technology Rights. 5.2 Paragraphs 1.1, 1.2, and 1.3 define Regents' Patent Rights, Licensed Products and Licensed Methods so that royalties shall be payable on products and methods covered by both pending patent applications and issued patents, provided that no earned royalties shall be payable under Regents' Patent Rights on pending claims that are abandoned or that are pending for more than thirty (30) years from the effective date of this Agreement. In no event shall any royalty be due under Regents' Patent Rights or Regents' Technology Rights after the expiration of the last-to-expire patent licensed hereunder which covers the Licensee's activities. 5.2(a) Paragraphs 1.6, 1.2, and 1.3 define Regents' Technology Rights, Licensed Products and Licensed Methods so that royalties shall be payable on products and methods covered by Regents' Technology Rights but not Regents' Patent Rights, in accordance with Paragraph 5.1(a) and (b). No royalties shall be payable under Regents' Technology Rights in any country after [***] from the date of first commercial sale in that country, or after a patent licensed hereunder that covers the Licensee's activities has expired in that country, as provided for in Paragraph 5.2 above. No royalties shall be payable under Regents' Technology Rights on products developed independently of Regents' Technology Rights. 5.3 Earned royalties shall accrue in each country for the duration of Regents' Patent Rights or Regents' Technology Rights in that country and shall be payable to The 8 ***Confidential Treatment Requested 11 Regents when Licensed Products are invoiced, or if not invoiced, when delivered to a third party. For earned royalties accruing on sales for cash (or the equivalent thereof) outside the United States, the Licensee may delay payment of earned royalties until it actually receives payment from its customer, provided that such delay does not exceed three (3) months from the date of invoice. 5.4 Royalties accruing to The Regents shall be paid to The Regents quarterly on or before the following dates of each calendar year: February 28 May 31 August 31 November 30 Each such payment will be for royalties which accrued within the Licensee's most recently completed calendar quarter. 5.5 The Licensee shall pay to The Regents MILESTONE PAYMENTS. Milestone payments for any particular milestone event shall be made within thirty (30) days of the date of the milestone event. Milestone payments shall be made as follows: (a) [***] (b) [***] 9 ***Confidential Treatment Requested 12 [***] (c) [***] (d) [***] 5.6 All monies due The Regents shall be payable in United States funds collectible at par in San Francisco, California. When Licensed Products are sold for monies other than United States dollars, the earned royalties will first be determined in the foreign currency of the country in which such Licensed Products were sold and then converted into equivalent United States funds. The exchange rate will be that rate quoted in the Wall Street Journal on the last business day of the reporting period. 5.7 Royalties earned with respect to sales occurring in any country outside the United States shall not be reduced by any taxes, fees, or other charges imposed by the Government of such country on the remittance of royalty income. The Licensee shall also be for all bank transfer charges. Notwithstanding this, all payments made by the response Licensee in fulfillment of The Regents' tax liability in any particular country shall be credited against Earned Royalties, royalties or fees due The Regents for that country. 10 ***Confidential Treatment Requested 13 5.7(a) The Licensee shall not be required to sell Licensed Product in a particular country if taxes and fees or other charges imposed by the government make such sales unprofitable to the Licensee. In such event, the Licensee shall notify The Regents of its intention not to sell in such country, and the Licensee shall be required to sublicense rights in such country to any qualified company recommended by The Regents. 5.8 If at any time legal restrictions prevent the prompt remittance of part or all royalties by the Licensee with respect to any country where a Licensed Product is sold, the Licensee shall have the right and option to make such payments by depositing the amount thereof in local currency to The Regents' account in a bank or other depository in such country. The Regents will use its best efforts to transfer the monies held in the account specified in Paragraph 5.8 to the United States. If after one year from the date of the first deposit into that account there are still legal restrictions that prevent The Regents from transferring the monies, The Regents shall transfer the impounded funds back to the Licensee, and the Licensee shall convert the amount owed to The Regents into United States funds and shall pay The Regents directly from its U.S. source of funds for the amount impounded. The Licensee shall then pay all future royalties due to The Regents from its U.S. source of funds so long as the legal restrictions of paragraph 5.8 still apply. 5.9 Notwithstanding anything to the contrary in Paragraph 5.3 hereof, in the event that any patent or any claim thereof included within the Regents' Patent Rights shall be rejected or held invalid in a final decision by a patent office from which no appeal or additional patent prosecution has or can be taken or by a court of competent jurisdiction and last resort and from which no appeal has or can be taken, all obligation to pay royalties 11 14 based on such patent or claim or any claim patentably indistinct therefrom shall cease as of the date of such final decision. The Licensee shall not, however, be relieved from paying any royalties that accrued before such decision or that are based on another patent or claim not involved in such decision, or that are based on The Regents' Technology Rights as provided for in this Agreement. 5.10 No royalties shall be collected or paid hereunder on Licensed Products sold to the account of the U.S. Government, any agency thereof, state or domestic municipal government as provided for in applicable Licenses to the Government relating to the Karin Technologies. 6. DUE DILIGENCE 6.1 The Licensee, upon execution of this Agreement, shall diligently proceed with the development, manufacture and sale of Licensed Products and shall earnestly and diligently endeavor to market the same within a reasonable time after execution of this Agreement and in quantities sufficient to meet the market demands therefor. 6.2 The Licensee shall be entitled to exercise prudent and reasonable business judgment in meeting its due diligence obligations hereunder. 6.3 The Licensee shall endeavor to obtain all necessary governmental approvals for the manufacture, use and sale of Licensed Products. 6.4 If the Licensee is unable to perform any of the following: [***] 12 ***Confidential Treatment Requested 15 ' [***] [***] [***] [***] [***] [***] (6.4h) reasonably fill the market demand for Licensed Products following commencement of marketing at any time during the exclusive period of this Agreement; then, subject to Paragraph 6.5, The Regents shall have the right and option either to terminate this Agreement or to reduce the Licensee's exclusive license to a nonexclusive license. This right, if exercised by The Regents, supersedes the rights granted in Article 2 (GRANT). 6.5 Subject to Paragraphs 6. 1 and 6.2, if the Licensee is unable to meet any of the dates set forth in Paragraph 6.4, with regard to either the [***] Technologies or the [***] Technologies, respectively, the parties shall in good faith re-establish a date or dates that are 13 ***Confidential Treatment Requested 16 reasonable under the then current circumstances. The Regents shall not exercise its rights to terminate this Agreement or convert it to a non-exclusive agreement unless a re-established date is not met. If a re-established date is more than six months from the original date, The Licensee shall begin making an annual license maintenance fee for the delayed product of [***] per year. The annual license maintenance fee shall begin to be payable in [***] for the [***] Technologies, or [***] for the [***] Technologies, on the anniversary date of the effective date hereof and shall continue until sales of the delayed product begin. The annual maintenance fee provided for in this Paragraph shall not exceed [***] per year per Technology (i.e. the [***] Technologies or the [***] Technologies, respectively). The re-established date shall not affect the date when any milestone payment would be due under Paragraph 5.5. 6.6 Either party to this Agreement may refer a dispute arising under this Agreement to arbitration. Such referral to arbitration shall be made by so notifying the other party in writing in accordance with the provisions of Article 19 hereto (NOTICES), stating the nature of the dispute to be resolved. Any such arbitration shall be controlled by the provisions of the Commercial Arbitration Rules of the American Arbitration Association then in effect, with the proviso that the arbitrators shall not be employees of the parties and shall establish an arbitration timetable resulting in a hearing, in San Francisco, California, within 120 days of the original request to arbitrate. The decision of the arbitrators shall be enforceable, but not appealable, in any court of competent jurisdiction. 14 ***Confidential Treatment Requested 17 7. PROGRESS AND ROYALTY REPORTS 7.1 Beginning February 28, 1994 and semi-annually thereafter, the Licensee shall submit to The Regents a progress report covering the Licensee's activities related to the development and testing of all Licensed Products and the obtaining of the governmental approvals necessary for marketing. These progress reports shall be made for each Licensed Product until the first commercial sale of that Licensed Product occurs in the United States. These progress reports shall be considered "Data" for all purposes of Article 28, hereof and shall be subject to the terms thereof. 7.2 The progress reports submitted under section 7.1 should include, but not be limited to, the following topics: - summary of work completed - key scientific discoveries - summary of work in progress - current schedule of anticipated events or milestones - market plans for introduction of Licensed Products, and - a summary of resources (dollar value) spent in the reporting period. 7.3 The Licensee shall have a continuing responsibility to keep The Regents informed of the large/small entity status (as defined by the United States Patent and Trademark Office) of itself and its sublicensees and Affiliates. 7.4 The Licensee also agrees to report to The Regents in its immediately subsequent progress and royalty report the date of first commercial sale of a Licensed Product in each country. 15 18 7.5 After the first commercial sale of a Licensed Product anywhere in the world, the Licensee will make quarterly royalty reports to The Regents on or before each February 28, May 31, August 31 and November 30 of each year. Each such royalty report will cover the Licensee's most recently completed calendar quarter and will show (a) the gross sales and Net Sales of Licensed Products sold by the Licensee during the most recently completed calendar quarter; (b) the number of each type of Licensed Product sold; (c) the royalties, in U.S. dollars, payable hereunder with respect to such sales; (d) the method used to calculate the royalty; and (e) the exchange rates used. 7.6 If no sales of Licensed Products has been made during any reporting period, a statement to this effect shall be required. 8. BOOKS AND RECORDS 8.1 The Licensee shall keep books and records accurately showing all Licensed Products manufactured, used, and/or sold under the terms of this Agreement. Such books and records shall be preserved for at least five (5) years from the date of the royalty payment to which they pertain and shall be open to inspection by representatives or agents of The Regents at reasonable times. 8.2 The fees and expenses of The Regents' representatives performing such an examination shall be borne by The Regents. However, if an error in royalties of more than five percent (5%) of the total royalties due for any year is discovered, then the fees and expenses of these representatives shall be borne by the Licensee. 16 19 9. LIFE OF THE AGREEMENT 9.1 Unless otherwise terminated by operation of law or by acts of the parties in accordance with the terms of this Agreement, this Agreement shall be in force from the effective date recited on page one and shall remain in effect for the life of the last-to-expire patent licensed under this Agreement; or, if no patent in Regents' Patent Rights issues, for [***] years from the effective date of this Agreement, or for [***] years from the date of first commercial sales in a given country, if such date is more than [***] from the effective date. 9.2 Any termination of this Agreement shall not affect the rights and obligations set forth in the following Articles: Article 8 Books and Records Article 12 Disposition of Licensed Products on Hand Upon Termination Article 13 Use of Names and Trademarks Article 18 Indemnification Article 23 Failure to Perform Article 28 Secrecy 10. TERMINATION BY THE REGENTS 10.1 If the Licensee should violate or fail to perform any term or covenant of this Agreement, then The Regents may give written notice of such default (Notice of Default) to the Licensee. If the Licensee should fail to repair such default within ninety (90) days of 17 ***Confidential Treatment Requested 20 the effective date of such notice, The Regents shall have the right to terminate this Agreement and the licenses herein by a second written notice (Notice of Termination) to the Licensee. If a Notice of Termination is sent to the Licensee, this Agreement shall automatically terminate on the effective date of such notice. Such termination shall not relieve the Licensee of its obligation to pay any royalty or License fees owing at the time of such termination and shall not impair any accrued right of The Regents. These notices shall be subject to Article 19 (Notices). 11. TERMINATION BY LICENSEE 11.1 The Licensee shall have the right at any time to terminate this Agreement in whole or as to any portion of Regents' Patent Rights or Regents' Technology Rights by giving notice in writing to The Regents. Such notice of termination shall be subject to Article 19 (Notices) and termination of this Agreement shall be effective ninety (90) days from the effective date of such notice. 11.2 Any termination pursuant to the above paragraph shall not relieve the Licensee of any obligation or liability accrued hereunder prior to such termination or rescind anything done by the Licensee or any payments made to The Regents hereunder prior to the time such termination becomes effective, and such termination shall not affect in any manner any rights of The Regents arising under this Agreement prior to such termination. 18 21 12. DISPOSITION OF LICENSED-PRODUCTS ON HAND UPON TERMINATION 12.1 Upon termination of this Agreement pursuant to Article 10 or Article 11, the Licensee shall have the privilege of disposing of all previously made or partially made Licensed Products, but no more, within a period of one hundred and twenty (120) days, provided, however, that the sale of such Licensed Products shall be subject to the terms of this Agreement including, but not limited to, the payment of royalties at the rate and at the time provided herein and the rendering of reports thereon. 13. USE OF NAMES AND TRADEMARKS 13.1 Nothing contained in this Agreement shall be construed as conferring any right to use in advertising, publicity, or other promotional activities any name, trade name, trademark, or other designation of either party hereto (including contraction, abbreviation or simulation of any of the foregoing). Unless required by law, the use by Licensee of the name, "The Regents of the University of California" or the name of any campus of the University of California is expressly prohibited. 14. LIMITED WARRANTY 14.1 The Regents warrants to the Licensee that it has the lawful right to grant this license. 14.2 This license and the associated Inventions are provided WITHOUT WARRANTY OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE 19 22 OR ANY OTHER WARRANTY, EXPRESS OR IMPLIED. THE REGENTS MAKES NO REPRESENTATION OR WARRANTY THAT THE LICENSED PRODUCTS OR LICENSED METHODS WILL NOT INFRINGE ANY PATENT OR OTHER PROPRIETARY RIGHT. 14.3 IN NO EVENT WILL THE REGENTS BE LIABLE FOR ANY INCIDENTAL, SPECIAL OR CONSEQUENTIAL DAMAGES RESULTING FROM EXERCISE OF THIS LICENSE OR THE USE OF THE INVENTIONS OR LICENSED PRODUCTS. 14.4 Nothing in this Agreement shall be construed as: (14.4a) a warranty or representation by The Regents as to the validity or scope of any Regents' Patent Rights; or (14.4b) a warranty or representation that anything made, used, sold or otherwise disposed of under any license granted in this Agreement is or will be free from infringement of patents of third parties; or (14.4c) an obligation to bring or prosecute actions or suits against third parties for patent infringement except as provided in Article 17; or (14.4d) conferring by implication, estoppel or otherwise any license or rights under any patents of The Regents other than Regents' Patent Rights as defined herein, regardless 20 23 of whether such patents are dominant or subordinate to Regents' Patent Rights; or (14.4e) an obligation to furnish any know how not provided in Regents' Patent Rights, except as specifically provided for under Regents' Technology Rights. 15. PATENT PROSECUTION AND MAINTENANCE 15.1 Provided that the Licensee has paid patent expenses as provided for in Paragraph 15.5, The Regents shall diligently prosecute and maintain the United States and foreign patents comprising Regents' Patent Rights using counsel of its choice, and The Regents shall provide the Licensee with copies of all relevant documentation so that the Licensee may be informed and apprised of the continuing prosecution and the Licensee agrees to keep this documentation confidential. The Regents' counsel will take instructions only from The Regents. 15.2 The Regents shall use all reasonable efforts to amend any patent application to include claims reasonably requested by the Licensee to protect the products contemplated to be sold under this Agreement. 15.3 The Licensee shall apply for an extension of the term of any patent included within Regents' Patent Rights if appropriate under the Drug Price Competition and Patent Term Restoration Act of 1984 and/or European, Japanese and other foreign counterparts of this Law. The Licensee shall prepare all such documents, and The Regents 21 24 agrees to execute such documents and to take such additional action as the Licensee may reasonably request in connection therewith. 15.4 In the event either party receives notice pertaining to infringement or potential infringement of any issued patent included within Regents' Patent Rights pursuant to the Drug Price Competition and Patent Term Restoration Act of 1984 (and/or European and Japanese counterparts of this Law), such party shall notify the other party within ten (10) days after receipt of such notice. 15.5 The costs of preparing, filing, prosecuting and maintaining all United States patent applications contemplated by this Agreement shall be borne by the Licensee. Costs billed to The Regents by The Regents' counsel shall be rebilled to Licensee and shall be due within 30 days of rebilling by The Regents. This includes patent prosecution costs for these Inventions incurred by The Regents prior to the execution of this Agreement. Such costs will be due upon execution of this Agreement and billing by The Regents. Such prior costs will be approximately [***]. 15.6 The Licensee shall have the continuing responsibility to notify The Regents if the Licensee or any of its sublicensees is not a small entity under the provisions of 35 USC 41(h). 15.7 The Licensee shall have the right to request The Regents to obtain patent protection on the Inventions in foreign countries if available and if it so desires. The Licensee shall notify The Regents by January 6, 1993 of its decision to obtain foreign patents. This notice concerning foreign filing shall be in writing, must identify the countries desired, and reaffirm the Licensee's obligation to underwrite the costs thereof. The absence 22 ***Confidential Treatment Requested 25 of such a notice from the Licensee to The Regents shall be considered an election not to secure foreign rights. 15.8 The preparation, filing and prosecuting of all foreign patent applications filed at the Licensee's request, as well as the maintenance of all resulting patents, shall be at the sole expense of the Licensee. Such patents shall be held in the name of The Regents and shall be obtained using counsel of The Regents' choice. 15.9 The Licensee's obligation to underwrite and to pay patent prosecution costs shall continue for so long as this Agreement remains in effect, provided, however, that the Licensee may terminate its obligations with respect to any given patent application or patent upon three (3) months written notice to The Regents. The Regents will use its best efforts to curtail patent costs when such a notice is received from the Licensee. The Regents may continue prosecution and/or maintenance of such application(s) or patent(s) at its sole discretion and expense; provided, however, that the Licensee shall have no further right or licenses thereunder. 15.10 The Regents shall have the right to file, prosecute or maintain patent applications at its own expense in any country in which the Licensee has not elected to file, prosecute, or maintain patent rights in accordance with this Article 15, and such applications and resultant patents shall not be subject to this Agreement. 16. PATENT MARKING 16.1 The Licensee agrees to mark all Licensed Products made, used or sold under the terms of this Agreement, or their containers, in accordance with the applicable 23 26 patent marking laws. 17. PATENT INFRINGEMENT 17.1 In the event that the Licensee shall learn of the substantial infringement of any patent licensed under this Agreement, the Licensee shall call The Regents' attention thereto in writing and shall provide The Regents with reasonable evidence of such infringement. Both parties to this Agreement agree that during the period and in a jurisdiction where the Licensee has exclusive rights under this Agreement, neither will notify a third party of the infringement of any of Regents' Patent Rights without first obtaining consent of the other party, which consent shall not be unreasonably denied. Both parties shall use their best efforts in cooperation with each other to terminate such infringement without litigation. 17.2 The Licensee may request that The Regents take legal action against the infringement of Regents' Patent Rights. Such request shall be made in writing and shall include reasonable evidence of such infringement and damages to the Licensee. If the infringing activity has not been abated within ninety (90) days following the effective date of such request, The Regents shall have the right to: (17.2a) commence suit on its own account; or (17.2b) refuse to participate in such suit, and The Regents shall give notice of its election in writing to the Licensee by the end of the one-hundredth (100th) day after receiving notice of such request from the Licensee. The Licensee may thereafter bring suit for patent infringement if and only if The Regents elects 24 27 not to commence suit and if the infringement occurred during the period and in a jurisdiction where the Licensee had exclusive rights under this Agreement. However, in the event the Licensee elects to bring suit in accordance with this paragraph, The Regents may thereafter join such suit at its own expense. 17.3 Such legal action as is decided upon shall be at the expense of the party on account of whom suit is brought and all recoveries recovered thereby shall belong to such party, provided, however, that legal action brought jointly by The Regents and the Licensee and fully participated in by both shall be at the joint expense of the parties and all recoveries shall be shared jointly by them in proportion to the share of expense paid by each party. If the Licensee pays all legal expenses, it shall have the right to offset one half of its out-of-pocket legal expenses against any earned royalties payable under Paragraph 5. 1, provided that earned royalties payable under Paragraph 5.1 shall not be reduced in any given quarter by more than [***]; any unused credit may be carried forward until the Licensee has received full credit for its creditable legal expenses. 17.4 Each party agrees to cooperate with the other in litigation proceedings instituted hereunder but at the expense of the party on account of whom suit is brought. Such litigation shall be controlled by the party bringing the suit, except that The Regents may be represented by counsel of its choice pursuant to The Regents' determination in any suit brought by the Licensee, and The Licensee may be represented by counsel of its choice pursuant to The Licensee's determination in any suit brought by The Regents. 25 ***Confidential Treatment Requested 28 18. INDEMNIFICATION 18.1 The Licensee agrees to indemnify, hold harmless and defend The Regents, its officers, employees, and agents; the sponsors of the research that led to the Inventions; and the inventors of the patents and patent applications in Regents' Patent Rights and their employers against any and all claims, suits, losses, damage, costs, fees, and expenses resulting from or arising out of exercise of this license or any sublicense. This indemnification will include, but will not be limited to, any product liability. 18.2 The Licensee, at its sole cost and expense, shall insure its activities in connection with the work under this Agreement and obtain, keep in force and maintain insurance as follows, beginning with the date that materials to be used on or by the third parties are first manufactured: Comprehensive or Commercial Form General Liability Insurance (contractual liability included) with limits as follows: (a) Each Occurrence $1,000,000 (b) Products/Completed Operations Aggregate $5,000,000 (c) Personal and Advertising Injury $1,000,000 (d) General Aggregate (commercial form only) $5,000,000 It should be expressly understood, however, that the coverages and limits referred to under the above shall not in any way limit the liability of the Licensee. The Licensee shall furnish The Regents with certificates of insurance evidencing compliance with all requirements. Such certificates shall: 26 29 (a) Provide for thirty (30) day advance written notice to The Regents of any modification. (b) Indicate that The Regents has been endorsed as an additional insured under the coverages referred to under the above. (c) Include a provision that the coverages will be primary and will not participate with nor will be excess over any valid and collectable insurance or program of self-insurance carried or maintained by The Regents. 18.3 The Regents shall promptly notify the Licensee in writing of any claim or suit brought against The Regents in respect of which The Regents intends to invoke the provisions of this Article 18. The Licensee will keep The Regents informed on a current basis of its defense of any claims pursuant to this Article 18. 19. NOTICES 19.1 Any notice or payment required to be given to either party shall be deemed to have been properly given and to be effective (a) on the date of delivery if delivered in person or (b) five (5) days after mailing if mailed by first-class certified mail, postage paid, to the respective addresses given below, or to such other address as it shall designate by written notice given to the other party. In the case of the Licensee: Signal Pharmaceuticals, Inc. 11545 Sorrento Valley Road, Suite 315 San Diego, CA 92121 Attention: Chief Executive Officer 27 30 In the case of The Regents: THE REGENTS OF THE UNIVERSITY OF CALIFORNIA 1320 Harbor Bay Parkway, Suite 150 Alameda, California 94502 Attention: Director; Office of Technology Transfer Referring to: UC Case Nos. [***] 20. ASSIGNABILITY 20.1 This Agreement is binding upon and shall inure to the benefit of The Regents, its successors and assigns, but shall be personal to the Licensee and assignable by the Licensee only with the written consent of The Regents, which consent shall not be unreasonably withheld. 21. LATE PAYMENTS 21.1 In the event royalty payments, rebillings or fees are not received by The Regents when due, the Licensee shall pay to The Regents interest charges at a rate of ten (10) percent per annum. Such interest shall be calculated from the date payment was due until actually received by The Regents. 22. WAIVER 22.1 It is agreed that no waiver by either party hereto of any breach or default of any of the covenants or agreements herein set forth shall be deemed a waiver as to any subsequent and/or similar breach or default. 28 ***Confidential Treatment Requested 31 23. FAILURE TO PERFORM 23.1 In the event of a failure of performance due under the terms of this Agreement and if it becomes necessary for either party to undertake legal action against the other on account thereof, then the prevailing party shall be entitled to reasonable attorney's fees in addition to costs and necessary disbursements. 24. GOVERNING LAWS 24.1 THIS AGREEMENT SHALL BE INTERPRETED AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF CALIFORNIA, but the scope and validity of any patent or patent application shall be governed by the applicable laws of the country of such patent or patent application. 25. PREFERENCE FOR UNITED STATES INDUSTRY 25. 1 Because this Agreement grants the exclusive right to use or sell the Inventions in the United States, the Licensee agrees that any products embodying these Inventions or produced through the use thereof will be manufactured substantially in the United States. 26. FOREIGN GOVERNMENT APPROVAL OR REGISTRATION 26.1 If this Agreement or any associated transaction is required by the law of any nation to be either approved or registered with any governmental agency, the Licensee 29 32 shall assume all legal obligations to do so. 27. EXPORT-CONTROL LAWS 27.1 The Licensee shall observe all applicable United States and foreign laws with respect to the transfer of Licensed Products and related technical data to foreign countries, including, without limitation, the International Traffic in Arms Regulations (ITAR) and the Export Administration Regulations. 28. SECRECY 28.1 With regard to confidential information ("Data"), which can be oral or written or both, received from The Regents regarding these Inventions, or received from the Licensee regarding its business, the receiving party (hereinafter "Recipient") agrees: (1) not to use the Data except for the sole purpose of performing under the terms of this Agreement; (2) to safeguard Data against disclosure to others with the same degree of care as it exercises with its own data of a similar nature; (3) not to disclose Data to others (except to its employees, agents or consultants who are bound to the Licensee by a like obligation of confidentiality) without the express written permission of the disclosing party, except that the Recipient shall not be prevented from using or disclosing any of the Data: 30 33 (a) which the Recipient can demonstrate by written records was previously known to it; (b) which is now, or becomes in the future, public knowledge other than through acts or omissions of the Recipient; or (c) which is lawfully obtained by the Recipient from sources independent of the disclosing party; (4) that the secrecy obligations hereunder are subject to the California Public Records Act; and (5) that the secrecy obligations of the Recipient with respect to Data shall continue for a period ending five (5) years from the termination date of this Agreement. 28.2 With regard to biological material received from The Regents, including any cell lines, vectors, genetic material, derivatives, products progeny or material derived therefrom ("Biological Material"), the Licensee hereby agrees: (1) not to use Biological Material except for the sole purpose of performing under the terms of this Agreement; (2) not to transfer Biological Material to others (except to its employees, agents or consultants who are bound to the Licensee by like obligations conditioning and restricting access, use and continued use of Biological Material) without the express written permission of The Regents, except that the Licensee shall not be prevented from transferring Biological Material which: 31 34 (a) becomes publicly available other than through acts or omissions of the Licensee, or (b) is lawfully obtained by the Licensee from sources independent of The Regents; (3) to safeguard Biological Material against disclosure and transmission to others with the same degree of care as it exercises with its own biological materials of a similar nature; (4) to destroy all copies of Biological Material at the termination pursuant to Article 10 or Article 11 of this Agreement; and (5) that title to the Biological Material shall automatically transfer to the Licensee at the expiration of this Agreement. 29. MISCELLANEOUS 29.1 The headings of the several sections are inserted for convenience of reference only and are not intended to be a part of or to affect the meaning or interpretation of this Agreement. 29.2 This Agreement will not be binding upon the parties until it has been signed below on behalf of each party, in which event, it shall be effective as of the date recited on page one. 29.3 No amendment or modification hereof shall be valid or binding upon the parties unless made in writing and signed on behalf of each party. 32 35 29.4 This Agreement embodies the entire understanding of the parties and shall supersede all previous communications, representations or understandings, either oral or written, between the parties relating to the subject matter hereof. The Secrecy Agreements dated September 7, 1992 (U.C. Control No. 92-20-0437), August 13, 1992 (U.C. Control No. 93-20-0575), August 13, 1993 (U.C. Control No. 93-20-0576), and the Letters of Intent dated September 16, 1992 (U.C. Control No. 92-30-0436), and June 11, 1993 (U.C. Control No. 93-30-0379), are hereby terminated. 29.5 In case any of the provisions contained in this Agreement shall be held to be invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability shall not affect any other provisions hereof, but this Agreement shall be construed as if such invalid or illegal or unenforceable provisions had never been contained herein. 29.6 This Agreement includes Appendix A which is attached hereto. Appendix A is a Shareholder's Agreement. As long as The Regents is a shareholder under the Shareholder's Agreement, or until the Common Stock of the Company (as defined in Appendix A) is publicly traded, the Licensee agrees that it shall give The Regents' designated representative notice of all of its Board of Directors meetings, as it gives to its own board members. The designated Regents' representative shall be permitted to attend at least one meeting of the Board of Directors per year (the date and time of which shall be determined by the Licensee in its sole discretion) and to comment and ask questions during the proceedings. The Regents' representative shall be selected after consultation with the 33 36 Licensee, and it is understood that the representative is not a Director and cannot vote on matters before the Board. IN WITNESS WHEREOF, both The Regents and the Licensee have executed this Agreement, in duplicate originals, by their respective officers hereunto duly authorized, on the day and year hereinafter written. SIGNAL PHARMACEUTICALS, INC. THE REGENTS OF THE UNIVERSITY OF CALIFORNIA By: /s/ MARK D. CARMAN By: /s/ WILLIAM T. DAVIS ---------------------------- ---------------------------- (Signature) (Signature) Name: MARK D. CARMAN Name: William T. Davis --------------------------- (Please Print) Title: V.P. OPERATION'S Title: Associate Director; ---------------------------- Office of Technology Transfer CORPORATE DEV. Date: 10/14/93 Date: 10/26/93 -------------------------- -------------------------- APPROVAL AS TO LEGAL FORM: /s/ P. MARTIN SIMPSON 10/6/93 ------------------------------ ------------ P. Martin Simpson, Jr., Resident Date Counsel Office of Technology Transfer University of California 34 EX-10.33 36 EXHIBIT 10.33 1 EXHIBIT 10.33 UC Case Nos. [***] FIRST AMENDMENT TO EXCLUSIVE LICENSE AGREEMENT FOR METHODS FOR [***] THIS FIRST AMENDMENT TO LICENSE AGREEMENT (the "First Amendment") is effective this 22nd day of June 1997 between The Regents of the University of California, a California corporation with administrative headquarters at 300 Lakeside Drive, 22nd Floor, Oakland, California 94612-3550 ("The Regents"), and Signal Pharmaceuticals, Inc., a California corporation with an address at 11545 Sorrento Valley Road, Suite 315, San Diego, California 92121 ("Licensee"). BACKGROUND A. The Regents and Licensee entered into an agreement effective October 26, 1993 (UC Control No. 93-04-0786) which is entitled [***] (the "License Agreement"); B. The Regents and Licensee wish to amend the License Agreement to include rights to The Regents' undivided interest in pending U.S. Patent Application No. [***]. Rights granted in this First Amendment are limited to The Regents' undivided interest because the patent application is the result of a collaboration between The Regents and The University of Massachusetts Medical Center (UMMC) and is jointly assigned to both institutions. C. UMMC has filed conflicting patent applications, which could lead to interferences with patent applications filed under UC Case No. [***] and increase Licensee's patent prosecution costs under this license. D. The Regents and Licensee also wish to amend the License Agreement to show negotiated and agreed upon changes to the terms on sublicensing, confidentiality, patent enforcement, place of manufacture for Licensed Products, and dispute resolution. U.C. AGREEMENT CONTROL NUMBER 93-04-0786I 1 ***Text Omitted and Filed Separately Confidential Treatment Requested Under 17 C.F.R. Sections 200.80, 200.83 and 230.406 2 First Amendment to Exclusive License Agreement U.C. Control No. 93-04-0786 E. The parties wish to clarify and bring current the patents and patent applications that are subject to this agreement, including the addition of certain continuation-in-part applications. F. As recited in Paragraph 6.5 of the License Agreement, if the Licensee is unable to meet any of the dates set forth in Paragraph 6.4 of the License Agreement, with regard to either the [***] Technologies or the [***] Technologies, the parties shall in good faith re-establish a date or dates that are reasonable under the then current circumstances. Since Signal has made significant progress in the development of both the [***] Technologies and the [***] Technologies, The Regents wishes to amend the License Agreement to extend the due diligence dates recited in Paragraph 6.4 by [***] as requested by Licensee. Licensee and The Regents agree: 1. Paragraph 1. 1 of Article 1 (Definitions) of the License Agreement is removed in its entirety and replaced with the following: 1.1 "Regents' Patent Rights" means The Regents' interest in subject matter claimed in or covered by any of the following: 1.1.(1) Pending U.S. Patent Application Serial No. [***] entitled "[***]", filed [***], [***] by [***] (UC Case [***]), which is a continuation application to U.S. Patent Application [***] (UC Case No. [***]); 1.1.(2) Pending U.S. Patent Application Serial [***] entitled "[***]", filed [***] by [***] (UC Case [***]); 1.1.(3) U.S. Patent No. [***] entitled "[***] [***]", filed on [***] by [***] (UC Case No. [***]); 1.1.(4) Pending U.S. Patent Application Serial No. [***] entitled "[***]", filed [***] by [***] (UC Case No. [***]); 2 ***Confidential Treatment Requested 3 First Amendment to Exclusive License Agreement U.C. Control No. 93-04-0786 1. 1. (5) U. S. Patent No. [***] entitled "[***]", filed [***] by [***] (UC Case No. [***]); 1. 1. (6) U. S. Patent No. [***] entitled "[***]", filed on [***] by [***] (UC Case No. [***]); 1. 1. (7) Pending U.S. Patent Application Serial No. [***] entitled "[***]", filed [***] by [***] (UC Case No. [***]); 1.1.(8) Pending U.S. Patent Application Serial No. [***], entitled "[***]", filed [***] by [***] (UC Case No. [***]); 1.1.(9) Pending U.S. Patent Application Serial No. [***], entitled "[***]", filed [***] by [***] (UC Case No. [***]); and continuing applications thereof including divisions and substitutions but excluding continuation-in-part applications, except to the extent that those continuation-in-part applications contain claims supported in the original application; any patents issuing on said application or continuing applications including reissues; and any corresponding foreign applications or patents. 2. Paragraph 3.3 of Article 3 (Sublicensing) of the License Agreement is removed in its entirety and replaced with the following: 3.3 Upon termination of this Agreement or reduction of its licenses to non-exclusive, for any reason, The Regents shall accept assignment of sublicenses, to the extent that it is not unreasonable for The Regents to do so as a public entity and provided that: (a) The Licensee was not in breach of this Agreement when entering into the sublicense; 3 ***Confidential Treatment Requested 4 First Amendment to Exclusive License Agreement U.C. Control No. 93-04-0786 (b) The sublicensee is not in breach of its sublicense agreement at the time of termination of this Agreement; and (c) The sublicensee acquires no rights from or obligations on the part of The Regents other than those that are specifically granted in this Agreement, and the sublicensee assumes all obligations to The Regents required of Licensee by this Agreement, including past due obligations existing at the time of assumption of the sublicense, as well as any additional payments required by the sublicense. 3. Paragraph 6.4 of Article 6 (Due Diligence) of the License Agreement is removed in its entirety and replaced with the following: [***] 6.4h reasonably fill the market demand for Licensed Products following commencement of marketing at any time during the exclusive period of this Agreement; 4 ***Confidential Treatment Requested 5 First Amendment to Exclusive License Agreement U.C. Control No. 93-04-0786 then, subject to Paragraph 6.5, The Regents shall have the right and option either to terminate this Agreement or to reduce the Licensee's exclusive license to a nonexclusive license. This right, if exercised by The Regents, supersedes the rights granted in Article 2 (Grant). 4. The fourth sentence of Paragraph 6.5 of the License Agreement which reads, "The annual license maintenance fee shall begin to be payable in [***] for the [***] Technologies, or [***] for the [***] Technologies, on the anniversary date of the effective date hereof and shall continue until sales of the delayed product begin," is removed and replaced with the following: "The annual license maintenance fee shall begin to be payable in [***] for the [***] Technologies, or [***] for the [***] Technologies, on the anniversary date of the effective date hereof and shall continue until sales of the delayed product begin. " 5. Paragraph 6.6 of Article 6 (Due Diligence) of the License Agreement is removed in its entirety and replaced with the following: 6.6 Either party to this Agreement shall refer a dispute arising under this Article to mediation prior to commencing litigation with the other party under this Agreement. The mediation shall be conducted in accordance with the rules of the Commercial Arbitration and Mediation Center for the Americas. 6. Article 25 (Preference for United States Industry) of the License Agreement is removed in its entirety and replaced with the following: 25.1 Because this Agreement grants the exclusive right to use or sell the Inventions in the United States, the Licensee agrees that any products sold in the U.S. embodying these Inventions or produced through the use thereof will be manufactured substantially in the United States. 5 ***Confidential Treatment Requested 6 First Amendment to Exclusive License Agreement U.C. Control No. 93-04-0786 7. Subparagraph 28.1(3) of Article 28 (Secrecy) of the License Agreement is removed in its entirety and replaced with the following: 28.1(3) not to disclose Data to others (except to its employees, agents, consultants, investors or collaborators who are bound to the Licensee by a like obligation of confidentiality) without the express written permission of the disclosing party, except that the Recipient shall not be prevented from using or disclosing any of the Data: (a) which the Recipient can demonstrate by written records was previously known to it; (b) which is now, or becomes in the future, public knowledge other than through acts or omissions of the Recipient; or (c) which is lawfully obtained by the Recipient from sources independent of the disclosing party. 8. Licensee and The Regents recognize that the license granted in the License Agreement to pending U.S. Patent Application No. [***] may be limited by the outcome of an interference, if one is declared, between The Regents and UMMC. The Licensee will, however, have a license under any rights remaining to The Regents following any interference proceeding. 6 ***Confidential Treatment Requested 7 First Amendment to Exclusive License Agreement U.C. Control No. 93-04-0786 9. Except as amended, modified and supplemented by the terms of this First Amendment, the License Agreement shall remain in full force and effect in accordance with its terms. The parties have executed this FIRST AMENDMENT TO THE LICENSE AGREEMENT by their respective and duly authorized officers, as evidenced by the signatures below. SIGNAL PHARMACEUTICALS, INC. THE REGENTS OF THE UNIVERSITY OF CALIFORNIA By: /s/ CARL BOBKOSKI By: /s/ TERENCE A. FEUERBORN -------------------------------- --------------------------------- (Signature) (Signature) Name: /s/ CARL BOBKOSKI Name: ------------------------------ ------------------------------- (Please Print) Terence A. Feuerborn Title: E.V.P. Title: Executive Director Research Administration and Technology Transfer Date: 6/19/97 Date: 6/22/97 ------------------------------ ------------------------------- Approved as to legal form: /s/ SANDRA S. SCHULTZ 6/14/92 ----------------------- ------- Sandra S. Schultz, Attorney Date Office of Technology Transfer University of California 7 EX-10.34 37 EXHIBIT 10.34 1 *** Text Omitted and Filed Separately Confidential Treatment Requested Under 17 C.F.R. Sections 200.80, 200.83 and 230.406. EXHIBIT 10.34 [UNIVERSITY OF CALIFORNIA LETTERHEAD] February 2,1998 Carl F. Bobkoski Executive Vice President Signal Pharmaceuticals, Inc. 5555 Oberlin Drive San Diego, CA 92121 RE: Second Amendment to Exclusive License Agreement for: Methods for Production of Neuroblasts and Testing Drugs... UC Case No. 92-116 etc.: UC Agreement Control No. 93-04-0786 Dear Carl: I write regarding a proposed designated sublicense agreement, which Signal Pharmaceuticals, Inc. "Signal") is negotiating for the [***] Technologies (as defined in the subject License Agreement) with a certain other party ("Designated Sublicensee"). Signal wishes to issue this sublicense with a royalty base that differs from the royalty base defined in the License Agreement and on other terms and conditions which vary from the License Agreement. Accordingly: The Regents agrees to waive certain provisions of the License Agreement solely for this designated sublicense in consideration of Signal agreeing that (capitalized terms should have the meaning set forth herein, if not specified herein, the meaning defined in the above referenced License Agreement): (a) The designated sublicense grant will be confined to a field allowing the Designated Sublicensee to use the [***] Technologies in connection with [***] ***Confidential Treatment Requested 2 Carl F. Bobkoski February 2, 1998 Page 2 (b) Signal will pay The Regents an earned royalty on Net Sales of Licensed Product sold by the Designated Sublicensee, its affiliates and sublicensees as set forth in Appendix A hereto; accordingly, solely for purposes of the designated sublicense agreement. Paragraphs 5.1 through 5.3 and 5.9 of the License Agreement are hereby superseded by the terms and conditions set forth in Appendix A. (c) Upon termination of the License Agreement or reduction of Signal's license under the License Agreement to non-exclusive, for any reason, The Regents shall accept assignment of this designated sublicense, as provided for in the First Amendment to Exclusive License Agreement for [***] effective June 22, 1997. Notwithstanding the foregoing, The Regents shall accept assignment of this sublicense even if Signal was in breach of the License Agreement when entering into the sublicense. (d) The designated sublicense agreement will require that Sublicensee (itself or through a designee) develop at least [***] as follows: - [***] - [***] - [***] - [***] Notwithstanding the foregoing, the designated sublicense agreement may provide for reasonable extensions of the foregoing diligence deadlines, if despite diligent efforts such deadline is or may not be met. However, in the event that The Regents accepts assignment of the sublicense, The Regents shall not be required to provide any extension of the diligence deadlines and any extension of the diligence deadlines shall be at the sole discretion of The Regents. Apart from the above-specified changes, the subject sublicense agreement will adhere to all the sublicensing provisions of the License Agreement. However, to the extent this letter and the License Agreement conflict solely with respect to the designated sublicense agreement this letter will control. ***Confidential Treatment Requested 3 Carl F. Bobkoski February 2, 1998 Page 3 If you agree to the terms of this letter, please sign both enclosed originals and return them to me. I will return a fully executed original to you for your records. Sincerely, /s/ PATRICIA ANDERSON COTTON, PH.D. ----------------------------------- Patricia Anderson Cotton, Ph.D. Licensing Officer ______________________________________________________________________________ SIGNAL PHARMACEUTICALS THE REGENTS OF THE UNIVERSITY INC.: OF CALIFORNIA: By: /s/ CARL F. BOBKOSKI By: /s/ TERENCE A. FEUERBORN ------------------------------- ------------------------------- (Signature) (Signature) Name: Carl F. Bobkoski Name: Terence A. Feuerborn Title: Executive Vice President Title: Executive Director Office of Research Administration and Technology Transfer Date: Feb. 13, 98 Date: 3-2-98 ----------------------------- ----------------------------- [ILLEGIBLE] /s/ P. Martin Simpson, Jr. 3-Jan 98 ----------------------- -------- P. Martin Simpson, Jr. Date Resident Counsel Office of Technology Transfer University of California 4 APPENDIX A TO SECOND AMENDMENT DATED FEBRUARY 2, 1998 Signal and The Regents agree that solely for purposes of the designated sublicense agreement: 1. The following terms defined in Paragraphs 1.2, 1.3, 1.4 and 1.5 of the License Agreement shall have the following meanings: 1.2 "Licensed Product" means any product, composition or material (i) the sale of which would, but for the licenses granted to the Designated Sublicensee, infringe a Valid Claim within The Regents' Patent Rights in the country for which such product, composition or material is sold or (ii) is manufactured or administered to a patient by a Licensed Method. 1.3 "Licensed Method" means any method (i) the practice of which would, but for the license granted to Designated Sublicensee, infringe a Valid Claim within Regents' Patent Rights or (ii) consisting of a method of [***] 1.4 "Net Sales" means the total amount invoiced to third parties on sales of Licensed Products by Designated Sublicensee, its affiliates or sublicensees, less the following reasonable and customary deductions to the extent applicable to such invoiced amounts: (i) all trade, cash and quantity credits, discounts, refunds or government rebates; (ii) amounts for claims, allowances or credits for returns, retroactive price reductions, or chargebacks; (iii) packaging, handling fees and prepaid freight, sales taxes, duties and other governmental charges (including value added tax); and (iv) provisions for uncollectible accounts determined in accordance with reasonable accounting practices, consistently applied to all products of the selling party; provided, however, that in the case of Patient-Specific Licensed Products, "Net Sales" shall equal [***] of the foregoing amounts (after the deductions described in (i) through (iv) above). For purposes of the foregoing, it is understood that Net Sales shall include only the amount invoiced for materials consisting of Licensed Products (less the foregoing deductions and adjustments) and shall not include charges related to services [***] performed in connection with the sale of such Licensed Products; accordingly, Net Sales shall not include, without limitation, charges for [***] or the like. For the removal of doubt, Net Sales shall not include sales by Sublicensee to its affiliates for resale, provided that if Sublicensee sells a Licensed Product to an affiliate for resale, Net Sales shall include the amounts invoiced by such affiliate to third parties on the resale of such Licensed Product. 1.5 "Affiliate" means any corporation or other business entity in which the Licensee or Designated Sublicensee owns or controls, directly or indirectly, at least fifty (50%) of the outstanding stock or other voting rights entitled to elect directors; provided however, that any country where the local law shall not permit foreign equity participation of at least 50%, then an ***Confidential Treatment Requested 5 "Affiliate" shall include any company in which the Licensee or Sublicensee owns or controls, directly or indirectly, the maximum percentage of such outstanding stock or voting rights permitted by local law. 2. The following definitions are added to Article I (Definitions) of the License Agreement: 1.9 [***] 2.0 "Valid Claim" shall mean a claim of an issued and unexpired patent or a claim of a pending patent application within Regents' Patent Rights which has not been held unpatentable, invalid or unenforceable by a court or other government agency of competent jurisdiction and has not been admitted to be invalid or unenforceable through reissue, re-examination, disclaimer or otherwise. Notwithstanding the foregoing, if a claim of a pending patent application within Regents' Patent Rights has not issued as a claim of an issued patent within Regent's Patent Rights, on or before [***] such pending claim shall not be a Valid Claim for purposes of the sublicense agreement unless and until such claim issues. 3. Paragraphs 5.1, 5.2, 5.3 and 5.9 of the License Agreement shall be removed and replaced with the following: 5.1(a) The Licensee shall pay The Regents an earned royalty of [***] of the Net Sales of Licensed Product sold by the Designated Sublicensee, its Affiliates or sublicensees; provided that the earned royalty shall be [***] of the Net Sales of Licensed Products, if such Net Sales by Licensee, its Affiliates and sublicensees (including without limitation, Designated Sublicensee, its Affiliates and sublicensees) are less than [***] per year in any given calendar year of sales. 5.1(b) The earned royalty due under Paragraph 5.1(a) above with respect to a Licensed Product which is not covered by any Valid Claim but is manufactured or administered to patients using a Licensed Method not covered by a Valid Claim shall be [***]. 5.2 Royalties shall continue under Paragraph(s) 5.1(a) and 5.1(b) above with respect to each Licensed Product, (i) on a country-by-country basis for so long as the sale of such Licensed Product would, but for the license granted to Designated Sublicensee, infringe a Valid Claim within the Regents' Patent rights in such country or (ii) with respect to a Licensed Product(s) not covered by any Valid Claim but that is manufactured or administered to patients using a Licensed Method not covered by a Valid Claim for [***] from the date of first commercialization of the first such Licensed Product in any country. ***Confidential Treatment Requested 6 5.3 Earned royalties due on Net Sales of Licensed Products by Designated Sublicensee, its affiliates or sublicensees shall be deemed accrued in the quarter in which Licensee receives payment from the Sublicensee with respect to such Net Sales, but in no event later than the quarter following the quarter in which Net Sales are made by the Sublicensee, its affiliates or sublicensee. EX-10.35 38 EXHIBIT 10.35 1 ***Text Omitted and Filed Separately Confidential Treatment Requested Under 17 C.F.R. Sections 200.80, 200.83 and 230.406 EXHIBIT 10.35 RESTRICTED STOCK PURCHASE AGREEMENT Agreement made as of this 26th day of October, 1993 by and between Signal Pharmaceuticals, Inc., a California corporation (the "Company"), and The Regents of the University of California ("The Regents" or "Purchaser"). Unless otherwise defined herein, all capitalized terms used herein shall have the same meanings given to them in that certain Exclusive License Agreement (the "License Agreement") by and between Purchaser and the Company, dated October 26, 1993, a copy of which is attached hereto as Exhibit 1. 1. PURCHASE OF SHARES 1.1 Purchase. In consideration of Purchaser's grant of certain patent and technology rights to the Company pursuant to the License Agreement, the Company shall issue to Purchaser [***] shares of its Common Stock. Upon the Company's achievement of certain milestones, the Company shall issue additional shares to Purchaser as follows: (a) The Company shall issue [***] shares of its Common Stock (as adjusted for stock splits, subdivisions, combinations, recapitalizations and distributions of stock) to Purchaser: (i) [***] (ii) [***] provided, however, that only one such issuance shall be made pursuant to each of (i) and (ii), above, regardless of how many lead compounds utilizing the [***] or [***] Technologies may subsequently be entered into toxicology studies. (b) Upon the [***], the Company shall issue [***] shares of its Common Stock (as adjusted for stock splits, subdivisions, combinations, recapitalizations and distributions of stock) to Purchaser; ***Confidential Treatment Requested 2 [***] (c) [***], the Company shall issue to Purchaser [***] shares of its Common Stock (as adjusted for stock splits, subdivisions, combinations, recapitalizations and distributions of stock); [***] All shares of the Company's Common Stock issued to Purchaser pursuant to this paragraph 1.1, shall hereinafter be referred to as the "Shares". Notwithstanding the foregoing, the Company shall have no obligation to issue any shares following any termination of the License Agreement. 2. INVESTMENT REPRESENTATIONS 2.1 Exemption from Registration. The Shares have not been registered under the 1933 Act, and are accordingly being issued to Purchaser in reliance upon the exemption from such registration provided by Section 4(2) of the 1933 Act. 2.2 Investment Intent. Purchaser hereby warrants and represents that it is acquiring the Shares for its own account and not with a view to their resale or distribution and that it is prepared to hold the Shares for an indefinite period and has no present intention to sell, distribute or grant any participating interests in, the Shares. Purchaser hereby acknowledges the fact that the Shares have not been registered under the Securities Act of 1933, as amended (the "1933 Act"), and that the Company is issuing the Shares to it in reliance on the representations made by it herein. 2.3 Restricted Securities. (a) Purchaser hereby confirms that it has been informed that the Shares may not be resold or transferred unless such Shares are first registered under the 1933 Act or unless an exemption from such registration is available. Accordingly, Purchaser hereby acknowledges that it is prepared to hold the Shares for an indefinite period and that it is aware that Rule 144 of the Securities and Exchange Commission issued under the 1933 Act is not presently available to exempt the sale of the Shares from the registration requirements of the Act. Should Rule 144 subsequently become available, Purchaser is aware that any sale of Shares effected pursuant to the Rule may, depending upon the status of Purchaser as an "affiliate" or "non-affiliate" 2 ***Confidential Treatment Requested 3 under the Rule, be made only in limited amounts in accordance with the provisions of the Rule, and that in no event may any Shares be sold pursuant to the Rule until Purchaser has held such Shares for at least two (2) years following their issuance. (b) Should the Company not become subject to the reporting requirements of the Exchange Act, then Purchaser may, provided he/she is not at the time an affiliate of the Company (nor was such an affiliate during the preceding three (3) months), sell the Shares (without registration) pursuant to paragraph (k) of Rule 144 after the Shares have been held for a period of three (3) years following the payment in cash of the Purchase Price for such shares. 2.4 Disposition of Shares. Except as specifically set forth below, Purchaser hereby agrees that it shall make no disposition of the Shares, unless and until: (a) it shall have complied with all requirements of this Agreement applicable to the disposition of such Shares; (b) it shall have notified the Company of the proposed disposition and furnished it with a written summary of the terms and conditions of the proposed disposition; and (c) unless otherwise waived by the Company, it shall have delivered to the Company a written opinion of counsel at the Company's expense, in form and substance satisfactory to the Company, that (i) the proposed disposition does not require registration of the Shares under the 1933 Act or (ii) all appropriate action necessary for compliance with the registration requirements of the 1933 Act or of any exemption from registration available under the 1933 Act has been taken. The Company shall not be required (i) to transfer on its books any Shares which have been sold or transferred in violation of the provisions of this Section 2, nor (ii) to treat as the owner of the Shares, or otherwise to accord voting or dividend rights to, any transferee to whom the Shares have been so transferred. 2.5 Restrictive Legends. In order to reflect the restrictions on disposition of the Shares, the stock certificates for the Shares shall be endorsed with restrictive legends, including the following legend: "The securities represented by this certificate have not been registered under the Securities Act of 1933. The shares have been acquired for investment and may not be sold or offered for sale in the absence of an effective registration statement for the shares 3 4 under that Act, a 'no action' letter of the Securities and Exchange Commission as to such sale or offer, or an opinion of counsel to the Company that registration under such Act is not required for such sale or offer." 3. TRANSFER RESTRICTIONS 3.1 Transferee Obligations. Each person (other than the Company) to whom the Shares are transferred must, as a condition precedent to the validity of such transfer, acknowledge in writing to the Company that such person is bound by the provisions of this Agreement and that the transferred shares are subject to the market stand-off provisions of paragraph 3.2 to the same extent such shares would be so subject if retained by Purchaser. 3.2 Market Stand-Off. (a) In connection with any underwritten public offering by the Company of its equity securities pursuant to an effective registration statement filed under the 1933 Act, including the Company's initial public offering (the "IPO"), Purchaser and all subsequent holders of the Shares who derive their chain of ownership through a transfer from Purchaser ("Owner") shall not sell, make any short sale of, loan, hypothecate, pledge, grant any option for the purchase of, or otherwise dispose or transfer for value or otherwise agree to engage in any of the foregoing transactions with respect to, any Shares without the prior written consent of the Company or its underwriters. Such limitations shall be in effect for such period of time from and after the effective date of the final prospectus for such offering as may be requested by the Company or such underwriters. (b) Owner shall be subject to the market standoff provisions of this paragraph 3.2 provided and only if all of the executive officers and directors of the Company are also subject to similar arrangements. (c) In the event of any stock dividend, stock split, recapitalization or other change affecting the Company's outstanding Common Stock effected as a class without the Company's receipt of consideration, then any new, substituted or additional securities distributed with respect to the Shares shall be immediately subject to the provisions of this paragraph 3.2, to the same extent the Shares are at such time covered by such provisions. 4 5 (d) In order to enforce the limitations of this paragraph 3.2, the Company may impose stop-transfer instructions with respect to the Shares until the end of the applicable standoff period. 4. REGISTRATION RIGHTS. 4.1 For purposes of this Section 4: (a) The term "register", "registered," and "registration" refer to a registration effected by preparing and filing a registration statement or similar document in compliance with the Act, and the declaration or ordering of effectiveness of such registration statement or document; (b) The term "Registrable Securities" means the Common Stock issued pursuant to this Agreement, excluding, however, any Registrable Securities sold by a person in a transaction in which his rights under this Section 4 are not assigned; (c) The number of shares of "Registrable Securities then outstanding" shall be determined by the number of shares of Common Stock outstanding which are, and the number of shares of Common Stock issuable pursuant to then exercisable or convertible securities which are, Registrable Securities. (d) The term "Holder" means any person owning or having the right to acquire Registrable Securities or any assignee thereof in accordance with Section 4.7 hereof. 4.2 Company Registration. If (but without any obligation to do so) the Company proposes to register (including for this purpose a registration effected by the Company for shareholders other than the Holders) any of its stock or other securities under the Act in connection with the public offering of such securities solely for cash (other than a registration relating solely to the sale of securities to participants in a Company stock plan, or a registration on any form which does not include substantially the same information as would be required to be included in a registration statement covering the sale of the Registrable Securities), the Company shall, at such time, promptly give each Holder written notice of such registration. Upon the written request of each Holder given within twenty (20) days after mailing of such notice by the Company in accordance with Section 5.2, the Company shall, subject to the provisions of Section 4.4, cause to be registered under the Act all of the Registrable Securities that each such Holder has requested to be registered. 5 6 4.3 Expenses of Company Registration. The Company shall bear and pay all expenses incurred in connection with any registration, filing or qualification of Registrable Securities with respect to the registrations pursuant to Section 4.2 for each Holder (which right may be assigned as provided in section 4.7), including (without limitation) all registration, filing, and qualification fees, printers' and accounting fees relating or apportionable thereto, but excluding underwriting discounts and commissions relating to Registrable Securities. 4.4 Underwriting Requirements. In connection with any offering involving an underwriting of shares of the Company's capital stock, the Company shall not be required under Section 4.2 to include any of the Holders' securities in such underwriting unless they accept the terms of the underwriting as agreed upon between the Company and the underwriters selected by it (or by other persons entitled to select the underwriters), and then only in such quantity as the underwriters determine in their sole discretion will not jeopardize the success of the offering by the Company. If the total amount of securities, including Registrable Securities, requested by shareholders to be included in such offering exceeds the amount of securities sold other than by the Company that the underwriters determine in their sole discretion is compatible with the success of the offering, then the Company shall be required to include in the offering only that number of such securities, including Registrable Securities, which the underwriters determine in their sole discretion will not jeopardize the success of the offering (subject to the rights of other security holders of the Company, including, without limitation, preferred shareholders, the securities so included to be apportioned pro rata among the selling shareholders according to the total amount of securities entitled to be included therein owned by each selling shareholder or in such other proportions as shall mutually be agreed to by such selling shareholders). For purposes of the preceding parenthetical concerning apportionment, for any selling shareholder which is a holder of Registrable Securities and which is a partnership or corporation, the partners, retired partners and shareholders of such holder, or the estates and family members of any such partners and retired partners and any trusts for the benefit of any of the foregoing persons shall be deemed to be a single "selling shareholder", and any pro-rata reduction with respect to such "selling shareholder" shall be-based upon the aggregate amount of shares carrying registration rights owned by all entities and individuals included in such "selling shareholder", as defined in this sentence. 6 7 4.5 Delay of Registration. No Holder shall have any right to obtain or seek an injunction restraining or otherwise delaying any such registration as the result of any controversy that might arise with respect to the interpretation or implementation of this Section 4. 4.6 Indemnification. In the event any Registrable Securities are included in a registration statement under this Section 4: (a) To the extent permitted by law, the Company will indemnify and hold harmless each Holder, any underwriter (as defined in the Act) for such Holder and each person, if any, who controls such Holder or underwriter within the meaning of the Act or the Securities Exchange Act of 1934, as amended (the "1934 Act"), against any losses, claims, damages, or liabilities (joint or several) to which they may become subject under the Act, or the 1934 Act or other federal or state law, insofar as such losses, claims, damages, or liabilities (or actions in respect thereof) arise out of or are based upon any of the following statements, omissions or violations (collectively a "Violation"): (i) any untrue statement or alleged untrue statement of a material fact contained in such registration statement, including any preliminary prospectus or final prospectus contained therein or any amendments or supplements thereto, (ii) 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 violation or alleged violation by the Company of the Act, the 1934 Act, any state securities law or any rule or regulation promulgated under the Act, or the 1934 Act or any state securities law; and the Company will pay to each such Holder, underwriter or controlling person, as incurred, any legal or other expenses reasonably incurred by them in connection with investigating or defending any such loss, claim, damage, liability, or action; provided, however, that the indemnity agreement contained in this subsection 4.6 shall not apply to amounts paid in settlement of any such loss, claim, damage, liability, or action if such settlement is effected without the consent of the Company (which consent shall not be unreasonably withheld), nor shall the Company be liable in any such case for any such loss, claim, damage, liability, or action to the extent that it arises out of or is based upon a Violation which occurs in reliance upon and in conformity with written information furnished expressly for use in connection with such registration by any such Holder, underwriter or controlling person. (b) To the extent permitted by law, each selling Holder will indemnify and hold harmless the Company, each of its directors, each of its officers who has signed the registration statement, each person, if any, who controls the Company within the meaning of the Act, any underwriter, any other Holder selling 7 8 securities in such registration statement and any controlling person of any such underwriter or other Holder, against any losses, claims, damages, or liabilities (joint or several) to which any of the foregoing persons may become subject, under the Act, or the 1934 Act or other federal or state law, insofar as such losses, claims, damages, or liabilities (or actions in respect thereto) arise out of or are based upon any Violation, in each case to the extent (and only to the extent) that such Violation occurs in reliance upon and in conformity with written information furnished by such Holder expressly for use in connection with such registration; and each such Holder will pay, as incurred, any legal or other expenses reasonably incurred by any person intended to be indemnified pursuant to this subsection 4.6(b), in connection with investigating or defending any such loss, claim, damage, liability, or action; provided, however, that the indemnity agreement contained in this subsection 4.6(b) shall not apply to amounts paid in settlement of any such loss, claim, damage, liability or action if such settlement is effected without the consent of the Holder, which consent shall not be unreasonably withheld; provided, that, in no event shall any indemnity under this subsection 4.6(b) exceed the gross proceeds from the offering received by such Holder. (c) The foregoing indemnity agreements of the Company and Holders are subject to the condition that, insofar as they relate to any Violation made in a preliminary prospectus but eliminated or remedied in the amended prospectus on file with the SEC at the time the registration statement in question becomes effective or the amended prospectus filed with the SEC pursuant to SEC Rule 424(b) (the "Final Prospectus"), such indemnity agreement shall not inure to the benefit of any indemnified party if a copy of the Final Prospectus was furnished to such indemnified party and was not furnished to the person asserting the loss, liability, claim or damage at or prior to the time such Final Prospectus is required to be delivered under the Securities Act if such loss, claim or damage would have been avoided had the indemnified party furnished the Final Prospectus to such person. (d) Promptly after receipt by an indemnified party under this Section 4.6 of notice of the commencement of any action (including any governmental action), such indemnified party will, if a claim in respect thereof is to be made against any indemnifying party under this Section 4.6, deliver to the indemnifying party a written notice of the commencement thereof and the indemnifying party shall have the right to participate in, and, to the extent the indemnifying party so desires, jointly with any other indemnifying party similarly noticed, to assume the defense thereof with counsel mutually satisfactory to the parties; provided, however, that an indemnified party (together with all other indemnified parties which may be represented without conflict by one counsel) shall have the right to retain 8 9 one separate counsel, with the fees and expenses to be paid by the indemnifying party, if representation of such indemnified party by the counsel retained by the indemnifying party would be inappropriate due to actual or potential differing interests between such indemnified party and any other party represented by such counsel in such proceeding. The failure to deliver written notice to the indemnifying party within a reasonable time of the commencement of any such action, if prejudicial to its ability to defend such action, shall relieve such indemnifying party of any liability to the indemnified party under this Section 4.6, but the omission so to deliver written notice to the indemnifying party will not relieve it of any liability that it may have to any indemnified party otherwise than under this Section 4.6. (e) If the indemnification provided for in this Section 4.6 is held by a court of competent jurisdiction to be unavailable to an indemnified party with respect to any loss, liability, claim, damage, or expense referred to therein, then the indemnifying party, in lieu of indemnifying such indemnified party hereunder, shall contribute to the amount paid or payable by such indemnified party as a result of such loss, liability, claim, damage, or expense in such proportion as is appropriate to reflect the relative fault of the indemnifying party on the one hand and of the indemnified party on the other in connection with the statements or omissions that resulted in such loss, liability, claim, damage, or expense as well as any other relevant equitable considerations. The relative fault of the indemnifying party and of the indemnified party shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission to state a material fact relates to information supplied by the indemnifying party or by the indemnified party and the parties' relative intent, knowledge, access to information, and opportunity to correct or prevent such statement or omission. (f) Notwithstanding the foregoing, to the extent that the provisions on indemnification and contribution contained in the underwriting agreement entered into in connection with the underwritten public offering are in conflict with the foregoing provisions, the provisions in the underwriting agreement shall control. (g) The obligations of the Company and Holders under this Section 4.6 shall survive the completion of any offering of Registrable Securities in a registration statement under this Section 4, and otherwise. 4.7 Assignment of Registration Rights. The rights to cause the Company to register Registrable Securities pursuant to this Section 4 may be assigned (but only with all related obligations) by a Holder to a transferee or assignee of such 9 10 securities who, after such assignment or transfer, holds at least twenty percent (20%) of the shares of Registrable Securities originally purchased by such Holder (subject to appropriate adjustment for stock splits, stock dividends, combinations and other recapitalizations), provided the Company is, within a reasonable time after such transfer, furnished with written notice of the name and address of such transferee or assignee and the securities with respect to which such registration rights are being assigned; and provided, further, that such assignment shall be effective only if immediately following such transfer the further disposition of such securities by the transferee or assignee is restricted under the Act. For the purposes of determining the number of shares of Registrable Securities held by a transferee or assignee, the holdings of transferees and assignees of a partnership who are partners or retired partners of such partnership (including spouses and ancestors, lineal descendants and siblings of such partners or spouses who acquire Registrable Securities by gift, will or intestate succession) shall be aggregated together and with the partnership; provided that all assignees and transferees who would not qualify individually for assignment of registration rights shall have a single attorney-in-fact for the purpose of exercising any rights, receiving notices or taking any action under this Section 4. 5. INTERPRETATION 5.1 Purchaser Undertaking. Purchaser hereby agrees to take whatever additional action and execute whatever additional documents the Company may in its judgment deem necessary or advisable in order to carry our or effect one or more of the obligations or restrictions imposed on either Purchaser or the Shares pursuant to the express provisions of this Agreement. 5.2 Notices. Any notice required or permitted in connection any matter pertaining to this Agreement shall be given in writing and shall be deemed effective upon personal delivery or upon deposit in the United States Mail, registered or certified, postage prepaid and addressed to the party to be notified at the address indicated below such party's signature line on this Agreement or at such other address as such party may designate by 10 days' advance written notice under this Section 5.2 to the other party to this Agreement. 5.3 Governing Law. This agreement shall be construed and enforced in accordance with, and shall be governed by, the laws of the State of California. 5.4 Counterparts. This Agreement may be executed in counterparts, each of which shall be deemed to be an original, but all of which together shall constitute one and the same instrument. 10 11 5.5 Successors and Assigns. The provisions of this Agreement shall inure to the benefit of, and be binding upon, the Company and its successors and assigns and Purchaser and Purchaser's legal representatives, heirs, legatees, distributees, assigns and transferees by operation of law, whether or not any such person shall have become a party to this Agreement and have agreed in writing to join herein and be bound by the terms and conditions hereof. IN WITNESS WHEREOF, the parties have executed this Agreement as of the day and year first written above. SIGNAL PHARMACEUTICALS, INC. By: /s/ LUKE B. EVNIN ------------------------------------ Luke B. Evnin, President Address: 11545 Sorrento Valley Road San Diego, CA 92121 THE REGENTS OF THE UNIVERSITY OF CALIFORNIA By: /s/ WILLIAM T. DAVIS ------------------------------------ Its: Assoc. Dir OTT ------------------------------------ Address: 1320 Harbor Bay Parkway ------------------------------------ Alameda CA 94502 ------------------------------------ Approval as to legal form: P. MARTIN SIMPSON JR. 10/1/93 --------------------------------------------------- P. MARTIN SIMPSON, JR., Resident Counsel Date Office of Technology Transfer University of California 11 EX-10.36 39 EXHIBIT 10.36 1 ***Text Omitted and Filed Separately Confidential Treatment Requested Under 17 C.F.R. Sections 200.80, 200.83 and 230.406. EXHIBIT 10.36 LICENSE AGREEMENT BETWEEN SIGNAL PHARMACEUTICALS, INC. AND THE REGENTS OF THE UNIVERSITY OF CALIFORNIA Case No. [***] ***Confidential Treatment Requested 2 EXCLUSIVE LICENSE AGREEMENT This agreement ("Agreement") is made this 18th day of February, 1998 ("Effective Date") by and between Signal Pharmaceuticals, Inc., a California corporation having a principal place of business at 5555 Oberlin Drive, San Diego, California 92121 ("LICENSEE") and The Regents Of The University of California, a California corporation having its statewide administrative offices at 300 Lakeside Drive, 22nd Floor, Oakland, California 94612-3550 ("THE REGENTS"), represented by its San Diego campus having an address at University of California, San Diego, Technology Transfer Office, Mailcode 0910, 9500 Gilman Drive, La Jolla, California 92093-0910 ("UCSD") RECITALS Whereas, certain inventions, generally characterized as [***] ("Invention"), Case No. [***], were made in the course of research at UCSD by [***] ("Inventors") and are covered by Regents' Patent Rights as defined below; Whereas, U.S. Patent Application, Serial No. [***] was filed in the United States Patent and Trademark Office by the Inventors on [***] and such application is included within Regents' Patent Rights; Whereas, the Inventors are employees of UCSD and as such are under an obligation to assign their rights to the Invention to THE REGENTS; Whereas, the development of the Invention was sponsored by Department of Health and Human Services and as a consequence this license is subject to overriding obligations to the Federal Government under 35 U.S.C. Sections 200-212 and applicable regulations; Whereas, LICENSEE and THE REGENTS executed a secrecy agreement, identified as U.C. Control No. 97-20-0108 and effective on April 17, 1997 ("Secrecy Agreement") under which LICENSEE evaluated the Invention; Whereas, LICENSEE and THE REGENTS executed a letter agreement, identified as U.C. Control No. 97-30-0130 and effective on June 10, 1997 ("Letter Agreement"), under which THE REGENTS and LICENSEE have negotiated the grant of license under Regents' Patent Rights; ***Confidential Treatment Requested 3 Page 2 of 25 Exclusive License Agreement Case No. SD97-026 Whereas, LICENSEE is a "small business concern" as defined in 37 CFR Section 121-12(a); Whereas, THE REGENTS is desirous that the Invention be developed and utilized to the fullest possible extent so that its benefits can be enjoyed by the general public; Whereas, LICENSEE is desirous of obtaining certain rights from THE REGENTS for commercial development, use, and sale of the Invention, and THE REGENTS is willing to grant such rights; Whereas, LICENSEE desires to issue common stock of LICENSEE to THE REGENTS under the agreement appended hereto in Appendix A ("Shareholder's Agreement") as partial consideration for such rights; and Whereas, both parties recognize and agree that royalties due hereunder shall be paid on both pending patent applications and issued patents. Now, Therefore, the parties agree: ARTICLE 1. DEFINITIONS. 1.1 "Affiliate" means any corporation or other business entity in which LICENSEE owns or controls, directly or indirectly, at least fifty percent (50%) of the outstanding stock or other voting rights entitled to elect directors, or in which LICENSEE is owned or controlled directly or indirectly by at least 50% of the outstanding stock or other voting rights entitled to elect directors; but in any country where the local law does not permit foreign equity participation of at least 50%, then an "Affiliate" includes any company in which LICENSEE owns or controls or is owned or controlled by, directly or indirectly, the maximum percentage of outstanding stock or voting rights permitted by local law. 1.2 "Licensed Method" means any method that is covered by Regents' Patent Rights, the use of which would constitute, but for the license granted to LICENSEE under this Agreement, an infringement of any pending or issued claim within Regents' Patent Rights. 1.3 "Licensed Product" means any material that is either 4 Exclusive License Agreement Page 3 of 25 Case No. SD97-026 covered by Regents' Patent Rights, that is identified or produced by the Licensed Method, or that the use of which would constitute, but for the license granted to LICENSEE under this Agreement, an infringement of any pending or issued claim within Regents' Patent Rights. 1.4 "Net Sales" means the total of the gross invoice prices of Licensed Products sold by LICENSEE, an Affiliate, or a sublicensee of LICENSEE, less the sum of the following actual and customary deductions where applicable: cash, trade, or quantity discounts, including chargebacks; sales, use, tariff, import/export duties or other excise taxes imposed on particular sales; transportation charges and allowances; credits to customers because of rejections or returns; or bad debts. For purposes of calculating Net Sales, transfers to an Affiliate or sublicensee for end use by the Affiliate or sublicensee shall be treated as sales at list price. 1.5 "Regents' Patent Rights" means any of the following: the U.S. patent application, serial number [***], entitled [***] disclosing and claiming the Invention, filed by Inventors and assigned to THE REGENTS; and continuing applications thereof including divisions, substitutions, and continuations-in-part (but only to extent the claims thereof are enabled by disclosure of the parent application); any patents issuing on said applications including reissues, reexaminations and extensions; and any corresponding foreign applications or patents. ARTICLE 2. GRANT. 2.1 Subject to the limitations set forth in this Agreement, THE REGENTS grants to LICENSEE a world-wide license under Regents' Patent Rights to make, have made, use, sell, have sold, offer for sale and import Licensed Products and to practice Licensed Methods. 2.2 Except as otherwise provided in this Agreement, the license granted in Paragraph 2.1 hereof shall be exclusive for the life of the Agreement. 2.3 The license granted in Paragraph 2.1 hereof is subject to all the applicable provisions of any license to the United ***Confidential Treatment Requested 5 Exclusive License Agreement Page 4 of 25 Case No. SD97-026 States Government executed by THE REGENTS and is subject to the overriding obligations to the U.S. Government under 35 U.S.C. Sections 200-212 and applicable governmental implementing regulations. 2.4 The license granted in Paragraph 2.1 hereof is for all fields of use. 2.5 THE REGENTS reserves the right to use the Invention and associated technology for educational and research purposes. ARTICLE 3. SUBLICENSES. 3.1 THE REGENTS also grants to LICENSEE the right to issue sublicenses to third parties to make, have made, use, sell, have sold, offer for sale and import Licensed Products and to practice Licensed Methods, as long as LICENSEE has current exclusive rights thereto under this Agreement. To the extent applicable, sublicenses shall include all of the rights of and obligations due to THE REGENTS (and, if applicable, the United States Government) that are contained in this Agreement. 3.2 LICENSEE shall promptly provide THE REGENTS with a copy of each sublicense issued; collect and guarantee payment of all payments due THE REGENTS from sublicensees; and summarize and deliver all reports due THE REGENTS from sublicensees. 3.3 In the event that the license granted in this Agreement is terminated, THE REGENTS shall assume any sublicenses granted by LICENSEE hereunder, and THE REGENTS shall be held only to the obligations of THE REGENTS under this Agreement. ARTICLE 4. LICENSE-ISSUE FEE. 4.1 Within seven days after the Effective Date, LICENSEE shall pay to THE REGENTS [***], and issue to THE REGENTS [***] shares of LICENSEE's common stock (collectively, the "License Issue Fee") in accordance with the Shareholder's Agreement and in the manner provided in paragraph 7.1 hereof. 4.2 The License-Issue Fee payable by LICENSEE as specified in paragraph 4.1 hereinabove is non-refundable, non-cancelable, ***Confidential Treatment Requested 6 Exclusive License Agreement Page 5 of 25 No. SD971-0426 and is not an advance against royalties. ARTICLE 5. MILESTONE PAYMENTS. 5.1 Within thirty (30) days following (i) [***] (ii) [***], whichever occurs first, LICENSEE shall pay to THE REGENTS [***] shares of LICENSEE's common stock in accordance with the Shareholder's Agreement and in the manner provided in paragraph 7.1 hereof. 5.2 Within thirty (30) days following the date LICENSEE [***], LICENSEE shall pay to THE REGENTS [***] and issue to THE REGENTS [***] shares of LICENSEE's common stock in accordance with the Shareholder's Agreement and in the manner provided in paragraph 7.1 hereof. 5.3 Within thirty (30) days following the date LICENSEE [***], LICENSEE shall pay to THE REGENTS [***] and issue to THE REGENTS [***] shares of LICENSEE's common stock in accordance with the Shareholder's Agreement and in the manner provided in paragraph 7.1 hereof. 5.4 The milestone payments specified in paragraphs 5.1, 5.2 and 5.3 hereinabove are non-refundable and are not an advance against earned royalties. ARTICLE 6. ROYALTIES. 6.1 Earned Royalties. LICENSEE shall also pay to THE REGENTS an earned royalty of one percent (1.0%) of the Net Sales, except that in any given calendar quarter in which the Net Sales ***Confidential Treatment Requested 7 Exclusive License Agreement Page 6 of 25 Case No. SD97-026 total less than [***] the earned royalty payable by LICENSEE to THE REGENTS shall be [***] of such Net Sales. ARTICLE 7. PAYMENT TERMS. 7.1 Stock Payments. The parties understand that THE REGENTS' Patent Policy (effective November 18, 1985) provides that the Inventors as a group are entitled to forty-two and one-half percent (42.5%) of net royalties and fees, whether in the form of cash or equity, received by THE REGENTS for licensing of the Invention to LICENSEE. The parties further understand that THE REGENTS' Policy on Accepting Equity When Licensing University Technology (effective February 16, 1996) provides that each of the Inventors may elect to: (i) directly receive his or her share of such equity, or (ii) have THE REGENTS accept his or her share of the equity. Accordingly, with respect to any payment in the form of equity due to THE REGENTS under this Agreement, THE REGENTS shall provide written notice to LICENSEE, within thirty (30) days after the execution of this Agreement by both parties, of the manner in which THE REGENTS would like any equity payments due under this Agreement distributed. 7.2 Cash Payments. All monies due THE REGENTS are payable in United States dollars, all checks for such monies shall be made payable to "The Regents of the University of California", referencing THE REGENTS' taxpayer identification number, 95-6006144, and such checks shall be delivered to THE REGENTS pursuant to Article 20 (NOTICES). When Licensed Products are sold for monies other than United States dollars, LICENSEE shall first determine the earned royalty in the currency of the country in which Licensed Products were sold and then convert the amount into equivalent United States funds, using the exchange rate quoted in the Wall Street Journal on the last business day of the applicable reporting period. 7.3 Royalties shall accrue in each country for the duration of Regents' Patent Rights in that country and are payable to THE REGENTS when Licensed Products are invoiced, or if not invoiced, when delivered to a third party. For earned royalties accruing on sale for cash (or the equivalent thereof) outside the United States, LICENSEE may delay payment of earned royalties until it actually receives payment from its customer, provided that such ***Confidential Treatment Requested 8 Exclusive License Agreement Page 7 of 25 Case No. SD97-026 delay does not exceed three (3) months from the date of invoice. 7.4 Paragraphs 1.3, 1.4 and 1.6 define Licensed Methods, Licensed Products and Regents' Patent Rights so that royalties shall be payable on products and methods covered by pending applications and issued patents, provided that no earned royalties shall be payable under Regents' Patent Rights on pending claims once the claims are no longer pending due to abandoning prosecution thereof or that are pending more than [***] years from the Effective Date. In no event shall any royalty be due under Regents' Patent Rights after the expiration of the last-to-expire patent licensed hereunder which covers LICENSEE's activities. 7.5 LICENSEE shall pay earned royalties quarterly on or before February 28, May 31, August 31 and November 30 of each calendar year. Each such payment shall be for earned royalties accrued within LICENSEE's most recently completed calendar quarter. 7.6 Royalties earned on sales occurring in any country outside the United States may not be reduced by any taxes, fees, or other charges imposed by the government of such country on the payment of royalty income. LICENSEE is also responsible for all bank transfer charges. Notwithstanding this, all payments made by LICENSEE in fulfillment of THE REGENTS' tax liability in any particular country shall be credited against earned royalties or fees due THE REGENTS for that country. 7.7 If at any time legal restrictions prevent the prompt remittance of part or all royalties by LICENSEE with respect to any country where a Licensed Product is sold, LICENSEE shall have the right and option to make such payments by depositing the amount thereof in local currency to THE REGENTS' account, if any, in a bank or other depository in such country. THE REGENTS will use reasonable efforts to transfer the monies held in the account specified in this Paragraph 7.7 to the United States. If after one (1) year from the date of the first deposit into that account, there are still legal restrictions that prevent THE REGENTS from transferring the monies, THE REGENTS shall transfer the impounded funds back to LICENSEE, and LICENSEE shall convert the amount owed to THE REGENTS into United States funds and shall pay THE REGENTS directly from its U.S. source of funds for the amount impounded. LICENSEE shall then pay all future royalties ***Confidential Treatment Requested 9 Exclusive License Agreement Page 8 of 25 Case No. SD97-026 due to THE REGENTS with respect to Net Sales in such country from its U.S. source of funds so long as the legal restrictions described in this Paragraph 7.7 still apply. 7.8 In the event that any patent or patent claim within The Regents' Patent Rights is held invalid in a final decision by a patent office from which no appeal or additional patent prosecution has been or can been taken, or by a court of competent jurisdiction and last resort and from which no appeal has been or can be taken, all obligation to pay royalties based on that patent or claim or any claim patentably indistinct therefrom shall cease as of the date of such final decision. LICENSEE shall not, however, be relieved from paying any royalties that accrued before such final decision or that are based on another patent or claim not involved in such final decision. 7.9 No royalties may be collected or paid on Licensed Products sold to the account of the U.S. Government or any agency thereof as provided for in the license to the U.S. Government. 7.10 In the event royalty payments, rebillings or fees payable in cash are not received by THE REGENTS when due, LICENSEE shall pay to THE REGENTS interest charges at a rate of ten (10) percent per annum. Such interest shall be calculated from the date payment was due until actually received by THE REGENTS. ARTICLE 8. DUE DILIGENCE. 8.1 Upon execution of this Agreement, LICENSEE shall diligently proceed with the development, manufacture and sale of Licensed Products and shall earnestly and diligently endeavor to market the same within a reasonable time after execution of this Agreement. 8.2 LICENSEE shall endeavor to obtain all necessary governmental approvals for the manufacture, use and sale of Licensed Products. 8.3 LICENSEE shall: (a) [***] ***Confidential Treatment Requested 10 Exclusive License Agreement Page 9 of 25 Case No. SD97-026 (b) [***] (c) [***] (d) [***] (d) reasonably fill the market demand for Licensed Products following commencement of marketing at any time during the exclusive period of this Agreement. 8.4 In addition to the obligations set forth above, LICENSEE shall spend not less than [***] during [***] of this Agreement for the development of Licensed Products. LICENSEE may, at its sole option, fund the research of [***] and credit the amount of such funding actually paid to UCSD against its obligation under this paragraph. 8.5 Subject to paragraphs 8.1, 8.2 and 8.6 hereof, if LICENSEE believes that it will be unable to perform any of its obligations under paragraphs 8.3 or 8.4 hereinabove, LICENSEE shall deliver notice to THE REGENTS of its belief in its prospective inability to perform and reasons therefor, at least three (3) months before the date when such obligation or obligations to perform comes due. This notice shall be subject to Article 20 (NOTICES). Upon receipt of such notice, LICENSEE and THE REGENTS shall negotiate in good faith and for a period not to exceed three (3) months from the date of such notice ("Renegotiation Period") to re-establish a date or dates for performance of such obligation or obligations, which date or dates the parties consider reasonable under the then-current circumstances, and to establish what consideration, if any, THE REGENTS shall be entitled to in consideration for such re-established date or dates. If LICENSEE and THE REGENTS are unable to mutually agree within the Renegotiation Period to a reestablished date or dates for performance by LICENSEE and/or consideration for THE REGENTS, then THE REGENTS shall have the *** Confidential Treatment Requested 11 Exclusive License Agreement Page 10 of 25 Case No. SD97-026 right and option to either terminate this Agreement or reduce LICENSEE's exclusive license to a nonexclusive license. This right, if exercised by THE REGENTS, shall supersede the rights granted in Article 2 (GRANT). 8.6 Notwithstanding any other provision of this Article 8, LICENSEE shall be entitled to exercise its prudent and reasonable business judgment in the manner in which LICENSEE proceeds to meet its obligations under paragraphs 8.1, 8.2, 8.3 and 8.4 hereinabove. ARTICLE 9. PROGRESS AND ROYALTY REPORTS. 9.1 Progress Reports. (a) Beginning February 28, 1998 and semi-annually thereafter, LICENSEE shall submit to THE REGENTS a progress report covering LICENSEE's (and any Affiliate's or sublicensee's) activities related to the development and testing of all Licensed Products and the obtaining of the governmental approvals necessary for marketing. Progress reports shall be made for each Licensed Product until the first commercial sale of that Licensed Product occurs in the United States. These progress reports shall be considered "Confidential Information" for all purposes of Article 28 (SECRECY) hereof and shall be subject to the terms thereof. (b) Progress reports submitted under this paragraph should include, but are not limited to, the following topics: (1) summary of work completed; (2) summary of work in progress; (3) current schedule of anticipated events or milestones; (4)market plans for introduction of Licensed Products; and (5) a summary of resources (dollar value) spent in the reporting period. 12 Exclusive License Agreement Page 11 of 25 Case No. SD97-026 (c) LICENSEE shall report to THE REGENTS, in its immediately subsequent progress report, the date of first commercial sale of a Licensed Product in each country. 9.2 Royalty Reports. After the first commercial sale of a Licensed Product anywhere in the world, LICENSEE shall make quarterly royalty reports to THE REGENTS on or before each February 28, May 31, August 31 and November 30 of each year. Each royalty report shall cover LICENSEE's most recently completed calendar quarter and shall show: (a) the gross sales and Net Sales of Licensed Products sold during the most recently completed calendar quarter; (b) the number of each type of Licensed Product sold; (c) the royalties, in U.S. dollars, payable with respect to sales of Licensed Products; (d) the method used to calculate the royalty; and (e) the exchange rates used. If no sales of Licensed Products have been made during any reporting period, a statement to this effect is required. ARTICLE 10. BOOKS AND RECORDS. 10.1 LICENSEE shall keep accurate books and records showing all Licensed Products manufactured, used, and/or sold under the terms of this Agreement. Books and records must be preserved for at least five (5) years from the date of the royalty payment to which they pertain. 10.2 Books and records shall be open to inspection by representatives or agents of THE REGENTS at reasonable times. THE REGENTS shall bear the fees and expenses of examination; but if an error in royalties of more than ten percent (10%) of the total royalties due for any year is discovered in any examination, then LICENSEE shall bear the fees and expenses of that examination. 13 Exclusive License Agreement Page 12 of 25 Case No. SD97-026 ARTICLE 11. TERM OF THE AGREEMENT. 11.1 Unless otherwise terminated by operation of law or by acts of the parties in accordance with the terms of this Agreement, this Agreement shall be in force from the Effective Date and shall remain in effect for the life of the last-to-expire issued patent licensed under this Agreement; or if no patent in the Regents' Patent Rights issues, until the date of abandonment of the last patent application in the Regents' Patent Rights. 11.2 Any termination of this Agreement shall not affect the rights and obligations set forth in the following Articles: (a) Article 10 (BOOKS AND RECORDS); (b) Article 13 (DISPOSITIONS OF LICENSED PRODUCT ON HAND UPON TERMINATION); (c) Article 14 (USE OF NAMES AND TRADEMARKS); (d) Article 19 (INDEMNIFICATION); (e) Article 23 (FAILURE TO PERFORM); (f) Article 28 (SECRECY); and (g) Article 29 (DISPUTE RESOLUTION). ARTICLE 12. TERMINATION. 12.1 Termination by The Regents. If LICENSEE fails to perform or violates any term of this Agreement, then THE REGENTS may give written notice of default ("Notice of Default") to LICENSEE. If LICENSEE fails to repair the default within ninety (90) days of the effective date of Notice of Default, THE REGENTS may terminate this Agreement and the licenses herein by a second written notice ("Notice of Termination") to LICENSEE. If a Notice of Termination is sent to LICENSEE, this Agreement shall automatically terminate on the effective date of that notice. Termination shall not relieve LICENSEE of its obligation to pay any fees owing at the time of termination and shall not impair any accrued right of THE REGENTS. These notices are subject to 14 Exclusive License Agreement Page 13 of 25 Case No. SD97-026 Article 20 (Notices). 12.2 Termination by Licensee. (a) LICENSEE has the right at any time to terminate this Agreement in whole or as to any portion of Regents' Patent Rights by giving notice in writing to THE REGENTS. Notice of termination shall be subject to Article 20 (NOTICES), and termination of this Agreement shall be effective ninety (90) days from the effective date of notice. (b) Any termination under the above paragraph does not relieve LICENSEE of any obligation or liability accrued under this Agreement prior to termination or rescind any payment made to THE REGENTS or anything done by LICENSEE prior to the time termination becomes effective. Termination does not affect in any manner any rights of THE REGENTS arising under this Agreement prior to termination. ARTICLE 13. DISPOSITION OF LICENSED PRODUCTS ON HAND UPON TERMINATION. 13.1 Upon termination of this Agreement, LICENSEE is entitled to dispose of all previously made or partially made Licensed Products, but no more, within a period of one hundred and twenty (120) days provided that the sale of those Licensed Products is subject to the terms of this Agreement, including but not limited to the rendering of reports and payment of royalties required under this Agreement. ARTICLE 14. USE OF NAMES AND TRADEMARKS. 14.1 Nothing contained in this Agreement confers any right to use in advertising, publicity, or other promotional activities any name, trade name, trademark, or other designation of either party hereto (including contraction, abbreviation or simulation of any of the foregoing). Unless required by law, the use by LICENSEE of the name, "The Regents Of The University Of California" or the name of any campus of the University Of California is prohibited. 14.2 THE REGENTS may disclose to the Inventors the terms and 15 Exclusive License Agreement Page 14 of 25 Case No. SD97-026 conditions of this Agreement upon their request. If such disclosure is made, THE REGENTS shall require that the Inventors not disclose any such terms or conditions to others. 14.3 If a third party inquires whether a license to Regents' Patent Rights is available, THE REGENTS may disclose the existence of this Agreement and the extent of the grant in Article 2 to such third party, but shall not disclose the name of LICENSEE or any other term of this Agreement, except where THE REGENTS are required to disclose such information under either the California Public Records Act or other requirement of applicable law. ARTICLE 15. LIMITED WARRANTY. 15.1 THE REGENTS warrants to LICENSEE that it has the lawful right to grant this license. 15.2 This license and the associated Invention are provided WITHOUT WARRANTY OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR ANY OTHER WARRANTY, EXPRESS OR IMPLIED. THE REGENTS MAKES NO REPRESENTATION OR WARRANTY THAT THE LICENSED PRODUCTS OR LICENSED METHODS WILL NOT INFRINGE ANY PATENT OR OTHER PROPRIETARY RIGHT. 15.3 IN NO EVENT MAY THE REGENTS BE LIABLE FOR ANY INCIDENTAL, SPECIAL OR CONSEQUENTIAL DAMAGES RESULTING FROM EXERCISE OF THIS LICENSE OR THE USE OF THE INVENTION OR LICENSED PRODUCTS. 15.4 Nothing in this Agreement shall be construed as: (a) a warranty or representation by THE REGENTS as to the validity or scope of any Regents' Patent Rights; (b) a warranty or representation that anything made, used, sold or otherwise disposed of under any license granted in this Agreement is or will be free from infringement of patents of third parties; (c) an obligation to bring or prosecute actions or suits against third parties for patent infringement except as provided in Article 18 (PATENT INFRINGEMENT); 16 Exclusive License Agreement Page 15 of 25 Case No. SD97-026 (d) conferring by implication, estoppel or otherwise any license or rights under any patents of THE REGENTS other than Regents' Patent Rights as defined in this Agreement, regardless of whether those patents are dominant or subordinate to Regent's Patent Rights; or (e) an obligation to furnish any know-how not provided in Regents' Patent Rights. ARTICLE 16. PATENT PROSECUTION AND MAINTENANCE. 16.1 Provided that LICENSEE has paid patent costs as provided for in Paragraph 16.5, THE REGENTS shall diligently prosecute and maintain the United States and foreign patents comprising Regents' Patent Rights using counsel of its choice, and THE REGENTS shall provide LICENSEE with copies of all relevant documentation so that LICENSEE may be informed of the continuing prosecution and LICENSEE agrees to keep this documentation confidential. The Regents' counsel shall take instructions only from THE REGENTS, and all patents and patent applications under this Agreement shall be assigned solely to THE REGENTS. 16.2 THE REGENTS shall use all reasonable efforts to amend any patent application to include claims reasonably requested by LICENSEE to protect the products contemplated to be sold under this Agreement. 16.3 LICENSEE shall apply for an extension of the term of any patent included within Regents' Patent Rights if appropriate under the Drug Price Competition and Patent Term Restoration Act of 1984 and/or European, Japanese and other foreign counterparts of this law. LICENSEE shall prepare all documents for such application, and THE REGENTS agrees to execute such documents and to take any other additional action as LICENSEE reasonably requests in connection therewith. 16.4 In the event THE REGENTS as represented by the licensing associate at UCSD responsible for the administration of the license granted in this Agreement receives notice pertaining to infringement or potential infringement of any issued patent within Regents' Patent Rights pursuant to the Drug Price Competition Act and Patent Term Restoration Act of 1984 (and/or 17 Exclusive License Agreement Page 16 of 25 Case No. SD97-026 European and Japanese counterparts of such law), THE REGENTS shall notify LICENSEE within thirty (30) days after receipt of such notice. 16.5 LICENSEE shall bear the costs of preparing, filing, prosecuting and maintaining all United States and foreign patent applications contemplated by this Agreement. Costs billed to THE REGENTS by THE REGENTS' counsel shall be rebilled to LICENSEE and shall be due within 30 days of rebilling by THE REGENTS. These costs include patent prosecution costs for the Invention incurred by THE REGENTS prior to the execution of this Agreement and any patent prosecution costs that may be incurred with respect to the Invention for patentability opinions, re-examination, re-issue, interferences, or inventorship determinations. Prior costs shall be due on execution of this Agreement and billing by THE REGENTS. Such prior costs will be approximately [***] 16.6 LICENSEE may request THE REGENTS to obtain patent protection on the Invention in foreign countries if available and if it so desires. LICENSEE shall notify THE REGENTS of its decision to obtain or maintain foreign patents not less than sixty (60) days prior to the deadline for any payment, filing, or action to be taken in connection therewith. This notice concerning foreign filing shall be in writing, shall identify the countries desired, and shall reaffirm LICENSEE's obligation to underwrite the costs thereof. The absence of such a notice from LICENSEE to THE REGENTS shall be considered an election not to obtain or maintain foreign rights. 16.7 LICENSEE's obligation to underwrite and to pay patent prosecution costs shall continue for so long as this Agreement remains in effect; provided, however, that LICENSEE may terminate its obligations with respect to any given patent application or patent upon three (3) months' written notice to THE REGENTS. THE REGENTS shall use reasonable efforts to curtail patent costs when such a notice is received from LICENSEE. THE REGENTS may continue prosecution and/or maintenance of such applications or patent(s) at its sole discretion and expense; provided, however, that LICENSEE shall have no further right or licenses thereunder. Non-payment of patent costs may be deemed by THE REGENTS as an election by LICENSEE not to maintain applications) or Patents). 16.8 THE REGENTS may file, prosecute or maintain patent *** Confidential Treatment Requested 18 Exclusive License Agreement Page 17 of 25 Case No. SD97-026 applications and/or patents arising therefrom at its own expense in any country in which LICENSEE has not elected to file, prosecute, or maintain such patent applications or patents in accordance with this Article, and those applications and resultant patents shall not be subject to this Agreement. ARTICLE 17. PATENT MARKING. 17.1 LICENSEE shall mark all Licensed Products made, used or sold under the terms of this Agreement, or their containers, in accordance with the applicable patent marking laws. ARTICLE 18. PATENT INFRINGEMENT. 18.1 If LICENSEE learns of the substantial infringement of any patent licensed under this Agreement, LICENSEE shall call THE REGENTS' attention thereto in writing within thirty (30) days after so learning and provide THE REGENTS with reasonable evidence of such infringement. Neither party shall notify a third party of the infringement of any of Regents' Patent Rights without first obtaining consent of the other party, which consent shall not be unreasonably denied. Both parties shall use reasonable efforts in cooperation with each other to terminate infringement without litigation. 18.2 LICENSEE may request that THE REGENTS take legal action against the infringement of Regents' Patent Rights. Such request shall be made in writing and shall include reasonable evidence of such infringement and damages to LICENSEE. If the infringing activity has not abated within ninety (90) days following the effective date of request, THE REGENTS then shall have the right to: (a) commence suit on its own account, or (b) refuse to participate in the suit; and THE REGENTS shall give notice of its election in writing to LICENSEE by the end of the one-hundredth (100th) day after receiving notice of such request from LICENSEE. LICENSEE may thereafter bring suit for patent infringement, at its own expense, if and only if THE REGENTS elects not to commence suit 19 Exclusive License Agreement Page 18 of 25 Case No. SD97-026 and if the infringement occurred during the period and in a jurisdiction where LICENSEE had exclusive rights under this Agreement. If, however, LICENSEE elects to bring suit in accordance with this paragraph, THE REGENTS may thereafter join that suit at its own expense. 18.3 Such legal action as is decided on shall be at the expense of the party bringing suit and all recoveries recovered thereby shall belong to the party bringing suit; provided, however, that legal action brought jointly by THE REGENTS and LICENSEE and fully participated in by both shall be at the joint expense of the parties and all recoveries shall be shared jointly by them in proportion to the share of expense paid by each party. If LICENSEE pays all legal expenses, it shall have the right to offset one half of its out-of-pocket legal expense, to the extent they exceed any recoveries recovered by LICENSEE in such legal action, against any earned royalties payable under Paragraph 6.1; provided, however, that earned royalties payble under Paragraph 6.1 shall not be reduced in any given quarter by more than [***]. Any unused credit may be carried forward until LICENSEE has received full credit for its creditable legal expenses. 18.4 Each party shall cooperate with the other in litigation proceedings instituted hereunder but at the expense of the party bringing suit. Litigation shall be controlled by the party bringing the suit, except that THE REGENTS may be represented by counsel of its choice in any suit brought by LICENSEE. ARTICLE 19. INDEMNIFICATION. 19.1 LICENSEE shall indemnify, hold harmless and defend THE REGENTS, its officers, employees, and agents; the sponsors of the research that led to the Invention; and the Inventors of the patents and patent applications in Regents' Patent Rights and their employers against any and all claims, suits, losses, damage, costs, fees, and expenses resulting from or arising out of exercise of this license or any sublicense. This indemnification will include, but not be limited to, any product liability. 19.2 LICENSEE, at its sole cost and expense, shall insure its activities in connection with the work under this Agreement *** Confidential Treatment Requested 20 Exclusive License Agreement Page 19 of 25 Case No. SD97-026 and obtain, keep in force and maintain insurance as follows, beginning with the date that Licensed Products or Licensed Methods are to used on or by third parties are first manufactured: (a) Comprehensive or commercial form general liability insurance (contractual liability included) with limits as follows! (1) Each Occurrence, $1,000,000, (2) Products/Completed Operations Aggregate, $5,000,000, (3) Personal and Advertising Injury, $1,000,000, and (4) General Aggregate (commercial form only), $5,000,000; and (b) The coverage and limits referred to under the above do not in any way limit the liability of LICENSEE. LICENSEE shall furnish THE REGENTS with certificates of insurance showing compliance with all requirements. Such certificates shall: (1) provide for thirty (30) day advance written notice to THE REGENTS of any modification, (2) indicate that THE REGENTS has been endorsed as an additional insured under the coverage referred to above, and (3) include a provision that the coverage shall be primary and shall not participate with nor shall be excess over any valid and collectable insurance or program of self-insurance carried or maintained by THE REGENTS. 19.3 THE REGENTS shall within a reasonable time notify LICENSEE in writing of any claim or suit brought against THE REGENTS in respect of which THE REGENTS intends to invoke the provisions of this Article. LICENSEE shall keep THE REGENTS informed on a current basis of its defense of any claims under this Article. 21 Exclusive License Agreement Page 20 of 25 Case No. SD97-026 ARTICLE 20. NOTICES. 20.1 Any notice or payment required to be given to either party shall be deemed to have been properly given and effective: (a) on the date of delivery if delivered in person, or (b) five (5) days after mailing if mailed by first-class certified mail, postage paid, to the respective addresses given below, or to such other address as is designated by written notice given to the other party. In the case of LICENSEE: Signal Pharmaceuticals, Inc. 5555 Oberlin Drive San Diego, California 92121 Attention: Chief Executive Officer In the case of THE REGENTS: University of California, San Diego Technology Transfer Office, Mailcode 0910 9500 Gilman Drive La Jolla, CA 92093-0910 Attention: Director ARTICLE 21. ASSIGNABILITY. 21.1 This Agreement may be assigned by THE REGENTS, but shall be personal to LICENSEE and assignable by LICENSEE only with the written consent of THE REGENTS, which consent shall not be unreasonably withheld. ARTICLE 22. NO WAIVER. 22.1 No waiver by either party of any breach or default of any of the covenants or agreements set forth in this Agreement shall be deemed a waiver as to any subsequent and/or similar breach or default. 22 Exclusive License Agreement Page 21 of 25 Case No. SD97-026 ARTICLE 23. FAILURE TO PERFORM. 23.1 In the event of a failure of performance due under this Agreement and if it becomes necessary for either party to undertake legal action against the other on account thereof, then the prevailing party shall be entitled to reasonable attorneys' fees in addition to costs and necessary disbursements. ARTICLE 24. GOVERNING LAWS. 24.1 THIS AGREEMENT SHALL BE INTERPRETED AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF CALIFORNIA, but the scope and validity of any patent or patent application shall be governed by the applicable laws of the country of the patent or patent application. ARTICLE 25. PREFERENCE FOR UNITED STATES INDUSTRY. 25.1 Because this Agreement grants the exclusive right to use or sell the Invention in the United States, LICENSEE agrees that any products sold in the U.S. embodying this Invention or produced through the use thereof shall be manufactured substantially in the United States. ARTICLE 26. GOVERNMENT APPROVAL OR REGISTRATION. 26.1 If this Agreement or any associated transaction is required by the law of any nation to be either approved or registered with any governmental agency, LICENSEE shall assume all legal obligations to do so. Licensee shall notify THE REGENTS if it becomes aware that this Agreement is subject to a United States or foreign government reporting or approval requirement. Licensee shall make all necessary filings and pay all costs including fees, penalties, and all other out-of-pocket costs associated with such reporting or approval process. ARTICLE 27. EXPORT CONTROL LAWS. 27.1 LICENSEE shall observe all applicable United States and foreign laws with respect to the transfer of Licensed Products 23 Exclusive License Agreement Page 22 of 25 Case No. SD97-026 and related technical data to foreign countries, including, without limitation, the International Traffic in Arms Regulations (ITAR) and the Export Administration Regulations. ARTICLE 28. SECRECY. 28.1 "Confidential Information" shall mean information regarding the Invention disclosed by THE REGENTS to LICENSEE, or information regarding LICENSEE's business disclosed by LICENSEE to THE REGENTS, which if disclosed in writing shall be marked "Confidential", or if first disclosed otherwise, shall within thirty (30) days of such disclosure be reduced to writing by the disclosing party (hereinafter, the "Disclosing Party"), marked as "Confidential" and sent to the receiving party (hereinafter, the "Recipient") 28.2 Recipient hereby agrees: (a) not to use the Confidential Information of the Disclosing Party except for the sole purpose of performing under the terms of this Agreement; (b) to safeguard such Confidential Information against disclosure to others with the same degree of care as it exercises with its own data of a similar nature; and (c) not to disclose such Confidential Information to others (except to its employees, agents or consultants who are bound to Recipient by a like obligation of confidentiality) without the express written permission of the Disclosing Party, except that Recipient shall not be prevented from using or disclosing any of the Confidential Information that: (1) Recipient can demonstrate by written records was previously known to it, (2) is now, or becomes in the future, public knowledge other than through acts or omissions of Recipient, (3) is lawfully obtained by Recipient from sources independent of the Disclosing Party, or (4) is required to be disclosed by the California 24 Exclusive License Agreement Page 23 of 25 Case No. SD97-026 Public Records Act or other requirement of law. 28.3 The secrecy obligations of Recipient with respect to Confidential Information shall continue for a period ending five (5) years from the termination date of this Agreement. ARTICLE 29. DISPUTE RESOLUTION. 29.1 Mediation. Either party to this Agreement may refer a dispute arising under this Agreement and which cannot be resolved among themselves without assistance, to third-party mediation in accordance with the rules of the American Arbitration Association then in effect or successor thereto. Such referral to mediation shall be made by notifying the other party in writing in accordance with the provisions of Article 20 (NOTICES) hereto, stating the nature of the dispute to be resolved by such mediation. Any resolution of such dispute arrived at in such mediation shall not be binding on either of the parties. 29.2 Arbitration. (a) Any such dispute that is not resolved within ninety (90) days after the date of such request for mediation in accordance with this Article 29 may be referred to and decided by arbitration, except for disputes based, in whole or in part, on Article 14 (USE OF NAME AND TRADEMARKS) hereof; Article 15 (LIMITED WARRANTY) hereof; Article 18 (PATENT INFRINGEMENT) hereof; Article 19 (INDEMNIFICATION) hereof; the validity of any claim of any patent or patent application within Regents' Patent Rights; or infringement by a party hereto, or a third party, of any claim of any patent within Regents' Patent Rights. Such referral to arbitration shall be made by notifying the other party in writing in accordance with the provisions of Article 20 (NOTICES) hereof, stating the nature of the dispute to be resolved. (b) The arbitration shall be held in San Diego, California, and shall be conducted in accordance with the Commercial Arbitration Rules of the American Arbitration Association then in effect or any successor thereto. None of the arbitrators selected by the parties to conduct such arbitration shall be employees of the parties. If the parties cannot agree on mutually satisfactory arbitrators within thirty (30) days of 25 Exclusive License Agreement Page 24 of 25 Case No. SD97-026 the request of any party hereto for arbitration hereunder, such arbitrators shall forthwith be appointed pursuant to the aforesaid rules of the American Arbitration Association. The arbitrators shall establish an arbitration timetable resulting in a hearing, within one hundred and twenty (120) days of the original request to arbitrate. (c) The arbitrators as a panel may grant injunctions and any and all other forms of relief in such dispute permitted under the American Arbitration Association rules then in effect or successor thereto; provided, however, that such panel shall not award punitive damages and shall not award costs and expenses, including attorney's fees and expenses. The decision of the panel shall be final, conclusive and binding on the parties to such arbitration, and shall not be appealable. The decision of the panel shall be enforceable in any court of competent jurisdiction. ARTICLE 30. MISCELLANEOUS. 30.1 The headings of the several sections are inserted for convenience of reference only and are not intended to be a part of or to affect the meaning or interpretation of this Agreement. 30.2 This Agreement is not binding on the parties until it has been signed below on behalf of each party. It shall be effective as of the Effective Date. 30.3 No amendment or modification of this Agreement shall be valid or binding on the parties unless made in writing and signed on behalf of each party. 30.4 This Agreement and the Shareholder's Agreement, together, embodies the entire understanding of the parties and supersedes all previous communications, representations or understandings, either oral or written, between the parties relating to the subject matter hereof. The Secrecy Agreement and Letter Agreement are both hereby terminated. 30.5 In case any of the provisions contained in this Agreement is held to be invalid, illegal, or unenforceable in any respect, such invalidity, illegality or unenforceability shall not affect any other provisions of this Agreement, and this 26 Exclusive License Agreement Page 25 of 25 Case No. SD97-026 Agreement shall be construed as if the invalid, illegal, or unenforceable provisions had never been contained in it. In Witness Whereof, both THE REGENTS and LICENSEE have executed this Agreement, in duplicate originals, by their respective and duly authorized officers on the day and year written. SIGNAL PHARMACEUTICALS, INC.: THE REGENTS OF THE UNIVERSITY OF CALIFORNIA: By /s/ CARL BOBKOSKI By /s/ ALAN S. PAAU ---------------------------- ----------------------------------- (Signature) (Signature) Name: EVP Alan S. Paau, Ph.D --------------------------- Title Carl Bobkoski Director, Technology --------------------------- Transfer Office Date Februaty 23, 1998 Date 2/25/98 ---------------------------- ------------------------------- EX-10.37 40 EXHIBIT 10.37 1 *** Text Omitted and Filed Separately Under 17 C.F.R. Sections 200.80 200.83 and 230.406 EXHIBIT 10.37 RESTRICTED STOCK PURCHASE AGREEMENT Agreement made as of this ______ day of ________________, 1998 by and between Signal Pharmaceuticals, Inc., a California corporation (the "Company"), and The Regents of the University of California ("The Regents" or "Purchaser"). Unless otherwise defined herein, all capitalized terms used herein shall have the same meanings given to them in that certain License Agreement (the "License Agreement") by and between Purchaser and the Company, dated _____________, 1998 a copy of which is attached hereto as Exhibit 1. 1. PURCHASE OF SHARES 1.1 PURCHASE. In consideration of Purchaser's grant of certain patent and technology rights to the Company pursuant to the License Agreement, within seven (7) days of the Effective Date of the License Agreement the Company shall issue to Purchaser [***] shares of its Common Stock in the manner provided in paragraph 7.1 of the License Agreement. Upon the Company's achievement of certain milestones, the Company shall issue additional shares to Purchaser in the manner provided in paragraph 7.1 of the License Agreement as follows: (a) Within thirty (30) days following (i) [***] the Company shall issue [***] shares of its Common Stock (as adjusted for stock splits, subdivisions, combinations, recapitalizations and distributions of stock) to Purchaser. (b) Within thirty (30) days following [***] the Company shall issue [***] shares of its Common Stock (as adjusted for stock splits, subdivisions combinations, recapitalizations and distributions of stock) to Purchaser; provided, however, that only [***]. (c) Within thirty (30) days following [***] the Company shall issue to Purchaser [***] shares of its Common Stock (as adjusted for stock splits, subdivisions, combinations, recapitalizations and distributions of stock); provided, however, that only [***]. All shares of the Company's Common Stock issued to Purchaser pursuant to this Paragraph 1.1, shall hereinafter be referred to as the "Shares". Notwithstanding the foregoing, the Company shall have no obligation to issue any shares following any termination of the License Agreement. 1. *** Confidential Treatment Requested 2 2. INVESTMENT REPRESENTATIONS. 2.1 EXEMPTION FROM REGISTRATION. The Shares have not been registered under the 1933 Act, and are accordingly being issued to Purchaser in reliance upon the exemption from such registration provided by Section 4(2) of the 1933 Act. 2.2 INVESTMENT INTENT. Purchaser hereby warrants and represents that it is acquiring the Shares for its own account and not with a view to their resale or distribution and that it is prepared to hold the Shares for an indefinite period and has no present intention to sell, distribute or grant any participating interests in, the Shares. Purchaser hereby acknowledges the fact that the Shares have not been registered under the Securities Act of 1933, as amended (the "1933 Act"), and that the Company is issuing the Shares to it in reliance on the representations made by it herein. 2.3 RESTRICTED SECURITIES. Purchaser hereby confirms that it has been informed that the Shares may not be resold or transferred unless such Shares are first registered under the 1933 Act or unless an exemption from such registration is available. Accordingly, Purchaser hereby acknowledges that it is prepared to hold the Shares for an indefinite period and that it is aware that Rule 144 of the Securities and Exchange Commission issued under the 1933 Act is not presently available to exempt the sale of the Shares from the registration requirements of the Act. Should Rule 144 subsequently become available, Purchaser is aware that any sale of Shares effected pursuant to the Rule may, depending upon the status of Purchaser as an "affiliate" or "non-affiliate" under the Rule, be made only in limited amounts in accordance with the provisions of the Rule, and that in no event may any Shares be sold pursuant to the Rule until Purchaser has held such Shares for at least one year following their issuance. 2.4 DISPOSITION OF SHARES. Except as specifically set forth below, Purchaser hereby agrees that it shall make no disposition of the Shares, unless and until: (a) it shall have complied with all requirements of this Agreement applicable to the disposition of such Shares; (b) it shall have notified the Company of the proposed disposition and furnished it with a written summary of the terms and conditions of the proposed disposition; and (c) unless otherwise waived by the Company, it shall have delivered to the Company a written opinion of counsel at the Company's expense, in form and substance satisfactory to the Company, that (i) the proposed disposition does not require registration of the Shares under the 1933 Act or (ii) all appropriate action necessary for compliance with the registration requirements of the 1933 Act or of any exemption from registration available under the 1933 Act has been taken. 2.5 RESTRICTIVE LEGENDS. In order to reflect the restrictions on disposition of the Shares, the stock certificates for the Shares shall be endorsed with restrictive legends, including the following legend: "The securities represented by this certificate have not been registered under the Securities Act of 1933. The shares have been acquired for investment and may not be 2. 3 sold or offered for sale in the absence of an effective registration statement for the shares under that Act, a `no action' letter of the Securities and Exchange Commission as to such sale or offer, or an opinion of counsel to the Company that registration under such Act is not required for such sale or offer." 3. TRANSFER RESTRICTIONS 3.1 TRANSFEREE OBLIGATIONS. Each person (other than the Company) to whom the Shares are transferred must, as a condition precedent to the validity of such transfer, acknowledge in writing to the Company that such person is bound by the provisions of this Agreement and that the transferred shares are subject to the market stand-off provisions of paragraph 3.2 to the same extent such shares would be so subject if retained by Purchaser. 3.2 MARKET STAND-OFF. (a) In connection with any underwritten public offering by the Company of its equity securities pursuant to an effective registration statement filed under the 1933 Act, including the Company's initial public offering (the "IPO"), Purchaser and all subsequent holders of the Shares who derive their chain of ownership through a transfer from Purchaser ("Owner") shall not sell, make any short sale of, loan, hypothecate, pledge, grant any option for the purchase of, or otherwise dispose of or transfer for value or otherwise agree to engage in any of the foregoing transactions with respect to, any Shares without the prior written consent of the Company or its underwriters. Such limitations shall be in effect for such period of time from and after the effective date of the final prospectus for such offering as may be requested by the Company or such underwriters (which period shall not exceed 180 days). (b) Owner shall be subject to the market stand-off provisions of this paragraph 3.2 provided and only if all of the executive officers and directors of the Company are also subject to similar arrangements. (c) In the event of any stock dividend, stock split, recapitalization or other change affecting the Company's outstanding Common Stock effected as a class without the Company's receipt of consideration, then any new, substituted or additional securities distributed with respect to the Shares shall be immediately subject to the provisions of this paragraph 3.2, to the same extent the Shares are at such time covered by such provisions. (d) In order to enforce the limitations of this paragraph 3.2, the Company may impose stop-transfer instructions with respect to the Shares until the end of the applicable stand-off period. 4. REGISTRATION RIGHTS. 4.1 For purposes of this Section 4: (a) The term "register", "registered," and "registration" refer to a registration effected by preparing and filing a registration statement or similar document in compliance with the 1933 Act, and the declaration or ordering of effectiveness of such registration statement or document. 3. 4 (b) The term "Registrable Securities" means the Common Stock issued pursuant to this Agreement, excluding, however, any Registrable Securities sold by a person in a transaction in which his rights under this Section 4 are not assigned. (c) The number of shares of "Registrable Securities then outstanding" shall be determined by the number of shares of Common Stock outstanding which are, and the number of shares of Common Stock issuable pursuant to then exercisable or convertible securities which are, Registrable Securities. (d) The term "Holder" means any person owning or having the right to acquire Registrable Securities or any assignee thereof in accordance with Section 4.7 hereof. 4.2 COMPANY REGISTRATION. If (but without any obligation to do so) the Company proposes to register (including for this purpose a registration effected by the Company for shareholders other than the Holders) any of its stock or other securities under the 1933 Act in connection with the public offering of such securities solely for cash (other than a registration relating solely to the sale of securities to participants in a Company stock plan, or a registration on any form which does not include substantially the same information as would be required to be included in a registration statement covering the sale of the Registrable Securities), the Company shall, at such time, promptly give each Holder written notice of such registration. Upon the written request of each Holder given within twenty (20) days after mailing of such notice by the Company in accordance with Section 5.2, the Company shall, subject to the provisions of Section 4.4, cause to be registered under the 1933 Act all of the Registrable Securities that each such Holder has requested to be registered. 4.3 EXPENSES OF COMPANY REGISTRATION. The Company shall bear and pay all expenses incurred in connection with any registration, filing or qualification of Registrable Securities with respect to the registrations pursuant to Section 4.2 for each Holder (which right may be assigned as provided in Section 4.7), including (without limitation) all registration, filing, and qualification fees, printers' and accounting fees relating to and apportionable thereto, but excluding underwriting discounts and commissions relating to Registrable Securities. 4.4 UNDERWRITING REQUIREMENTS. In connection with any offering involving an underwriting of shares of the Company's capital stock, the Company shall not be required under Section 4.2 to include any of the Holders' securities in such underwriting unless they accept the terms of the underwriting as agreed upon between the Company and the underwriters selected by it (or by other persons entitled to select the underwriters), and then only in such quantity as the underwriters determine in their sole discretion will not jeopardize the success of the offering by the Company. If the total amount of securities, including Registrable Securities, requested by shareholder to be included in such offering exceeds the amount of securities sold other than by the Company that the underwriters determine in their sole discretion is compatible with the success of the offering, then the Company shall be required to include in the offering only that number of such securities, including Registrable Securities, which the underwriters determine in their sole discretion will not jeopardize the success of the offering (subject to the rights of other security holders of the Company, including, without limitation, preferred shareholders, the securities so included to be apportioned pro rata among the selling shareholders according to the total amount of securities entitled to be included therein owned by each selling shareholder or in 4. 5 such other proportions as shall mutually be agreed to by such selling shareholders). For purposes of the preceding parenthetical concerning apportionment, for any selling shareholder which is a holder of Registrable Securities and which is a partnership of corporation, the partners, retired partners and shareholders of such holder, or the estates and family members of any such partners and retired partners and any trusts for the benefit of any of the foregoing persons shall be deemed to be a single "selling shareholder", and any pro-rata reduction with respect to such "selling shareholder" shall be based upon the aggregate amount of shares carrying registration rights owned by all entities and individuals included in such "selling shareholder", as defined in this sentence. 4.5 DELAY OF REGISTRATION. No holder shall have any right to obtain or seek an injunction restraining or otherwise delaying any such registration as the result of any controversy that might arise with respect to the interpretation or implementation of this Section 4. 4.6 INDEMNIFICATION. In the event any Registrable Securities are included in a registration statement under this Section 4: (a) To the extent permitted by law, the Company will indemnify and hold harmless each Holder, any underwriter (as defined in the 1933 Act) for such Holder and each person, if any, who controls such Holder or underwriter within the meaning of the Act or the Securities Exchange Act of 1934, as amended (the "1934 Act"), against any losses, claims, damages, or liabilities (joint or several) to which they may become subject under the 1933 Act, or the 1934 Act or other federal or state law, insofar as such losses, claims, damages, or liabilities (or actions in respect thereof) arise out of or are based upon any of the following statements, omissions or violations (collectively a "Violation"): (i) any untrue statement or alleged untrue statement of a material fact contained in such registration statement, including any preliminary prospectus or final prospectus contained therein or any amendments or supplements thereto, (ii) 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 violation or alleged violation by the Company of the 1933 Act, the 1934 Act, any state securities law or any rule or regulation promulgated under the 1933 Act, or the 1934 Act or any state securities law; and the Company will pay to each such Holder, underwriter or controlling person, as incurred, any legal or other expenses reasonably incurred by them in connection with investigating or defending any such loss, claim, damage, liability, or action; provided, however, that the indemnity agreement contained in this subsection 4.6 shall not apply to amounts paid in settlement of any such loss, claim, damage, liability, or action if such settlement is effected without the consent of the Company (which consent shall not be unreasonably withheld), nor shall the Company be liable in any such case for any such loss, claim, damage, liability, or action to the extent that it arises out of or is based upon a Violation which occurs in reliance upon and in conformity with written information furnished expressly for use in connection with such registration by any such Holder, underwriter or controlling person. (b) To the extent permitted by law, each selling Holder will indemnify and hold harmless the Company, each of its directors, each of its officers who has signed the registration statement, each person, if any, who controls the Company within the meaning of the 1933 Act, any underwriter, any other Holder selling securities in such registration statement and any controlling person of any such underwriter or other Holder, against any losses, claims, 5. 6 damages or liabilities (joint or several) to which any of the foregoing persons may become subject, under the 1933 Act, or the 1934 Act or other federal or state law, insofar as such losses, claims, damages, or liabilities (or actions in respect thereto) arise out of or are based upon any Violation, in each case to the extent (and only to the extent) that such Violation occurs in reliance upon and in conformity with written information furnished by such Holder expressly for use in connection with such registration; and each such Holder will pay, as incurred, any legal or other expenses reasonably incurred by any person intended to be indemnified pursuant to this subsection 4.6(b), in connection with investigating or defending any such loss, claim, damage, liability, or action; provided, however, that the indemnity agreement contained in this subsection 4.6(b) shall not apply to amounts paid in settlements of any such loss, claim, damage, liability or action if such settlement is effected without the consent of the Holder, which consent shall not be unreasonably withheld; provided, that, in no event shall any indemnity under this subsection 4.6(b) exceed the gross proceeds from the offering received by such Holder. (c) The foregoing indemnity agreements of the Company and Holders are subject to the condition that, insofar as they relate to any Violation made in a preliminary prospectus but eliminated or remedied in the amended prospectus on file with the SEC at the time the registration statement in question becomes effective or the amended prospectus filed with the SEC pursuant to SEC Rule 424(b) (the "Final Prospectus"), such indemnity agreement shall not inure to the benefit of any indemnified party if a copy of the Final Prospectus was furnished to such indemnified party and was not furnished to the person asserting the loss, liability, claim or damage at or prior to the time such Final Prospectus is required to be delivered under the 1933 Act if such loss, claim or damage would have been avoided had the indemnified party furnished the Final Prospectus to such person. (d) Promptly after receipt by an indemnified party under this Section 4.6 of notice of the commencement of any action (including any governmental action), such indemnified party will, if a claim in respect thereof is to be made against any indemnifying party under this Section 4.6, deliver to the indemnifying party a written notice of the commencement thereof and the indemnifying party shall have the right to participate in, and, to the extent the indemnifying party so desires, jointly with any other indemnifying party similarly noticed, to assume the defense thereof with counsel mutually satisfactory to the parties; provided, however, that an indemnified party (together with all other indemnified parties which may be represented without conflict by one counsel) shall have the right to retain one separate counsel, with the fees and expenses to be paid by the indemnifying party, if representation of such indemnified party by the counsel retained by the indemnifying party would be inappropriate due to actual or potential differing interests between such indemnified party and any other party represented by such counsel in such proceeding. The failure to deliver written notice to the indemnifying party within a reasonable time of the commencement of any such action, if prejudicial to its ability to defend such action, shall relieve such indemnifying party of any liability to the indemnified party under this Section 4.6, but the omission so to deliver written notice to the indemnifying party will not relieve it of any liability that it may have to any indemnified party otherwise than under this Section 4.6. (e) If the indemnification provided for in this Section 4.6 is held by a court of competent jurisdiction to be unavailable to an indemnified party with respect to any loss, liability, claim, damage, or expense referred to therein, then the indemnifying party, in lieu of 6. 7 indemnifying such indemnified party hereunder, shall contribute to the amount paid or payable by such indemnified party as a result of such loss, liability, claim, damage, or expense in such proportion as is appropriate to reflect the relative fault of the indemnifying party on the one hand and of the indemnified party on the other in connection with the statements or omissions that resulted in such loss, liability, claim, damage, or expense as well as any other relevant equitable considerations. The relative fault of the indemnifying party and of the indemnified party shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission to state a material fact relates to information supplied by the indemnifying party or by the indemnified party and the parties' relative intent, knowledge, access to information, and opportunity to correct or prevent such statement or omission. (f) Notwithstanding the foregoing, to the extent that the provisions on indemnification and contribution contained in the underwriting agreement entered into in connection with the underwritten public offering are in conflict with the foregoing provisions, the provisions in the underwriting agreement shall control. (g) The obligations of the Company and Holders under this Section 4.6 shall survive the completion of any offering of Registrable Securities in a registration statement under this Section 4, and otherwise. 4.7 ASSIGNMENT OF REGISTRATION RIGHTS. The rights to cause the Company to register Registrable Securities pursuant to this Section 4 may be assigned (but only with all related obligations) by a Holder to a transferee or assignee of such securities who, after such assignment or transfer, holds at least twenty percent (20%) of the shares of Registrable Securities originally purchased by such Holder (subject to appropriate adjustment for stock splits, stock dividends, combinations and other recapitalizations), provided the Company is, within a reasonable time after such transfer, furnished with written notice of the name and address of such transferee or assignee and the securities with respect to which such registration rights are being assigned; and provided, further, that such assignment shall be effective only if immediately following such transfer the further disposition of such securities by the transferee or assignee is restricted under the Act. For the purposes of determining the number of shares of Registrable Securities held by a transferee or assignee, the holdings of transferees and assignees of a partnership who are partners or retired partners of such partnership (including spouses and ancestors, lineal descendants and siblings of such partners or spouses who acquire Registrable Securities by gift, will or intestate succession) shall be aggregated together and with the partnership; provided that all assignees and transferees who would not qualify individually for assignment of registration rights shall have a single attorney-in-fact for the purpose of exercising any rights, receiving notices or taking any action under this Section 4. 5. INTERPRETATION. 5.1 PURCHASER UNDERTAKING. Purchaser hereby agrees to take whatever additional action and execute whatever additional documents the Company may reasonably in its judgment deem necessary or advisable in order to carry out or effect one or more of the obligations or restrictions imposed on either Purchaser or the Shares pursuant to the express provisions of this Agreement. 7. 8 5.2 NOTICES. Any notice required or permitted in connection with any matter pertaining to this Agreement shall be given in writing and shall be deemed effective upon personal delivery or upon deposit in the United States Mail, registered or certified, postage prepaid and addressed to the party to be notified at the address indicated below such party's signature line on this Agreement or at such other address as such party may designate by 10 days' advance written notice under this Section 5.2 to the other party to this Agreement. 5.3 GOVERNING LAW. This Agreement shall be construed and enforced in accordance with, and shall be governed by, the laws of the State of California. 5.4 COUNTERPARTS. This Agreement may be executed in counterparts, each of which shall be deemed to be an original, but all of which together shall constitute one and the same instrument. 5.5 SUCCESSORS AND ASSIGNS. The provisions of this Agreement shall inure to the benefit of, and be binding upon, the Company and its successors and assigns and Purchaser and Purchaser's legal representatives, heirs, legatees, distributees, assigns and transferees by operation of law, whether or not any such person shall have become a party to this Agreement and have agreed in writing to join herein and be bound by the terms and conditions hereof. IN WITNESS WHEREOF, the parties have executed this Agreement as of the day and year first written above. SIGNAL PHARMACEUTICALS, INC. By:_____________________________ Address: 5555 Oberlin Drive San Diego, California 92121 THE REGENTS OF THE UNIVERSITY OF CALIFORNIA By:_____________________________ Its:____________________________ Address: _______________________________ _______________________________ 8. EX-10.38 41 EXHIBIT 10.38 1 *** Text Omitted and Filed Separately Confidential Treatment Requested Under 17 C.F.R. Sections 200.80, 200.83 and 230.406. EXHIBIT 10.38 COLLABORATIVE DEVELOPMENT AND LICENSING AGREEMENT AMONG SIGNAL PHARMACEUTICALS, INC., AND TANABE SEIYAKU CO., LTD. 2 TABLE OF CONTENTS
Page ---- 1. DEFINITIONS................................................................. 1 2. RESEARCH AND DEVELOPMENT COLLABORATION; RESEARCH PERIOD..................... 10 3. PRODUCT DEVELOPMENT. ....................................................... 22 4. PAYMENT..................................................................... 23 5. LICENSES OF TECHNOLOGY...................................................... 25 6. GLOBAL RELATIONSHIP......................................................... 33 7. ARBITRATION................................................................. 34 8. CONFIDENTIALITY, DISCLOSURE AND PUBLICATION................................. 34 9. INDEMNIFICATION............................................................. 37 10. INDEPENDENT CONTRACTORS..................................................... 38 11. NO SOLICITATION OF EMPLOYEES................................................ 38 12. TERM. ..................................................................... 39 13. TERMINATION OF AGREEMENT.................................................... 39 14. PUBLIC ANNOUNCEMENT OF AGREEMENT............................................ 40 15. INVENTIONS AND PATENT MATTERS............................................... 41 16. RESEARCH EXPENSES........................................................... 46 17. REPRESENTATIONS AND WARRANTIES.............................................. 46 18. OPTION TO EXPAND TERRITORY.................................................. 48 19. MISCELLANEOUS............................................................... 48
i. 3 COLLABORATIVE DEVELOPMENT AND LICENSING AGREEMENT This Agreement is made effective as of the 31st day of March, 1996 (the "Effective Date") by and among Signal Pharmaceuticals, Inc., a California corporation, with its principal office at 5555 Oberlin Drive, San Diego, California, USA ("Signal") and Tanabe Seiyaku Co., Ltd., a Japanese corporation, with its principal office at 2-10 Dosho-machi 3-chome, Chuo-ku, Osaka 541, Japan ("Tanabe"). RECITALS WHEREAS, the parties desire to collaborate in the discovery and development and commercialization of therapeutic products for the prevention and treatment of inflammation and osteoporosis. NOW THEREFORE, THE PARTIES AGREE AS FOLLOWS: 1. DEFINITIONS 1.1 "Active Development" means, with respect to any Compound, that Tanabe is using at least such level of effort, in accordance with Tanabe's business, legal, medical and scientific judgement and Tanabe's normal practices and procedures, to continue the development of such Compound through preclinical and clinical studies and other registration directed activities as Tanabe spends on its own products in pre-clinical and clinical study with similar technical and commercial potential. 1.2 "Affiliates" means, with respect to any specified Person, a Person that is controlled by, controlling or under common control with the Person specified. For the purposes of this definition, control of a corporation or other business entity shall mean (i) direct or indirect beneficial ownership of greater than fifty percent (50%) of the voting stock or a greater than fifty percent (50%) interest in the income of such corporation or other business entity or (ii) the power to direct or cause the direction of the management of such corporation or other business entity. 1.3 "Agreement" means this Agreement, all exhibits and attachments referenced herein and all amendments and modifications hereto and thereto. 1.4 "Chemical Lead Compound" means any Potential Compound which (i) the applicable Research and Development Committee determines has met the requirements set forth on Exhibit A hereto, or (ii) Tanabe has selected in writing as a Chemical Lead Compound from a Signal Compound Library or a Joint Compound Library, or (iii) Tanabe has selected, in its sole discretion, from a Tanabe Compound Library for inclusion in the Collaborative Project. 4 1.5 "Chemical Modification" means any compound resulting from process or activity (initiated after the date of this Agreement) of deriving alternative chemical structures from a Chemical Lead Compound or a chemical modification of a Chemical Lead Compound, e.g. development of analogs. 1.6 "Collaborative Project" means the joint research and development collaboration of the Parties described in Article 2 of this Agreement, in Exhibit C and in the annual workplans prepared in coordination with the applicable Research and Development Committees, pursuant to which the parties shall test, evaluate and identify compounds as Potential Compounds, shall test and evaluate Potential Compounds and chemical modifications of Potential Compounds as potential Chemical Lead Compounds, and shall chemically modify, test and evaluate Compounds as potential Clinical Candidates. 1.7 "Compound" means any Chemical Lead Compound and all Chemical Modifications thereof. A Compound shall be either a Signal Compound, a Tanabe Compound or a Collaboration Compound. 1.7.1 "Signal Compound" means any Compound which is owned by or licensed to Signal or its Affiliates (other than from Tanabe pursuant to this Agreement), together with all Chemical Modifications thereof developed by Signal, by Tanabe, or by their Affiliates. 1.7.2 "Tanabe Compound" means any Compound which is owned by or licensed to Tanabe or its Affiliates (other than from Signal pursuant to this Agreement) together with all Chemical Modifications thereof developed by Signal, Tanabe, or by their Affiliates. 1.7.3 "Collaboration Compound" means a Compound which is neither a Signal Compound nor a Tanabe Compound but is contained in a Joint Compound Library, together with all Chemical Modifications thereof developed by Signal or Tanabe, or by their Affiliates. 1.8 "Clinical Candidate" means a Compound which (i) Tanabe determines meets the criteria set forth in Exhibit B or (ii) which Tanabe has otherwise selected in writing as a Clinical Candidate. 1.9 "IND" means an Investigational New Drug application filed with the United States Food and Drug Administration, or an equivalent application filed with a foreign regulatory authority. 1.10 "Inflammation" means a localized protective response or non-specific immune response, including but not limited to a hypersensitive response (an "inflammatory response"), elicited by injury, invasion or destruction of tissues, which 2. 5 serves to destroy, dilute, or wall off both the injurious agent and the injured tissue. Inflammation shall include, without limitation, the following generally recognized categories of inflammation: acute, chronic, subacute, adhesive, atrophic, catarrhal, croupous, fibrinous, diffuse, disseminated, exudative, fibroid, focal, granulomatous, hyperplastic, hypertrophic, interstitial, metastatic, necrotic, obliterative, parenchymatous, pseudomembranous, purulent, sclerosing, serous, simple, specific, toxic, traumatic, and ulcerative. Inflammation may be manifested, without limitation, as a condition, symptom, process or component in those diseases, disease processes, or host conditions (collectively, "Inflammatory Diseases") in which the inflammatory response is etiological in the health of the host and/or exacerbates (as opposed to ameliorates) the severity of the host's disease, disease process, symptom or condition, and in which the therapeutic goal is to directly intervene in the host's disease, disease process, symptom or condition by reducing, controlling or limiting the level or degree of the inflammatory response. Inflammatory Diseases shall include, without limitation, rheumatism (including arthritis), lupus (including discoid and systemic erythematosus, pernio and vulgaris), glomerulonephritis, transplant rejections, allergies, asthma and autoimmune diseases, but shall exclude osteoarthritis, multiple sclerosis, cardiovascular disease, oncologic indications and neuro-degenerative diseases, even where such diseases may have an inflammatory component. 1.11 "Joint Compound Libraries" means all chemical compounds (excluding Chemical Modifications of Tanabe Compounds or Signal Compounds) owned jointly by the Parties or licensed jointly to the Parties during the Research Period which they have the right to select or license for further development and commercialization pursuant to this Agreement. 1.12 "Joint Inflammation Committee" means the committee of two Signal scientific representatives and one Signal business representative and two Tanabe scientific representatives and one Tanabe business representative appointed by such respective Party to coordinate the research and development activities with respect to Compounds for the prevention and treatment of Inflammation under the Collaborative Project and carry out such other duties as are agreed to in writing by the Parties from time to time. 1.13 "Joint Invention" has the meaning set forth in Section 15.3. 1.14 "Joint Osteoporosis Committee" means the committee of two Signal scientific representatives and one Signal business representative and two Tanabe scientific representatives and one Tanabe business representative appointed by such respective Party (with the business representatives on the Joint Inflammation Committee and the Joint Osteoporosis Committee being for each party the same individual) to coordinate the research and development activities with respect to Compounds for the prevention and treatment of Osteoporosis under the Collaborative Project and carry out such other duties as are agreed to in writing by the Parties from time to time. 3. 6 1.15 "Joint Patent" means all patents and inventors' certificates and applications therefor throughout the world, including any renewal, division, continuation or continuation-in-part of any such applications and any patents issuing thereon, and any reissues, extensions, substitutions, confirmations, registrations, revalidations, revisions and additions of or to any such patents, to the extent that such patents, inventors' certificates and applications claim a discovery or an invention (including any Joint Invention) that is made, conceived or reduced to practice by one or more employees or agents from each Party in performing the Collaborative Project, and as to which such employees or agents would be inventors under the applicable patent laws. 1.16 "Main Activity Compound" means (i) any compound which, with respect to Inflammation and Osteoporosis, demonstrates, as of the Effective Date or during the Research Period, potency in an Inflammation Pathway or an Osteoporosis Pathway, respectively, at a level at least as high as the activity shown for that compound in any other signaling pathway, and (ii) any analog of any compound described in clause (i) above from the Signal Compound Libraries, Tanabe Compound Libraries or Joint Compound Libraries, or any chemical modification of any compound described in clause (i) above which chemical modification is identified during the term of this Agreement, in each case which demonstrates potency in an Inflammation Pathway or an Osteoporosis Pathway, respectively, at a level at least as high as the activity shown for that compound in any other signaling pathway. 1.17 "Net Sales" means with respect to any Product, the aggregate amount invoiced by a Party (including by its Affiliates, licensees and sublicensees) for or on account of any sale to a non-affiliated purchaser of such Product, less (i) normal and customary trade discounts, cash discounts, quantity discounts, rebates and other price reduction programs to purchasers allowed and taken; (ii) rebates to wholesalers; (iii) credits, allowances, discounts and rebates to, and chargebacks from the account of, such purchasers for spoiled, damaged, out-dated and returned Product; (iv) actual freight and insurance costs incurred or accrued in transporting such Product; (v) sales, value-added and other direct taxes (other than taxes on income); (vi) customs duties, surcharges and other governmental charges incurred in connection with the exportation or importation of such Product; and (vii) contributions made by Tanabe to the Japanese Fund for Sufferers from Adverse Drug Reactions not to exceed 1% of what would otherwise be Net Sales (the "Fund Contribution Cap"); provided that in no event shall items (i) and (ii) exceed that amount equal to the average discount, price reduction or rebate for a similar class of Tanabe products sold or offered to the same class of customer, such average to be weighted according to dollar volume ("Discount Ceiling"); provided further that the Parties agree to discuss in good faith a possible renegotiation of such Fund Contribution Cap and the Discount Ceiling before the first Product is launched for commercial sale in the Territory, taking into account then existing market conditions. In the event that Tanabe shall be required with respect to a Product to pay royalties to a third party (other than Signal or its licensors) for the sale of such Product, then Tanabe shall be entitled to deduct the amount of any such royalty actually paid by 4. 7 it from the amount that would otherwise constitute "Net Sales," provided such aggregate deduction shall not exceed 5% of Net Sales. Any commercial use of a Product by a Party (including its Affiliates, licensees and sublicensees) shall be considered a sale hereunder for accounting and royalty purposes. Notwithstanding the foregoing, (i) with respect to a Product which is sold in combination with one or more therapeutically active ingredients as a combination product (a "Combination Product"), then Net Sales of such Product shall be determined by multiplying the Net Sales of such Combination Product by a fraction, as determined by the mutual agreement of the parties, which represents the proportionate economic value of such Product relative to the economic value contributed by the other therapeutically active ingredients in such Combination Product; and (ii) with respect to a Product which is sold together with any other products and/or services at one unit price, whether packaged together or separately (a "Bundled Product"), then Net Sales of such Product shall be determined by multiplying the Net Sales of such Bundled Product by the fraction A/(A+B), where A is the average selling price of such Product if sold separately, and B is the total average selling price of such other products and/or such services in such Bundled Product if sold separately; provided, however, if either the average selling price of such Product or the total average selling price of such other products and/or such services in such Bundled Product is not available as of such date, then Net Sales of such Product shall be determined by multiplying the Net Sales of such Bundled Product by a fraction, as determined by the mutual agreement of the parties, which represents the proportionate economic value of such Product relative to the economic value contributed by the other products and/or such services in such Bundled Product; and (iii) with respect to a Product which is sold as a pharmaceutical product in a Delivery System (the "Delivery System Product"), then Net Sales of such Product shall be determined by reducing the Net Sales of such Delivery System Product by the amount of the reasonable fully-burdened cost to Tanabe, its Affiliate, licensee or sublicensee of such Delivery System determined in accordance with the standard accounting practices of Tanabe, its Affiliate, licensee or sublicensee (as applicable), consistently applied. For purposes of this Section 1.17, "Delivery System" means, with respect to a Product, any drug delivery system comprising the device(s), equipment, instrumentation or other components (but not solely containers or packaging) designed to accomplish or assist in the administration of such Product. 1.18 "Osteoporosis" means any disease, disease process and/or condition involving bone resorption and demineralization of bone (including abnormal rarefaction of bone and a general reduction in the mass of bone per unit of volume), bone formation, bone growth, calcium and phosphorus metabolism (including calcium and phosphorus absorption and reabsorption) and deformities such as loss of stature and pathological fractures. 1.19 "Party(ies)" means Signal and Tanabe. 5. 8 1.20 "Person" means an individual, a partnership, a joint venture, a corporation, a trust, an estate, an unincorporated organization or any other entity. 1.21 "Phase III Clinical Trials" means those pivotal human clinical trials in a particular country which are most nearly equivalent to those described as such in the United States Federal Food, Drug, and Cosmetics Act, as amended. 1.22 "Potential Compound" means a compound (a) which is identified prior to or during the term of the Research Period to have potential for the prevention or treatment of either (i) Inflammation, [***] or (ii) Osteoporosis, [***]; (b) which was tested, evaluated or derived by either or both Parties pursuant to the Collaborative Project; and (c) which possesses at least the following characteristics: (i) [***] 1.23 "Pricing Approval" means the determination of an allowable resale price for a Product by the applicable governmental authority in any situation in which commercial sales of such Product are not permitted until such Pricing Approval has been received. 1.24 "Product" means any composition (whether in the form of drug substance, bulk drug or final dosage form), which may be used in the prevention or treatment of either (i) Inflammation, [***] or (ii) Osteoporosis, [***] and that contains a Compound as an active ingredient. 1.25 "Regulatory Approval" means the granting of all governmental or regulatory approvals required, if any, for the sale of a Product in a given country or jurisdiction within the Territory. 1.26 "Research and Development Committee(s)" means the Joint Inflammation Committee and the Joint Osteoporosis Committee. 1.27 "Research Period" shall have the meaning given in Section 2.1. 6. ***Confidential Treatment Requested 9 1.28 "Rest of the World" means all of the nations of the world other than those in the Territory. 1.29 "Signal Compound Libraries" means all chemical compounds owned by Signal or licensed to Signal (other than by Tanabe) as of the Effective Date or during the Research Period which Signal has the right to select or license for further development and commercialization pursuant to this Agreement. 1.30 "Signal Technical Information" shall mean either "Signal Lead Identification Information," "Signal Compound Information," or "Signal Product Information," each as defined below: (a) "Signal Lead Identification Information" shall mean as to each Potential Compound, the information in Signal's or its Affiliates' possession or control which is necessary or useful to allow Tanabe to conduct its obligations pursuant to the Collaborative Project, and which is necessary or useful to allow the appropriate Research and Development Committee and Tanabe to evaluate whether or not such Potential Compound satisfies the Selection Criteria set forth on Exhibit A or otherwise is desirable for Tanabe to designate as a Chemical Lead Compound. Such information shall include information regarding Signal's non-proprietary and/or functional assays useful for confirming activity, but shall exclude information regarding the design or substance of any Signal proprietary primary or high throughput screening assays. (b) "Signal Compound Information" shall mean as to any Compound, (i) the information in Signal's or its Affiliates' possession or control regarding such Compound, which is necessary or useful to allow the appropriate Research and Development Committee and Tanabe to evaluate whether or not such Compound satisfies the Selection Criteria set forth on Exhibit B or otherwise is desirable for Tanabe to designate as a Clinical Candidate, or which is necessary or desirable to enable Tanabe to determine structure activity relationship and to synthesize and evaluate Chemical Modifications thereof, and (ii) provided that the Parties have first entered into a mutually acceptable written agreement regarding the reciprocal sharing of additional information (without additional charge, other than direct translation costs) regarding such Compound, such additional information regarding such Compound as the Parties mutually agree in writing which is in Signal's, its Affiliates' or sublicensees' (including the Western Pharmaceutical Partner's) possession or control regarding such Compound, and which is necessary or useful to the preclinical development of such Compound in the Territory. (c) "Signal Product Information" shall means as to any Compound and any Product containing such Compound, provided that the Parties have first entered into a mutually acceptable written agreement regarding the reciprocal sharing of information (without additional charge, other than direct translation costs) regarding such Compound, such information regarding such Compound as the Parties 7. 10 mutually agree in writing which is in Signal's, its Affiliates' or sublicensees' (including the Western Pharmaceutical Partner's) possession or control regarding such Compound, and which is necessary or useful to the clinical development, regulatory approval and commercialization of such Compound in the Territory. 1.31 "Signal Patents" means, with the exclusion of the Joint Patent Rights, all rights of Signal in any patents and inventors' certificates and applications therefor throughout the world, including any renewal, division, continuation or continuation-in-part of any such applications and any patents issuing thereon, and any reissues, extensions, substitutions, confirmations, registrations, revalidations, revisions and additions of or to any such patents, to the extent that such patents, inventors' certificates and applications claim a Compound or a Product or any use or method or process of manufacture of a specific Compound or Product. 1.32 "Signal Screens" means any primary or high throughput assays which are designed to test for activity in the same cell type/signaling pathway combination as any of the assays being employed by Signal in the Collaborative Project which assays are set forth in Exhibit C or as subsequently set forth in an annual workplan approved by the applicable Research and Development Committee (whether or not such assays are protected by any patent rights, trade secrets or other intellectual property rights of Signal). 1.33 "Tanabe Compound Libraries" means all chemical compounds (including organic compounds and extracts of microbial metabolites) owned by Tanabe or licensed to Tanabe (other than by Signal) as of the Effective Date or during the Research Period which Tanabe has the right to select or license for further development and commercialization pursuant to this Agreement. 1.34 "Tanabe Other Screens" means any primary or high throughput assays, other than Signal Screens, developed or in-licensed by Tanabe (excluding animal model and functional assays). 1.35 "Tanabe Patents" means, with the exclusion of the Joint Patent Rights, all rights of Tanabe in any patents and inventors' certificates and applications therefor throughout the world, including any renewal, division, continuation or continuation-in-part of any such applications and any patents issuing thereon, and any reissues, extensions, substitutions, confirmations, registrations, revalidations, revisions and additions of or to any such patents, to the extent that such patents, inventors' certificates and applications claim a Compound or a Product or any use or method or process of manufacture of a specific Compound or Product. 1.36 "Tanabe Technical Information" shall mean either "Tanabe Lead Identification Information," "Tanabe Compound Information," or "Tanabe Product Information," each as defined below: 8. 11 (a) "Tanabe Lead Identification Information" shall mean as to each compound from the Tanabe Compound Libraries which Tanabe, in its sole discretion, provides to Signal for screening under the Collaborative Project, the information in Tanabe's or its Affiliates' possession or control which is necessary or useful to allow Signal to conduct its obligations pursuant to the Collaborative Project, or which is necessary or desirable to enable Signal to determine structure activity relationship and to synthesize and evaluate chemical modifications thereof, and which is necessary or useful to allow the appropriate Research and Development Committee to evaluate whether or not such Potential Compound satisfies the Selection Criteria set forth on Exhibit A. (b) "Tanabe Compound Information" shall mean as to any Compound, (i) the information in Tanabe's or its Affiliates' possession or control regarding such Compound, which is necessary or useful to allow the appropriate Research and Development Committee to evaluate whether or not such Compound satisfies the Selection Criteria set forth on Exhibit B, and (ii) provided that the Parties have first entered into a mutually acceptable written agreement regarding the reciprocal sharing of additional information (without additional charge, other than direct translation costs) regarding such Compound, such additional information regarding such Compound as the Parties mutually agree in writing which is in Tanabe's, its Affiliates' or sublicensees' possession or control regarding such Compound, and which is necessary or useful to the preclinical development of such Compound in the Rest of the World. (c) "Tanabe Product Information" shall mean as to any Compound and any Product containing such Compound, provided that the Parties have first entered into a mutually acceptable written agreement regarding the reciprocal sharing of information (without additional charge, other than direct translation costs) regarding such Compound, such information regarding such Compound as the Parties mutually agree in writing which is in Tanabe's, its Affiliates' or sublicensees' possession or control regarding such Compound, and which is necessary or useful to the clinical development, regulatory approval and commercialization of such Compound in the Rest of the World. 1.37 "Territory" means Japan, China, South Korea, Taiwan, Thailand, Cambodia, Laos, Vietnam, Indonesia, Nepal, the Philippines, Singapore, Malaysia, Hong Kong, Myanmar and Brunei; provided that in the event that the option set forth in Section 18 is exercised, the "Territory" shall also include Australia, New Zealand and other Oceania countries. 1.38 "Use or Structure Contribution" means, with respect to Tanabe, Signal or both, an invention or discovery made by Tanabe, Signal or both, as applicable, regarding the composition of matter or use of any Compound which invention or discovery is claimed in a pending patent application or issued patent (a "Contribution 9. 12 Patent") in any of the following countries: United States, Japan, France, Germany and the United Kingdom (the "Measurement Countries"). 1.39 "Western Pharmaceutical Partner(s)" means one or more pharmaceutical companies other than Tanabe with which Signal from time to time agrees to collaborate to develop and/or market products for the prevention or treatment of Inflammation and/or Osteoporosis outside the Territory. 2. RESEARCH AND DEVELOPMENT COLLABORATION; RESEARCH PERIOD 2.1 Research Period. Unless the Collaborative Project is sooner terminated pursuant to Section 2.3(f), 13.4 or 13.5, the Collaborative Project shall terminate upon the date which is four (4) years from the Effective Date in Inflammation and Osteoporosis, respectively (the "Research Period"); provided that the Research Period may be extended twice for periods of one (1) year each by mutual written agreement of the Parties. 2.2 Joint Obligations. (a) Prioritization of Efforts. The Parties mutually agree that during the term of the Research Period each of the Parties (i) shall use its commercially reasonable efforts to carry out its responsibilities under the Collaborative Project; (ii) shall accord the Collaborative Project at least as high a priority as its other active research programs at similar stages with similar technical and commercial potential; and (iii) shall cooperate with each other in the Collaborative Project for the development of Products for the prevention or treatment of Inflammation and Osteoporosis. (b) Exchange of Technical Information During Research Period. During the term of the Research Period, (i) Signal shall inform the appropriate Research and Development Committee and Tanabe, to the extent it has not already done so, of all Signal Lead Identification Information, Signal Compound Information and Signal Product Information; (ii) Tanabe shall inform the appropriate Research and Development Committee and Signal, to the extent it has not already done so, of all Tanabe Lead Identification Information, Tanabe Compound Information and Tanabe Product Information; and (iii) each Party shall provide to the other Party, to the extent it has not already done so, summary written reports regarding such additional information regarding Potential Compounds, Compounds and Main Activity Compounds which is necessary or useful for the other Party to monitor the other Party's activities and progress. Each Party will permit access at reasonable times and with reasonable frequency to the appropriate personnel of the other Party to accomplish such information exchange. Each Party shall, at least at each meeting of each Research and Development Committee, (i) provide the other party with a progress report on its efforts and results on the Collaborative Project with respect to Inflammation and Osteoporosis, as appropriate, 10. 13 and (ii) inform the other Party of any Technical Information obtained by it to the extent and at the time required by this Section 2.2(b). Notwithstanding the foregoing, Signal shall not be entitled to disclose Tanabe Technical Information to any Western Pharmaceutical Partner until Tanabe and such Western Pharmaceutical Partner have mutually agreed in writing to share such information. (c) Exchange of Technical Information After Research Period. During the term of this Agreement, but after the expiration or termination of the Research Period, (i) Signal shall inform Tanabe, to the extent it has not already done so, of all Signal Compound Information and Signal Product Information; (ii) Tanabe shall inform Signal, to the extent it has not already done so, of all Tanabe Compound Information and Tanabe Product Information; and (iii) each Party shall provide to the other Party, to the extent it has not already done so, summary written reports regarding such additional information regarding Potential Compounds, Compounds and Main Activity Compounds which is necessary or useful for the other Party to monitor the other Party's activities and progress. Each Party will permit access at reasonable times and with reasonable frequency to the appropriate personnel of the other Party to accomplish such information exchange. Notwithstanding the foregoing, Signal shall not be entitled to disclose Tanabe Technical Information to any Western Pharmaceutical Partner until Tanabe and such Western Pharmaceutical Partner have mutually agreed in writing to share such information. 2.3 Obligations of Signal. (a) Screening Efforts. Signal shall screen those compounds which Tanabe selects in its sole discretion from Tanabe Compound Libraries, all compounds from Signal Compound Libraries and all compounds from Joint Compound Libraries using Signal's proprietary and non-proprietary whole-cell and enzyme assays and carry out its other obligations as set forth in Exhibit C and the annual workplans submitted hereunder. In performing the screening, Signal shall use its commercially reasonable efforts to identify a primary Compound and a back-up Compound for at least one molecular target within each of following pathways within Inflammation: [***]; and within Osteoporosis: (i) [***]. Signal shall allocate sufficient time, effort, equipment and facilities to the Collaborative Project, and shall proceed diligently, to conduct its obligations under the Collaborative Project and to accomplish the objectives thereof. Signal shall present all results of its screening of Potential Compounds to Tanabe and the applicable Research and Development Committee for review and for the applicable Research and Development Committee to determine whether a Potential Compound meets the criteria set forth in Exhibit A. When Signal discovers a Potential Compound during the Research Period that Signal believes may meet the Selection Criteria set forth on Exhibit A hereto or otherwise determines that a Potential Compound may be desirable to Tanabe as a Chemical Lead Compound, Signal shall 11. ***Confidential Treatment Requested 14 promptly notify the applicable Research and Development Committee and present the applicable Signal Lead Identification Information. Such Research and Development Committee shall review the results of Signal's screening of such Potential Compound and such other information and notify Tanabe and Signal in writing of its determination within ninety (90) days of the receipt of such information. If such Research and Development Committee determines that a Potential Compound meets the criteria set forth in Exhibit A or otherwise determines that a Potential Compound may be desirable to Tanabe as a Chemical Lead Compound, Signal promptly shall present and supply such Potential Compound to Tanabe in accordance with Section 2.4(d). Such presentation shall include all Signal Lead Identification Information as reasonably necessary to verify the Potential Compound meets the criteria set forth in Exhibit A and sufficient quantities of drug substance to allow Tanabe to conduct studies to confirm Signal's test results. In addition, Signal shall transfer to Tanabe Signal's non-proprietary functional assays and shall assist Tanabe in implementing such assays and to confirm the activity of such Potential Compounds in such assays (provided that Tanabe shall reimburse Signal for its direct out-of-pocket costs incurred in connection with such transfer or assistance). At the end of the second year of the Research Period, the Parties will jointly reassess the appropriateness of the staffing levels and will determine whether any material changes are appropriate. If so, then the parties will in good faith determine an adjustment for the following year. (b) Visiting Tanabe Scientist. During the Research Period, Signal shall accept at its research facilities up to [***] who shall be mutually agreeable to the Parties for Inflammation and/or Osteoporosis projects. Tanabe shall be responsible for all expenses relating to visas, transportation, lodging, salaries and benefits of such Tanabe scientist and Signal shall be responsible for expenses, including laboratory space, office space, instruments, equipment and materials, necessary to allow such Tanabe scientist to engage in research under the Collaborative Project on Signal's premises. The Tanabe scientist shall, to the extent possible, be included in the activities of Signal's research team for the Collaborative Project and shall be required to execute all confidentiality agreements as are used from time to time by Signal. It is acknowledged and agreed that Signal shall also be conducting research and development activities outside the scope of the Collaborative Project and shall be entitled to exclude the Tanabe scientist from participation in projects to the extent required to protect the confidentiality of such non-Collaborative Project work. (c) Ongoing Screening Services. Signal shall, for a period of one (1) year following the full completion of the Research Period (all four years), provide to Tanabe, at Tanabe's request, ongoing screening services for assays developed during (and not before or after) the Research Period on compounds developed or acquired by Tanabe following the end of the Research Period. Tanabe shall pay Signal the greater of [***] and shall owe Signal the same (as applicable) license terms and royalty terms therein as outlined in Sections 4.3 and 5.4. 12. ***Confidential Treatment Requested 15 (d) Assistance in Chemical Modification. As and when requested by the applicable Research and Development Committee, Signal may conduct any in-vitro screening described on Exhibit A with respect to Chemical Modifications or chemical modifications of compounds from the Tanabe Compound Libraries, selected by Tanabe in its sole discretion, for the purpose of identifying Potential Compounds or Compounds under the Collaborative Project. (e) Assistance in In-Vitro Studies. As and when requested by Tanabe, Signal shall study a compound, which originated from a Tanabe Compound Library and the composition of matter and use of which is characterized as a Tanabe Use or Structure Contribution, using Signal's proprietary and non-proprietary assays to attempt to define the mechanism of action of such compound in the Inflammation Pathways or Osteoporosis Pathways, as applicable. The data resulting from such studies shall be owned by Tanabe. (f) Development Obligations During Research Period. .1 Western Pharmaceutical Partner. Signal shall enter into a collaborative research and development agreement with respect to either its Inflammation program or its Osteoporosis program not later than August 31, 1996 (a "Minimum Partnering Transaction"). If a Minimum Partnering Transaction has not occurred on or before August 31, 1996, then Tanabe shall have the right to give Signal advance written notice of, and opportunity to cure, its failure to complete a Minimum Partnering Transaction. If Signal has failed to cure such default within such notice period, then Tanabe shall be entitled to terminate the Collaborative Project with such termination being effective six (6) months after the expiration, without cure, of such notice period. The applicable notice period shall be (i) ninety (90) days or (ii) one-hundred-eighty days in the event that Tanabe has selected at least one (1) Chemical Lead Compound which is first identified after screening in a Signal primary or high throughput assay on or before the date of such notice. .2 Periodic Reviews. At Tanabe's request and not more frequently than once in every six (6)-month period, Signal shall review with Tanabe its cash flow and headcount allocations to the Collaborative Project. As part of such review Signal shall demonstrate to Tanabe's reasonable satisfaction that (i) Signal has the ability over the following six (6)-month period to fund the Inflammation program at a level of at least [***] in [***] and [***] per year in [***] and the Osteoporosis program at a level of at least [***] in [***] and [***] per year in [***] (or such lesser or greater amount agreed to by the Parties and reflected in the workplan for that period); and (ii) Signal is expending effort at an activity level in the Inflammation program and in the Osteoporosis program consistent with the expenditure levels set forth in clause (i) above (or such lesser or greater amount agreed to by the Parties and reflected in the workplan for that period). If Signal defaults in its obligations under clause (i) or (ii) above, then Tanabe shall have the right to give 13. ***Confidential Treatment Requested 16 Signal advance written notice of, and opportunity to cure, its defaults in its obligations under clause (i) or (ii) above. If Signal has failed to cure such default within such notice period, then Tanabe shall be entitled to terminate the Collaborative Project with such termination being effective six (6) months after the expiration, without cure, of such notice period. The applicable notice period shall be [***]. .3 Commitment of FTEs. Signal shall allocate at least that number of research personnel (measured as full-time equivalents ("FTEs") and post-doctoral fellows ("Post-Docs")) to the Inflammation program and the Osteoporosis program as are set forth in the following schedule ("Minimum Staffing Requirement"):
Inflammation Program Allocated FTEs & Post-Docs -------------------- -------------------------- [***] [***]
Osteoporosis Program Allocated FTEs & Post-Docs -------------------- -------------------------- [***] [***]
If the Minimum Staffing Requirement has not been met during any one year period, then Tanabe shall have the right to give Signal advance written notice of, and opportunity to cure, its failure to meet the Minimum Staffing Requirement. If Signal has failed to cure such default within such notice period, then Tanabe shall be entitled to terminate the Collaborative Project with such termination being effective six (6) months after the expiration, without cure, of such notice period. The applicable notice period shall be [***]. (g) Active Development in Inflammation and Osteoporosis. Signal must use at least such level of efforts, in accordance with Signal's business, legal, medical and scientific judgement and Signal's normal practices and procedures, to continue the development of Compounds, Clinical Candidates or Products licensed to Signal in this Agreement through pre-clinical and clinical studies, and other registration directed activities as Signal spends on its own products in pre-clinical and clinical study with similar technical and commercial potential in the Rest of the World. 14. ***Confidential Treatment Requested 17 2.4 Obligations of Tanabe. (a) Delivery of Compound Library. As soon as reasonably feasible, but in no event later than sixty (60) days after the execution of this Agreement, Signal shall request and Tanabe shall deliver to Signal up to [***] organic compounds and [***] samples of [***] which shall be selected by Tanabe in its sole discretion from Tanabe Compound Libraries in a high throughput format reasonably necessary to enable Signal to screen, for use in Signal's screening activities. Thereafter, Tanabe shall make available such additional compounds from the Tanabe Compound Libraries as Tanabe determines in its sole discretion. All compounds from Tanabe Compound Libraries provided to Signal under this Agreement shall be and remain the sole property of Tanabe, shall (other than Compounds) be used by Signal solely for the purpose of carrying out its obligations under this Agreement, and shall (other than Compounds) not be transferred to any other Person for any purpose unless agreed to by the Parties pursuant to Section 6 of this Agreement. Tanabe may request Signal to conduct chemical modification, structural elucidation and testing of compounds from Tanabe Compound Libraries. Except to the extent so requested, Signal shall not undertake any efforts to elucidate the structure of any compound from the Tanabe Compound Libraries delivered to it by Tanabe for in-vitro testing or make any chemical modifications thereof until such compound is designated as a Chemical Lead Compound pursuant to Section 2.4(d) below. (b) Tanabe Screening Activities. Subject to the provisions of Sections 5.4(a)(v), (vi), (vii) and (viii) below, during the Research Period, Tanabe shall have the right to screen any compounds in any assays whatsoever. (c) Assistance in Screening Activities. As and when requested by the applicable Research and Development Committee, Tanabe may conduct any animal studies described on Exhibit A with respect to Potential Compounds. Tanabe agrees that it will not, in connection with any such studies, undertake any efforts to elucidate the structure of any Potential Compounds from the Signal Compound Libraries delivered to it by Signal for animal testing until such Potential Compounds are designated as Chemical Lead Compounds pursuant to Section 2.4(d) below. (d) Evaluation Obligations; Chemical Lead Compounds. The applicable Research and Development Committee shall have a period of ninety (90) days from the date a Potential Compound is delivered to it pursuant to Section 2.3(a), to review such Potential Compound for the purpose of confirming that such Potential Compound meets the Selection Criteria set forth on Exhibit A hereto. Tanabe shall have the right, within thirty (30) days after such ninety (90) day period, to either (i) designate such Potential Compound for Active Development as a Chemical Lead Compound or (ii) reject such Potential Compound. Tanabe shall request samples of such Potential Compound not later than two (2) months after first notification by Signal to the 15. ***Confidential Treatment Requested 18 applicable Research and Development Committee of Signal's determination pursuant to Section 2.3(a) that such Potential Compound may meet the Selection Criteria set forth on Exhibit A hereto or that a Potential Compound otherwise may be desirable to Tanabe as a Chemical Lead Compound (to allow Tanabe to set up its feasibility tests). Provided that Signal has assisted Tanabe in transferring and implementing such feasibility tests pursuant to Section 2.3(a), Tanabe shall notify Signal in writing within thirty (30) days after receipt of the drug substance of a Potential Compound whether it agrees with the determination of the applicable Research and Development Committee that a Potential Compound meets the criteria set forth in Exhibit A or that a Potential Compound otherwise shall be designated by Tanabe as a Chemical Lead Compound. Any Potential Compound designated by Tanabe (whether or not it meets the Selection Criteria set forth in Exhibit A) shall thereafter be a "Chemical Lead Compound." Any Potential Compound which is presented to Tanabe and not designated by Tanabe as a Chemical Lead Compound shall thereafter no longer be subject to the Collaborative Project. Prior to the designation of a Potential Compound from a Signal Compound Library as a Chemical Lead Compound pursuant to Section 2.4(d), Tanabe shall not engage in any attempts to elucidate the chemical structure of such Potential Compound, make any chemical modification to such Potential Compound, or test such Potential Compound for use outside the Inflammation Pathways or the Osteoporosis Pathways, as applicable. (e) Development and Qualification of Chemical Lead Compounds. Once a Potential Compound has been designated as a Chemical Lead Compound for any of (i) with respect to Inflammation: [***], and (ii) with respect to Osteoporosis [***], then Tanabe shall promptly conduct any chemical modifications or studies necessary with respect to such Compound to determine whether or not any such Compound meets the criteria for a Clinical Candidate as set forth in Exhibit B or Tanabe otherwise desires to designate such Compound as a Clinical Candidate. Subject to the limitations of Section 4.3, any Compound that Tanabe designates as a Clinical Candidate shall thereafter be a "Clinical Candidate" and such designation shall be subject to the milestone payment as described in Section 4.3(a) below. If Tanabe files in the Territory a request for initiation of human clinical studies of a Compound prior to designating such Compound as a Clinical Candidate, then upon the filing in the Territory of a request for initiation of human clinical studies for such Compound, such Compound thereafter shall be a "Clinical Candidate" and such designation shall be subject to the milestone payment as described in Section 4.3(a) below. All Potential Compounds from Signal Compound Libraries provided to Tanabe under this Agreement shall be and remain the sole property of Signal, shall (other than Compounds) be used by Tanabe solely for the purpose of carrying out its obligations under this Agreement and shall (other than Compounds) not be transferred to any other Person for any purpose unless agreed to by the Parties pursuant to this Agreement. Tanabe agrees that it will not, in connection with any such studies, undertake any efforts to elucidate the structure of any Potential Compounds 16. ***Confidential Treatment Requested 19 from the Signal Compound Libraries delivered to it by Signal until such Potential Compounds are designated as Chemical Lead Compounds pursuant to Section 2.4(d) above. All Chemical Modifications developed from (i) Signal Compounds shall constitute Signal Compounds, (ii) Tanabe Compounds shall constitute Tanabe Compounds, and (iii) Collaboration Compounds shall constitute Collaboration Compounds. To the extent either Party creates a Chemical Modification, such Party shall endeavor to provide the other Party with [***] of each Chemical Modification and a summary report describing how such Chemical Modification was synthesized and characterized. (f) Reversion of Rights to Compounds. Notwithstanding any other Section of this Agreement, if Tanabe "abandons its efforts" to conduct research, pre-clinical and clinical development, application for Regulatory Approval and commercialization of Compounds, Clinical Candidates and Products which may be used in the prevention or treatment of Inflammation in the Territory, then upon ninety (90) days prior written notice from Signal, the exclusive right and license granted to Tanabe under Section 5.1 in all Compounds, Clinical Candidates and Products which may be used in the prevention or treatment of Inflammation in the Territory shall terminate and such exclusive right and license granted to Tanabe under Section 5.1 shall revert to Signal. Tanabe shall not have "abandoned its efforts" if Tanabe at any such time either [***] Notwithstanding any other Section of this Agreement, if Tanabe "abandons its efforts" to conduct research, pre-clinical and clinical development, application for Regulatory Approval and commercialization of Compounds, Clinical Candidates and Products which may be used in the prevention or treatment of Osteoporosis in the Territory, then upon ninety (90) days prior written notice from Signal, the exclusive right and license granted to Tanabe under Section 5.1 in all Compounds, Clinical Candidates and Products which may be used in the prevention or treatment of Osteoporosis in the Territory shall terminate and such exclusive right and license granted to Tanabe under Section 5.1 shall revert to Signal. Tanabe shall not have "abandoned its efforts" if Tanabe at any such time either [***] (g) Visiting Signal Scientist. During the Research Period, Tanabe shall accept at its research facilities up to [***] who shall be mutually agreeable to the Parties for Inflammation and/or Osteoporosis projects. Signal 17. ***Confidential Treatment Requested 20 shall be responsible for all expenses relating to visas, transportation, lodging, salaries and benefits of such Signal scientist and Tanabe shall be responsible for expenses, including laboratory space, office space, instruments, equipment and materials, necessary to allow such Signal scientist to engage in research on Tanabe's premises under the Collaborative Project. The Signal scientist shall, to the extent possible, be included in the activities of Tanabe's research team for the Collaborative Project and shall be subject to all confidentiality obligations as are imposed usually by Tanabe. It is acknowledged and agreed that Tanabe shall also be conducting research and development activities outside the scope of the Collaborative Project and shall be entitled to exclude the Signal scientist from participation in projects to the extent required to protect the confidentiality of such non-Collaborative Project work. 2.5 Research and Development Committees. In order to effectively coordinate and communicate their respective research and development efforts in Inflammation and Osteoporosis: (i) Signal and Tanabe shall each promptly appoint their representatives to the Joint Inflammation Committee and the Joint Osteoporosis Committee; and (ii) each of Signal and Tanabe shall delegate the powers and authority to the Joint Inflammation Committee and the Joint Osteoporosis Committee that each Party deems desirable to allow each Research and Development Committee to effectively coordinate and communicate the Parties' respective efforts under the Collaborative Project in Inflammation and Osteoporosis, respectively; provided, that neither such Research and Development Committee shall have the power to enter into contracts or otherwise bind either of the Parties. Without limitation, each Research and Development Committee shall be responsible for (i) coordinating the research activities with respect to Compounds for the treatment of Inflammation or Osteoporosis, as applicable; (ii) working with Signal to prepare annual workplans for the testing, evaluation and identification of Potential Compounds as potential Chemical Lead Compounds, and the Chemical Modification, testing, evaluation and identification of Compounds as potential Clinical Candidates; (iii) assisting Signal in preparing annual budgets corresponding to such workplans; (iv) monitoring performance under the Collaborative Project in relation to the annual workplans and expenditures in relation to the corresponding budgets; and (v) reviewing the information regarding Potential Compounds and determining whether Potential Compounds satisfy the criteria set forth in Exhibit A. Each Party may change any of its representatives at any time and from time to time by written notice to the other Party prior to appointing a new representative to either Committee. Any vacancy on a Research and Development Committee caused by death, resignation, disability or otherwise shall be filled within thirty (30) days following the occurrence of such vacancy. 2.6 Meetings of the Research and Development Committees. The Research and Development Committees shall each meet, during the term of the Research Period, at least every six (6) months beginning as soon as possible after the Effective Date of this Agreement, and thereafter upon request by either Party (not to exceed four (4) meetings per year unless mutually agreed upon), at sites which shall be 18. 21 designated by each of the Parties in alternating sequence, with the first meeting to be held as soon as practicable. Meetings are expected to be held either at the offices of Signal or Tanabe or at some other mutually agreeable site. Each Party shall pay its own costs in attending meetings of each Research and Development Committee. Executive officers from Signal or Tanabe may attend such meetings at their discretion. Once during each year, at annual meetings during the Research Period, the Research and Development Committees will conduct an annual review of the actual progress of the Collaborative Project with respect to Inflammation or Osteoporosis, as appropriate (the "Annual Review"), will review and approve the development plans, workplans and budgets and objectives for the Collaborative Project for the following year, and will take such mutually agreeable actions as may be reasonable to facilitate the commercial success of the Collaborative Project with respect to Inflammation or Osteoporosis, as appropriate. 2.7 Procedure. A hosting Party shall designate a member to act as Chairman of each Research and Development Committee meeting. Each such Chairman shall be responsible for developing an agenda for the meeting to be chaired by him or her and shall distribute such agenda no later than fourteen (14) days prior to the scheduled meeting. The Chairman shall promptly, after each meeting, prepare and distribute to the members minutes reflecting the discussions of the Research and Development Committee. All meetings shall be conducted and records kept in English. 2.8 Dispute Resolution. In the event that a Research and Development Committee is unable to resolve any disagreement, either Party shall do their best efforts to resolve the dispute amicably, and shall prior to proceeding with any dispute resolution mechanisms conduct a meeting of the president of Signal and the Senior Executive Director of Research and Development of Tanabe to attempt in good faith to resolve such dispute. 2.9 Exclusivity. (a) Signal Obligations. (i) During the Research Period, Signal shall not, and shall cause its Affiliates and (sub)licensees collaborating with Signal in the development of Compounds, including the Western Pharmaceutical Partner, not to, conduct any research, development or commercialization activities relating to the discovery or use of compounds in an Inflammation Pathway(s) for the prevention or treatment of Inflammation (to the extent, with respect to any (sub)licensee, such collaboration involves such Inflammation Pathway(s)), or in an Osteoporosis Pathway(s) for the prevention or treatment of Osteoporosis (to the extent, with respect to any (sub)licensee, such collaboration involves such Osteoporosis Pathway(s)), in the Territory, for its own benefit, or with or for the benefit of any other Person, other than to the extent that any 19. 22 compounds developed for use in the respective pathways shall be licensed to Tanabe hereunder in the Territory; (ii) Following the Research Period but during the term of this Agreement, Signal shall not, and shall cause its Affiliates and (sub)licensees collaborating with Signal in the development of Compounds, including the Western Pharmaceutical Partner, not to, conduct any research, development or commercialization activities relating to the use of Main Activity Compounds in an Inflammation Pathway(s) for the prevention or treatment of Inflammation (to the extent, with respect to any (sub)licensee, such collaboration involves such Inflammation Pathway(s)), or in an Osteoporosis Pathway(s) for the prevention or treatment of Osteoporosis (to the extent, with respect to any (sub)licensee, such collaboration involves such Osteoporosis Pathway(s)), in the Territory, for its own benefit, or with or for the benefit of any other Person, other than to the extent that any Main Activity Compounds developed for use in the respective pathways shall be licensed to Tanabe hereunder in the Territory; (iii) During the term of the Agreement and subject to the provisions of Section 2.4(f), Signal shall not, and shall cause its Affiliates and (sub)licensees collaborating with Signal in the development of Compounds, including the Western Pharmaceutical Partner, not to, conduct any research, development or commercialization activities relating to the use of (a) Compounds, (b) Potential Compounds or (c) chemical modifications of Potential Compounds which if they were tested during the Research Period would have been Potential Compounds, for its own benefit, or with or for the benefit of any other Person, other than to the extent that any compounds described in clauses (a) through (c) above developed for use in the respective pathways shall be licensed to Tanabe hereunder in the Territory; and (iv) During the term of this Agreement, Signal shall not, and shall cause its Affiliates and (sub)licensees collaborating with Signal in the development of Compounds, including the Western Pharmaceutical Partner, not to, conduct any research, development or commercialization activities relating to the use of any Tanabe Compound other than in the prevention or treatment of Inflammation or Osteoporosis in the Rest of the World, for its own benefit, or with or for the benefit of any other Person, unless such Tanabe Compound first is designated by Tanabe as a Clinical Candidate or Signal, its Affiliate or sublicensee has [***] (b) Tanabe Obligations. (i) During the Research Period, Tanabe shall not, and shall cause its Affiliates and (sub)licensees collaborating with Tanabe in the development of Compounds not to, conduct any research, development or commercialization activities relating to the discovery or use of compounds in an Inflammation Pathway(s) for the 20. ***Confidential Treatment Requested 23 prevention or treatment of Inflammation (to the extent, with respect to any (sub)licensee, such collaboration involves such Inflammation Pathway(s)), or in an Osteoporosis Pathway(s) for the prevention or treatment of Osteoporosis (to the extent, with respect to any (sub)licensee, such collaboration involves such Osteoporosis Pathway(s)), in the Rest of the World, for its own benefit, or with or for the benefit of any other Person, other than to the extent that any compounds developed for use in the respective pathways shall be licensed to Signal hereunder in the Rest of the World; (ii) Following the Research Period but during the term of this Agreement, Tanabe shall not, and shall cause its Affiliates and (sub)licensees collaborating with Tanabe in the development of Compounds not to, conduct any research, development or commercialization activities relating to the use of Main Activity Compounds in an Inflammation Pathway(s) for the prevention or treatment of Inflammation (to the extent, with respect to any (sub)licensee, such collaboration involves such Inflammation Pathway(s)), or in an Osteoporosis Pathway(s) for the prevention or treatment of Osteoporosis (to the extent, with respect to any (sub)licensee, such collaboration involves such Osteoporosis Pathway(s)), in the Rest of the World, for its own benefit, or with or for the benefit of any other Person, other than to the extent that any Main Activity Compounds developed for use in the respective pathways shall be licensed to Signal hereunder in the Rest of the World; (iii) During the term of the Agreement, Tanabe shall not, and shall cause its Affiliates and (sub)licensees collaborating with Tanabe in the development of Compounds not to, conduct any research, development or commercialization activities relating to the use of (a) Compounds, (b) Potential Compounds, (c) chemical modifications of Potential Compounds which if they were tested during the Research Period would have been Potential Compounds, or (d) compounds identified from the Tanabe Compound Libraries which if they were tested during the Research Period would have been Potential Compounds, for its own benefit, or with or for the benefit of any other Person, other than to the extent that any compounds described in clauses (a) through (d) above developed for use in the respective pathways shall be licensed to Signal hereunder in the Rest of the World; and (iv) During the term of this Agreement, Tanabe shall not, and shall cause its Affiliates and (sub)licensees collaborating with Tanabe in the development of Compounds not to, conduct any research, development or commercialization activities relating to the use of any Signal Compound other than in the prevention or treatment of Inflammation or Osteoporosis in the Territory, for its own benefit, or with or for the benefit of any other Person, unless such Signal Compound first is designated by Tanabe as a Clinical Candidate. 21. 24 3. PRODUCT DEVELOPMENT. 3.1 Development Activities. Tanabe shall control all activities regarding the pre-clinical and clinical development, application for Regulatory and Pricing Approval and commercialization of all Compounds, Clinical Candidates and Products in the Territory. Signal shall control all activities regarding the pre-clinical and clinical development, application for Regulatory Approval and commercialization of all Compounds, Clinical Candidates and Products in the Rest of the World. If the parties mutually agree, Signal and Tanabe shall, in mutual cooperation with one another, establish a development plan for each Compound, Clinical Candidate and Product with respect to the development and regulatory approval of such Product on a worldwide basis (the "Development Plan"). In the event that both Parties are unable to agree on the Development Plan, Tanabe's decisions shall control all activities regarding the pre-clinical and clinical development, application for Regulatory and Pricing Approval and commercialization of all Compounds, Clinical Candidates and Products in the Territory and Signal's decisions shall control all activities regarding the pre-clinical and clinical development, application for Regulatory and Pricing Approval and commercialization of all Compounds, Clinical Candidates and Products in the Rest of the World; provided that in no event will either Party (and Signal shall similarly bind its Western Pharmaceutical Partner) knowingly take any action that will unnecessarily impair the other Party's efforts to have a Product achieve the relevant Regulatory Approvals. Each Party shall immediately inform the other at such time as it receives notice of any governmental or regulatory approvals and disapprovals for Products. Signal shall not be entitled to share any information received pursuant to this Section 3.1 with its Western Pharmaceutical Partner until Tanabe and such Western Pharmaceutical Partner have reached an agreement covering such exchange of information. 3.2 Development Efforts. Once a Clinical Candidate has been designated by Tanabe, Tanabe shall use its good faith efforts in proceeding with (i) the development, testing and, where applicable, manufacturing of a Product based on such Clinical Candidate or Chemical Modification thereof, including, without limitation, pre-clinical and clinical development, (ii) obtaining Regulatory and Pricing Approvals in the Territory and (iii) the subsequent manufacturing, marketing and sale of that Product in the Territory. Tanabe shall exercise its reasonable efforts and diligence in conducting such activities with respect to any Compound, Clinical Candidate or Product in accordance with Tanabe's business, legal, medical and scientific judgment and Tanabe's normal practices and procedures for compositions having similar technical and commercial potential for similar uses. 3.3 Inflammation Clinical Matters. Tanabe shall take all reasonable action and bear all costs to conduct the regulatory application and pre-clinical and clinical testing and the development of all Inflammation Products that result from the Collaborative Project contemplated by this Agreement within the Territory. 22. 25 3.4 Osteoporosis Clinical Matters. Tanabe shall take all reasonable action and bear all costs to conduct the regulatory application and pre-clinical and clinical testing and the development of all Osteoporosis Products that result from the Collaborative Project contemplated by this Agreement within the Territory. 3.5 Synthesized Compounds; Manufacturing. In the event Tanabe synthesizes Compounds or Clinical Candidates, Tanabe agrees to cooperate with Signal, based upon its manufacturing and supply capabilities, to make a reasonable effort to make research quantities of such Compounds or Clinical Candidates, as the case may be, available to Signal at a reasonable cost plus shipping charges. Tanabe agrees that, during the term of this Agreement, Tanabe will at the request of Signal negotiate in good faith with Signal with respect to entering into a manufacturing and supply agreement pursuant to which Tanabe would provide Signal with Signal's (but not its Western Pharmaceutical Partner's, which shall be subject to Tanabe's agreement with such Western Pharmaceutical Partner) requirements of each Inflammation and Osteoporosis Compound or Product selected for development hereunder. 4. PAYMENT. 4.1 Initial Payment. Within ten (10) days following execution of this Agreement, Tanabe shall pay to Signal, in consideration of the licenses granted by Signal to Tanabe hereunder, [***] by wire transfer of immediately available funds to the Signal bank account set forth in Section 4.4. 4.2 Research Funding. In consideration of Signal's research obligations set forth in Section 2 hereof, Tanabe shall pay to Signal the following amounts: (a) with respect to the Inflammation Program, [***] per year of the Research Period; and (b) with respect to the Osteoporosis Program, (i) [***] per annum for the [***] following the Effective Date [***], and (ii) [***] per year of the Research Period for each year following [***]. The per annum payments shall be made in two (2) equal semi-annual installments, in advance, with the first payment being due within ten (10) days following execution of this Agreement and subsequent payments being due and payable at each six (6) month interval thereafter by wire transfer of immediately available funds to the Signal bank account set forth in Section 4.4. At the end of each year, Signal shall determine its actual spending with respect to each program on a fully-allocated cost basis and in the event that the research funding received from Tanabe exceeds [***] of Signal's actual expenditures in [***] of the Research Period for Inflammation and in years [***] of the Research Period for Osteoporosis, then Signal shall refund such excess to Tanabe within ninety (90) days after the end of each of [***], and shall prepare and provide Tanabe with a written report in reasonable specific detail of all expenditures by Signal (on a fully-allocated cost basis determined in accordance with generally accepted accounting principles consistently applied) under the Collaborative Project during the 23. ***Confidential Treatment Requested 26 preceding one (1) year period, compared to the budgeted amounts therefor, and itemized by program and major cost category for such reporting period. In the event that Tanabe terminates the Research Period with respect to either Inflammation or Osteoporosis or both prior to the completion of [***], pursuant to Section 2.3(f), 13.4 and 13.5 hereof, then Tanabe shall continue to fund its otherwise applicable funding obligations until the effective date of such termination. Signal shall keep complete and accurate records in sufficient detail to properly reflect all expenditures by Signal under the Collaborative Project. Upon the written request of Tanabe and not more than once in each calendar year, Signal shall permit an independent certified public accounting firm of internationally recognized standing, selected by Tanabe and reasonably acceptable to Signal, at Tanabe's expense, to have access during normal business hours to such of the records of Signal as may be reasonably necessary to verify the accuracy of the research expenditure reports hereunder for any year ending not more than twenty-four (24) months prior to the date of such request. The accounting firm shall disclose to Tanabe only whether the reports are correct or not and the specific details concerning any discrepancies. No other information shall be shared. 4.3 Milestone Payments. Tanabe shall pay to Signal each of the amounts set forth below, by wire transfer of immediately available funds to the Signal bank account set forth in Section 4.4, upon the first achievement of each of the milestones set forth below, except that if a Compound is subsequently approved for indications other than Inflammation or Osteoporosis, the milestone payment described in Section 4.3(d) if not previously paid with respect to such Compound will be payable by Tanabe to Signal for such approved indication. (a) Upon the [***] (b) Upon the [***] (c) Upon the [***] (d) Upon receipt of governmental Pricing Approval for a Product, but in no event later than the first end user sale of such Product for any 24. ***Confidential Treatment Requested 27 [***] Notwithstanding the foregoing, (i) Tanabe shall not be required to [***], and (ii) the maximum aggregate amount which Tanabe shall be required to pay pursuant to this Section 4.3 with respect to all Compounds and Products shall be [***], and (iii) [***] 4.4 Payment Terms. All payments under this Agreement shall be by wire transfer of immediately available funds to the bank account set forth below and shall be non-refundable (except as otherwise set forth herein). First Interstate Bank of California #657 136 2nd Avenue P.O. Box 1488 San Mateo, California 94401-0870 Routing: 122000218 Name: Signal Pharmaceuticals, Inc. Account Number: [***] 5. LICENSES OF TECHNOLOGY; ROYALTIES. 5.1 License to Tanabe. (a) Subject to the terms and conditions of this Agreement and the payment in full of any milestone obligations which are owing to Signal as set forth in Section 4.3, Signal hereby grants to Tanabe an exclusive (even as to Signal) license under the Signal Patents, the Joint Patents and, to the extent required to be provided pursuant to Section 2.2 and 2.3, the Signal Technical Information to develop, make, have made, use, sell, have sold and import Products in the Territory. (b) Subject to the terms and conditions of this Agreement, Tanabe shall have the right to grant licenses or sublicenses to develop, make, have made, use, sell, have sold, and import Products in the Territory, provided that such licensees and sublicensees agree in writing to be bound by the applicable terms, if any, of this Agreement. Tanabe shall be responsible for the operations and activities of its licensees and sublicensees as if such operations and activities were carried out by Tanabe. As to each sublicense of a Signal Patent or a Joint Patent, Tanabe agrees to deliver to Signal notification of each sublicense granted by Tanabe and termination thereof, within fifteen 25. ***Confidential Treatment Requested 28 (15) days after execution or termination, setting forth the name of the sublicensee and the territory as to which the sublicense is effective. 5.2 License to Signal. (a) Subject to the terms and conditions of this Agreement, Tanabe hereby grants to Signal an exclusive (even as to Tanabe), license under the Tanabe Patents, the Joint Patents and, to the extent required to be provided pursuant to Section 2.2, the Tanabe Technical Information, to develop, make, have made, use, sell, have sold and import Products in the Rest of the World. (b) Subject to the terms and conditions of this Agreement, including, without limitation, Section 6.3 hereof, Signal shall have the right to grant licenses or sublicenses to develop, manufacture, market and sell all Products in the Rest of the World provided that such licensees and sublicensees agree in writing to be bound by the applicable terms, if any, of this Agreement. Signal shall be responsible for the operations and activities of its licensees and sublicensees as if such operations and activities were carried out by Signal. As to each sublicense of a Tanabe Patent or a Joint Patent, Signal agrees to deliver to Tanabe notification of each sublicense granted by Signal and termination thereof, within fifteen (15) days after execution or termination, setting forth the name of the sublicensee and the territory as to which the sublicense is effective. 5.3 Improvements. Any modification or improvement to the Compounds and/or Products (including any Tanabe Technical Information or Signal Technical Information regarding to such modification) licensed under this Agreement made before the termination of this Agreement shall be included in the license(s) granted under this Section 5 without additional charge to the licensing Party. The Parties agree to promptly disclose any such modifications or improvements. 5.4 Royalty Payments; Reports. Tanabe shall, (i) for a period equaling the longer of [***] from the date of the initial sale of each Product for each indication in the Territory or the expiration of the last Signal Patent, Joint Patent or Tanabe Patent (including in each case patents deemed to exist as a result of a Use or Structure Contribution by Tanabe, Signal or both Parties) which claims the use or sale of such Product in the country of sales, pay to Signal a royalty in U.S. dollars equal to the percentages ("Royalty Rates") set forth in Exhibit D and (ii) for so long as sales of any Product gives rise to an obligation by Signal to pay patent royalties to a Third Party, reimburse Signal for any and all such Third-Party patent royalties ("Third-Party Royalties"), subject to Section 5.4(e) below, due by Signal pursuant to its license ("Reimbursements"). Thereafter, [***] Tanabe shall remain liable for all royalties payable by its Affiliates or sublicensees. 26. ***Confidential Treatment Requested 29 (a) The applicable Royalty Rate shall be determined on the basis of: (i) [***] (ii) [***] (iii) [***] (iv) [***] (v) [***] (A) if the applicable Research and Development Committee determines that the greater therapeutically relevant activity of such Compound is identified in the Tanabe Other Screen, the screening of such Compound shall constitute a Signal Use or Structure Contribution (to the extent there exists either a Signal or a Tanabe Contribution Patent which claims the use of such Compound); provided, however, that the applicable Royalty Rate in the Territory shall be reduced by [***], the applicable Royalty Rate in the Rest of the World shall be increased by [***], the applicable milestone credit shall be increased by [***]; and (B) if the applicable Research and Development Committee determines that the greater therapeutically relevant activity of 27. ***Confidential Treatment Requested 30 such Compound is identified in the Signal Screen, the screening of such Compound shall constitute a Signal Use or Structure Contribution (to the extent there exists either a Signal or a Tanabe Contribution Patent which claims the use of such Compound). (vi) If Signal demonstrates to the satisfaction of the applicable Research and Development Committee that a Compound is Active in a Signal Screen when screened by Signal, and Tanabe is unable to demonstrate to the satisfaction of the applicable Research and Development Committee that such Compound is Active in a Tanabe Other Screen when screened by Tanabe, then for purposes of calculating the applicable Royalty Rate in the Territory and the Rest of the World and the applicable milestone credit, the screening of such Compound shall constitute a Signal Use or Structure Contribution (to the extent there exists either a Signal or a Tanabe Contribution Patent which claims the use of such Compound). (vii) If Signal is unable to demonstrate to the satisfaction of the applicable Research and Development Committee that a Compound is Active in a Signal Screen when screened by Signal, and Tanabe demonstrates to the satisfaction of the applicable Research and Development Committee that such Compound is Active in a Signal Screen or a Tanabe Other Screen when screened by Tanabe, then for purposes of calculating the applicable Royalty Rate in the Territory and the Rest of the World and the applicable milestone credit, the screening of such Compound shall constitute a Tanabe Use or Structure Contribution (to the extent there exists either a Tanabe or a Signal Contribution Patent which claims the use of such Compound). (viii) For purposes of Sections 5.4(a)(v), (vi) and (vii), "Active" means, with respect to any Compound in any Signal Screen or Tanabe Other Screen, that such Compound exhibits at least [***] in such Signal Screen or Tanabe Other Screen. (ix) In the event the applicable claim(s) of a Structure Patent or a Use Patent falls within the scope of the applicable claim(s) of another Structure Patent or Use Patent, the Parties shall determine whether any of the claims of one such patent "dominate" the claims of the other patent(s) and the applicable Royalty Rate shall be determined on the basis of which patents are "Dominant Patents." For purposes of this Agreement, a "Dominant Patent" means, with respect to any Compound, a patent application or issued patent of which the priority date is the earliest among all patent applications or patents which claim the composition of matter (in the case of Structure Patents) or the use (in the case of Use Patents) which would be infringed, absent the ownership thereof or the licenses granted herein, by the use or sale of a Product containing such Compound as an active ingredient. 28. ***Confidential Treatment Requested 31 (x) In the event that a majority of the members of the applicable Research and Development Committee is unable to agree upon any determination or decision under Section 5.4(a)(v), (vi) or (vii) above, then the parties first shall attempt to resolve such disagreement pursuant to Section 2.8 above, and if the parties are unable to so resolve such disagreement, such disagreement shall be finally resolved by binding arbitration pursuant to Article 7 below. In the event the applicable claim(s) of a Structure Patent or a Use Patent falls within the scope of the applicable claim(s) of another Structure Patent or Use Patent, the Parties shall determine whether any of the claims of one such patent "dominate" the claims of the other patent(s) and the applicable Royalty Rate shall be determined on the basis of which patents are "Dominant Patents." For purposes of this Agreement, a "Dominant Patent" means, with respect to any Compound, a patent application or issued patent of which the priority date is the earliest among all patent applications or patents which claim the composition of matter (in the case of Structure Patents) or the use (in the case of Use Patents) which would be infringed, absent the ownership thereof or the licenses granted herein, by the use or sale of a Product containing such Compound as an active ingredient. (b) If the Compound originated from a Tanabe Compound Library which is a "natural product library", then the applicable Royalty Rate shall [***] unless annual Net Sales of the Product in the Territory are [***] in which case the Royalty Rate in any such year shall not be reduced. (c) A [***] Royalty Rate corresponding to [***] shall apply as follows: Annual Net Sales Royalty Rate Tier [***] [***] [***] [***] [***] [***] For example, if a Product contains a Compound which originated from a compound in a Tanabe Compound Library, was screened by Signal in its primary assays resulting in a Signal Use or Structure Contribution (and is claimed or deemed to be claimed in a Signal Use Patent), and was chemically modified by Tanabe resulting in a Tanabe Use or Structure Contribution (and is claimed or deemed to be claimed in a Tanabe Structure Patent), then the Royalty Rates applicable to sales of the Product in the Territory are 6.5% for annual Net Sales less than $50,000,000 (Tier 1), 7.5% for annual Net Sales between $50,000,000 and $100,000,000 (Tier 2) and 8.5% for annual Net Sales above $100,000,000 (Tier 3). With respect to Signal's sales of the Product in 29. ***Confidential Treatment Requested 32 the Rest of the World, the applicable Royalty Rate is [***]. (d) Tanabe shall be entitled to credit up to the percentage set forth on Exhibit D of its aggregate milestone payments made pursuant to Section 4.3 above against up to [***] of any royalty payment then due Signal (excluding from such credit any pass-throughs of Third Party Royalties). (e) Reimbursements payable by Tanabe with respect to Third- Party Royalties in the Territory shall not exceed (i) [***] with respect to each Product derived from a Tanabe Compound Library or (ii) [***] of Net Sales, with respect to each Product derived from a Signal Compound Library. Any Third Party Royalties payable with respect to a Joint Compound Library derived Product shall be paid by the Party responsible for the sale(s) on which a Third-Party Royalty is payable, including sales by its Affiliates, licensees and sublicensees (other than the other Party). (f) Tanabe shall provide a royalty report and, if applicable, a royalty payment to Signal every six (6) months. The report and payment relating to Net Sales shall be provided within sixty (60) days after the end of March and September of each calendar year, and shall include all sales of Products by Tanabe and its Affiliates and sublicensees. (g) Tanabe shall provide Signal with a nonbinding, but good faith estimate, quarterly forecast of its projected sales of any Product during the upcoming calendar year not later than thirty (30) days prior to the start of each calendar year. (h) Signal shall provide to Tanabe a report detailing the calculation of the Reimbursements, together with a copy of the agreement providing for such Third Party royalties, within two (2) months of receiving the Tanabe royalty report. The payment for the Reimbursements shall be due and payable within one (1) month of receipt by Tanabe. (i) Tanabe shall keep, and require any Affiliate, licensee and sublicensee to keep, for a period of not less than seven (7) years, complete and accurate records of all Net Sales (including all discounts, rebates, returns and allowances) of each Product. Signal shall have the right, at Signal's sole expense, through an independent certified public accounting firm of internationally recognized standing, selected by Signal and reasonably acceptable to Tanabe, and following reasonable notice, to examine such records during regular business hours during the life of the Tanabe obligation to pay royalties on Net Sales of each Product, Delivery Systems Product and Combination Product; provided, however, that such examination shall not (i) be of records for any year ending not more than twenty-four (24) months prior to the date of such request, and (ii) take place more than once in any calendar year; and provided, further, that, such 30. ***Confidential Treatment Requested 33 accountants shall report to Signal only as to the accuracy of the royalty statements and payments. Copies of such reports shall be supplied to Tanabe. In the event the report demonstrates that Tanabe has underpaid royalties, Tanabe shall pay such royalties immediately upon request of Signal. If Tanabe has overpaid royalties, Tanabe may deduct such overpayments from future royalties owed to Signal. The fees charged by such accounting firm shall be paid by Signal; provided, however, if the audit discloses that the royalties payable by Tanabe for the audited period are more than one hundred ten percent (110%) of the royalties actually paid for such period, then Tanabe shall pay the reasonable fees and expenses charged by such accounting firm. Signal shall treat all financial information subject to review under this Section 5.4(i) as confidential, and shall cause its accounting firm to retain all such financial information in confidence. (j) Any tax paid or required to be withheld by Tanabe for the benefit of Signal on account of royalties payable to Signal under this Agreement shall be deductible from the amount of royalties otherwise due. Tanabe shall secure and send to Signal proof of any such taxes withheld and paid by Tanabe for the benefit of Signal and shall, at Signal's request, provide reasonable assistance to Signal in recovering said taxes, if possible. (k) The parties shall use all reasonable efforts to minimize any withholding taxes required to be taken on any amounts paid hereunder. 5.5 Signal and its sublicensees shall, (i) for a period equalling the longer of [***] from the date of the initial sale of each Product in the Rest of the World or the expiration of the last Signal Patent, Joint Patent or Tanabe Patent (including in each case patents deemed to exist as a result of a Use or Structure Contribution by Tanabe, Signal or both Parties) which claims the use or sale of such Product in the country of sales, pay to Tanabe a royalty in U.S. dollars equal to the percentages ("Royalty Rates") set forth in Exhibit D and (ii) [***], reimburse Tanabe for any and all such Third-Party patent royalties ("Third-Party Royalties"), subject to Section 5.5(b) below, due by Tanabe pursuant to its license ("Reimbursements"). Thereafter, the [***]. Signal shall remain liable for all royalties payable by its Affiliates or sublicensees. (a) The applicable Royalty Rate shall be determined on the basis set forth in Section 5.4(a) above and on Exhibit D. (b) Reimbursements payable by Signal with respect to Third- Party Royalties in the Rest of the World (on patent applications or patents claiming composition of matter or use licensed by Tanabe from a Third Party) shall not exceed (i) [***] of Net Sales, with respect to each Product derived from a Signal Compound Library or (ii) [***], with respect 31. ***Confidential Treatment Requested 34 to each Product derived from a Tanabe Compound Library. Any Third Party Royalties payable with respect to a Joint Compound Library derived Product shall be paid by the Party responsible for the sale(s) on which a Third-Party Royalty is payable, including sales by its Affiliates, licensees and sublicensees (other than the other Party). (c) Signal shall provide a royalty report and, if applicable, a royalty payment to Tanabe every six (6) months. The report and payment relating to Net Sales shall be provided within sixty (60) days after the end of March and September of each calendar year, and shall include all sales of Products by Signal and its Affiliates and sublicensees. (d) Signal shall provide Tanabe with a nonbinding, but good faith estimate, quarterly forecast of its projected sales of any Product during the upcoming calendar year not later than thirty days prior to the start of each calendar year. (e) Tanabe shall provide to Signal a report detailing the calculation of the Reimbursements, together with a copy of the agreement providing for such Third Party Royalties, within two (2) months of receiving the Signal royalty report. The payment for the Reimbursements shall be due and payable within one (1) month of receipt by Signal. (f) Signal shall keep, and require any Affiliate, licensee and sublicensee to keep, for a period of not less than seven (7) years, complete and accurate records of all Net Sales (including all discounts, rebates, returns and allowances) of each Product. Tanabe shall have the right, at Tanabe's sole expense, through an independent certified public accounting firm of internationally recognized standing, selected by Tanabe and reasonably acceptable to Signal, and following reasonable notice, to examine such records during regular business hours during the life of the Signal obligation to pay royalties on Net Sales of each Product, Delivery System Product and Combination Product; provided, however, that such examination shall not (i) be of records for any year ending not more than twenty-four (24) months prior to the date of such request, and (ii) take place more than once in any calendar year; and provided, further, that, such accountants shall report to Tanabe only as to the accuracy of the royalty statements and payments. Copies of such reports shall be supplied to Signal. In the event the report demonstrates that Signal has underpaid royalties, Signal shall pay such royalties immediately upon request of Tanabe. If Signal has overpaid royalties, Signal may deduct such overpayments from future royalties owed to Tanabe. The fees charged by such accounting firm shall be paid by Tanabe, provided, however, if the audit discloses that the royalties payable by Signal for the audited period are more than one hundred ten percent (110%) of the royalties actually paid for such period, then Signal shall pay the reasonable fees and expenses charged by such accounting firm. Tanabe shall treat all financial information subject to review under this Section 5.5(f) as confidential, and shall cause its accounting firm to retain all such financial information in confidence. 32. 35 (g) Any tax paid or required to be withheld by Signal for the benefit of Tanabe on account of royalties payable to Tanabe under this Agreement shall be deductible from the amount of royalties otherwise due. Signal shall secure and send to Tanabe proof of any such taxes withheld and paid by Signal for the benefit of Tanabe and shall, at Tanabe's request, provide reasonable assistance to Tanabe in recovering said taxes, if possible. (h) The parties shall use all reasonable efforts to minimize any withholding taxes required to be taken on any amounts paid hereunder. 6. GLOBAL RELATIONSHIP. 6.1 Overall Relationship. Signal intends to enter into one or more relationships with a Western Pharmaceutical Partner(s) to develop therapeutic products for the prevention or treatment of Inflammation and Osteoporosis and the Parties agree that the Collaborative Project may benefit from the joint efforts of Signal, Tanabe and such Western Pharmaceutical Partner(s). To this end, the Parties agree that in the event that Signal enters into a collaborative agreement with a Western Pharmaceutical Partner and the Western Pharmaceutical Partner and Tanabe have each chosen to develop a therapeutic product for the prevention or treatment of Inflammation and/or Osteoporosis containing the same Compound in development and having substantially the same identity for marketing, sales or regulatory purposes (a "Mutual Product"), the Parties shall consider in good faith whether it is in their mutual best interest to enter into a global collaboration with such Western Pharmaceutical Partner. 6.2 Global Development Plan; Coordination. If the Parties and the Western Pharmaceutical Partner mutually agree in writing to enter into such a global collaboration, such a global collaboration would be on mutually acceptable financial and other terms and conditions and evidenced by a separate mutually acceptable definitive written agreement duly approved, executed and delivered by Tanabe, Signal and the Western Pharmaceutical Partner. Subject to the mutual agreement of Tanabe, Signal and the Western Pharmaceutical Partner, such global collaboration may (i) establish a worldwide development plan for such Mutual Product with respect to each indication, the pre-clinical and clinical studies of such Mutual Product, to coordinate their respective development efforts and to create and maintain a single worldwide safety database and shall share the results of the clinical trials in order to facilitate such development, including, when feasible, elimination of duplicate development efforts; (ii) establish a collaborative committee to coordinate and communicate the research, development and commercialization efforts under the collaboration; and (iii) provide that each of Tanabe, Signal and the Western Pharmaceutical Partner would have certain license or other rights to access certain technical information (including without limitation Compound Information and Product Information) of the others, on mutually acceptable license terms and conditions, for the purpose of developing and commercializing the Mutual Product. It is understood and agreed that Signal will use its commercially reasonable 33. 36 efforts to negotiate a provision similar to that contained in Section 6.3 below, in its definitive agreement with its Western Pharmaceutical Partner allowing disclosure to Tanabe of pre-clinical and clinical data generated by such Western Pharmaceutical Partner based on any Compound designated by Tanabe which is also chosen for development by the Western Pharmaceutical Partner. 6.3 Transfer of Information; License Obligations. Once Signal has identified the Western Pharmaceutical Partner to Tanabe and each of Tanabe and the Western Pharmaceutical Partner has agreed to accept reciprocity on exchanges of Technical Information, then during the term of this Agreement, Signal, Tanabe and the Western Pharmaceutical Partner shall make available, without charge, to each other the applicable Signal, Tanabe or Western Pharmaceutical Partner such Compound Information and Product Information, respectively as the three parties mutually agree, for any Compound which is simultaneously under development by Tanabe and by such Western Pharmaceutical Partner in whatever form is best suited to fully deliver such information. Notwithstanding the foregoing, Tanabe, Signal and the Western Pharmaceutical Partner shall at all times make available to each other any information required to be disclosed by Section 9.1. 7. ARBITRATION. All disputes arising in any way out of or related to this Agreement, including, without limitation, its existence, validity, scope, application, termination or breach of this Agreement and the ownership of any inventions, the obligations of the Parties or these arbitration provisions shall be referred to and finally resolved by arbitration at the request of either Party in accordance with the provisions of the Commercial Rules of Arbitration of the American Arbitration Association in force at such time, which rules are deemed to be incorporated by reference into this Agreement. 7.1 Arbitration Tribunal. Unless otherwise agreed to by the parties, the arbitration tribunal shall consist of three (3) arbitrators, including two (2) members and a chairman. Tanabe and Signal shall each appoint one member. The chairman shall be appointed according to the American Arbitration Association Commercial Arbitration Rules. 7.2 Situs of Arbitration. The arbitration shall be held in Osaka, Japan. 8. CONFIDENTIALITY, DISCLOSURE AND PUBLICATION. 8.1 Prior Agreement. This Agreement supersedes but does not invalidate or cancel any and all previous agreements and understandings, whether oral or written, between the Parties regarding the treatment of confidential information. 8.2 Confidentiality. During the term of this Agreement and for ten (10) years thereafter, each Party shall maintain in confidence all information and materials disclosed by the other Party and marked as confidential or which such Party knows or 34. 37 has reason to know are or contain trade secrets or other proprietary information of the other, including, without limitation, information relating to the Technical Information of the other Party, Joint Inventions and inventions of the other Party, and the business plans of the other Party, including information provided by either Party to the other Party prior to the Effective Date (collectively, the "Confidential Information and Materials"), and shall not use the Confidential Information and Materials of the other Party for any purpose except as permitted by this Agreement or disclose the same to anyone other than those of its Affiliates, sublicensees, employees, consultants, agents or subcontractors as are necessary in connection with such Party's activities as contemplated in this Agreement. Each Party shall obtain binding agreement from any such employee, and binding written agreement from each such Affiliate, sublicensee, consultant, agent and subcontractor, prior to disclosure, to hold in confidence and not make use of the Confidential Information and Materials of the other Party for any purpose other than those permitted by this Agreement. 8.3 Exceptions. (a) The obligation of confidentiality contained in this Agreement shall not apply to the extent that: (i) either Party (the "Recipient") is required to disclose Confidential Information or Materials of the other Party by order or regulation of a governmental agency or a court of competent jurisdiction, provided that the Recipient shall not make any such disclosure (other than a filing of information or materials with the U.S. Securities and Exchange Commission, a similar filing of information or materials with the National Association of Securities Dealers or state securities regulators or a filing of information or materials pursuant to the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and the rules and regulations thereunder, as amended or an equivalent filing with a foreign applicable authority) without first notifying the other Party and allowing the other Party a reasonable opportunity to seek injunctive relief from (or protective order with respect to) the obligation to make such disclosure; or (ii) the Recipient can demonstrate that (A) the disclosed information was at the time of such disclosure to the Recipient already in (or thereafter enters) the public domain other than as a result of actions of the Recipient, its Affiliates, employees, sublicensees, agents or subcontractors in violation hereof; (B) the disclosed information was rightfully known by the Recipient or its Affiliates (as shown by its written records) prior to the date of disclosure to the Recipient in connection with the negotiation, execution or performance of this Agreement; or (C) the disclosed information was received by the Recipient or its Affiliates on an unrestricted basis from a source unrelated to any Party to this Agreement and not under a duty of confidentiality to the other Party; or (D) the disclosed information was independently developed by the Recipient or its Affiliates (as shown by written records) by persons without access to or use of the Confidential Information and Materials of the other Party; or (iii) disclosure is required to be made to a government regulatory agency as part of such agency's product license approval process. 35. 38 (b) In the event (i) that each of Tanabe and the Western Pharmaceutical Partner have agreed in writing to accept reciprocity on exchanges of Technical Information and (ii) that Signal's Western Pharmaceutical Partner chooses to develop a Product for the prevention or treatment of Inflammation and/or Osteoporosis based on a Compound and (iii) provided the Western Pharmaceutical Partner agrees to be bound by the terms specified in Section 6 of this Agreement, Signal shall have the right to disclose to the Western Pharmaceutical Partner any applicable Compound Information and Product Information with respect to such Compound provided to Signal by Tanabe. As a condition to such disclosure, Signal will require its Western Pharmaceutical Partner to enter into confidentiality provisions equivalent to those set forth in this Section 8. 8.4 Publications. Prior to any public disclosure or submission for publication by or on behalf of the Parties of a manuscript or other document describing the results of any aspect of the Collaborative Project or other scientific or clinical activity or collaboration between Tanabe and Signal or their Affiliates, the Party disclosing or submitting such a manuscript ("Disclosing Party") shall first send a copy of the manuscript to the applicable Joint Inflammation Committee or the Joint Osteoporosis Committee for their review for a period of 15 days. If such Research and Development Committee approves such publication, the Disclosing Party shall then send the other Party ("Responding Party") a copy of the manuscript to be submitted and shall allow the Responding Party not less than thirty (30) days from the date of receipt in which to determine whether the manuscript contains subject matter for which patent protection should be sought prior to publication of such manuscript for the purpose of protecting an invention of commercial value to the Responding Party, or whether the manuscript contains confidential information belonging to the Responding Party or whether such disclosure implicates issues regarding compliance with applicable securities laws. After the expiration of such thirty (30) day period, if the Responding Party has not objected in writing, the Disclosing Party may submit such manuscript for publication and publish or otherwise disclose to the public such research results. If the Responding Party believes the subject matter of the manuscript contains confidential information or a patentable invention of commercial value to the Responding Party, then prior to the expiration of such thirty (30) day period, the Responding Party shall notify the Disclosing Party in writing of its determination. Upon receipt of such written notice from the Responding Party, the Disclosing Party shall delay public disclosure of such information or submission of the manuscript to permit preparation and filing of a patent application on the disclosed subject matter. The Disclosing Party shall thereafter be free to publish or disclose such manuscript, except that the Disclosing Party may not disclose any confidential information of the Responding Party in violation of this Section 8 without the prior written consent of the Responding Party and that no publication of a patentable invention shall be made until a patent application covering such invention has been filed. Determination of authorship for any manuscript shall be in accordance with accepted scientific practice. Should any questions on authorship arise, this will be 36. 39 determined by good faith consultation between the members of the appropriate Research and Development Committee. 9. INDEMNIFICATION. Each Party shall defend, indemnify and hold the other Party, any Affiliate of the other Party, any officer, director or employee of such other Party or of any of its Affiliates (individually, an "Exculpated Party") harmless from and against any damage, loss, liability or expense (including, without limitation, reasonable attorneys' fees, settlement costs, litigation costs and costs on appeal regardless of outcome) incurred or suffered by any Exculpated Party arising out of any claim, demand, action or other proceeding by any person or entity (other than an Affiliate of the Exculpated Party) arising out of: (a) the material breach of any covenant or agreement by such Party; (b) any material misrepresentation or breach of warranty made by such Party pursuant to this Agreement; (c) any claim arising from the gross negligence or intentional misconduct of any of such Party's by or on behalf of such Party or its Affiliates, licensees, sublicensees, employees, consultants, agents or subcontractors (other than the other Party or its Affiliates) pursuant to its rights under this Agreement; (d) any claim of any kind whatsoever arising from the testing, manufacture, use, sale, consumption, distribution or advertising of any of the Compounds or Products by or on behalf of such Party or its Affiliates, licensees, sublicensees, employees, consultants, agents or subcontractors (other than the other Party or its Affiliates) pursuant to its rights under this Agreement; or (e) the operations or activities of such a Party's Affiliates, licensees or sublicensees in material contravention of the requirements of this Agreement (and such Party shall terminate immediately any such sublicense where a breach of its obligations by a sublicensee cannot be readily compensated through monetary damages). 9.1 Each Party shall notify the other immediately of any information concerning any material adverse side effect, injury, toxicity or sensitivity reaction, whether or not serious or unexpected (collectively, any "adverse event"), or any unexpected incidence, and the severity thereof, associated with the clinical uses, studies, investigations, tests and marketing of any Product, whether or not determined to be attributable to such Product. Without limiting the generality of the foregoing, each Party shall notify the other Party of any event or incidence regarding any Product, which it is required to notify or report to any governmental authority of the country in which it sells such Product, prior to the date when it is required to give such notice or to make such report. Each Party further shall immediately notify the other of any information received regarding any threatened or pending action by a governmental agency or any other third party arising out of or relating to an alleged adverse effect or unexpected incidence regarding any Product. Upon receipt of any such information, the Parties shall consult with each other in an effort to arrive at a mutually acceptable procedure for taking appropriate action; provided, however, that nothing contained herein shall be construed as restricting either Party's right to make a timely report of such matter to any government agency or take other action that it deems to be appropriate or required by applicable law or regulation, including the right of a Party to recall or withdraw such 37. 40 Product from marketing and selling. Signal shall cause any Western Pharmaceutical Partner to agree in writing to be bound by the provisions of this Section 9.1. The obligations in this Section 9.1 pertaining to Products shall survive the expiration or termination of this Agreement. 9.2 Either Party (the "Notifying Party") shall promptly notify the other Party (the "Indemnifying Party") of the existence of any third party claim, demand or other action giving rise to a claim for indemnification under this Agreement (a "Third Party Claim") and shall give the Indemnifying Party a reasonable opportunity to defend the same at its own expense and with its own counsel, provided that the Notifying Party shall at all times have the right to participate in such defense at its own expense. If, within a reasonable time after receipt of notice of a Third Party Claim, the Indemnifying Party shall fail to undertake to so defend, the Notifying Party shall have the right, but not the obligation, to defend and to compromise or settle (exercising reasonable business judgment) the Third Party Claim for the account and at the risk and expense of the Indemnifying Party. The indemnity obligations under this Article 9 shall not apply to amounts paid in settlement of any claim, demand, action or other proceeding if such settlement is effected without the consent of the Indemnifying Party, which consent shall not be withheld unreasonably. The Indemnifying Party may not settle the action or otherwise consent to an adverse judgment in such action that diminishes the rights or interests of the Exculpated Party without the express written consent of the Exculpated Party. Each Party shall make available to the other at the other's expense such information and assistance as the other shall reasonably request in connection with the defense of a Third Party Claim. 9.3 Notwithstanding anything to the contrary in this Agreement, except as set forth in the first paragraph of this Article 9, neither Party shall be liable to the other Party for any special, consequential or incidental damages arising out of or related to this Agreement. 10. INDEPENDENT CONTRACTORS. Both Parties shall act solely as independent contractors and nothing in this Agreement shall be construed to give either Party the power or authority to act for, bind or commit the other Party. Each Party shall indemnify the other and hold it harmless against any claim based on a representation of authority in excess of that provided herein, subject to the provisions of Section 9.2. 11. NO SOLICITATION OF EMPLOYEES. During the Research Period and for [***] thereafter, neither Party shall solicit the other's employees (or advisors and collaborators who are individuals and are identified in writing at the time of execution of this Agreement) without the prior written approval of the other Party. This provision will not preclude any Party from hiring any such employees, advisors and collaborators if they independently apply for a job without solicitation or pursuant to a general solicitation not specifically directed at such employee, advisor or collaborator. 38. ***Confidential Treatment Requested 41 12. TERM. This Agreement shall become effective as of the Effective Date first written above and, unless sooner terminated pursuant to the provisions of Section 13 below, shall remain in full force and effect for so long as Tanabe or Signal shall be obligated to make royalty or Reimbursement payments to the other Party pursuant to Section 5.4 or 5.5. Upon a termination of this Agreement pursuant to this Article 12, (a) Tanabe shall have a non-exclusive, royalty-free license to continue to make, have made, use, and sell Products in the Territory, and (b) Signal shall have a non-exclusive, royalty-free license to continue to make, have made, use, and sell Products in the Rest of the World. 13. TERMINATION OF AGREEMENT. 13.1 Termination by Mutual Agreement. This Agreement may be terminated in its entirety by mutual written agreement of both Parties. 13.2 Breach of Material Term. This Agreement may be terminated at the option of either Party upon written notice to the other, if such other Party is in material breach or default with respect to any material term or provision hereof (other than any breach or default described in Section 2.3(f) hereof, which breach or default shall be subject to the provisions of Section 2.3) and fails to cure the same within sixty (60) days (one-hundred and twenty (120) days if a cure would be impossible in sixty (60) days but can be accomplished within the 120 day period) after written notice of said breach or default. Such termination rights shall be in addition to and not in substitution of any other remedies that may be available to the Party serving such notice against the Party in default. Termination pursuant to this Section 13.2 shall not relieve the Party in default from liability and damages to the other Party for breach of this Agreement. 13.3 Termination Upon Bankruptcy. This Agreement may be terminated at the option of either Party upon written notice to the other, if such other Party is adjudged bankrupt, files or has filed against it any petition under any bankruptcy, insolvency or similar law, which petition is not dismissed within sixty (60) days, has a receiver appointed for its business or property or makes a general assignment for the benefit of its creditors. 13.4 Infringement of Third Party Patents. If, as a result of any claim, proceeding or litigation by any Third Party against Signal regarding Signal's proprietary whole-cell and enzyme assays occurring during the term of this Agreement, Signal or Tanabe is barred from carrying out its future material obligations herein, Tanabe has a right to terminate the Collaborative Project. 13.5 Termination of the Collaborative Project by Tanabe. Except as set forth in this Section 13.5, the Collaborative Project with respect to Inflammation or Osteoporosis or both, may be terminated prior to its four (4) year period at Tanabe's option upon six (6) months' advance written notice to Signal. Tanabe may not deliver 39. 42 such notice of termination to Signal prior to the completion of two (2) years from the Effective Date. Tanabe further may not deliver such notice of termination with respect to the Inflammation program if either (i) [***] or (ii) [***]. Tanabe further may not deliver such notice of termination with respect to the Osteoporosis program if either (i) [***], or (ii) [***]. Additionally, such termination shall not be effective during any period where Tanabe has failed to meet its obligations pursuant to Section 2.4. 13.6 Effect of Termination; Survival. Termination of this Agreement for any cause shall not release a Party from any liability, which at the time of termination has already accrued to another Party, or which thereafter may accrue in respect of any act or omission prior to such termination. The obligations and rights established in Sections 4 and 5 (with respect to Compounds subject to a license to Tanabe) shall survive the termination of this Agreement by Tanabe pursuant to Section 13.2 or 13.3. The obligations and rights established in Sections 4 and 5 (with respect to Compounds subject to a license to Signal) shall survive the termination of this Agreement by Signal pursuant to Section 13.2 or 13.3. The obligations and rights established in Sections 7, 8, 9, 11, 15 and 19 shall survive the termination of this Agreement for any reason. 14. PUBLIC ANNOUNCEMENT OF AGREEMENT. Except as required to comply with federal and state securities laws or equivalent Japanese laws or any order of a court or government agency, and except as provided below, neither Party shall release information concerning this Agreement or the subject matter hereof to the public, news media, or other media, without first sending the other Party by express mail or facsimile, a copy of the information to be disclosed and allowing the other Party a reasonable time (as soon as reasonably possible but in no event greater than four (4) business days from the date of receipt) in which to comment on the information. If the other Party objects to the information to be disclosed and prior to the expiration of the four (4) business day period, the other Party shall so notify the disclosing Party who shall then delay public disclosure of the information and make reasonable efforts to accommodate any request for revisions by the other Party. If no notification is received during the four (4) business day period, the Party proposing disclosure shall be free to disclose the information. The Parties designate the following individuals to receive and approve announcements under this provision: Signal, its Executive Vice President; Tanabe, its 40. ***Confidential Treatment Requested 43 President. The Parties agree that Signal may discuss the general terms of the Agreement with potential Western Pharmaceutical Partners and other potential investors in Signal without disclosing any Confidential Information of Tanabe or Tanabe Technical Information without Tanabe's prior written consent; and that the parties will cooperate in good faith with one another to formulate a form of announcement that Signal and Tanabe may release as soon as practicable after the Effective Date. 15. INVENTIONS AND PATENT MATTERS. The ownership rights and other matters regarding discoveries and inventions (whether or not patentable) first conceived or reduced to practice under the Collaborative Project pursuant to this Agreement (together with all patents and other intellectual property rights thereto) shall be as follows: 15.1 Signal Inventions and Patent Rights. Any Compounds or Products or other discoveries or inventions first made, conceived or reduced to practice solely by one or more employees or agents of only Signal or its Affiliates ("Signal Inventions"), together with all patents and other intellectual property rights thereto, shall be owned by Signal, subject to the licenses granted herein. 15.2 Tanabe Inventions and Patent Rights. Any Compounds or Products or other discoveries or inventions first made, conceived or reduced to practice solely by one or more employees or agents of only Tanabe or its Affiliates ("Tanabe Inventions"), together with all patents and other intellectual property rights thereto, shall be owned by Tanabe, subject to the licenses granted herein. 15.3 Joint Inventions and Patent Rights. All inventions or other discoveries first made, conceived or reduced to practice by one or more employees or agents from each party ("Joint Inventions"), together with all patents and other intellectual property rights thereto, shall be owned by each party with the other party as equal, undivided property, subject to the licenses granted herein. Each party shall promptly disclose to the other party and applicable Research and Development Committee the conception or reduction to practice of Joint Inventions. Signal shall control the filing, prosecution, issuance and maintenance of Joint Patents in the Rest of the World. Tanabe shall control the filing, prosecution, issuance and maintenance of Joint Patents in the Territory. Each Party shall retain patent counsel reasonably acceptable to the other Party to assist in the filing, prosecution, issuance and maintenance of Joint Patents. Each Party shall cause to be provided to the other Party the text of such patent applications before filing them and consider in good faith and incorporate the other Party's reasonable requests related thereto. In all other matters related to the filing, prosecution, issuance and maintenance of Joint Patents, each Party shall provide to the other Party copies of any official action or submission and shall confer with the other Party giving due consideration to the other Party's reasonable requests. 41. 44 15.4 General Provisions Relating to Prosecution and Maintenance. (a) Signal shall be responsible for and shall control the preparation, filing, prosecution and maintenance of all patents and patent applications which claim a Signal Invention, and shall pay all costs incurred in connection therewith. Signal shall use its good faith efforts to provide Tanabe with an opportunity to review and comment on the text of each patent application which constitutes a Structure Patent or a Use Patent in the Territory before filing such application in the Territory and shall supply Tanabe with a copy of such patent application as filed, together with notice of its filing date and serial number and shall keep Tanabe generally informed regarding the status thereof. Tanabe shall cooperate with Signal, execute all lawful papers and instruments and make all rightful oaths and declarations as may be necessary in the preparation, prosecution and maintenance of all such patent applications which constitute a Structure Patent or a Use Patent in the Territory. Any information provided to Tanabe under this Section 15.4(a) shall be deemed Confidential Information and Materials of Signal. If Signal decides to abandon or not to maintain a Signal Patent in the Territory, Signal shall first offer to assign to Tanabe such Signal Patent without charge or obligation at least ninety (90) days prior to the expiration of any time limit for response or payment due date. (b) Tanabe shall be responsible for and shall control the preparation, filing, prosecution and maintenance of all patents and patent applications which claim a Tanabe Invention, and shall pay all costs incurred in connection therewith. Tanabe shall use its good faith efforts to provide Signal with an opportunity to review and comment on the text of each patent application which constitutes a Structure Patent or a Use Patent in the Rest of the World before filing such application in the Rest of the World and shall supply Signal with a copy of such patent application as filed, together with notice of its filing date and serial number and shall keep Signal generally informed regarding the status thereof. Signal shall cooperate with Tanabe, execute all lawful papers and instruments and make all rightful oaths and declarations as may be necessary in the preparation, prosecution and maintenance of all such patent applications which constitute a Structure Patent or a Use Patent in the Rest of the World. Any information provided to Signal under this Section 15.4(b) shall be deemed Confidential Information and Materials of Tanabe. If Tanabe decides to abandon or not to maintain a Tanabe Patent in the Rest of the World, Tanabe shall first offer to assign to Signal such Tanabe Patent without charge or obligation at least ninety (90) days prior to the expiration of any time limit for response or payment due date. (c) For any and all Joint Inventions, the parties shall exert reasonable efforts in cooperation with each other, through the Research and Development Committee or otherwise, to investigate, evaluate, and determine to the mutual satisfaction of both parties the manner of obtaining and protecting their respective intellectual property rights in such Joint Inventions, including whether any patent applications are to be filed, by whom, and where. Patent applications for Joint 42. 45 Inventions shall be filed initially in the United States or in Japan, unless the appropriate Research and Development Committee determines for a compelling business reason that the application should first be filed in another jurisdiction. Each party shall cooperate and assist the other party in connection with its filing, prosecution, issuance and maintenance of Joint Patents. Each party shall keep the other party informed at regular intervals, or upon request, of the status of all patent applications and patents with respect to Joint Patents for which it has responsibility. Where appropriate, each party shall sign or cause to have signed all documents relating to the patent applications or patents for the Joint Patents and shall cause such patent applications and patents to be assigned to Signal and Tanabe jointly. In the event that Signal or Tanabe elect not to file, prosecute, issue or maintain a Joint Patent, they shall each promptly provide adequate notice to the other Party and allow the other Party, at its expense, the opportunity to proceed with a Joint Patent. During the prosecution of patent applications filed on such Joint Inventions, the party receiving copies of correspondence from the respective patent office shall keep the other party timely informed of such communications, thereby providing the other party with a reasonable opportunity for comment. Such communication is intended to promote coordination and consistency in the prosecution of patent applications for Joint Inventions throughout the world. 15.5 Payments; Disputes. With respect to Joint Patent application filings, each Party shall bear all costs and expenses for fees or other payments required to submit and maintain joint applications and patents in their respective territories. In the event there is a dispute as to whether a particular invention constitutes a Joint Invention or should be the subject of a Signal Patent or Tanabe Patent, the issue shall be resolved by the appropriate Research and Development Committee. 15.6 Infringement of Signal Patents by a Third Party. If at any time either Party hereto shall become aware of any infringement or threatened infringement by a third party in the Territory of any or all of the Signal Patents, Tanabe Patents or Joint Patents to which the Party having the knowledge thereof claims an interest pursuant to the Agreement, the Party having the knowledge thereof shall forthwith give notice thereof to the other Party. Upon notice of any such infringement, the Parties shall promptly consult with one another with a view toward reaching agreement on a course of action to be pursued. (a) Signal shall take all reasonable steps to defend Signal Patents against infringement and Tanabe shall in such event give all reasonable assistance to Signal with respect to patent and legal questions against reimbursement by Signal to Tanabe of all out-of-pocket costs occasioned thereby and in case any monetary recovery is obtained, such recovery shall belong to Signal. In addition, Tanabe shall have the right to join any suit by Signal covering the enforcement of a Signal Patent in the Territory. 43. 46 (b) Except as provided in Section 15.6(a), (c) and (d), in the event any monetary recovery in connection with the prosecution of such infringement action is obtained, such monetary recovery shall be applied in the following priority: first, to the reimbursement of Signal and Tanabe for their out-of-pocket expenses (including attorneys' fees) in prosecuting such infringement action; second, the balance of the monetary recovery to be shared equally by Signal and Tanabe. If the monetary recovery is less than the out-of-pocket expenses of Signal and Tanabe, reimbursement shall be on a pro-rata basis, based upon cost incurred. Any expense or liability in connection with the prosecution of such infringement action (including legal costs incurred by the defendant(s)) shall be shared equally by Signal and Tanabe. To the extent only one Party is permitted to bring suit, Signal and Tanabe shall consult in good faith to determine the most appropriate Party to bring suit, with the sharing of recoveries as set forth above, to the extent permitted by law. Any expense or liability in connection with the defense of any counterclaim or cross-claim action shall be borne by the Parties as determined in the court proceeding for said counterclaim or cross-claim. (c) If Signal declines to bring suit to enforce a Signal Patent, Tanabe may, subject to the written consent of Signal which shall not be unreasonably withheld, file an infringement action in the Territory in its name or on behalf of Signal where necessary, at its own expense. In such case, Tanabe shall be the sole recipient of the proceeds of any recovery, provided that Tanabe shall indemnify Signal against any expenses or liability incurred by Signal relating to such proceedings, excluding however any expenses or liabilities relating to the defense by Signal of any counterclaim or cross-claim that may be brought against Signal. (d) If Signal and Tanabe, after consultation with each other, elect not to bring suit, individually or jointly, or if Signal and/or Tanabe, as the case may be, are/is not able to stop such infringing activities, the Parties shall renegotiate in good faith their arrangement applicable in the country affected by such infringement, including but not limited to, a reduction of royalty rate payable by Tanabe to Signal. 15.7 Infringement of Tanabe Patents by a Third Party. If at any time either Party hereto shall become aware of any infringement or threatened infringement by a third party in the Rest of the World of any or all of the Signal Patents, Tanabe Patents or Joint Patents to which the Party having the knowledge thereof claims an interest pursuant to the Agreement, the Party having the knowledge thereof shall forthwith give notice thereof to the other Party. Upon notice of any such infringement, the Parties shall promptly consult with one another with a view toward reaching agreement on a course of action to be pursued. (a) Tanabe shall take all reasonable steps to defend Tanabe Patents against infringement and Signal shall in such event give all reasonable assistance to Tanabe with respect to patent and legal questions against reimbursement by Tanabe to Signal of all out-of-pocket costs occasioned thereby and in case any monetary recovery 44. 47 is obtained, such recovery shall belong to Tanabe. In addition, Signal shall have the right to join any suit by Tanabe covering the enforcement of a Tanabe Patent in the Rest of the World. (b) Except as provided in Section 15.7(a), (c) and (d), in the event any monetary recovery in connection with the prosecution of such infringement action is obtained, such monetary recovery shall be applied in the following priority: first, to the reimbursement of Signal and Tanabe for their out-of-pocket expenses (including attorneys' fees) in prosecuting such infringement action; second, the balance of the monetary recovery to be shared equally by Signal and Tanabe. If the monetary recovery is less than the out-of-pocket expenses of Signal and Tanabe, reimbursement shall be on a pro-rata basis, based upon cost incurred. Any expense or liability in connection with the prosecution of such infringement action (including legal costs incurred by the defendant(s)) shall be shared equally by Signal and Tanabe. To the extent only one Party is permitted to bring suit, Signal and Tanabe shall consult in good faith to determine the most appropriate Party to bring suit, with the sharing of recoveries as set forth above, to the extent permitted by law. Any expense or liability in connection with the defense of any counterclaim or cross-claim action shall be borne by the Parties as determined in the court proceeding for said counterclaim or cross-claim. (c) If Tanabe declines to bring suit to enforce a Signal Patent, Signal may, subject to the written consent of Tanabe which shall not be unreasonably withheld, file an infringement action in the Rest of the World in its name or on behalf of Tanabe where necessary, at its own expense. In such case, Signal shall be the sole recipient of the proceeds of any recovery, provided that Signal shall indemnify Tanabe against any expenses or liability incurred by Tanabe relating to such proceedings, excluding however any expenses or liabilities relating to the defense by Tanabe of any counterclaim or cross-claim that may be brought against Tanabe. (d) If Signal and Tanabe, after consultation with each other, elect not to bring suit, individually or jointly, or if Signal and/or Tanabe, as the case may be, are/is not able to stop such infringing activities, the Parties shall renegotiate in good faith their arrangement applicable in the country affected by such infringement, including but not limited to, a reduction of royalty rate payable by Tanabe to Signal. 15.8 Alleged Infringement of Patents. In the event of dispute concerning a third party's patent rights in the Territory, Signal and Tanabe will proceed as follows: (a) While a dispute concerning an alleged infringement of a third party's patent rights is in progress, the Party which had a claim brought against it by a third party (the "Defendant Party") will use its commercially reasonable best efforts to defend against the infringement claim and resolve the dispute; and the Defendant Party will pay all of its attorneys' fees and expenses associated with the resolution of this dispute. Additionally, the other Party will assist and use its commercially reasonable best 45. 48 efforts to help the Defendant Party resolve the dispute on favorable terms, with the other Party to bear its own expenses. (b) In the event the dispute is resolved against Signal and Tanabe, with a finding of an infringement, then each Party shall bear its own costs and expenses; provided the Party who made, manufactured or sold the Product in the area where the infringement was deemed to have occurred, shall bear the entire responsibility for all damages to the third party and shall indemnify and hold harmless the other Party for the payment of such damages. 16. RESEARCH EXPENSES. Except as otherwise expressly provided by this Agreement, each Party shall bear its own internal research, development and regulatory costs. 17. REPRESENTATIONS AND WARRANTIES. Signal and Tanabe each represent and warrant to the other as set forth below: 17.1 Representations and Warranties of Signal. Signal represents and warrants that: (a) The execution, delivery and performance of this Agreement by Signal will not, with or without notice, the passage of time or both, result in any violation of, be in conflict with, or constitute a default under any material contract, obligation or commitment to which Signal is a party or by which it is bound, or to Signal's knowledge, any statute, rule or governmental regulation applicable to Signal. (b) Signal has all requisite legal and corporate power and authority to enter into this Agreement, to grant the licenses to be granted by Signal hereunder and to carry out and perform its obligations under the terms of this Agreement. It has the capacity and skills required to carry out its obligations with respect to the research and development of Compounds and Products as contemplated by this Agreement. All corporate action on the part of Signal, its officers and directors necessary for the grants of licenses pursuant hereto and the performance of Signal's obligations hereunder has been taken. This Agreement constitutes a valid and binding obligation of Signal, enforceable in accordance with its terms, except as: (i) the enforceability hereof may be limited by bankruptcy, insolvency, moratorium or other similar law as affecting the enforcement of creditors' rights generally; (ii) the availability of equitable remedies (e.g., specific performance, injunctive relief and other equitable remedies) may be limited by equitable principles or general applicability; (iii) to the extent the indemnification provisions contained in this Agreement may be limited by applicable federal or state securities law; and (iv) that no representation is made regarding the effect of laws relating to competition, antitrust or misuse or the effect of Tanabe's or third parties' intellectual property rights. 46. 49 (c) All employees of Signal who are expected to participate in the Collaborative Project have signed agreements regarding proprietary information and inventions with Signal in a form reasonably considered by Signal and its counsel to assure Signal's title to any Joint Inventions, Signal Technical Information or Signal Patents that may arise or be developed by such employees hereunder. Such agreements are legal, valid and binding obligations of Signal and its employees and are enforceable in accordance with their terms, except as limited by applicable bankruptcy laws and other similar laws affecting the creditors' rights and remedies generally and except insofar as the availability of equitable remedies may be limited. 17.2 Representations and Warranties of Tanabe. Tanabe represents and warrants that: (a) The execution, delivery and performance of this Agreement by Tanabe will not, with or without notice, the passage of time or both, result in any violation of, be in conflict with, or constitute a default under any material contract, obligation or commitment to which Tanabe is a party or by which Tanabe is bound, or to Tanabe's knowledge, any statute, rule or governmental regulation applicable to Tanabe. (b) Tanabe has all requisite legal and corporate power and authority to enter into this Agreement, to grant the licenses to be granted by Tanabe hereunder and to carry out and perform its obligations under the terms of this Agreement. It has the capacity and skills required to carry out its obligations with respect to the development and the marketing/sales of the Products as contemplated by this Agreement. All corporate action on the part of Tanabe and its officers and directors necessary for the grants of licenses pursuant hereto and the performance of Tanabe's obligations hereunder has been taken. This Agreement constitutes a valid and binding obligation of Tanabe, enforceable in accordance with its terms, except as (i) the enforceability hereof may be limited by bankruptcy, insolvency, moratorium or other similar law as affecting the enforcement of creditors' rights generally, (ii) the availability of equitable remedies (e.g., specific performance, injunctive relief, and other equitable remedies) may be limited by equitable principles or general applicability, (iii) to the extent the indemnification provisions contained in this Agreement may be limited by applicable law and (iv) and that no representation is made regarding the effect of laws relating to competition, antitrust or misuse or the effect of Signal's or third parties' intellectual rights. (c) All employees of Tanabe who are expected to participate in the Collaborative Project have agreements regarding proprietary information and inventions with Tanabe in a form reasonably considered by Tanabe and its counsel to assure Tanabe's title to any Joint Inventions or Tanabe Technical Information that may arise or be developed by such employees hereunder. Such agreements are legal, valid and binding obligations of Tanabe and its employees and are enforceable in accordance with their terms, except as limited by applicable bankruptcy laws and other similar laws 47. 50 affecting the creditors' rights and remedies generally and except insofar as the availability of equitable remedies may be limited. 17.3 EXCEPT AS OTHERWISE EXPRESSLY SET FORTH IN THIS AGREEMENT, SIGNAL AND TANABE MAKE NO REPRESENTATIONS AND EXTEND NO WARRANTIES OF ANY KIND, EITHER EXPRESS OR IMPLIED. THERE ARE NO EXPRESS OR IMPLIED WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE. 18. OPTION TO EXPAND TERRITORY. If Signal's Western Pharmaceutical Partner or its Affiliates do not have operations in Australia or New Zealand and if the Western Pharmaceutical Partner does not require rights in Australia or New Zealand in order for Signal to complete a research collaboration with such Western Pharmaceutical Partner in Signal's judgment, Signal will grant to Tanabe the exclusive option set forth below to acquire exclusive rights to commercialize Compounds or Products in Australia, New Zealand and other Oceania countries (the "Marketing Option") on terms and conditions to be negotiated. Prior to entering into any agreement with a third party to grant exclusive rights to commercialize a Compound or a Product in Australia, New Zealand and other Oceania countries, Signal shall notify Tanabe in writing of the terms of any such proposed agreements. Such notice shall be deemed an offer to Tanabe to enter into agreements on the proposed terms and conditions. Tanabe shall have thirty (30) days to accept the offer contained in such notice. Upon acceptance by Tanabe, the parties will negotiate in good faith to draft and execute definitive agreements within two (2) months of acceptance. Signal and Tanabe shall negotiate in good faith with respect to the option described in this Section 18. In the event that Signal and Tanabe are not able to negotiate an agreement on mutually agreeable terms within two (2) months of the beginning of negotiations with respect to the Marketing Option, Signal hereby agrees that if Signal intends to accept any offer from a third party which is not more favorable to it than Tanabe's last offer, Signal shall promptly notify Tanabe and Tanabe shall have the right to enter into an agreement with Signal on the terms and conditions of such third party offer. This right of first refusal shall survive termination of negotiations pursuant to this Section 18 for a period of nine (9) months. 19. MISCELLANEOUS. 19.1 Successors and Assigns. This Agreement shall be binding on the Parties hereto and their respective successors and assigns. Neither of the Parties hereto shall be entitled to assign this Agreement or any of its rights or obligations hereunder, including an assignment to one of its Affiliates, without the consent of the other. If either Party is acquired or merged with another entity, that entity shall succeed to all of the rights and obligations of the disappearing Party; provided in the event either Party is acquired or merged with another entity, such acquiring or successor entity shall expressly assume in writing the due and punctual performance and observance of all obligations under this Agreement of the Party it has acquired or with which it has merged, with the 48. 51 same effect as if such entity had originally been such Party hereunder; and further provided if such acquiring or successor entity does not so assume the obligations of the Party it has acquired or with which it has merged, the other Party may terminate this Agreement pursuant to Section 13 hereof. Notwithstanding the foregoing, nothing contained in this Section 19.1 shall be construed as preventing either Party from sublicensing its rights to any Products granted hereunder. 19.2 Further Assurances. Signal and Tanabe shall cooperate with each other and execute and deliver to each other such other instruments and documents and take such other actions as may be reasonably requested from time to time in order to carry out, evidence and confirm the rights and intended purposes of this Agreement. 19.3 English Language. This Agreement is entered into in the English language. All meetings and correspondence between the Parties are to be in English. In the event of any dispute concerning the construction or meaning of this Agreement, reference shall be made only to this Agreement as written in English and not to any translation into any other language. 19.4 Governing Law. Disputes arising out of or based upon this Agreement shall be governed by and construed in accordance with the laws of the State of California, United States of America, as applied to agreements among California residents entered into and to be performed entirely within California. 19.5 Notices. Notices, demands or other communications required or permitted to be given or made hereunder shall be in writing and delivered personally or sent by private overnight mail delivery, with recorded delivery or by legible telefax or by any other lawful means addressed to the intended recipient at its address set forth below in this Section or to such other address or telefax number as any Party may from time to time duly notify to the other. Any such notice, demand or communication shall, unless contrary as proved, be effective upon receipt. Correspondence to Signal shall be addressed to: Carl F. Bobkoski Executive Vice President Signal Pharmaceuticals, Inc. 5555 Oberlin Drive San Diego, CA 92121 Telefax number: (619) 558-7513 49. 52 with a copy to: Brobeck, Phleger & Harrison Two Embarcadero Place 2200 Geng Road Palo Alto, CA 94303 Attn: J. Stephan Dolezalek Telefax number: (415) 496-2736 Correspondence to Tanabe shall be addressed to: Tanabe Seiyaku Co., Ltd. 2-10 Dosho-machi 3-chome Chuo-ku, Osaka 541, Japan Attn: President Telefax number: (06) 205-5509 19.6 Entire Agreement. This Agreement, together with the schedules, appendices and exhibits hereto, constitutes the entire agreement between the Parties with respect to the subject matter hereof and supersedes all prior representations, understandings and agreements between the Parties regarding the subject matter hereof. Except as otherwise expressly provided no modification, amendment or waiver of any of the provisions of this Agreement shall be effective unless made in writing specifically referred to this Agreement and duly signed and delivered by the Parties hereto. 19.7 No Waiver. No failure or delay on the part of Signal or Tanabe in exercising any right under this Agreement, irrespective of the length of time for which such failure or delay shall continue, will operate as a waiver of, or impair, any such right. No single or partial exercise of any such right will preclude any other or further exercise thereof or the exercise of any other right. No waiver of any such right will be effective unless given in a signed writing. No waiver of any such right will be deemed a waiver of any other right hereunder or thereunder. 19.8 Severability. In case any provision of this Agreement shall be invalid, illegal, or unenforceable, it shall to the extent practicable, be modified so as to make it valid, legal and enforceable and to retain as nearly as practicable the intent of the Parties, and the validity, legality, and enforceability of the remaining provisions shall not in any way be affected or impaired thereby. 19.9 Force Majeure. Neither Party shall be held liable or responsible to the other Party nor be deemed to have defaulted under or breached this Agreement for failure or delay in fulfilling or performing any terms of this Agreement to the extent, and for so long as, such failure or delay is caused by or results from fires, floods, embargoes, government regulations or administrative guidance, prohibitions or interventions, war, 50. 53 acts of war (whether war be declared or not), insurrections, riots, civil commotions, strikes, lockouts, acts of God, or any other cause beyond their respective reasonable control, but they shall make every reasonable effort to remove any such cause of their failure or delay as soon as possible. 19.10 Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. 51. 54 IN WITNESS WHEREOF, the Parties have executed this Agreement as of the Effective Date written above. SIGNAL PHARMACEUTICALS, INC. By: [SIG] ------------------------------------- Name: (Illegible) Title: PRESIDENT TANABE SEIYAKU CO., LTD. By: /s/ TETSUYA TOSA ------------------------------------- Tetsuya Tosa, Ph.D. Senior Executive Director Research and Development Representative Director [SIGNATURE PAGE TO COLLABORATIVE DEVELOPMENT AND LICENSING AGREEMENT] 52. 55 EXHIBIT A SELECTION CRITERIA FOR A CHEMICAL LEAD COMPOUND A. Definition A Chemical Lead Compound is a [***]: Tanabe may designate a specific compound as a Chemical Lead Compound even if the compound fails to meet one or more such criteria. B. [***] A-1 ***Confidential Treatment Requested 56 C. [***] A-2 ***Confidential Treatment Requested 57 EXHIBIT B SELECTION CRITERIA FOR THE CLINICAL CANDIDATE [***] B-1 ***Confidential Treatment Requested 58 EXHIBIT C INFLAMMATION PROGRAM [***] C-1 ***Confidential Treatment Requested 59 EXHIBIT D [***] ***Confidential Treatment Requested EX-10.39 42 EXHIBIT 10.39 1 *** Text Omitted and Filed Separately Confidential Treatment Requested Under 17 C.F.R. Sections 200.80, 200.83 and 230.406. EXHIBIT 10.39 AMENDMENT TO COLLABORATIVE DEVELOPMENT AND LICENSING AGREEMENT THIS AMENDMENT TO THE COLLABORATIVE DEVELOPMENT AND LICENSING AGREEMENT (the "Amendment") is entered into as of March 31st, 1998 by and between SIGNAL PHARMACEUTICALS, INC., a California corporation with its principal office at 5555 Oberlin Drive, San Diego, California USA ("Signal"), and TANABE SEIYAKU CO., LTD., a corporation incorporated under the laws of Japan with its principal office at 2-10 Dosho-machi 3-chome, Chuo-ku, Osaka, Japan ("Tanabe"). RECITALS WHEREAS, Signal and Tanabe entered into that certain Collaborative Development and Licensing Agreement dated as of March 31, 1996 (the "Agreement") to collaborate in the discovery, development and commercialization of therapeutic products for the prevention and treatment of inflammation and osteoporosis (capitalized terms used but not otherwise defined in this Amendment shall have the meanings given such terms in the Agreement); and WHEREAS, Signal and Tanabe wish to amend the Agreement in the manner set forth in this Amendment and otherwise to provide for certain agreements by the Parties as set forth herein. AGREEMENT Now THEREFORE, in consideration of the mutual promises hereinafter set forth, the Parties hereto agree as follows: 1. TERMINATION OF AGREEMENT. The Parties hereby agree to terminate the Agreement pursuant to Section 13.1 thereof, effective as of March 31, 1998 (the "Effective Date"). Except as otherwise expressly set forth herein, following the Effective Date, the Agreement shall be of no further force or effect. 1 2 2. SELECTION OF CHEMICAL LEAD COMPOUND. (a) Tanabe hereby selects one compound which was derived from the Collaborative Project as a Chemical Lead Compound ("Selected Compound"). The chemical structure of the Selected Compound shall be attached hereto as ANNEX A. (b) Notwithstanding the provisions of Section 1.5 of the Agreement, the term "Chemical Modification" shall mean any compound resulting from any process or activity (initiated after the Effective Date) of deriving alternative chemical structures from the Selected Compound or a chemical modification of the Selected Compound, e.g. development of analogs. 3. LICENSE TO TANABE. Subject to the terms and conditions of this Amendment and the payment in full of all milestone and royalty obligations hereunder, effective as of the Effective Date, Signal hereby grants to Tanabe an exclusive (even as to Signal) license, with the right to grant sublicenses, under the Signal Patents, the Joint Patents and the Signal Technical Information to develop, make, have made, use, sell, have sold, offer for sale and import Products containing a Compound which is either (i) the Selected Compound or (ii) a Chemical Modification made by or on behalf of Tanabe or Signal of the Selected Compound in each case, in the Territory (as defined below) ("License"). The patent application number of the Signal Patents which cover the Selected Compound or any Chemical Modification and which is existing at the Effective Date shall be attached hereto as ANNEX B. For the purpose of the License, the following terms shall have different meanings from those set forth in the Agreement: (a) Notwithstanding the provisions of Section 1.24 of the Agreement, for purposes of this Amendment the term "Product" shall mean any composition (whether in the form of drug substance, bulk drug or final dosage form), which may be used in any indication whatsoever, and that contains a Compound as an active ingredient. (b) Notwithstanding the provisions of Section 1.37 of the Agreement, for purposes of this Amendment the term "Territory" shall mean the entire world. 4. REPORT OF RESEARCH & DEVELOPMENT OF THE SELECTED COMPOUND. Once each calendar year, Tanabe shall provide Signal with summary report regarding the research and development progress of the Selected Compound or any Chemical Modifications. 2 3 5. TERM OF THE LICENSE. The License shall become effective as of the Effective Date and, unless sooner terminated pursuant to the Section 6 hereof shall remain in full force and effect for so long as Tanabe shall be obligated to make royalty payment to Signal pursuant to Section 5.4 of the Agreement. 6. TERMINATION OF LICENSE BY TANABE. In case Tanabe determines that it will not pursue the development and commercialization of the Product, the License shall be terminated with written notice to Signal. In such case, the License terminates and the rights to the Compound under the Signal Patents, the Joint Patents and the Signal Technical Information shall automatically revert to Signal. 7. PAYMENT OBLIGATIONS AND PATENT MATTERS. (a) Within one (1) week from the Effective Date, Tanabe shall pay to Signal a nonrefundable license fee of [***] in consideration of the License granted to Tanabe hereunder. Any tax paid or required to be withheld by Tanabe for the benefit to Signal on account of such payment shall be deductible from the amount otherwise due. Tanabe shall secure and send to Signal proof of any such taxes withheld and paid by Tanabe for the benefit of Signal and shall, at Signal's request, provide reasonable assistance to Signal in recovering said taxes, if possible. (b) The obligations and rights established in Sections 4.3, 4.4, 5.4 and 15 of the Agreement with respect to Compounds subject to the License shall survive the termination of the Agreement. Notwithstanding the foregoing, the following Sections 15.4(a) and 15.8(b) of the Agreement is hereby amended as follows: 15.4(a) Signal shall be responsible for and shall control the preparation, filing, prosecution and maintenance of all patents and patent applications which claim a Signal Invention, and shall pay all costs incurred in connection therewith. Tanabe shall cooperate with Signal, execute all lawful papers and instruments and make all rightful oaths and declarations as may be necessary in the preparation, prosecution and maintenance of all such patent applications which constitute a Structure Patent in the Territory. Any information provided to Tanabe under this Section 15.4(a) shall be deemed Confidential Information and Materials of 3 ***Confidential Treatment Requested 4 Signal. Promptly after the Effective Date, Signal shall inform Tanabe of the list of countries which it intends to file any application for the Signal Patent which covers the Selected Compound. Tanabe may propose additional countries to file such Signal Patent. If Signal decides not to file the patent application (i) proposed by Tanabe or (ii) listed by Signal, or decides to abandon or not to maintain a Signal Patent, in any country in the Territory, Signal shall first offer to assign to Tanabe such Signal Patent in such country without charge or obligation at least ninety (90) days prior to the expiration of any time limit response or payment due date. Signal shall cooperate with Tanabe in such assignment along with the preparation, prosecution and maintenance of all such patent and applications therefor. 15.8(b) In the event the dispute is resolved against Tanabe, with a finding of an infringement, then Tanabe shall bear its own costs and expenses; provided in case (i) Tanabe is obligated to make any payment in terms of damage, royalty or otherwise, or (ii) Signal Patent covering the Selected Compound is held to be invalid or otherwise unenforceable by a court or other legal or administrative tribunal from which no appeal can be taken, the Parties shall discuss and agree in good faith as to the downward adjustment of the royalty payments set forth in Section 5.4 of the Agreement. (c) Tanabe may register, in Japan and any applicable country in the Territory, exclusive patent license with the Japanese Patent Office and other applicable governmental agencies in such country. Upon Tanabe's request, Signal shall assist Tanabe in effecting such registration by executing any formal license agreements and delivering all other necessary instruments and documents to Tanabe which are consistent with the License granted hereunder. (d) Signal represents and warrants to Tanabe that, to the best of Signal's knowledge, it has all right, title and interest in the Signal Patents required in order to grant the rights contemplated by the License and that there is no existing Reimbursement necessary therefor. 8. PROVISION OF STATEMENT OF EXPENDITURE AND STUDY RESULT REPORT. Notwithstanding the termination of the Agreement, Signal shall prepare and provide Tanabe with a written statement in reasonable specific detail of all expenditures by Signal for year 2 and study result report for second half-year of year 2 of the Collaboration Project within thirty (30) days of the Effective Date. 4 5 9. OTHER REVISIONS. (a) For the avoidance of doubt, all Research and Development Committees have been dissolved. Where there is reference to "the determination or approval of the Research and Development Committee" in the surviving clause of the Agreement, it shall be revised to read "the agreement of the Parties". (b) The bank account set forth in Section 4.5 shall be amended by the bank account set forth below: Bank: [***] ABA#: [***] Account#: [***] (c) Correspondence of Signal (with copy to:) set forth in Section 19.5 of the Agreement shall be amended as follows: Cooley Godward LLP 4365 Executive Drive Suite 1100 San Diego, CA 92121-2128 FAX 619 453-3555 9. PUBLIC ANNOUNCEMENT. Except as required to comply with federal and state securities laws or equivalent Japanese laws or any order of a court or government agency, and except as provided below, neither Party shall release information concerning this Amendment, the Amendment or the subject matter hereof or thereof to the public, news media or other media, without first sending the other Party by express mail or facsimile a copy of the information to be disclosed and allowing the other Party a reasonable time (as soon as reasonably possible but in no event greater than four (4) business days from the date of receipt) in which to comment on the information. If the other Party objects to the information to be disclosed prior to the expiration of the four (4) business day period, the other Party shall so notify the disclosing Party who 5 ***Confidential Treatment Requested 6 shall then delay public disclosure of the information and make reasonable efforts to accommodate any request for revisions by the other Party. If no notification is received during the four (4) business day period; the Party proposing disclosure shall be free to disclose the information. The Parties designate the following individuals to receive and approve announcements under this provision: Signal, its Executive Vice President; Tanabe, its President. The Parties agree that Signal may discuss the general terms of the Amendment and the Agreement with potential collaborative partners and other potential investors in Signal without disclosing any Confidential Information of Tanabe or Tanabe Technical Information without Tanabe's prior written consent; and that the Parties will cooperate in good faith with one another to formulate a form of announcement that Signal and Tanabe may release as soon as practicable after the Effective Date. 10. REPRESENTATIONS AND WARRANTIES. Each Party represents and warrants that it has all, requisite legal and corporate power and authority to enter into this Amendment and to carry out and perform its obligations under the terms of this Amendment. All corporate action on the part of each Party and its officers and directors necessary for the performance of such Party's obligations hereunder has been taken. This Amendment will constitute a valid and binding obligation of each Party, enforceable in accordance with its terms, except (a) as the enforceablility hereof may be limited by bankruptcy, insolvency, moratorium or other similar law as affecting the enforcement of creditors' rights generally, (b) as the availability of equitable remedies (e.g., specific performance, injunctive relief and other equitable remedies) and (c) to the extent the indemnification provisions contained in this Amendment may be limited by applicable law. 11. EFFECT OF TERMINATION; SURVIVAL. This Amendment shall not release a Party from any liability which, as of the Effective Date, has already accrued to another Party or which thereafter may accrue in respect of any act or omission prior to the Effective Date. In addition to those obligations and rights that survive termination of the Agreement in accordance with Section 4(b) hereof, the obligations and rights established in Sections 7, 8 (excluding Section 8.4), 9 (excluding Section 9.1), 11 and 19 of the Agreement shall survive the termination of the Agreement. In addition to the foregoing, the obligation of confidentiality for the information relating to the Compound shall survive the termination of the License for ten (10) years thereafter. 6 7 12. GOVERNING LAW. This Amendment shall be governed by and construed in accordance with the laws of the State of California, United States of America, as applied to agreements among California residents entered into and to be performed entirely within California, 13. COUNTERPARTS. This Amendment may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. IN WITNESS WHEREOF, the Parties have executed this Amendment on the day and year first written above. SIGNAL PHARMACEUTICALS, INC. TANABE SEIYAKU CO., LTD. By: /s/ ALAN J. LEWIS By: /s/ TOSHIO TANAKA Name: Alan J. Lewis, Ph.D. Name: Toshio Tanaka President and Title: President & CEO Title: Chief Executive Officer, Representative Director Attachment: ANNEX A=Chemical Structure of the Selected Compound ANNEX B=Patent Application Number of Signal Patent 7 8 ANNEX A [***] 8 ***Confidential Treatment Requested 9 ANNEX B [***] 9 ***Confidential Treatment Requested EX-10.40 43 EXHIBIT 10.40 1 EXHIBIT 10.40 STOCK PURCHASE AGREEMENT THIS STOCK PURCHASE AGREEMENT is entered into as of March 31, 1996, by and between Signal Pharmaceuticals, Inc., a California corporation, (the "Company"), and Tanabe Seiyaku Co., Ltd., a Japanese corporation (the "Investor"). A. The Investor desires to acquire 500,000 shares of the Company's Series D Preferred Stock, no par value per share (the "Shares") upon the terms and conditions hereinafter described. B. In consideration of the mutual covenants and conditions contained herein, the parties agree as follows: 1. Purchase and Sale of Shares. 1.1 Sale and Issuance of Shares. (a) The Company shall adopt and file with the Secretary of State of California on or before the Closing (as defined below) Amended and Restated Articles of Incorporation in the form attached hereto as Exhibit A (the "Restated Articles"). (b) Subject to the terms and conditions of this Agreement, Investor agrees to purchase at the Closing (as defined below) and the Company agrees to sell and issue to the Investor at the Closing, the Shares at the price of $4.00 per share for an aggregate purchase price of Two Million U.S. Dollars (U.S.$2,000,000) (the "Purchase Price"). 1.2 Closing. The consummation of the purchase and sale of the Shares shall take place at the offices of Brobeck Phleger & Harrison, 550 West C Street, San Diego, California, at 4:00 p.m. (Pacific Time), on April 2, 1996, or at such other time and place as the Company and the Investor mutually agree upon orally or in writing (which time and place are designated as the "Closing"). At the Closing, the Company shall deliver to the Investor a certificate representing the Shares. In consideration of such delivery, Investor will make payment therefor by wire transfer payable to the Company in the amount of the Purchase Price. The date of the Closing shall be referred to as the "Closing Date." 1.3 Issuance of Additional Shares Upon Certain Events. (a) In the event that the Company shall issue and sell Series E Preferred Stock to a venture capital investor at a per share price of less than $2.80 per 2 share (subject to adjustment for stock splits, reverse stock splits, recapitalizations and the like after the date hereof), then the Company shall be obligated to issue, and the Investor shall be entitled to receive, without payment of any additional consideration, a number of shares of fully paid, nonassessable Series D Preferred Stock of the Company equal to the excess of (a) the quotient obtained by dividing (i) $2,000,000 by (ii) the Reduced Purchase Price (defined below); over (b) 500,000 (as adjusted for stock splits, reverse stock splits, recapitalizations and the like in the same manner as outstanding shares would be adjusted). The "Reduced Purchase Price" shall mean (a) the product obtained by multiplying $4.00 times the Series E per share price divided by (b) $2.80, rounded to the nearest hundredth. As an example, in the event that the Company shall issue and sell Series E Preferred Stock to a venture capital investor for $2.00 per share, the Investor would receive an additional 199,300 shares of Series D Preferred Stock. Such issuance shall be deemed to be effective immediately after the closing of the sale of Series E Preferred Stock, and duly executed certificates representing such Series D Preferred Stock shares shall be delivered to the Investor immediately after such closing. (b) In the event that the Company shall issue and sell Series E Preferred Stock to a pharmaceutical or biotechnology company (the "Corporate Partner") in connection with a transaction involving technology licensing, research or development activities, the distribution or manufacture of the Company's products or the like (a "Technology Transaction") at a per share purchase price of less than $4.00 per share (subject to adjustment for stock splits, reverse stock splits, recapitalizations and the like after the date hereof), then the Company shall be obligated to issue, and the Investor shall be entitled to receive, without payment of any additional consideration, a number of shares of fully paid, nonassessable shares of Series D Preferred Stock of the Company equal to the excess of (a) the quotient obtained by dividing (i) $2,000,000 by (ii) the Corporate Partner Purchase Price (defined below); over (b) 500,000 (as adjusted for stock splits, reverse stock spits, recapitalizations and the like in the same manner as outstanding shares would be adjusted). The term "Corporate Partner Purchase Price" shall mean the per share purchase price of the Series E Preferred Stock being paid by the Corporate Partner. As an example, in the event that the Corporate Partner Purchase Price shall be $3.00 per share, the Investor would receive an additional 166,667 of Series D Preferred Stock. Such issuance shall be deemed to be effective immediately after the closing of the sale of Series E Preferred Stock, and duly executed certificates representing such Series D Preferred Stock shares shall be delivered to the Investor immediately after such closing. 2. Representations and Warranties of the Company. The Company hereby represents and warrants to the Investor that, except as set forth on a Schedule of Exceptions attached hereto as Exhibit B, specifically identifying the relevant subparagraph hereof, which exceptions shall be deemed to be representations and warranties as if made hereunder: 2. 3 2.1 Organization; Good Standing; Qualification. The Company is a corporation duly organized, validly existing, and in good standing under the laws of the State of California, has all requisite corporate power and authority to own and operate its properties and assets and to carry on its business as now conducted and as proposed to be conducted, to execute and deliver this Agreement and any other agreement to which the Company is a party the execution and delivery of which is contemplated hereby (the "Ancillary Agreements"), to issue and sell the Series D Preferred Stock and the Common Stock issuable upon conversion thereof (collectively, the "Securities"), and to carry out the provisions of this Agreement, the Restated Articles and any Ancillary Agreement. The Company is duly qualified to transact business and is in good standing in each jurisdiction in which the failure so to qualify would have a material adverse effect on its business, properties, prospects or financial condition. 2.2 Authorization. All corporate action on the part of the Company, its officers, directors, and shareholders necessary for the authorization, execution and delivery of this Agreement and any Ancillary Agreement, the performance of all obligations of the Company hereunder and thereunder and the authorization, issuance (or reservation for issuance), sale, and delivery of the Series D Preferred Stock being sold hereunder and the Common Stock issuable upon conversion thereof has been taken or will be taken prior to the Closing, and this Agreement and any Ancillary Agreement constitute valid and legally binding obligations of the Company, enforceable in accordance with their respective terms except (i) as limited by applicable bankruptcy, insolvency, reorganization, moratorium, and other laws of general application affecting enforcement of creditors' rights generally, (ii) as limited by laws relating to the availability of specific performance, injunctive relief, or other equitable remedies or (iii) as to the enforceability of Section 7.3 of this Agreement against Investor. 2.3 Valid Issuance of Preferred and Common Stock. The Series D Preferred Stock that is being purchased by the Investor hereunder, when issued, sold and delivered in accordance with the terms of this Agreement for the consideration expressed herein, will be duly and validly issued, fully paid, and nonassessable, and, based in part upon the representations of the Investor in this Agreement, will be issued in compliance with all applicable federal and state securities laws and will be free of restrictions on transfer other than restrictions on transfer under this Agreement and under applicable state and federal securities laws. The Common Stock issuable upon conversion of the Series D Preferred Stock purchased under this Agreement has been duly and validly reserved for issuance and, upon issuance in accordance with the terms of the Restated Articles, will be duly and validly issued, fully paid and nonassessable, and issued in compliance with all applicable securities laws, as presently in effect, of the United States and each of the states whose securities laws govern the issuance of any of the Series D Preferred Stock and will be free of restrictions on transfer other than restrictions on transfer under this Agreement and under applicable state and federal securities laws. 3. 4 2.4 Governmental Consents. No consent, approval, qualification, order or authorization of, or filing with, any local, state or federal governmental authority is required on the part of the Company in connection with the Company's valid execution, delivery, or performance of this Agreement, the offer, sale or issuance of the Series D Preferred Stock by the Company or the issuance of Common Stock upon conversion of the Series D Preferred Stock, except (i) the filing of the Restated Articles with the Secretary of State of the State of California, and (ii) such filings as have been made prior to the Closing, except that any notices of sale required to be filed with the Securities and Exchange Commission under Regulation D of the Securities Act of 1933, as amended (the "Securities Act"), or such post-closing filings as may be required under applicable state securities laws, which will be timely filed within the applicable periods therefor. 2.5 Capitalization and Voting Rights. The authorized capital of the Company consists, or will consist prior to the Closing, of: (i) Preferred Stock. Fourteen Million, Seven Hundred Ninety Three Thousand, Three Hundred Twenty Five (14,793,325) shares of Preferred Stock, no par value (the "Preferred Stock"), of which Two Million, Six Hundred Twenty Six Thousand, Eight Hundred Ninety Two (2,626,892) shares have been designated Series A Preferred Stock, all of which are issued and outstanding, and Two Million, Eight Hundred Seventy Five Thousand (2,875,000) shares have been designated Series B Preferred Stock, all of which are issued and outstanding, Eight Million, Seven Hundred Ninety One Thousand, Four Hundred Thirty Three (8,791,433) shares have been designated Series C Preferred Stock, all of which are issued and outstanding, and Five Hundred Thousand (500,000) shares have been designated Series D Preferred Stock, up to all of which will be sold pursuant to this Agreement. The rights, privileges and preferences of the Series A, Series B, Series C and Series D Preferred Stock will be as stated in the Restated Articles. (ii) Common Stock. 20,000,000 shares of common stock ("Common Stock"), no par value, of which 1,985,574 shares are issued and outstanding. (iii) The outstanding shares of Series A, Series B, and Series C Preferred Stock and Common Stock are owned by the stockholders and in the numbers specified in Exhibit C hereto. (iv) The outstanding shares of Series A, Series B, and Series C Preferred Stock and Common Stock are all duly and validly authorized and issued, fully paid and nonassessable, and have been issued in accordance with the registration or qualification provisions of the Securities Act of 1933 and any relevant state securities laws or pursuant to valid exemptions therefrom. 4. 5 (v) Except for (A) the conversion privileges of the Series A, Series B, Series C and Series D Preferred Stock, (B) the rights provided in paragraph 2.3 of an Investors' Rights Agreement by and among the Company and certain investors, (C) currently outstanding options to purchase 1,252,500 shares of Common Stock reserved for issuance to employees, directors and consultants pursuant to the Company's 1993 Stock Option Plan (the "Option Plan") and options to purchase 657,426 shares of Common Stock reserved for issuance to certain employees and consultants pursuant to the Option Plan, (D) currently outstanding options to purchase 73,000 shares of Common Stock reserved for issuance to certain founders pursuant to the Company's Founders Option Plan (the "Founders Plan") and options to purchase 122,000 shares of Common Stock reserved for issuance to certain founders pursuant to the Founders Plan and (E) the Warrants to be issued to the Investor pursuant to this Agreement, there are not outstanding any options, warrants, rights (including conversion or preemptive rights and rights of first refusal) or agreements for the purchase or acquisition from the Company of any shares of its capital stock. The Company is not a party or subject to any agreement or understanding, and, to the best of the Company's knowledge, there is no agreement or understanding between any persons that affects or relates to the voting or giving of written consents with respect to any security or the voting by a director of the Company. 2.6 Subsidiaries. The Company does not own or control, directly or indirectly, any interest in any other corporation, association, or other business entity. 2.7 Litigation. There is no action, suit, proceeding or investigation pending or, to the Company's knowledge, currently threatened against the Company which questions the validity of this Agreement, or the right of the Company to enter into it, or to consummate the transactions contemplated hereby, or which might result, either individually or in the aggregate, in any material adverse changes in the assets, condition, affairs or prospects of the Company, financially or otherwise, or any change in the current equity ownership of the Company, nor is the Company aware that there is any basis for the foregoing. The foregoing includes, without limitation, actions pending or threatened involving the prior employment of any of the Company's employees, their use in connection with the Company's business of any information or techniques allegedly proprietary to any of their former employers, or their obligations under any agreements with prior employers. The Company is not a party or subject to the provisions of any order, writ, injunction, judgment or decree of any court or government agency or instrumentality. There is no action, suit, proceeding or investigation by the Company currently pending or which the Company intends to initiate. 2.8 Patents and Trademarks. The Company has sufficient title and ownership or license rights of all patents, trademarks, service marks, trade names, copyrights, trade secrets, information, proprietary rights and processes necessary for its business as now conducted and believes it will be able to develop such intellectual property such that it can operate its business as proposed to be conducted without any 5. 6 conflict with or infringement of the rights of others. There are no outstanding options, licenses, or agreements of any kind relating to the foregoing, nor is the Company bound by or a party to any options, licenses or agreements of any kind with respect to the patents, trademarks, service marks, trade names, copyrights, trade secrets, licenses, information, proprietary rights and processes of any other person or entity. The Company has not received any communications alleging that the Company has violated or, by conducting its business as proposed, would violate any of the patents, trademarks, service marks, trade names, copyrights or trade secrets or other proprietary rights of any other person or entity. The Company is not aware that any of its employees is obligated under any contract (including licenses, covenants or commitments of any nature) or other agreement, or subject to any judgment, decree or order of any court or administrative agency, that would interfere with the use of his best efforts to promote the interests of the Company or that would conflict with the Company's business as proposed to be conducted. Neither the execution nor delivery of this Agreement, nor the Investors' Rights Agreement, nor the carrying on of the Company's business by the employees of the Company, nor the conduct of the Company's business as proposed, will, to the Company's knowledge, conflict with or result in a breach of the terms, conditions or provisions of, or constitute a default under, any contract, covenant or instrument under which any of such employees is now obligated. The Company does not believe it is or will be necessary to utilize any inventions of any of its employees (or people it currently intends to hire) made prior to their employment by the Company. 2.9 Compliance with Other Instruments. The Company is not in violation or default of any provisions of its Amended and Restated Articles of Incorporation or Bylaws or of any instrument, judgment, order, writ, decree or contract to which it is a party or by which it is bound or, to its knowledge, of any provision of federal or state statute, rule or regulation applicable to the Company. The execution, delivery and performance by the Company of this Agreement and the consummation of the transactions contemplated hereby will not result in any such violation or be in conflict with or constitute, with or without the passage of time and giving of notice, either a default under any such provision, instrument, judgment, order, writ, decree or contract or an event which results in the creation of any lien, charge or encumbrance upon any assets of the Company or the suspension, revocation, impairment, forfeiture, or nonrenewal of any material permit, license, authorization, or approval applicable to the Company, its business or operations or any of its assets or properties, except that the foregoing may be limited by (i) applicable bankruptcy, insolvency, reorganization, moratorium, and other laws of general application affecting enforcement of creditors' rights generally, and (ii) laws relating to the availability of specific performance, injunctive relief, or other equitable remedies. 2.10 Agreements; Action. 6. 7 (a) Except for agreements explicitly contemplated hereby, there are no agreements, understandings or proposed transactions between the Company and any of its officers, directors, affiliates, or any affiliate thereof. (b) There are no agreements, understandings, instruments, contracts, proposed transactions, judgments, orders, writs or decrees to which the Company is a party or by which it is bound which may involve (i) obligations (contingent or otherwise) of, or payments to the Company in excess of, $100,000, or (ii) the license of any patent, copyright, trade secret or other proprietary right to or from the Company or (iii) provisions restricting or affecting the development, manufacture or distribution of the Company's products or services, or (iv) positions on the Scientific Advisory Board or any other consultancies, except as set forth in the Schedule of Exceptions. (c) The Company has not (i) declared or paid any dividends, or authorized or made any distribution upon or with respect to any class or series of its capital stock, (ii) incurred any indebtedness for money borrowed or any other liabilities individually in excess of $50,000 or, in the case of indebtedness and/or liabilities individually less than $50,000, in excess of $100,000 in the aggregate, (iii) made any loans or advances to any person, other than ordinary advances for travel expenses, or (iv) sold, exchanged or otherwise disposed of any of its assets or rights. (d) For the purposes of subsections (b) and (c) above, all indebtedness, liabilities, agreements, understandings, instruments, contracts and proposed transactions involving the same person or entity (including persons or entities the Company has reason to believe are affiliated therewith) shall be aggregated for the purpose of meeting the individual minimum dollar amounts of such subsections. (e) The Company is not a party to and is not bound by any contract, agreement or instrument, or subject to any restriction under its Amended and Restated Articles of Incorporation or Bylaws, which adversely affects its business as now conducted or as proposed to be conducted, its properties or its financial condition. 2.11 Related-Party Transactions. No employee, officer, or director of the Company or member of his or her immediate family is indebted to the Company, nor is the Company indebted (or committed to make loans or extend or guarantee credit) to any of them. To the best of the Company's knowledge, none of such persons has any direct or indirect ownership interest in any firm or corporation with which the Company is affiliated or with which the Company has a business relationship, or any firm or corporation that competes with the Company, except that employees, officers, or directors of the Company and members of their immediate families may own stock in publicly traded companies that may compete with the Company. No member of the immediate family of any officer or director of the Company is directly or indirectly interested in any material contract with the Company. 7. 8 2.12 Permits. The Company has all franchises, permits, licenses, and any similar authority necessary for the conduct of its business as now being conducted by it, the lack of which could materially and adversely affect the business, properties, prospects, or financial condition of the Company and believes it can obtain, without undue burden or expense, any similar authority for the conduct of its business as planned to be conducted. The Company is not in default in any material respect under any of such franchises, permits, licenses, or other similar authority. 2.13 Environmental and Safety Laws. To the best of its knowledge, the Company is not in violation of any applicable statute, law, or regulation relating to the environment or occupational health and safety, and to the best of its knowledge, no material expenditures are or will be required in order to comply with any such existing statute, law, or regulation. 2.14 Disclosure. Except such confidential information which is proprietary to the Company and is not material to making an investment decision in the Company, the Company has fully provided the Investor with all the information which the Investor has requested for deciding whether to purchase the Series D Preferred Stock and all information which the Company believes is reasonably necessary to enable such Investor to make such decision. Neither this Agreement, the Investors' Rights Agreement, nor any other statements or certificates made or delivered in connection herewith or therewith when taken together contains any untrue statement of a material fact or omits to state a material fact necessary to make the statements herein or therein not misleading. 2.15 Registration Rights. Except as provided in the Investors' Rights Agreement, the Company has not granted or agreed to grant any registration rights, including piggyback rights, to any person or entity. 2.16 Corporate Documents. Except for amendments necessary to satisfy representations and warranties or conditions contained herein (the form of which amendments has been approved by the Investors), the Amended and Restated Articles of Incorporation and Bylaws of the Company are in the form previously provided to the Investors. 2.17 Title to Property and Assets. The Company owns its property and assets free and clear of all mortgages, liens, loans and encumbrances, except such encumbrances and liens which arise in the ordinary course of business and do not materially impair the Company's ownership or use of such property or assets. With respect to the property and assets it leases, the Company is in compliance with such leases and, to the best of its knowledge, holds a valid leasehold interest free of any liens, claims or encumbrances. 8. 9 2.18 Financial Statements. The Company has delivered to the Investor its unaudited Financial Statements at December 31, 1995 (the "Financial Statements"). The Financial Statements are complete and correct in all material respects. Except as set forth in the Financial Statements, the Company has no liabilities, contingent or otherwise, other than (i) liabilities incurred in the ordinary course of business subsequent to the date of the Financial Statements and (ii) obligations under contracts and commitments incurred in the ordinary course of business and not required under generally accepted accounting principles to be reflected in the Financial Statements, which, in both cases, individually or in the aggregate, are not material to the financial condition or operating results of the Company. 2.19 Changes. Since December 31, 1995 there has not been: (a) any change in the assets, liabilities, financial condition or operating results of the Company, except changes which have not been, in the aggregate, materially adverse. (b) any damage, destruction or loss, whether or not covered by insurance, materially and adversely affecting the assets, properties, financial condition, operating results, prospects or business of the Company (as such business is presently conducted and as it is proposed to be conducted); (c) any waiver by the Company of a valuable right or of a material debt owed to it; (d) any satisfaction or discharge of any lien, claim or encumbrance or payment of any obligation by the Company, except which is not material to the assets, properties, financial condition, operating results or business of the Company (as such business is presently conducted and as it is proposed to be conducted); (e) any change or amendment to a material contract or arrangement by which the Company or any of its assets or properties is bound or subject; (f) any material change in any compensation arrangement or agreement with any officer of the Company; or (g) to the Company's knowledge, any other event or condition of any character which might materially and adversely affect the assets, properties, financial condition, operating results or business of the Company (as such business is presently conducted and as it is proposed to be conducted). 9. 10 2.20 Employee Benefit Plans. The Company does not have any Employee Benefit Plan as defined in the Employee Retirement Income Security Act of 1974. 2.21 Tax Returns, Payments and Elections. The Company has filed all tax returns and reports as required by law. These returns and reports are true and correct in all material respects. The Company has paid all taxes and other assessments due, except those contested by it in good faith which are listed in the Schedule of Exceptions. The Company has not elected pursuant to the Internal Revenue Code of 1986, as amended ("Code"), to be treated as a Subchapter S corporation or a collapsible corporation pursuant to Section 341(f) or Section 1362(a) of the Code, nor has it made any other elections pursuant to the Code (other than elections which relate solely to methods of accounting, depreciation or amortization) which would have a material effect on the Company, its financial condition, its business as presently conducted or proposed to be conducted or any of its properties or material assets. 2.22 Insurance. The Company has in full force and effect fire and casualty insurance policies, with extended coverage, sufficient in amount (subject to reasonable deductibles) to allow it to replace any of its properties that might be damaged or destroyed. 2.23 Minute Books. The minute books of the Company contain a complete summary of all meetings of directors and shareholders since the time of incorporation and reflect all transactions referred to in such minutes accurately in all material respects. 2.24 Labor Agreements and Actions. The Company is not bound by or subject to (and none of its assets or properties is bound by or subject to) any written or oral, express or implied, contract, commitment or arrangement with any labor union, and no labor union has requested or, to the knowledge of the Company, has sought to represent any of the employees, representatives or agents of the Company. There is no strike or other labor dispute involving the Company pending, or to the knowledge of the Company threatened, which could have a material adverse effect on the assets, properties, financial condition, operating results, or business of the Company (as such business is presently conducted and as it is proposed to be conducted), nor is the Company aware of any labor organization activity involving its employees. The Company is not aware that any officer or key employee, or that any group of key employees, intends to terminate their employment with the Company, nor does the Company have a present intention to terminate the employment of any of the foregoing. Subject to general principles related to wrongful termination of employees, the employment of each officer and employee of the Company is terminable at the will of the Company. 2.25 Section 83(b) Elections. To the best of the Company's knowledge, elections and notices pursuant to Section 83(b) of the Internal Revenue Code 10. 11 and any analogous provisions of applicable state tax laws have been timely filed by all individuals who have purchased shares of the Company's Common Stock which are subject to vesting or other risk of forfeiture. 2.26 Real Property Holding Company. The Company is not a "United States real property holding corporation" (as that term is defined in Treasury Regulation Section 1.897-2(b)). If at any time in the future the Company shall become a "United States real property holding corporation," the Company shall, as promptly as practicable, notify each foreign Investor of such change in status. Within 30 days after receipt of a request from a foreign Investor, the Company shall prepare and deliver to such foreign Investor the statement required under Treasury Regulation Section 1.897-2(h)(l)(i) and either or both of the following documents: (i) an affidavit in conformance with the requirements of Section 1445(b)(3) of the Code or (ii) a notarized statement, executed by an officer having actual knowledge of the facts, that the shares of Company stock held by such foreign Investor are of a class that is regularly traded on an established securities market, within the meaning of Section 1445(b)(6) of the Code. If the Company is unable to provide either document described in (i) or (ii) above, if requested, it shall promptly notify such foreign Investor in writing of the reasons for such inability. Finally, upon the request of a foreign Investor and without regard to whether either document described in (i) or (ii) above has been requested, the Company shall cooperate fully with the efforts of such foreign Investor to obtain a "qualifying statement," within the meaning of Section 1445(b)(4) of the Code, or such other documents as would excuse a transferee of a foreign Investor's interest from withholding of income tax imposed pursuant to Section 1445(a) of the Code. 3. Representations and Warranties of the Investor. The Investor hereby represents and warrants to the Company that: 3.1 Authorization. This Agreement constitutes its valid and legally binding obligation, enforceable in accordance with its terms except (i) as limited by applicable bankruptcy, insolvency, reorganization, moratorium, and other laws of general application affecting enforcement of creditors' rights generally, (ii) as limited by laws relating to the availability of specific performance, injunctive relief, or other equitable remedies or (iii) as to the enforceability of Section 7.3 of this Agreement against Investor. 3.2 Organization. The Investor is a corporation duly organized and validly existing and in good standing under the laws of Japan, with all requisite power and authority to own its properties and conduct its business as now being conducted. 3.3 Purchase Entirely for Own Account. This Agreement is made with the Investor in reliance upon representation to the Company, which by Investor's execution of this Agreement it hereby confirms, that the Series D Preferred Stock to be received by Investor and Common Stock issuable upon conversion thereof will be 11. 12 acquired for investment for Investor's own account, not as a nominee or agent, and not with a view to the resale or distribution of any part thereof, and that Investor has no present intention of selling, granting any participation in, or otherwise distributing the same. By executing this Agreement, the Investor further represents that Investor does not have any contract, undertaking, agreement or arrangement with any person to sell, transfer or grant participations to such person or to any third person, with respect to any of the Securities. Investor represents that it has full power and authority to enter into this Agreement. 3.4 Disclosure of Information. Investor believes it has received all the information it considers necessary or appropriate for deciding whether to purchase the Series D Preferred Stock. Investor further represents that it has had an opportunity to ask questions and receive answers from the Company regarding the terms and conditions of the offering of the Series D Preferred Stock. The foregoing, however, does not limit or modify the representations and warranties of the Company in Section 2 of this Agreement or the right of the Investor to rely thereon. 3.5 Restricted Securities. Investor understands that the Securities it is purchasing are characterized as "restricted securities" under the United States federal securities laws inasmuch as they are being acquired from the Company in a transaction not involving a public offering and that under such laws and applicable regulations such securities may be resold without registration under the Act, only in certain limited circumstances. In this connection, the Investor represents that it is familiar with Rule 144 of the Act promulgated by the Securities and Exchange Commission (the "SEC"), as presently in effect, and understands the resale limitations imposed thereby and by the Act. 3.6 Accredited Investor. Investor is an "accredited investor" within the meaning of paragraph (a) of Rule 501 of Regulation D promulgated by the SEC and an "excluded purchaser" within the meaning of Section 25102(f) of the California Corporate Securities Law of 1968, as amended, and Section 260.102.13 of the California Code of Regulations, Title 10. 3.7 Further Limitations on Disposition. Without in any way limiting the representations set forth above, the Investor further agrees not to make any disposition of all or any portion of the Series D Preferred Stock unless: (a) the disposition is made as part of a firmly underwritten public offering of the Company's stock or (b) until the transferee has agreed in writing for the benefit of the Company to be bound by this Section 3 and Section 7 hereof, and the (i) Investor shall have notified the Company of the proposed disposition and shall have furnished the Company with a detailed statement of the circumstances surrounding the proposed 12. 13 disposition, and (ii) if reasonably requested by the Company, the Investor shall have furnished the Company with an opinion of counsel, reasonably satisfactory to the Company, that such disposition will not require registration of such shares under the Act. It is agreed that the Company will not require opinions of counsel for transactions made pursuant to Rule 144 except in unusual circumstances. 3.8 Legends. It is understood that the certificates evidencing the Securities may bear one or all of the following legends: (a) "These securities have not been registered under the Securities Act of 1933, as amended, or any State Securities law and such securities may not be sold, offered for sale, pledged or hypothecated in the absence of a registration statement in effect with respect to the securities under such Act or an opinion of counsel satisfactory to the Company that such registration is not required or unless sold pursuant to Rule 144 of such Act." (b) Any legend required by the laws of the State of California or Delaware or any other applicable state securities law, including any legend required by the California Department of Corporations. 3.9 Compliance with Law. Investor is not a party to any agreement or instrument, or subject to any charter or other corporate restriction or, to its actual knowledge, any judgment, order, decree, law, ordinance, regulation or other governmental restriction which would prevent or impede, or be breached or violated by, the transactions contemplated in this Agreement. 4. California Commissioner of Corporations. 4.1 Corporate Securities Law. THE SALE OF THE SECURITIES WHICH ARE THE SUBJECT OF THIS AGREEMENT HAS NOT BEEN QUALIFIED WITH THE COMMISSIONER OF CORPORATIONS OF THE STATE OF CALIFORNIA AND THE ISSUANCE OF SUCH SECURITIES OR THE PAYMENT OR RECEIPT OF ANY PART OF THE CONSIDERATION FOR SUCH SECURITIES PRIOR TO SUCH QUALIFICATION IS UNLAWFUL, UNLESS THE SALE OF SECURITIES IS EXEMPT FROM QUALIFICATION BY SECTION 25100, 25102 OR 25105 OF THE CALIFORNIA CORPORATIONS CODE. THE RIGHTS OF ALL PARTIES TO THIS AGREEMENT ARE EXPRESSLY CONDITIONED UPON SUCH QUALIFICATION BEING OBTAINED, UNLESS THE SALE IS SO EXEMPT. 5. Conditions of Investor's Obligations at Closing. The obligations of the Investor under this Agreement are subject to the fulfillment on or before the Closing of each of the following conditions unless otherwise waived by the Investor: 13. 14 5.1 Representations and Warranties. The representations and warranties of the Company contained in Section 2 shall be true on and as of the Closing with the same effect as though such representations and warranties had been made on and as of the date of such Closing. 5.2 Performance. The Company shall have performed and complied with all agreements, obligations and conditions contained in this Agreement and the Ancillary Agreements that are required to be performed or complied with by it on or before the Closing, all corporate or other proceedings in connection with the transactions contemplated at the Closing and all documents incident thereto shall be reasonably satisfactory in form and in substance to counsel for Investor and the Investors shall have received all such counterpart original and certified or other copies of such documents as they may reasonably request. 5.3 Compliance Certificate. The President of the Company shall have delivered to the Investor a certificate certifying that the conditions specified in Sections 5.1 and 5.2 have been fulfilled and stating that there shall have been no adverse change in the business, affairs, properties, assets or conditions of the Company since the date of the Financial Statements. 5.4 Qualifications. There shall not be in effect any law, rule or regulation prohibiting or restricting the sale and issuance of the Shares or the Common Stock issuable upon conversion thereof, or requiring any consent or approval of any person or governmental entity which shall not have been obtained to issue the Shares. 5.5 Opinion of Company Counsel. Investor shall have received from Brobeck, Phleger & Harrison LLP, Palo Alto, California, counsel for the Company, an opinion, dated as of the Closing, in substantially the form attached hereto as Exhibit D, which opinion is incorporated herein by this reference. 5.6 Investor Rights. The Company and the Investor shall have executed and delivered that certain Investor Rights Agreement of even date herewith providing certain rights to Investor to have shares of Common Stock registered for sale and providing for certain information rights. 5.7 Common Stock Warrants. The Company shall have delivered to Investor Warrants attached as Exhibit E (the "Warrants") entitling Investor to purchase such number of shares of Common Stock (at the price at which the Company first sells any shares of its Common Stock to the public in a registered public offering, the "IPO Price") as equals $2,000,000 U.S. divided by such IPO Price. Such Warrants shall be exercisable only in connection with such initial public offering, shall expire upon completion of such offering, and shall be subject to compliance with applicable securities laws and regulations (including but not limited to the rules and policies of the National Association of Securities Dealers, Inc.). The Company shall use its best efforts to 14. 15 include the issuance of the shares of Common Stock upon exercise of the Warrants (the "Warrant Shares") in such initial public offering. In the event that the inclusion of such issuance is not permitted pursuant to the Act or the rules and regulations promulgated thereunder, the Company shall use its best efforts to effect a registration of the issuance and/or resale of the Warrant Shares on the earlier of (a) if Form S-3 is available to the Company for such registration, as soon as practicable following the date on which such form is available to the Company with respect to the registration of the issuance and/or resale of the Warrant Shares or (b) in all other events, one (1) year following the initial public offering. 5.8 Collaborative Agreement. The Company and the Investor shall have executed and delivered that certain Collaborative Development and Licensing Agreement of even date (the "Collaborative Development and Licensing Agreement") and made payment to the Company of the initial semi-annual installment of research payments thereunder. 6. Conditions of the Company's Obligations at Closing. The obligations of the Company to the Investor under this Agreement are subject to the fulfillment on or before the Closing of each of the following conditions: 6.1 Representations and Warranties. The representations and warranties of Investor contained in Section 3 shall be true on and as of the Closing with the same effect as though such representations and warranties had been made on and as of the Closing. 6.2 Payment of Purchase Price. The Investor shall have delivered the Purchase Price specified in Section 1. 6.3 Qualifications. There shall not be in effect any law, rule or regulation prohibiting or restricting the sale and issuance of the Shares or the Common Stock issuable upon conversion thereof, or requiring any consent or approval of any person or governmental entity which shall not have been obtained to issue the Shares. 6.4 Investor Rights. The Company and the Investor shall have executed and delivered that certain Investor Rights Agreement of even date herewith providing certain rights to Investor to have shares of Common Stock registered for sale and providing for certain information rights. 6.5 Collaborative Agreement. The Company and the Investor shall have executed and delivered the Collaborative Development and Licensing Agreement and the Investor shall have paid the initial semi-annual installment of research payments thereunder. 7. Covenants of the Investor. 15. 16 7.1 Standstill Provisions. Commencing as of the Closing and for the period until the later of (i) six (6) months following the end of the Research Period (as defined in the Collaborative Development and Licensing Agreement) or (ii) the first anniversary of the consummation of the Company's initial public offering of shares of Common Stock, registered under the Act pursuant to a registration statement on Form S-1, Investor (including all Affiliates or agents of Investor) shall not acquire beneficial ownership of any shares of Common Stock of the Company, any securities convertible into or exchangeable for Common Stock, or any other right to acquire Common Stock, except by way of stock dividends or other distributions or offerings made available to holders of Series D Preferred Stock (or Common Stock issued upon conversion thereof) generally, from the Company or any other person or entity, without the prior written consent of the Company, which consent may be withheld in the Company's sole discretion, if such acquisition should cause Investor (including all Affiliates of Investor) to beneficially own more than 9.99% of the Company's outstanding voting stock (assuming the full conversion and exercise of all convertible and exercisable securities of the Company held by Investor and its Affiliates); provided, however, that in no event shall (i) the original purchase of securities pursuant to this Agreement including the Warrants described in Section 5.7, or (ii) any reduction in the outstanding shares of the Company's capital stock (or rights or options), cause a violation of this Section 7.1. 7.2 Transfer Restriction. In addition to the market stand-off agreement set forth in Section 1.15 of the Investor Rights Agreement, Investor hereby agrees that during the time periods commencing as of the Closing until six (6) months following the end of the Research Period (the "Restricted Period") that neither it nor any Affiliate shall, directly or indirectly sell, offer to sell, contract to sell (including, without limitation, any short sale), grant any option to purchase or otherwise transfer or dispose of (other than to donees who agree to be similarly bound) any of the Shares, securities purchased pursuant to the Warrants or shares issuable upon conversion or exercise thereof ("Restricted Securities") at any time during the Restricted Period. In order to enforce the foregoing covenant, the Company may impose stop-transfer instructions with respect to the Restricted Securities held by Investor or any Affiliate (and the Restricted Securities of every other person subject to the foregoing restriction) until the end of such period. 7.3 Voting Agreement. Investor agrees that it shall, so long as it holds shares of the Company's Series D Preferred Stock or the Common Stock issued upon conversion thereof, vote such shares with respect to any proposed merger or combination of the Company with any other entity in the same proportion as the shares of other parties who are not themselves a party to any such merger or combination. 8. Right of First Refusal. 8.1 Right of First Refusal. 16. 17 (a) In the event that the Investor or a direct or indirect transferee of the Investor (the "Transferring Shareholder") proposes to sell, pledge or otherwise transfer the Series D Preferred Shares, securities purchased in accordance with to Section 7.1 (or shares of Common Stock issued or issuable upon conversion or exercise thereof) or any portion thereof, acquired under or the purchase of which is contemplated by this Agreement, or any interest in such securities to any person or entity, the Company shall have a right of first refusal with respect to such securities ("Offered Stock"). If the Transferring Shareholder desires to transfer Offered Stock, the Transferring Shareholder shall give a written notice (the "Transfer Notice") to the Company describing fully the proposed transfer, including the number of shares proposed to be transferred, the proposed transfer price and the name and address of the proposed transferee. (b) The Company (or its assigns) shall have the irrevocable and exclusive option (but not the obligation) for a period of thirty (30) days from the date of receipt of the Transfer Notice to elect to purchase all, but not less than all, of the Offered Stock at a price per share and upon the terms specified in the Transfer Notice. (c) The option of the Company to purchase shares of Offered Stock under this Section 8 shall be exercised by giving written notice to the Transferring Shareholder within such thirty day option period. 8.2 Failure to Give Notice. Failure by the Company to give the notice provided for in subsections 8.1(b) and (c), within the time periods for the exercise of its option provided for therein shall be deemed an election not to purchase any shares of the Offered Stock and the option given to the Company in Section 8.1 shall be deemed to have expired. 8.3 Non-Exercise of Right. If the Transfer Notice shall have been duly given to the Company and the Company does not exercise the purchase option referred to in this Section 8 to purchase the Offered Stock, then the Transferring Shareholder shall be free to sell the Offered Stock in accordance with this Section 8.3. The Offered Stock to be sold as contemplated by this Section 8.3 shall be sold at not less than the price per share set forth in such Transfer Notice and upon substantially the same terms but no less favorable to the Transferring Shareholder than the terms set forth in the Transfer Notice (except that the form of consideration need not be in cash so long as the value of such consideration is equivalent to the purchase price set forth in the Transfer Notice and not subject to forgiveness or other reduction), subject to the purchaser of the Offered Stock agreeing in writing to be bound by the terms of this Agreement; provided, however, that if the sale of the Offered Stock shall not be consummated within ninety (90) days immediately following the expiration of the Company's purchase option set forth in Section 8.1, the shares of the Offered Stock shall 17. 18 again be subject to the terms and conditions of this Agreement in the same manner as if the Transfer Notice had not been given. 8.4 Closing, Failure to Close. In the event that the Offered Stock is to be purchased by the Company pursuant to this Section 8, then such purchase shall, unless the parties thereto otherwise agree, be completed at the principal office of the Company on or before the sixtieth (60th) day following the receipt of the Transfer Notice by the Company from the Transferring Shareholder pursuant to Section 8.1. 8.5 Binding Effect. The Company's right of first refusal shall inure to the benefit of its successors and assigns and shall be binding upon any transferee of the Offered Stock acquired pursuant to this Agreement (including shares of Common Stock issued or issuable upon conversion of the Series D Preferred Stock). 8.6 Exempt Transfers. The right of first refusal shall not apply to (i) transfers to affiliates of Investor provided the transferee agrees to be bound by the obligations of this Agreement and the Collaborative Development and Licensing Agreement by and between the parties dated of even date with this Agreement is still then in full force and effect, (ii) transactions involving a merger, reorganization or sale of all or substantially all of the business or capital stock of the Company approved by the Company's board of directors, (iii) the sale from time to time of any Offered Stock to the public following the Company's initial public offering involving registered shares or pursuant to Rule 144 or pursuant to a registered public offering, or (iv) transactions involving a merger, reorganization or sale of all or substantially all of the business, assets or capital stock of Investor provided the transferee agrees to be bound by the obligations of this Agreement. 8.7 Termination. The right of first refusal of the Company under this Section 8 shall terminate on the earlier of (i) consummation of the Company's initial public offering or (ii) such time as Investor and its Affiliates in the aggregate beneficially own less than five percent (5.0%) of the Company's Common Stock (assuming the full conversion and exercise of all convertible and exercisable securities of the Company). 9. Covenants of the Company. 9.1 Subsequent Issuance of Capital Stock with Anti-dilution Protection. In the event that (a) the Company, within the first twelve (12) months following the Closing, shall (i) issue securities with an aggregate issue price not greater than $10,000,000 to (ii) a Corporate Partner in connection with a Technology Transaction (collectively, (i) and (ii) shall be known as the "Corporate Partner Transaction") and (b) in connection with the Corporate Partner Transaction, the Company implements contractual or charter provisions which provide to the securities issued thereunder anti-dilution protection against the issuance of securities subsequent to the Corporate Partner Transaction at a price per share less than the price per share at 18. 19 which such securities are issued in the Corporate Partner Transaction (the "Anti-Dilution Protection"), then the Investor shall be entitled to receive the identical benefit afforded to the Corporate Partner in the Corporate Partner Transaction with respect to the Anti- Dilution Protection. 9.2 Subsequent Grant of Piggyback Registration Rights. In the event that the Company, within the first twelve (12) months following the Closing, shall (i) grant piggyback registration rights to (ii) a Corporate Partner in connection with a Technology Transaction (collectively, (i) and (ii) shall be known as the "Registration Rights Transaction"), then the Investor shall be entitled to receive the identical benefit afforded to the Corporate Partner in the Registration Rights Transaction with respect to the piggyback registration rights. 10. Miscellaneous. 10.1 Survival of Warranties. The warranties, representations and covenants of the Company and the Investor contained in or made pursuant to this Agreement shall survive the execution and delivery of this Agreement and the Closing and shall in no way be affected by any investigation of the subject matter thereof made by or on behalf of the Investor or the Company. 10.2 Successors and Assigns. Except as otherwise provided herein, the terms and conditions of this Agreement shall inure to the benefit of and be binding upon the respective successors and assigns of the parties (including transferees of any of the Shares sold hereunder or any Common Stock issued upon conversion thereof). Nothing in this Agreement, express or implied, is intended to confer upon any party other than the parties hereto or their respective successors and assigns any rights, remedies, obligations, or liabilities under or by reason of this Agreement, except as expressly provided in this Agreement. 10.3 Governing Law. This Agreement shall be governed by and construed under the laws of the State of California as applied to agreements among California residents entered into and to be performed entirely within California. 10.4 Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. 10.5 Titles and Subtitles. The titles and subtitles used in this Agreement are used for convenience only and are not to be considered in construing or interpreting this Agreement. 10.6 Notices. Unless otherwise provided, any notice required or permitted under this Agreement shall be given in writing and shall be deemed effectively 19. 20 given upon personal delivery to the party to be notified or upon deposit with the United States Post Office, by registered or certified mail, postage prepaid and addressed to the party to be notified at the following addresses or at such other address as such party may designate by ten (10) days' advance written notice to the other parties: If to the Company: Signal Pharmaceuticals, Inc. 5555 Oberlin Drive San Diego, California 92121 Attn: President With a Copy to: J. Stephan Dolezalek, Esq. Brobeck, Phleger & Harrison Two Embarcadero Place 2200 Geng Road Palo Alto, California 94303 If to the Investor: Tanabe Seiyaku Co., Ltd. 2-10 Dosho-Machi 3-Chome Chuo-ku, Osaka 541 JAPAN Attn: President 10.7 Finder's Fee. Investor represents that it neither is nor will be obligated for any finders' fee or commission in connection with this transaction. The Investor agrees to indemnify and to hold harmless the Company from any liability for any commission or compensation in the nature of a finders' fee (and the costs and expenses of defending against such liability or asserted liability) for which the Investor or any of its officers, employees, or representatives is responsible. The Company agrees to indemnify and hold harmless the Investor from any liability for any commission or compensation in the nature of a finder's fee (and the costs and expenses of defending against such liability or asserted liability) for which the Company or any of its officers, employees or representatives is responsible. 10.8 Expenses. Irrespective of whether the Closing is effected, the Company shall pay its own and Investor shall pay its own costs and expenses with respect to the negotiation, execution, delivery and performance of this Agreement and any Ancillary Agreements. If any action at law or in equity is necessary to enforce or interpret the terms of this Agreement or the Restated Certificate, the prevailing party 20. 21 shall be entitled to reasonable attorney's fees, costs and necessary disbursements in addition to any other relief to which such party may be entitled. 10.9 Amendments and Waivers. Any term of this Agreement may be amended and the observance of any term of this Agreement may be waived (either generally or in a particular instance and either retroactively or prospectively), only with the written consent of the Company and the Investor. 10.10 Severability. If one or more provisions of this Agreement are held to be unenforceable under applicable law, such provision shall be excluded from this Agreement and the balance of the Agreement shall be interpreted as if such provision were so excluded and shall be enforceable in accordance with its terms. 10.11 Aggregation of Stock. All shares of Series D Preferred Stock held or acquired by Investor or Affiliates of Investor shall be aggregated together for the purpose of determining the availability of any rights under this Agreement. 21. 22 IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written. COMPANY: INVESTOR: SIGNAL PHARMACEUTICALS, INC., TANABE SEIYAKU CO., LTD., a California corporation a corporation formed under the laws of Japan By: [SIG] By: /s/ TETSUYA TOSA ------------------------ ------------------------------ Tetsuya Tosa, Ph.D. Title: President Senior Executive Director --------------------- Research and Development Representative Director [SIGNATURE PAGE TO STOCK PURCHASE AGREEMENT] 22. EX-10.41 44 EXHIBIT 10.41 1 *** Text Omitted and Filed Separately Confidential Treatment Requested Under 16 C.F.R. Sections 200.80, 200.83 and 230.406. EXHIBIT 10.41 AGREEMENT THIS AGREEMENT is made this ____ day of July, 1996 (the "Effective Date") between N.V. ORGANON, Molenstraat 110, P.O. Box 20, 5340 BH Oss, the Netherlands (hereinafter referred to as "Organon") and SIGNAL PHARMACEUTICALS, 5555 Oberlin Drive, San Diego, California 92121, USA (hereinafter referred to as "Signal"). INTRODUCTION A. Signal has considerable experience in making biological assays useful for screening compounds: B. Organon has experience in medicinal chemistry and has certain proprietary technology regarding the optimization of lead compounds arising from screening in assay systems. C. Organon wishes to retain the services of Signal to assist Organon in the discovery and development of new assays for the targets which are selected as provided below. THEREFORE THE PARTIES HEREBY AGREE AS FOLLOWS: 1. DEFINITIONS 1.1. "Affiliate" means in the case of each party any entity that directly or indirectly controls, is controlled by, or is under common control with that party. For such purpose the terms "control" means ownership or control of at least 50% of the voting interest in the entity in question. 1.2. "Compound Patent" means a patent or patent application claiming an invention or discovery specific to a Lead Compound and a genus of compounds reasonably expected to have the same or similar activity, which Lead Compound or genus of compounds result from the use of a Research Assay. 1.3. "Development Compound" means a compound which has undergone preclinical animal studies, formulation and production work necessary to commence formal animal toxicology studies, and is selected for formal animal toxicology studies in preparation for the submission of an U.S. IND or an equivalent foreign filing. 1.4. "Executive Committee" means the committee to be established pursuant to Article 2 hereof. 1.5. "FTE" means the full time equivalent effort, for one year, of one person who participates directly in the research and development activities contemplated under 1. 2 this Agreement. Such participation includes, without limitation, production of chemical, biological and/or other materials or reagents provided for use under this Agreement (and the resupply thereof if shelf stock is provided, as reasonably determined by Signal). 1.6. "Gene/gen products Patents" means a patent or patent application claiming an invention or discovery specific to [***], having been identified under the Target Research. 1.7. "Lead Compound" will have the meaning assigned in Section 3.2. 1.8. "Library" means a library or mixture of compounds, including the compounds contained or proposed to be contained therein. 1.9. "Net Sales" means the total revenue from commercial sales received by a party hereto, its Affiliates and/or licensees from the sale of an Organon Product to independent third parties less the following amounts: (i) discounts, including cash discounts, trade allowances or rebates actually allowed or granted and taken, (ii) credits or allowances actually granted upon claims or returns, regardless of the party requesting the return, (iii) separately itemized freight charges paid for delivery and (iv) taxes or other governmental charges levied on or measured by the invoiced amount, whether absorbed by the billing party or the billed party. 1.10. "Organon Compound" means a compound selected from an Organon Library, Organon internal development or otherwise from a third party source other than Signal engaged by Organon to provide compounds. 1.11. "Organon Library" means a Library designed and/or synthesized or acquired by Organon (alone or with third parties) 1.12. "Organon Product" means any product in the Target Research Field which contains one or more active compounds (i) selected by use of a Research Assay (ii) derived from one or more compounds so selected or (iii) significantly altered or advanced to the next stage of development by use of a Research Assay (a "Selected Compound"). Organon shall inform Signal about all compounds identified as having biological activity in any Research Assays and whether such compounds are Selected 2. ***Confidential Treatment Requested 3 Compounds or were selected by Organon through other means prior to running such compounds in a Research Assay. If such compounds were selected by Organon through other means prior to running such compounds in a Research Assay, Organon will provide Signal access to its lab journals and demonstrate to Signal's reasonable satisfaction that such compounds were selected by Organon through other means prior to running such compounds in a Research Assay. All Organon Products, containing the same active compound, or a compound which is derived from the active compound (such as a different salt, ester, crystal form or the like), regardless of other differences, such as dose, dosage form, indication and the like shall be considered a single Organon Product, as the case may be, unless such Organon Product also contains another active compound that is selected by use of a Research Assay or is derived from such a compound. Organon Product shall exclude any compound that was already "in active development" by Organon before screening such compound in a Research Assay or was already selected by Organon prior to screening with the Research Assays as described above, except as set forth below. The compound will be deemed to be in "active development" after (i) toxicology studies have been finished, and/or (ii) efficacious results in an animal model have been obtained, and/or (iii) efficacious results in at least two in vitro models have been obtained. Notwithstanding the foregoing, such a compound shall be an Organon Product if the compound's development is significantly altered by the results of screening the compound in a Research Assay. 1.13. "Research Assay" means an assay based on [***]. 1.14. "Research Assay Patent" means a patent or patent application claiming a Research Assay. 1.15. "Research Committee" means a team to be established for the purposes of the Target Research pursuant to Section 3.1.2 hereof. 1.16. "Research Plan" shall mean the research activities to be conducted by the parties pursuant to the Target Research. The initial Research Plan is attached as Exhibit A which may be amended from time to time upon the mutual agreements of the parties. 1.17. "Research Term" shall mean the term of the Target Research referenced in Article 3. 3. ***Confidential Treatment Requested 4 1.18. "Signal Compound" means a compound selected from a Signal Library, Signal internal development or otherwise from a third party source engaged by Signal to provide compounds. 1.19. "Signal Library" means a Library designed and/or synthesized or acquired by Signal (alone or with third parties). 1.20. "Signal Technology" means all inventions, know-how, trade secrets, and other proprietary information (whether patented or not), which are owned by Signal as of the Effective Date or developed during the Research Term, as to which Signal has the right to grant to Organon a license hereunder, and consisting of methods and materials for the production and/or use of biological assays. Signal Technology shall not include any inventions covered by any Research Assay Patent, Gene/gen product Patent or Compound Patent. 1.21. "Signal Technology Patents" means all patents and patent applications (including provisionals, divisionals, continuations, continuations in part, reissues, re-examinations, substitutions, additions and any extensions to such patents) claiming Signal Technology. Signal Technology Patents shall not include any Research Assay Patent, Gene/gen product Patent or Compound Patent. 1.22. "Target Research" means the research and development program directed toward the Target Research Field conducted by the parties pursuant to Article 3 of this Agreement. 1.23. "Target Research Field" means [***], for human therapeutic and/or diagnostic use; provided, however, the Target Research shall exclude [***]. 2. EXECUTIVE COMMITTEE 2.1. The parties will establish an Executive Committee for the purposes of developing, reviewing and monitoring research plans, research budgets and changes thereto, and supervising the Target Research within the parameters established in this Agreement. The Executive Committee shall have such even number of members as the parties shall agree, half of the members being appointed by each party, with each of Signal and Organon having one vote. In the event of deadlock on any issue, such issue shall be referred for decision to a senior officer designated by each party, which officer shall have the appropriate responsibility and authority to represent and bind such party with respect to such issue or dispute. During the Research Term, the Executive 4. ***Confidential Treatment Requested 5 Committee shall meet not less than twice per year, and the location of such meetings shall alternate between San Diego and Oss, all unless otherwise agreed by the parties. 3. TARGET RESEARCH The Target Research shall commence upon the Effective Date and shall continue for three years thereafter, extendible for up to two additional years under substantially the same FTE funding and other terms as are set forth herein, with mutual consent. If the milestone described in Exhibit B is not met within [***] after the Effective Date Organon at its sole discretion may forthwith terminate the Target Research by written notice effective as of [***]. If the milestone described in Exhibit C is not met within [***] after the Effective Date Organon at its sole discretion may terminate the Target Research effective as of [***]. For purposes of this Agreement, the "Research Term" shall be the period from the Effective Date until the Target Research expires or is terminated pursuant to this Article 3. Under the Target Research Signal shall use reasonable efforts to deliver up to four Research Assays to Organon. If Organon elects to terminate the Target Research (a) [***] or (b) prior to receiving the [***] and paying the first milestone under Section 3.2.1(a), whichever is earlier, then this Agreement and all licenses granted hereunder shall terminate, except that the provisions listed in Section 9.3(b) shall survive. Otherwise, this Agreement shall survive termination or expiration of the Target Research. 3.1. RESEARCH PROGRAM 3.1.1. The parties agree to execute the Research Plan subject to the following: (a) Signal agrees that, during the Research Term, Signal shall collaborate exclusively with Organon within the Target Research Field. (b) Signal will not actively participate with third parties in the design of new Research Assays, for use within the Target Research Field, during the Research Term or for one year after termination of the Target Research by Organon pursuant to Section 3 above. If the Target Research continues for the full three year term, Signal will refrain from such activities for one year after the end of the Research Term, provided, however, if any milestone payments pursuant to Sections 3.2.1(b) or 3.2.1(c) are made during such four-year period, then Signal will refrain from such activities for five years after the end of the Research Term, and if any royalties are paid under Section 5. ***Confidential Treatment Requested 6 3.2.3 during such five-year period, then Signal will refrain from such activities for the term of this Agreement. (c) Organon shall, at its discretion, provide access to its proprietary technologies and know-how, as may be useful in connection with the Target Research. For clarity of understanding, Signal shall not have the right to utilize such technologies and know-how other than in connection with the Target Research. 3.1.2. The Target Research shall be implemented by the Research Committee which shall be comprised of an equal number of members, but not more than four, from each party. Membership of the Research Committee will be determined according to the needs of the particular project. The leaders of the Research Committee shall be nominated by the Executive Committee. In the event of deadlock on any matter the Research Committee shall refer such matter to the Executive Committee. The Research Committee shall meet as often as may be required for the purposes of the Target Research but in any event not less than four times per year, again unless otherwise agreed by the parties. Written reports of such meetings and of the status of the individual projects shall be submitted to the Executive Committee. Unless otherwise agreed, meetings shall alternate between the relevant sites of Signal and Organon. 3.1.3. In consideration of the exclusive rights given to it Organon shall pay, within five (5) days after the Effective Date, to Signal a fee of One Million Dollars (U.S. $1,000,000). 3.1.4. In addition, Organon shall pay Signal's fully-burdened costs per year per FTE actively engaged in the Target Research. The initial rate shall be [***] per FTE per year, this amount to be increased annually, effective January 1 of each calendar year, commencing January 1, 1998, based on increases in the United States Consumer Price Index for all Urban Consumers, all items not seasonally adjusted (sources Bureau of Labor Statistics) for the previous calendar year. This payment also compensates Signal for all ordinary travel expenses incurred by such FTE's in attending meetings or the Research Committee and/or Executive Committee. Unless otherwise agreed in writing, Signal shall make available, on average, the FTEs as set forth in Exhibit D. Such FTEs shall include a balanced group of Ph.D. or equivalent, scientists and other technical support personnel. The annual cost of such FTEs shall be due and payable in equal quarterly installments in advance, on the following schedule. The first such payment shall be due 6. ***Confidential Treatment Requested 7 and payable upon the Effective Date, and shall cover the FTE cost from such date through the end of the then current quarterly period, on a prorated basis. Thereafter, for the remainder of the Target Research, FTE payments for each quarterly period shall be due and payable on each January 15, April 15th, July 15th and September 15th in U.S. dollars by bank wire transfer. Signal shall submit corresponding invoices to Organon no later than forty-five (45) days before the date upon which payment is due, with the last payment also being prorated. Such payments shall be subject to reconciliation in accordance with Section 3.1.5 herein. 3.1.5. Signal will keep records of the time spent by its FTEs on the Target Research, Organon shall have the right to have these records audited, in the same manner as is set forth in Section 6.4. Signal will report the level of FTE effort to Organon on a quarterly basis. During the course of the Target Research, Signal will notify Organon if it becomes apparent that the level of effort at Signal is expected to deviate from the level required under Section 3.1.4. If the level of effort is less than an average, on an annual basis, of the number of FTE's required pursuant to Section 3.1.4, Organon will be entitled to additional FTE effort in subsequent quarterly periods, such that the required annual average is restored. Conversely, if the average annual level of effort by Signal exceeds the number of FTE's required and funded pursuant to Section 3.1.4, Signal will be entitled to reduce the FTE effort in subsequent quarterly periods, such that the required annual average is restored. At the end of the Target Research the parties will restore any such imbalance between actual and funded FTE's either through appropriate payments or refunds, or through the extension of the Target Research until the balance is restored, as mutually agreed to by the parties. 3.2. DEVELOPMENT AND COMMERCIALIZATION The provisions of this Section 3.2 shall apply to all compounds (the "Lead Compounds") which result from the use of Research Assays. 3.2.1. ORGANON MILESTONE PAYMENTS. (a) Organon shall pay Signal [***]. (b) [***]. 7. ***Confidential Treatment Requested 8 (c) For Development Compounds, the following milestone payments shall be made by Organon to Signal. (i) [***] (ii) [***] (iii) [***] For clarity of understanding the milestones referred to in Section 3.2.1(c) shall each be payable only once for each compound; such that the maximum aggregate milestone payments for a single compound will be [***]. (d) If more than one Organon Product is commercialized originating from the same selection criteria and Research Assay(s) as a back-up to another Organon Product for which milestones have already been paid, and which is approved for the same therapeutic indication as such Organon product, Organon shall pay Signal retroactively the payments under Section 3.2.1(b) and (c) upon the date of first commercial sale of each such second or further Organon Product. 3.2.2. THIS SECTION INTENTIONALLY LEFT BLANK 3.2.3. ROYALTIES As a further compensation for providing the Research Assays to Organon, on each Organon Product Organon shall pay the following royalties to Signal: (a) For each Organon Product which contains an Organon Compound, or an analog, derivative or homolog of an Organon Compound and not an analog, derivative or homolog of a Signal Compound, Organon shall pay to Signal royalties on Net Sales made by Organon, its Affiliates or licensees, at the rate of [***] of Net Sales if aggregate annualized worldwide Net Sales for the Organon Product do not exceed [***], at the rate of [***] if aggregate annualized worldwide Net Sales for the Organon Product are greater than [***] and do not exceed [***], and [***] of Net Sales if aggregate annualized worldwide Net Sales for the Organon Product exceed [***]. 8. ***Confidential Treatment Requested 9 For each Organon Product which contains a Signal Compound, or an analog, derivative or homolog of a Signal Compound, Organon shall pay to Signal royalties on Net Sales made by Organon, its Affiliates or licensees, at the rate of [***] of Net Sales if aggregate annualized worldwide Net Sales for the Organon Product does not exceed [***], at the rate of [***] if aggregate annualized worldwide Net Sales for such Organon Product are greater than [***] and do not exceed [***], and [***] of Net Sales if aggregate annualized worldwide Net Sales for such Organon Product exceed [***]. (b) In addition to the royalties set forth above, Organon shall pay to Signal all royalties owed by Signal, pursuant to its agreements with third parties, for the use of Signal Compounds, Compound Patents, Signal Technology, Signal Technology Patents, Research Assay Patents or Gene/gen product Patents in the Target Research or otherwise under this Agreement. Notwithstanding the foregoing, Signal shall notify the Research Committee before using in the Target Research, any Signal Technology or invention covered by Signal Technology Patents, Research Assay Patents or Gene/gen product Patents (but not Signal Compounds or Compound Patents) which is subject to such a royalty obligation to a third party. If the Research Committee elects to make use of such technology or inventions, Organon shall pay such royalties as provided above. If the Research Committee elects not to make use of such technology or invention, no such royalties shall be owed by Organon and neither party shall apply such technology or invention to the Target Research. As of the date of this Agreement, Signal has no agreements with third parties pertaining to the use of Signal Compounds, Compound Patents, Signal Technology, Signal Technology Patents, Research Assay Patents or Gene/gen product Patents under which royalties will be due for the use of such compounds, technology or patents in the manner contemplated under this Agreement. (c) Royalties shall be paid until the later of (i) the expiration or disclaimer of the last Research Assay Patent Genes/Receptor Patent Compound Patent, a Signal Technology Patent that covers the relevant Organon Product or the manufacture or use thereof for an approved indication on a country by country basis or (ii) [***] from the first commercial launch in each country. Each party acknowledges and agrees that the Signal Technology generally, and the Research Assays in particular, constitute highly valuable materials and information, as reflected for example in the payments to be made by Organon under Section 3.2.1(a), as well as those to be made under Sections 3.1.3 and 3.1.4. Signal has made every effort to retain such materials and information in 9. ***Confidential Treatment Requested 10 confidence. Irrespective of whether the Research Assays, for example, are covered by Research Assay Patents, access to such assays will provide Organon with substantial competitive advantage in the discovery and development of products in the Target Research Field. In order to induce Signal to make such assays available to Organon, in addition to other payments provided in this Agreement, Organon agrees to pay, even if no Research Assay Patents or other patents cover such Organon Product, (i) royalties on Net Sales in North America at the rate set forth above for [***] from commercial launch of each Organon Product in each North American country, and (ii) a royalty of [***] on Net Sales in each other country for [***] from commercial launch of each Organon Product in each such country. 3.2.4. Lead Compound Development; Abandoned Products (a) Organon agrees to use commercially reasonable diligence to develop and commercialize Lead Compounds for development and commercialization as an Organon Product. Organon will keep Signal informed of the progress of its development of products under this Section 3.2, at each meeting of the Executive Committee during the Research Term, and not less frequently than once per year thereafter. (b) If at any time Organon has conducted no significant development activity with regard to a particular Signal Compound for a period of twelve months, Signal will have the right to develop and commercialize products incorporating such Signal Compound ("Abandoned Products"), subject to the following. Signal shall not develop or commercialize any Abandoned Product so long as Organon is developing an Organon Product with demonstrated activity in the same Research Assay (or set of Research Assays) as the Abandoned Product demonstrates activity in. Signal may not commence development of any Abandoned Product until the first anniversary of the conclusion of the Target Research. (c) For the one year period commencing on the date Signal first obtains the right to develop an Abandoned Product, Organon shall have the following right of first negotiation to re-acquire rights to such Abandoned Product. Upon notice by either party during such one year period, the parties shall negotiate in good faith for up to sixty (60) days to reach a Term Sheet providing for Organon to re-acquire such rights. If a Term Sheet can be agreed upon, the parties shall negotiate in good faith for up to sixty (60) additional days to reach a definitive agreement. If no definitive agreement is executed within such time period, Signal shall be free to pursue such Abandoned Product alone or with third parties subject only to royalties at the following rates: [***] of Net Sales if aggregate annualized worldwide Net Sales for the Abandoned Product do not exceed [***], [***] of Net Sales if aggregate annualized worldwide Net Sales for the Abandoned Product are greater than [***] and do not exceed [***], 10. ***Confidential Treatment Requested 11 and [***] of Net Sales if aggregate annualized worldwide Net Sales for the Abandoned Product exceed [***], which shall be paid in accordance with the mechanisms set forth in Sections 3.2.3(c) and Section 6 with respect to Organon Products. 3.3. TITLE TO NEW INVENTIONS AND PATENT RIGHTS 3.3.1. Inventions and discoveries made by inventors employed by Signal shall be owned by Signal, Inventions and discoveries made by inventors employed by Organon shall be owned by Organon. Inventions and discoveries made by both inventors employed by Signal as inventors employed by Organon shall be jointly owned. Each party shall provide the other party with any and all available information and documentation needed to prepare, file, prosecute, re-examine patent applications. Both parties shall refrain from any action that might endanger possible patent rights arising from the Target Research. 3.3.2. PATENT COMMITTEE. The parties shall form a joint Patent Committee to review the preparation and prosecution of patents arising from the Target Research. The Patent Committee shall include a patent attorney designated by each party and the chemistry program head designated by each party. All patent applications arising from the Target Research shall be evaluated in accordance with the following process: (a) The designated patent attorneys from each party shall advise the Executive Committee on inventorship issues related to patents arising from the Target Research. (b) Unless otherwise agreed, patents and patent applications owned by one party shall be drafted, filed, prosecuted and maintained by the party that owns the patent rights, as provided in Section 3.3.1 at that party's expense. The Patent Committee shall decide which party will draft and prosecute joint patents in consultation with the other party: the expenses for the drafting and prosecution of such patent shall be shared equally between the parties. In all cases, each party shall keep the other party informed as to the status and progress of all relevant patents and patent applications; and shall draft, file, prosecute and maintain joint patents and patent applications in consultation with the other party. (c) If there is a dispute between Signal and Organon related to patents arising from the Target Research, including, without limitation, issues regarding patent claims, the scope of patent claims; and inventorship, the parties shall refer the matter to an independent patent attorney acceptable to both parties for resolution. 11. ***Confidential Treatment Requested 12 3.4. LICENSES AND OPTION RIGHTS Subject to the terms and conditions of this Agreement, Signal hereby grants to Organon a world-wide non-exclusive license, during the Research Term only under the Signal Technology within the Target Research Field to conduct research in accordance with the Research Plan. Subject to the terms of this Agreement, Signal hereby grants to Organon a world-wide exclusive license, for the period following the end of the Research Term until this Agreement expires or is terminated, to use the Signal Compounds and under the Research Assay Patents, Gene/gen product Patents and Compound Patents to research, develop, make, have made, use and sell Organon Products; provided, however, that any compound from any source that is useful for the [***] shall be specifically excluded from the scope of the foregoing license. If, however, a compound has been selected in the Target Research Field that potentially is useful for the [***], the parties shall negotiate in good faith, together with any of Signal's licensee(s) in such field, a possible extension of the foregoing license with regard to such compound. Subject to the terms of this Agreement, Signal hereby grants to Organon a world-wide non-exclusive license, for the period following the end of the Research Term until this Agreement expires or is terminated, to use the Signal Technology and Signal Technology Patents for any purpose in the Target Research Field. Organon shall have the right to grant sublicenses under its exclusive license rights, with the prior written consent of Signal, not to be unreasonably withheld; provided that such consent shall not be required for sublicenses to Organon's Affiliates. 4. PATENT ENFORCEMENTS 4.1. INFRINGEMENT ACTION BY A THIRD PARTY 4.1.1. NOTICE. Each party shall promptly notify the other party if any legal proceedings are commenced against any party or any purchaser of a Organon Product, claiming that the manufacture, use or sale of such Organon Product is an infringement of a third party's patent or other intellectual property rights. 4.1.2. DEFENSE OF CLAIMS INVOLVING ORGANON PRODUCT. Organon shall have the right, and to the extent required by Section 5.1, the obligation to assume and solely manage the defense of any such infringement claim relating to the Organon Product in its own name or in the name of Signal, if necessary, in such event. (i) Signal shall take all appropriate or necessary actions to assist in the defense of such action or claim (ii) Organon shall bear all costs and expenses associated with such action or claim (including, without limitation, legal fees and expenses). 12. ***Confidential Treatment Requested 13 (iii) Organon shall not settle any such claim in any manner which adversely affects Signal without Signal's prior written consent. 4.2. INFRINGEMENT ACTION AGAINST A THIRD PARTY 4.2.1. NOTICE. Each party shall promptly notify the other party if it becomes aware of any infringement of any Signal Patents or Organon Patents by any third party. 4.2.2. MAINTENANCE OF LAWSUITS INVOLVING SIGNAL PATENTS. Signal shall have the first right (but not the obligation) to file and maintain lawsuits for infringement of any Signal Patents by any third party, in its own name or in the name of Organon, if necessary. If Signal exercises its right to file and maintain such a lawsuit, Signal shall promptly notify Organon thereof and Organon shall have the right to join Signal in such action. Within 30 days of the date of such notice, (i) Organon shall exercise or waive its right to join Signal in such action; and (ii) representatives of Signal and Organon shall meet and confer (whether or not Organon joins Signal in such action) to allocate between the parties (a) the costs incurred in maintaining such an action and (b) any monetary recovery in connection with any such infringement. Organon shall give Signal all reasonable assistance and cooperate in any such proceedings filed by Signal, including the entry into additional agreements necessary to perfect Signal's right to bring or maintain such lawsuits. If Signal does not exercise its rights to enforce a patent covering Organon Product within 90 days after the date of such notice of infringement under Section 4.2.1, Organon shall have the right to file and maintain such infringement action at its own cost and expense, provided that the third party product which is the subject of such infringement action is a competing product with respect to the Organon Product. [***] of the costs incurred by Organon in maintaining such infringement action shall be credited against Organon's royalty obligation with respect to sales of Organon Product in such country pending the conclusion of such infringement action, provided that such credit shall not exceed [***] of the royalty otherwise payable by Organon in any quarter (the "Royalty Offset"). Any monetary recovery in connection with any such infringement action shall first be applied to reimburse the party bringing such suit for all costs and expenses incurred by such party, both internal and external, including attorney's fees and expenses (excluding any amounts funded out of the Royalty Offset). In the event that Signal declines to file and maintain a lawsuit for infringement of Signal Patents and Organon assumes the maintenance of such claim, then any sums withheld by Organon by virtue of the Royalty Offset shall be reimbursed to Signal pro rata with Organon's recovery of its costs and expenses which were not covered 13. ***Confidential Treatment Requested 14 by the Royalty Offset. Any remaining recovery shall be divided equally between the parties unless Organon elects not to bear [***] the expenses of a suit brought by Signal, in which case Signal shall retain any remaining recovery, unless otherwise agreed by the parties as a part of a cost recovery agreement between the parties. 4.2.3. MAINTENANCE OF CLAIMS INVOLVING ORGANON PATENTS. Organon shall have the first right (but not the obligation) to file and maintain lawsuits for infringement of any Organon Patents by any third party in its own name or in the name of Signal, if necessary. If Organon exercises its right to file and maintain such a lawsuit, and the infringer is developing or marketing a product that would compete with an Abandoned Product which Signal is developing or commercializing, then Organon shall promptly notify Signal thereof and Signal shall have the right to join Organon in such an action. Within 30 days of the date of such notice (i) Signal shall exercise or waive its right to join Organon in such action; and (ii) representatives of Signal and Organon shall meet and confer (whether or not Signal joins Organon in such action) to allocate between the parties (a) the costs incurred in maintaining such an action and (b) any monetary recovery in connection with any such infringement. In any case, Signal shall give such Organon all reasonable assistance and cooperation in any such proceedings filed by Organon, including the entry into additional agreements necessary to perfect Organon's right to bring or maintain such lawsuits. If Organon does not exercise its right to enforce an Organon Patent within 90 days after the date of such notice of infringement under Section 4.2.1, then Signal shall have the right to file and maintain such infringement action at its own cost and expense, provided that the third party product which is the subject of such infringement action is a competing product with respect to the Abandoned Product which Signal is developing or commercializing. [***] of the costs incurred by Signal in maintaining such infringement action shall be credited against Signal's royalty obligations with respect to sales of such Abandoned Product in such country pending the conclusion of such infringement action, provided that such credit shall not exceed [***] of the royalty otherwise payable by Organon in any quarter (the "Royalty Offset"). Any monetary recovery in connection with any such infringement action first will be applied to reimburse the party bringing such suit for all costs and expenses incurred by such party, both internal and external, including attorneys' fees and expenses (excluding any amounts funded out of the Royalty Offset). In the event that Organon declines to file and maintain a lawsuit for infringement of such an Organon Patent, and Signal assumes the maintenance of such claim, then any sums withheld by Signal by virtue of the Royalty Offset shall be reimbursed to Organon pro rata with Signal's recovery of its costs and expenses which were not covered by the Royalty Offset. Any remaining recovery shall be divided equally between the parties unless Signal elects not to bear [***] the expenses of a suit brought by Organon, in which case Organon shall retain any remaining 14. ***Confidential Treatment Requested 15 recovery, unless otherwise agreed by the parties as a part of a cost recovery agreement between the parties 5. INDEMNITY; NO WARRANTIES 5.1. ORGANON PRODUCTS 5.1.1. Organon agrees to indemnify, defend and hold harmless Signal, and its respective officers, directors, shareholders, and employees from and against all claims, losses, costs, damages and liability of any kind, including without limitation attorneys fees, (collectively "Liabilities") arising in connection with the development, manufacture, use or sale of Organon Products, except for Liabilities arising as a result of breach by Signal of its obligations under this Agreement, or any manufacturing, marketing or other agreement between the parties with respect to the product in question. Signal shall not make any admission of liability nor take any other action which could prejudice the defense of such claim or lawsuit by Organon. 5.1.2. Signal shall promptly notify Organon of receipt of any claim or lawsuit subject to Section 5.1.1 and shall cooperate with Organon in connection with the investigation and defense of such claim or lawsuit. Organon shall have the right to control the defense, with counsel of its choice, provided that the indemnified party shall have the right to be represented by advisory counsel at its own expense. 5.2. ABANDONED PRODUCTS 5.2.1. Signal agrees to indemnify, defend and hold harmless Organon, and its respective officers, directors, shareholders, and employees from and against all Liabilities arising in connection with the development, manufacture, use or sale of Abandoned Products, except for Liabilities arising as a result of breach by Organon of its obligations under this Agreement, or any manufacturing, marketing or other agreement between the parties with respect to the product in question. Organon shall not make any admission of liability nor take any other action which could prejudice the defense of such claim or lawsuit by Signal. 5.2.2. Organon shall promptly notify Signal of receipt of any claim or lawsuit subject to Section 5.2.1 and shall cooperate with Signal in connection with the investigation and defense of such claim or lawsuit. Signal shall have the right to control the defense, with counsel of its choice, provided that the indemnified party shall have the right to be represented by advisory counsel at its own expense. 5.3. EXCEPT AS EXPRESSLY STATED IN THIS AGREEMENT, NEITHER PARTY MAKES ANY, AND EACH PARTY EXPRESSLY DISCLAIMS ALL IMPLIED WARRANTIES, INCLUDING WARRANTIES OF 15. 16 MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE, WITH RESPECT TO ANY LIBRARIES OR OTHER BIOLOGICAL OR CHEMICAL MATERIALS OR INFORMATION PROVIDED TO THE OTHER PARTY PURSUANT TO THIS AGREEMENT OR THE PATENTABILITY OR FREEDOM FROM INFRINGEMENT OF ANY OF THE FOREGOING. 6. PAYMENTS AND ACCOUNTING 6.1. All payments hereunder shall be made in U.S. Dollars. 6.2. Organon shall keep true and correct accounts of sales of all products in respect of which royalties are payable to Signal pursuant to this Agreement, and the calculation of Net Sales and royalties with respect thereto, and shall deliver to Signal written statements thereof in such form as both shall agree upon within sixty (60) days following the end of each calendar quarter and at the same time shall pay to Signal the amount of such royalties shown to be due. 6.3. All royalties shall be earned in the local currency of the country where the applicable Net Sales are made, but shall be converted for payment into U.S. Dollars, in accordance with the standard procedures used by the Organon in converting currencies of world-wide product sales for its products generally. If royalties cannot be remitted from a country, the parties will work together to arrive at an equitable solution for paying such royalties to Signal. Unless the parties mutually agree to the contrary, such obligation shall be satisfied if royalty payments are paid to an account of the party in the country in question. Any withholding or other tax that Organon is required by law to withhold and pay on behalf of Signal with respect to the royalties payable to Signal under this Agreement shall be deducted from said royalties and paid contemporaneously with the remittance to Signal; provided, however, that in regard to any tax so deducted, Organon shall furnish Signal with proper evidence of the taxes paid on its behalf. 6.4. Signal shall have the right to have an independent certified public accountant of its own selection and at its own expense, except one to whom Organon may have reasonable objection, examine the relevant books and records of account of Organon during reasonable business hours, to determine whether appropriate accounting and payment have been made hereunder. Said independent certified public accountant shall treat as confidential, and shall not disclose to Signal any other information not pertaining to the royalty amounts payable under this Agreement. Such examination can be undertaken at any time within two years after the date on which such royalty amounts were due and payable. 16. 17 7. PUBLICITY AND PUBLICATION 7.1. The parties will mutually agree on a press release to be issued upon execution of this Agreement. Neither party shall make any subsequent public announcement concerning the terms of this Agreement not previously made public without the prior written approval of the other party with regard to the form, content and precise timing of such announcement, except such as may be required to be made by either party in order to comply with applicable law, regulations or court orders. Such consent shall not be unreasonably withheld or delayed by the other party. Prior to any such public announcement, the party wishing to make the announcement will submit a draft of the proposed announcement of the other party in sufficient time to enable the other party to consider and comment thereon. Nothing in this section shall preclude disclosures by either party to third parties under confidentiality restrictions in order to carry out the purposes of this Agreement or to define the scope of rights which may be granted to a third party without violating this Agreement. 7.2. PUBLICATIONS. Neither party will publish or publicly disclose results arising from the Target Research without the prior consent of the other party, which consent shall not be unreasonably withheld. With respect to any proposed publication or public disclosure of such results, the following shall apply: 7.2.1. The Research Committee shall review any proposed publication with respect to the content, authorship, acknowledgment, and shall either approve release of the publication, or propose revisions to the publication. Any disputes relating to the contents or authorship of any publication(s) prepared by Signal and Organon scientists participating in the Target Research shall be referred to the Executive Committee for resolution. 7.2.2. The proposed publication shall be reviewed by the patent departments and any other departments of Organon and Signal in accordance with their customary procedures. 7.2.3. At such time as the proposed publication has been reviewed and approved by the Research Committee and the patent and/or other departments of Organon and Signal, the publication may be submitted for publishing. 8. CONFIDENTIALITY 8.1. Except as specifically authorized under the terms of this Agreement each party shall, for the term of this Agreement and for five (5) years after its termination for any reason whatsoever, treat any proprietary information disclosed to it by the other party as strictly confidential, and shall not disclose such proprietary information to third parties or use it for purposes other than those authorized therein. 17. 18 Except as set forth in the exceptions hereinafter any information, data or material, including without limitation, software, technology, business plans or information, communicated to the other which is identified as confidential, or which the other party has reason to believe is confidential, will be deemed and treated as Proprietary Information. Proprietary Information also includes proprietary chemical, physical or biological materials, identified as confidential, exchanged pursuant to this Agreement. Access to such Proprietary Information will be limited to those employees or consultants of the party receiving such information or of such party's Affiliates or sublicensees, who reasonably require such information in order to carry out activities authorized pursuant to this Agreement. Such employees or consultants will be advised of the confidential nature of the Proprietary Information and the related confidentiality undertaking. Proprietary Information shall not include, and the above confidentiality undertaking shall in no event restrict or impair each party's right to use or disclose any information which: (a) at the time of disclosure is in the public domain or thereafter becomes part of the public through no fault of the party receiving such information; (b) the party receiving such information can conclusively establish that it was in its possession prior to the time of disclosure; (c) is independently made available to the party receiving such information by a third party who is not thereby in violation of a confidential relationship with the other party; or (d) the receiving party can establish was independently developed without use of the Proprietary Information of the other party. The receiving party shall not be restricted from disclosing such information as is required to be disclosed by law, regulation, or court or governmental order, provided that the receiving party reasonably notifies the disclosing party prior to such disclosure of such requirement. Upon termination of this Agreement, and provided the Proprietary Information is still of a confidential nature, the party recipient of the Proprietary Information will upon request from the disclosing party either return any such information or destroy the same. 18. 19 9. TERM AND TERMINATION 9.1. The Research Term shall be as set forth in Article 3. 9.2. Unless terminated earlier under Section 9.3, this Agreement shall continue in full force and effect until the expiration of all milestone and royalty obligations or Organon under Article 3. Upon expiration of this Agreement under this Section 9.2, Organon shall have fully paid-up licenses, respectively, under Section 3.4.1, and the provisions identified in Section 9.3(a) shall survive expiration hereof. 9.3. Early termination. (a) In the event of material breach of this Agreement by either party, the matter shall be submitted for resolution to the chief executive officers of each party. If, 30 days after submission to the respective chief executive officers, no resolution is achieved, then the non-breaching party may send written notice of the alleged default to the breaching party. If the material breach is not cured with sixty (60) days following receipt of such notice, the non-breaching party may terminate this Agreement immediately upon written notice to the breaching party. (b) The parties acknowledge that under this Agreement, each party holds a complex series of ongoing technology rights and licenses, development rights and obligations, and economic rights and obligations; the breach of which may not be adequately compensated in monetary damages alone. The parties therefore agree that each may be entitled to remedies in the nature of specific performance of the obligations of the other. (c) In all cases of early termination or expiration of this Agreement, the following provisions shall survive, together with any other obligations of either party which have accrued as of the effective date of termination or expiration: Articles 5, 7, 8, 9 and 10 and Section 6.4. 9.4. All licenses granted under this Agreement and deemed to be, for purposes of Section 365(n) of the U.S. Bankruptcy Code, licenses of right to "intellectual property" as defined in Section 101 of such Code. The parties agree that Organon may fully exercise all of its rights and elections under the Bankruptcy code. The parties further agree that, in the event Organon elects to retain its rights as a licensee under such Code, Organon shall be entitled to complete access to any technology licensed to it hereunder and all embodiments of such technology. Such embodiments of the technology shall be delivered to Organon not later than: 19. 20 (a) the commencement of bankruptcy proceedings against Signal, upon written request, unless Signal elects to perform its obligations under the Agreement, or (b) if not delivered under (a) above, upon the rejection of this Agreement by or on behalf of Signal, upon written request by Organon. 9.5. IN NO EVENT SHALL EITHER PARTY BE LIABLE TO THE OTHER FOR LOST PROFITS OR ANY CONSEQUENTIAL, INCIDENTAL OR INDIRECT DAMAGES TO THE OTHER PARTY, HOWEVER CAUSED, IN CONNECTION WITH THIS AGREEMENT, PROVIDED THAT NOTHING IN THIS SECTION 9.5 SHALL LIMIT THE INDEMNIFICATION OBLIGATIONS OF EITHER PARTY PURSUANT TO ARTICLE 5 AS TO CONSEQUENTIAL, INCIDENTAL OR INDIRECT DAMAGES TO THIRD PARTIES FOR WHICH THE INDEMNITEES MAY BE LIABLE. 10. MISCELLANEOUS 10.1. Neither party shall have the right to assign its rights or obligations under this Agreement to any third party, other than an Affiliate of such party, or a successor in a change of control by way of merger, acquisition or otherwise, without the prior written consent of the other party, which consent shall not be unreasonably withheld. The foregoing notwithstanding, Organon's prior written consent shall be required during the period beginning with the Effective Date and ending on the date that is one year following the Research Term, with regard to assignment under this Agreement to a successor to Signal which is a direct competitor with Organon. If Organon withholds consent to an assignment to such a direct competitor, Signal shall have the right to terminate the Target Research and Organon shall retain all rights as if the Target Research Program had continued for the full term. This Agreement shall be binding on, and inure to the benefit of, the permitted successors and assigns of the parties. All permitted sublicenses and/or assignments by either party of any of its rights under this Agreement shall be subject to all of the terms and conditions of this Agreement, which shall be binding on the sublicensees and/or assignees. 10.2. The parties hereto are independent contractors. Nothing contained herein shall constitute either party the agent of the other party for any purpose whatsoever, or constitute the parties as partners or joint venturers. Employees of each party remain employees of said party and shall be considered at no time agents of or render a fiduciary duty to the other party. Neither party hereto shall have any implied right or authority to assume or create any obligations on behalf of or in the name of the other party or to bind the other party to any other contract, agreement or undertaking with any third party. 20. 21 10.3. No amendment, waiver of modification of this Agreement shall be valid or binding on either party unless made in writing and signed by both parties. The failure of either party to enforce any provision of this Agreement at any time shall not be construed as a present or future waiver of such or any other provision of this Agreement. The express waiver by either party of any provision or requirement hereunder shall not operate as a future waiver of such or any other provision or requirement. 10.4. In the event that any provision in this Agreement shall be held to be unlawful or invalid in any jurisdiction, the meaning of such provision shall be construed to the greatest extent possible so as to render it enforceable. If no such construction can render such provision enforceable, it shall be severed, and the remainder of the Agreement shall remain in full force and effect, only to the extent that such remainder is consistent with the intentions of the parties as evidenced by this Agreement as a whole. The parties shall use best efforts to negotiate in good faith a reasonable substitute, valid and enforceable provision effective in such jurisdiction. 10.5. Any notice required or permitted to be given by either party under this Agreement shall be in writing, addressed, in the case of Signal, to its Chief Executive Officer, with copy to its General Counsel, and in the case of Organon, to its President with copy to its General Counsel, at the respective addresses of the parties shown in the first paragraph of this Agreement, or such other address as may from time to time be indicated in a notice given under this Section 10.5. All notices shall be sent by certified or registered first class mail, telefax confirmed by certified or registered first class mail, or personal delivery, and shall be effective on receipt at the address referenced above. 10.6. Neither party will be deemed in breach of this Agreement as a result of default, delay or failure to perform by such party which is due to causes beyond the reasonable control of such party, including without limitation, fire, earthquake, act of God, severe weather, act of war, strikes, lockouts or other labor disputes, riots, civil disturbances, actions or inactions of governmental authorities (except in response to a breach by such party), or epidemics. In the event of any such force majeure, the party affected shall promptly notify the other party, shall use all reasonable efforts to overcome such force majeure, and shall keep the other party informed with respect thereto. 10.7. All headings and captions used in this Agreement are for convenience only, and are not intended to have substantive effect. 10.8. This Agreement may be executed by the parties in one or more identical counterparts, all of which together shall constitute this Agreement. 10.9. This Agreement shall be governed by and construed in accordance with the laws of the State of Delaware. 21. 22 10.10. DISPUTE RESOLUTION 10.10.1. All disputes of all types under this Agreement shall be referred to the Executive Committee for resolution. The Executive Committee shall use all reasonable efforts to resolve such matters within thirty (30) days after such referral, including referral of questions to outside independent experts where the Executive Committee deems appropriate. 10.10.2. If the Executive Committee is unable to resolve such dispute the dispute shall be referred to the Chief Executive Officers ("CEOs") of the parties for resolution. 10.10.3. In the event the CEOs are not able to resolve such dispute within thirty (30) days after the matter is referred to them, the following shall apply: (a) Prior to entering into binding arbitration in accordance with the provisions of Section 10.10.3(b) below, the parties shall enter into non-binding mediation. The mediation shall be conducted by an independent mediator acceptable to both parties. Either party may serve upon the other party a written demand for mediation. Such mediation shall commence within thirty (30) days of the other party's receipt of such demand, unless otherwise agreed in writing by the parties. Each party shall make available to the mediation an authorized representative with the capacity to bind such party, and the mediation shall be conducted as deemed appropriate by the mediator. (b) In the event that the dispute cannot be resolved by the mediation mechanism referenced in Section 10.10.3(a) the dispute shall be referred to arbitration in accordance with the rules then prevailing of the Center for Public Resources ("CPR") 680 Fifth Avenue, New York, New York 10019 unless otherwise mutually agreed. The arbitration shall be conducted in New York City, New York. Unless otherwise agreed by the parties the arbitration panel shall consist of arbitrator selected in accordance with the CFR rules. This section 10.10.3 shall not limit the rights of any party to seek in court of competent jurisdiction interim relief and only such interim relief, as may be needed to maintain the status quo or otherwise protect the subject matter of the dispute until the arbitrators have been appointed and shall have had an opportunity to act. 10.11. This Agreement constitutes the entire agreement of the parties with respect to the subject matter hereof and supersedes all previous agreement, understandings and negotiations, whether oral or written, with respect to such subject matter. All information exchanged pursuant to the Confidentiality Agreement dated _________, 199_ shall be governed by Article 8. 22. 23 Executed and effective as of the date first set forth above. N.V. ORGANON SIGNAL PHARMACEUTICALS, INC. By:________________________ By:_________________________________ Title:_____________________ Title:______________________________ By:________________________ Title:_____________________ 23. 24 EXHIBIT A [***] ***Confidential Treatment Requested 24. 25 EXHIBIT B [***] ***Confidential Treatment Requested 25. 26 EXHIBIT C [***] ***Confidential Treatment Requested 26. 27 EXHIBIT D [***] ***Confidential Treatment Requested 27. EX-10.43 45 EXHIBIT 10.43 1 ***Text Omitted and Filed Separately Confidential Treatment Requested under 17 C.F.R. Sections 200.80, 200.83 and 230.406 EXHIBIT 10.43 RESEARCH COLLABORATION AGREEMENT THIS RESEARCH COLLABORATION AGREEMENT (the "Agreement"), dated as of ________, 1996, (the "Effective Date") is entered into between SIGNAL PHARMACEUTICALS, INC., a California corporation ("SIGNAL"), having a place of business at 5555 Oberlin Drive, San Diego, California 92121, and ROCHE BIOSCIENCE, a Division of Syntex (U.S.A.) Inc., a Delaware corporation ("ROCHE BIOSCIENCE"), having a place of business at 3401 Hillview Avenue, Palo Alto, California 94304. W I T N E S S E T H: WHEREAS, SIGNAL has rights to certain technology for the generation of neuronal and glial cell lines and central nervous system ("CNS") cell lines generated using the technology; WHEREAS, SIGNAL and ROCHE BIOSCIENCE desire to conduct a joint research program to develop [***] and WHEREAS, ROCHE BIOSCIENCE wishes to evaluate the CNS cell lines containing certain molecular targets; NOW, THEREFORE, in consideration of the foregoing premises, and the mutual covenants set forth below, the parties hereby agree as follows: ARTICLE 1 DEFINITIONS For purposes of the Agreement, the terms defined in this Article 1 shall have the respective meanings set forth below: 1.1 "Affiliate" shall mean, with respect to any Person, any other Person which directly or indirectly controls, is controlled by, or is under common control with, such Person. A Person shall be regarded as in control of another Person if it owns, or directly or indirectly controls, more than fifty percent (50%) of the voting stock or other ownership interest of the other Person, or if it directly or indirectly possesses the power to direct or cause the direction of the management and policies of the other Person by any means whatsoever. Notwithstanding the above, Genentech, Inc., shall not be deemed an Affiliate of ROCHE BIOSCIENCE for purposes of the Agreement. 1.2 "Cell Type Characterization" will be determined by examining the [***] A cell shall ***Confidential Treatment Requested 2 be deemed [***] 1.3 "Cloned Immortalized PNS Cell Lines" shall refer to [***] 1.4 "CNS Cell Lines" shall mean the human central nervous system cell lines which are part of the SIGNAL Patent Rights. 1.5 "Compound" shall mean a therapeutic agent that is a ligand, agonist or antagonist to a Signal PNS Cell Line target and has been identified in a screening assay or ROCHE BIOSCIENCE Assay against a target available due to a Signal PNS Cell Line, and such ligand, agonist or antagonist activity is the primary mechanism of action of such therapeutic agent. 1.6 "Extant Genes" shall mean Genes where the rights to the cloned Gene are not in the public domain or with ROCHE; and where access to SIGNAL cell lines provides ROCHE BIOSCIENCE with rights to, and a source of, the human form of the Gene. 1.7 "Field" shall mean therapeutic or diagnostic products directed [***] 1.8 "Gene" shall mean either a gene or a gene product. 1.9 "Immortalized PNS Cells" refers to [***] 1.10 "Invention" shall have the meaning set forth in Section 8.1. 1.11 "Novel Genes" shall mean Genes that are discovered using PNS Cell Lines which Genes are not related to Extant Genes and have a clear patent priority filing date. 1.12 "Perpetualized PNS Cells" refers to [***] 1.13 "Person" shall mean an individual, corporation, partnership, limited liability company, trust, business trust, association, joint stock company, joint venture, pool, syndicate, sole proprietorship, unincorporated organization, governmental authority or any other form of entity not specifically listed herein. 2 ***Confidential Treatment Requested 3 1.14 "PNS Cell Lines" shall mean the Stable Cell Lines developed pursuant to the Research Program. 1.15 "Product" shall mean (a) a product for use in the Field which (i) incorporates a Compound and could not have been developed, manufactured, used, or sold without infringing one or more claims under the SIGNAL Patent Rights or (ii) uses or incorporates some portion of one or more PNS Cell Lines; or (b) the same product defined above for a secondary indication which is for use outside the Field. 1.16 "Program Support" shall mean the money paid by ROCHE BIOSCIENCE to SIGNAL to support the Research Program. 1.17 "Public Genes" shall mean human Genes that are in the public domain and available for research and drug discovery use; or, human Genes that ROCHE BIOSCIENCE has patented and which are not Novel Genes or Extant Genes. 1.18 "Research Program" shall mean the research study described in the Research Proposal dated July 10, 1996 attached as Exhibit A to the Agreement. 1.19 "Research Committee" shall mean the joint research committee comprising representatives of SIGNAL and ROCHE BIOSCIENCE as described in Paragraph 3.6.1 below. 1.20 "Research Program Period" shall mean the period commencing on the first day of the month following the Effective Date of the Agreement and expiring three (3) years from the date thereof, unless the Program Support is earlier terminated as provided herein. 1.21 "Research Results" shall mean all data and information (but not Inventions) arising from the research conducted during the Research Program Period. 1.22 "ROCHE BIOSCIENCE Assays" shall mean any assay utilized by ROCHE BIOSCIENCE for use in the Field and those other assays to be described in Exhibit D hereto, as the same may be amended from time to time by the mutual written agreement of the parties, for use outside the Field. 1.23 "ROCHE BIOSCIENCE Know-How" shall mean all information and data, which is owned by or licensed to ROCHE BIOSCIENCE (other than through a license from SIGNAL under this Agreement) during the Research Program Period, is not generally known (including, but not limited to, formulae, procedures, protocols, techniques and results of experimentation and testing), and is necessary or useful to conduct the Research Program or to develop, make, use, sell or seek regulatory approval in any country to market a Product; all to the extent and only to the extent that ROCHE BIOSCIENCE now has or hereafter will have the right to grant licenses, immunities or other rights thereunder. 1.24 "ROCHE BIOSCIENCE Patent Rights" shall mean (a) all patent applications heretofore or hereafter filed or having legal force in any country owned by or licensed to 3 4 ROCHE BIOSCIENCE or to which ROCHE BIOSCIENCE otherwise acquires rights (other than through this Agreement), which claim the ROCHE BIOSCIENCE Assays together with any and all patents that have issued or in the future issue therefrom, including utility, model and design patents and certificates of invention, and (b) all divisionals, continuations, continuations-in-part, reissues, renewals, extensions or additions to any such patents and patent applications; all to the extent and only to the extent that ROCHE BIOSCIENCE now has or hereafter will have the right to grant licenses, immunities or other rights thereunder. 1.25 "ROCHE BIOSCIENCE Technology" shall mean, collectively, the ROCHE BIOSCIENCE Know-How and the ROCHE BIOSCIENCE Patent Rights. 1.26 "SIGNAL Know-How" shall mean all information and data, which is owned by or licensed to SIGNAL (other than through a license from ROCHE BIOSCIENCE under this Agreement) during the Research Program Period, is not generally known (including, but not limited to, formulae, procedures, protocols, techniques and results of experimentation and testing), and is necessary or useful to conduct the Research Program or to develop, make, use, sell or seek regulatory approval in any country to market a Product arising from the Research Program for use in the Field; all to the extent and only to the extent that SIGNAL now has or hereafter will have the right to grant licenses, immunities or other rights thereunder. 1.27 "SIGNAL Materials" shall mean the PNS Cell Lines and CNS Cell Lines in which ROCHE BIOSCIENCE is being granted rights under this Agreement. 1.28 "SIGNAL Patent Rights" shall mean (a) all patent applications heretofore or hereafter filed or having legal force in any country owned by or licensed to SIGNAL or to which SIGNAL otherwise acquires rights (other than through this Agreement), which claim (i) the technology for the generation of neuronal and glial cell lines useful for the development of Compounds or Products; (ii) the CNS Cell Lines or any cells comprising the foregoing; (iii) the use of the technology described in clause (i) or the use of the CNS Cell Lines and cells described in clause (ii) above, together with any and all patents that have issued or in the future issue therefrom, including utility, model and design patents and certificates of invention, and (b) all divisionals, continuations, continuations-in-part, reissues, renewals, extensions or additions to any such patents and patent applications; all to the extent and only to the extent that SIGNAL now has or hereafter will have the right to grant licenses, immunities or other rights thereunder. 1.29 "SIGNAL Technology" shall mean, collectively, the SIGNAL Know-How and the SIGNAL Patent Rights. 1.30 "Stable Cell Line" shall mean a Cloned Immortalized PNS Cell Line in which (a) [***] 1.31 "Third Party" shall mean any Person other than SIGNAL, ROCHE BIOSCIENCE and their respective Affiliates. 4 ***Confidential Treatment Requested 5 ARTICLE 2 REPRESENTATIONS AND WARRANTIES Each party hereby represents and warrants to the other party, as of the date of the Agreement, as follows: 2.1 Existence and Power. Such party (a) is duly organized, validly existing and in good standing under the laws of the state in which it is organized; (b) has the requisite power and authority and the legal right to own and operate its property and assets, to lease the property and assets it operates under lease, and to carry on its business as it is now being conducted, and (c) is in compliance with all requirements of applicable law, except to the extent that any noncompliance would not materially adversely affect such party's ability to perform its obligations under the Agreement. 2.2 Authorization and Enforcement of Obligations. Such party (a) has the requisite power and authority and the legal right to enter into the Agreement and to perform its obligations hereunder, and (b) has taken all necessary action on its part to authorize the execution and delivery of the Agreement and the performance of its obligations hereunder. The Agreement has been duly executed and delivered on behalf of such party, and constitutes a legal, valid, binding obligation, enforceable against such party in accordance with its terms. 2.3 Consents. All necessary consents, approvals and authorizations of all governmental authorities and other Persons required to be obtained by such party in connection with the Agreement have been obtained. 2.4 No Conflict. The execution and delivery of the Agreement and the performance of such party's obligations hereunder (a) do not conflict with or violate any requirement of applicable laws or regulations, and (b) do not conflict with, or constitute a default under, any contractual obligation of such party. 2.5 DISCLAIMER OF WARRANTIES. 2.5.1 NOTHING IN THE AGREEMENT SHALL BE CONSTRUED AS A REPRESENTATION MADE, OR WARRANTY GIVEN, BY EITHER PARTY THAT ANY PATENT WILL ISSUE BASED UPON ANY PENDING PATENT APPLICATION WITHIN THE SIGNAL PATENT RIGHTS OR THE ROCHE BIOSCIENCE PATENT RIGHTS, THAT ANY PATENT WITHIN THE SIGNAL PATENT RIGHTS OR THE ROCHE BIOSCIENCE PATENT RIGHTS WHICH ISSUES WILL BE VALID, OR THAT THE USE OF ANY SIGNAL MATERIALS OR ANY SIGNAL TECHNOLOGY OR THE ROCHE BIOSCIENCE TECHNOLOGY WILL NOT INFRINGE THE PATENT OR PROPRIETARY RIGHTS OF ANY OTHER PERSON. 5 6 2.5.2 THE SIGNAL MATERIALS ARE PROVIDED BY SIGNAL "AS IS" AND WITHOUT WARRANTY OF ANY KIND, EXPRESS OR IMPLIED, INCLUDING WITHOUT LIMITATION THE WARRANTIES OF DESIGN, MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE, NONINFRINGEMENT OF THE INTELLECTUAL PROPERTY RIGHTS OF THIRD PARTIES OR WARRANTIES ARISING FROM A COURSE OF DEALING, USAGE OR TRADE PRACTICES. IN NO EVENT WILL SIGNAL OR ANY OF ITS THIRD PARTY LICENSORS WHOSE TECHNOLOGY IS UTILIZED IN PROVIDING SIGNAL MATERIALS HEREUNDER BE LIABLE FOR ANY INCIDENTAL, SPECIAL OR CONSEQUENTIAL DAMAGES RESULTING FROM EXERCISE OF THE LICENSE RIGHTS BY ROCHE BIOSCIENCE HEREUNDER OR USE OF THE SIGNAL MATERIALS OR THE PRODUCTS. ARTICLE 3 COLLABORATIVE RESEARCH PROGRAM 3.1 Purpose and Scope. During the Research Program Period, the parties shall conduct research, as set forth herein, and shall use commercially reasonable efforts to perform the activities described in Exhibit A and to efficiently achieve the specific aims thereof, consistent with prudent drug discovery and development practices. The overall objective is to develop PNS Cell Lines which may be useful for the discovery of Compounds and the development of Products. It is expected that SIGNAL shall deliver to ROCHE BIOSCIENCE within [***] of the end of the Research Program at least [***] human PNS Cell Lines; however, this expectation shall not be deemed a representation or warranty by SIGNAL. Provided the Research Program Period is not terminated early under provisions of the Agreement prior to the intended full three (3) year term, SIGNAL shall deliver to ROCHE BIOSCIENCE any human PNS Cell Lines which lines were in the characterization or application stage at the end of the Research Program Period and the development thereof was completed within six (6) months after the end of the Research Program Period. 3.2 Allocation of Research Program Efforts. Exhibit A outlines the duties of each party with respect to the Research Program. In the event that the acquisition of rights to a Third Party's Intellectual Property are deemed necessary by the parties in order to complete the Research Program and prevent possible infringement of that Third Party's rights, ROCHE BIOSCIENCE agrees that SIGNAL shall not be obligated at SIGNAL's expense to acquire those rights; however, the parties shall negotiate with each other in good faith to reach a reasonable commercial solution with respect to avoiding or solving such possible infringement of a Third Party's rights, including potential negotiation of a license with that Third Party. Except for the Program Support and as otherwise provided herein, each party shall be responsible for its own expenses in performing its duties under the Agreement. 3.3 Research Funding for PNS Cell Line. Unless otherwise agreed to in writing by the parties, ROCHE BIOSCIENCE shall be responsible for funding the Research Program activities at SIGNAL by providing payment to support the number of full-time equivalents 6 ***Confidential Treatment Requested 7 ("FTEs") per Agreement quarter as set forth below, and SIGNAL shall allocate the specified number of FTE's to the Research Program: CHART 1 [***] At any time during [***] of the Agreement, ROCHE BIOSCIENCE has the sole option to increase the number of FTE's for Program Support during the [***] or [***] up to a maximum of [***]. ROCHE BIOSCIENCE must make a written request to SIGNAL for increases within that limit at least ninety (90) days in advance of the desired addition(s) and SIGNAL shall use commercially reasonable efforts to add such personnel. The parties by mutual agreement may increase the number of FTE's beyond [***]. Subject to the other provisions of the Agreement, ROCHE BIOSCIENCE Program Support costs per FTE shall be as set forth below: CHART 2 [***] *The expense per FTE in Chart 2 shall be increased annually, effective as of each anniversary date of the Research Program Period, commencing with the first anniversary date, based on increases in the United States Consumer Price Index for all Urban Consumers ("CPI"), all items not seasonally adjusted (sources Bureau of Labor Statistics) for the most recent twelve (12) months CPI data available fifteen (15) days prior to each anniversary date. Once established for an Agreement year, support costs per FTE shall remain constant throughout that Agreement year. Payment of the Program Support costs per FTE shall be made in quarterly installments in advance commencing on the first day of the Research Program Period and thereafter by no later than the first day of each successive quarter of the Research Program (not calendar quarter), with the actual payment required to be determined by multiplying the number of FTEs to be utilized for that next quarter (per Chart 1 above or as otherwise modified as provided above) by twenty-five percent (25%) of the expense per FTE for the year in which that next quarter occurs (per Chart 2 above). 7 ***Confidential Treatment Requested 8 3.3.1 Right to Terminate Program Support ROCHE BIOSCIENCE shall have the right to cease providing Program Support upon the occurrence of certain events described below and subject to the following terms and conditions: (a) If Signal fails to [***] by the end of Year One of the Agreement, then ROCHE BIOSCIENCE, as its sole remedy, has the option to notify SIGNAL that ROCHE BIOSCIENCE shall cease providing Program Support; provided such notice is delivered to SIGNAL by no later than ten (10) days after the end of Year One. In the event ROCHE BIOSCIENCE exercises such option, ROCHE BIOSCIENCE must continue to provide Program Support for the first quarter of Year 2 by paying an amount determined by multiplying the number of FTEs being utilized for the fourth quarter of Year 1 (per Chart 1 in Section 3.3) by twenty-five percent (25%) of the expense per FTE in Year 2 (per Chart 2 in Section 3.3), and the obligation to continue Program Support shall terminate thereafter. (b) During Year 2 of the Agreement, if SIGNAL fails to meet certain criteria level standards as set forth in Exhibit B to the Agreement, ROCHE BIOSCIENCE, as its sole remedy, has an option to notify SIGNAL that ROCHE BIOSCIENCE shall cease providing Program Support. In the event ROCHE BIOSCIENCE exercises such option, ROCHE BIOSCIENCE must continue to provide Program Support for the longer of (i) ninety (90) days after receipt of the notice by SIGNAL or (ii) the date of intended termination specified in the notice ("Continuation Period"). During the Continuation Period, ROCHE BIOSCIENCE must continue to provide Program Support by meeting normally scheduled payment date(s) in amount(s) determined by multiplying the number of FTEs scheduled to be assigned to the Research Program during each full or partial quarter of the Continuation Period (per Chart 1 or as modified per Section 3.3 above ) by the pro rata expense in Year Two for one FTE during that full or partial quarter of the Continuation Period (per Chart 2 in Section 3.3 above). (c) Even if SIGNAL is meeting the criteria level standards for Year 2 set forth in Exhibit B, ROCHE BIOSCIENCE has an option to notify SIGNAL that ROCHE BIOSCIENCE shall cease providing Program Support for Year 3; provided such notice is delivered to SIGNAL by no later than the end of Year 2. If such notice is not received by SIGNAL prior to the end of the third quarter of Year 2, then that notice will not be effective until ninety (90) days after receipt and ROCHE BIOSCIENCE shall be responsible to continue to provide normally scheduled payments for Program Support until the effective date of the notice at a rate determined using the method provided in subparagraph (b) above. If the option under this subparagraph (c) is not exercised prior to the end of Year 2, then the option shall lapse. (d) If ROCHE BIOSCIENCE exercises any of the options under subparagraphs (a), (b) or (c) above, SIGNAL shall work with ROCHE BIOSCIENCE to wind-down and transition the Research Program in a reasonable commercial manner during the period between receipt of the notice and the actual expiration of Program Support as provided in those subparagraphs. 8 ***Confidential Treatment Requested 9 (e) If ROCHE BIOSCIENCE discontinues the Program Support, the Research Program Period shall terminate. 3.3.2 No Refund. All Program Support payments shall be non-refundable, and are not an advance against any license or milestone fees due under the Agreement. 3.4 Research Results. 3.4.1 Ownership and Use. SIGNAL and ROCHE BIOSCIENCE shall jointly own the Research Results specifically related to the purpose and scope of the Research Program (the "Joint Research Results"). Signal shall own the Research Results that are not specifically related to the purpose and scope of the Research Program (the "SIGNAL Research Results"). All patent or other intellectual property rights arising from the conduct of the Research Program shall be determined as provided in Section 8.1 below. Except as otherwise provided in Article 4, neither SIGNAL nor ROCHE BIOSCIENCE shall have the right to use the Joint Research Results, without the prior written consent of the other party, for any purpose other than (a) to fulfill its respective obligations under this Agreement and (b) for ROCHE BIOSCIENCE to develop and commercialize Compounds into human drug Products. SIGNAL shall have the exclusive rights to (c) use the SIGNAL Research Results outside the Field and (d) except as provided in Paragraph 4.3.2, use the Joint Research Results to the extent that such Joint Research Results may have utility outside the Field for both internal research and research sponsored by a Third Party as part of a research and development partnership, provided in the latter instance that under the terms of such partnership at least two of the following criteria are satisfied: [***] Without any further action by the parties, ROCHE BIOSCIENCE hereby assigns to SIGNAL any and all intellectual property rights relating to the SIGNAL Research Results and such rights in the Joint Research Results involving data and information outside the Field as are appropriate and necessary to accomplish the purposes of the preceding sentence. 3.4.2 Reports. At least once each ninety (90) days, SIGNAL shall prepare and provide ROCHE BIOSCIENCE and each member of the Research Committee with a written research report, in reasonably specific detail, summarizing the Research Results from its conduct of the Research Program. 3.5 Restrictions on Use of SIGNAL Materials. 3.5.1 Test and Evaluate. ROCHE BIOSCIENCE shall have the right to use the SIGNAL Materials to develop ROCHE BIOSCIENCE Assays for identifying or characterizing potential Compounds and developing Products, on the terms and subject to the conditions of the Agreement. Except as the parties otherwise expressly agree in writing, ROCHE BIOSCIENCE 9 ***Confidential Treatment Requested 10 shall not, directly or indirectly, use the SIGNAL Materials for any purpose other than as set forth in this Paragraph 3.5.1. 3.5.2 Acknowledgment of SIGNAL Ownership. ROCHE BIOSCIENCE acknowledges that the SIGNAL Materials, together with all SIGNAL Technology rights relative thereto, are, and shall remain, the sole property of SIGNAL. Nothing herein shall be deemed to grant to ROCHE BIOSCIENCE rights in the SIGNAL Materials or the SIGNAL Technology, except as expressly set forth in the Agreement. ROCHE BIOSCIENCE shall not, directly or indirectly, transfer the SIGNAL Materials to any Person other than to employees of ROCHE BIOSCIENCE or its Affiliates. If, at any time, ROCHE BIOSCIENCE ceases to pay the annual license maintenance fees required under Section 4.2 of the Agreement (except where excused under the Paragraphs 4.2.1 and 4.2.2), then ROCHE BIOSCIENCE shall immediately cease use of the SIGNAL Materials for which the annual license maintenance fees are no longer being paid. Additionally, if the Research Program is terminated other than by expiration of the full three (3) year Research Program Period, then ROCHE BIOSCIENCE shall immediately also cease use of the SIGNAL Materials except those Materials for which the annual license maintenance fees are continuing either to be paid or the annual license maintenance fees are excused under Paragraph 4.2.1; or immediately when either of the above exceptions is no longer satisfied. 3.5.3 Research Purposes. ROCHE BIOSCIENCE UNDERSTANDS THAT THE SIGNAL MATERIALS ARE EXPERIMENTAL IN NATURE, ARE FOR RESEARCH USE ONLY AND HAVE NOT BEEN APPROVED FOR HUMAN USE. ROCHE BIOSCIENCE SHALL NOT ADMINISTER THE SIGNAL MATERIALS TO HUMANS IN ANY MANNER OR FORM. 3.6 Research Committee. 3.6.1 Composition. The Research Program shall be conducted under the direction of the Research Committee comprising two (2) named representatives of SIGNAL and two (2) named representatives of ROCHE BIOSCIENCE. Each party shall appoint its representatives to the Research Committee from time to time, and may substitute one or more of its representatives, in its sole discretion, effective upon notice to the other party of such change. 3.6.2 Meetings. The Research Committee shall meet prior to commencing the activity under the Research Program and shall meet at least once every four (4) months, either in person or by telephone conference, on such dates and at such times and places as agreed to by SIGNAL and ROCHE BIOSCIENCE, with in person meetings alternating between San Diego, California and Palo Alto, California or such other locations as the parties mutually agree. At such meetings, the Research Committee shall (a) set and reevaluate goals; (b) allocate manpower; (c) evaluate the Research Results and (d) modify approaches to obtain Research Program goals as dictated by the science. 3.6.3 Actions. Any approval, determination or other action agreed to by all of the members of the Research Committee present at the relevant Research Committee meeting 10 11 shall be the approval, determination or other action of the Research Committee; provided, however, that at least one (1) representative of each party are present at such meeting. Notwithstanding the above, ROCHE BIOSCIENCE shall have the controlling vote with respect to [***] 3.6.4 Disagreements. All disagreements within the Research Committee, other than those over which ROCHE BIOSCIENCE has the controlling vote as provided in Paragraph 3.6.3 above, shall be resolved in the following manner: (a) The representatives of the Research Committee promptly shall present the disagreement to the chief executive officer, or another person designated by the respective chief executive officers, of each of SIGNAL and ROCHE BIOSCIENCE who has the principal responsibility for such party's work under the Agreement. (b) Such executives shall meet to discuss each party's view and to explain the basis for their respective positions of such disagreement, and in good faith shall attempt to resolve such disagreement among themselves. (c) If such executives cannot promptly resolve such disagreement, then such executives shall endeavor in good faith to establish a mutually-acceptable method to resolve such disagreement, and such disagreement shall be resolved in accordance with such method if so established, or by any other lawful means if no such method is so established. 3.6.5 Reports. Within ten (10) days following each Research Committee meeting the Research Committee shall prepare and provide to each party a reasonably detailed written summary report which shall (a) summarize all matters discussed by the Research Committee, (b) state any determinations of the Research Committee and (c) summarize the reasons for each determination described in clause (b) above. 3.6.6 Disbandonment. Upon conclusion of the Research Program Period and delivery of the final report under Paragraph 3.6.5, the Research Committee shall be disbanded. ARTICLE 4 GRANT OF LICENSES 4.1 PNS Cell Lines. 4.1.1 SIGNAL Grant. SIGNAL, on the terms and subject to the conditions of the Agreement, hereby grants to ROCHE BIOSCIENCE: (a) a nonexclusive (except as set forth is Section 4.3), worldwide, royalty-free license under the SIGNAL Technology, during the Research Program Period, with 11 ***Confidential Treatment Requested 12 respect to use of the PNS Cell Lines and to use any one or more of Genes which are within the PNS Cell Lines to identify Compounds for use in the Field. (b) a nonexclusive (except as set forth is Section 4.3), worldwide, royalty-free license under the SIGNAL Technology, after conclusion of the Research Program Period, with respect to use of the PNS Cell Lines and to use any one or more of Genes which are within the PNS Cell Lines to develop Compounds. (c) a nonexclusive (except as set forth is Section 4.3), worldwide, royalty-free license under the SIGNAL Technology, after conclusion of the Research Program Period, to develop, make, use and sell Products. 4.1.2 ROCHE BIOSCIENCE Grant. On the terms and subject to the conditions of the Agreement, ROCHE BIOSCIENCE hereby grants to SIGNAL a nonexclusive, worldwide, royalty-free license to use of the ROCHE BIOSCIENCE Technology, during the Research Program Period. 4.1.3 No Sublicense. Neither SIGNAL under Paragraph 4.1.2 nor ROCHE BIOSCIENCE under Paragraph 4.1.1, subparagraphs (a) and (b), shall have the right to grant sublicenses under the licenses granted to any Affiliate or Third Party. Subject to including applicable provisions of this Agreement in a sublicense, ROCHE BIOSCIENCE may sublicense under Paragraph 4.1.1, subparagraph (c), to any Affiliate or Third Party; however, this limited right to sublicense is not intended to override the proscriptions against sublicensing under the preceding sentence. 4.2 PNS Annual License Maintenance Fee. Subject to the limitations set forth in Paragraphs 4.2.1 and 4.2.2 below, ROCHE BIOSCIENCE will be required to pay to SIGNAL an annual license maintenance fee of [***] for each PNS Cell Line delivered by SIGNAL to ROCHE BIOSCIENCE pursuant to the Research Program as long as that PNS Cell Line is continuing to be utilized by ROCHE BIOSCIENCE for drug research and development purposes. Unless payment of the annual license maintenance fee is exempted under Paragraphs 4.2.1 or 4.2.2 below, with respect to a specific PNS Cell Line, such fee will be due and payable within thirty (30) days after completion and delivery of that PNS Cell Line to ROCHE BIOSCIENCE and on each anniversary date of the first payment due date thereafter. If payment of the annual license maintenance fee is exempted at the time of delivery of a PNS Cell Line, then the first payment with respect thereto shall be due and payable at the earlier of (a) one year after completion of the full three-year Research Program Period or (b) thirty (30) days after (i) ROCHE BIOSCIENCE no longer qualifies for an exemption under Paragraphs 4.2.1 or 4.2.2 below or (ii) early termination of the Research Program Period. 4.2.1 Maximum License Maintenance Fees. The maximum annual license maintenance fee required to be paid in any one calendar year with respect to the PNS Cell Lines is [***] and the maximum of all annual license maintenance fees payments required with respect to the PNS Cell Lines is [***] 12 ***Confidential Treatment Requested 13 4.2.2 Waiver of Annual License Maintenance Fees. For any Research Program year (not calendar year) during the Research Program in which Program Support provided by ROCHE BIOSCIENCE equals or exceeds [***], then ROCHE BIOSCIENCE shall not be required to make the annual license maintenance fees with respect to any PNS Cell Line that would otherwise be required under Section 4.2 above. 4.3 Exclusivity. 4.3.1 Cloned Immortalized PNS Cell Lines. ROCHE BIOSCIENCE'S license shall be exclusive with respect to a Cloned Immortalized PNS Cell Line in the Field for as long as ROCHE BIOSCIENCE is either: (a) making annual license maintenance fee payments with respect thereto, (b) is exempt from making the payment specified in clause (a) above because of Paragraph 4.2.1 above or (c) is exempt from making the payment specified in clause (a) above because of Paragraph 4.2.2 above; provided, that ROCHE BIOSCIENCE is diligently developing at least one (1) potentially milestone-generating Compound in the Field. The diligence requirement shall be deemed satisfied initially if ROCHE BIOSCIENCE files within three (3) years after termination of the Research Program at least one Investigational New Drug application with the United States Food and Drug Administration, or an equivalent application with a foreign regulatory authority, with respect to a Product. Thereafter, ROCHE BIOSCIENCE must be continuing with human clinical development with respect to that Product or at all times have at least one other Product undergoing human clinical development in order to continue to satisfy the diligence requirement. 4.3.2 Novel Genes. For each Novel Gene that is a target in the Field and is discovered pursuant to the Research Program, after such discovery, ROCHE BIOSCIENCE'S license shall be exclusive and SIGNAL shall not grant thereafter a license to any Third Party with respect to that Novel Gene in any PNS Cell Line in any field of use for as long as ROCHE BIOSCIENCE is making all milestone payments required under this Agreement with respect to that Novel Gene. Both parties agree that the ROCHE BIOSCIENCE exclusivity in all fields of use applies only to the Novel Gene and not to the entire PNS Cell Line, where exclusivity is controlled by Paragraph 4.3.1. 4.4 Reservation of Rights. Except as otherwise provided herein, SIGNAL expressly reserves the right for itself, and the right to grant to Affiliates and Third Parties the right, to use the SIGNAL Technology and SIGNAL Materials for: (a) research, screening, testing and evaluation purposes inside or outside the Field, and (b) making, using or selling products or other commercial services outside the Field. 4.5 Right of First Negotiation. Without limiting the rights implicitly granted to ROCHE BIOSCIENCE in the definition of Product, ROCHE BIOSCIENCE shall have the right of first negotiation for a license from SIGNAL for SIGNAL Research Results and Inventions (if such rights are not included in the the definiton of Product) for use outside the Field, including without limitation, [***], if SIGNAL is not prevented under any Third Party agreement from entering 13 ***Confidential Treatment Requested 14 into such negotiations, and is not otherwise obligated to offer such SIGNAL Research Results and Inventions to a Third Party. 4.6 Lapse of Licenses. If, at any time, ROCHE BIOSCIENCE ceases to pay the annual license maintenance fees required under Section 4.2 of the Agreement (except where excused under the Paragraphs 4.2.1 and 4.2.2), then the licenses granted hereunder with respect to the PNS Cell Line and all Genes and the contents thereof shall lapse if ROCHE BIOSCIENCE fails to cure such nonpayment within thirty (30) days after receipt of notice from SIGNAL. Additionally, if the Agreement is terminated other than by expiration of the full three (3) year Program Research Period, then the licenses shall lapse with respect to all PNS Cell Lines and all Genes except for those for which the annual license maintenance fees are continuing to be paid. ARTICLE 5 DILIGENCE AND MILESTONE PAYMENTS FOR RESEARCH PROGRAM 5.1 Diligence Bonus. ROCHE BIOSCIENCE shall pay bonuses to SIGNAL if the following cell line development and characterization goals are achieved within the time frame indicated: [***] * The right to each successive bonus is not dependent upon earning the preceding bonus. 14 ***Confidential Treatment Requested 15 5.2 Target and Drug Discovery Milestones. ROCHE BIOSCIENCE shall make, subject to the limitations set forth in Paragraphs 5.2.1 and 5.2.2 below, the following milestone payments to SIGNAL in connection with attainment of the specified milestone objective relative to various Gene types: [***] * All preclinical milestones arising from achievement and payment of milestones set forth in items 1 through 4 and 7 through 10 of the table shall not exceed [***]. Payment of any milestones achieved under items 5, 6 and 11 of the table are to be excluded in determining the total payments against the maximum of [***]. 5.3 Form and Manner of Payment of Milestones and Bonuses. All milestone and bonus payments provided for in Sections 5.1 and 5.2 above shall be made within thirty (30) 15 ***Confidential Treatment Requested 16 days after attainment of the bonus or milestone attaining event. All payments shall be made in United States Dollars, for SIGNAL's account, by wire transfer to a United States bank designated in writing by SIGNAL. 5.4 Reports. In order for SIGNAL to monitor the diligence and progress of ROCHE BIOSCIENCE toward the attainment of milestones payable under the Agreement, once a PNS Cell Line has been delivered to ROCHE BIOSCIENCE, then each six (6) months thereafter ROCHE BIOSCIENCE shall deliver to SIGNAL a report in form reasonably satisfactory to SIGNAL concerning the progress of drug development. ARTICLE 6 CNS CELL LINES 6.1 Access Fee. On the Effective Date of the Agreement, ROCHE BIOSCIENCE shall pay to SIGNAL an access fee ("Access Fee") of [***], which amount shall allow ROCHE BIOSCIENCE the right to evaluate CNS Cell Lines against the [***] molecular targets identified on Exhibit C hereto for a period of six months from the first day of the Research Program Period (the "Evaluation Period"). Within fifteen (15) days after the first day of the Research Program Period, SIGNAL shall allow ROCHE BIOSCIENCE access to CNS Cell Lines. 6.2 Grant of Evaluation License for CNS Cell Line. Upon receipt of the Access Fee and without any further action required, SIGNAL grants to ROCHE BIOSCIENCE a license under the SIGNAL Technology during the Evaluation Period with respect to the CNS Cell Lines. The license shall be limited to the evaluation of the molecular targets identified on Exhibit C and shall be exclusive with respect to those molecular targets. 6.3 Option to License. During the Evaluation Period, ROCHE BIOSCIENCE shall have an option to obtain the license(s) described in Section 6.4 below. ROCHE BIOSCIENCE must give notice to SIGNAL of the exercise of this option no later than the end of the Evaluation Period. 6.4 Grant of License for CNS Cell Line. On the terms and subject to the conditions of Article 4 of the Agreement, SIGNAL upon exercise of the option in Section 6.3, without any further action required by SIGNAL, grants to ROCHE BIOSCIENCE a nonexclusive, worldwide, royalty-free license under the SIGNAL Technology with respect to use of the CNS Cell Lines and to the use of any one or more Genes within the cell lines and within the SIGNAL Technology to develop, make, use and sell a therapeutic product for use against one of the molecular targets described in Exhibit C only. With respect to each molecular target described in Exhibit C, the license grant shall be exclusive (but may not be sublicensed) and shall remain in effect as long as the license and license maintenance fees described in Section 6.5 below are paid. If ROCHE BIOSCIENCE either voluntarily terminates its license with respect a CNS Cell Line or fails to pay the license fees described in Section 6.5, then the license will lapse with respect to that CNS Cell Line and any products derived therefrom. 16 ***Confidential Treatment Requested 17 6.5 CNS Cell Line License Fees. Upon exercise of the option described in Section 6.3 above, ROCHE BIOSCIENCE shall pay to SIGNAL an additional access license fee in the amount of [***]. In order to maintain any one or more of the licenses upon which the option was validly exercised, ROCHE BIOSCIENCE must pay on each anniversary date of the exercise of the option an annual license maintenance fee of [***] until a total of [***] of annual license maintenance fees have been paid pursuant to this Section 6.5. 6.6 Form of Payment. All payments made under this Article 6 shall be made in United States Dollars, for SIGNAL's account, by wire transfer to a United States bank designated in writing by SIGNAL. ARTICLE 7 CONFIDENTIALITY 7.1 Confidential Information. Except with respect to publication rights described in Section 7.4 below, during the term of the Research Program, and for a period of ten (10) years following the expiration or earlier termination thereof, each party shall maintain in confidence the Joint Research Results and all information of the other party disclosed by the other party and identified as, or acknowledged to be, confidential (collectively, the "Confidential Information"), and shall not use, disclose or grant the use of the Confidential Information except on a need-to-know basis to those directors, officers, employees, employees of Affiliates and consultants, to the extent such disclosure is reasonably necessary in connection with such party's activities as expressly authorized by the Agreement. To the extent that disclosure is authorized by the Agreement, prior to disclosure, each party hereto shall obtain agreement of any such Person to hold in confidence and not make use of the Confidential Information for any purpose other than those permitted by the Agreement. 7.2 Permitted Disclosures. The confidentiality obligations contained in Section 7.1 above shall not apply to the extent that (a) any receiving party (the "Recipient") is required to disclose information by law, order or regulation of a governmental agency or a court of competent jurisdiction, provided that the Recipient shall not make any such disclosure (other than a filing of information or materials with the Unites States Securities and Exchange Commission, a similar filing of information or materials with the National Association of Security Dealers or state securities regulators or a filing of information or materials pursuant to the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and the rules and regulations thereunder, as amended or an equivalent filing with a foreign applicable authority) without first notifying the other party and allowing the other party a reasonable opportunity to seek injunctive relief from (or protective order with respect to) the obligation to make such disclosure; or (b) the Recipient can demonstrate that (i) the disclosed information was public knowledge at the time of such disclosure to the Recipient, or thereafter became public knowledge, other than as a result of actions of the Recipient in violation hereof; (ii) the disclosed information was rightfully known by the Recipient (as shown by its written records) prior to the date of disclosure to the Recipient by the other party hereunder; (iii) the disclosed 17 ***Confidential Treatment Requested 18 information was disclosed to the Recipient on an unrestricted basis from a source unrelated to any party to the Agreement and not under a duty of confidentiality to the other party; or (iv) the disclosed information was independently developed by the Recipient or its Affiliates (as shown by written records) by persons without access to or use of the Confidential Information of the other party; or (c) disclosure is required to be made to a governmental regulatory agency as part of such agency's product license approval process. 7.3 Terms of the Agreement. SIGNAL and ROCHE BIOSCIENCE shall not disclose any terms or conditions of the Agreement to any Third Party without the prior consent of the other party, except as required by applicable law or to Persons with whom ROCHE BIOSCIENCE or SIGNAL has entered into or proposes to enter into a business relationship, provided that such relationship will not conflict (or is highly unlikely to interfere) with the purpose of the Agreement and such Persons shall enter into confidentiality agreement with, or otherwise owe a duty of confidentiality to SIGNAL or ROCHE BIOSCIENCE, as applicable. Notwithstanding the foregoing, after execution of the Agreement, ROCHE BIOSCIENCE and SIGNAL shall agree upon the substance of information that can be used to describe the terms of this transaction, and ROCHE BIOSCIENCE and SIGNAL may disclose such information, as modified by mutual agreement from time to time, without the other party's consent. 7.4 Publications. Prior to any public disclosure or submission for publication by or on behalf of the parties of a manuscript or other document describing the Joint Research Results, the party desiring to disclose or submit such a manuscript ("Disclosing Party") shall send a copy of the proposed manuscript to the other party ("Responding Party"), and shall allow the Responding Party not less than thirty (30) days from the date of receipt in which Responding Party may reasonably determine whether the manuscript contains either subject matter for which patent protection should be sought to protect the Responding Party's intellectual property rights prior to publication of the manuscript or contains Confidential Information belonging to the Responding Party. In either of these events, the Responding Party may by written notice request a delay in publication for up to an additional sixty (60) days and/or deletion of the Responding Party's Confidential Information. Upon receipt of such written notice from the Responding Party, the Disclosing Party shall delay public disclosure of such information or submission of the manuscript. After lapse of the delay period, the Disclosing Party shall be free to publish or disclose such manuscript, except that the Disclosing Party may not disclose any Confidential Information of the Responding Party in violation of this Article 7 without the prior written consent of the Responding Party. ARTICLE 8 INVENTIONS AND PATENTS 8.1 Ownership of Inventions. The entire right and title in all inventions, discoveries and other technology (except the Research Results), whether or not patentable, and any patent applications or patents based thereon, conceived or reduced to practice during the Research Program Period in connection with the Research Program (collectively, the "Inventions") (a) by employees or others acting solely on behalf of SIGNAL or its Affiliates, or which constitute SIGNAL Materials, shall be owned solely by SIGNAL (the "SIGNAL Inventions"), (b) by 18 19 employees or others acting solely on behalf of ROCHE BIOSCIENCE or its Affiliates shall be owned solely by ROCHE BIOSCIENCE(the "ROCHE BIOSCIENCE Inventions"), and (c) jointly by employees or others acting on behalf of SIGNAL and by employees or others acting on behalf of ROCHE BIOSCIENCE or their respective Affiliates, or which constitute a use of SIGNAL Materials, shall be owned jointly by SIGNAL and ROCHE BIOSCIENCE (the "Joint Inventions"). Each party promptly shall disclose to the other party the conception or reduction to practice of Inventions by employees or others acting on behalf of such party. SIGNAL and ROCHE BIOSCIENCE each hereby represents that all employees and other Persons acting on its behalf in performing its obligations under the Agreement shall be obligated under a binding written agreement to assign to it, or as it shall direct, all Inventions made or developed by such employees or other Persons. SIGNAL agrees that ROCHE BIOSCIENCE shall have exclusive rights, regardless of ownership, to the use of all intellectual property in the PNS Cell Lines for use in the Field related to Novel Genes discovered through the use of the PNS Cell Lines. ROCHE BIOSCIENCE agrees that SIGNAL shall have exclusive rights, regardless of ownership, to the use of all intellectual property, including all Inventions arising from the Research Program, for use outside the Field for both internal research and research sponsored by a Third Party as part of a research and development partnership, which partnership satisfies at least two of the criteria described in subparagraphs (d)(i) through (v) of Paragraph 3.4.1; provided ROCHE BIOSCIENCE shall have rights to use such intellectual property to develop and commercialize Compounds into Products. Each party shall grant to the other party such worldwide, royalty-free licenses to its Inventions and Know-How as are reasonably necessary or useful to accomplish the purposes of the prior two sentences. 8.2 Patent Prosecution and Maintenance. 8.2.1 SIGNAL Inventions. SIGNAL shall have the right, in its sole discretion and at its sole expense, to control the preparation, filing, prosecution and maintenance of all SIGNAL Patent Rights and all patents and patent applications which claim the SIGNAL Inventions. 8.2.2 ROCHE BIOSCIENCE Inventions. ROCHE BIOSCIENCE shall have the right, in its sole discretion and at its sole expense, to control the preparation, filing, prosecution and maintenance of all patents and patent applications which claim the ROCHE BIOSCIENCE Inventions. 8.2.3 Patent Prosecution and Maintenance. SIGNAL and ROCHE BIOSCIENCE shall determine by mutual agreement which party controls the preparation, filing, prosecution and maintenance of all patents and patent applications which claim the Joint Inventions; however, [***]. 8.2.4 Rights to Review. In the case of each application and patent described in this Section 8.2 which claims a Joint Invention, the controlling party shall use its good faith efforts to provide the other party with an opportunity to review and comment on the text of each patent application before filing, and shall supply the other party with a copy of such patent application as filed, together with notice of its filing date and serial number. 19 ***Confidential Treatment Requested 20 8.2.5 Cooperation. Each party shall cooperate with the other party, execute all lawful papers and instruments and make all rightful oaths and declarations as may be necessary in the preparation, prosecution and maintenance of all applications and patents described in this Section 8.2. 8.3 Enforcement of Patent Rights. 8.3.1 Notification of Infringement. If at any time, either party hereto shall become aware of any infringement or threatened infringement by a Third Party of any or all the SIGNAL Patent Right, ROCHE BIOSCIENCE Patent Rights or the joint patent rights arising from the Joint Inventions to which the party having the knowledge thereof claims an interest pursuant to the Agreement, the party having the knowledge thereof shall promptly give notice thereof to the other party. 8.3.2 Patent Party Rights. The party (the "Patent Party") with the right to control the maintenance of the patents described in Section 8.2 above shall have the right to determine the appropriate course of action to enforce such patents or otherwise abate the infringement thereof, to take (or refrain from taking) appropriate action to enforce such patents, to control any litigation or other enforcement action and to enter into, or permit, the settlement of any such litigation or other enforcement action with respect to such patents, and shall consider, in good faith, the interests of the other party in so doing. 8.3.3 Other Party Rights. In the case of each patent described in this Section 8.2 which claims a Joint Invention, if the Patent Party does not, within one hundred twenty (120) days of receipt of notice from the other party abate the infringement or file suit to enforce such patent against at least one infringing party, the other party shall have the right to take whatever action it deems appropriate to enforce such patent. 8.3.4 Settlement. The party controlling any such enforcement action shall not settle the action or otherwise consent to an adverse judgment in such action that diminishes the rights or interests of the non-controlling party without the prior written consent of the other party. With respect to suits to enforce SIGNAL Patent Rights and patents which claim SIGNAL Inventions or ROCHE BIOSCIENCE Inventions, all moneys recovered upon the final judgment or settlement of any such suit shall be retained by the controlling party. With respect to suits to enforce patent which claim Joint Inventions, all moneys recovered upon the final judgment or settlement of any such suit shall first be applied to the reimbursement of the parties for their out-of-pocket expenses (including reasonable attorneys' fees) in prosecuting such infringement with the balance to be shared by the parties as they mutually agree. If the monetary recovery is less than the out-of-pocket expenses of the parties, reimbursement shall be on a pro-rata basis. 8.3.5 Cooperation. Notwithstanding the foregoing, SIGNAL and ROCHE BIOSCIENCE shall fully cooperate with each other in the planning and execution of any action to enforce the patents described in Section 8.2 which claim a Joint Invention. 20 21 8.4 No Other Technology Rights. Except as otherwise provided in the Agreement, under no circumstances shall a party, as a result of the Agreement, obtain any ownership interest or other right in any technology, know-how, patents, pending patent applications, products, vaccines, antibodies, cell lines or cultures, or animals of the other party, including items owned, controlled or developed by the other, or transferred by the other to such party at any time pursuant to the Agreement. It is understood and agreed by the parties that the Agreement does not grant to either party any license or other right in basic technology of the other party except to the extent necessary to enable the parties to carry out their part of the Research Program and as otherwise provided in Article 6 hereto. ARTICLE 9 TERM AND TERMINATION 9.1 Expiration. Unless terminated earlier pursuant to Paragraph 3.3.1 or Section 9.2, the term of the Research Program shall expire at the end of the full three (3) year Research Program Period. Article 6 and any other provisions relative to the CNS Cell Lines shall not expire as long as ROCHE BIOSCIENCE maintains at least one license with respect thereto. The remainder of the Agreement, unless terminated under Section 9.2 shall not expire until the later of (a) final license and milestone payments due relative to the PNS Cell Lines have been made or (b) ROCHE BIOSCIENCE has ceased use of all PNS Cell Lines on which milestone payments and license fees are otherwise due hereunder. 9.2 Termination for Cause. Either party may terminate the Agreement upon the occurrence of any of the following: (a) The other party shall (i) seek the liquidation, reorganization, dissolution, or winding up of itself (other than dissolution or winding up for the purposes of reconstruction or amalgamation) or the composition or readjustment of all or substantially all of its debts, (ii) apply for or consent to the appointment of, or the taking of possession by, a receiver, custodian, trustee or liquidator of itself or of all or substantially all of its assets, (iii) make a general assignment for the benefit of its creditors, (iv) commence a voluntary case under the United States Bankruptcy Code, (v) file a petition seeking to take advantage of any other law relating to bankruptcy, insolvency, reorganization, winding-up or composition or readjustment of debts, or (vi) adopt any resolution of its board of directors or stockholders; or for the purpose of effecting any of the foregoing; or (b) A proceeding or case shall be commenced without the application or consent of the other party and such proceeding or case shall continue undismissed, or an order, judgment or decree approving or ordering any of the following shall be entered and continue unstayed in effect, for a period of ninety (90) days from and after the date service of process is effected upon the other party, seeking (i) its liquidation, reorganization, dissolution or winding up, or the composition or readjustment of all or substantially all of its debts, (ii) the appointment of a trustee, receiver, custodian, liquidator or the like of itself or of all or 21 22 substantially all of its assets, or (iii) similar relief under any law relating to bankruptcy, insolvency, reorganization, winding up or composition or readjustment of debts; or (c) Except as otherwise provided in Article 11 below, upon or after the breach of any material provision of the Agreement, if the breaching party has not cured such breach within ninety (90) days after notice thereof from the other party, the Agreement shall terminate, at the option of the other party, after the expiration of such ninety (90) day cure period. 9.3 Effect of Expiration and Termination. The Research Program shall cease upon early termination of the Agreement. Expiration or earlier termination of the Agreement shall not relieve the parties of any obligation or rights accruing prior to such expiration or termination. The provisions of Articles 4, 5, 6, 7, 8, 10 and 14; Section 2.5; and Paragraphs 3.4.1 and 3.5.2 shall survive the expiration or earlier termination of the Research Program or Agreement. ARTICLE 10 INDEMNITY 10.1 Direct Indemnity. Each party shall defend, indemnify and hold the other party, its Affiliates, directors, officers, employees, agents and stockholders harmless and hereby forever releases and discharges the other party, its Affiliates, directors, officers, employees, agents and stockholders from and against all losses, liabilities, damages and expenses (including reasonable attorneys' fees and costs) that the other party, its Affiliates, directors, officers, employees, agents and stockholders may suffer or incur as a result of any claims, demands, actions or other proceedings made or instituted by a Third Party against any of them arising out of or relating to (a) any material breach by the indemnifying party of its obligations under the Agreement, (b) the gross negligence or willful misconduct in connection with the activities performed by or on behalf of the indemnifying party hereunder; (c) the testing, manufacture, use, sale, consumption, distribution or advertising of any of the Compounds or Products by or on behalf of such party or its Affiliates, licensees or sublicensees, employees, consultants, agents or subcontractors pursuant to such party's rights under the Agreement; or (d) the operations or activities of such a Party's Affiliates, licensees or sublicensees in material contravention of the requirements of the Agreement. A Third Party licensor of enabling technology is also indemnified under this Article 10 to the extent such technology is utilized in the performance of the Agreement. 10.2 Procedure. A party (the "Indemnitee") that intends to claim indemnification under this Article 10 shall promptly notify the other party (the "Indemnitor") of any claim, demand, action or other proceeding for which the Indemnitee intends to claim such indemnification, and the Indemnitor shall have the right to participate in, and, to the extent the Indemnitor so desires, jointly with any other indemnitor similarly noticed, to assume the defense thereof with counsel selected by the Indemnitor; provided, however, that the Indemnitee shall have the right to retain its own counsel, with the fees and expenses to be paid by the Indemnitor, if representation of the Indemnitee by the counsel retained by the Indemnitor 22 23 would be inappropriate due to actual or potential differing interests between the Indemnitee and any other party represented by such counsel in such proceedings. The indemnity obligations under this Article 10 shall not apply to amounts paid in settlement of any loss, claim, damage, liability or action if such settlement is effected without the consent of the Indemnitor, which consent shall not be unreasonably withheld or delayed. The failure to deliver notice to the Indemnitor within a reasonable time after the commencement of any such action, if prejudicial to its ability to defend such action, shall relieve the Indemnitor of any liability to the Indemnitee under this Article 10, but the omission to deliver such notice to the Indemnitor shall not relieve it of any liability that it may have to the Indemnitee otherwise than under this Article 10. The Indemnitor may not settle the action or otherwise consent to an adverse judgment in such action that diminishes the rights or interests of the Indemnitee without the express written consent of the Indemnitee. The Indemnitee, its employees and agents, shall cooperate fully with the Indemnitor and its legal representatives in the investigation of any action, claim or liability covered by this indemnification. 10.3 Insurance. ROCHE BIOSCIENCE and SIGNAL each shall maintain, through self insurance or otherwise, insurance with respect to its Research Program Period activities contemplated by the Agreement, in such amount as ROCHE BIOSCIENCE or SIGNAL, respectively, customarily maintains covering its similar activities. SIGNAL and ROCHE BIOSCIENCE, as applicable, shall maintain such insurance for so long as each continues to conduct such activities, and thereafter for so long as SIGNAL and ROCHE BIOSCIENCE, as applicable, each customarily maintains insurance for itself covering its similar activities. So long as ROCHE BIOSCIENCE, or its ultimate parent (currently Roche Holding Ltd.) maintains a financial net worth as determined by mutually-agreed generally accepted accounting principles of at least one hundred million dollars ($100,000,000), then subparagraphs (a) through (g) below shall not be applicable. However, if the financial net worth decreases below such amount, then notwithstanding the preceding paragraph, effective as of such time as any Product enters human clinical trials or, if at time thereafter, the financial net worth drops below such amount, ROCHE BIOSCIENCE with respect to that Product shall insure its activities under this Agreement and obtain, keep in force and maintain insurance, including without limitation product liability insurance, in amounts sufficient to cover its obligations under this Agreement and consistent with reasonable business practice in the industry. Without limiting the foregoing, coverage shall in no event be less than the following: Comprehensive or Commercial Form General Liability Insurance (contractual liability included) with limits as follows: (a) Each occurrence $1,000,000 (b) Products/Completed Operations Aggregate $5,000,000 (c) Personal and Advertising Injury $1,000,000 (d) General Aggregate (commercial form only) $5,000,000 It should be expressly understood, however, that the coverages and limits referred to under the above shall not in any way limit ROCHE BIOSCIENCE'S liability. Certificates of insurance evidencing compliance with all requirements shall be requested and shall provide as follows: 23 24 (e). Provide for thirty (30) day advance written notice to SIGNAL of any modification or termination; (f) Indicate that SIGNAL and the University of California have been endorsed as insureds under the coverages referred to under the above; and (g) Include a provision that the coverages will be primary and will not participate with nor will be excess over any valid and collectable insurance or program of self - insurance carried or maintained by ROCHE BIOSCIENCE. ARTICLE 11 FORCE MAJEURE Neither party shall be held liable or responsible to the other party nor be deemed to have defaulted under or breached the Agreement for failure or delay in fulfilling or performing any term of the Agreement to the extent, and for so long as, such failure or delay is caused by or results from causes beyond the reasonable control of the affected party including but not limited to fire, floods, embargoes, war, acts of war (whether war be declared or not), insurrections, riots, civil commotions, strikes, lockouts or other labor disturbances, acts of God or acts, omissions or delays in acting by any governmental authority or the other party. ARTICLE 12 ASSIGNMENT The Agreement may not be assigned or otherwise transferred (except to an Affiliate of a party), nor, except as expressly provided hereunder, may any right or obligations hereunder be assigned or transferred by either party without the written consent of the other party; provided, however, that either SIGNAL or ROCHE BIOSCIENCE may, without such written consent, assign the Agreement and its rights and obligations hereunder in connection with the transfer or sale of all or substantially all of its business (or, in the case of SIGNAL, all or substantially all of the business containing the SIGNAL Technology to be utilized in performance of the Agreement), or in the event of its merger or consolidation or change in control or similar transaction. Anypermitted assignee shall assume all obligations of its assignor under the Agreement. ARTICLE 13 SEVERABILITY Each party hereby acknowledges that it does not intend to violate any public policy, statutory or common laws, rules, regulations, treaty or decision of any government agency or executive body thereof of any country or community or association of countries. Should one or more provisions of the Agreement be or become invalid, the parties shall substitute, by mutual 24 25 consent, valid provisions for such invalid provisions which valid provisions in their economic effect are sufficiently similar to the invalid provisions that it can be reasonably assumed that the parties would have entered into the Agreement with such provisions. In case such provisions cannot be agreed upon, the invalidity of one or several provisions of the Agreement shall not affect the validity of the Agreement as a whole, unless the invalid provisions are of such essential importance to the Agreement that it is to be reasonably assumed that the parties would not have entered into the Agreement without the invalid provisions. ARTICLE 14 MISCELLANEOUS 14.1 Notices. Any consent, notice or report required or permitted to be given or made under the Agreement by one of the parties to the other shall be in writing, delivered personally or by facsimile (and promptly confirmed by personal delivery, US first class mail or courier), US first class mail or courier, postage prepaid (where applicable), addressed to such other party at its address indicated below, or to such other address as the addressee shall have last furnished in writing to the addressor and (except as otherwise provided in the Agreement) shall be effective upon receipt by the addressee. If to SIGNAL: Signal Pharmaceuticals, Inc. 5555 Oberlin Drive San Diego, California 92121 Attention: President Telefax number: (619) 558-7513 If to ROCHE BIOSCIENCE: ROCHE BIOSCIENCE, a Division of Syntex (U.S.A.) Inc. 3401 Hillview Avenue Palo Alto, CA 94304 Attention: Head, Neurobiology Unit Telefax number: (415) 852-1932 with a copy to: ROCHE BIOSCIENCE, a Division of Syntex (U.S.A.) Inc. 3401 Hillview Avenue Palo Alto, CA 94304 Attention: Legal Department Telefax number: (415) 852-1338 14.2 Applicable Law. The Agreement shall be governed by and construed in accordance with the laws of the State of California, without regard to the conflicts of law principles thereof. 25 26 14.3 Compliance with Applicable Laws. The parties shall use reasonable efforts to comply with all applicable laws, regulations and governmental orders in connection with their respective activities related to the Agreement, including without limitation the research, development, manufacture, use and sale of Products. Without limiting the foregoing, ROCHE BIOSCIENCE shall observe all applicable United States and foreign laws with respect to the transfer of Product and related technical data to foreign countries, including without limitation, the International Traffic in Arms Regulations (ITAR) and the Export Administration Regulations. 14.4 Entire Agreement. The Agreement, including the Exhibits hereto, constitutes the entire understanding of the parties with respect to the subject matter hereof. All express or implied agreements and understandings, either oral or written, heretofore made are expressly superseded by the Agreement. The Agreement may be amended, or any term hereof modified, only by a written instrument duly executed by both parties. 14.5 Headings. The captions to the several Articles, Sections and Paragraphs hereof are not a part of the Agreement, but are merely guides or labels to assist in locating and reading the several Articles, Sections and Paragraphs hereof. 14.6 Independent Contractors. It is expressly agreed that SIGNAL and ROCHE BIOSCIENCE shall be independent contractors and that the relationship between the two parties shall not constitute a partnership, joint venture or agency. Neither SIGNAL nor ROCHE BIOSCIENCE shall have the authority to make any statements, representations or commitments of any kind, or to take any action, which shall be binding on the other, without the prior consent of the party to do so. 14.7 Waiver. Unless otherwise provided herein, no failure or delay on the part of a party in exercising any right under the Agreement, irrespective of the length of time for which such failure or delay shall continue, shall operate as a waiver of, or impair, any such right. The waiver by either party of any right hereunder or the failure to perform or of a breach by the other party shall not be deemed a waiver of any other right hereunder or of any other breach or failure by said other party whether of a similar nature or otherwise. 14.8 Further Assurances. The parties shall cooperate with each other and execute and deliver to each other such other instruments and documents and take such other actions as may be reasonable requested from time to time in order to carry out, evidence and confirm the rights and intended purposes of the Agreement. 14.9 Counterparts. The Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. 26 27 IN WITNESS WHEREOF, the parties have executed the Agreement as of the date first set forth above. SIGNAL PHARMACEUTICALS, INC. By /s/ ALAN J. LEWIS ----------------------------- Name Alan J. Lewis -------------------------- Title President ------------------------- ROCHE BIOSCIENCE, a Division of Syntex (U.S.A.), Inc. By /s/ JAMES N. WOODY 8/21/96 ----------------------------- Name James N. Woody -------------------------- Title President -------------------------- 27 28 EXHIBIT A [***] 28 ***Confidential Treatment Requested 29 EXHIBIT B CRITERIA LEVEL STANDARDS [***] B-1 ***Confidential Treatment Requested 30 EXHIBIT C MOLECULAR TARGETS OF CNS CELL LINES [***] C-1 ***Confidential Treatment Requested 31 EXHIBIT D ROCHE BIOSCIENCE ASSAYS None on the Effective Date. D-1 32 CONFIDENTIALITY AGREEMENT SIGNAL PHARMACEUTICALS, INC. THIS AGREEMENT, effective December 12, 1996 (the "Effective Date"), by and between Roche Bioscience, a division of Syntex (U.S.A.) Inc. ("Roche Bioscience"), having an address at 3401 Hillview Avenue, Palo Alto, California 94304, and Signal Pharmaceuticals, Inc. ("Signal"), having an address at 5555 Oberlin Drive, San Diego, California 92121, shall govern the conditions of disclosure by Signal and its affiliates to Roche Bioscience of written confidential Information dealing with Signal's bone disease programs ("Information"). This Agreement and any other Agreement specifically excludes Information communicated concerning NF(K)B (ubiquitin). 1. In consideration of Signal's and its affiliates' disclosure to Roche Bioscience of said Information, Roche Bioscience hereby agrees: (a) not to use such Information except for the sole purpose of evaluating its interest therein; and (b) not to disclose or transfer Information to others (except to its employees who reasonably require same for the sole purpose hereof and who are bound to it by like obligations as to confidentiality) without the express written permission of Signal, except that Roche Bioscience shall not be prevented from using or disclosing Information that: (i) Roche Bioscience can demonstrate by written records was known to Roche Bioscience before the date of disclosure hereunder; (ii) is now, or becomes in the future, publicly available other than by breach of this Agreement by Roche Bioscience; or (iii) is lawfully disclosed to Roche Bioscience on a non-confidential basis by a third party who is not obligated to Signal or any other party to retain such Information in confidence. 2. If samples are provided by Signal or its affiliates to Roche Bioscience and Roche Bioscience formulates, modifies and/or tests the samples in any way, Roche Bioscience shall submit all resulting Information and/or test results to Signal. Roche Bioscience shall treat said Information and/or test results in the same manner as Information under the terms of Section 1, above, unless the parties agree otherwise in writing. 3. It is further agreed that the furnishing of Information under this Agreement shall not constitute any grant, option or license to Roche Bioscience under any patent or other rights now or hereafter held by Signal or any of its affiliates with respect to said Information. 1 33 4. The obligations of Roche Bioscience under the terms of this Agreement shall remain in effect for five (5) years from the date of disclosure. 5. This Agreement shall be interpreted and enforced in accordance with the law of the State of California (regardless of the choice of law principles of California or any other jurisdiction). ROCHE BIOSCIENCE, a division SIGNAL PHARMACEUTICALS, INC. of Syntex (U.S.A.) Inc. By R. ROOTH By /s/ CARL BOBKOSKI ------------------------- ------------------------------ Print Name R. Rooth Print Name CARL BOBKOSKI ------------------------- ------------------------------ Title ILLEGIBLE Title EVP ------------------------- ------------------------------ Date 12 DEC 1996 Date 12/12/96 ------------------------- ------------------------------ 2 34 [SIGNAL PHARMACEUTICALS, INC. LOGO] CONFIDENTIALITY OBLIGATIONS Signal Pharmaceuticals, Inc. [the Company] requests that Agouron Pharmaceuticals, Inc. (the "Recipient") sign the following confidentiality agreement in connection with your review of certain proprietary business information of the Company as described below. The Recipient acknowledges that the Recipient is receiving confidential information, financial information, business plans relating to transcriptional regulation of HPV and its use for the discovery of novel therapeutic agents and other proprietary information of the Company, which plans contain sensitive confidential information about the Company that is valuable to them in their businesses. In addition, the recipient will receive oral information from officers of the Company regarding its plans, strategies and finances. All such information shall be deemed "Confidential Information" unless otherwise provided as below. The Recipient and the Company agree [a] that the Confidential Information will be and will remain the sole property of the Company, [b] that all proprietary rights in connection with the Confidential Information will be and will remain the sole property of the Company and [c] that nothing in this Agreement is to be construed as granting or conferring any rights by license or otherwise, expressly or impliedly, for any business strategy, marketing plan, invention, discovery, protocol design or improvement on any of the foregoing, embodied in the Confidential Information disclosed hereunder. The Recipient agrees to use the Confidential Information solely for the purpose of evaluating the potential relationship between the Recipient and the Company. The Recipient agrees that, for a period of five [5] years from the date upon which this Agreement is accepted you will maintain all Confidential Information in confidence and will refrain from using any such Confidential Information for any purpose, unless so authorized in writing by the Company. The Company agrees that no obligation of confidentiality or limitation on use will apply to any information which: was known by the Recipient prior to receipt hereunder, as evidenced by written records in your possession; or was generally known to the public prior to its receipt by the Recipient hereunder; or subsequent to receipt hereunder becomes generally known to the public other than by any act or omission on the Recipient's part; or 35 subsequent to receipt hereunder, is made available to the Recipient by a third party legally entitled to do so; or was independently developed by the Recipient without reference to the information received from the Company hereunder, as evidenced by written records in your possession; or is required by law, regulation, rule, act or order of any governmental authority to be disclosed. Immediately upon written request of the Company, the Recipient will return to the Company any and all written or tangible forms of Confidential Information and all copies thereof, with the exception of one copy to be retained for reference and proof. The Company represent and warrants that it owns the Confidential Information and has the right to disclose the same to the Recipient. The Recipient agrees that this Agreement supersedes all prior discussions and writings and constitutes the entire agreement between the Recipient and the Company with respect to your confidentiality obligations. No waiver or modification will be binding upon either party unless made in writing and signed by you as a duly authorized representative of the Company. The failure of the Company to enforce at any time or for any period of time the provisions of this Agreement will not be construed to be a waiver of such provisions or of the rights to enforce each and every such provision. If the foregoing is acceptable to you, please indicate your concurrence by signing the duplicate originals of this Agreement. By: /s/ MARK D. CARMAN ------------------------------------- Mark D. Carman, Ph.D. Vice President, Corporate Development Agreed To and Accepted: /s/ GARY E. FRIEDMAN ------------------------------------- Signature Gary E. Friedman, Esq. September 5, 1996 ------------------------------------- ------------------------- Vice President and General Counsel Name Date [SIGNAL PHARMACEUTICALS INC. LOGO] 36 FIRST AMENDMENT TO COLLABORATIVE RESEARCH AGREEMENT THIS FIRST AMENDMENT TO COLLABORATIVE RESEARCH AGREEMENT is entered into effective September 5, 1997 by and between Syntex (U.S.A.) Inc., through its Roche Bioscience division ("Roche Bioscience") and Signal Pharmaceuticals, Inc. ("Signal"). WHEREAS, the parties entered into a Research Collaboration Agreement dated August 26, 1996 (the "Agreement"); WHEREAS, under Section 3.3.1(a) of the Agreement, Roche Bioscience has the right to cease providing Program Support if Signal fails to [***] WHEREAS, Signal recently delivered to Roche Bioscience what Signal believes is a [***] Roche Bioscience is determining whether what Signal delivered is a [***] WHEREAS, Roche Bioscience wishes to have additional time to make such determination and Signal wishes to grant such extension of time to Roche Bioscience. NOW, THEREFORE, in consideration of the mutual promises contained herein and for other good and valuable consideration receipt of which is hereby acknowledged, the parties agree as follows: 1. Any defined terms not defined herein shall have the meaning set forth in the Agreement. 2. Section 3.1.1(a) is hereby amended by deleting "ten (10) days after the end of Year One" at the end of the first sentence and replacing it with "September 30, 1997" so that the first sentence of Section 3.1.1(a) reads as follows: If Signal fails to [***] by the end of Year One of the Agreement, then Roche Bioscience, as it sole remedy, has the option to notify Signal that Roche Bioscience shall cease providing Program Support; provided that such notice is delivered to Signal by no later than September 30, 1997. 3. All other terms and conditions of the Agreement shall remain the same. IN WITNESS WHEREOF, the parties have executed this First Amendment to be effective as of the date first written above. ROCHE BIOSCIENCE SIGNAL PHARMACEUTICALS, INC. a division of SYNTEX (U.S.A.) INC. By /s/ GAYLE M. MILLS By /s/ CARL BOBKOSKI -------------------------------- ------------------------- Gayle M. Mills Vice President, Neurobiology Print Name CARL BOBKOSKI Business Unit Title Executive Vice President Date 4 September 1997 Date September 8, 1997 ***Confidential Treatment Requested EX-10.44 46 EXHIBIT 10.44 1 *** Text Omitted and Filed Separately Confidential Treatment Requested Under 17 C.F.R. Sections 200.80, 200.83 and 230.406. Exhibit 10.44 EXCLUSIVE LICENSE AGREEMENT This Agreement, effective as of October 1996 (the "Effective Date"), is between the University of Massachusetts ("University"), a public institution of higher education of the Commonwealth of Massachusetts, and Signal Pharmaceuticals, Inc. ("Company"), a Delaware Corporation. RECITALS WHEREAS, University is the owner by assignment of the inventions claimed in the United States Patent Application listed on Exhibit A; WHEREAS, Company desires to obtain an exclusive license in the field of drug discovery under the rights of University in any patent rights claiming such inventions; and WHEREAS, University is willing to grant Company such an exclusive license on the terms and conditions set forth in this Agreement. NOW, THEREFORE, University and Company hereby agree as follows: 1. Definitions. 1.1. "Affiliate" shall mean any legal entity (such as a corporation, partnership, or limited liability company) that is controlled by Company. For the purposes of this definition, the term "control" means (i) beneficial ownership of at least fifty percent (50%) of the voting securities of a corporation or other business organization with voting securities or (ii) a fifty percent (50%) or greater interest in the net assets or profits of a partnership or other business organization without voting securities. 1.2. "Confidential Information" shall mean any confidential or proprietary information furnished by one party (the "Disclosing Party") to the other party (the "Receiving Party") in connection with this Agreement, provided that such information is specifically designated as confidential. Such Confidential Information shall include, without limitation, any diligence reports furnished to University under Section 3.1. and royalty reports furnished to University under Section 5.1. 1.3. "Field" shall mean use of the [***] proteins and genetic sequences for drug discovery applications. 1.4. "Licensed Product" shall mean any product that cannot be developed, manufactured, used, or sold without infringing one or more claims under the Patent Rights. Licensed Products include, without limitation, pharmaceutical compounds identified through use of an [***] screen. 1 ***Confidential Treatment Requested 2 1.5. "Net Sales" shall mean the gross amount billed or invoiced on sales by Company and its Affiliates and Sublicensees of Licensed Products, less the following: (i) customary trade, quantity, or other cash reduction programs or cash discounts and commissions to non-affiliated brokers or agents to the extent actually allowed and taken; (ii) amounts repaid or credited by reason of rejection or return; (iii) to the extent separately stated on purchase orders, invoices, or other documents of sale, any taxes or other governmental charges levied on the production, sale, transportation, delivery, or use of a Licensed Product which is paid by or on behalf of Company; (iv) outbound transportation costs prepaid or allowed and costs of insurance in transit; and (v) customs duties, surcharges, and other governmental charges incurred in connection with the exportation or importation of Licensed Products. In any transfers of Licensed Products between Company and an Affiliate or Sublicensee, Net Sales shall be calculated based on the final sale of the Licensed Product to an independent third party only, and the transfers between Company and an Affiliate or Sublicensee shall be excluded from the calculation of net sales. In the event that Company or an Affiliate or Sublicensee receives non-monetary consideration for any Licensed Products, Net Sales shall be calculated based on the fair market value of such consideration. In the event that Company or its Affiliates or Sublicensees use or dispose of a Licensed Product in the provision of a commercial service, the Licensed Product shall be considered sold and the Net Sales shall be calculated based on the sales price of the Licensed Product to an independent third party during the same Royalty Period or, in the absence of such sales, on the fair market value of the Licensed Product as determined by the parties in good faith. 1.6. "Patent Rights" shall mean the U.S. patent application listed on Exhibit A, and any divisional, continuation, or continuation-in-part of such patent applications to the extent the claims are directed to [***], as well as any patent issued thereon and any reissue or extension of such patent, and any foreign counterparts to such patents and patent applications. Exhibit A shall be periodically amended to include any additional Patent Rights that may arise; however, the failure to timely amend this Agreement shall not result in a change of the definition of Patent Right in the preceding sentence. 1.7. "Related Technology" shall mean any know-how, technical information, research and development information, test results, and data necessary for the effective exercise of the Patent Rights which has been developed in the laboratory of [***] as of the Effective Date and which is owned by University. 1.8. "Royalty Period" shall mean the partial calendar quarter commencing on the date on which the first Licensed Product is sold or used and every complete or partial calendar quarter thereafter during which either (i) this Agreement remains in effect or (ii) Company has the right to complete and sell work-in-progress and inventory of Licensed Products pursuant to Section 8.4. 1.9. "Sublicense Income" shall mean any payments that Company receives from a Sublicensee in consideration of the sublicense of the rights granted Company under Section 2.1. with respect to the Patent Rights, including without limitation license initiation fees, license 2 ***Confidential Treatment Requested 3 maintenance fees, payments in excess of fair market value which are made in consideration for the issuance of equity securities of Company, and payments committed to the development of Licensed Products, but excluding royalty and milestone payments. 1.10. "Sublicensee" shall mean any permitted sublicensee of the rights granted Company under this Agreement, as further described in Section 2.2. 1.11. "Term" shall mean the term of this Agreement as further defined in Section 8.1. below. 2. Grant of Rights. 2.1. License Grant. (a) Patent Rights. Subject to the terms of this Agreement, University hereby grants to Company and its Affiliates an exclusive, worldwide, royalty-bearing license (with the right to sublicense) under its commercial rights in the Patent Rights to develop, make, have made, use, and sell Licensed Products in the Field. (b) Related Technology. Subject to the terms of this Agreement, University hereby grants to Company and its Affiliates a non-exclusive, worldwide, royalty-bearing license (with the right to sublicense) under its commercial rights in the Related Technology to develop, make, have made, use, and sell Licensed Products in the Field. 2.2. Sublicenses. Company shall have the right to grant sublicenses of its rights under Section 2.1. with the consent of University, which consent shall not be unreasonably withheld or delayed. All sublicense agreements executed by Company pursuant to this Article 2 shall expressly bind the Sublicensee to the terms of this Agreement and shall provide for the automatic assignment of such agreement to University if this Agreement is terminated as described in Article 8 below. Company shall promptly furnish University with a fully executed copy of any such sublicense agreement. 2.3 Retained Rights. (a) University. University retains the right to make and use Licensed Products for academic research and academic patient care, without payment of compensation to Company. University may license its retained rights under this Section to research collaborators of University faculty members, post-doctoral fellows, and students. Notwithstanding the above retention of rights, the University does not retain any right to make, use, or sublicense any third party the right to use the license or sublicense for commercial applications in the Field. (b) Federal Government. To the extent that any invention claimed in the Patent Rights has been partially funded by the federal government, this Agreement and the grant of any rights in such Patent Rights are subject to and governed by federal law as set forth in 35 U.S.C. Sections 201-211, and the regulations promulgated thereunder, as amended, or any successor statutes 3 4 or regulations. Company acknowledges that these statutes and regulations reserve to the federal government a royalty-free, non-exclusive, non-transferable license to practice any government funded invention claimed in any Patent Rights. If any term of this Agreement fails to conform with such laws and regulations, the relevant term shall be deemed an invalid provision and modified in accordance with Section 10.10. The inventions claimed in the Patent Rights and the Related Technology were conceived or reduced to practice by [***], an employee of the [***] and a faculty member of University, and were assigned to University by [***] in accordance with the Collaboration Agreement between [***] and University dated November 16, 1990, as amended (the "Collaboration Agreement"). Pursuant to the Collaboration Agreement, University is required to grant [***] a paid-up, non-exclusive, irrevocable license to use the Patent Rights and the Related Technology for [***] noncommercial purposes, but of this Exclusive License Agreement to the contrary, Company acknowledges that [***] shall have the [***] License. 3. Company Obligations Relating to Commercialization. 3.1. Diligence Requirements. Company shall use diligent efforts, or shall require its Affiliates and Sublicensees to use diligent efforts, to develop Licensed Products and to introduce Licensed Products into the commercial market; thereafter, Company or its Affiliates or Sublicensees shall make Licensed Products reasonably available to the public. Company shall have conclusively satisfied its obligations under this Section 3.1. if Company or an Affiliate or Sublicensee fulfills the following obligations: (1) Within sixty (60) days after the Effective Date, Company shall furnish University with a written summary of the research and development plans under which Company intends to develop Licensed Products. (2) Within sixty (60) days after each anniversary of the Effective Date, Company shall furnish University with a written summary of the progress of its efforts during the prior year to develop and commercialize Licensed Products, including research and development efforts, efforts to obtain regulatory approval, and marketing efforts. (3) [***] (4) [***] In the event that University reasonably determines that the diligence obligations of Company under this Section 3.1. have not been fulfilled by Company or by an Affiliate or Sublicensee, University shall furnish Company with written notice of such determination. Within sixty (60) days after receipt of such notice, Company shall either (i) fulfill the relevant obligation or (ii) negotiate with University a mutually acceptable schedule of revised diligence obligations, failing 4 ***Confidential Treatment Requested 5 which University shall have the right, immediately upon written notice to Company, to terminate this Agreement or to grant additional license to third parties under its rights in the Patent Rights. So long as at least one of the Company or its Affiliates or Sublicensees continues to meet the diligence requirements set forth above, the University shall not have any termination rights under this Section 3.1. 3.2. Indemnification. (a) Indemnity. Company shall indemnify, defend, and hold harmless University and its trustees, officers, faculty, students, employees, and agents and their respective successors, heirs and assigns (the "Indemnitees"), against any liability, damage, loss, or expense (including reasonable attorneys fees and expenses of litigation) incurred by or imposed upon any of the Indemnitees in connection with any third-party claims, suits, actions, demands or judgments arising out of any theory of liability (including without limitation actions in the form of tort, warranty, or strict liability and regardless of whether such action has any factual basis) concerning any Licensed Product, process, or service that is made, used, or sold pursuant to any right or license granted under this Agreement; provided, however, that such indemnification shall not apply to any liability, damage, loss, or expense to the extent directly attributable to (i) the negligent activities or intentional misconduct of the Indemnitees or (ii) the settlement of a claim, suit, action, or demand by Indemnitees without the prior written approval of Company. Company also shall indemnify, defend, and hold harmless [***] and its trustees, officers, employees, and agents, and their respective successors, heirs and assigns (the "[***] Indemnitees"), from and against any claim, liability, cost, expense, damage deficiency, loss, or obligation (including, without limitation, reasonable attorney's fees and costs), based upon, arising out of, or otherwise relating to any actions taken or omissions made in connection with or pursuant to this Exclusive License Agreement The [***] Indemnitees agree to provide Company with prompt written notice of any claim, suite action, demand or judgment for which indemnification is sought under this Agreement. Company agrees that any sublicense shall agree to provide Institute with the same indemnity provided by Company herein. (b) Procedures. The Indemnitees agree to provide Company with prompt written notice of any claim, suit, action, demand, or judgment for which indemnification is sought under this Agreement. Company agrees, at its own expense, to provide attorneys reasonably acceptable to University to defend against any such claim. The Indemnitees shall cooperate fully with Company in such defense and will permit Company to conduct and control such defense and the disposition of such claim, suit, or action (including all decisions relative to litigation, appeal, and settlement); provided, however, that any Indemnitee shall have the right to retain its own counsel, at the expense of Company, if representation of such Indemnitee by the counsel retained by Company would be inappropriate because of actual or potential differences in the interests of such Indemnitee and any other party represented by such counsel. Company agrees to keep University informed of the progress in the defense and disposition of such claim and to consult with University with regard to any proposed settlement The failure to deliver a written notice to Company within a reasonable time after the commencement of such claim, suit, or action, if prejudicial to Company's ability to defend such action, shall relieve Company of any liability to 5 ***Confidential Treatment Requested 6 the Indemnitees under Section 3.2, but the omission to deliver shall not relieve Company of any liability that it may have to the Indemnitees other than under this Section 3.2. (c) Insurance. Effective as of such time as a Licensed Product enters human clinical trials, Company shall maintain insurance or self-insurance that is reasonably adequate to fulfill any potential obligation to the Indemnitees, but in any event not less than one million dollars ($1,000,000) for injuries to any one person arising out of a single occurrence and five million dollars ($5,000,000) for injuries to all persons arising out of a single occurrence. Company shall provide University, upon request, with written evidence of such insurance or self-insurance. Company shall continue to maintain such insurance or self-insurance after the expiration or termination of this Agreement during any period in which Company or any Affiliate or Sublicensee continues to make, use, or sell a product that was a Licensed Product under this Agreement and thereafter for a period of five (5) years. Until such time as a Licensed Product enters human clinical trials, Company shall maintain insurance or self-insurance in such amount as Company customarily maintains covering similar activities, and shall maintain such insurance so long as Company customarily carries such insurance coverage, or until a Licensed Product enters human clinical trials. 3.3. Use of University Name. In accordance with Section 7.3., Company and its Affiliates and Sublicensees shall not use the name "University of Massachusetts" or any variation of that name in connection with the marketing or sale of any Licensed Products. 3.4. Marking of Licensed Products. To the extent commercially feasible and consistent with prevailing business practices Company shall mark, and shall cause its Affiliates and Sublicensees to mark, all Licensed Products that are manufactured or sold under this Agreement with the number of each issued patent under the Patent Rights that applies to such Licensed Product. 3.5. Compliance with Law. Company shall comply with, and shall require its Affiliates and Sublicensees comply with, all local, state, federal, and international laws and regulations relating to the development, manufacture, use, and sale of Licensed Products. Company expressly agrees to comply with the following: (i) Company or its Affiliates or Sublicensees shall obtain all necessary approvals from the United States Food & Drug Administration and any similar governmental authorities of any foreign jurisdiction in which Company or an Affiliate or Sublicensee intends to make, use, or sell Licensed Products. (ii) Company and its Affiliates and Sublicensees shall comply with all United States laws and regulations controlling the export of certain commodities and technical data, including without limitation all Export Administration Regulations of the United States Department of Commerce. Among other things, these laws and regulations prohibit, or require a license for, the export of certain types of commodities and technical data to specified countries. Company hereby gives written assurance that it will comply with, and will require its Affiliates and Sublicensees to comply with, all United States 6 7 export control laws and regulations, and that it will indemnify, defend, and hold University harmless (in accordance with Section 3.2.) for the consequences of any such violation. (iii) To the extent that any invention claimed in the Patent Rights has been partially funded by the United States government, and only to the extent required by applicable laws and regulations, Company agrees that any Licensed Products used or sold in the United States will be manufactured substantially in the United States or its territories. Current law provides that if domestic manufacture is not commercially feasible under the circumstances, University may seek a waiver of this requirement from the relevant federal agency on behalf of Company. 4. Consideration for Grant of Rights. 4.1. License Fee. In partial consideration of the rights granted Company under this Agreement, Company shall pay to University, within thirty (30) days after the Effective Date, a license fee of [***]. In addition, Company shall reimburse University for all expenses incurred by University as of the Effective Date in connection with the Patent Rights. These license fee payments are nonrefundable and are not creditable against any other payments due to University under this Agreement 4.2. Equity. In partial consideration of the license granted Company under this Agreement, Company shall issue to University a total of [***] shares of Common Stock of Company, under the terms of the Common Stock Purchase Agreement dated as of the Effective Date between Company and University (the "Common Stock Purchase Agreement"). 4.3. Milestone Payments. Company shall pay University the following milestone payments within thirty (30) days after the occurrence of each event with respect to each Licensed Product for each indication:
Milestone Payment --------- ------- [***]
7 ***Confidential Treatment Requested 8 * With respect to these milestones, only one payment is required per indication regardless of the number of Licensed Products that trigger the milestone within a [***] period, provided that each such Licensed Product is a derivative or analogue of a single precursor chemical entity. These milestone payments are nonrefundable and are not creditable against any other payments due to University under this Agreement. Company shall pay University such amounts regardless of who achieves the milestone, whether Company or an Affiliate or Sublicensee. 4.4 Royalties. (a) Base Royalty. In partial consideration of the rights granted Company under this Agreement, Company shall pay to University the following royalties on Net Sales of Licensed Products by Company and its Affiliates and Sublicensees: [***] If both royalty rates could apply to sales of a Licensed Product, only the higher royalty rate shall apply (i.e., the [***] rate will apply rather than a [***] rate). (b) No Multiple Royalties. No multiple royalties shall be payable because a particular Licensed Product or its manufacture, use, or sale are or shall be covered by more than one patent application or patent included within the Patent Rights. 4.5. Minimum Royalty. In each calendar year during the Term, University shall receive the following minimum royalty payments: [***]
If the actual royalty payments to University in any calendar year are less than the minimum royalty payment required for that year, Company shall have the right to pay University the difference between the actual royalty payment and the minimum royalty payment in full satisfaction of its obligations under this Section, provided such minimum payment is made to University within sixty (60) days after the conclusion of the calendar year. Waiver of any minimum royalty payment by University shall not be construed as a waiver of any subsequent minimum royalty payment. 8 ***Confidential Treatment Requested 9 4.6. Sublicense Income. Company shall pay University a total of [***] of all Sublicense Income. Such amounts shall be due and payable within sixty (60) days after Company receives the relevant payment from the Sublicensee. Company has stated that Company intends to license the Patent Rights together with patent rights licensed by Company from third parties so that in one license agreement Company would sublicense rights to multiple targets comprising one "signaling pathway." In such event, and if Company must pay a royalty to such third-party licensors, the percentage of Sublicense Income payable to University shall be reduced by (i) [***] in the case of one such third- party licensor and (ii) [***] in the case of more than one such third-party licensor. 4.7. Sales Bonus. Company shall pay University one-time bonuses in the amount of [***] in the event that cumulative worldwide gross sales of Licensed Products by Company and its Affiliates and Sublicensees exceeds [***] and an additional [***] in the event that cumulative worldwide gross sales of Licensed Products by Company and its Affiliates and Sublicensees exceeds [***]. Such amount shall be due and payable within sixty (60) days after the conclusion of the Royalty Period in which such revenue milestone is achieved. 5. Royalty Reports; Payments; Records. 5.1. Reports and Payments. Within sixty (60) days after the conclusion of each Royalty Period, Company shall deliver to University a report containing the following information: (i) the number of Licensed Products sold to independent third parties in each country, and the number of Licensed Products used by Company and its Affiliates and Sublicensees to provide commercial services in each country; (ii) the gross sales price for each Licensed Product by Company and its Affiliates during the applicable Royalty Period in each country; (iii) calculation of Net Sales for the applicable Royalty Period in each country, including a listing of applicable deductions; (iv) total royalty payable on Net Sales in U.S. dollars, together with the exchange rates used for conversion; and (v) withholding taxes, if any, required by law to be deducted as a payment by University in respect of such Net Sales. All such reports shall be considered Company Confidential Information. If no royalties are due to University for any Royalty Period, the report shall so state. Concurrent with this report, Company shall remit to University any payment due for the applicable Royalty Period. 9 ***Confidential Treatment Requested 10 5.2. Payments in U.S. Dollar. All payments due under this Agreement shall be payable in United States dollars. Conversion of foreign currency to U.S. dollars shall be made at the conversion rate existing in the United States (as reported in the Wall Street Journal) on the last working day of the calendar quarter preceding the applicable Royalty Period. Such payments shall be without deduction of exchange, collection, or other charges. 5.3. Payments in Other Currencies. If by law, regulation, or fiscal policy of a particular country, conversion into United States dollars or transfer of funds of a convertible currency to the United States is restricted or forbidden, Company shall give University prompt written notice of such restriction, which notice shall satisfy the sixty-day payment deadline described in Section 5.1. Company shall pay any amounts due University through whatever lawful methods University reasonably designates; provided, however, that if University fails to designate such payment method within thirty (30) days after University is notified of the restriction, Company may deposit such payment in local currency to the credit of University in a recognized banking institution selected by Company and identified by written notice to University, and such deposit shall fulfill all obligations of Company to University with respect to such payment 5.4. Records. Company shall maintain, and shall require its Affiliates and Sublicensees to maintain, complete and accurate records of Licensed Products that are made, used, or sold under this Agreement and any amounts payable to University in relation to such Licensed Products, which records shall contain sufficient information to permit University to confirm the accuracy of any reports delivered to University under Section 5.1. The relevant party shall retain such records relating to a given Royalty Period for at least three (3) years after the conclusion of that Royalty Period, during which time University shall have the right, at its expense, to cause its internal accountants or an independent, certified public accountant to inspect such records during normal business hours for the sole purpose of verifying any reports and payments delivered under this Agreement. Such accountant shall not disclose to University any information other than information relating to accuracy of reports and payments delivered under this Agreement. The parties shall reconcile any underpayment or overpayment within thirty (30) days after the accountant delivers the results of the audit. In the event that any audit performed under this Section reveals an underpayment in excess of ten percent (10%) in any Royalty Period, Company shall bear the full cost of such audit; however, Company shall have the right to review and verify the audit results prior to being required to pay the cost of the audit. University may exercise its rights under this Section only once every year and only with reasonable prior notice to Company. 5.5. Late Payments. Any payments by Company that are not paid on or before the date such payments are due under this Agreement shall bear interest, to the extent permitted by law, at two percentage points above the Prime Rate of interest as reported in the Wall Street Journal on the date payment is due, with interest calculated based on the number of days that payment is delinquent. 5.6. Method of Payment. All payments under this Agreement should be made in the name of the "University of Massachusetts" and sent to the address identified below. Each payment should reference this Agreement and identify the obligation under this Agreement that the payment satisfies. 10 11 5.7 Withholding and Similar Taxes. Royalty payments and other payments due to University under this Agreement shall not be reduced by reason of any withholding or similar taxes applicable to such payments to University. 6. Patents and Infringement. 6.1. Responsibility for Patent Rights. University shall have primary responsibility, at the expense of Company, for the preparation, filing, prosecution, and maintenance of all Patent Rights, using patent counsel reasonably acceptable to Company. University shall consult with Company as to the preparation, filing, prosecution, and maintenance of all such Patent Rights reasonably prior to any deadline or action with the U.S. Patent & Trademark Office or any foreign patent office and shall furnish Company with copies of all relevant documents reasonably in advance of such consultation. 6.2. Payment of Expenses. Within thirty (30) days after University invoices Company, Company shall reimburse University for all reasonable patent-related expenses incurred by University pursuant to Section 6.1. Company may elect, upon sixty (60) days written notice to University, to cease payment of the expenses associated with obtaining or maintaining patent protection for one or more Patent Rights in one or more countries. In such event, Company shall lose all rights under this Agreement with respect to such Patent Rights in such countries, but Company shall retain rights in all other countries in which Company has not elected to cease payment of patent-related expenses. 6.3. Abandonment. In the event that University desires to abandon any patent or patent application within the Patent Rights, University shall provide Company with reasonable prior written notice of such intended or decline of responsibility, and Company shall have the right, at its expense, to prepare, file, prosecute, and maintain the relevant Patent Rights. 6.4. Infringement (a) Notification of Infringement Each party agrees to provide written notice to the other party promptly after becoming aware of any infringement of the Patent Rights. (b) Company Right to Prosecute. So long as the license granted Company under Section 2.1.(a) remains exclusive (subject to the retained rights under Section 2.3), Company shall have the right, under its own control and at its own expense, to prosecute any third party infringement of the Patent Rights in the Field or, together with other licensees of the Patent Rights in other fields, to defend the Patent Rights in any declaratory judgment action brought by a third party which alleges invalidity, unenforceability, or non-infringement of the Patent Rights. Prior to commencing any such action, Company shall consult with University and shall consider the views of University regarding the advisability of the proposed action and its effect on the public interest. Company shall not enter into any settlement, consent judgment, or other Voluntary final disposition of any infringement action under this Subsection without the prior 11 12 written consent of University, which consent shall not be unreasonably withheld or delayed. Any recovery obtained in an action under this Subsection shall be distributed as follows: (i) each party shall be reimbursed for any expenses incurred in the action (including the amount of any royalty payments withheld from University as described below), (ii) as to ordinary damages, Company shall receive an amount equal to its lost profits or a reasonable royalty on the infringing sales (whichever measure of damages the court shall have applied), less a reasonable approximation of the royalties that Company would have paid to University if Company had sold the infringing products and services rather than the infringer, and (iii) as to special or punitive damages, the parties shall share equally in any award. Company may offset a total of fifty percent (50%) of any expenses incurred under this Subsection against any royalty payments due to University under this Agreement, provided that in no event shall the royalty payments under Section 4.4., when aggregated with any other offsets and credits allowed under this Agreement, be reduced by more than fifty percent (50%) in any Royalty Period. (c) University as Indispensable Party. University shall permit any action under this Section to be brought in its name if required by law, provided that Company shall hold University harmless from, and if necessary indemnify University against any costs, expenses, or liability that University may incur in connection with such action. (d) University Right to Prosecute. In the event that Company fails to initiate an infringement action within a reasonable time after it first becomes aware of the basis for such action, or to answer a declaratory judgment action within a reasonable time after such action is filed, University shall have the right to prosecute such infringement or answer such declaratory judgment action, under its sole control and at its sole expense, and any recovery obtained shall be given to University. (e) Cooperation. Each party agrees to cooperate fully in any action under this Section 6.4. which is controlled by the other party, provided that the controlling party reimburses the cooperating party promptly for any costs and expenses incurred by the cooperating party in connection with providing such assistance. 7. Confidential Information; Publications; Publicity. 7.1. Confidential Information. (a) Designation. Confidential Information that is disclosed in writing shall be marked with a legend indicating its confidential status (such as "Confidential" or "Proprietary"). Confidential Information that is disclosed orally or visually shall be documented in a written notice prepared by the Disclosing Party and delivered to the Receiving Party within thirty (30) days of the date of disclosure; such notice shall summarize the Confidential Information disclosed to the Receiving Party and reference the time and place of disclosure. (b) Obligations. For a period of five (5) years after disclosure of any portion of Confidential Information, the Receiving Party shall (i) maintain such Confidential Information in strict confidence, except that the Receiving Party may disclose or permit the disclosure of any 12 13 Confidential Information to its directors, officers, employees, consultants, and advisors who are obligated to maintain the confidential nature of such Confidential Information and who need to know such Confidential Information for the purposes of this Agreement; (ii) use such Confidential Information solely for the purposes of this Agreement; and (iii) allow its trustees or directors, officers, employees, consultants, and advisors to reproduce the Confidential Information only to the extent necessary for the purposes of this Agreement, with all such reproductions being considered Confidential Information. (c) Exceptions. The obligations of the Receiving Party under Subsection 7.1.(b) above shall not apply to the extent that the Receiving Party can demonstrate that certain Confidential Information (i) was in the public domain prior to the time of its disclosure under this Agreement; (ii) entered the public domain after the time of its disclosure under this Agreement through means other than an unauthorized disclosure resulting from an act or omission by the Receiving Party; (iii) was independently developed or discovered by the Receiving Party without use of the Confidential Information; (iv) is or was disclosed to the Receiving Party at any time, whether prior to or after the time of its disclosure under this Agreement, by a third party having no fiduciary relationship with the Disclosing Party and having no obligation of confidentiality with respect to such Confidential Information; or (v) is required to be disclosed to comply with applicable laws or regulations, or with a court or administrative order, provided that the Disclosing Party receives reasonable prior written notice of such disclosure. (d) Ownership and Return. The Receiving Party acknowledges that the Disclosing Party (or any third party entrusting its own information to the Disclosing Party) claims ownership of its Confidential Information in the possession of the Receiving Party. Upon the expiration or termination of this Agreement, and at the request of the Disclosing Party, the Receiving Party shall return to the Disclosing Party all originals, copies, and summaries of documents, materials, and other tangible manifestations of Confidential Information in the possession or control of the Receiving Party, except that the Receiving Party may retain one copy of the Confidential Information in the possession of its legal counsel solely for the purpose of monitoring its obligations under this Agreement. 7.2. Publications. University and its employees will be free to publicly disclose (through journals, lectures, or otherwise) the results of any research in the Field or relating to the subject matter of the Patent Rights, except as otherwise provided by written agreement between University and Company (e.g., a sponsored research agreement). 7.3. Publicity Restrictions. Company shall not use the name of University or any of its trustees, officers, faculty, students, employees, or agents, or any adaptation of such names, or any terms of this Agreement in any promotional material or other public announcement or disclosure without the prior written consent of University. The foregoing notwithstanding, Company shall have the right to disclose such information without the consent of University in any prospectus, offering memorandum, or other document or filing required by applicable securities laws or other applicable law or regulation, provided that Company shall have given University at least ten (1O) days prior written notice of the proposed text for the purpose of 13 14 giving University the opportunity to comment on such text. Company and its Affiliates and Sublicensees shall not use the name, likeness, or logos of the [***] in any press release, general publication, advertising, marketing, promotional or sales literature without prior written consent from an authorized official of the [***]. 8. Term and Termination. 8.1. Term. This Agreement shall commence on the Effective Date and shall remain in effect until (i) the expiration of all issued patents within the Patent Rights or (ii) for a period of ten (1O) years after the Effective Date if no such patents have issued within that ten-year period, unless earlier terminated in accordance with the provisions of this Agreement. 8.2. Termination for Default. In the event that either party commits a material breach of its obligations under this Agreement and fails to cure that breach within sixty (60) days after receiving written notice thereof, the other party may terminate this Agreement immediately upon written notice to the party in breach. If the alleged breach involves nonpayment of any amounts due University under this Agreement, Company shall be entitled to the sixty-day cure period only with respect to the first such breach, with the cure period for each subsequent breach shortened as follows: thirty days for the second breach, fifteen days for the third breach, and termination immediately upon written notice to Company, without any cure period, for any subsequent breach. 8.3. Force Majeure. Neither party will be responsible for delays resulting from causes beyond the reasonable control of such party, including without limitation fire, explosion, flood, war, strike, or riot, provided that the nonperforming party uses commercially reasonable efforts to avoid or remove such causes of nonperformance and continues performance under this Agreement with reasonable dispatch whenever such causes are removed. 8.4. Effect of Termination. The following provisions shall survive the expiration or termination of this Agreement Articles 1 and 9; Sections 3.2., 3.5., 5.1. (obligation to provide final report and payment), 5.4., 6.2., 7.1., 7.3., 8.4., and 10.8. Upon the early termination of this Agreement, Company and its Affiliates and Sublicensees may complete and sell any work-in progress and inventory of Licensed Products that exist as of the effective date of termination, provided that (i) Company is current in payment of all amounts due University under this Agreement and not in dispute, (ii) Company pays University the applicable royalty on such sales of Licensed Products in accordance with the terms and conditions of this Agreement, and (iii) Company and its Affiliates and Sublicensees shall complete and sell all work-in-progress and inventory of Licensed Products within six (6) months after the effective date of termination. 14 ***Confidential Treatment Requested 15 9. Dispute Resolution. 9.1. Procedures Mandatory. The parties agree that any dispute arising out of or relating to this Agreement shall be resolved solely by means of the procedures set forth in this Article, and that such procedures constitute legally binding obligations that are an essential provision of this Agreement; provided, however, that all procedures and deadlines specified in this Article may be modified by written agreement of the parties. If either party fails to observe the procedures of this Article, as modified by their written agreement, the other party may bring an action for specific performance in any court of competent jurisdiction. 9.2. Dispute Resolution Procedures. (a) Negotiation. In the event of any dispute arising out of or relating to this Agreement, the affected party shall notify the other party, and the parties shall attempt in good faith to resolve the matter within ten (10) days after the date of such notice (the "Notice Date"). Any disputes not resolved by good faith discussions shall be referred to senior executives of each party, who shall meet at a mutually acceptable time and location within thirty (30) days after the Notice Date and attempt to negotiate a settlement. (b) Mediation. If the matter remains unresolved within sixty (60) days after the Notice Date, or if the senior executives fail to meet within thirty (30) days after the Notice Date, either party may initiate mediation upon written notice to the other party, whereupon both parties shall be obligated to engage in a mediation proceeding under the then current Center for Public Resources ("CPR") Model Procedure for Mediation of Business Disputes, except that specific provisions of this Section shall override inconsistent provisions of the CPR Model Procedure. The mediator will be selected from the CPR Panels of Neutrals. If the parties cannot agree upon the selection of a mediator within ninety (90) days after the Notice Date, then upon the request of either party, the CPR shall appoint the mediator. The parties shall attempt to resolve the dispute through mediation until one of the following occurs: (i) the parties reach a written settlement; (ii) the mediator notifies the parties in writing that they have reached an impasse; (iii) the parties agree in writing that they have reached an impasse; or (iv) the parties have not reached a settlement within one hundred and twenty (120) days after the Notice Date. (c) Trial Without Jury. If the parties fail to resolve the dispute through mediation, or if neither party elects to initiate mediation, each party shall have the right to pursue any other remedies legally available to resolve the dispute, provided, however, that the parties expressly waive any right to a jury trial in any legal proceeding under this Section. 9.3. Preservation of Rights Pending Resolution, (a) Performance to Continua. Each party shall continue to perform its obligations under this Agreement pending final resolution of any dispute arising out or relating to this Agreement; provided, however, that a party may suspend performance of its obligations during any period in which the other party fails or refuses to perform its obligations. 15 16 (b) Provisional Remedies. Although the procedures specified in this Article are the sole and exclusive procedures for the resolution of disputes arising out of relating to this Agreement, either party may seek a preliminary injunction or other provisional equitable relief if, in its reasonable judgment, such action is necessary to avoid irreparable harm to itself or to preserve its rights under this Agreement (c) Statute of Limitations. The parties agree that all applicable statutes of limitation and time-based defenses (such as estoppel and laches) shall be tolled while the procedures set forth in Subsections 9.2.(a) and 9.2(b) are pending. The parties shall take any actions necessary to effectuate this result. 10. Miscellaneous. 10.1. Representations and Warranties. University represents and warrants that its employees have assigned to University their entire right, title, and interest in the Patent Rights and that it has authority to grant the rights and licenses set forth in this Agreement. UNIVERSITY MAKES NO OTHER WARRANTIES CONCERNING THE PATENT RIGHTS AND RELATED TECHNOLOGY, INCLUDING WITHOUT LIMITATION ANY EXPRESS OR IMPLIED WARRANTY OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE. Specifically, University makes no warranty or representation (i) regarding the validity or scope of the Patent Rights, (ii) that the exploitation the Patent Rights or any Licensed Product will not infringe any patents or other intellectual property rights of a third party, and (iii) that any third party is not currently infringing or will not infringe the Patent Rights. 10.2. Tax-Exempt Status. Company acknowledges that University, as a public institution of the Commonwealth of Massachusetts, holds the status of an exempt organization under the United States Internal Revenue Code. Company also acknowledges that certain facilities in which the licensed inventions were developed may have been financed through offerings of tax-exempt bonds. If the Internal Revenue Service determines, or if counsel to University reasonably determines, that any term of this Agreement jeopardizes the tax-exempt status of University or the bonds used to finance University facilities, the relevant term shall be deemed an invalid provision and modified in accordance with Section 1O.1O. 10.3. Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original, and all of which together shall be deemed to be one and the same instrument. 10.4. Headings. All headings are for convenience only and shall not affect the meaning of any provision of this Agreement. 10.5. Binding Effect. This Agreement shall be binding upon and inure to the benefit of the parties and their respective permitted successors and assigns. 10.6. Assignment. This Agreement may not be assigned by either party without the prior written consent of the other party, except that Company may assign this Agreement to an 16 17 affiliate or to a successor in connection with the merger, consolidation, or sale of all or substantially all of its assets or that portion of its business to which this Agreement relates. 10.7. Amendment and Waiver, This Agreement may be amended, supplemented, or otherwise modified only by means of a written instrument signed by both parties. Any waiver of any rights or failure to act in a specific instance shall relate only to such instance and shall not be construed as an agreement to waive any rights or fail to act in any other instance, whether or not similar. 10.8. Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the Commonwealth of Massachusetts irrespective of any conflicts of law principles. 10.9. Notice. Any notices required or permitted under this Agreement shall be in writing, shall specifically refer to this Agreement, and shall be sent by hand, recognized national overnight courier, confirmed facsimile transmission, confirmed electronic mail, or registered or certified mail, postage prepaid, return receipt requested, to the following addresses or facsimile numbers of the parties: If to University: Office of Commercial Ventures and Intellectual Property University of Massachusetts 55 Lake Avenue North Worcester, MA 01605 Attention: Joseph F.X. McGuirl Executive Director Tel: (508) 856-1626 Fax: (508) 856-5004 17 18 If to Company: Signal Pharmaceuticals, Inc. 5555 Oberlin Drive San Diego, CA 92121 Attention: Alan J. Lewis, Ph.D. President and Chief Executive Officer Tel: (619) 558-7500 Fax: (619) 558-7513 All notices under this Agreement shall be deemed effective upon receipt. A party may change its contact information immediately upon written notice to the other party in the manner provided in this Section. 10.10. Severability. In the event that any provision of this Agreement shall be held invalid or unenforceable for any reason, such invalidity or unenforceability shall not affect any other provision of this Agreement, and the parties shall negotiate in good faith to modify the Agreement to preserve (to the extent possible) their original intent If the parties fail to reach a modified agreement within sixty (60) days after the relevant provision is held invalid or unenforceable, then the dispute shall be resolved in accordance with the procedures set forth in Article 9. While the dispute is pending resolution, this Agreement shall be construed as if such provision were deleted by agreement of the parties. 10.11. Entire Agreement. Except for the Common Stock Purchase Agreement, this Agreement constitutes the entire agreement between the parties with respect to its subject matter and supersedes all prior agreements or understandings between the parties relating to its subject matter. IN WITNESS WHEREOF, the parties have caused this Agreement to be executed by their duly authorized representatives as of the date first written above. UNIVERSITY OF MASSACHUSETTS SIGNAL PHARMACEUTICALS, INC. By: /s/ JOSEPH F.X. MCGUIRL By: /s/ ALAN J. LEWIS, PH.D. ------------------------------- --------------------------------- Joseph F.X. McGuirl Alan J. Lewis, Ph.D. Executive Director, CVIP President and Chief Executive Officer 18 19 EXHIBIT A List of Patent Rights [***] ***Confidential Treatment Requested EX-10.45 47 EXHIBIT 10.45 1 *** Text Omitted and Filed Separately Confidential Treatment Requested Under 17 C.F.R. Sections 200.80, 200.83 and 230.406. EXHIBIT 10.45 RESTRICTED STOCK PURCHASE AGREEMENT Agreement made as of this 31st day of October, 1996 by and between Signal Pharmaceuticals, Inc., a California corporation (the "Company"), and University of Massachusetts (or "Purchaser"). Unless otherwise defined herein, all capitalized terms used herein shall have the same meanings given to them in that certain Exclusive License Agreement (the "License Agreement") by and between Purchaser and the Company, dated October 31, 1996, a copy of which is attached hereto as Exhibit 1. 1. PURCHASE OF SHARES 1.1 Purchase. In consideration of Purchaser's grant of certain patent and technology rights to the Company pursuant to the License Agreement, the Company shall issue to Purchaser [***] shares of its Common Stock. All Shares of the Company's Common Stock issued to Purchaser pursuant to this paragraph, shall hereinafter be referred to as the "Shares" 2.0 INVESTMENT REPRESENTATIONS 2.1 Payment. The Company represents and warrants that the Shares, when issued in accordance with the provisions of this Agreement, will be duly and validly issued, fully paid, and non-assessable. 2.2 Exemption from Registration. The Shares have not been registered tinder the 1933 Act, and are accordingly being issued to Purchaser in reliance upon the exemption from such registration provided by 4(2) of the 1933 Act. 2.3 Investment Intent. Purchaser hereby warrants and represents that it is acquiring the Shares for its own account and not with a view to their resale or distribution and that it is prepared to hold the Shares for an indefinite period and has no present intention to sell, distribute or grant any participating interests in, the Shares except that Purchaser may transfer the Shares to the University of Massachusetts Foundation ("the "Foundation"). Purchaser hereby acknowledges the fact that the Shares have not been registered under the Securities Act of 1933, as amended (the "1993 Act"), and that the Company is issuing the Shares to it in reliance on the representations made by it herein. ***Confidential Treatment Requested 2 2.4 Restricted Securities. (a) Purchaser hereby confirms that it has been informed that the Shares may not be resold or transferred unless such Shares are first registered under the 1933 Act or unless an exemption from such registration is available. Accordingly, Purchaser hereby acknowledges that it is prepared to hold the Shares for an indefinite period and that it is aware that Rule 144 of the Securities and Exchange Commission issued under the 1933 Act is not presently available to exempt the sale of the Shares from the registration requirements of the Act. Should Rule 144 subsequently become available, Purchaser is aware that any sale of Shares effected pursuant to the Rule may, depending upon the status of Purchaser as an "affiliate" or "non-affiliate" under the Rule, be made only in limited amounts in accordance with the provisions of the Rule, and that in no event may any Shares be sold pursuant to the Rule until Purchaser has held such Shares for at least two (2) years following their issuance. (b) Should the Company not become subject to the reporting requirements of the Exchange Act, then Purchaser may, provided he/she is not at the time an affiliate of the Company (nor was such an affiliate during the preceding three (3) months), sell the Shares (without registration) pursuant to paragraph (k) of Rule 144 after the Shares have been held for it period of three (3) years following the effective date of the license agreement. 2.5 Disposition of Shares. Except as specifically set forth below, Purchaser hereby agrees that it shall make no disposition of the Shares, unless and until: (a) it shall have complied with all requirements of this Agreement applicable to the disposition of such Shares; (b) it shall have notified the Company of the proposed disposition and furnished it with a written summary of the terms and conditions of the proposed disposition; and (c) unless otherwise waived by the Company, it shall have delivered to the Company a written opinion of counsel at the Company's expense, in form and substance satisfactory to the Company, that (i) the proposed disposition does not require registration of the Shares under the 1933 Act or (ii) all appropriate action necessary for compliance with the registration requirements of the 1933 Act or of any exemption from registration available under the 1933 Act has been taken. The Company shall not be required (i) to transfer on its books any Shares which have been sold or transferred in violation of the provisions of this Section 2, nor (ii) to treat as the owner of the Shares, or otherwise to 2 3 accord voting or dividend rights to, any transferee to whom the Shares have been so transferred. 2.6 Restrictive Legends. In order to reflect the restrictions on disposition of the Shares, the stock certificates for the Shares shall be endorsed with restrictive legends, including the following legend: "The securities represented by this certificate have not been registered under the Securities Act of 1933. The shares have been acquired for investment and may not be sold or offered for sale in the absence of an effective registration statement for the shares under that Act, a 'no action' letter of the Securities and Exchange Commission as to such sale or offer, or an opinion of counsel to the Company that registration under such Act is not required for such sale or offer." 3. TRANSFER RESTRICTIONS 3.1 Transferee Obligations. Each person (other than the Company and the Foundation) to whom the Shares are transferred must, as a condition precedent to the validity of such transfer, acknowledge in writing to the Company that such person is bound by the provisions of this Agreement and that the transferred shares are subject to the market stand-off provisions of paragraph 3.2 to the same extent such shares would be so subject if retained by Purchaser. 3.2 Market Stand-Off. (a) In connection with any underwritten public offering by the Company of its equity securities pursuant to an effective registration statement filed under the 1933 Act, including the Company's initial public offering (the "IPO"), Purchaser and all subsequent holders of the Shares who derive their chain of ownership through a transfer from Purchaser ("Owner") shall not sell, make any short sale of, loan, hypothecate, pledge, grant any option for the purchase of, or otherwise dispose or transfer for value or otherwise agree to engage in any of the foregoing transactions with respect to, any Shares without the prior written consent of the Company or its underwriters. Such limitations shall be in effect for such period of time from and after the effective date of the final prospectus for such offering as may be requested by the Company or such underwriters. (b) Owner shall be subject to the market standoff provisions of this paragraph 3.2 provided and only if all of the executive officers and directors of the Company are also subject to similar arrangements. (c) in the event of any stock dividend, stock split, recapitalization or other change affecting the Company's outstanding Common Stock effected 3 4 as a class without the Company's receipt of consideration, then any new, substituted or additional securities distributed with respect to the Shares shall be immediately subject to the provisions of this paragraph 3.2, to the same extent the Shares are at such time covered by such provisions. (d) In order to enforce the limitations of this paragraph 3.2, the Company may impose stop-transfer instructions with respect to the Shares until the end of the applicable standoff period. 4. REGISTRATION RIGHTS 4.1 For purposes of this Section 4: (a) The term "register", "registered," and "registration" refer to a registration effected by preparing and filing a registration statement or similar document in compliance with the Act, and the declaration or ordering of effectiveness of such registration statement or document; (b) The term "Registrable Securities" means the Common Stock issued pursuant to this Agreement, excluding, however, any Registrable Securities sold by a person in a transaction in which his rights under this Section 4 are not assigned; (c) The number of shares of "Registrable Securities then outstanding" shall be determined by the number of shares of Common Stock outstanding which are, and the number of shares of Common Stock issuable pursuant to then exercisable or convertible securities which are, Registrable Securities. (d) The term "Holder" means any person owning or having the right to acquire Registrable Securities or any assignee thereof in accordance with Section 4.7 hereof. 4.2 Company Registration, If (but without any obligation to do so) the Company proposes to register (including for this purpose a registration effected by the Company for shareholders other than the Holders) any of its stock or other securities under the Act in connection with the public offering of such securities solely for cash (other than a registration relating solely to the sale of securities to participants in a Company stock plan, or a registration on any form which does not include substantially the same information as would be required to be included in a registration statement covering the sale of the Registrable Securities, the Company shall, at such time, promptly give each Holder written notice of such registration. Upon the written request of each Holder given within twenty (20) days after mailing of such notice by the Company in accordance with Section 5.2, the Company shall, subject to the 4 5 provisions of Section 4.4, cause to be registered under the Act all of the Registrable Securities that each such Holder has requested to be registered. 43 Expenses of Company Registration. The Company shall bear and pay all expenses incurred in connection with any registration, filing or qualification of Registrable Securities with respect to the registrations pursuant to Section 4.2 for each Holder (which right may be assigned as provided in Section 4.7), including (without limitation) all registration, filing, and qualification fees, printers' and accounting fees relating or apportionable thereto, but excluding underwriting discounts and commissions relating to Registrable Securities. 4.4 Underwriting Requirements. In connection with any offering involving an underwriting of shares of the Company's capital stock, the Company shall not be required under Section 4.2 to include any of the Holders' securities in such underwriting unless they accept the terms of the underwriting as agreed upon between the Company and the underwriters selected by it (or by other persons entitled to select the underwriters), and then only in such quantity as the underwriters determine in their sole discretion will not jeopardize the success of the offering by the Company. If the total amount of securities, including Registrable Securities, requested by shareholders to be included in such offering exceeds the amount of securities, sold other than by the Company that the underwriters determine in their sole discretion is compatible with the success of the offering, then the Company shall be required to include in the offering only that number of such securities, including Registrable Securities, which the underwriters determine in their sole discretion will not jeopardize the success of the offering (subject to the rights of other security holders of the Company, including, without limitation, preferred shareholders, the securities so included to be apportioned pro rata among the selling shareholders). For purposes of the preceding parenthetical concerning apportionment, for any selling shareholder which is a holder of Registrable Securities and which is a partnership or corporation, the partners, retired partners and shareholders of such holder, or the estates and family members of any such partners and retired partners and any trusts for the benefit of any of the foregoing persons shall be deemed to be a single "selling shareholder", and any pro-rata reduction with respect to such "selling shareholder" shall be based upon the aggregate amount of shares carrying registration rights owned by all entities and individuals included in such "selling shareholder", as defined in this sentence. 4.5 Delay of Registration. No Holder shall have any right to obtain or seek an injunction restraining or otherwise delaying any such registration as the result of any controversy that might arise with respect to the interpretation or implementation of this Section 4. 5 6 4.6 Indemnification. In the event any Registrable Securities are included in a registration statement under this Section 4. (a) To the extent permitted by law, the Company will indemnify and hold harmless each Holder, any underwriter (as defined in the Act) for such Holder and each person, if any, who controls such Holder or underwriter within the meaning of the Act or the Securities Exchange Act of 1934, as amended (the "1934 Act"), against any losses, claims, damages, or liabilities (joint or several) to which they may become subject under the Act, or the 1934 Act or other federal or state law, insofar as such losses, claims, damages, or liabilities (or actions in respect thereof) arise out of or are based upon any of the following statements, omissions or violations (collectively a "Violation"): (i) any untrue statement or alleged untrue statement of a material fact contained in such registration statement, including any preliminary prospectus or final prospectus contained therein or any amendments or supplements thereto, (ii) 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 violation or alleged violation by the Company of the Act, the 1934 Act, any state securities law or any rule or regulation promulgated under the Act, or the 1934 Act or any state securities law; and the Company will pay to each such Holder, underwriter or controlling person, as incurred, any legal or other expenses reasonably incurred by them in connection with investigating or defending any such loss, claim, damage, liability, or action; provided, however, that the indemnity agreement contained in this subsection 4.6 shall not apply to amounts paid in settlement of any such loss, claim, damage, liability, or action if such settlement is effected without the consent of the Company (which consent shall not be unreasonably withheld), nor shall the Company be liable in any such case for any such loss, claim, damage, liability, or action to the extent that it arises out of or is based upon a Violation which occurs in reliance upon and in conformity with written information furnished expressly for use in connection with such registration by any such Holder, underwriter or controlling person. (b) To the extent permitted by law, each selling Holder will indemnify and hold harmless the Company, each of its directors, each of its officers who has signed the registration statement, each person, if any, who controls the Company within the meaning of the Act, any underwriter, any other Holder selling securities in such registration statement and any controlling person of any such underwriter or other Holder, against any losses, claims, damages, or liabilities (joint or several) to which any of the foregoing persons may become subject, under the Act, or the 1934 Act or other federal or state law, insofar as such losses, claims, damages, or liabilities (or actions in respect thereto) arise out of or are based upon any Violation, in each case to the extent ( and only to the extent) that such Violation occurs in reliance upon and in conformity with written information furnished by such 6 7 Holder expressly for use in connection with such registration; and each such Holder will pay, as incurred, any legal or other expenses reasonably incurred by any person intended to be indemnified pursuant to this subsection 4.69(b), in connection with investigating or defending any such loss, claim, damage, liability, or action; provided, however, that the indemnity agreement contained in this subsection 4.6(b) claim, damage, liability or action if such settlement is effected without the consent of the Holder, which consent shall not be unreasonably withheld; provided, that, in no event shall any indemnify under this subsection 4.6(b) exceed the gross proceeds from the offering received by such Holder. (c) The foregoing indemnity agreements of the Company and Holders are subject to the condition that, insofar as they relate to any Violation made in a preliminary prospectus but eliminated or remedied in the amended prospectus on file with the SEC at the time the registration statement in question becomes effective or the amended prospectus filed with the SEC pursuant to SEC Rule 424(b) (the "Final Prospectus"), such indemnity agreement shall not inure to the benefit of any indemnified party if a copy of the Final Prospectus was furnished to such indemnified party and was, not furnished to the person asserting the loss, liability, claim or damage at or prior to the time such Final Prospectus is required to be delivered under the Securities Act if such loss, claim or damage would have been avoided had the indemnified party furnished the Final Prospectus to such person. (d) Promptly after receipt by an indemnified party under this Section 4.6 of notice of the commencement of any action (including any governmental action), such indemnified party will, if a claim in respect thereof is to be made against any indemnifying party under this Section 4.6, deliver to the indemnifying party a written notice of the commencement thereof and the indemnifying party shall have the right to participate in, and, to the extent the indemnifying party so desires, jointly with any other indemnifying party similarly noticed, to assume the defense thereof with counsel mutually satisfactory to the parties; provided, however, that an indemnified party (together with all other indemnified parties which may be represented without conflict by one counsel) shall have the right to retain one separate counsel, with the fees and expenses to be paid by the indemnifying party, if representation of such indemnified party by the counsel retained by the indemnifying party would be inappropriate due to actual or potential differing interests between such indemnified party and any other party represented by such counsel in such proceeding. The failure to deliver written notice to the indemnifying party within a reasonable time of the commencement of any such action, if prejudicial to its ability to defend such action, shall relieve such indemnifying party of any liability to the indemnified party under this Section 4.6, but the omission so to deliver written notice to the indemnifying party will not relieve it of any liability that it may have to any indemnified party otherwise than under this Section 4.6. 7 8 (e) If the indemnification provided for in this Section 4.6 is held by a court of competent jurisdiction to be unavailable to an indemnified party with respect to any loss, liability, claim, damage, or expense referred to therein, then the indemnifying party, in lieu of indemnifying such indemnified party hereunder, shall contribute to the amount paid or payable by such indemnified party as a result of such loss, liability, claim, damage, or expense in such proportion as is appropriate to reflect the relative fault of the indemnifying party on the one hand and of the indemnified party on the other in connection with the statements of omissions that resulted in such loss, liability, claim, damage, or expense as well as any other relevant equitable considerations. The relative fault of the indemnifying party and of the indemnified party shall he determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission to state a material fact relates to information supplied by the indemnifying party or by the indemnified party and the parties' relative intent, knowledge, access to information, and opportunity to correct or prevent such statement or omission. (f) Notwithstanding the foregoing, to the extent that the provisions on indemnification and contribution contained in the underwriting agreement entered into in connection with the underwritten public offering are in conflict with the foregoing provisions, the provisions in the underwriting agreement shall control. (g) The obligations of the Company and Holders under this Section 4.6 shall survive the completion of any offering of Registrable Securities in a registration statement under this Section 4, and otherwise. 4.7 Assignment of Registration Rights. The rights to cause the Company to register Registrable Securities pursuant to this Section 4 may be assigned (but only with all related obligations) by a Holder to a transferee or assignee of such securities who, after such assignment or transfer, holds at least twenty percent (20%) of the shares of Registrable Securities originally purchased by such Holder (subject to appropriate adjustment for stock splits, stock dividends, combinations and other recapitalizations), provided the Company is, within a reasonable time after such transfer, furnished with written notice of the name and address of such transferee or assignee and the securities with respect to which such registration rights are being assigned; and provided, further, that such assignment shall be effective only if immediately following such transfer the further disposition of such securities by the transferee or assignee is restricted under the Act. For the purposes of determining the number of shares of Registrable Securities held by a transferee or assignee, the holdings or transferees and assignees of a partnership who are partners or retired partners of such partnership (including spouses and ancestors, lineal descendants and siblings of such 8 9 partners or spouses who acquire Registrable Securities by gift, will or intestate succession) shall be aggregated together and with the partnership; provided that all assignees and transferees who would not qualify individually for assignment of registration rights shall have a single attorney-in-fact for the purpose of exercising any rights, receiving notices or taking any action under this Section 4. 5. INTERPRETATION 5.1 Purchaser Undertaking. Purchaser hereby agrees to take whatever additional action and execute whatever additional documents the Company may in its judgment deem necessary or advisable in order to carry our or effect one or more of the obligations or restrictions imposed on either Purchaser or the Shares pursuant to the express provisions of this Agreement. 5.2 Notices. Any notice required or permitted in connection any matter pertaining to this Agreement shall be given in writing and shall be deemed effective upon personal delivery or upon deposit in the United States Mail, registered or certified, postage prepaid and addressed to the party to be notified at the address indicated below such party's signature line on this Agreement or at such other address as such party may designate by 10 days' advance written notice under this Section 5.2 to the other party to this Agreement. 5.3 Governing Law. This agreement shall be construed and enforced in accordance with, and shall be governed by, the laws of the State of California. 5.4 Counterparts. This Agreement may be executed in counterparts, each of which shall be deemed to be an original, but all of which together shall constitute one and the same instrument. 5.5 Successors and Assigns. The provisions of this Agreement shall inure to the benefit of, and be binding upon, the Company and its successors and assigns and Purchaser and Purchaser's legal representatives, heirs, legatees, distributees, assigns and transferees by operation of law, whether or not any such person shall have become a party to this Agreement and have agreed in writing to join herein and be bound by the terms and conditions hereof. 9 10 IN WITNESS WHEREOF, the parties have executed this Agreement as of the day and year first written above. SIGNAL PHARMACEUTICALS, INC. By: /s/ ALAN J. LEWIS ------------------------------- Alan J. Lewis, Ph.D. President and CEO UNIVERSITY OR MASSACHUSETTS By: /s/ JOSEPH F.X. McGUIRL ------------------------------- Joseph F.X. McGuirl Executive Director Office of Commercial Ventures and Intellectual Property By: /s/ STEPHEN W. LENHARDT ------------------------------- Stephen W. Lenhardt Vice President for Management and Fiscal Affairs University Treasurer 10 EX-10.46 48 EXHIBIT 10.46 1 *** Text Omitted and Filed Separately Confidential Treatment Requested Under 17 C.F.R. Sections 200.80, 200.83 and 230.406. EXHIBIT 10.46 LICENSE AGREEMENT This Agreement, effective as of October 28, 1997 (the "Effective Date"), is between the University of Massachusetts ("University"), a public institution of higher education of the commonwealth of Massachusetts, and Signal Pharmaceuticals, Inc. ("Company"), a Delaware corporation. RECITALS WHEREAS, University is the joint owner, together with the Regents of the University of California ("UC"), of the inventions claimed in U.S. Patent Application Serial No. [***] and has filed with the U.S. Patent & Trademark Office the cases included under the U.S. Patent Applications listed on EXHIBIT A; WHEREAS, Company desires the University grant to Company a worldwide license in the field of drug discovery under the rights of University in Patent Rights and Related Technology (as defined below); and WHEREAS, University is willing to grant Company such license on the terms and conditions set forth in this Agreement. NOW, THEREFORE, University and Company hereby agree as follows: 1. DEFINITIONS. 1.1 "AFFILIATE" shall mean any legal entity (such as a corporation, partnership, or limited liability company) that is controlled by Company. For the purposes of this definition, the term "control" means any or both of the following: (i) beneficial ownership of at least fifty percent (50%) of the voting securities of a corporation or other business organization with voting securities or (ii) a fifty percent (50%) or greater interest in the net assets or profits of a partnership or other business organization without voting securities. 1.2 "CONFIDENTIAL INFORMATION" shall mean any confidential or proprietary information furnished by one party (the "Disclosing Party") to the other party (the "Receiving Party") in connection with this Agreement, provided that such information is specifically designated as confidential. Such Confidential Information shall include, without limitation, any ***Confidential Treatment Requested 2 diligence reports furnished to University under Section 3.1. and royalty reports furnished to University under Section 5.1. 1.3 "FDA" shall mean the United States Food and Drug Administration. 1.4 "FIELD" shall mean the field of drug discovery and shall not include reagents other than for drug discovery and shall not include the field of diagnostics. 1.5 "IND" (or "Investigational New Drug Application") shall mean an application to the FDA to commence human clinical testing of a drug, as defined by the FDA. 1.6 "JOINT PATENT RIGHTS" shall mean U.S. Patent Application Serial No. [***], and, to the extent of claims therein directed to subject matter specifically described in U.S. Patent Application Serial No. [***], any divisional, continuation, or continuation-in-part of such patent application, as well as any patent issued thereon and any reissue, reexamination or extension of such patent, and any foreign counterparts to such patent and patent application. 1.7 "LICENSED PRODUCT" shall mean any material either that is covered by the Patent Rights or the Related Technology, that is identified or produced by a Licensed Method, or that the manufacture, use or sale of which would constitute, but for the license granted to Company pursuant to this Agreement, an infringement of any pending or issued claim within the Patent Rights. 1.8 "LICENSED METHOD" shall mean any method that is covered by the Patent Rights or Related Technology, the use of which would constitute, but for the license granted to Company pursuant to this Agreement, an infringement of any pending or issued claim within the Patent Rights or a misuse of Related Technology. 1.9 "NDA" (or "New Drug Application") shall mean an application to the FDA to commence commercial sale of a drug, as defined by the FDA. 1.10 "NET SALES" shall mean the total of the gross invoice prices of Licensed Products and of Royalty-Bearing Products sold by Company, an Affiliate, or a Sublicensee, less the sum of the following actual deductions where applicable: cash, trade, or quantity discounts; sales, use, tariff, import/export duties, or other excise taxes; transportation charges and allowances or credits because of rejections, breakage, or returns. 2 ***Confidential Treatment Requested 3 In any transfers of Licensed Products or Royalty-Bearing Products between Company and an Affiliate or Sublicensee, Net Sales shall be calculated based on the final sale of the Licensed Product or Royalty-Bearing Product to an independent third party only, and the transfers between Company and an Affiliate or Sublicensee shall be excluded from the calculation of Net Sales. In the event that the Company or any Affiliate receives non-monetary consideration for any Licensed Products or Royalty-Bearing Products, Net Sales shall be calculated based on the fair market value of such consideration as determined by the parties. In the event that company or its Affiliates use or dispose of a Licensed Product or Royalty-Bearing Product in the provision of a commercial service, the Licensed Product or Royalty-Bearing Product shall be considered sold and the Net Sales shall be calculated based on the sales price of the Licensed Product or Royalty-Bearing Product under a hypothetical sale to an independent third party, during the same Royalty Period or, in the absence of such sales, on the fair market value of the Licensed Product or Royalty-Bearing Product as determined by the parties. 1.11 "PATENT RIGHTS" shall mean the Joint Patent Rights and the UMMC Cases. 1.12 "RELATED TECHNOLOGY" shall mean any know-how, technical information, research and development information, test results, and data necessary for the effective exercise of the Patent Rights which has been developed in the laboratory of [***] as of the first filing date of U.S. Patent Application No. [***] and which is owned by University, provided that data necessary for the effective exercise of the Patent Rights and developed in the laboratory of [***] as of the effective date will be made available to Company upon reasonable request by Company. 1.13 "ROYALTY-BEARING PRODUCTS" shall mean any material either that is covered by the Patent Rights, Related Technology, Licensed Method, UC Patent Rights or UC Technology Rights, or that the manufacture, use or sale of which would constitute, but for the licenses granted to the Company pursuant to this Agreement and the UC Agreement, an infringement of any issued claim within the Patent Rights or the UC Patent Rights. 1.14 "ROYALTY PERIOD" shall mean each of (a) the partial calendar quarter commencing on the date on which the first Royalty-Bearing Product is sold or used and (b) every complete or partial calendar quarter thereafter until the later of (i) the end of the Term, or (ii) the Company is 3 ***Confidential Treatment Requested 4 no longer obligated to make royalty payments to UC with respect to UC Patent Rights under that certain Exclusive License Agreement between UC and Company dated October 26, 1993 (UC Control Number 93-04-0786) (the "UC Agreement", a redacted copy of which is EXHIBIT B to this Agreement) or under any equivalent or replacement agreement between UC and Company. In addition, the term "Royalty Period" shall also include any calendar quarter subsequent to the last "Royalty Period" as defined in the preceding sentence during which Company has the right to complete and sell work-in-progress and inventory of Royalty-Bearing Products pursuant to Section 8.4. 1.15 "SUBLICENSEE" shall mean any permitted sublicensee of the rights granted Company under this Agreement, as further described in Section 2.2. 1.16 "TERM" shall mean the term of this Agreement as further defined in Section 8.1 below. 1.17 "UMMC CASES" shall mean the U.S. Patent Applications listed on EXHIBIT A and, to the extent of claims therein directed to subject matter specifically described in the patent applications listed on EXHIBIT A, any divisional, continuation, or continuation-in-part of such patent applications, as well as any patent issued thereon and any reissue, reexamination or extension of such patent, and any foreign counterparts to such patents and patent applications. 1.18 "UC PATENT RIGHTS" shall mean U.S. Patent No. [***]; U.S. Patent No. [***]; and U.S. Patent No. [***] and any divisional, continuation, or continuation-in-part of such patent or patent applications, as well as any patents issued thereon and any reissue or reexams or extension of such patents, and any foreign counterparts to such patents and patent applications. 1.19 "UC TECHNOLOGY RIGHTS" shall mean any know-how, technical information, research and development information, test results, and data relating to UC Case No. 93-173 (as identified in the UC Agreement) and necessary for the effective exercise of the UC Patent Rights which have been licensed to Company pursuant to the UC Agreement. 2. GRANT OF RIGHTS. 2.1 LICENSE GRANT. (a) PATENT RIGHTS. Subject to the terms of this Agreement, University hereby grants to Company and its Affiliates an exclusive, worldwide, royalty-bearing license (with the 4 ***Confidential Treatment Requested 5 right to sublicense) under the Patent Rights to develop, make, have made, use, offer for sale, sell, and import Licensed Products in the Field. (b) RELATED TECHNOLOGY AND LICENSED METHOD. Subject to the terms of this Agreement, University hereby grants to Company and its Affiliates a non-exclusive, worldwide, royalty-bearing license (with the right to sublicense) under the Related Technology and the Licensed Method to develop, make, have made, use, offer for sale, sell, and import Licensed Products in the Field. 2.2 SUBLICENSES. Company shall have the right to grant sublicenses of its rights under Section 2.1. All sublicense agreements executed by Company pursuant to this Article 2 shall be consistent with the terms of this Agreement and shall provide for the automatic assignment of such agreement to University if this Agreement is terminated. Company shall promptly furnish University with a fully executed copy of any such sublicense agreement. 2.3 RETAINED RIGHTS. (a) UNIVERSITY. University retains the right to make and use Licensed Products covered by Patent Rights for academic research and academic patient care, without payment of compensation to Company. University may license its retained rights under this Section to research collaborators of University faculty members, to post-doctoral fellows, and to students solely for academic research and academic patient care. Notwithstanding the above retention of rights, the University does not retain any right to make, use, or sublicense any third party the right to use the license or sublicense of its retained rights under this Section for commercial applications in the Field. (b) FEDERAL GOVERNMENT. To the extent that any invention claimed in the Patent Rights has been partially funded by the federal government, this Agreement and the grant of any rights in such Patent Rights are subject to and governed by federal law as set forth in 35 U.S.C. SectionSection201-211, and the regulations promulgated thereunder, as amended, or any successor statutes or regulations. Company acknowledges that these statutes and regulations reserve to the federal government a royalty-free, non-exclusive, non-transferable license to practice any government-funded invention claimed in any non-transferable license to practice any government-funded invention claimed in any Patent Rights. If any term of this Agreement fails to conform with such laws and regulations, the relevant term shall be deemed an invalid provision and modified in accordance with section 10.10. 5 6 At least some of the inventions claimed in the Patent Rights and the Related Technology were conceived or reduced to practice by [***], an employee of the [***] and a faculty member of University, and were assigned to University by [***] in accordance with the Collaboration Agreement, between [***] and University dated November 16, 1990, as amended (the "Collaboration Agreement"). Pursuant to the Collaboration Agreement, University is required to grant [***] a paid-up, non-exclusive, irrevocable license to use such Patent Rights and such Related Technology which correspond to such inventions for [***] non-commercial purposes (the "[***] License"), but notwithstanding any provision of this Agreement to the contrary, Company acknowledges that [***] shall have the [***] License. 2.4 EFFECT OF EXPIRATION OF ROYALTY PERIOD. Unless this Agreement is earlier terminated in accordance with Section 8 below, upon the expiration of the last Royalty Period, Company will have a fully paid, non-exclusive, irrevocable, worldwide, perpetual license (with the right to sublicense) under any Patent Rights that are then expired or are no longer enforceable, Related Technology, and Licensed Method to develop, make, have made, use, offer for sale, sell, and import Licensed Products, provided Company is then in substantial compliance with all provisions of this Agreement. 3. COMPANY OBLIGATIONS RELATING TO COMMERCIALIZATIONS. 3.1 DILIGENCE REQUIREMENTS. (a) Company, upon execution of this Agreement, shall diligently proceed with the development, manufacture, and sale of Licensed Products and/or Royalty-Bearing Products and shall earnestly and diligently endeavor to market the same within a reasonable time after execution of this Agreement. Company shall have the responsibility to obtain all necessary governmental approvals for the manufacture, use, and sale of Licensed Products and Royalty-Bearing Products. If Company is unable to perform any of the following: (i) [***]; (ii) [***]; 6 ***Confidential Treatment Requested 7 (iii) [***]; (iv) [***] (v) reasonably fill the market demand for Licensed Products or Royalty-Bearing Products following commencement of marketing at any time during the exclusive period of this Agreement; then, subject to subsection (b) of this Section 3.1, University shall have the right and option either to terminate this agreement or to reduce Company's exclusive license to a non-exclusive license. This right, if exercised, supersedes the rights granted in Section 2.1;. So long as at least one of the Company or its Affiliates or Sublicensees continues to meet the diligence requirements set forth above, the University shall not have any termination rights under this Section 3.1. (b) Subject to subsection (a) of this Section 3.1, if Company is unable to meet any of the dates set forth in subsection (a), the parties shall in good faith re-establish a date or dates that are reasonable under the then current circumstances. Provided Company is then in full compliance with all other material provisions of this Agreement, University shall not exercise its rights to terminate this Agreement or convert it to a non-exclusive agreement unless a reestablished date is not met. If a reestablished date is more than six (6) months from the original date, Company shall begin making an annual license maintenance fee for the delayed product of [***] per year, which fee shall begin to be payable in [***], on the anniversary date of the Effective Date, and shall continue until sales of the delayed product begin. The annual maintenance fee provided for in this Section 3.1 shall not exceed [***] per year. The re-established date shall not affect the date when any milestone payment would be due under Section 4.3. 3.2 INDEMNIFICATION. (a) INDEMNITY. Company shall indemnify, defend and hold harmless University and its trustees, officers, faculty, students, employees, and agents and their respective successors, heirs and assigns (the "Indemnitees"), against any liability, damage, loss, or expense 7 ***Confidential Treatment Requested 8 (including reasonable attorneys' fees and expenses of litigation) incurred by or imposed upon any of the Indemnitees in connection with any third-party claims, suits, actions, demands or judgments arising out of any theory of liability (including without limitation actions in the form of tort, warranty, or strict liability and regardless of whether such action has any factual basis) concerning any Licensed Product or Royalty-Bearing Product, process, or service that is made, used, or sold pursuant to any right or license granted under this Agreement; provided, however, that such right or license granted under this Agreement; provided, however, that such indemnification shall not apply to any liability, damage, loss, or expense to the extent directly attributable to (i) the negligent activities or intentional misconduct of the Indemnitees or (ii) the settlement of a claim, suit, action, or demand by Indemnities without the prior written approval of Company. Company also shall indemnify, defend, and hold harmless [***] and its trustees, officers, employees, and agents, and their respective successors, heirs and assigns (the "[***] Indemnitees"), from and against any claims, liability, cost, expense, damage deficiency, loss, or obligation (including, without limitation, reasonable attorney's fees and costs), based upon, arising out of, or otherwise relating to any actions taken or omissions made in connection with or pursuant to this License Agreement. The [***] Indemnitees agree to provide Company with prompt written notice of any claim, suit action, demand or judgment for which indemnification is sought under this Agreement. Company agrees that any Sublicensee shall agree to provide [***] with the same indemnity provided by Company herein. (b) PROCEDURES. The indemnities agree to provide Company with prompt written notice of any claim, suit, action, demand, or judgment for which indemnification is sought under this Agreement. Company agrees, at its own expense, to provide attorneys reasonably acceptable to University to defend against any such claim. The Indemnitees shall cooperate fully with Company in such defense and will permit Company to conduct and control such defense and the disposition of such claim, suit, or action (including all decisions relative to litigation, appeal, and settlement); provided, however, that any Indemnitee shall have the right to retain its own counsel, at the expense of Company, if representation of such Indemnitee by the counsel retained by Company would be inappropriate because of actual or potential differences in the interests of such Indemnitee and any other party represented by such counsel. Company agrees to keep University informed of the progress in the defense and disposition of such claim and to consult with University with regard to any proposed settlement. The failure to deliver a written notice to Company within a reasonable time after the commencement of such claim, suit, or action, if prejudicial to Company's ability to defend such action, shall correspondingly appropriately reduce Company's liability to the Indemnitees under Section 3.2, but the omission to deliver shall 8 ***Confidential Treatment Requested 9 not relieve Company of any liability that it may have to indemnitees other than under this Section 3.2. (c) INSURANCE. Effective as of such time as a Licensed Product or Royalty-Bearing Product enters human clinical trials, Company shall maintain insurance or self-insurance that is reasonable adequate to fulfill any potential obligation to the Indemnitees, but in any event not less than one million dollars ($1,000,000) for injuries to any one person arising out of a single occurrence and five million dollars ($5,000.000) for injuries to all persons arising out of a single occurrence. Company shall provide University, upon request, with rewritten evidence of such insurance or self-insurance. Company shall continue to maintain such insurance or self-insurance after the expiration or termination of this Agreement during any period in which Company or Affiliate or Sublicensee continues to make, use, or sell a product that was a Licensed Product or Royalty-Bearing Product under this Agreement and thereafter for a period of five (5) years. Until such time as a Licensed Product or Royalty-Bearing Product enters human clinical trials, Company shall maintain insurance or self-insurance in such amount as Company customarily maintains covering similar activities, and shall maintain such insurance so long as Company customarily carries such insurance coverage or until a Licensed Product or Royalty-Bearing Product enters human clinical trials. 3.3 USE OF UNIVERSITY NAME. In accordance with Section 7.3., Company and its Affiliates and Sublicensees shall not use the name "University of Massachusetts" or any variation of that name in connection with the marketing or sale of any Licensed Products. 3.4 MARKING OF LICENSED PRODUCTS. To the extent commercially feasible and consistent with prevailing business practices, Company shall mark, and shall cause its Affiliates and Sublicensees to mark, all Licensed Products that are manufactured or sold under this Agreement with the number of each issued patent under the Patent Rights that applies to such Licensed Product. 3.5 COMPLIANCE WITH LAW. Company shall comply with, and shall require its Affiliates and Sublicensees comply with, all local, state, federal, and international laws and regulations relating to the development, manufacture, use, and sale of Licensed Products. Company expressly agrees to comply with the following: (i) Company or its Affiliates or Sublicensees shall obtain all necessary approvals from the United States Food & Drug Administration and any similar governmental authorities of 9 10 any foreign jurisdiction in which Company or an Affiliate or Sublicensee intends to make, use, or sell Licensed Products. (ii) Company and its Affiliates and Sublicensees shall comply with all United States laws and regulations controlling the export of certain commodities and technical data, including without limitation all Export Administration Regulations of the United States Department of Commerce,. Among other things, these laws and regulations prohibit, or require a license for, the export of certain types of commodities and technical data to specified countries. Company hereby gives written assurance that it will comply with, and will require its Affiliates and Sublicensees to comply with, all United States export control laws and regulations, and that it will indemnify, defend, and hold University harmless (in accordance with Section 3.2) for the consequences of any such violation. (iii) To the extent that any invention claimed in the Patent Rights has been partially funded by the United States government, and only to the extent required by applicable laws and regulations, Company agrees that any Licensed Products used or sold in the United States will be manufactured substantially in the United States or its territories. Current law provides that if domestic manufacture is not commercially feasible under the circumstances, University may seek a waiver of this requirement from the relevant federal agency on behalf of Company. 4. CONSIDERATION FOR GRANT OF RIGHTS. 4.1 LICENSE FEE. In partial consideration of the rights granted Company under this Agreement, Company shall pay to University, within thirty (30) days after the Effective Date, a license fee of [***]. In addition, Company shall reimburse University for patent prosecution expenses in the aggregate amount of [***] incurred by University as of the Effective Date with respect to Patent Rights; provided, however, that Company's obligation to reimburse such patent prosecution expenses shall be conditioned upon University's delivery to Company of a reasonably detailed, written itemization of such expenses. Copies of University patent prosecution invoices which provide reasonable detail shall be sufficient written itemization of such expenses. These license fee payments and reimbursements are non refundable and are not creditable against any other payments due to University under this Agreement. 4.2 EQUITY. In partial consideration of the license granted Company under this Agreement, Company shall issue to University, within thirty (30) days after the Effective Date, a 10 ***Confidential Treatment Requested 11 total of [***] shares of Common Stock of Company (subject to adjustment upon changes in stock through merger, consolidation, reorganization, recapitalization, stock dividend, dividend in property other than cash, stock split, liquidating dividend, combination of shares, exchange of shares, change in corporate structure or otherwise), under the terms of the Common Stock Purchase Agreement dated as of the Effective Date between Company and University (the "Common Stock Purchase Agreement"). 4.3 MILESTONE PAYMENTS. Company shall pay University the following milestone payments and make the following issuances of Company Common Stock (subject to adjustment upon changes in stock through merger, consolidation, reorganization, recapitalization, stock dividend, dividend in property other than cash, stock split, liquidating dividend, combination of shares, exchange of shares, change in corporate structure or otherwise ) to University within thirty (30) days after the occurrence of each event described below:
MILESTONE PAYMENT STOCK ISSUANCE [***]
In addition, in the event that Company makes any milestone payment(s) to UC with respect to subsequent compounds utilizing Patent Rights, Related Technology, Licensed Method, UC patent Rights, or UC Technology Rights, Company shall pay to University an amount equal to [***] of such milestone payment(s). 11 ***Confidential Treatment Requested 12 These milestone payments and stock issuances are nonrefundable and are not creditable against any other payments due to University under this Agreement. Company shall pay University such amounts and shall issue such stock regardless of who achieves the milestone, whether the Company or an Affiliate or Sublicensee. 4.4 ROYALTIES (a) BASE ROYALTY. In partial consideration of the rights granted Company under this Agreement, Company shall pay to University an earned royalty of [***] of Not Sales of Licensed Products and Royalty-Bearing Products by Company, an Affiliate or a Sublicensee (the "[***] Royalty"), provided that the earned royalty shall be [***] of Net Sales of a Licensed Product or Royalty-Bearing Product if Net Sales of the Licensed Product or Royalty-Bearing Product are less than [***] per year in any given calendar year of sales (the "[***]"). Company shall pay the [***] Royalty to University for any Royalty Period as to which it cannot be ascertained at the time royalty payments are due whether Net Sales for the calendar year of such Royalty Period will be less than [***]; provided, however, that Company shall be entitled to credit from University in accordance with section 5.4 in the event that the Year-End Report (as defined in Section 5.1) indicates that Company has made excessive royalty payments to University for a calendar year. Any earned royalty due under this Section 4.4 shall be reduced by fifty percent (50%) in the event that a Licensed Product or Royalty-Bearing Product is not covered by Patent Rights or UC Patent Rights but is covered by or developed from related Technology or UC Technology Rights. (b) NO MULTIPLE ROYALTIES. No multiple royalties shall be payable because a particular Licensed Product or its manufacture, use, or sale are or shall be covered by more than one patent application or patent included within the Patent Rights. 4.5 MINIMUM ROYALTY. In each calendar year after the Effective Date, Company shall pay and University shall receive the following minimum royalty payments: [***]
12 ***Confidential Treatment Requested 13 If the actual royalty payments to University in any calendar year are less than the minimum royalty payment required for that year, Company shall have the right to pay University the difference between the actual royalty payment and the minimum royalty payment in full satisfaction of its obligations under this Section, provided such minimum payment is made to University within sixty (60) days after the conclusion of the calendar year. Waiver of any minimum royalty payment by University shall not be construed as a waiver of any subsequent minimum royalty payment. 4.6 SUBLICENSE INCOME. In the event the Company pays to UC any portion of any payments the Company receives in consideration for the sublicense of the Patent Rights, Related Technology, Licensed Method, UC Patent Rights or UC Technology Rights, Company shall pay to University an amount equal to [***] of such payment(s). 5. ROYALTY REPORTS; PAYMENTS; RECORDS. 5.1 REPORTS AND PAYMENTS. Within sixty (60) days after the conclusion of each Royalty Period, Company shall deliver to University a report (each a "Report") containing the following information: (i) the number of Licensed Products and Royalty-Bearing Products sold to independent third parties in each country, and the number of Licensed Products and Royalty-Bearing Products used by Company and its Affiliates and Sublicensees to provide commercial services in each country; (ii) the gross sales price for each Licensed Product and Royalty-Bearing Product by Company and its Affiliates during the applicable Royalty Period in each country; (iii) calculation of Net Sales for the applicable Royalty Period in each country, including a listing of applicable deductions; (iv) total royalty payable on Net Sales in U.S. dollars together with the exchange rates used for conversion; and 13 ***Confidential Treatment Requested 14 (v) withholding taxes, if any, required by law to be deducted as a payment by University in respect of such Net Sales. In addition, the Report for the Royalty Period ending on December 31 of a given calendar year (the "Year-End Report") shall state whether Company is entitled to credit pursuant to Section 4.4(a) as a result of having paid the [***] Royalty during a calendar year in which Net Sales exceeded [***] and, if Company is entitled to such credit, shall also set forth the amount of the credit to which Company is entitled, as calculated in accordance with Section 5.4. If no royalties are due to University for any Royalty Period, the Report for such Royalty Period shall so state. Concurrent with the delivery of each Report, Company shall remit to University any payment due for the applicable Royalty Period. All such reports shall be considered Company Confidential Information. 5.2 PAYMENTS IN U.S. DOLLARS. All payments due under this Agreement shall be payable in U.S. dollars. Conversion of foreign currency to U.S. dollars shall be made at the conversion rate existing in the United States (as reported in the Wall Street Journal) on the last working day of the calendar quarter preceding the applicable Royalty Period. Such payments shall be without deduction of exchange, collection, or other charges. 5.3 PAYMENT IN OTHER CURRENCIES. If by law, regulation, or fiscal policy of a particular country, conversion into United States dollars or transfer of funds of a convertible currency to the United States is restricted or forbidden, Company shall give University prompt written notice of such restriction, which notice shall satisfy the sixty-day payment deadline described in Section 5.1. Company shall pay any amounts due University through whatever awful methods University reasonably designates; provided, however, that if University fails to designate such payment method within thirty (30) days after University is notified of the restriction, Company may deposit such payment in local currency to the credit of University in a recognized banking institution selected by Company and identified by written notice to University and such deposit shall fulfill all obligations of Company to University with respect to such payments. 5.4 CREDIT FOR OVERPAYMENTS. Within thirty (30) days of University's receipt of a Year-End Report disclosing overpayment of royalties by Company, University shall credit to Company an amount equal to the lesser of (a) the difference between the [***] royalty paid to University and the [***] Royalty to which University was actually entitled and (b) the difference 14 ***Confidential Treatment Requested 15 between the [***] Royalty and the applicable minimum royalty for such calendar year, as specified in Section 4.5. 5.5 RECORDS. Company shall maintain and shall require its Affiliates and Sublicensees to maintain, complete and accurate records of Licensed Products and Royalty-Bearing Products that are made, used, or sold under this Agreement and any amounts payable to University in relation to such Licensed Products and Royalty Bearing Products, which records shall contain sufficient information to permit University to confirm the accuracy of any Reports due to University under Section 5.1. The relevant party shall retain such records relating to a given Royalty Period for at least three (3) years after the conclusion of that Royalty Period during which time University shall have the right, at its expense, to cause its internal accountants or an independent, certified public accountant to inspect such records during normal business hours for the sole purpose of verifying any reports and payments due under this Agreement. Such accountant shall not disclose to University any information other than information relating to accuracy of reports and payments delivered under this Agreement. The parties shall reconcile any underpayment or overpayment within thirty (30) days after the accountant delivers the results of the audit. In the event that any audit performed under this Section reveals an underpayment in excess of ten percent (10%) in any Royalty Period, Company shall bear the full cost of such audit; however, Company shall have the right to review and verify the audit results for thirty (30) days after the accountant delivers the results of the audit, prior to being required to pay the cost of the audit. University may exercise its rights under this Section only once every year and only with reasonable prior notice to Company. 5.6 LATE PAYMENTS. Any payment by Company that are not paid on or before the date such payments are due under this Agreement shall bear interest, to the extent permitted by law, at two percentage points above the Prime Rate of interest as reported in the Wall Street Journal on the date payment is due, with interest calculated based on the number of days that payment is delinquent. 5.7 METHOD OF PAYMENT. All payments under this Agreement should be made in the name of the "University of Massachusetts" and sent to the address identified below. Each payment should reference this Agreement and identify the obligation under this Agreement that the payment satisfies. 15 ***Confidential Treatment Requested 16 5.8 WITHHOLDING AND SIMILAR TAXES. Royalty payments and other payments due to University under this Agreement shall not be reduced by reason of any withholding or similar taxes applicable to such payments to University. 6. PATENTS AND INFRINGEMENT. 6.1 RESPONSIBILITY FOR JOINT PATENT RIGHTS. Company shall have primary responsibility, at Company's expense, for the preparation, filing, prosecution, and maintenance of all Joint Patent Rights (except as otherwise agreed in writing by University and by UC), using patent counsel selected by Company. Company shall consult with University as to the preparation, filing, prosecution, and maintenance of all such Joint Patent Rights reasonably prior to any deadline or action with the U.S. Patent & Trademark Office or any foreign patent office (a "Patent Office") and shall furnish University with copies of all relevant documents reasonably in advance of such consultation. Responsibility for any patent rights covered by the UMMC Cases shall be determined in accordance with Section 6.2 below. 6.2 CONTROL OF UMMC CASES. From and after the Effective date, University shall have responsibility for and control over the prosecution and maintenance of the UMMC Cases and Company shall bear responsibility for the expenses of such prosecution and maintenance. For so long as University controls prosecution and maintenance of the UMMC Cases, University shall (a) not make any filings of any nature or type with a Patent Office in connection with the UMMC Cases (including, without limitation any initial filing, any amendments to such filing, any continuations-in-part or any response to any Patent Office action or communication) without the prior approval of Company, (b) keep Company fully informed of the status of the UMMC Cases, (c) furnish Company with copies of all relevant documents in connection with University's preparation, filing, prosecution, maintenance or abandonment of the UMMC Cases reasonably prior to any deadline or action with any Patent Office, and (d) consult with Company regarding such documents and endeavor in good faith to consider and incorporate any comments on such documents that Company may have (University to have final authority with respect to such prosecution and maintenance in the event of disagreement between it and Company). Notwithstanding the foregoing, University acknowledges and agrees that it will not prosecute any subject matter with respect to UMMC Cases which would interfere, as defined by 35 U.S.C. Section135, with subject matter in issued claims of the UC Patent Rights or the Joint Patent Rights, or take any other action to prompt a declaration of interference of the UMMC Cases with any such patent rights and, in the event that such an interference is declared, will immediately take steps 16 17 reasonably necessary to dissolve such interference including, if necessary, abandoning the claims. The University shall not abandon any of the UMMC Cases, fail to respond to any outstanding action from a Patent Office or fail to pay any applicable issue fee or maintenance fee without first offering to transfer to Company responsibility for control over prosecution and maintenance of the applicable rights under the UMMC Cases with a reasonable amount of time to allow Company to prevent the abandonment of the UMMC Cases, or respond to such Patent Office action or pay such issue fee or maintenance fee. Company shall reimburse University for the expenses of such preparation, filing, prosecution and maintenance with respect to UMMC Cases; provided, however, that Company's obligation to reimburse such expenses shall be conditioned upon University's delivery to Company of a reasonable written itemization of such expenses. The amount of such expenses incurred to date which Company shall be obligated to reimburse University is [***] (as of July 25, 1997). Copies of University's invoices with respect to such expenses shall be deemed to be sufficient written itemization of such expenses. 6.3 INFRINGEMENT. (a) NOTIFICATION OF INFRINGEMENT. Each party agrees to provide written notice to the other party promptly after becoming aware of any infringement of the Patent Rights. (b) COMPANY RIGHT TO PROSECUTE. So long as the license granted Company under Section 2.1(a) remains exclusive (subject to the retained rights under Section 2.3 and any applicable rights of UC with respect to Joint Patent Rights), Company shall have the right, under its own control and its own expense, to prosecute any third party infringement of the Patent Rights in the Field or, together with other licensees of the Patent Rights in other fields, to defend the Patent Rights in any declaratory judgment action brought by a third party which alleges invalidity, unenforceability, or non-infringement of the Patent Rights. Prior to commencing any action as aforesaid, Company shall consult with University and shall consider the views of University regarding the advisability of the proposed action and its effect on the public interest. Company shall not enter into any settlement, consent judgment, or other voluntary final disposition of any infringement action under this Subsection without the prior written consent of the University, which consent shall not be unreasonably withheld or delayed. Any recovery obtained in an action under this Subsection which relates solely to the Patent Rights shall be distributed as follows: (i) each party shall be reimbursed for any expenses incurred in the action 17 ***Confidential Treatment Requested 18 (including the amount of any royalty payments withheld from University as described below); (ii) as to ordinary damages, Company shall receive an amount equal to its lost profits or a reasonable royalty on the infringing sales (whichever measure of damages the court shall have applied), and shall remit to University a reasonable approximation of the royalties that Company would have paid to University if Company had sold the infringing products and services rather than the infringer, and (iii) as to special or punitive damages, the parties shall share any award in proportion to the share of expense paid by each party. Company may offset a total of [***] of any expenses incurred under this Subsection against any royalty payments due to University under this Agreement, provided that in no event shall the royalty payments under Section 4.4., when aggregated with any other offsets and credits allowed under this Agreement, be reduced by more than [***] in any Royalty Period. (c) UNIVERSITY AS INDISPENSABLE PARTY. University shall permit any action under this Section to be brought in its name if required by law, provided that Company shall hold University harmless from, and if necessary indemnify University against, any costs, expenses, or liability that University may incur in connection with such action. (d) UNIVERSITY RIGHT TO PROSECUTE. In the event that Company fails to initiate an infringement action with respect to Patent Rights within a reasonable time after it first becomes aware of the basis for such action, or to answer a declaratory judgment or other action within a reasonable time after such action is filed, University shall have the right to prosecute such infringement or answer such declaratory judgment action, under its sole control and its sole expense, and any recovery obtained shall be given to University. (e) COOPERATION. Each party agrees to cooperate fully in any action under this Section 6.3 which is controlled by the other party, provided that the controlling party reimburses the cooperating party promptly for reasonable costs and expenses incurred by the cooperating party in connection with providing such assistance. 7. CONFIDENTIAL INFORMATION; PUBLICATIONS; PUBLICITY. 7.1 CONFIDENTIAL INFORMATION (a) DESIGNATION. Confidential Information that is disclosed in writing shall be marked with a legend indicating its confidential status (such as "Confidential" or "Proprietary"). Confidential Information that is disclosed orally or visually shall be documented in a written 18 ***Confidential Treatment Requested 19 notice prepared by the Disclosing Party and delivered to the Receiving Party within thirty (30) days of the date of disclosure; such notice shall summarize the Confidential Information disclosed to the Receiving Party and reference the time and place of disclosure. (b) OBLIGATIONS. For a period of five (5) years after disclosure of any portion of Confidential Information, the Receiving Party shall (i) maintain such Confidential Information in strict confidence, except that the Receiving Party may disclose or permit the disclosure of any Confidential Information to its directors, officers, employees, consultants, and advisors who are obligated to maintain the confidential nature of such Confidential Information and who need to know such Confidential Information solely for the performance and administration of this Agreement; and (ii) allow its trustees or directors, officers, employees, consultants, and advisors to reproduce the Confidential Information only to the extent necessary for the purposes of this Agreement, with all such reproductions being considered Confidential Information. (c) EXCEPTIONS. The obligations of the Receiving Party under Subsection 7.1(b) above shall not apply to the extent that the receiving Party can demonstrate that certain Confidential Information (i) was in the public domain prior to the time of its disclosure under this Agreement; (ii) entered the public domain after the time of its disclosure under this Agreement through means other than an unauthorized disclosure resulting from an act or omission by the Receiving Party; (iii) was independently developed or discovered by the Receiving Party without use of the Confidential Information; (iv) is or was disclosed to the Receiving Party at any time whether prior to or after the time of its disclosure under this Agreement, by a third party having no fiduciary relationship with the Disclosing Party and having no obligation of confidentiality with respect to such Confidential Information; or (v) is required to be disclosed to comply with applicable laws or regulations, or with a court or administrative order, provided that the Disclosing Party receives reasonable prior written notice of such obligation for disclosure. (d) OWNERSHIP AND RETURNS. The Receiving Party acknowledges that the Disclosing Party (or any third party entrusting its own information to the Disclosing Party) claims ownership of its Confidential Information in the possession of the Receiving Party. Upon the expiration or termination of this Agreement, and at the request of the Disclosing Party, the Receiving Party shall return to the Disclosing Party all originals, copies, and summaries of documents, materials and other tangible manifestations of Confidential Information in the possession or control of the Receiving Party, except that the Receiving Party may retain one copy 19 20 of the Confidential Information in the possession of its legal counsel solely for the purpose of monitoring its obligations under this Agreement. 7.2 PUBLICATIONS. University and its employees will be free to disclose publicly (through journals, lectures, or otherwise) the results of any research in the Field or relating to the subject matter of the Patent Rights, except as otherwise provided by written agreement between University and Company (e.g., a sponsored research agreement). 7.3 PUBLICITY RESTRICTIONS. Company shall not use the name of University or any of its trustees, officers, faculty, students, employees, or agents, or any adaptation of such names, or any terms of this Agreement in any promotional material or other public announcement or disclosure without the prior written consent of University. The foregoing notwithstanding, Company shall have the right to disclose such information without the consent of University in any prospectus, offering memorandum, or other document or filing required by applicable securities laws or other applicable law or regulation, provided that Company shall have given University at least ten (10) days prior written notice of the proposed text and of the requirement for the proposed disclosure for the purpose of giving University the opportunity to comment on such text. Company and its Affiliates and Sublicensees shall not use the name, likeness, or logos of the [***] in any press release, general publication, advertising, marketing, promotional or sales literature without prior written consent from an authorized official of the [***]. 8. TERM AND TERMINATION. 8.1 TERM. This Agreement shall commence on the Effective Date and shall remain in effect until (i) the expiration of all issued patents within the Patent Rights or (ii) for a period of ten (10) years after the Effective Date if no such patents have issued within that ten-year period, unless earlier terminated in accordance with the provisions of this Agreement (the "Term"). 8.2 TERMINATION FOR DEFAULT. In the event that either party commits a material breach of its obligations under this Agreement and fails to cure that breach within sixty (60) days after receiving written notice thereof, the other party may terminate this Agreement immediately upon written notice to the party in breach. If the alleged breach involves nonpayment of any amounts due University under this Agreement, Company shall be entitled to the sixty-day cure period only with respect to the first such breach, with the cure period for each subsequent breach shortened as follows: thirty (30) days for the second breach; fifteen (15) days for the third 20 ***Confidential Treatment Requested 21 breach; and termination immediately upon written notice to Company, without any cure period for any subsequent breach. 8.3 FORCE MAJEURE. Neither party will be responsible for delays resulting from causes beyond the reasonable control of such party, including without limitation fire, explosion, flood, war, strike, or riot, provided that the nonperforming party uses commercially reasonable efforts to avoid or remove such causes of nonperformance and continues performance under this Agreement with reasonable dispatch whenever such causes are removed. 8.4 EFFECT OF TERMINATION. The following provisions shall survive the expiration or termination of this Agreement: Articles 1, 5 (except that Section 5.1 shall only survive as to the obligation to provide final report and payment), 7 and 9; Sections 3.2, 3.5, 8.4, 10.8 and 10.9. In addition, Sections 4.3, 4.4 and 4.5 shall survive the expiration (but not the termination) of this Agreement until the end of the last Royalty Period. Upon the early termination of this Agreement, Company and its Affiliates and Sublicensees may complete and sell any work-in-progress and inventory of licensed products that exist as of the effective date of termination, provided that (i) Company is current in payment of all amounts due University under this Agreement, (ii) Company pays University the applicable royalty on such sales of Licensed Products and Royalty-Bearing Products in accordance with the terms and conditions of this Agreement, and (iii) Company and its Affiliates and Sublicensees shall complete and sell all work-in-progress and inventory of Licensed Products within six (6) months after the effective date of termination. 9. DISPUTE RESOLUTION. 9.1 PROCEDURES MANDATORY. The parties agree that any dispute arising out of or relating to this Agreement shall be resolved solely by means of the procedures set forth in this Article, and that such procedures constitute legally binding obligations that are an essential provision of this Agreement; provided, however, that all procedures and deadlines specified in this Article may be modified by written agreement of the parties. If either party fails to observe the procedures of this Article, as modified by their written agreement, the other party may bring an action for the specific performance in any court of compentent jurisdiction. 9.2 DISPUTE RESOLUTION PROCEDURES. 21 22 (a) NEGOTIATION. In the event of any dispute arising out of or relating to this Agreement, the affected party shall notify the other party, and the parties shall attempt in good faith or resolve the matter within ten (10) days after the date of such notice (the "Notice Date"). Any disputes not resolved by good faith discussions shall be referred to senior executives of each party, who shall meet at a mutually acceptable time and location within thirty (30) days after the Notice Date and attempt to negotiate a settlement. (b) MEDIATION. If the matter remains unresolved within sixty (60) days after the notice Date, or if the senior executives fail to meet within thirty (30) days after the Notice Date, either party may initiate mediation upon written notice to the other party, whereupon both parties shall be obligated to engage in a mediation proceeding under then current Center for Public Resources ("CPR") Model Procedure for Mediation of Business Disputes, except that specific provisions of this Section shall override inconsistent provisions of the CPR Model Procedure. The mediator will be selected from the CPR Panels of Neutrals. If the parties cannot agree upon the selection of a mediator within ninety (90) days after the Notice Date, then upon the request of either party, the CPR shall appoint the mediator. The parties shall attempt to resolve the dispute through mediation until one of the following occurs: (i) the parties reach a written settlement; (ii) the mediator notifies the parties in writing that they have reached an impasse; (iii) the parties agree in writing that they have reached an impasse; or (iv) the parties have not reached a settlement within one hundred and twenty (120) days after the Notice Date. (c) TRIAL WITHOUT JURY. If the parties fail or resolve the dispute through mediation, or if neither party elects to initiate mediation, each party shall have the right to pursue any other remedies legally available to resolve the dispute, provided, however, that the parties expressly waive any right to a jury trial in any legal proceeding under this Section. 9.3 PRESERVATION OF RIGHTS PENDING RESOLUTION. (a) PERFORMANCE TO CONTINUE. Each party shall continue to perform its obligations under this Agreement pending final resolution of any dispute arising out or relating to this Agreement; provided, however, that a party may suspend performance of its obligations during any period in which the other party fails or refuses to perform its obligations. (b) PROVISIONAL REMEDIES. Although the procedures specified in this Article are the sole and exclusive procedures for the resolution of disputes arising out of relating to this Agreement, either party may seek a preliminary injunction or other provisional equitable relief if, 22 23 in its reasonable judgment, such action is necessary to avoid irreparable harm to itself or to preserve its rights under this Agreement. (c) STATUTE OF LIMITATIONS. The parties agree that all applicable statutes of limitation and time-based defenses (such as estoppel and laches) shall be tolled while the procedures set forth in Subsections (9.2.(a) and 9.2(b) are pending. The parties shall take any actions necessary to effectuate this result. 10. MISCELLANEOUS. 10.1 REPRESENTATIONS AND WARRANTIES. University represents and warrants that its employees have assigned to University their entire right, title, and interest in the Patent Rights and that it has authority to grant the rights and licenses set forth in this Agreement. UNIVERSITY MAKES NO OTHER WARRANTIES CONCERNING THE PATENT RIGHTS AND RELATED TECHNOLOGY, INCLUDING WITHOUT LIMITATION ANY EXPRESS OR IMPLIED WARRANTY OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE. Specifically, University makes no warranty or representation (i) regarding the validity or scope of the Patent Rights (ii) that the exploitation of Patent Rights or any Licensed Product will not infringe any patents or other intellectual property rights of a third party, and (iii) that any third party is not currently infringing or will not infringe the Patent Rights. 10.2 TAX-EXEMPT STATUS. Company acknowledges that University, as a public institution of the Commonwealth of Massachsuetts, holds the status of an exempt organization under the United States Internal Revenue Code. Company also acknowledges that ascertain facilities in which the licensed inventions were developed may have been financed through offerings of tax-exempt bonds. If the Internal Revenue Service determines, or if counsel to University reasonably determines, that any term of this Agreement jeopardizes the tax-exempt status of University or the bonds used to finance University facilities, the relevant term shall be deemed in invalid provisions and modified in accordance with Section 10.10. 10.3 COUNTERPARTS. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original, and all of which together shall be deemed to be one and the same instrument. 10.4 HEADINGS. All headings are for convenience only and shall not affect the meaning of any provision of this Agreement. 23 24 10.5 BINDING EFFECT. This Agreement shall be binding upon and inure to the benefit of the parties and their respective permitted successors and assigns. 10.6 ASSIGNMENT. This Agreement may not be assigned by either party without the prior written consent of the other party, except that Company may assign this Agreement to an affiliate or to a successor in connection with the merger, consolidation, or sale of all or substantially all of its assets or that portion of its business to which this Agreement relates. 10.7 AMENDMENT AND WAIVER. This Agreement may be amended, supplemented, or otherwise modified only by means of a written instrument signed by both parties. Any waiver of any rights or failure to act in a specific instance shall relate only to such instance and shall not be construed as an agreement to waive any rights or fail to act in any other instance, whether or not similar. 10.8. GOVERNING LAW. This Agreement shall be governed by and construed in accordance with the laws of the Commonwealth of Massachusetts irrespective of any conflicts of law principles. 10.9 NOTICE. Any notices required or permitted under this Agreement shall be in writing, shall specifically refer to this Agreement, and shall be sent by hand, recognized national overnight courier, confirmed facsimile transmission, confirmed electronic mail, or registered or certified mail, postage prepaid, return receive requested, to the following addresses or facsimile numbers of the parties. 24 25 If to University: Office of Commercial Ventures and Intellectual Property University of Massachsuetts 55 Lake Avenue North Worcester, MA 01605 Attention: Joseph F. X. McGuirl Executive Director Tel: (508) 856-1626 Fax: (508) 856-5004 If to Company: Signal Pharmaceuticals, Inc. 5555 Oberlin Drive San Diego, CA 92121 Attention: Alan J. Lewis, Ph.D. President and Chief Executive Officer Tel: (619) 558-7500 Fax: (619) 558-7513 All notices under this Agreement shall be deemed effective upon receipt. A party may change its contact information immediately upon written notice to the other party in the manner provided in this Section. 10.10 SEVERABILITY. In the event that any provision of this Agreement shall be held invalid or unenforceable for any reason, such invalidity or unenforceability shall not affect any other provision of this Agreement, and the parties shall negotiate in good faith to modify the Agreement to preserve (to the extent possible) their original intent. If the parties fail to reach a modified agreement within sixty (60) days after the relevant provision is held invalid or unenforceable, then the dispute shall be resolved in accordance with the procedures set forth in Article 9. While the dispute is pending resolution, this Agreement shall be construed as if such provision were deleted by agreement of the parties. 10.11 ENTIRE AGREEMENT. Except for the Common Stock Purchase Agreement, this Agreement constitutes the entire agreement between the parties with respect to its subject 25 26 and supersedes all prior agreement or understandings between the parties relating to its subject matter. IN WITNESS WHEREOF, The parties have caused this Agreement to be executed by their duly authorized representatives as of the date first written above. UNIVERSITY OF MASSACHUSETTS SIGNAL PHARMACEUTICALS, INC. By: /s/ JOSEPH F.X. McGUIRL By: /s/ CARL BOBKOSKI -------------------------------- ------------------------------ Joseph F.X. McGuirl Carl Bobkoski Executive Director, CVIP Executive Vice President 26 27 EXHIBIT A LIST OF UMMC CASES U.S. PATENT APPLICATION SERIAL NO. [***] U.S. PATENT APPLICATION SERIAL NO. [***] 27 ***Confidential Treatment Requested EX-10.47 49 EXHIBIT 10.47 1 * Text Omitted and Filed Separately Confidential Treatment Requested Under 17 C.F.R. Sections 200.80, 200.83 and 230.406. EXHIBIT 10.47 RESTRICTED STOCK PURCHASE AGREEMENT Agreement made as of this 8th day of December, 1997 by and between Signal Pharmaceuticals, Inc., a California corporation (the "Company"), and University of Massachusetts (the "Purchaser"). Unless otherwise defined herein, all capitalized terms used herein shall have the same meanings given to them in that certain Exclusive License Agreement (the "License Agreement") by and between Purchaser and the Company, dated October 28, 1997, a copy of which is attached hereto as Exhibit 1. 1. PURCHASE OF SHARES 1.1 PURCHASE. In consideration of Purchaser's grant of certain patent and technology rights to the Company pursuant to the License Agreement, the Company shall issue to Purchaser [***] shares of its Common Stock. All shares of the Company's Common Stock issued to Purchaser pursuant to this paragraph, shall hereinafter be referred to as the "Shares." 2. INVESTMENT REPRESENTATIONS 2.1 PAYMENT. The Company represents and warrants that the Shares, when issued in accordance with the provisions of this Agreement, will be duly and validly issued, fully paid, and non-assessable. 2.2 EXEMPTION FROM REGISTRATION. The Shares have not been registered under the 1933 Act (defined below), and are accordingly being issued to Purchaser in reliance upon the exemption from such registration provided by 4(2) of the 1933 Act. 2.3 INVESTMENT INTENT. Purchaser hereby warrants and represents that it is acquiring the Shares for its own account and not with a view to their resale or distribution and that it is prepared to hold the Shares for an indefinite period and has no present intention to sell, distribute or grant any participating interests in, the Shares except that Purchaser may transfer the Shares to the University of Massachusetts Foundation (the "Foundation"). Purchaser hereby acknowledges the fact that the Shares have not been registered under the Securities Act of 1933, as amended (the "1933 Act"), and that the Company is issuing the Shares to it in reliance on the representations made by it herein. 2.4 RESTRICTED SECURITIES. (a) Purchaser hereby confirms that it has been informed that the Shares may not be resold or transferred unless such Shares are first registered under the 1933 Act or unless an exemption from such registration is available. Accordingly, Purchaser 1. ***Confidential Treatment Requested 2 hereby acknowledges that it is prepared to hold the Shares for an indefinite period and that it is aware that Rule 144 of the Securities and Exchange Commission issued under the 1933 Act is not presently available to exempt the sale of the Shares from the registration requirements of the 1933 Act. Should Rule 144 subsequently become available, Purchaser is aware that any sale of Shares effected pursuant to the Rule may, depending upon the status of Purchaser as an "affiliate" or "non-affiliate" under the Rule, be made only in limited amounts in accordance with the provisions of the Rule, and that in no event may any Shares be sold pursuant to the Rule until Purchaser has held such Shares for at least one (1) year following their issuance. (b) Should the Company not become subject to the reporting requirements of the Securities Exchange Act of 1934, as amended (the "1934 Act"), then Purchaser may, provided he/she is not at the time an affiliate of the Company (nor was such an affiliate during the preceding three (3) months), sell the Shares (without registration) pursuant to paragraph (k) of Rule 144 after the Shares have been held for a period of two (2) years following the effective date of the License Agreement. 2.5 DISPOSITION OF SHARES. Except as specifically set forth below, Purchaser hereby agrees that it shall make no disposition of the Shares, unless and until: (a) it shall have complied with all requirements of this Agreement applicable to the disposition of such Shares; (b) it shall have notified the Company of the proposed disposition and furnished it with a written summary of the terms and conditions of the proposed disposition; and (c) unless otherwise waived by the Company, it shall have delivered to the Company a written opinion of counsel at the Company's expense, in form and substance satisfactory to the Company, that (i) the proposed disposition does not require registration of the Shares under the 1933 Act or (ii) all appropriate action necessary for compliance with the registration requirements of the 1933 Act or of any exemption from registration available under the 1933 Act has been taken. The Company shall not be required (i) to transfer on its books any Shares which have been sold or transferred in violation of the provisions of this Section 2, nor (ii) to treat as the owner of the Shares, or otherwise to accord voting or dividend rights to, any transferee to whom the Shares have been so transferred. 2.6 RESTRICTIVE LEGENDS. In order to reflect the restrictions on disposition of the Shares, the stock certificates for the Shares shall be endorsed with restrictive legends, including the following legend: 2. 3 "The securities represented by this certificate have not been registered under the Securities Act of 1933. The shares have been acquired for investment and may not be sold or offered for sale in the absence of an effective registration statement for the shares under that Act, a 'no action' letter of the Securities and Exchange Commission as to such sale or offer, or an opinion of counsel to the Company that registration under such Act is not required for such sale or offer." 3. TRANSFER RESTRICTIONS. 3.1 TRANSFEREE OBLIGATIONS. Each person (other than the Company and the Foundation) to whom the Shares are transferred must, as a condition precedent to the validity of such transfer, acknowledge in writing to the Company that such person is bound by the provisions of this Agreement and that the transferred shares are subject to the market stand-off provisions of paragraph 3.2 to the same extent such shares would be so subject if retained by Purchaser. 3.2 MARKET STAND-OFF. (a) In connection with any underwritten public offering by the Company of its equity securities pursuant to an effective registration statement filed under the 1933 Act, including the Company's initial public offering, Purchaser and all subsequent holders of the Shares who derive their chain of ownership through a transfer from Purchaser ("Owner") shall not sell, make any short sale of, loan, hypothecate, pledge, grant any option for the purchase of, or otherwise dispose or transfer for value or otherwise agree to engage in any of the foregoing transactions with respect to, any Shares without the prior written consent of the Company or its underwriters. Such limitations shall be in effect for such period of time from and after the effective date of the final prospectus for such offering as may be requested by the Company or such underwriters. (b) Owner shall be subject to the market standoff provisions of this paragraph 3.2 provided and only if all of the executive officers and directors of the Company are also subject to similar arrangements. (c) In the event of any stock dividend, stock split, recapitalization or other change affecting the Company's outstanding Common Stock effected as a class without the Company's receipt of consideration, then any new, substituted or additional securities distributed with respect to the Shares shall be immediately subject to the provisions of this paragraph 3.2, to the same extent the Shares are at such time covered by such provisions. 3. 4 (d) In order to enforce the limitations of this paragraph 3.2, the Company may impose stock-transfer instructions with respect to the Shares until the end of the applicable standoff period. 4. REGISTRATION RIGHTS. 4.1 For purpose of this Section 4: (a) The term "register", "registered," and "registration" refer to a registration effected by preparing and filing a registration statement or similar document in compliance with the 1933 Act, and the declaration or ordering of effectiveness of such registration statement or document; (b) The term "Registrable Securities" means the Common Stock issued pursuant to this Agreement, excluding, however, any Registrable Securities sold by a person in a transaction in which his rights under this Section 4 are not assigned; (c) The number of shares of "Registrable Securities then outstanding" shall be determined by the number of shares of Common Stock outstanding which are, and the number of shares of Common Stock issuable pursuant to then exercisable or convertible securities which are, Registrable Securities; (d) The term "Holder" means any person owning or having the right to acquire Registrable Securities or any assignee thereof in accordance with Section 4.7 hereof. 4.2 COMPANY REGISTRATION. If (but without any obligation to do so) the Company proposes to register (including for this purpose a registration effected by the Company for shareholders other than the Holders) any of its stock or other securities under the 1933 Act in connection with the public offering of such securities solely for cash (other than a registration relating solely to the sale of securities to participants in a Company stock plan, or a registration on any form which does not include substantially the same information as would be required to be included in a registration statement covering the sale of the Registrable Securities), the Company shall, at such time, promptly give each Holder written notice of such registration. Upon the written request of each Holder given within twenty (20) days after mailing of such notice by the Company in accordance with Section 5.2, the Company shall, subject to the provisions of Section 4.4, cause to be registered under the 1933 Act all of the Registrable Securities that each such Holder has requested to be registered. 4.3 EXPENSES OF COMPANY REGISTRATION. The Company shall bear and pay all expenses incurred in connection with any registration, filing or qualification of Registrable Securities with respect to the registrations pursuant to Section 4.2 for each 4. 5 Holder (which right may be assigned as provided in Section 4.7), including (without limitation) all registration, filing, and qualification fees, printers' and accounting fees relating or apportionable thereto, but excluding underwriting discounts and commissions relating to Registrable Securities. 4.4 UNDERWRITING REQUIREMENTS. In connection with any offering involving an underwriting of shares of the Company's capital stock, the Company shall not be required under Section 4.2 to include any of the Holders' securities in such underwriting unless they accept the terms of the underwriting as agreed upon between the Company and the underwriters selected by it (or by other persons entitled to select the underwriters), and then only in such quantity as the underwriters determine in their sole discretion will not jeopardize the success of the offering by the Company. If the total amount of securities, including Registrable Securities, requested by shareholders to be included in such offering exceeds the amount of securities sold other than by the Company that the underwriters determine in their sole discretion is compatible with the success of the offering, then the Company shall be required to include in the offering only that number of such securities, including Registrable Securities, which the underwriters determine in their sole discretion will not jeopardize the success of the offering (subject to the rights of other security holders of the Company, including, without limitation, preferred shareholders, the securities so included to be apportioned pro rata among the selling shareholders). For purposes of the preceding parenthetical concerning apportionment, for any selling shareholder that is a holder of Registrable Securities and that is a partnership or corporation, the partners, retired partners and shareholders of such holder, or the estates and family members of any such partners and retired partners and any trusts for the benefit of any of the foregoing persons shall be deemed to be a single "selling shareholder", and any pro-rata reduction with respect to such "selling shareholder" shall be based upon the aggregate amount of shares carrying registration rights owned by all entities and individuals included in such "selling shareholder", as defined in this sentence. 4.5 DELAY OF REGISTRATION. No Holder shall have any right to obtain or seek an injunction restraining or otherwise delaying any such registration as the result of any controversy that might arise with respect to the interpretation or implementation of this Section 4. 4.6 INDEMNIFICATION. In the event any Registrable Securities are included in a registration statement under this Section 4: (a) To the extent permitted by law, the Company will indemnify and hold harmless each Holder, any underwriter (as defined in the 1933 Act) for such Holder and each person, if any, who controls such Holder or underwriter within the meaning of the 1933 Act or the 1934 Act, against any losses, claims, damages, or liabilities (joint or 5. 6 several) to which they may become subject under the 1933 Act or the 1934 Act or other federal or state law, insofar as such losses, claims, damages, or liabilities (or actions in respect thereof) arise out of or are based upon any of the following statements, omissions or violations (collectively a "Violation"): (i) any untrue statement or alleged untrue statement of a material fact contained in such registration statement, including any preliminary prospectus or final prospectus contained therein or any amendments or supplements thereto, (ii) 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 violation or alleged violation by the Company of the 1933 Act, the 1934 Act, any state securities law or any rule or regulation promulgated under the 1933 Act, or the 1934 Act or any state securities law; and the Company will pay to each such Holder, underwriter or controlling person, as incurred, any legal or other expenses reasonably incurred by them in connection with investigating or defending any such loss, claim, damage, liability, or action; provided, however, that the indemnity agreement contained in this subsection 4.6 shall not apply to amounts paid in settlement of any such loss, claim, damage, liability, or action if such settlement is effected without the consent of the Company (which consent shall not be unreasonably withheld), nor shall the Company be liable in any such case for any such loss, claim, damage, liability, or action to the extent that it arises out of or is based upon a Violation which occurs in reliance upon and in conformity with written information furnished expressly for use in connection with such registration by any such Holder, underwriter or controlling person. (b) To the extent permitted by law, each selling Holder will indemnify and hold harmless the Company, each of its directors, each of its officers who has signed the registration statement, each person, if any, who controls the Company within the meaning of the 1933 Act, any underwriter, any other Holder selling securities in such registration statement and any controlling person of any such underwriter or other Holder, against any losses, claims, damages, or liabilities (joint or several) to which any of the foregoing persons may become subject, under the 1933 Act, or the 1934 Act or other federal or state law, insofar as such losses, claims, damages, or liabilities (or actions in respect thereto) arise out of or are based upon any Violation, in each case to the extent (and only to the extent) that such Violation occurs in reliance upon and in conformity with written information furnished by such Holder expressly for use in connection with such registration; and each such Holder will pay, as incurred, any legal or other expenses reasonably incurred by any person intended to be indemnified pursuant to this subsection 4.6(b), in connection with investigating or defending any such loss, claim, damage, liability, or action; provided, however, that the indemnity agreement contained in this subsection 4.6(b) claim, damage, liability or action if such settlement is effected without the consent of the Holder, which consent shall not be unreasonably withheld; provided, that, in no event shall any indemnity under this subsection 4.6(b) exceed the gross proceeds from the offering received by such Holder. 6. 7 (c) The foregoing indemnity agreements of the Company and Holders are subject to the condition that, insofar as they relate to any Violation made in a preliminary prospectus but eliminated or remedied in the amended prospectus on file with the SEC at the time the registration statement in question becomes effective or the amended prospectus filed with the SEC pursuant to SEC Rule 424(b) (the "Final Prospectus"), such indemnity agreement shall not inure to the benefit of any indemnified party if a copy of the Final Prospectus was furnished to such indemnified party and was not furnished to the person asserting the loss, liability, claim or damage at or prior to the time such Final Prospectus is required to be delivered under the 1933 Act if such loss, claim or damage would have been avoided had the indemnified party furnished the Final Prospectus to such person. (d) Promptly after receipt by an indemnified party under this Section 4.6 of notice of the commencement of any action (including any governmental action), such indemnified party will, if a claim in respect thereof is to be made against any indemnifying party under this Section 4.6, deliver to the indemnifying party a written notice of the commencement thereof and the indemnifying party shall have the right to participate in, and, to the extent the indemnifying party so desires, jointly with any other indemnifying party similarly noticed, to assume the defense thereof with counsel mutually satisfactory to the parties; provided, however, that an indemnified party (together with all other indemnified parties which may be represented without conflict by one counsel) shall have the right to retain one separate counsel, with the fees and expenses to be paid by the indemnifying party, if representation of such indemnified party by the counsel retained by the indemnifying party would be inappropriate due to actual or potential differing interests between such indemnified party and any other party represented by such counsel in such proceeding. The failure to deliver written notice to the indemnifying party within a reasonable time of the commencement of any such action, if prejudicial to its ability to defend such action, shall relieve such indemnifying party of any liability to the indemnified party under this Section 4.6, but the omission so to deliver written notice to the indemnifying party will not relieve it of any liability that it may have to any indemnified party otherwise than under this Section 4.6. (e) If the indemnification provided for in this Section 4.6 is held by a court of competent jurisdiction to be unavailable to an indemnified party with respect to any loss, liability, claim, damage, or expense referred to therein, then the indemnifying party, in lieu of indemnifying such indemnified party hereunder, shall contribute to the amount paid or payable by such indemnified party as a result of such loss, liability, claim, damage, or expense in such proportions is appropriate to reflect the relative fault of the indemnifying party on the one hand and of the indemnified party on the other in connection with the statements of omissions that resulted in such loss, liability, claim, damage, or expense as well as any other relevant equitable considerations. The relative fault of the indemnifying party and of the indemnified party shall be determined by 7. 8 reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission to state a material fact relates to information supplied by the indemnifying party or by the indemnified party and the parties' relative intent, knowledge, access to information, and opportunity to correct or prevent such statement or omission. (f) Notwithstanding the foregoing, to the extent that the provisions on indemnification and contribution contained in the underwriting agreement entered into in connection with the underwritten public offering are in conflict with the foregoing provisions, the provisions in the underwriting agreement shall control. (g) The obligations of the Company and Holders under this Section 4.6 shall survive the completion of any offering of Registrable Securities in a registration statement under this Section 4, and otherwise. 4.7 ASSIGNMENT OF REGISTRATION RIGHTS. The rights to cause the Company to register Registrable Securities pursuant to this Section 4 may be assigned (but only with all related obligations) by a Holder to a transferee or assignee of such securities who, after such assignment or transfer, holds at least twenty percent (20%) of the shares of Registrable Securities originally purchased by such Holder (subject to appropriate adjustment for stock splits, stock dividends, combinations and other recapitalizations), provided the Company is, within a reasonable time after such transfer, furnished with written notice of the name and address of such transferee or assignee and the securities with respect to which such registration rights are being assigned; and provided, further, that such assignment shall be effective only if immediately following such transfer the further disposition of such securities by the transferee or assignee is restricted under the 1933 Act. For the purposes of determining the number of shares of Registrable Securities held by a transferee or assignee, the holdings or transferees and assignees of a partnership who are partners or retired partners of such partnership (including spouses and ancestors, lineal descendants and siblings of such partners or spouses who acquire Registrable Securities by gift, will or intestate succession) shall be aggregated together and with the partnership; provided that all assignees and transferees who would not qualify individually for assignment of registration rights shall have a single attorney-in-fact for the purpose of exercising any rights, receiving notices or taking any action under this Section 4. 5. INTERPRETATION 5.1 PURCHASER UNDERTAKING. Purchaser hereby agrees to take whatever additional action and execute whatever additional documents the Company may in its judgment deem necessary or advisable in order to carry out or effect one or more of the 8. 9 obligations or restrictions imposed on either Purchaser or the Shares pursuant to the express provisions of this Agreement. 5.2 NOTICES. Any notice required or permitted in connection with any matter pertaining to this Agreement shall be given in writing and shall be deemed effective upon personal delivery or upon deposit in the United States Mail, registered or certified, postage prepaid and addressed to the party to be notified at the address indicated below such party's signature line on this Agreement or at such other address as such party may designate by 10 days' advance written notice under this Section 5.2 to the other party to this Agreement. 5.3 GOVERNING LAW. This agreement shall be construed and enforced in accordance with, and shall be governed by, the laws of the State of California. 5.4 COUNTERPARTS. This Agreement may be executed in counterparts, each of which shall be deemed to be an original, but all of which together shall constitute one and the same instrument. 5.5 SUCCESSORS AND ASSIGNS. The provisions of this Agreement shall inure to the benefit of, and be binding upon, the Company and its successors and assigns and Purchaser and Purchaser's legal representatives, heirs, legatees, distributees, assigns and transferees by operation of law, whether or not any such person shall have become a party to this Agreement and have agreed in writing to join herein and be bound by the terms and conditions hereof. 9. 10 IN WITNESS WHEREOF, the parties have executed this Agreement as of the day and year first written above. SIGNAL PHARMACEUTICALS, INC. Address: 5555 Oberlin Drive San Diego, CA 92121 By: /s/ ALAN J. LEWIS ------------------------------------ Alan J. Lewis, Ph.D. President and CEO UNIVERSITY OF MASSACHUSETTS Address: 55 Lake Avenue North Worcester, MA 01655 By: /s/ JOSEPH F.X. MCGUIRL ------------------------------------ Joseph F.X. McGuirl Executive Director Office of Commercial Ventures and Intellectual Property By: /s/ STEPHEN W. LENHARDT ------------------------------------ Stephen W. Lenhardt Vice President for Management and Fiscal Affairs University Treasurer 10. EX-10.48 50 EXHIBIT 10.48 1 * Text Omitted and Filed Separately Confidential Treatment Requested Under 17 C.F.R. Sections 200.80, 200.83 and 230.406. EXHIBIT 10.48 RESEARCH, DEVELOPMENT AND LICENSE AGREEMENT Dated November 25, 1997 by and between SIGNAL PHARMACEUTICALS, INC. and ARES TRADING S.A. 2 RESEARCH, DEVELOPMENT AND LICENSE AGREEMENT ------------------------------------------- TABLE OF CONTENTS -----------------
PAGE ARTICLE I DEFINITIONS ............................................................. 1 ----------- 1.01 Affiliate ....................................................... 2 1.02 ARES Know-How ................................................... 2 1.03 ARES Patents .................................................... 2 1.04 Business Day .................................................... 2 1.05 Effective Date .................................................. 2 1.06 Facilities ...................................................... 3 1.07 FDA ............................................................. 3 1.08 Field ........................................................... 3 1.09 Initial Term .................................................... 3 1.10 Joint Know-How .................................................. 3 1.11 Joint Patents ................................................... 3 1.12 Joint Research Committee ........................................ 3 1.13 Licensed Product ................................................ 4 1.14 Net Sales ....................................................... 4 1.15 NF-kB ........................................................... 4 1.16 Protocol ........................................................ 5 1.17 Research ........................................................ 5 1.18 SIGNAL Know-How ................................................. 5 1.19 SIGNAL Patents .................................................. 5 1.20 SIGNAL Technology ............................................... 5 1.21 Subsequent Term ................................................. 6 1.22 Tanabe .......................................................... 6 1.23 Term ............................................................ 6 1.24 Territory ....................................................... 6 1.25 Valid Claim ..................................................... 6 ARTICLE II RESEARCH ................................................................ 6 -------- 2.01 Joint Research Committee ........................................ 6 2.01.01 Purpose ................................................. 6 2.01.02 Membership .............................................. 7 2.01.03 Schedule ................................................ 7 2.01.04 Procedures .............................................. 7 2.02 Performance of the Research ..................................... 7 2.03 Performance Standard ............................................ 8 2.03.01 SIGNAL .................................................. 8 2.03.02 ARES .................................................... 8
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PAGE 2.04 Commitment of Research Personnel ................................ 8 2.05 Exclusive Relationship .......................................... 8 2.05.01 SIGNAL .................................................. 8 2.05.02 Tanabe Agreement ........................................ 9 2.06 Facilities ...................................................... 9 2.07 Records ......................................................... 10 2.08 Audit ........................................................... 10 2.09 Research by ARES ................................................ 10 2.10 Term of the Research ............................................ 10 2.11 Research Funding ................................................ 11 2.12 Materials ....................................................... 12 2.12.01 ARES Materials .......................................... 12 2.12.02 SIGNAL Materials ........................................ 12 2.13 Ownership of SIGNAL Technology .................................. 13 2.13.01 No Ownership by SIGNAL Employees ........................ 13 2.13.02 SIGNAL Know-How and SIGNAL Patents ...................... 13 2.13.03 Joint Know-How and Joint Patents........................ 13 2.14 License of ARES Know-How and ARES Patents ....................... 14 ARTICLE III LICENSE ................................................................. 14 ------- 3.01 Grant of License ................................................ 14 3.02 Disclosure of SIGNAL Know-How and Joint Know-How ................ 15 3.03 License Fees .................................................... 15 3.03.01 New Target or Indication ................................ 15 3.03.02 Other Licensed Products ................................. 16 3.03.03 New Dosage or Formulation of Licensed Product ........... 17 3.04 Equity Investment ............................................... 17 3.05 Ongoing Royalty ................................................. 17 3.06 Deduction for ARES Discovery .................................... 18 3.07 Adverse Patents ................................................. 18 3.08 Reimbursement to SIGNAL ......................................... 18 3.09 Single Royalty .................................................. 19 3.10 Taxes Withheld .................................................. 19 3.11 Report of Royalties ............................................. 19 3.12 Payment of Royalties ............................................ 19 3.13 Interest on Payments ............................................ 20 3.14 Records ......................................................... 20 3.15 Reversion of Rights to Signal ................................... 20 3.15.01 Exercise of Reversion Option ............................ 20 3.15.02 SIGNAL Obligation to Make Payment ....................... 21 3.15.03 ARES Grant of License ................................... 22
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PAGE ARTICLE IV ADDITIONAL RIGHTS ....................................................... 22 ----------------- 4.01 Co-Promotion .................................................... 22 4.01.01 Exercise of Option ...................................... 22 4.01.02 Royalty Calculations .................................... 24 4.02 Supply of Licensed Products and/or 4.03 Combination Products ............................................ 24 ARTICLE V PATENT PROSECUTION AND ENFORCEMENT ...................................... 25 ---------------------------------- 5.01 Prosecution and Maintenance by SIGNAL ........................... 25 5.02 Prosecution and Maintenance by ARES ............................. 25 5.03 Prosecution of Infringement or Patent Defense by SIGNAL ....................................................... 26 5.04 Participation in Prosecution of Infringement or Patent Defense by ARES ....................................... 26 5.05 Prosecution of Infringement or Patent Defense by ARES ......................................................... 27 ARTICLE VI TERM AND TERMINATION .................................................... 28 -------------------- 6.01 Term ............................................................ 28 6.02 Termination by ARES ............................................. 28 6.03 Termination for Breach .......................................... 28 6.04 Termination upon ARES' Bankruptcy ............................... 29 6.05 No Termination upon SIGNAL's Bankruptcy ......................... 29 6.06 Effect of Termination ........................................... 29 6.07 Cumulative Rights and Remedies .................................. 30 ARTICLE VII REPRESENTATIONS, WARRANTIES AND ------------------------------ INDEMNIFICATION ......................................................... 30 --------------- 7.01 SIGNAL Representations .......................................... 30 7.02 ARES Representations ............................................ 32 7.03 SIGNAL Indemnification .......................................... 32 7.04 ARES Indemnification ............................................ 33 7.05 Disclaimer of Warranties ........................................ 34 ARTICLE VIII GENERAL PROVISIONS ...................................................... 35 ------------------ 8.01 No Waiver ....................................................... 35 8.02 Force Majeure ................................................... 35 8.03 Notices ......................................................... 35
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PAGE 8.04 Independent Contractors ......................................... 36 8.05 Assignment ...................................................... 37 8.05.01 General ................................................. 37 8.05.02 Acquisition or Merger ................................... 37 8.06 No Sale or Other Disposal of SIGNAL Technology .................. 38 8.07 Reference to Patents ............................................ 38 8.08 No Third-Party Beneficiary ...................................... 38 8.09 Publicity ....................................................... 38 8.10 Confidential Information ........................................ 39 8.11 Publication ..................................................... 40 8.12 Counterparts .................................................... 41 8.13 No Strict Construction .......................................... 41 8.14 Governing Law ................................................... 41 8.15 Dispute Resolution .............................................. 41 8.15.01 Negotiation ............................................. 41 8.15.02 Arbitration ............................................. 42 8.16 Cooperation ..................................................... 43 8.17 Integration ..................................................... 43 EXHIBIT A ARES Know-How ........................................................... 45 EXHIBIT B ARES Patents ........................................................... 46 EXHIBIT C Protocol ................................................................ 47 EXHIBIT D SIGNAL Know-How ......................................................... 48 EXHIBIT E SIGNAL Patents .......................................................... 49 EXHIBIT F SIGNAL Third-Party Agreements ........................................... 50 EXHIBIT G Third-Party Rights in SIGNAL Know-How and SIGNAL Patents .......................................................... 51
iv 6 RESEARCH, DEVELOPMENT AND LICENSE AGREEMENT THIS RESEARCH, DEVELOPMENT AND LICENSE AGREEMENT (the "Agreement") effective as of the ___ day of November 1997 by and between ARES TRADING S.A., a Swiss company with its principal place of business at Chateau de Vaumarcus, 2028 Vaumarcus, Switzerland (hereinafter "ARES"), and SIGNAL PHARMACEUTICALS, INC. a California corporation with a principal place of business at 5555 Oberlin Drive, San Diego, California 92121, U.S.A. (hereinafter "SIGNAL") (ARES and SIGNAL are sometimes hereinafter referred to collectively as the "Parties" or individually as a "Party"); WITNESSETH: WHEREAS, ARES in conjunction with its affiliates and/or agents desires to perform and have performed research within the field of the modulation of nuclear factor kappa B; and WHEREAS, SIGNAL in conjunction with its agents, consultants and/or academic collaborators is willing to perform and to collaborate with ARES in the performance of such research; and WHEREAS, in connection with such research collaboration, ARES wishes to obtain an exclusive license within the Territory (as defined herein) to develop, make, have made, import, use, and sell Licensed Products (as also defined herein); and WHEREAS, SIGNAL is willing to grant such a license to ARES; NOW, THEREFORE, in consideration of the premises and the mutual covenants and agreements herein contained, the Parties hereto have agreed as follows: ARTICLE I DEFINITIONS As used in this Agreement, each term listed below shall have the meaning that is given after it: 7 Section 1.01. Affiliate. Any corporation, firm, partnership or other entity that controls, is controlled by or is under common control with the Party in question. For this purpose, "control" shall mean the ownership, whether direct or indirect, of fifty percent (50%) or more of the equity having the power to vote on or otherwise direct the affairs of the entity. Section 1.02. ARES Know-How. Any invention, discovery, formula, design, process, know-how, data, composition, matter, device, or any improvement thereof, whether patentable or not, in which ARES or its Affiliates have any right, title or interest that is necessary or useful for the research, discovery, development, manufacture, use, import or sale of products within the Field, including without limitation any invention, discovery, formula, design, process, know-how, data, composition, matter, device, or any improvement thereof, whether patentable or not, set forth on Exhibit A hereto or obtained, developed, made, conceived or first reduced to practice in connection with the Research solely by ARES, its Affiliates and/or agents, but excluding any Joint Know-How. Section 1.03. ARES Patents. (i) Patents (including the inventor's certificates) that include one or more Valid Claims, including without limitation any substitution, extension (including supplemental protection certificate), registration, confirmation, reissue, continuation, divisional, continuation-in-part, reexamination, renewal or the like thereof or thereto, (ii) pending applications for patents, including without limitation any continuation, divisional or continuation-in-part thereof, and any provisional applications with respect thereto, that, in each case, are listed in Exhibit B to this Agreement or claim any ARES Know-How, and (iii) any foreign counterparts of any of the foregoing. Section 1.04. Business Day. Any day other than a Saturday, Sunday or other day on which the principal commercial banks located in Vaumarcus, Switzerland or San Diego, California are not open for business during normal banking hours. Section 1.05. Effective Date. November ___, 1997. - 2 - 8 Section 1.06. Facilities. A Party's research facilities and the research facilities of any of such Party's agents, Affiliates, consultants and/or academic collaborators who collaborate in the performance of the Research. Section 1.07. FDA. The United States Food and Drug Administration. Section 1.08. Field. The modulation of NF-(kappa)B, [***] Section 1.09. Initial Term. The period beginning on the Effective Date and ending three (3) years thereafter, unless sooner terminated in accordance with the terms and conditions of Article VI. Section 1.10. Joint Know-How. Any invention, discovery, formula, design, process, know-how, data, composition, matter, device, or any improvement thereof, whether patentable or not, obtained, developed, made, conceived or first reduced to practice in connection with the Research jointly by ARES, its Affiliates and/or agents and SIGNAL, its agents, consultants and/or academic collaborators. Section 1.11. Joint Patents. (i) Patents (including the inventor's certificates) that include one or more Valid Claims, including without limitation any substitution, extension (including supplemental protection certificate), registration, confirmation, reissue, continuation, divisional, continuation-in-part, reexamination, renewal or the like thereof or thereto, (ii) pending applications for patents, including without limitation any continuation, divisional or continuation-in-part thereof, and any provisional applications with respect thereto, that, in each case, claim any Joint Know-How, and (iii) any foreign counterparts of any of the foregoing. Section 1.12. Joint Research Committee. A committee established by the Parties for the purpose of defining and overseeing the implementation of the Research. - 3 - ***Confidential Treatment Requested 9 Section 1.13. Licensed Product. A product, the development, manufacture, import, use, or sale of which (i) but for the license granted in this Agreement, would infringe one or more Valid Claims of a SIGNAL Patent or Joint Patent licensed hereunder, or (ii) utilizes the SIGNAL Know-How or Joint Know-How licensed hereunder. Section 1.14. Net Sales. The amount received for a sale of the Licensed Product or Combination Product (as defined below), as applicable, to third parties by ARES, its Affiliates or sublicensees, less: (i) trade, cash and quantity discounts, rebates or reimbursements, if any, actually allowed or paid; (ii) returns, allowances and adjustments actually granted to customers; (iii) freight, insurance and other transportation charges actually accrued or paid; and (iv) taxes (other than taxes on ARES' income), duties or other governmental charges on sales or use actually absorbed by ARES or its Affiliates or sublicensees with respect to the sale of such Licensed Product or Combination Product. If the Licensed Product is sold in combination with other ingredients, products, devices, equipment or components (a "Combination Product"), Net Sales for any such Combination Product shall be computed by multiplying what would otherwise be the Net Sales of such Combination Product by the Combination Allocation Fraction (as defined below) attributable to such Combination Product. The "Combination Allocation Fraction" as used herein shall be a fraction, the numerator of which shall be the fair market value of the Licensed Product included in the Combination Product and the denominator of which shall be the fair market value of such Licensed Product plus the fair market value of the ingredients, products, equipment or components of such Combination Product that are not Licensed Product. If no market price exists, fair market value shall be determined in good faith by ARES and SIGNAL. Sales among ARES and its Affiliates or sublicensees shall be disregarded and only final sales to unrelated third parties shall be included in Net Sales. Section 1.15. NF-(kappa)B. Nuclear factor kappa B. - 4 - 10 Section 1.16. Protocol. A protocol for a research project established from time to time by the Joint Research Committee in accordance with Section 2.01 hereof and the sample protocol set forth as Exhibit C to this Agreement. Section 1.17. Research. Research performed pursuant to the Protocols by SIGNAL, its agents, consultants and/or academic collaborators, either alone or in collaboration with ARES, its Affiliates and/or agents, relating to the Field. Section 1.18. SIGNAL Know-How. Any invention, discovery, formula, design, process, know-how, data, composition, matter, device, or any improvement thereof, whether patentable or not, in which SIGNAL has any right, title or interest that is necessary or useful for the research, discovery, development, manufacture, use, import or sale of products within the Field, including without limitation any invention, discovery, formula, design, process, know-how, data, composition, matter, device or any improvement thereof, whether patentable or not, set forth on Exhibit D hereto or obtained, developed, made, conceived or first reduced to practice in connection with the Research solely by SIGNAL, its agents, consultants and/or academic collaborators, but excluding any Joint Know-How. Section 1.19. SIGNAL Patents. (i) Patents (including the inventor's certificates) that include one or more Valid Claims, including without limitation any substitution, extension (including supplemental protection certificate), registration, confirmation, reissue, continuation, divisional, continuation-in-part, reexamination, renewal or the like thereof or thereto, (ii) pending applications for patents, including without limitation any continuation, divisional or continuation-in-part thereof, and any provisional applications with respect thereto, that, in each case, are listed in Exhibit E to this Agreement or claim any SIGNAL Know-How, and (iii) any foreign counterparts of any of the foregoing. Section 1.20. SIGNAL Technology. SIGNAL Patents and SIGNAL Know-How and SIGNAL's right, title and interest in, to and under Joint Patents and Joint Know-How, collectively. - 5 - 11 Section 1.21. Subsequent Term. The period beginning upon the expiration of the Initial Term and continuing until the expiration of the Term. Section 1.22. Tanabe. Tanabe Seiyaku Co., Ltd. Section 1.23. Term. As defined in Section 6.01 hereof. Section 1.24. Territory. All countries of the world, with the exception of Japan, China, South Korea, Taiwan, Thailand, Cambodia, Laos, Vietnam, Indonesia, Nepal, the Philippines, Singapore, Malaysia, Hong Kong, Myanmar and Brunei. Section 1.25. Valid Claim. A claim of an issued patent which claim has not lapsed, been canceled or become abandoned and has not been declared invalid by an unreversed and unappealable decision or judgment of a court or other appropriate body of competent jurisdiction, and that has not been admitted to be invalid or unenforceable through reissue or disclaimer. ARTICLE II RESEARCH Section 2.01. Joint Research Committee. 2.01.01. Purpose. The Joint Research Committee shall establish written Protocols for the performance of the Research, including schedules therefor and interim and final reporting obligations with respect thereto, and allocate responsibility for performance of the Research between the Parties, with the expectation that the Research shall principally be performed by SIGNAL, its agents, consultants and/or academic collaborators. The Joint Research Committee shall review the performance of the Research pursuant to the Protocols and, if necessary, approve amendments to a Protocol or terminate the Research being performed pursuant to a Protocol. Upon the completion or earlier termination of the Research being performed pursuant to a Protocol, the Joint Research Committee shall analyze the results of such Research. - 6 - 12 2.01.02. Membership. The Joint Research Committee shall initially comprise three (3) representatives appointed by ARES and three (3) representatives appointed by SIGNAL but the composition of the Joint Research Committee may be modified from time to time upon the mutual written agreement of the Parties. One representative of each Party shall be designated as the contact person for that Party. Each Party shall have the right to change its representatives to the Joint Research Committee or its contact person at any time upon notice to the other Party. 2.01.03. Schedule. The Joint Research Committee shall meet within thirty (30) days of the Effective Date, and thereafter at least quarterly or more frequently as requested by either Party. The contact person for each Party shall agree upon the time and place of each meeting. 2.01.04. Procedures. A meeting of the Joint Research Committee may be held only if a quorum of at least two (2) representatives of each Party is present. All decisions of the Joint Research Committee must be made by the unanimous consent of the representatives of both Parties present at a meeting. The proceedings of the meetings of the Joint Research Committee shall be summarized in minutes signed by the contact person of each Party or his/her designee. Section 2.02. Performance of the Research. SIGNAL agrees to use its commercially reasonable and diligent efforts consistent with prevailing practices within the pharmaceutical and biotechnology industries to perform, and as necessary to cause its agents, consultants and/or academic collaborators to perform, the Research. SIGNAL shall accord the Research at least as high a priority as it accords its other active research programs for which it receives comparable funding. SIGNAL shall cooperate with ARES in the performance of the Research as required by the relevant Protocols. - 7 - 13 Section 2.03. Performance Standard. 2.03.01. SIGNAL. SIGNAL represents and warrants that it has the experience, capability and resources, including but not limited to sufficient qualified personnel, including its agents, consultants and/or academic collaborators, to perform the Research in accordance with the terms and conditions of this Agreement. SIGNAL agrees to perform and to have performed the Research in accordance with such terms and conditions and in conformity with generally accepted standards of good laboratory practice and with all applicable federal, state and local laws, guidelines, rules and regulations including without limitation the United States Food, Drug and Cosmetic Act and guidelines, rules and regulations promulgated by the FDA. 2.03.02. ARES. ARES represents and warrants that it and its Affiliates have the experience, capability and resources, including but not limited to sufficient qualified personnel, to perform the preclinical, clinical and regulatory activities contemplated by this Agreement. ARES agrees to perform and to have performed such activities in conformity with generally accepted standards of good laboratory practice and good clinical practice and with all applicable federal, state and local laws, guidelines, rules and regulations including without limitation the United States Food, Drug and Cosmetic Act and guidelines, rules and regulations promulgated by the FDA. Section 2.04. Commitment of Research Personnel. SIGNAL shall allocate to the Research a total of [***] research personnel (measured as full-time equivalents) and post-doctoral fellows combined. SIGNAL shall also allocate any additional research personnel to the Research as SIGNAL believes in good faith are required from time to time to comply with Sections 2.02 and 2.03 hereof. Section 2.05. Exclusive Relationship. 2.05.01. SIGNAL. ARES acknowledges and agrees that SIGNAL and Tanabe have entered into a Collaborative Development and Licensing Agreement dated March - 8 - ***Confidential Treatment Requested 14 31, 1996, as amended to date (the "Tanabe Agreement"), pursuant to which SIGNAL has granted certain exclusive rights to Tanabe within the Field, as set forth in the Tanabe Agreement, for those countries specifically excluded from the definition of the Territory in Section 1.24 hereof. Except for its obligations under the Tanabe Agreement, SIGNAL represents and warrants that it shall not perform any research relating to the Field other than the Research. 2.05.02. Tanabe Agreement. ARES acknowledges and agrees that, in accordance with the terms of the Tanabe Agreement, once each of Tanabe and ARES has agreed to accept reciprocity on exchanges of Signal Technical Information and Tanabe Technical Information (as defined in the Tanabe Agreement), then during the term of the Tanabe Agreement, SIGNAL, Tanabe and ARES shall make available to each other such Signal Compound Information, Tanabe Compound Information, Signal Product Information and Tanabe Product Information (as defined in the Tanabe Agreement) as the three parties may mutually agree for any Compound (as defined in the Tanabe Agreement) that is under development by Tanabe and ARES in whatever form is best suited fully to deliver such information. Unless and until Tanabe and ARES have so agreed to accept reciprocity on exchanges of information, SIGNAL shall not disclose to Tanabe any ARES Know-How or ARES Patents. In addition ARES hereby agrees to be bound by the provisions of Section 9.1 of the Tanabe Agreement, and SIGNAL hereby agrees to immediately notify ARES of, and consult with ARES regarding, any information it receives from, or provides to, Tanabe pursuant to Section 9.1 of the Tanabe Agreement. Section 2.06. Facilities. SIGNAL shall perform the Research and shall cause the Research to be performed at the Facilities of SIGNAL, its agents, consultants and/or academic collaborators, that SIGNAL represents and warrants are adequate to perform the Research. SIGNAL has taken, or shall take, all standard precautions consistent with pharmaceutical and biotechnology industry practices to ensure that such Facilities are protected by security systems - 9 - 15 that will maintain the confidentiality and prevent the loss of records and information obtained or developed pursuant to this Agreement. Section 2.07. Records. In conformity with standard pharmaceutical and biotechnology industry practices and the terms and conditions of this Agreement, SIGNAL shall prepare and maintain, and shall cause to be prepared and maintained, complete and accurate written records, accounts, notes, reports and data with respect to all laboratory work conducted in the performance of the Research, and upon ARES' request shall send legible copies of the aforesaid to ARES. Section 2.08. Audit. SIGNAL shall notify ARES of any request for an audit of the Facilities or records pertaining to the Research sufficiently in advance of such audit to allow a representative of ARES to be present during such audit. Section 2.09. Research by ARES. To the extent that the Joint Research Committee or the Parties agree, whether in connection with one or more Protocols or otherwise, that any of the Research is to be performed by ARES, its Affiliates and/or agents or at the Facilities of ARES, its Affiliates and/or agents, ARES shall be obligated to fulfill the same requirements and meet the same standards as are required of SIGNAL in Sections 2.02, 2.06, 2.07 and 2.08 hereof. Section 2.10. Term of the Research. Unless at least six (6) months prior to the expiration of the Initial Term, or at least six (6) months prior to the expiration of any subsequent three-year period during the Subsequent Term, ARES gives SIGNAL notice of its decision to terminate the Research, the Research shall continue for an additional three-year period, subject to termination of the Agreement pursuant to Article VI. Upon termination of the Research, ARES shall have no right, title and interest in, to and under any invention, discovery, formula, design, process, know-how, data, composition, matter, device, or product, or any improvement thereof, whether patentable or not, obtained, developed, made, conceived or first reduced to practice by SIGNAL, its agents, consultants and/or collaborators (including Tanabe) following termination of the Research, and the only rights of ARES hereunder shall be rights to (i) ARES Know-How and - 10 - 16 ARES Patents and (ii) SIGNAL Technology obtained, developed, made, conceived or first reduced to practice prior to such termination. Section 2.11. Research Funding. As full compensation for SIGNAL's, its agents', consultants' and academic collaborators' performance of the Research during the Initial Term, ARES shall pay, or cause to be paid, to SIGNAL [***] which shall be due and payable in accordance with the following schedule: [***] In the event the Research continues for any three-year period during the Subsequent Term, then as full compensation for SIGNAL's, its agents', consultants' and academic collaborators' - 11 - ***Confidential Treatment Requested 17 performance of the Research during such three-year period, ARES shall pay, or cause to be paid, to SIGNAL the amount paid during the prior three-year period adjusted to reflect the percentage increase for the prior three-year period in the Consumer Price Index of the Bureau of Labor Statistics of the United States Department of Labor. [***] of such adjusted amount shall be due and payable at the start of such three-year period and thereafter at [***] intervals. Section 2.12. Materials. 2.12.01. ARES Materials. To the extent required to do so pursuant to any Protocol, ARES shall make available to SIGNAL quantities of proprietary ARES materials sufficient to carry out the applicable Research, which materials shall be used for no other purpose, it being understood that SIGNAL shall take reasonable care to handle, store and use these materials so as to avoid loss, contamination and waste. All materials so furnished shall be deemed to be ARES "Confidential Information" subject to the obligations set forth in Section 8.10 hereof and SIGNAL shall return any unused ARES materials at the conclusion of the relevant Research or the earlier termination of this Agreement, unless written authorization to destroy such materials is given by ARES. SIGNAL shall account for all materials not returned. 2.12.02. SIGNAL Materials. To the extent required to do so pursuant to any Protocol, SIGNAL shall make available to ARES quantities of proprietary SIGNAL materials sufficient to carry out the applicable Research, which materials shall be used for no other purpose, it being understood that ARES shall take reasonable care to handle, store and use these materials so as to avoid loss, contamination and waste. All materials so furnished shall be deemed to be SIGNAL "Confidential Information" subject to the obligations set forth in Section 8.10 hereof and ARES shall return any unused SIGNAL materials at the conclusion of the relevant Research or the earlier termination of this Agreement, unless written authorization to destroy such materials is given by SIGNAL. ARES shall account for all materials not returned. - 12 - ***Confidential Treatment Requested 18 Section 2.13. Ownership of SIGNAL Technology. 2.13.01. No Ownership by SIGNAL Employees. All employees of SIGNAL who are expected to perform the Research have signed agreements regarding proprietary information and inventions with SIGNAL in a form reasonably considered by SIGNAL and its counsel to assure SIGNAL's right, title and interest in, to and under the SIGNAL Technology in accordance with Subsections 2.13.02 and 2.13.03 below. 2.13.02. SIGNAL Know-How and SIGNAL Patents. All right, title and interest in, to and under all SIGNAL Know-How and SIGNAL Patents obtained, developed, made, conceived or first reduced to practice in connection with the Research shall be owned by or licensed to SIGNAL. SIGNAL shall enter into customary agreements with its agents, consultants and/or academic collaborators that provide that all of such agents', consultants' and/or academic collaborators' right, title and interest in, to and under such SIGNAL Know-How and SIGNAL Patents shall be assigned or licensed exclusively to SIGNAL, unless SIGNAL and ARES agree in writing (including as reflected in the signed minutes of meetings of the Joint Research Committee) that such exclusivity is not required to protect SIGNAL's competitive position with respect to the performance of the Research and ARES' competitive position with respect to the development, manufacture, import, use, and sale of Licensed Products and Combination Products. SIGNAL's right, title and interest in, to and under such SIGNAL Know-How and SIGNAL Patents shall be licensed to ARES pursuant to Section 3.01 hereof. 2.13.03. Joint Know-How and Joint Patents. All right, title and interest in, to and under all Joint Know-How and Joint Patents shall be owned jointly and equally by SIGNAL and ARES, each with an undivided one-half interest. SIGNAL shall enter into customary agreements with its agents, consultants and academic collaborators that provide that all of such agents', consultants' and academic collaborators' right, title and interest in, to and under such Joint Know-How and Joint Patents shall be assigned or licensed exclusively to SIGNAL, unless SIGNAL and ARES agree in writing (including as reflected in the signed - 13 - 19 minutes of meetings of the Joint Research Committee) that such exclusivity is not required to protect SIGNAL's competitive position with respect to the performance of the Research and ARES' competitive position with respect to the development, manufacture, import, use, and sale of Licensed Products and Combination Products. SIGNAL's right, title and interest in, to and under such Joint Know-How and Joint Patents shall be licensed to ARES pursuant to Section 3.01 hereof. Section 2.14. License of ARES Know-How and ARES Patents. ARES hereby grants to SIGNAL, and SIGNAL hereby accepts, [ *** ] solely for the purpose of conducting the Research pursuant to this Agreement. Such license shall be valid for the term of the Research as set forth in Section 2.10 hereof. ARTICLE III LICENSE Section 3.01. Grant of License. SIGNAL hereby grants to ARES, and ARES hereby accepts, an exclusive license under the SIGNAL Technology, valid for the Term and with the right to grant sublicenses, to develop, make, have made, import, use, and sell Licensed Products and Combination Products within the Territory. ARES shall notify any sublicensee of the SIGNAL Technology of all rights and obligations of ARES hereunder licensed to such sublicensee. For the avoidance of doubt, except in connection with Sections 2.09 and 6.05 and Subsection 8.05.02 hereof, and other than with respect to inventions, discoveries, formulas, designs, processes, know-how, data, compositions, matter, devices, or any improvements thereof, whether patentable or not, obtained, developed, made, conceived or first reduced to practice in connection with the Research, the foregoing is not intended to grant ARES a license to the SIGNAL Technology for research purposes. - 14 - ***Confidential Treatment Requested 20 Section 3.02. Disclosure of SIGNAL Know-How and Joint Know-How. Following the execution and delivery of this Agreement and as appropriate from time to time thereafter during the Term, SIGNAL shall disclose to ARES the SIGNAL Know-How and the Joint Know-How pursuant to a program and in a form (e.g. writings, visual representations, computer software, models or instruction) as shall best facilitate the use of such SIGNAL Know-How and Joint Know-How by ARES. Section 3.03. License Fees. In addition to the royalties that shall be payable under Sections 3.05 and 4.01 hereof, the purchase of SIGNAL Series F Preferred Stock by ARES' Affiliate pursuant to Section 3.04 hereof, and in consideration of the grant of the exclusive license set forth in Section 3.01 hereof, ARES shall pay SIGNAL the following license fees on a Licensed Product by Licensed Product basis. 3.03.01 New Target or Indication. For each Licensed Product for which no license fee has yet been paid and that is either (A) [***] or (B) [***], its Affiliates or sublicensees then within thirty (30) days of the corresponding event, ARES shall pay, or cause to be paid, to SIGNAL the following nonrefundable license fees: (i) [***] (ii) [***] (iii) [***] - 15 - ***Confidential Treatment Requested 21 (iv) [***] (v) [***] ARES shall promptly notify SIGNAL of the occurrence of any event described above. 3.03.02 Other Licensed Products. For each Licensed Product being developed by ARES, its Affiliates or sublicensees for which no license fee has yet been paid and that is not subject to Subsection 3.03.01 above, ARES shall pay, or cause to be paid, to SIGNAL the following nonrefundable license fees: (i) [***] (ii) [***] (iii) [***] - 16 - ***Confidential Treatment Requested 22 ARES shall promptly notify SIGNAL of the occurrence of any event described above. 3.03.03. New Dosage or Formulation of Licensed Products. For the avoidance of doubt, if a license fee has been paid pursuant to this Section 3.03 with respect to any Licensed Product, then no additional license fee shall be payable hereunder with respect to any new dosage, presentation or formulation of such Licensed Product (including any inclusion of such Licensed Product in a Combination Product). Section 3.04. Equity Investment. On or before December 1, 1997, ARES' Affiliate, Ares-Serono S.A., shall purchase [***] of SIGNAL for total consideration of [***] pursuant to a stock purchase agreement that shall be executed and delivered simultaneously herewith. Section 3.05. Ongoing Royalty. Subject to the provisions of this Article III, ARES shall during the Term pay or cause to be paid to SIGNAL royalties on Net Sales of Licensed Products or Combination Products at the following rates: (i) [***] of total annual Net Sales of Licensed Products and Combination Products at or below [***]; (ii) [***] of total annual Net Sales of Licensed Products and Combination Products above [***]; (iii) [***] of total annual Net Sales of Licensed Products and Combination Products above [***]; and (iv) [***] of total annual Net Sales of Licensed Products and Combination Products above [***]; - 17 - ***Confidential Treatment Requested 23 provided, however, that upon the expiration or invalidation of the last remaining Valid Claim of a SIGNAL Patent or Joint Patent in effect in a country that covers such Licensed Product or Combination Product, royalties payable for such country with respect to such Licensed Product or Combination Product shall be reduced by [***] Section 3.06. [***] ARES may [***] hereof, [***] of total annual Net Sales for any Licensed Product or Combination Product whose primary pharmacological activity is the modulation of an intracellular molecule [***]. Section 3.07. Adverse Patents. ARES may deduct from up to [***] of the royalties due SIGNAL for any Licensed Product or Combination Product under Sections 3.05 and 4.01 hereof (following any deduction made pursuant to Section 3.06 hereof) an amount equal to [***] royalties paid to third parties by ARES, its Affiliates and/or sublicensees in order to develop, manufacture, import, use or sell such Licensed Product or Combination Product pursuant to agreements that may be entered into in good faith after the Effective Date with parties owning or controlling a patent that, but for such agreements, would bar the development, manufacture, import, use or sale of such Licensed Product or Combination Product. Section 3.08. Reimbursement to SIGNAL. In addition to the royalties due SIGNAL under Sections 3.05 and 4.01 hereof, ARES shall during the Term reimburse, or cause to be reimbursed, SIGNAL for royalties paid to third parties by SIGNAL pursuant to agreements in existence on the Effective Date with respect to the development, manufacture, import, use or sale of a Licensed Product or Combination Product, as set forth on Exhibit F hereto, or agreements subsequently approved in writing by the Parties; provided, however, in no event shall such reimbursement exceed [***] of the total annual Net Sales of such Licensed Product or Combination Product. - 18 - ***Confidential Treatment Requested 24 Section 3.09. Single Royalty. Nothing herein contained shall obligate ARES, its Affiliates and/or sublicensees to pay or cause to be paid to SIGNAL more than one royalty on any unit of Licensed Product or Combination Product. Section 3.10. Taxes Withheld. Any and all taxes that are levied on royalties accruing under this Agreement in a country in which provision is made in the law or by regulation for withholding may be deducted by the payor from such royalties and paid to the proper taxing authority and evidence of such payment shall be secured and sent to SIGNAL within one (1) month of such payment. The Parties shall do all such lawful acts and things and sign all such lawful deeds and documents as either Party may reasonably request from the other Party to enable ARES, its Affiliates and/or sublicensees to take advantage of any applicable legal provision or any double taxation treaties with the object of paying the sums due to SIGNAL hereunder without withholding any tax. Section 3.11. Report of Royalties. Within sixty (60) days of the end of each calendar quarter during the Term (including the sixty (60) day period following the end of the calendar quarter in which the Term terminates), ARES shall deliver to SIGNAL a written report showing its computation of royalties due under this Agreement on Net Sales during such calendar quarter. All such Net Sales shall be segmented by each report according to sales by ARES, its Affiliates and/or sublicensees as well as on a country by country basis, including the rates of exchange used to convert such royalties into United States dollars from the currency in which the sales were made. The rate of exchange to be used in any such conversion shall be the rate reported in the Wall Street Journal for the purchase of United States dollars with such currency on the last Business Day of the quarter for which the report is being prepared. Section 3.12. Payment of Royalties. Royalties shall be payable hereunder by ARES on behalf of itself, its Affiliates and/or sublicensees, whichever shall have effected the sales on which a royalty is due. Simultaneous with the delivery of the report described in Section 3.11 - 19 - 25 hereof ARES shall pay or cause to be paid to SIGNAL at such place as SIGNAL may from time to time designate all royalties earned in the preceding calendar quarter. Section 3.13. Interest on Payments. In the event that any payment due pursuant to this Agreement, including research payments, license fees and royalties, is not made when due, the payment shall accrue interest from the date due until paid at the rate of one percent (1%) per month; provided, however, that in no event shall such rate exceed the maximum legal annual interest rate. The payment of such interest shall not limit SIGNAL's right to exercise any other rights it may have as a consequence of the lateness of any payment. Section 3.14. Records. ARES shall keep or cause to be kept accurate records in sufficient detail to enable the royalties payable hereunder to be determined. During the Term and for a period of two years following the termination of this Agreement, upon the request of SIGNAL (but not more frequently than once in each calendar year) an independent public accountant selected by SIGNAL and approved by ARES shall be allowed access, during ordinary business hours, to such records pertaining to the preceding two (2) calendar years solely to verify the accuracy of royalty payments made or payable hereunder. SIGNAL and ARES shall mutually determine a general strategy for such audit in advance of its conduct. Said accountant shall not disclose to SIGNAL any information except that which should properly be contained in a royalty report required under this Agreement. SIGNAL shall bear the full cost of such audit unless such audit reveals an under-reporting of royalties in excess of five percent (5%) of the amount due under this Agreement, in which case the full cost of the audit shall be borne by ARES. Section 3.15. Reversion of Rights to SIGNAL. 3.15.01. Exercise of Reversion Option. In the event ARES, its Affiliates and/or sublicensees cease to pursue development or commercialization of at least one Licensed Product or Combination Product at any time when ARES is no longer providing research funding to SIGNAL pursuant to Section 2.11 hereof, ARES shall immediately notify SIGNAL and, - 20 - 26 SIGNAL may exercise an option, on a product by product basis, to obtain a reversion of all right, title and interest granted to ARES hereunder with respect to any potential Licensed Product or Combination Product. SIGNAL shall exercise such option by providing ARES ninety (90) days prior notice of such intended reversion of rights, specifying the potential Licensed Product or Combination Product that is the subject of such reversion. Such reversion of rights shall become effective at the end of such notice period, unless during such notice period (i) ARES can demonstrate that ARES, its Affiliates and/or sublicensees are diligently pursuing the development or commercialization of at least one Licensed Product or Combination Product or (ii) ARES provides to SIGNAL a reasonably detailed written plan for commercially reasonable development and commercialization of such Licensed Product or Combination Product and takes affirmative steps to begin implementation of such plan. 3.15.02. SIGNAL Obligation to Make Payments. For each Licensed Product or Combination Product for which rights have reverted to SIGNAL pursuant to Subsection 3.15.01 hereof, SIGNAL shall pay to ARES [***] of the amount or fair market value, as applicable, of any and all consideration received by SIGNAL with respect to such Licensed Product or Combination Product (other than payments received for equity at fair market value or payments received to support further research and development of such Licensed Product or Combination Product so long as such payments do not exceed SIGNAL's cost of conducting such further research and development), whether such consideration is in cash, payment in kind, exchange or other form, until the total amount of such payments to ARES equals [***] of the following amount: [***] - 21 - ***Confidential Treatment Requested 27 3.15.03. [***] ARES Grant of License. To the extent necessary to permit SIGNAL to develop, make, have made, import, use, and sell Licensed Products or Combination Products within the Territory following a reversion of rights [***] pursuant to an agreement to be negotiated in good faith between the Parties; provided, however, that in addition to the payments due ARES under Subsection 3.15.02 hereof, SIGNAL shall reimburse ARES for royalties paid to third parties by ARES or its Affiliates with respect to the development, manufacture, import, use or sale of such Licensed Products or Combination Products. ARTICLE IV ADDITIONAL RIGHTS Section 4.01. Co-Promotion. 4.01.01. Exercise of Option. Within thirty (30) days following notice from ARES to SIGNAL of submission by ARES or its Affiliates of a New Drug Application (NDA) or equivalent for a Licensed Product or Combination Product in the United States, SIGNAL shall have the right by notice to ARES to exercise its option to participate with ARES or its Affiliates in promoting such Licensed Product or Combination Product in the United States; provided, however, that SIGNAL can demonstrate concurrently with such option exercise that it can commit to making a material investment in, and contribution to, promotion of such Licensed Product or Combination Product. Upon SIGNAL's exercise of such option on these terms and conditions, ARES in its sole discretion shall within sixty (60) days of such option exercise select one of the following two alternatives: (i) [***] - 22 - ***Confidential Treatment Requested 28 [***] (ii) ARES may agree to negotiate in good faith with SIGNAL a co-promotion agreement for such Licensed Product or Combination Product in the United States containing customary terms and conditions. The period for such negotiation shall begin upon SIGNAL's exercise of its option and end six months thereafter. , [***] such co-promotion agreement shall also provide for defined standards for promotional diligence sufficient to ensure that SIGNAL makes a material investment in, and contribution to, promotion of such Licensed Product or Combination Product. In addition the co-promotion agreement shall, to the extent necessary, [***] to permit SIGNAL to fulfill its co-promotion obligations with respect to Licensed Products or Combination Products and shall, in any event, reflect the following terms and conditions with respect to royalties and allocation of Net Sales for each such Licensed Product or Combination Product: (A) SIGNAL shall receive a royalty of [***] of such Net Sales; (B) [***] of such Net Sales shall then be allocated to ARES; (C) a portion of the remainder of such Net Sales shall then be allocated to the Party that has manufactured, or contracted to have manufactured (including pursuant to Section 4.02 hereof), such Licensed Product or Combination Product, the amount of such allocation to equal such Party's direct costs associated with the manufacture of the Licensed Product or Combination Product; (D) [***] of Net Sales remaining after the allocations set forth in Subsections 4.01.01(ii)(A), (B) and (C) above shall be divided by the - 23 - ***Confidential Treatment Requested 29 Parties in proportion to their respective direct costs associated with the co-promotion of such Licensed Product or Combination Product; and (E) [***] of Net Sales remaining after the allocations set forth in Subsections 4.01.01(ii)(A), (B) and (C) above shall be allocated to ARES until an amount has been recouped equal to the total of [***] and thereafter any remaining amount shall be allocated in accordance with the terms and conditions of Subsection 4.01.01(ii)(D) above. 4.01.02. Royalty Calculations. The royalties and allocation of Net Sales set forth in Subsection 4.01.01 above shall be in lieu of the royalties set forth in Section 3.05 hereof with respect to Net Sales of Licensed Products or Combination Products for the United States. Net Sales for the United States subject to royalty calculations pursuant to Subsection 4.01.01 shall also not be used in computing total annual Net Sales of Licensed Products and Combination Products pursuant to Section 3.05. Upon the expiration or invalidation of the last Valid Claim of a Patent in effect in the United States that covers a Licensed Product or Combination Product, royalties payable for the United States pursuant to Subsection 4.01.01 (i) and (ii)(A) above shall be [***] Section 4.02. Supply of Licensed Products and/or Combination Products. At the request and option of [***] the Parties agree to negotiate in good faith a supply agreement pursuant to which [***] for sale upon such reasonable terms and conditions as the Parties shall mutually agree; provided, however, if the Parties have entered into a co-promotion agreement pursuant to Subsection 4.01.01 (ii) hereof, then such supply agreement shall provide for [***] - 24 - ***Confidential Treatment Requested 30 [***] ARTICLE V PATENT PROSECUTION AND ENFORCEMENT Section 5.01. Prosecution and Maintenance by SIGNAL. SIGNAL shall prosecute and maintain the SIGNAL Patents and Joint Patents in the Territory in accordance with reasonable commercial standards and reasonable principles of intellectual property protection. All applications for SIGNAL Patents shall be filed in the name of SIGNAL and all applications for Joint Patents shall be filed in the name of ARES or its Affiliates and SIGNAL. SIGNAL shall keep ARES currently advised of all steps that will be taken in the prosecution of the SIGNAL Patents and Joint Patents. SIGNAL shall furnish ARES with copies of all substantive communications between SIGNAL and applicable patent offices regarding the SIGNAL Patents and Joint Patents. SIGNAL shall provide draft applications for SIGNAL Patents and Joint Patents to ARES sufficiently in advance of filing for ARES to have the opportunity to comment thereon. ARES shall provide all reasonable cooperation to SIGNAL at SIGNAL's cost and expense in connection with SIGNAL's prosecution and maintenance of the SIGNAL Patents and Joint Patents including without limitation signing all documents necessary to prosecute and maintain the SIGNAL Patents and Joint Patents. SIGNAL shall bear the cost of prosecuting and maintaining the SIGNAL Patents and Joint Patents in force and of filing all applications for SIGNAL Patents and Joint Patents. Section 5.02. Prosecution and Maintenance by ARES. If SIGNAL does not fulfill its obligations to prosecute and maintain the SIGNAL Patents and Joint Patents in the Territory pursuant to Section 5.01 above, then SIGNAL shall so advise ARES in time to enable ARES to fulfill these obligations. ARES shall deduct all reasonable cost and expense it incurs in so doing from the royalties due SIGNAL pursuant to Sections 3.05 and 4.01 hereof. SIGNAL shall provide all reasonable cooperation to ARES at SIGNAL's cost and expense in connection with - 25 - ***Confidential Treatment Requested 31 ARES' prosecution and maintenance of the SIGNAL Patents and Joint Patents, including without limitation signing and delivering to ARES, within ten (10) days of ARES' request therefor, all documents necessary for ARES to prosecute and maintain the SIGNAL Patents and Joint Patents in the name of SIGNAL. Section 5.03. Prosecution of Infringement or Patent Defense by SIGNAL. If either Party learns of (i) any infringement or potential infringement of a SIGNAL Patents or Joint Patent by a third party in the Territory and/or (ii) any claim by a third party that a SIGNAL Patent or Joint Patent is invalid in the Territory, it shall promptly notify the other Party. SIGNAL shall have the right to prosecute such infringement or to defend against such claim (an "Action"). SIGNAL shall keep ARES informed of, and shall from time to time consult with ARES regarding, the status of any such Action and shall provide ARES with copies of all documents filed in, and all written communications relating to, such Action. ARES shall provide all reasonable cooperation to SIGNAL in connection with such Action, and SIGNAL shall reimburse ARES for its out-of-pocket expenses incurred in rendering such cooperation. In the event SIGNAL obtains any recovery from such Action or the compromise or settlement thereof, the total amount of such recovery shall first be used to reimburse SIGNAL for its reasonable expenses incurred in connection with such Action and the balance of such recovery shall be allocated [***] to SIGNAL and [***] to ARES. Section 5.04. Participation in Prosecution of Infringement or Patent Defense by ARES. In the event ARES wishes do so, ARES shall have the right to participate and be represented in an Action by its own counsel at its own expense, but may not take any steps to direct such Action nor to compromise or settle such Action, as SIGNAL shall have the primary responsibility for directing such Action. SIGNAL agrees that it shall not compromise or settle any Action in which ARES has exercised its right to participate without ARES' prior written consent, which consent shall not unreasonably be withheld. In the event SIGNAL and ARES obtain any recovery from such Action or the compromise or settlement thereof, the total amount of such - 26 - ***Confidential Treatment Requested 32 recovery shall first be used to reimburse the Parties pro-rata, based on costs incurred, for their reasonable expenses incurred in connection with such Action and the balance of such recovery shall be shared equally between the Parties. Section 5.05. Prosecution of Infringement or Patent Defense by ARES. If within ninety (90) days from the date on which SIGNAL is notified or otherwise becomes aware of an infringement or potential infringement of a SIGNAL Patent or Joint Patent in the Territory or a claim that a SIGNAL Patent or Joint Patent is invalid in the Territory, either (i) the infringement has not been terminated or the claim has not been withdrawn or (ii) SIGNAL has not initiated an Action against such third party, SIGNAL shall, upon request of ARES, grant ARES the right to initiate an Action against such third party at its own cost and expense, provided, however, that ARES shall be entitled to deduct such cost and expense from up to [***] of the royalties due SIGNAL thereafter pursuant to Sections 3.05 and 4.01 hereof. Notwithstanding the ninety (90) day period established in the previous sentence, in the event that SIGNAL has not instituted a summary proceeding with respect to an infringement or potential infringement of a SIGNAL Patent or Joint Patent and the right to institute such a summary proceeding shall lapse within two weeks, ARES may institute such a summary proceeding. ARES shall keep SIGNAL informed of, and shall from time to time consult with SIGNAL regarding, the status of any such Action or summary proceeding and shall provide SIGNAL with copies of all documents filed in, and all written communications relating to, such Action or summary proceeding. SIGNAL agrees, in the event that ARES cannot prosecute such Action or summary proceeding in its own name, to sign and deliver to ARES, within ten (10) days of ARES' request therefor, all documents necessary for ARES to prosecute such Action or summary proceeding in the name of SIGNAL, but ARES shall control the prosecution of any such Action or summary proceeding. SIGNAL shall have the right to participate and be represented in such Action or summary proceeding by its own counsel at its own expense. SIGNAL shall provide all reasonable cooperation to ARES in connection with such Action or summary proceeding, and ARES shall - 27 - ***Confidential Treatment Requested 33 reimburse SIGNAL for its out-of-pocket expenses incurred in rendering such cooperation. ARES may not compromise or settle such Action or summary proceeding without SIGNAL's prior written consent, which consent shall not unreasonably be withheld. In the event ARES obtains any recovery from such Action or the compromise or settlement thereof, the total amount of such recovery shall first be used to reimburse ARES for any costs and expense not deducted from royalty payments due hereunder, then to reimburse SIGNAL for any cost and expense so deducted, [***] ARTICLE VI TERM AND TERMINATION Section 6.01. Term. The license granted under Article III hereof shall continue in force in each country from the Effective Date until (i) the expiration or invalidation of the last Valid Claim of a SIGNAL Patent or Joint Patent in effect in such country covering a Licensed Product or Combination Product, or (ii) ten years from the first commercial sale of a Licensed Product or Combination Product by ARES, its Affiliates or sublicensees in such country following the receipt of marketing approval therein, whichever shall last occur, and this Agreement shall terminate upon the expiration or invalidation of the last of such Valid Claims or the termination of the last of such ten-year periods, unless the Agreement is terminated at an earlier date pursuant to Sections 6.02, 6.03 or 6.04 hereof. Section 6.02. Termination by ARES: ARES may terminate this Agreement effective at any time after the end of the Initial Term by giving six (6) months prior notice to SIGNAL. Section 6.03. Termination for Breach. Either Party may terminate this Agreement sixty (60) days after giving the other Party notice of breach of any material provision of this Agreement (including without limitation the representations and warranties set forth in Article VII hereof) by the other Party, unless such breach is cured within the period of such notice. - 28 - ***Confidential Treatment Requested 34 Section 6.04. Termination upon ARES' Bankruptcy. SIGNAL may terminate this Agreement if an insolvency proceeding is instituted by or against ARES, ARES makes an assignment for the benefit of creditors, admits in writing its inability to pay its debts as they become due, commences a proceeding for the appointment of a receiver, trustee, liquidator or conservator of itself or of the whole or any substantial part of its property, or files a petition seeking reorganization, composition, liquidation, dissolution or similar arrangement under any present or future statute, law or regulation. Section 6.05. No Termination upon SIGNAL's Bankruptcy. All rights and licenses granted under or pursuant to this Agreement by SIGNAL to ARES are, and shall otherwise be deemed to be, for purposes of Section 365(n) of the United States Bankruptcy Code (the "Bankruptcy Code"), licenses of rights to "intellectual property" as defined under Section 101(56) of the Bankruptcy Code. The Parties agree that ARES, as a licensee of such rights under this Agreement, shall retain and may fully exercise all of its rights and elections under the Bankruptcy Code. The Parties further agree that, in the event of the commencement of a bankruptcy proceeding by or against SIGNAL under the Bankruptcy Code, ARES shall be entitled to a complete duplicate of (or complete access to, as appropriate) any such intellectual property and all embodiment of such intellectual property, and the same, if not already in its possession, shall be promptly delivered to ARES (i) upon any such commencement of a bankruptcy proceeding upon written request therefor by ARES, unless SIGNAL elects to continue to perform all of its obligations under this Agreement, or (ii) if not delivered under (i) above, upon the rejection of this Agreement by or on behalf of SIGNAL, upon written request therefor by ARES. Section. 6.06. Effect of Termination. If this Agreement is not terminated at an earlier date by ARES pursuant to Sections 6.02 or 6.03 hereof or by SIGNAL pursuant to Sections 6.03 or 6.04 hereof, then upon its termination in accordance with Section 6.01 hereof ARES shall have an irrevocable, fully paid-up license within the Territory under the SIGNAL Technology to - 29 - 35 develop, make, have made, import, use, and sell any Licensed Products or Combination Products to which ARES had any right, title or interest prior to the termination of this Agreement. If this Agreement is terminated by ARES pursuant to Sections 6.02 or 6.03 hereof or by SIGNAL pursuant to Sections 6.03 or 6.04 hereof, then upon its termination all rights and obligations of the Parties hereunder, including without limitation the rights and obligations with respect to the licenses granted under Article III hereof, shall terminate. Notwithstanding the foregoing, termination of this Agreement shall not release either Party from its obligations accrued prior to the effective date of termination nor deprive either Party from any rights that this Agreement provides shall survive termination. Section 6.07. Cumulative Rights and Remedies. Any right to terminate this Agreement shall be in addition to and not in lieu of all other rights or remedies that the Party giving notice of termination may have at law or in equity or otherwise, including without limitation rights under the United States Bankruptcy Code. ARTICLE VII REPRESENTATIONS, WARRANTIES AND INDEMNIFICATION Section 7.01. SIGNAL Representations. SIGNAL represents and warrants to ARES as follows: (i) SIGNAL has the right, power and authority to enter into this Agreement and to perform the Research and grant ARES a license under the SIGNAL Technology in accordance with the terms and conditions of this Agreement; (ii) all requisite corporate action has been taken to authorize SIGNAL's execution, delivery and performance of this Agreement; (iii) SIGNAL has all right, title and interest in, to and under the SIGNAL Technology, which, with the exception of rights granted to Tanabe, is free and clear of any liens, charges, encumbrances or rights of others to possession or use; - 30 - 36 (iv) with the exception of rights granted to Tanabe, SIGNAL has not previously licensed, assigned, transferred, or otherwise conveyed any right, title or interest in, to or under the SIGNAL Technology to any third party; (v) all third parties who have or had any right, title and interest in, to and under the SIGNAL Know-How and SIGNAL Patents, as identified on Exhibit G, have assigned or licensed such right, title and interest to SIGNAL under the terms and conditions set forth on Exhibit G; (vi) to the best of SIGNAL's knowledge after due inquiry, the practice and use of the SIGNAL Technology pursuant to the terms and conditions of this Agreement shall not infringe any patent, copyright, trademark, or other proprietary or property rights of any third parties; (vii) to the best of SIGNAL's knowledge after due inquiry, no third party has filed, pursued or maintained or threatened to file, pursue or maintain any claim, lawsuit, charge, complaint or other action alleging that the SIGNAL Technology infringes any patent, copyright or trademark or other proprietary or property rights of any third parties; (viii) there are no suits, proceedings, arbitrations, claims or counterclaims or governmental investigations pending or asserted in writing to SIGNAL, and to the best of SIGNAL's knowledge, there are no suits, proceedings, arbitrations, claims or counterclaims or governmental investigations threatened against SIGNAL that would give any third party the right to enjoin or rescind the transactions contemplated by this Agreement or would otherwise prevent SIGNAL from complying with the terms and conditions of this Agreement; (ix) execution and delivery of this Agreement and performance hereunder does not breach, violate, contravene or constitute a default under any contracts, arrangements or commitments to which SIGNAL is a party or by which it is bound; and (x) no warranty or representation by SIGNAL in this Agreement and no other agreement, exhibit, or instrument required to be delivered by SIGNAL to ARES pursuant - 31 - 37 to this Agreement contains or will contain any untrue statement of material fact or omit to state a material fact required in order to make such warranty, representation, other agreement, exhibit or instrument not misleading. Section 7.02. ARES Representations. ARES represents and warrants to SIGNAL as follows: (i) ARES has the right, power and authority to enter into this Agreement; (ii) all requisite corporate action has been taken to authorize ARES' execution, delivery and performance of this Agreement; (iii) there are no suits, proceedings, arbitrations, claims or counterclaims or governmental investigations pending or asserted in writing to ARES, and to the best of ARES' knowledge, there are no suits, proceedings, arbitrations, claims or counterclaims or governmental investigations threatened against ARES that would give any third party the right to enjoin or rescind the transactions contemplated by this Agreement or would otherwise prevent ARES from complying with the terms and conditions of this Agreement; (iv) execution and delivery of this Agreement and performance hereunder does not breach, violate, contravene or constitute a default under any contracts, arrangements or commitments to which ARES is a party or by which it is bound; and (v) no warranty or representation by ARES in this Agreement and no other agreement, exhibit or instrument required to be delivered by ARES to SIGNAL pursuant to this Agreement contains or will contain any untrue statement of material fact or omit to state a material fact required in order to make such warranty, representation, other agreement, exhibit or instrument not misleading. Section. 7.03. SIGNAL Indemnification. SIGNAL shall defend, indemnify and hold harmless ARES, its Affiliates and sublicensees, their officers, agents and employees (each individually a "SIGNAL Indemnified Party," and collectively the "SIGNAL Indemnified Parties"), from and against any and all liabilities, losses, damages, actions, claims, costs or - 32 - 38 expenses suffered or incurred by the SIGNAL Indemnified Parties (including reasonable attorneys' fees) (individually a "SIGNAL Liability," and collectively the "SIGNAL Liabilities") that arise from (i) personal injury or property damage to third parties resulting from a breach of this Agreement by SIGNAL (including without limitation a breach of SIGNAL's representations and warranties in Section 7.01 hereof); or (ii) the enforcement by a SIGNAL Indemnified Party of its rights under this Section 7.03; provided, however, that SIGNAL shall have no obligation to defend, indemnify, and hold harmless hereunder to the extent a SIGNAL Liability arises from the negligence or willful misconduct of a SIGNAL Indemnified Party or from the negligence, failure to comply with instructions regarding use of a Licensed Product or Combination Product or other wrongdoing of any user of the Licensed Product or Combination Product. ARES shall promptly notify SIGNAL of any claim or action giving rise to SIGNAL Liabilities subject to the provisions of this Section 7.03. SIGNAL shall have the right to defend any such claim or action, at its cost and expense, and shall keep ARES informed of developments in any such claim or action. ARES shall cause the SIGNAL Indemnified Parties to cooperate with SIGNAL in the defense of any such claim or action. SIGNAL shall not settle or compromise any such claim or action in a manner that imposes any restrictions or obligations on a SIGNAL Indemnified Party or grants any rights to Licensed Products or Combination Products, or to SIGNAL Technology necessary or useful to develop, make, have made, import, use, and sell Licensed Products or Combination Products, without ARES' prior written consent. The indemnification rights of any SIGNAL Indemnified Party contained herein are in addition to and not in lieu of all other rights that such SIGNAL Indemnified Party may have at law or in equity or otherwise and shall survive the termination of this Agreement. Section 7.04. ARES Indemnification. ARES shall defend, indemnify and hold harmless SIGNAL, its officers, agents and employees (each individually a "ARES Indemnified Party," and collectively the "ARES Indemnified Parties"), from and against any and all liabilities, losses, damages, actions, claims, costs or expenses suffered or incurred by the ARES Indemnified - 33 - 39 Parties (including reasonable attorneys' fees) (individually a "ARES Liability," and collectively the "ARES Liabilities") that arise from (i) personal injury or property damage to third parties resulting from (A) a breach of this Agreement by ARES (including without limitation a breach of ARES' representations and warranties in Section 7.02 hereof) or (B) ARES', its Affiliates' or sublicensees' development, manufacture, import, use or sale of Licensed Products or Combination Products pursuant to this Agreement; or (ii) the enforcement by an ARES Indemnified Party of its rights under this Section 7.04; provided, however, that ARES shall have no obligation to defend, indemnify, and hold harmless hereunder to the extent an ARES Liability arises from the negligence or willful misconduct of an ARES Indemnified Party or from the negligence, failure to comply with instructions regarding use of a Licensed Product or Combination Product or other wrongdoing of any user of the Licensed Product or Combination Product. SIGNAL shall promptly notify ARES of any claim or action giving rise to ARES Liabilities subject to the provisions of this Section 7.04. ARES shall have the right to defend any such claim or action, at its cost and expense, and shall keep SIGNAL informed of developments in any such claim or action. SIGNAL shall cause the ARES Indemnified Parties to cooperate with ARES in the defense of any such claim or action. ARES shall not settle or compromise any such claim or action in a manner that imposes any restrictions or obligations on an ARES Indemnified Party. The indemnification rights of any ARES Indemnified Party contained herein are in addition to and not in lieu of all other rights that such ARES Indemnified Party may have at law or in equity or otherwise and shall survive the termination of this Agreement. Section 7.05. Disclaimer of Warranties. Neither Party guarantees the safety or usefulness of any Licensed Product or Combination Product. EXCEPT AS EXPRESSLY SET FORTH IN THIS AGREEMENT, NEITHER PARTY MAKES ANY REPRESENTATION OR WARRANTY TO THE OTHER PARTY OF ANY NATURE, EXPRESS OR IMPLIED, INCLUDING WITHOUT LIMITATION ANY WARRANTY OF NONINFRINGEMENT, MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE. - 34 - 40 ARTICLE VIII GENERAL PROVISIONS Section 8.01. No Waiver. No failure on the part of either Party to exercise, and no delay in exercising, any right shall operate as a waiver thereof, nor shall any single or partial exercise by either Party of any right preclude any other future exercise thereof or the exercise of any other right. Section 8.02. Force Majeure. Neither Party shall lose any rights hereunder or be liable to the other Party for damages or losses on account of failure of performance by the defaulting Party to the extent the failure is occasioned by government action, war, fire, explosion, flood, strike, lockout, embargo, act of God, or any other similar cause beyond the reasonable control of the defaulting Party; provided, however, the Party claiming force majeure shall promptly notify the other Party of the existence of such force majeure, shall use its best efforts to avoid or remedy such force majeure and shall continue performance hereunder with the utmost dispatch whenever such force majeure is avoided or remedied. Section 8.03. Notices. All notices, reports, requests or demands required or permitted under this Agreement shall be sent by air courier or by facsimile, with confirmed transmission, properly addressed to the respective Parties as follows: If to SIGNAL: SIGNAL PHARMACEUTICALS, INC. 5555 Oberlin Drive San Diego, California 92121 U.S.A. Attention: President and Chief Executive Officer Telephone: 619-558-7500 Facsimile: 619-558-7513 - 35 - 41 With a copy to: COOLEY GODWARD LLP 4365 Executive Drive Suite 1100 San Diego, California 92121 U.S.A. Attention: Frederick T. Muto Telephone: 619-550-6000 Facsimile: 619-453-3555 If to ARES: ARES TRADING S.A. Chateau de Vaumarcus 2028 Vaumarcus Switzerland Attn.: General Manager Telephone: 41-38-55-3231 Facsimile: 41-38-55-3208 With a copy to: ARES-SERONO INTERNATIONAL S.A. 15 bis, chemin des Mines 1202 Geneva Switzerland Attention: General Counsel Telephone: 41-22-738-8000 Facsimile: 41-22-739-3070 or to such addresses or addresses as the Parties hereto may designate for such purposes during the Term. Notices shall be deemed to have been sufficiently given or made: (i) if by facsimile with confirmed transmission, when performed, and (ii) if by air courier, three (3) days after delivery to the air courier company. Section 8.04. Independent Contractors. No agency, partnership or joint venture is hereby established; each Party shall act hereunder as an independent contractor. Neither SIGNAL nor ARES shall enter into, or incur, or hold itself out to third parties as having authority to enter into or incur on behalf of the other Party any contractual obligations, expenses or liabilities whatsoever. - 36 - 42 Section 8.05. Assignment. 8.05.01. General. This Agreement shall be binding upon the Parties and their respective permitted successors and assigns. This Agreement may be assigned by either Party in whole or in part to its Affiliates. Except as otherwise set forth in Subsection 8.05.02 hereof, this Agreement may be otherwise assigned by either Party in whole or in part only with the prior written consent of the other Party. 8.05.02. Acquisition or Merger. If either Party (or substantially all its assets) is acquired by or merged with a third party or if either Party acquires a third party (or substantially all its assets), the entity that results from that transaction (the "Combined Entity") shall succeed to all of the rights and obligations of the affected Party under this Agreement with the same effect as if the Combined Entity had originally been a Party hereunder. Notwithstanding the foregoing, upon such succession of the Combined Entity to the rights and obligations hereunder, the Parties may agree to terminate this Agreement or the other Party may elect to terminate this Agreement (including upon commission by the Combined Entity of a material breach of the Agreement following such succession), with the following result: (i) if the terminating Party is SIGNAL, then to the extent necessary to develop, manufacture, import, use or sell Licensed Products or Combination Products in existence prior to such termination, SIGNAL shall be granted an irrevocable, fully paid-up, nonexclusive license within the Territory under the ARES Know-How and ARES Patents; provided, however, that SIGNAL shall reimburse ARES for royalties paid to third parties by ARES or its Affiliates with respect to the development, manufacture, import, use or sale of such Licensed Products or Combination Products; and (ii) if the terminating Party is ARES, ARES shall be granted an irrevocable, fully paid-up, exclusive license, with the right to grant sublicenses, within the Territory under the SIGNAL Technology to develop, make, have made, import, use, and sell any Licensed Products or Combination Products to which ARES had any right, title or interest prior - 37 - 43 to such termination. ARES shall also be entitled to a complete duplicate of (A) all records, notes, reports and data with respect to all laboratory work performed in the conduct of the Research and (B) all biological and chemical materials used in connection with the Research prior to such termination and the same, if not already in its possession, shall be promptly delivered to ARES upon such termination. Notwithstanding the foregoing, termination of this Agreement shall not release either Party, or the Combined Entity of which it is a part, from any obligations accrued prior to the effective date of termination nor deprive either Party, or such Combined Entity, from any rights that this Agreement provides shall survive termination. Section 8.06. No Sale or Other Disposal of SIGNAL Technology. Without ARES' prior written consent, SIGNAL shall not sell, transfer, assign, or otherwise dispose of, or purport to sell, transfer, assign or otherwise dispose of, any right, title or interest in, to and under SIGNAL Technology that is necessary or useful to develop, make, have made, import, use, and sell Licensed Products or Combination Products; provided, however, that ARES acknowledges that, prior to the date hereof, SIGNAL has granted certain rights in the SIGNAL Technology to Tanabe. Section 8.07. Reference to Patents. ARES shall mark or cause to be marked the Licensed Products and Combination Products developed, made, imported, used or sold pursuant to this Agreement with such references to the SIGNAL Patents or Joint Patents as are required by the applicable laws of the territories in which such Licensed Products or Combination Products are developed, made, imported used and sold. Section 8.08. No Third-Party Beneficiary. Nothing in this Agreement, express or implied, is intended to confer on any person other than the Parties hereto, or their respective permitted successors and assigns, any benefits, rights or remedies. Section 8.09. Publicity. Neither Party may use in any manner the other Party's name or insignia, or any contraction, abbreviation or adaptation thereof, without the express written - 38 - 44 consent of the other Party. Neither Party may publicly disclose or issue press releases concerning the existence of this Agreement or the terms and conditions hereof except with the express written consent of the other Party, which consent shall not unreasonably be withheld. Notwithstanding the foregoing, either Party shall have the right to disclose information concerning this Agreement in any prospectus, offering memorandum or other document or filing to the extent required by applicable securities laws but only after providing the other Party reasonable notice of such intended disclosure and consulting with the other Party to determine the reasonable nature and scope of such intended disclosure. Section 8.10. Confidential Information. For the purpose of this Agreement, the term "Confidential Information" shall mean any information disclosed by either Party to the other pursuant to this Agreement in tangible form clearly marked "secret," "confidential" or "proprietary" or, if disclosed otherwise, summarized or described in tangible form and clearly marked as above within thirty (30) days of the initial disclosure. Each Party shall hold Confidential Information it has received in confidence during the Term and for a period of five (5) years thereafter and shall not disclose such Confidential Information to third parties without the consent of the disclosing Party, other than Confidential Information that: (i) was known to the receiving Party prior to disclosure by the disclosing Party as evidenced by the receiving Party's prior written records; (ii) is disclosed to the receiving Party by a third party, except if such disclosure is made on a confidential basis or in violation of a confidentiality obligation to the disclosing Party or its Affiliates; (iii) is or becomes public knowledge other than by the receiving Party's breach of this confidentiality obligation; (iv) the receiving Party must disclose to government authorities for the purpose of seeking marketing approval of Licensed Products or Combination Products pursuant to this Agreement; - 39 - 45 (v) the receiving Party must disclose to individuals who have a need to know to effectuate the development and commercialization of Licensed Products or Combination Products pursuant to this Agreement, provided each such individual is bound by a confidentiality obligation comparable to the obligation set forth in this Section 8.10; (vi) the receiving Party independently develops or discovers without use of or reference to the Confidential Information; or (vii) the receiving Party must disclose, pursuant to a requirement of law, provided the receiving Party has given the disclosing Party prompt notice of such fact, so the disclosing Party may obtain a protective order or other appropriate remedy concerning any such disclosure and/or waive compliance with the confidentiality obligations of this Section 8.10. The receiving Party shall fully cooperate with the disclosing Party in connection with the disclosing Party's efforts to obtain any such order or other remedy. If any such order or other remedy does not fully preclude disclosure, or the disclosing Party waives such compliance, the receiving Party shall make such disclosure, but only to the extent such disclosure is legally required, and shall use its best efforts to have confidential treatment accorded to the disclosed Confidential Information. Each Party may disclose Confidential Information only to those of its employees, agents, Affiliates, consultants and academic collaborators who are bound by confidentiality obligations comparable to the obligation set forth in this Section 8.10. All Confidential Information shall be returned to the disclosing Party by the receiving Party upon request by the disclosing Party upon the termination of this Agreement, with the exception of a single copy to be retained by the receiving Party in a confidential file for the purpose of determining compliance with this confidentiality obligation. This obligation shall survive termination of this Agreement. Section 8.11. Publication. Any manuscript, abstract or other publication or presentation prepared by or on behalf of either Party and relating to the SIGNAL Technology must be submitted to the other Party for review and approval at least thirty (30) Business Days prior to - 40 - 46 submission for publication or public release, which approval shall not unreasonably be withheld. Publication or public release of any such manuscript, abstract or other publication or presentation is subject to the confidentiality and nondisclosure obligations set forth in Section 8.10 hereof. Section 8.12. Counterparts. This Agreement may be signed in any number of counterparts with the same effect as if the signatures to each counterpart were upon a single instrument, and all such counterparts together shall be deemed an original of this Agreement. Section 8.13. No Strict Construction. This Agreement has been prepared jointly and shall not be strictly construed against either Party. Section 8.14. Governing Law. The form, execution, validity, construction and effect of this Agreement shall be determined in accordance with the laws of the Commonwealth of Massachusetts and the United States of America, regardless of the choice of law principles of those or any other jurisdictions. Section 8.15. Dispute Resolution. Any disputes, questions or claims raised by a Party and arising out of or in connection with this Agreement that cannot be settled by negotiation between the Parties within fifteen (15) days after notice thereof shall be resolved in accordance with the terms and conditions set forth in this Section 8.15. The Parties agree that any such dispute, question or claim shall be resolved solely by application of the procedures set forth in this Section 8.15. These procedures, however, may be modified by written agreement of the Parties with respect to any particular dispute, question or claim that may arise under this Agreement. 8.15.01. Negotiation. The procedures of this Section 8.15 shall be initiated by a notice (the "Dispute Notice") given by one Party (for purposes of this Section 8.15, the "Claimant") to the other Party. The Dispute Notice shall be accompanied by (i) a statement of the Claimant describing the dispute, question or claim in reasonable detail, and (ii) documentation supporting the Claimant's position with respect to the dispute, question or claim, if applicable. Within twenty (20) days after receipt by the other Party (for purposes of this - 41 - 47 Section 8.15, the "Respondent") of the Dispute Notice and accompanying materials, if any, the chief executive officers of the Parties in question, or other members of senior management of such Parties, each with full authority from the chief executive officer to settle the dispute, shall meet (the "Management Meeting") in a mutually agreeable location to resolve the dispute. If the Parties cannot agree on a time or location for the Management Meeting, (i) the Meeting shall be held at 10:00 A.M., local time, on the twentieth (20th) day after the Respondent's receipt of the Dispute Notice, (ii) the location of such Meeting shall be in a first-class hotel suite identified and paid for by the Claimant in Boston, Massachusetts. If the senior management representative of either Party intends to be accompanied at the Management Meeting by counsel, the other Party shall be given at least four (4) days notice of such intention and may also be accompanied by counsel. All negotiations pursuant to this Subsection 8.15.1 shall be confidential and treated as compromise and settlement negotiations and shall not be admissible in any arbitration or other proceeding. 8.15.02. Arbitration. If the Parties are unable to resolve the dispute, question or claim within thirty (30) days following the day of the Management Meeting, the dispute, question or claim shall be finally settled by arbitration in accordance with the Center for Public Resources Rules for Non-Administered Arbitration of International Disputes (and the Center for Public Resources shall serve, if necessary, as the "Neutral Organization") by three arbitrators appointed in accordance with such Rules who shall be impartial and disinterested individuals who do not have a direct or indirect interest in either Party or the subject matter of the arbitration. The Parties agree that notices served in the manner provided herein shall be valid for such arbitration. Any such arbitration shall be conducted in English and shall be held in Boston, Massachusetts. The arbitrators shall apply the substantive law that the Parties have chosen as the governing law pursuant to Section 8.14 hereof. Pending the issuance of the arbitrators' decision, the Parties shall continue to operate under the Agreement as it existed on the date the Dispute Notice was given; provided, however, that the arbitrators' decision shall be retroactive to such - 42 - 48 date. The costs of the arbitration (including without limitation the fees and expenses of the arbitrators, attorneys and experts, the travel and other expenses of witnesses, as well as the fees and expenses in any collateral actions, such as actions for enforcement) shall be borne in their entirety by the nonprevailing Party in the arbitration. The Parties hereby exclude any right of appeal to any court on the merits of the dispute, question or claim. Judgment on the award may be entered in any court having jurisdiction over the award or any of the Parties or their assets The award may grant any relief appropriate under the applicable law, including without limitation declaratory relief and/or specific performance. Section 8.16. Cooperation. Both Parties shall cooperate in good faith and take all necessary steps at the request of either Party to ensure that this Agreement is enforceable in accordance with its terms. Section 8.17. Integration. This Agreement, together with the Exhibits hereto, constitutes the entire agreement between the Parties hereto relating to the subject matter hereof and supersedes all prior and contemporaneous negotiations, agreements, representations, understandings and commitments with respect thereto, including without limitation the Letter between the Parties dated September 9, 1997. No terms or provisions of this Agreement shall be varied, extended or modified by any prior or subsequent statement, conduct or act of either of the Parties, except by a written instrument specifically referring to and executed in the same manner as this Agreement. - 43 - 49 IN WITNESS WHEREOF, the Parties hereto have caused this Agreement to be executed and delivered as of the day and year first above written. "SIGNAL" "ARES" SIGNAL PHARMACEUTICALS, INC. ARES TRADING S.A. By: By: /s/ ERNESTO BERTARELLI ---------------------------- --------------------------------- Name: Name: ERNESTO BERTARELLI ---------------------------- --------------------------------- Title: Title: DIRECTOR ---------------------------- --------------------------------- - 44 - 50 IN WITNESS WHEREOF, the Parties hereto have caused this Agreement to be executed and delivered as of the day and year first above written. "SIGNAL" "ARES" SIGNAL PHARMACEUTICALS, INC. ARES TRADING S.A. By: /s/ ALAN J. LEWIS By: ---------------------------- --------------------------------- Name: ALAN J. LEWIS Name: ---------------------------- --------------------------------- Title: PRESIDENT / CEO Title: ---------------------------- --------------------------------- - 44 - 51 EXHIBIT A ARES Know-How - 45 - 52 EXHIBIT B ARES Patents [***] * World Intellectual Property Organization country codes - 46 - ***Confidential Treatment Requested 53 EXHIBIT C Protocol Description of Research Project: Responsible Party (SIGNAL, ARES, or Joint): Methodology (including milestones): Personnel (including Consultants and Academic Collaborators): Materials: Reports (Interim and Final): Schedule (including Completion Date): Budget: - 47 - 54 EXHIBIT D SIGNAL Know-How [***] - 48 - ***Confidential Treatment Requested 55 EXHIBIT E SIGNAL Patents [***] - 49 - ***Confidential Treatment Requested 56 EXHIBIT F SIGNAL Third-Party Agreements [***] - 50 - ***Confidential Treatment Requested 57 EXHIBIT G Third-Party Rights in SIGNAL Know-How and SIGNAL Patents [***] - 51 - ***Confidential Treatment Requested EX-10.49 51 EXHIBIT 10.49 1 ***Text Omitted and Filed Separately Confidential Treatment Requested Under 17 C.F.R. Sections 200.80, 200.83 and 230.406 EXHIBIT 10.49 ================================================================================ COLLABORATIVE RESEARCH AND LICENSE AGREEMENT between SIGNAL PHARMACEUTICAL, INC. and THE DUPONT MERCK PHARMACEUTICAL COMPANY ================================================================================ 2 -2- COLLABORATIVE RESEARCH AND LICENSE AGREEMENT THIS COLLABORATIVE RESEARCH AND LICENSE AGREEMENT (the "Agreement") is made as of ___________, 1997 (the "Effective Date") by and between SIGNAL PHARMACEUTICALS, INC., a Delaware corporation with its principal office at 5555 Oberlin Drive, San Diego, California 92121 ("SIGNAL") and THE DUPONT MERCK PHARMACEUTICAL COMPANY, a general partnership organized and existing under the laws of the State of Delaware and having its principal offices at 974 Centre Road, Wilmington, Delaware 19807 ("DPM"). RECITALS WHEREAS, SIGNAL is a biotechnology company engaged in identifying new classes of small molecule drugs that regulate genes and the production of disease-causing proteins; WHEREAS, DPM is a pharmaceutical company dedicated to the research, development, manufacture and commercialization of pharmaceutical products; WHEREAS, SIGNAL and DPM wish to establish a collaborative relationship to develop and commercialize novel products for the treatment and prevention of human immunodeficiency virus ("HIV") and hepatitis C virus ("HCV"); WHEREAS, DPM desires to obtain, and SIGNAL is willing to grant, an option to expand the collaborative relationship to include the development and commercialization of novel products for the treatment and prevention of [***]; WHEREAS, it is recognized and acknowledged by SIGNAL that DPM has carried out and will continue to carry out programs to discover, develop and commercialize products for the treatment and prevention of HIV and HCV which are outside of this collaboration; and WHEREAS, SIGNAL and DPM wish to enter into this Agreement to establish the collaboration on the terms and subject to the conditions set forth herein. NOW, THEREFORE, in consideration of the foregoing recitals and the mutual covenants and agreements contained herein, the parties hereto, intending to be legally bound, do hereby agree as follows. ***Confidential Treatment Requested 3 -3- ARTICLE 1 DEFINITIONS The terms in this Agreement with initial letters capitalized, whether used in the singular or plural, shall have the meaning designated below or, if not designated below, the meaning as designated in places throughout this Agreement. 1.1 "Affiliate" means an individual, trust, business trust, joint venture, partnership, corporation, association or any other entity which owns, is owned by or is under common ownership with a party. For the purposes of this definition, the term "owns" (including, with correlative meanings, the terms "owned by" and "under common ownership with") as used with respect to any party, shall mean the possession (directly or indirectly) of more than 50% of the outstanding voting securities of a corporation or comparable equity interest in any other type of entity. 1.2 "Annual Research Plan" means the plan for conducting the research activities under the Collaboration as described in Article 3 hereof. 1.3 "Assay" means one or more of the following assays which are described in Appendix 1 attached hereto, which have been developed or are to be developed in HTS format under this Agreement in accordance with the Research Plan: [***] 1.4 "Assay Technology" means SIGNAL Technology necessary or useful for performing the Assays. 1.5 "Calendar Quarter" means the respective periods of three (3) consecutive calendar months ending on March 31, June 30, September 30 and December 31. 1.6 "Calendar Year" means each successive period of twelve (12) months commencing on January 1 and ending on December 31. 1.7 "Collaboration" means the activities of SIGNAL and DPM carried out in performance of the Research Project under this Agreement. 1.8 "Collaboration Know-How" means Know-How (i) arising from or in connection with the conduct of the Collaboration under this Agreement in accordance with the Research Plan and (ii) which is jointly developed by or under the common Control of SIGNAL or one of its Affiliates, on the ***Confidential Treatment Requested 4 -4- one hand, and DPM or one of its Affiliates, on the other hand. 1.9 "Collaboration Patent Rights" means all Patent Rights that claim or cover inventions (i) conceived of and reduced to practice jointly (as determined in accordance with the rules of inventorship under United States patent law) by employees or others acting on behalf of SIGNAL or one of its Affiliates, on the one hand, and employees or others acting on behalf of DPM or one of its Affiliates, on the other hand, in connection with activities conducted pursuant to the Research Plan or (ii) which come under the common Control of SIGNAL or one of its Affiliates, on the one hand, and DPM or one of its Affiliates, on the other hand, during the Research Term and any Extended Research Term and are necessary or appropriate for the full commercial exploitation of the Field. 1.10 "Collaboration Technology" means Collaboration Know-How and Collaboration Patent Rights. 1.11 "Combination Product" means a Product containing a Compound which includes one or more additional active ingredients other than a Compound. 1.12 "Compound" means any compound or any analog or derivative thereof identified or selected for development by DPM or SIGNAL based upon use of the Assays during, or otherwise in the course of and as a result of the Collaboration during the Research Term and any Extended Research Term or by DPM during the period of up to [***] thereafter and subject to Section 4.1. It is to be understood that this definition of Compound excludes molecules or compounds that are acquired or discovered by DPM other than by the use of Assays (or target scopes) of this Agreement, but are subjected to an Assay for further knowledge or characterization as a standard. A derivative Compound is a molecule derived from and related to a screened compound identified or synthesized during the Research Term and any Extended Research Term in the course of and as a result of the Collaboration. 1.13 "Confidential Information" means all information and materials received by either party from the other party pursuant to this Agreement and all information and materials developed in the course of the Collaboration, including, without limitation, Know-How of each party and Collaboration Know-How. 1.14 "Control" means possession of the ability to grant a license or sublicense as provided for herein without violating the terms of any agreement with or other arrangement with any Third Party. ***Confidential Treatment Requested 5 -5- 1.15 "Distributor" shall mean a Third Party distributor engaged by DPM to market and distribute Product in any Distributor Market. 1.16 "Distributor Markets" means the markets in which DPM does not have a field selling organization for direct sales and marketing, where DPM markets Products through distributors. For purposes of this definition, "Distributor Markets" shall not include [***] 1.17 "Effective Date" means the date appearing in the first paragraph of the Agreement. 1.18 "FDA" means the United States Food and Drug Administration. 1.19 "Field" means the use of the Assays for the discovery, identification and development of Compounds and Products for the treatment or prevention of HIV and HCV and the use, manufacture, distribution, marketing and sale of Compounds and Products for the treatment or prevention of HIV and HCV. If DPM exercises the option set forth in Section 4.3, the definition of the Field shall be expanded to include the discovery, identification and development of Compounds and Products for the treatment or prevention of [***] and the use, manufacture, distribution, marketing and sale of Compounds and Products for the treatment or prevention of [***]. 1.20 "First Commercial Sale" of a Product means the first sale for use or consumption of such Product in a country after required marketing and pricing approval has been granted by the governing health regulatory authority of such country. Sale to an Affiliate shall not constitute a First Commercial Sale unless the Affiliate is the end user of the Product. 1.21 "FTE" means a full time equivalent researcher employed by SIGNAL or DPM and assigned to work on the Research Project with such time and effort to constitute one researcher working on the Research Project on a full time basis consistent with normal business and scientific practice (at least 40 hours per week of dedicated effort; on an annual basis, at least 40 hours per week of dedicated effort for at least 48 weeks (excluding official SIGNAL holidays) per year). 1.22 "HCV Constructs" mean collectively or individually polynucleotide constructs, which are owned or Controlled by SIGNAL, and which SIGNAL may now possess or acquire during the Research Term and any Extended Research Term, containing HCV polynucleotide sequences, including but not limited to those polynucleotide constructs listed in ***Confidential Treatment Requested 6 -6- Appendix 2 hereto. 1.23 "Hit" means any compound that demonstrates reproducible significant activity in an Assay. The level of activity required to be designated a Hit will be set by the RMC. 1.24 "HTS" means high throughput screening. 1.25 "IND" means an Investigational New Drug Application filed with the FDA to commence human clinical testing of a Product, or the equivalent in any other country or jurisdiction. 1.26 "Know-How" means technical information and materials, including without limitation, technology, data, cell lines, constructs, chemicals, inventions (patentable or otherwise), practices, methods, knowledge, skill, and experience relating to Compounds, Hits, Lead Compounds, Assays, and Products. 1.27 "Lead Compound" means any Hit or any analog or derivative of a Hit showing potential therapeutic activity in cellular or animal models in follow-up testing after testing in an Assay and which is selected for pre-clinical safety assessment testing. Lead Compounds will be selected by the RMC as set forth in Section 2.1. 1.28 "NDA" means a New Drug Application filed in the FDA to obtain marketing approval for a Product, or the equivalent in any other country or jurisdiction. 1.29 "Net Sales" means the gross amounts invoiced for sales of Compound or Product by DPM and its Affiliates to non-Affiliated Third Parties, including but not limited to Distributors and Sublicensees, in bona fide, arms-length transactions, less (to the extent actually incurred or reasonably estimated and accrued in accordance with GAAP and to the extent not already deducted in the amount invoiced): (a) trade and quantity discounts, (b) credits or allowances upon claims, damaged goods, rejections or returns, including recalls, (c) freight, postage, shipping and insurance charges for delivery of Product, (d) custom duties, surcharges, sales or excise taxes and other governmental charges (other than income taxes) incurred directly related to the sale, (e) rebates, chargebacks and other amounts paid, credited or accrued, (f) retroactive price reductions, (g) bad debt expense, and (h) amounts incurred resulting from governmental mandated rebate programs. Sales of Products for use in clinical trials (including expanded access 7 -7- programs) prior to receipt of regulatory approval to market such Product shall not be included in Net Sales. With respect to the sales of Combination Product, Net Sales shall be calculated on the basis of the invoice price of a Product containing the same weight of Compound sold without other active ingredients. In the event such Compound is not sold without other active ingredients, Net Sales shall be calculated by multiplying the amounts received by DPM or its Affiliates attributable to Combination Products by the Combination Allocation Portion (as defined below) attributable to such Combination Product. The "Combination Allocation Portion," as used herein, shall mean that portion of any amounts received by DPM or its Affiliates from the sale of any Combination Product that results from multiplying the total amount received by DPM or its Affiliates from such sale by a fraction, the numerator of which is the fair market value of the Compound included in the Combination Product and the denominator of which is the fair market value of such Compound and the fair market value of the products or parts of such Combination Product which are not Compounds. Fair market value shall be determined in good faith by DPM and SIGNAL either together or with a mutually agreeable third party in the event that no market price is available. In the event that the parties shall disagree regarding the fair market value denomination, the parties shall resolve such dispute in accordance with Article 12 hereof. 1.30 "Pass-Through Net Sales" means the gross amounts invoiced for sales of Product by Distributors and Sublicensees to non-Affiliated Third Parties, in bona fide, arms-length transactions, less deductions listed in the [***] or other SIGNAL License Agreement. SIGNAL shall include in each SIGNAL License Agreement entered into after the Effective Date a definition of Net Sales and/or Pass-Through Net Sales that is consistent with the definition of Net Sales in Section 1.29 above or as provided in the SIGNAL License Agreement with [***] The purpose for such consistency being to prevent any obligation to keep a multiplicity of books and records. 1.31 "Patent Rights" means all rights under (a) patents (including the inventor's certificates) that include one or more Valid Claims, including without limitation any substitution, extension (including supplemental protection certificate), registration, confirmation, reissue, continuation, divisional, continuation-in-part, re-examination, renewal or the like, and (b) pending applications for patents, including, without limitation, any continuation, division or continuation-in-part thereof, and any provisional ***Confidential Treatment Requested 8 -8- applications, which applications are listed and will be listed during the Term of this Agreement in attached Schedule A and which are considered to be either Collaboration Patent Rights or Signal Patent Rights. 1.32 "Phase IIb" means such studies in humans of the safety, dose ranging and efficacy of a Product designed to generate sufficient data to make a decision about whether to commence a Pivotal Trial, as more specifically defined by the rules and regulations of the FDA and corresponding rules and regulations in other countries or jurisdictions. 1.33 "Pivotal Trial" means a controlled study in humans on sufficient numbers of patients designed to establish the efficacy and safety of a Product which is prospectively designed to demonstrate statistically whether the Product is safe and effective for use in a particular indication in a manner sufficient to obtain full Regulatory Approval to market that Product. 1.34 "Product" means any marketed product (a) containing a formulation or dosage of a Compound; or (b) the manufacture, use or sale of which is covered by one or more of SIGNAL Patent Rights, Collaboration Know-How or Collaboration Patent Rights. 1.35 "Regulatory Approval" means any approvals (including pricing and reimbursement approvals), licenses, registrations or authorizations of any national, supra-national, regional, state or local regulatory agency, department or other governmental entity necessary for the manufacture, distribution, use and sale of a Product in a regulatory jurisdiction. "Regulatory Approval" in the U.S. means NDA approval. 1.36 "Research Project" means the research activities under the Collaboration carried out in accordance with the Research Plan as described in Article 3 hereof. 1.37 "Research Term" means the period beginning on the Effective Date and ending on the third anniversary of the Effective Date; provided, however, that the Research Term may be extended for up to three (3) additional one-year periods ("Extended Research Term") at DPM's option upon written notice to SIGNAL given no less than ninety (90) days prior to the expiration of the Research Term or any extension thereof, as the case may be. 1.38 "Research Year" means each twelve month period during the Research Term and any Extended Research Term, with the first Research Year beginning on the Effective Date. 9 -9- 1.39 "RMC" means the Research Management Committee established pursuant to Section 2.1 hereof. 1.40 "Royalty Term" means, in the case of any Product, in any country, the period of time commencing on the First Commercial Sale and ending upon the later of (a) [***] from the date of First Commercial Sale in such country, or (b) the expiration of the last to expire of the SIGNAL Patent Rights and the Collaboration Patent Rights containing a Valid Claim covering such Product in such country. 1.41 "Signal Compound" means a compound contained in the Signal Compound Library. 1.42 "Signal Compound Library" means all compounds owned or Controlled by SIGNAL which are available for screening in the Assays in accordance with the terms and conditions of this Agreement, including but not limited to the compounds and compound libraries identified in Appendix 3 hereto (but excluding, for purposes of HIV and the [***] drug target, any compounds licensed by SIGNAL from [***]). 1.43 "SIGNAL Know-How" means all Know-How, which are owned or Controlled by SIGNAL, which SIGNAL may now possess or acquire during the Research Term and any Extended Research Term, which are necessary or useful for DPM to utilize the Assays or in the discovery, development, manufacture, marketing, use or sale of Compounds or Products. 1.44 "Signal License Agreements" shall mean any license agreement which SIGNAL has entered into as of the Effective Date pursuant to which SIGNAL Controls Assay Technology, any part of the Signal Compound Library or any Signal Compound or any such subsequent license agreement which SIGNAL has entered into which is approved as a Signal License Agreement by the RMC after review and approval by the Finance Division of DPM with respect to the definition of Net Sales and for any payments which may be assumed by DPM for milestone and royalty payments. These are listed in Appendix 5 and any subsequent such Agreements, if any, will be added during the Research Term and any Extended Research Term. 1.45 "SIGNAL Patent Rights" means the Patent Rights owned or Controlled by SIGNAL, either solely or jointly with another party, which SIGNAL may now possess or acquire in the future, which (i) are necessary or useful for DPM to utilize the Assays or in the discovery, development, manufacture, marketing, use or sale of Compounds or Products or (ii) which contains a claim which would be infringed by a third party's ***Confidential Treatment Requested 10 -10- manufacture, use, import or sale of any Compound or Product. These are listed in Appendix 6 and will be added during the Research Term and any Extended Research Term. 1.46 "SIGNAL Technology" means the SIGNAL Patent Rights and the SIGNAL Know-How. 1.47 "Sublicense Territory" means all countries in which a license has been granted to a Sublicensee, but shall specifically exclude the [***] except with the prior approval of SIGNAL. 1.48 "Sublicensee" means a Third Party to whom DPM has granted a license or sublicense to develop, make, have made, use, offer for sale, sell and import Products in the Field. 1.49 "Sublicensing Revenue" means the amount actually paid to DPM by a Sublicensee arising from the license or sublicense of the right to develop, make, have made, use, offer for sale, sell and import Products in the Field. Sublicensing Revenue shall include license fees, royalties, and any other payments with respect to the SIGNAL Technology or the Collaboration Technology but shall not include any payments tied to the provision of goods and services by DPM to such Sublicensee to compensate DPM for the provision of such goods and services. 1.50 "Term" means the period commencing on the Effective Date and ending on the Termination Date. 1.51 "Termination Date" means the last date on which DPM is obligated to make any payments to SIGNAL pursuant to Section 5. 1.52 "Third Party" means any entity other than SIGNAL or DPM or an Affiliate of SIGNAL or DPM. 1.53 "Valid Claim" means a claim of an issued patent or pending patent application which claim has not lapsed, been canceled or become abandoned and has not been declared invalid by an unreversed and unappealable decision or judgment of a court or other appropriate body of competent jurisdiction, and which has not been admitted to be invalid or unenforceable through reissue or disclaimer. 1.54 "Viral Target" means the viral target of an Assay, HIV, HCV [***] as the case may be, as specified in Appendix 1 hereto. ***Confidential Treatment Requested 11 -11- ARTICLE 2 RESEARCH MANAGEMENT COMMITTEE 2.1 Research Management Committee. The Collaboration will be managed by the RMC, which will be comprised of three representatives appointed by SIGNAL and three representatives appointed by DPM. The RMC shall be co-chaired jointly by a representative of each party. Either party may appoint substitute or replacement members of the RMC to serve as their representatives upon notice to the other party. The initial members of the RMC shall be appointed by the parties within thirty (30) days following the Effective Date. The RMC shall oversee the principal research aspects of the Collaboration; and DPM shall be solely responsible for development, manufacturing and marketing activities. The RMC shall have the responsibility and authority to (a) set and modify research goals including recommendations to pursue different assays, (b) assign tasks and responsibilities under the Research Plan to the parties, (c) set criteria for identification of Lead Compounds and Hits, (d) recommend Hits to be developed as Lead Compounds and/or to be chemically modified for development as Lead Compounds, (e) monitor the progress of the Collaboration and (f) review and modify the Research Plan, as it shall deem appropriate to achieve the parties' objectives under this Agreement. 2.2 Meetings. The RMC shall meet in-person or by teleconference on a Calendar Quarter basis or more frequently as may be agreed upon, to review the progress of the parties in performing the Research Project, with each party to bear all travel and related costs for its representatives. 2.3 Decision-Making Process. Each member of the RMC shall have one vote, and decisions by the RMC shall be made by a majority vote. Any disagreement among members of the RMC will be resolved within the RMC based on the efficient achievement of the objectives of this Agreement. Any disagreement which cannot be resolved by a majority vote of the RMC shall be referred to the appropriate officers of SIGNAL and DPM for resolution under Article 12. It is the intent of the parties to resolve issues through the RMC whenever possible and to refer issues to the officers of SIGNAL and DPM only when resolution through the RMC cannot be achieved. ARTICLE 3 CONDUCT OF COLLABORATION 3.1 Exclusivity. All Compounds discovered or licensed by either DPM or Signal shall be developed and commercialized for use in the Field pursuant to and subject to the provisions of this Agreement. During the 12 -12- Research Term and any Extended Research Term, and for a period of two (2) years following the Research Term or any Extended Research Term, DPM and its Affiliates, shall not work independently of SIGNAL, either alone or with any Third Party, and shall not enter into any negotiations or agreements with any Third Party, with respect to the use of the Assays. During the Research Term and any Extended Research Term and for a period of two (2) years following the Research Term or any Extended Research Term, SIGNAL and its Affiliates, shall not work independently of DPM, either alone or with any Third Party, and shall not enter into any negotiations or agreements with any Third Party, with respect to the Field. This Section 3.1 shall not in any way limit or modify the licenses granted to DPM by SIGNAL under this Agreement. 3.2 Objectives of Collaboration. The objective of the Collaboration is to identify Hits and Lead Compounds that are suitable for development by DPM as Products for commercialization in the Field. DPM shall be responsible for the development of Products, including all preclinical and clinical testing, obtaining Regulatory Approval for Products, manufacturing of Compounds and Products, and the commercialization of Products in the Field. The parties agree that the Collaboration shall be conducted in accordance with the initial research plan attached hereto as Appendix 2, its modifications, and each Annual Research Plan. The parties expect that: (i) initially, SIGNAL will be primarily responsible for screening the compound libraries of each party using Assays developed or to be developed primarily by SIGNAL, which responsibility may thereafter be shifted in whole or in part to DPM in the RMC's discretion; (ii) SIGNAL will initially have primary responsibility for follow-up and confirmation of any Hits in HCV Assays; (iii) DPM will have primary responsibility for follow-up and confirmation of any Hits in HIV Assays; (iv) the parties will share responsibility for assessment of antiviral activity of Hits; and (v) DPM will have primary responsibility for in vivo testing of Compounds and any follow-up medicinal chemistry. 3.3 Annual Research Plan. The Research Project will be conducted under an Annual Research Plan which describes the work to be pursued by SIGNAL and DPM during the Research Year. The first Annual Research Plan shall be prepared by the RMC within forty-five (45) days after the Effective Date. Subsequent Annual Research Plans shall be prepared by the RMC, not later than sixty (60) days prior to the start of each Research Year. The Annual Research Plan shall outline the work on the Research Project proposed to be carried out during the subsequent Research Year and the number of FTEs to be assigned to such work. 13 -13- 3.4 Research Efforts. Each party shall use good faith commercially reasonable and diligent efforts (as defined below) to perform its responsibilities under the Annual Research Plan. In particular, DPM will provide funding to SIGNAL pursuant to Section 5.3 in each Research Year during the Research Term and any Extended Research Term to support [***] qualified FTEs at SIGNAL specified in the Annual Research Plan, unless modified by the RMC during the Research Term and any Extended Research Term which funding by DPM shall be contingent upon SIGNAL providing and retaining such qualified FTEs. In addition, DPM will commit the number(s) of appropriately qualified FTEs to the performance of DPM's responsibilities as specified in the Annual Research Plan. Any modification in such FTE commitments by the parties shall be made by the RMC in accordance with Article 2. As used herein, the term "commercially reasonable and diligent efforts" will mean, unless the parties agree in writing otherwise, those efforts consistent with the exercise of prudent scientific and business judgment in accordance with industry standards, as applied to other products of similar scientific and commercial potential. The Research Project will be conducted in good scientific manner, and in compliance with all applicable good laboratory practices, and applicable legal requirements, to attempt to achieve efficiently and expeditiously the objectives of the Collaboration. Throughout the Research Term and any Extended Research Term, SIGNAL shall assign a balanced number of FTE Ph.D. or equivalent scientists and other technical support personnel as specified in the Annual Research Plan to perform the work set forth in each Annual Research Plan. The name, curriculum vitae, and percentage of time devoted to working on the Research Project for each scientist comprising [***] potential FTE scientists shall be provided to DPM within sixty (60) days of the Effective Date and not later than sixty (60) days prior to the start of each subsequent Research Year. The mixture of skills and levels of such FTEs shall be appropriate to the scientific objectives of the Research Project. The scientists comprising such [***] FTEs and their percentage of time devoted to working on the Research Project shall be identified in each Annual Research Plan. The selection of such scientists shall be communicated to DPM at the same time offers of employment are made. 3.5 Availability of Resources. Each party will maintain laboratories, offices and all other facilities at its own expense and risk necessary to carry out its responsibilities under the Collaboration pursuant to the Annual Research Plan. In particular, within ninety (90) days following the Effective Date, SIGNAL will have established, and will thereafter during the Research Term and any Extended Research Term ***Confidential Treatment Requested 14 -14- maintain, a non-shared BSL-2 laboratory space for conducting antiviral work. Each party agrees to make its employees and non-employee consultants reasonably available at their respective places of employment to consult with the other party on issues arising during the Collaboration and in connection with any request from any regulatory agency, including, without limitation, regulatory, scientific, technical and clinical testing issues. 3.6 Transfer of Technical Information, Know-How and Materials. As the Assays are established and as improvements to the Assays are made, SIGNAL shall provide DPM with all technical information, Know-How and materials necessary to enable DPM to utilize such Assays. Within thirty (30) days following the Effective Date, SIGNAL shall provide DPM with access to all HCV Constructs owned or Controlled by SIGNAL as of the Effective Date, including those listed in Appendix 2 hereof. 3.7 Screening of Signal Compounds in the Assays. As the Assays are developed and validated, SIGNAL shall promptly proceed to diligently screen in the Assays such Signal Compounds which exist prior to the Effective Date or are synthesized or acquired by SIGNAL during the Research Term and any Extended Research Term as determined by the RMC. The results of such testing and the structure of any Hits shall be promptly disclosed to DPM as such results are obtained. Likewise, DPM shall promptly disclose to SIGNAL the results of its biologic screening activities during the Research Term and any Extended Research Term. 3.8 Disclosure; Reports. SIGNAL will make available and disclose to DPM promptly after the Effective Date all Signal Know-How known as of the Effective Date. Each party will make available and disclose to the other party all SIGNAL Know-How or Collaboration Know-How, as applicable, learned, acquired or discovered by such party at any time on or before the end of the Research Term and any Extended Research Term, as promptly as is reasonably practicable after such Know-How is learned. In addition, each party shall inform the other promptly upon identifying any Hits in its performance of screening activities pursuant to the Research Plan and shall provide such additional information with respect thereto as the other party or the RMC shall reasonably request. The parties will exchange at a minimum quarterly written reports (with copies to the RMC) presenting a meaningful summary of the work performed on the Research Project. In addition, on reasonable request by a party, the other party will make presentations of its activities under this Agreement to inform such party of the details of the work done under this Agreement. Know-How and other information regarding the Research Project disclosed by one party to the 15 -15- other party pursuant hereto may be used only in accordance with the rights granted under this Agreement. Within thirty (30) days following the end of each Calendar Quarter, SIGNAL and DPM shall each provide to the RMC a written report summarizing in reasonable detail the work performed by it under the Research Project during the preceding Calendar Quarter. Subsequent to the termination or expiration of the Research Term and any Extended Research Term, DPM shall provide SIGNAL with quarterly reports concerning the status of its development activities concerning the commercialization of Products, including but not limited to the results of preclinical and clinical studies. 3.9 Records. SIGNAL and DPM shall each maintain records in sufficient detail and in good scientific manner appropriate for patent purposes and as will properly reflect all work done and results achieved in the performance of the Research Project (including all data in the form required to be maintained under any applicable governmental regulations). Such records shall include books, records, reports, research notes, charts, graphs, comments, computations, analyses, recordings, photographs, computer programs and documentation thereof, computer information storage means, samples of materials and other graphic or written data generated in connection with the Research Project. SIGNAL and DPM shall each provide the other the right to inspect such records, and shall provide copies of all requested records, to the extent reasonably required for the performance of the requesting party's obligations under this Agreement; provided, however, that each party shall maintain such records and the information of the other contained therein in confidence in accordance with Article 8 below and shall not use such records or information except to the extent otherwise permitted by this Agreement. 3.10 DPM Compounds. To further the objectives of the Collaboration, DPM shall transfer to SIGNAL certain DPM compounds for testing by SIGNAL in the Assays in accordance with the applicable Annual Research Plan. Such compounds provided or otherwise disclosed by DPM to SIGNAL under this Agreement are referred to herein as "DPM Compounds". Such DPM Compounds and all information relating to such DPM Compounds and information and materials derived from the use of such DPM Compounds will be used by SIGNAL solely for the testing of the DPM Compounds in the Assays as specified in the Annual Research Plan and shall be used for no other purpose. SIGNAL will promptly provide to DPM all data from such testing of DPM Compounds as such data is developed. Upon expiration or termination of the Research Project, SIGNAL shall, upon the request of 16 -16- DPM, return or destroy all compounds and other materials provided to SIGNAL by DPM in the performance of the Research Project. DPM shall at all times own all rights to the DPM Compounds it provides or discloses to SIGNAL hereunder, including without limitation, all rights with respect to the manufacture, use or sale of such DPM Compounds. Accordingly, SIGNAL agrees to: (i) disclose to DPM any inventions it conceives or makes covering the manufacture, use, or sale of DPM Compounds; (ii) assign to DPM all patent rights of SIGNAL covering the manufacture, use, or sale of DPM Compounds; (iii) execute any necessary papers and otherwise reasonably cooperate with DPM in securing such patent rights. Anything to the contrary not withstanding, any such patent rights conveyed by SIGNAL to DPM under this Section 3.10 shall be included in Collaboration Patent Rights as set forth in (ii) of Section 1.9. 3.11 Subcontracts. Notwithstanding Section 3.1, subject to the provisions of Article 8 and subject to the prior written approval of the RMC, SIGNAL and DPM may subcontract portions of the Research Project to be performed by them in the normal course of their business to a Third Party upon prior written notice to the other; provided, however, that such Third Party has entered into an appropriate confidentiality agreement with SIGNAL and/or DPM obligating such Third Party to be bound by the obligations contained in this Agreement. ARTICLE 4 GRANT OF LICENSES 4.1 License Under Assay Technology. Subject to the terms and conditions of this Agreement and during the Research Term and Extended Research Term, and for a period of [***] following the Research Term and any Extended Research Term, Signal grants to DPM a worldwide, exclusive (except as to SIGNAL, as described below) license under the Assay Technology to conduct screening of compounds in the Assays in the Field, including the right to grant sublicenses solely to its Affiliates for such purposes. Notwithstanding the preceding sentence, SIGNAL retains the right under the Assay Technology solely to perform its obligations under this Agreement, including but not limited to conducting screening of DPM Compounds and Signal Compound Libraries as contemplated by and in accordance with the Research Plan, including the right to grant sublicenses solely to its Affiliates for such purposes. Subject to the terms and conditions of this Agreement, during the [***] period after the Research Term and any Extended Research Term ("Post Research Term"), SIGNAL shall have the right to conduct screening of Signal Compound Libraries in the Assays. Any compound 17 -17- identified by DPM or by SIGNAL with the acceptance of DPM based upon use of the Assays during such Post Research Term shall be a Compound subject to all of the terms and conditions of this Agreement. Any such Compound identified by SIGNAL or DPM during such Post Research Term shall be disclosed to the other party at the time such Compound is identified. For up to a [***] period after the Post Research Term referred to in the preceding paragraph DPM will continue to pay for Compounds first identified, continued or selected for development by DPM based upon use of the Assays during or otherwise in the course of and as a result of the Collaboration as long as the Assays are not in the public domain to be used by independent Third Parties. During this additional extended period, the milestone and royalty payments set forth in Sections 5.4.3, 5.4.4, 5.4.5 and 5.5 shall be equal to the amounts set forth therein multiplied by: [***] if such Compound is identified within the [***] after expiration of the Post Research Term; [***] if such Compound is identified between [***] after the expiration of the Post Research Term. After expiration of the Post Research Term, DPM has a non-exclusive, fully paid-up license under the Assay Technology. 4.2 License Under Signal Technology and Collaboration Technology. Subject to the terms and conditions of this Agreement, particularly Section 5.8, SIGNAL hereby grants to DPM a worldwide, exclusive, royalty-bearing license during the Royalty Term, with right to sublicense, under the SIGNAL Technology and the Collaboration Technology to develop, make, have made, use, offer for sale, sell, and import Compounds and Products in the Field, including the right to grant sublicenses to Affiliates and Sublicensees. DPM shall diligently pursue development of Products. If DPM ceases to pursue diligently development and commercialization of at least one Product during or subsequent to the Research Term, SIGNAL shall have the right to terminate the license granted to DPM hereunder on a Product by Product basis in the event SIGNAL disagrees with DPM on the reasons for ceasing development of such Product. Upon termination of such license for any such terminated Product, SIGNAL shall receive an exclusive license, with the right to grant sublicenses, to all Collaboration Technology for such terminated Product and to ***Confidential Treatment Requested 18 -18- make, have made, use, offer for sale, sell or import all Lead Compounds selected from DPM's compound library relating thereto in the Field on terms and conditions to be negotiated. In addition, if a compound is selected as a Lead Compound from the SIGNAL Compound Library and DPM ceases to pursue diligently development and commercialization of such compound, all rights to such Lead Compound shall revert to SIGNAL. 4.3 [***] Option. During the period of eight (8) months following the Effective Date [***], DPM shall have the option, upon commitment by DPM to fund [***] additional SIGNAL FTEs for the duration of the Research Term and any Extended Research Term, to expand the Collaboration, the definition of the Field to include [***], and the definition of Assays to the [***] as set forth in Appendix 1 hereto. In the event that DPM has not exercised such option by providing notice to SIGNAL of its desire to exercise such option prior to the expiration of the [***], then SIGNAL shall thereafter be free to license such assays to a Third Party. If DPM exercises such option, DPM shall be responsible for all milestone, royalty and other payments due under any SIGNAL License Agreement with respect to any [***] 4.4 Sublicenses. DPM shall notify any permitted Sublicensee hereunder of all rights and obligations of such party under this Agreement licensed to such Sublicensee and require such Sublicensee to be bound by all of the terms and conditions of this Agreement. Upon termination of this Agreement by DPM pursuant to Section 10.2, no existing sublicenses shall be affected by such termination as long as such sublicense is in compliance with all of the terms and conditions of this Agreement, and all such sublicenses shall remain in effect according to their terms shall be either (a) assigned to SIGNAL, if acceptable to SIGNAL, or (b) continue as Sublicensees of DPM following such termination. 4.5 No Other License. No right or license under any patent or patent application is granted by DPM or SIGNAL under this Agreement, except as specifically and expressly set forth herein. 4.6 Limitation on Right to Sublicense. DPM agrees not to sublicense rights granted hereunder to either Merck & Company or E.I. duPont deNemours & Company ("Parents," which term shall include any entity in which either Parent has a controlling interest as defined below) without the written consent of SIGNAL, such consent not to be unreasonably withheld. In the event DPM decides to ***Confidential Treatment Requested 19 -19- sublicense rights granted hereunder to a Parent, then DPM agrees it will do so only under terms and conditions substantially the same as those it receives through arms length negotiation with an independent third party. DPM agrees not to sublicense rights granted hereunder to non-Affiliates in which DPM has a controlling interest without the written consent of SIGNAL, such consent not to be unreasonably withheld. For the purposes of this Section 4.6, an entity shall be regarded as in DPM's control or a Parent's control if DPM or such Parent owns or directly or indirectly controls more than twenty percent (20%) of the voting stock or other ownership interest of the entity, or has the power to elect or appoint more than twenty percent (20%) of the members of the governing body of the entity. There shall be no other limitation on DPM's right to sublicense except as expressed in this Section 4.6. DPM may sublicense its Affiliates without SIGNAL's consent. ARTICLE 5 PAYMENT OBLIGATIONS 5.1 License Fee. In partial consideration of the grant of the licenses set forth in Article 4 above, DPM agrees to pay to SIGNAL within ten (10) days of the Effective Date a one-time, non-refundable fee of $1.0 million. In addition, DPM shall pay SIGNAL the amount of [***] within ten (10) days of its receipt of the HCV Constructs as set forth under Section 3.6 hereof. 5.2 Equity Investment. In the event that, at any time during the Research Term, SIGNAL completes an initial public offering of its Common Stock ("IPO"), DPM shall, as part of the IPO, purchase $2.0 million of shares of Common Stock of SIGNAL in a private placement completed simultaneously with the IPO and subject to Rule 144 of the Securities Act at a price per share equal to the share price to the public in the IPO. Such equity investment shall be made pursuant to a Stock Purchase Agreement substantially in the form attached hereto as Appendix 7 (the "Stock Purchase Agreement"). 5.3 Research Funding. DPM agrees to fund the Research Project at SIGNAL, during the Research Term and any Extended Research Term on a fully allocated FTE basis in an amount equal to [***] per FTE per year in accordance with the FTE requirements set forth in the Annual Research Plan. Such amount shall be payable in advance in four quarterly installments during each Calendar Year on or before the end of the Calendar Quarter. Any payment for a portion of a quarterly period shall ***Confidential Treatment Requested 20 -20- be made on a pro rata basis. The first such payment shall be made within ten (10) days the Effective Date. Such annual funding shall be reevaluated annually and adjusted in proportion to the percentage increase in the Consumer Price Index. Except as provided in this Section 5.3, or as may be agreed from time to time by the parties in writing, each of SIGNAL and DPM will bear all of its own expenses incurred in connection with the Collaboration. Research funding by DPM shall be contingent upon SIGNAL providing and retaining the number of qualified FTEs set forth in Section 3.3 and 3.4 (or adjusted for any shortfall on a prorata basis), the applicable Annual Research Plan and SIGNAL using good faith commercially reasonable and diligent efforts to achieve the goals of the Annual Research Plan. 5.4 Milestone Payments. Within thirty (30) days after achievement of each of the milestone events set forth below, subject to the terms and conditions of this Agreement, DPM shall pay to SIGNAL the indicated nonrefundable milestone payment, in cash or as an equity investment, as the case may be, set forth below. 5.4.1 [***] 5.4.2 [***] ***Confidential Treatment Requested 21 -21- 5.4.3 Milestone Payments for HIV. (a) For a Compound in each Viral Target developed for the treatment or prevention of HIV, DPM shall pay to SIGNAL: [***] For such Compounds developed for the prevention or treatment of HIV infection, the milestone payments above shall be paid only [***] (b) For each subsequent new Compound for which Regulatory Approval is obtained for the prevention or treatment of HIV infection, DPM will pay milestone payments not to exceed [***] as follows: (i) [***] (ii) [***] 5.4.4 Milestone Payments for HCV. (a) For a Compound in each Viral Target developed for the treatment or prevention of HCV, DPM shall pay to SIGNAL: (i) [***] ***Confidential Treatment Requested 22 -22- (ii) [***] (iii) [***] (iv) [***] For such Compounds developed for the prevention or treatment of HCV infection, the milestone payments above shall be paid only once upon the first occurrence of such milestone event. (b) For each subsequent new Compound for which Regulatory Approval is obtained for the prevention or treatment of HCV infection, DPM will pay milestone payments not to exceed [***] as follows: (i) [***] (ii) [***] 5.4.5 Milestone Payments for [***]. In the event that DPM exercises its option with respect to [***] and the [***] are included in the definition of Assays hereunder, DPM shall pay the following milestone payments. (a) For a Compound in each Viral Target developed for the treatment or prevention of [***], DPM shall pay to SIGNAL: (i) [***] (ii) [***] ***Confidential Treatment Requested 23 -23- (iii) [***] (iv) [***] For such Compounds developed for the prevention or treatment of [***], the milestone payments above shall be paid only once upon the first occurrence of such milestone event. (b) For each subsequent new Compound for which Regulatory Approval is obtained for the prevention or treatment of [***], DPM will pay milestone payments not to exceed [***] as follows: [***] 5.5 Royalty Payments. Subject to the terms and conditions of this Agreement, particularly Section 5.5.4, DPM shall pay to SIGNAL a royalty on Net Sales of Product as set forth below. 5.5.1 Royalty on Products for HIV. (a) DPM shall pay to SIGNAL the following royalty on Net Sales of Products for the treatment or prevention of HIV as follows: (i) [***] of the aggregate annual Net Sales of such Product for aggregate annual Net Sales of such Product less than [***]; (ii) [***] of the aggregate annual Net Sales of such Product for aggregate annual Net Sales of such Product between [***] and [***] ***Confidential Treatment Requested 24 -24- (iii) [***] of the aggregate annual Net Sales of such Product for aggregate annual Net Sales of such Product between [***] and [***]; and (iv) [***] of the aggregate annual Net Sales of such Product for aggregate annual Net Sales of such Product which exceed [***]. 5.5.2 Royalty on Products for HCV. (a) DPM shall pay to SIGNAL the following royalty on Net Sales of Products for the treatment or prevention of HCV as follows: (i) [***] of the aggregate annual Net Sales of such Product for aggregate annual Net Sales of such Product less than [***]; (ii) [***] of the aggregate annual Net Sales of such Product for aggregate annual Net Sales of such Product between [***] and [***]; (iii) [***] of the aggregate annual Net Sales of such Product for aggregate annual Net Sales of such Product between [***] and [***]; and (iv) [***] of the aggregate annual Net Sales of such Product for aggregate annual Net Sales of such Product which exceed [***]. 5.5.3 Royalty on Products for [***]. (a) In the event that DPM exercises its option with respect to [***] and the [***] Assays are included in the definition of Assays hereunder, DPM shall pay to SIGNAL the following royalty on Net Sales of Products for the treatment or prevention of [***] as follows: (i) [***] of the aggregate annual Net Sales of such Product for aggregate annual Net Sales of such Product less than [***]; (ii) [***] of the aggregate annual Net Sales of such ***Confidential Treatment Requested 25 -25- Product for aggregate annual Net Sales of such Product between [***] and [***]; (iii) [***] of the aggregate annual Net Sales of such Product for aggregate annual Net Sales of such Product between [***] and [***]; and (iv) [***] of the aggregate annual Net Sales of such Product for aggregate annual Net Sales of such Product which exceed [***]. 5.5.4 With respect to each Product such royalty payments shall be payable on a country-by-country basis during the Royalty Term for such Product in such country. 5.5.5 The royalties payable hereunder shall be subject to the following conditions: (i) subject to 5.5.6 and 5.5.7, only one royalty shall be due with respect to the same unit of Product; (ii) that no royalties shall be due upon the sale or other transfer among DPM and its Affiliates, but in such cases the royalty shall be due and calculated upon DPM's or its Affiliate's Net Sales of Product to the first independent third party; (iii) no royalties shall accrue on the disposition of Product in reasonable quantities by DPM or its Affiliates as bona fide samples or as donations to non-profit institutions or government agencies for non-commercial purposes; (iv) if a compulsory license is granted with respect to Product in any country with a royalty rate lower than the royalty rate provided above, then the royalty rate to be paid by DPM shall be [***]; and (v) notwithstanding the above royalty rates, upon DPM's request, the parties agree to discuss in good faith a reduction (without any obligation to agree to such a reduction) of such royalty rate in any ***Confidential Treatment Requested 26 -26- given country in the event the level of development, patent protection or general commercial environment affects the commercial viability of the Product under such royalty rate. 5.5.6 Sales by Distributors in Distributor Markets. In the case of sales of Product by any Distributor in any Distributor Market, to the extent that SIGNAL is obligated under any Signal License Agreement to pay royalty payments on such sales of Product by Distributors in Distributor Markets, then, in addition to any royalty amounts payable to SIGNAL under Section 5.5.1, 5.5.2 or 5.5.3, DPM shall pay to SIGNAL an amount equal to the amount SIGNAL is obligated to pay and actually pays to its licensors with respect to such Distributor sales under such Signal License Agreement, provided however, that such amount payable by DPM to SIGNAL under this Section 5.5.6 shall in no event exceed [***] of the applicable annual Pass-Through Net Sales of Product by such Distributor. In no event, however, shall the total royalties paid to SIGNAL under this Section 5.5.6 be higher than what they would have been if calculated on sales to the ultimate third party as set forth in Sections 5.5.1, 5.5.2, and 5.5.3 as if DPM marketed the Product to the ultimate third party itself rather than through a Distributor. See Appendix 4 for example calculations. 5.5.7 Sales by Sublicensees. (a) In the event that DPM licenses or sublicenses the right to sell Product to a Sublicensee and DPM does not supply and sell Compound or Product to such Sublicensee, then DPM shall pay to SIGNAL [***] of all Sublicensing Revenue that DPM receives from such Sublicensee. (b) In the event that DPM licenses or sublicenses the right to sell Product to a Sublicensee and DPM supplies and sells Compound or Product to such Sublicensee, then the term "Net Sales" in Section 5.5.1, 5.5.2 and 5.5.3 with respect to such Compound or Product sold by DPM to such Sublicensee shall include any payments received by DPM from such Sublicensee based on sales of Product by such Sublicensee. (c) To the extent that SIGNAL is obligated under any Signal License Agreement to pay royalty payments on sales of Product by any Sublicensee, then, in addition to any royalty amounts payable to SIGNAL under Section 5.5.1, 5.5.2, 5.5.3, 5.5.7(a) or 5.5.7(b), DPM shall pay to SIGNAL an amount equal to the amount SIGNAL is obligated to pay and actually pays to its licensors with respect to such Sublicensee ***Confidential Treatment Requested 27 -27- sales under such Signal License Agreement, provided however, that such amount payable by DPM to SIGNAL under this Section 5.5.7 shall in no event exceed [***] based on sales of Product by such Sublicensee. In no event, however, shall the total royalties paid to SIGNAL under this Section 5.5.7 be higher than what they would have been if calculated on sales to the ultimate third party as set forth in Sections 5.5.1, 5.5.2, and 5.5.3 as if DPM marketed the Product to the ultimate third party itself rather than through a Sublicensee. See Appendix 4 for example calculations. 5.6 Signal License Agreements. Unless otherwise specified in this Agreement SIGNAL shall be responsible for all payment obligations, costs and expenses with respect to the Signal License Agreements, including but not limited to, any upfront payments, license maintenance fees, milestone payments, royalty payments and legal fees and disbursements. 5.7 Third Party Patents. If DPM in its reasonable judgment and after consultation with SIGNAL is required to obtain a license from a non-Affiliated third party under a valid claim of a dominating patent in order to import, manufacture, use or sell a Product or Compound, and to pay a royalty under such license, and the infringement of such patent cannot reasonably be avoided by DPM, the reasonableness of which shall be determined mutually by DPM and SIGNAL, DPM's obligation to pay royalties under Section 5.5 shall be reduced by [***] the amount of the royalty actually paid to such third party, provided, however, that the royalties payable under Section 5.5 shall not be reduced in any event below [***] of the amounts paid according to Section 5.5. In addition, if DPM is required to pay up-front payments and/or milestone payments in consideration for such license, then the milestone payments under Section 5.4 shall be reduced by [***] the amount of the up-front payments and milestone payments paid to such third party, provided, however, that the amount of such up-front payments and milestone payments paid to such third party shall not be reduced in any event below [***] of the amounts set forth in Section 5.4. 5.8 Paid-up License. For each country, upon expiration of DPM's obligation to pay royalties hereunder with respect to a Product, DPM shall have a fully paid-up, non-exclusive license under any Signal Know-How or Signal Patent Rights, to make, have made, use, sell, offer for sale and import the applicable Product in that country. ***Confidential Treatment Requested 28 -28- ARTICLE 6 PAYMENTS; RECORDS; AUDITS 6.1 Payment; Reports. Royalty payments and reports for the sale of Products shall be calculated and reported for each Calendar Quarter. All royalty payments due to SIGNAL under this Agreement shall be paid within sixty (60) days of the end of each Calendar Quarter, unless otherwise specifically provided herein. Each payment of royalties shall be accompanied by a report of Net Sales of Products in sufficient detail to permit confirmation of the accuracy of the royalty payment made, including, without limitation, the number of Products sold, the gross sales and Net Sales of Products, the royalties, in U.S. dollars, payable, the method used to calculate the royalty and the exchange rates used. 6.2 Exchange Rate; Manner and Place of Payment. All payments hereunder shall be payable in U.S. dollars. With respect to each quarter, for countries other than the United States, whenever conversion of payments from any foreign currency shall be required, such conversion shall be made at the rate of exchange reported in The Wall Street Journal on the last business day of the applicable reporting period. All payments owed under this Agreement shall be made by wire transfer, unless otherwise specified by SIGNAL. 6.3 Late Payments. In the event that any payment, including royalty, milestone and research payments, due hereunder is not made when due, the payment shall accrue interest from the date due at the rate of 1.5% per month; provided, however, that in no event shall such rate exceed the maximum legal annual interest rate. The payment of such interest shall not limit SIGNAL from exercising any other rights it may have as a consequence of the lateness of any payment. 6.4 Records and Audits. During the Term and for a period of two (2) years thereafter, DPM shall be obligated to keep complete and accurate records pertaining to the development and sale or other disposition of Products in sufficient detail to permit SIGNAL to confirm the accuracy of all payments due hereunder. SIGNAL shall have the right to cause an independent, certified public accountant of nationally recognized standing reasonably acceptable to DPM to audit such records to confirm Net Sales and royalty and other payments for the preceding year. Such audits may be exercised during normal business hours once a year upon at least thirty (30) working days' prior written notice to DPM. SIGNAL shall bear the full cost of such audit unless such audit correctly discloses a variance of more than 10% from the amount of the Net Sales or royalties or other payments 29 -29- due under this Agreement. In such case, DPM shall bear the full cost of such audit. DPM's obligation to retain such records shall expire two (2) years after a payment has been made. DPM shall include in each sublicense granted by it pursuant to this Agreement and in each distribution agreement with a Distributor in a Distributor Market, a provision requiring the Sublicensee and the Distributor to make reports to DPM, to keep and maintain books and records of sales made pursuant to such sublicense and distribution agreement, and to grant access to such books and records by DPM's independent accountant to the same extent and under the same obligations as required by DPM under this Agreement. SIGNAL shall treat all financial information subject to review under this Section in accordance with the confidentiality provisions of this Agreement, and shall cause its accounting firm to enter into an acceptable confidentiality agreement with DPM obligating it to retain all such financial information in confidence pursuant to such confidentiality agreement. 6.5 Taxes. All turnover and other taxes levied on account of the royalties and other payments accruing to SIGNAL under this Agreement shall be paid by SIGNAL for its own account, including taxes levied thereon as income to SIGNAL. If provision is made in law or regulation for withholding, such tax shall be deducted from the royalty or other payment made by DPM to the proper taxing authority and a receipt of payment of the tax secured and promptly delivered to SIGNAL. Each party agrees to assist the other party in claiming exemption from such deductions or withholdings under any double taxation or similar agreement or treaty from time to time in force. 6.6 Prohibited Payments. Notwithstanding any other provision of this Agreement, if DPM is prevented from paying any such royalty by virtue of the statutes, laws, codes or governmental regulations of the country from which the payment is to be made, then such royalty may be paid by depositing funds in the currency in which accrued to SIGNAL's account in a bank acceptable to Signal in the country whose currency is involved. ARTICLE 7 PATENT RIGHTS AND INFRINGEMENT 7.1 Ownership of Patent Rights. SIGNAL shall own all inventions invented solely by employees or agents of SIGNAL or its Affiliates in connection with the Collaboration and all Patent Rights claiming such inventions. DPM shall own all inventions invented solely by employees or agents of DPM or its Affiliates in connection with the Collaboration and all 30 -30- Patent Rights claiming such inventions. All inventions invented jointly by employees or agents of SIGNAL and DPM or their respective Affiliates in connection with the Collaboration, and all Patent Rights claiming such inventions shall be owned jointly by DPM and SIGNAL as Collaboration Patents Rights. Inventorship shall be determined under U.S. patent law. 7.2 Prosecution and Maintenance of Patent Rights. (a) It is the intention of the parties to secure broad patent protection for discoveries and inventions made in connection with the Collaboration. SIGNAL shall be responsible for the filing, prosecution and maintenance of all SIGNAL Patent Rights and all patent applications and patents covering any inventions owned solely by SIGNAL under Section 7.1. DPM shall be responsible for the filing, prosecution and maintenance of all patent applications and patents covering any inventions owned solely by DPM under Section 7.1. Each party shall consider in good faith the requests and suggestions of the other party with respect to strategies for filing and prosecuting such patent applications. The inventing party shall keep the other party informed of progress with regard to the filing, prosecution, maintenance, enforcement and defense of patents applications and patents subject to this Section 7.2(a). (b) In the case of Collaboration Patent Rights, the parties shall agree on the allocation of responsibility for the preparation, filing, prosecution, and maintenance of any such Collaboration Patent Rights. The party controlling a Collaboration Patent Right shall consult with the other party as to the preparation, filing, prosecution, and maintenance of such Collaboration Patent Right reasonably prior to any deadline or action with the U.S. Patent & Trademark Office or any foreign patent office, and shall furnish to the other party copies of all relevant documents reasonably in advance of such consultation. In the event that the party controlling a Collaboration Patent Right desires to abandon such Collaboration Patent Right, or if the party assuming control of a Collaboration Patent Right later declines responsibility for such Collaboration Patent Right, the controlling party shall provide reasonable prior written notice to the other party of such intention to abandon or decline responsibility, and such other party shall have the right, at its expense, to prepare, file, prosecute, and maintain any Collaboration Patent Rights. The costs for the preparation, filing, prosecution and maintenance of Collaboration Patent Rights shall be shared on a 50/50 basis; however, neither party shall be subject to any internal costs for work done in-house by the other party. (c) Each party will promptly disclose to the other party such inventions arising from or made in the performance of the Research Project and any patent or patent applications claiming such inventions, to the extent that such inventions are necessary or useful to the Research Project or the rights licensed hereunder. 31 -31- (d) In no event will the Signal Patent Rights be abandoned without DPM first being given an opportunity to maintain such Signal Patent Rights. In the event that SIGNAL decides not to continue the prosecution or maintenance of a patent application or patent within the Signal Patent Rights in a country, SIGNAL shall provide DPM with prior written notice of this decision and cooperate with DPM so as to provide DPM reasonable opportunity to assume full responsibility for the continued prosecution or maintenance of such patent application or patent. In such event that SIGNAL desires to discontinue maintenance or prosecution of the Signal Patent Rights, SIGNAL agree to then assign such SIGNAL Patent Rights to DPM at no cost. 7.3 Cooperation of the Parties. Each party agrees to cooperate fully in the preparation, filing, and prosecution of any Collaboration Patent Rights under this Agreement. Such cooperation includes, but is not limited to: (a) executing all papers and instruments, or requiring its employees or agents, to execute such papers and instruments, so as to effectuate the ownership of Patent Rights set forth in Section 7.1 above and to enable the other party to apply for and to prosecute patent applications in any country; and (b) promptly informing the other party of any matters coming to such party's attention that may affect the preparation, filing, or prosecution of any such patent applications. 7.4 Infringement by Third Parties. (a) SIGNAL and DPM each shall immediately give notice to the other of any potential infringement by a third party of any Signal Patent Rights or Collaboration Patent Rights in the Field of which they become aware or of any certification of which they become aware filed under the United States "Drug Price Competition and Patent Term Restoration Act of 1984" claiming that any Signal Patent Rights or Collaboration Patent Rights covering any Product are invalid or unenforceable or that infringement will not arise from the manufacture, use or sale of Product by a third party. (b) DPM as exclusive licensee with respect to the Signal Patent Rights will have the right in the Field to bring suit or other proceeding at its expense against the infringer in its own name or in the name of SIGNAL where necessary, after consultation with SIGNAL. SIGNAL shall be kept advised 32 -32- at all times of such suit or proceedings brought by DPM. SIGNAL may, in its discretion and at its expense, join DPM as party to the suit or other proceeding, provided that DPM shall retain control of the prosecution of such suit or proceedings in such event. DPM has the right to approve of any outside counsel selected by SIGNAL. SIGNAL agrees to cooperate with DPM in its efforts to protect Signal Patent Rights, including joining as a party where necessary. (c) If DPM does not bring suit or other proceeding against the infringer, SIGNAL may in its discretion, bring suit or other proceeding at its expense against the infringer, provided however, that SIGNAL shall first consult with DPM as to whether such act(s) by a third party reasonably constitute infringement and whether it is commercially advisable to bring such suit or proceeding, as reasonably determined by DPM. DPM shall be kept advised at all times of such suit or proceedings brought by SIGNAL. DPM may, in its discretion and at its expense, join SIGNAL as party to the suit or other proceeding, provided that SIGNAL shall retain control of the prosecution of such suit or proceedings in such event. SIGNAL has the right to approve of any outside counsel selected by DPM. DPM agrees to cooperate with SIGNAL in its efforts to protect SIGNAL Patent Rights, including joining as a party where necessary. (d) Neither party shall have the right to settle any patent infringement litigation under this Section 7.4 in a manner that diminishes the rights or interests of the other party without the consent of the other party. (e) Each party will bear its own expenses with respect to any suit or other proceeding against an infringer. Any recovery in connection with such suit or proceeding will first be applied to reimburse SIGNAL and DPM for their out-of-pocket expenses, including attorney's fees. The party controlling the suit will retain the balance of any recovery. However, if damages are awarded to DPM based on lost sales or profit then DPM shall pay to SIGNAL royalties that it would have paid had DPM made the sales. 7.5 Infringement of Third Party Rights. DPM and SIGNAL shall promptly notify the other in writing of any allegation by a Third Party that the activity of either of the parties in the Field infringes or may infringe the intellectual property rights of such Third Party. DPM shall have the first right to control any defense of such claim at its own expense and by counsel of its own choice, and SIGNAL shall have the right, at its own expense, to be represented in any such action by counsel of its own choice. If DPM fails to proceed in a timely fashion with regard to such defense, SIGNAL shall have the right to control any such defense of such claim at its 33 -33- own expense and by counsel of its own choice, and DPM shall have the right, at its own expense, to be represented in any such action by counsel of its own choice. Neither party shall have the right to settle any patent infringement litigation under this Section 7.5 in a manner that diminishes the rights or interests of the other party without the consent of such other party. 7.6 Patent Term Extension. SIGNAL shall cooperate with DPM in obtaining patent term restoration or supplemental protection certificates or their equivalents in any country with respect to the Signal Patent Rights. In the event that elections with respect to obtaining such patent term restoration, supplemental protection certificates or their equivalents are to be made, DPM shall have the right to make the election and SIGNAL agrees to abide by such election. ARTICLE 8 CONFIDENTIALITY 8.1 Nondisclosure. The Confidential Disclosure Agreement between the parties dated November 11, 1996, is hereby incorporated into this Agreement; and, the obligations therein will be further subject to the terms and conditions of this Agreement. During the Research Term and any Extended Research Term and for a period of five (5) years thereafter, each party will maintain all Confidential Information in trust and confidence and will not disclose any Confidential Information to any Third Party or use any Confidential Information for any purpose except (a) as expressly authorized by this Agreement, (b) as required by law or court order, or (c) to its Affiliates. Each party may use such Confidential Information only to the extent required to accomplish the purposes of this Agreement. Each party will use at least the same standard of care as it uses to protect proprietary or confidential information of its own to ensure that its Affiliates, employees, agents, consultants and other representatives do not disclose or make any unauthorized use of the Confidential Information. Each party will promptly notify the other upon discovery of any unauthorized use or disclosure of the Confidential Information. 8.2 Exceptions. Confidential Information shall not include any information which the receiving party can prove by competent evidence: (a) is now, or hereafter becomes, through no act or failure to act on the part of the receiving party, generally known or available; (b) is known by the receiving party at the time of receiving 34 -34- such information, as evidenced by its records; (c) is hereafter furnished to the receiving party by a Third Party, as a matter of right and without restriction on disclosure; (d) is independently developed by the receiving party without the aid, application or use of Confidential Information; or (e) is the subject of a written permission to disclose provided by the disclosing party. 8.3 Publications. Each party to this Agreement recognizes that the publication of papers regarding results of Collaboration hereunder, including oral presentations and abstracts, may be beneficial to both parties provided such publications are subject to reasonable controls to protect Confidential Information. In particular, it is the intent of the parties to maintain the confidentiality of any Confidential Information included in any foreign patent application until such foreign patent application has been published. Accordingly, each party shall have the right to review and approve any paper proposed for publication by the other party, including oral presentations and abstracts, which utilizes data generated from the Collaboration and/or includes Confidential Information of the other party. Before any such paper is submitted for publication, the party proposing publication shall deliver a complete copy to the other party at least sixty (60) days prior to submitting the paper to a publisher. The receiving party shall review any such paper and give its comments to the publishing party within twenty (20) days of the delivery of such paper to the receiving party. The publishing party shall comply with the other party's request to delete references to such other party's Confidential Information in any such paper and agrees to withhold publication of same for an additional ninety (90) days in order to permit the parties to obtain patent protection, if either of the parties deem it necessary, in accordance with the terms of this Agreement. With respect to oral presentation materials and abstracts, the parties shall make reasonable efforts to expedite review of such materials and abstracts, and shall return such items as soon as practicable to the publishing party with appropriate comments, if any, but in no event later than thirty (30) days from the date of delivery to the receiving party. 35 -35- ARTICLE 9 REPRESENTATIONS, WARRANTIES AND COVENANTS 9.1 Representations and Warranties. (a) Each party hereby represents and warrants that it is duly organized and validly existing under the laws of the state of its incorporation and that it has the corporate power and authority to enter into this Agreement and to carry out the provisions hereof. (b) Each party hereby represents and warrants that it is duly authorized to execute and deliver this Agreement and to perform its obligations hereunder. (c) Each party hereby represents and warrants (i) that this Agreement is a legal and valid obligation binding upon it and is enforceable in accordance with its terms, (ii) that the execution, delivery and performance of this Agreement by such party does not conflict with any agreement, instrument or understanding, oral or written, to which it is a party or by which it may be bound, nor violate any law or regulation of any court, governmental body or administrative or other agency having authority over it, (iii) and that it is not aware of any impediment which would inhibit its ability to perform the terms and conditions imposed on it by this Agreement. (d) Each party warrants that it has enforceable written agreements with all of its employees who receive Confidential Information under this Agreement assigning to such party ownership of all intellectual property rights created in the course of their employment. (e) SIGNAL warrants that the only license agreements it has as of the Effective Date within the scope of this Agreement are with [***] by which SIGNAL acquired rights to [***] library of compounds, and [***] HCV Constructs. (f) SIGNAL warrants that there is no infringement of [***] U.S. Patents granted prior to the Effective Date which relate to HCV protease. (g) SIGNAL warrants that it owns or possesses adequate licenses or other rights to use all SIGNAL Technology necessary to the conduct of the Collaboration. As of the Effective Date, no claim is pending or, to the best of SIGNAL's knowledge, threatened, to the effect that any SIGNAL Patent Rights owned or licensed by SIGNAL, or which SIGNAL otherwise has the right to use, is invalid or unenforceable by SIGNAL, ***Confidential Treatment Requested 36 -36- and, to the best of SIGNAL's knowledge, there is no basis for any such claim (whether or not pending or threatened). To the best of SIGNAL's knowledge, all SIGNAL Know-How developed by and belonging to SIGNAL for which patent protection has not been sought has been kept confidential. SIGNAL has not granted or assigned to any Third Party any right to manufacture, have manufactured, assemble or sell any Compound or Product. 9.2 Disclaimer of Warranties. Neither party guarantees the safety or usefulness of any Product. EXCEPT AS EXPRESSLY SET FORTH IN THIS AGREEMENT, NEITHER PARTY MAKES ANY REPRESENTATION OR WARRANTY TO THE OTHER PARTY OF ANY NATURE, EXPRESS OR IMPLIED, INCLUDING, WITHOUT LIMITATION, ANY WARRANTY OF NONINFRINGEMENT, MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE. 9.3 Indemnification. 9.3.1 Indemnification by SIGNAL. SIGNAL shall defend, indemnify, and hold harmless DPM and its directors, officers, agents, parent companies, affiliates, and employees, from and against any and all claim, loss, damage, liability, injury (including death), cost or expense, including without limitation expenses of litigation and reasonable attorneys' fees, in connection with any claims made or suits brought against DPM relating to this Agreement which are alleged to arise from the negligence, willful misconduct, or material breach of this Agreement by SIGNAL, its Affiliates, subcontractors or agents; provided however that SIGNAL shall not be obligated to provide indemnification hereunder to the extent that any such claim, loss, damage, liability, injury, cost or expense results from the negligence, willful misconduct, or material breach of this Agreement by DPM. 9.3.2 Indemnification by DPM. DPM shall at all times during the term of this Agreement and thereafter, indemnify, defend and hold SIGNAL, its directors, agents, officers, employees and affiliates, from and against any and all claim, loss, damage, liability, injury (including death), cost or expense, including without limitation expenses of litigation and reasonable attorneys' fees, in connection with any claims made or suits brought against SIGNAL relating to this Agreement and alleged to arise: (i) from the negligence, willful misconduct, or material breach of this Agreement by DPM, its Affiliates, subcontractors or agents or (ii) out of the death of or injury to any person or persons or out of any damage to property and resulting from the production, manufacture, sale, use, lease, 37 -37- consumption or advertisement of Product; provided however that DPM shall not be obligated to provide indemnification hereunder to the extent that any such claim, loss, damage, liability, injury, cost or expense results from the negligence, willful misconduct, or material breach of this Agreement by SIGNAL. 9.3.3 Procedure. Should a party or any of its officers, agents, parent companies, affiliates, or employees (the "Indemnitee") intend to claim indemnification under this Article, such Indemnitee shall promptly notify the other party (the "Indemnitor") in writing of any alleged loss, claim, damage, liability or action in respect of which the Indemnitee intends to claim such indemnification, and the Indemnitor shall be entitled to assume the defense thereof with counsel selected by the Indemnitor and approved by the Indemnitee, such approval not to be unreasonably withheld; provided, however, that if representation of Indemnitee by such counsel first selected by the Indemnitor would be inappropriate due to a conflict of interest between such Indemnitee and any other party represented by such counsel, then Indemnitor shall select other counsel for the defense of Indemnitee, with the fees and expenses to be paid by the Indemnitor, such other counsel to be approved by Indemnitee and such approval not to be unreasonably withheld. The indemnity agreement in this Article shall not apply to amounts paid in settlement of any loss, claim, damage, liability or action if such settlement is effected without the consent of the Indemnitor, which consent shall not be withheld unreasonably. The failure to deliver notice to the Indemnitor within a reasonable time after the commencement of any such action, if prejudicial to its ability to defend such action, shall relieve such Indemnitor of any liability to the Indemnitee under this Article, but the omission so to deliver notice to the Indemnitor will not relieve it of any liability that it may have to any Indemnitee otherwise than under this Article. The Indemnities under this Article, its employees and agents, shall cooperate fully with the Indemnitor and its legal representatives in the investigation of any action, claim or liability covered by this indemnification. Article 10 Term And Termination 10.1 Term. This Agreement shall commence as of the Effective Date and, unless sooner terminated as provided herein, shall expire as of the end of the Royalty Term. 10.2 Termination for Cause. Either party may terminate this Agreement upon sixty (60) days' written notice upon the occurrence of any 38 -38- of the following: (a) Upon or after the bankruptcy, insolvency, dissolution or winding up of the other party (other than dissolution or winding up for the purposes of reconstruction or amalgamation); or (b) Upon or after the breach of any material provision of this Agreement by the other party by causes and reasons within its control, as shown by credible evidence, if the breaching party has not commenced to cure such breach within sixty (60) days after notice thereof by the other party. 10.3 Effect of Expiration or Termination. (a) Expiration or termination of this Agreement shall not relieve the parties of any obligation accruing prior to such expiration or termination. Without limiting the foregoing, except as set forth in this Agreement, the obligations and rights of the parties under Articles 5 and 8, Sections 6.4, 9.2, 9.3 and 10.3 and Articles 12 and 13 shall survive termination or expiration of this Agreement. (b) Following the expiration of the Research Term and any Extended Research Term, (i) the parties will continue to collaborate on the same terms and conditions for Compounds and Products in development as of the last day of the Research Term and any Extended Research Term, (ii) the RMC will continue to manage the Research Project until the date on which the last Compound and Product in development as of the last day of the Research Term and any Extended Research Term commences a Phase I clinical trial, and (iii) without limitation, the rights and obligations of the parties with respect to such Products under Sections 4.1, 4.2, 4.4, 5.4, 5.5 and 5.6 and Articles 6 and 7 shall survive through the end of the Royalty Term. (c) Without limiting any remedies otherwise available to DPM, if DPM terminates this Agreement for cause pursuant to Section 10.2, (a) all licenses set forth in Article 4 shall continue for so long as DPM is not in breach of its obligations to pay to SIGNAL all milestone payments and royalty payments in accordance with this Agreement and complies with the provisions of Article 6 of this Agreement, and (b) SIGNAL shall return to DPM any Confidential Information of DPM. (d) Without limiting any remedies otherwise available to SIGNAL, if SIGNAL terminates this Agreement for cause pursuant to 39 -39- Section 10.2, (a) all licenses granted by SIGNAL to DPM hereunder shall terminate and revert to SIGNAL, and (b) DPM shall return to SIGNAL any Confidential Information of SIGNAL. 10.4. Failure to Pursue. If DPM is not diligently pursuing the development of at least one Product using good faith commercially reasonable efforts in accordance with industry standards and consistent with the usual practice followed by DPM in pursuing the development of its other similar pharmaceutical products, then SIGNAL shall have the right to terminate the license right granted to DPM pursuant to Article 4 only with respect to such Product which SIGNAL asserts is not being diligently pursued by DPM. SIGNAL shall not have the right to terminate under this Section 10.4 with respect to such Product unless (a) DPM is given ninety (90) days prior written notice by SIGNAL of SIGNAL's intent to terminate with respect to such Product, stating the reasons and justification for such termination and recommending steps which DPM should take in such development, and (b) DPM has not taken good faith commercially reasonable steps during such ninety (90) day period to diligently pursue development of such Product. Notwithstanding the foregoing, SIGNAL shall in no event have the right to terminate such license for such Product if the development of such Product is not being pursued on the basis that a competitive product is being diligently developed by DPM pursuant to this Agreement, or that such Product is deemed by DPM unlikely to yield satisfactory results in clinical trials or regulatory submissions, or that such Product is believed by DPM to be commercially unattractive. In the event SIGNAL disagrees with the reasons why DPM is not pursuing such Product, SIGNAL can so notify DPM and the further development and commercialization of such Product may be undertaken by SIGNAL at its risk and expense, and subject to SIGNAL negotiating a license with DPM under Collaboration Technology for such Product as set forth in Section 4.2, second paragraph. 10.5. Failure to Retain Qualified Scientists. DPM may terminate this Agreement upon ninety (90) days prior written notice in the event that SIGNAL is unable to retain sufficient qualified researchers to provide commercially reasonable support for the Research Project. ARTICLE 11 PUBLICITY 11.1 Publicity Review. DPM and SIGNAL will jointly discuss and agree, based on the principles of Section 11.2, on any statement to the 40 -40- public regarding the execution and the subject matter of this Agreement or any other aspect of this Agreement, except with respect to disclosures required by law or regulation. Promptly following the Effective Date, the parties shall issue a joint press release, which press release shall not refer to any contingent payments in aggregate. Neither party shall use the name of the other party in any public statement, prospectus, annual report, or press release without the prior written approval of the other party, which approval shall not be unreasonably withheld or delayed, provided, however, that both parties shall endeavor in good faith to give the other party a minimum of five business days to review such press release, prospectus, annual report, or other public statement; and provided, further, that either party may use the name of the other party in any public statement, prospectus, annual report, or press release without the prior written approval of the other party, if such party is advised by counsel that such disclosure is required to comply with applicable law. However, any such use of the name of the other party shall be submitted to that party in advance of such use in order to make any reasonable, good faith modifications. 11.2 Standards. In the discussion and agreement referred to in Section 11.1, the principles observed by DPM and SIGNAL will be accuracy, the requirements for confidentiality under Article 8, the advantage a competitor of DPM or SIGNAL may gain from any public or Third Party statements under Section 11.1, the requirements of disclosure under any securities laws or regulations of the United States, including those associated with public offerings, and the standards and customs in the pharmaceutical industry for such disclosures by companies comparable to DPM and SIGNAL. ARTICLE 12 DISPUTE RESOLUTION 12.1 Disputes. The parties recognize that disputes as to certain matters may from time to time arise which relate to either party's rights and/or obligations hereunder. It is the objective of the parties to establish procedures to facilitate the resolution of such disputes in an expedient manner by mutual cooperation and without resort to litigation. Any disputes arising between the parties relating to, arising out of or in any way connected with the Agreement or any term or condition hereof, or the performance by either party of its obligations hereunder (including any disputes between the representatives of SIGNAL and DPM on the RMC), whether before or after termination of the Agreement, ("Disputes") will be resolved as set forth in this Section. Any Dispute between 41 -41- representatives of SIGNAL and DPM shall be resolved by the RMC. Failing resolution of such Dispute by the RMC, or in the event of a Dispute between representatives of SIGNAL and DPM on the RMC, the Dispute will be presented to the chief executive officers of DPM and SIGNAL, who shall attempt in good faith to promptly resolve such Dispute. If such chief executive officers are unable to resolve such Dispute, any litigation instituted by DPM shall, unless otherwise agreed to in writing by SIGNAL, be filed in a California federal or state court and any litigation instituted by SIGNAL shall, unless otherwise agreed to in writing by DPM, be filed in a Delaware federal or state court. ARTICLE 13 MISCELLANEOUS 13.1 Activities Outside of Collaboration. Except as otherwise specifically provided herein, all activities of the parties outside of the Collaboration are outside of the scope of this Agreement and nothing herein is intended to limit SIGNAL or its Affiliates from using the SIGNAL Technology for other purposes. 13.2 Assignment. (a) Either party may assign any of its rights or obligations under this Agreement in any country to any Affiliates; provided, however, that such assignment shall not relieve the assigning party of its responsibilities for performance of its obligations under this Agreement. (b) This Agreement may not be assigned or otherwise transferred by either party, except to Affiliates, without the consent of the other party; provided, however, that DPM or SIGNAL may, without such consent, assign this Agreement and its rights and obligations hereunder to its Affiliates and parent corporations, or in connection with the transfer or sale of all or substantially all of its business, or in the event of its merger or consolidation or change in control or similar transaction; and provide further, that in the event of such a transaction, no intellectual property rights of the acquiring corporation shall be included in the technology licensed hereunder except with the approval of the acquiring corporation. (c) This Agreement shall be binding upon and inure to the benefit of the successors and permitted assigns of the parties. Any assignment not in accordance with this Agreement shall be void. 42 -42- 13.3 Force Majeure. Neither party shall lose any rights hereunder or be liable to the other party for damages or losses on account of failure of performance by the defaulting party if the failure is occasioned by government action, war, fire, explosion, flood, strike, lockout, embargo, act of God, or any other similar cause beyond the control of the defaulting party; provided, however, that the party claiming force majeure has exerted all reasonable efforts to avoid or remedy such force majeure. 13.4 Notices. Any notice or other communication pursuant to this Agreement shall be sufficiently made or given on the date of mailing if sent to such party by facsimile on such date, with paper copy being sent by certified first class mail, postage prepaid, or by next day express delivery service, addressed to it at its address below (or such address as it shall designate by written notice given to the other party). In the case of DPM: President, DuPont Merck Research Laboratories The DuPont Merck Pharmaceutical Company Experimental Station, Bldg. 400 Wilmington, Delaware 19880-0400 (fax number: 302-992-3040) with copy to: Associate General Counsel Legal Department The DuPont Merck Pharmaceutical Company 974 Centre Road, DuPont Merck Plaza, WR722 Wilmington, Delaware 19807-2802 (fax number: 302-892-8536) In the case of SIGNAL: Chief Executive Officer Signal Pharmaceuticals Inc. 5555 Oberlin Drive San Diego, CA 92121 43 -43- (fax number: 619-558-7513) with a copy to: Frederick T. Muto, Esquire Cooley Godward LLP 4365 Executive Drive San Diego, CA 92121 (fax number: 619-453-3555) 13.5 Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of Delaware without reference to any rules of conflict of laws, except that all questions concerning the construction or effect of patent rights will be construed in accordance with the laws of the country granting those rights. 13.6 Waiver. Except as specifically provided for herein, the waiver from time to time by either of the parties of any of their rights or their failure to exercise any remedy shall not operate or be construed as a continuing waiver of same or of any other of such party's rights or remedies provided in this Agreement. 13.7 Severability. If any term, covenant or condition of this Agreement or the application thereof to any party or circumstance shall, to any extent, be held to be invalid or unenforceable, then (a) the remainder of this Agreement, or the application of such term, covenant or condition to parties or circumstances other than those as to which it is held invalid or unenforceable, shall not be affected thereby and each term, covenant or condition of this Agreement shall be valid and be enforced to the fullest extent permitted by law; and (b) the parties hereto covenant and agree to renegotiate any such term, covenant or application thereof in good faith in order to provide a reasonably acceptable alternative to the term, covenant or condition of this Agreement or the application thereof that is invalid or unenforceable, it being the intent of the parties that the basic purposes of this Agreement are to be effectuated. 13.8 Independent Contractors. It is expressly agreed that SIGNAL and DPM shall be independent contractors and that the relationship between the two parties shall not constitute a partnership or agency of any kind. Neither SIGNAL nor DPM shall have the authority to make any statements, representations or commitments of any kind, or to take any action, which shall be binding on the other, without the prior written 44 -44- authorization of the party to do so. 13.9 Entire Agreement. This Agreement sets forth all of the covenants, promises, agreements, warranties, representations, conditions and understandings between the parties hereto with respect to the subject matter hereof and supersedes and terminates all prior agreements and understanding between the parties, except all obligations of the parties under the Confidential Disclosure Agreement referenced in Section 8.1 survive and are subject to further terms and conditions of this Agreement. There are no covenants, promises, agreements, warranties, representations conditions or understandings, either oral or written, between the parties other than as set forth herein and therein. No subsequent alteration, amendment, change or addition to this Agreement shall be binding upon the parties hereto unless reduced to writing and signed by the respective authorized officers of the parties. 13.10 Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. 13.11 EEOC Compliance. SIGNAL agrees to comply with the following Equal Employment Opportunity Compliance statement: (a) SIGNAL will not discriminate against any individual performing of behalf of SIGNAL under this Agreement because of race, religion, sex, age within statutory limits, disability, national origin, or veteran status. SIGNAL agrees to post in conspicuous places notices setting forth the provisions of this non-discrimination clause. (b) SIGNAL will, in all solicitation or advertisements for candidates or applicants for employment with SIGNAL and involving the performance of this Agreement, state that all qualified applicants will receive consideration for employment without regard to race, religion, sex, age within statutory limits, national origin, disability or veteran status. (c) In the event of SIGNAL non-compliance with these non-discrimination clauses or with any laws, rules, regulations, or orders, this Agreement may be canceled, terminated, or suspended at the discretion of DPM in accordance with Section 10.2. SIGNAL warrants that it has complied with all applicable laws, rules, orders and regulations covering services specified herein, including but not limited to Executive Order 11246 (and the rules and regulations promulgated thereunder), the Rehabilitation Act of 1973 and the Vietnam Era Veterans Readjustment Act of 1974. 45 -45- 13.12 Use of Trade Names. Subject to Section 11.1, neither party will, without prior written consent of the other party, use any trademark or trade name owned by the other party, or owned by an Affiliate or Parent corporation of the other party, in any publication, publicity, advertising, or otherwise. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed in duplicate by their duly authorized officers as of the date first above written. THE DUPONT MERCK PHARMACEUTICAL SIGNAL PHARMACEUTICALS, INC. COMPANY By: [SIG] By: /s/ ALAN LEWIS --------------------------------- ----------------------------------- Name: President & CEO Name: Alan Lewis ------------------------------- --------------------------------- Title: December 26, 1997 Title: PRES/CEO ------------------------------ -------------------------------- 46 -46- Appendix 1 [***] ***Confidential Treatment Requested 47 Appendix 2 List of HCV Constructs [***] ***Confidential Treatment Requested 48 -49- Appendix 3 Signal Compound Libraries [***] ***Confidential Treatment Requested 49 -50- Appendix 4 Example 1 [***] ***Confidential Treatment Requested 50 -51- Appendix 5 Signal License Agreement [***] ***Confidential Treatment Requested 51 -52- Appendix 6 Signal Patent Rights None as of the Effective Date. 52 -53- Schedule A Collaboration Patent Rights or Signal Patent Rights None as of the Effective Date EX-10.50 52 EXHIBIT 10.50 1 *** Text Omitted and Filed Separately Confidential Treatment Requested Under 17 C.F.R. Sections 200.80, 200.83 and 230.406. EXHIBIT 10.50 STOCK PURCHASE AGREEMENT BETWEEN SIGNAL PHARMACEUTICALS, INC. AND THE DUPONT MERCK PHARMACEUTICAL COMPANY 2 SIGNAL PHARMACEUTICALS, INC. STOCK PURCHASE AGREEMENT THIS STOCK PURCHASE AGREEMENT (the "Agreement") is made as of December __, 1997 by and between SIGNAL PHARMACEUTICALS, INC., a California corporation with its principal office at 5555 Oberlin Drive, San Diego, CA 92121 ("SIGNAL") and THE DUPONT MERCK PHARMACEUTICAL COMPANY, a Delaware general partnership with its principal office at DuPont Merck Plaza, Centre Road - Walnut Run, Wilmington, DE 19805 ("DPM"). RECITALS WHEREAS, SIGNAL and DPM have entered into that certain Collaborative Research and License Agreement of even date herewith (the "Collaboration Agreement"); and WHEREAS, in connection with, and as a condition of DPM entering into, the Collaboration Agreement, SIGNAL desires to sell to DPM, and DPM desires to purchase from SIGNAL, shares of SIGNAL's capital stock, on the terms and subject to the conditions set forth in this Agreement. NOW, THEREFORE, in consideration of the foregoing recitals and the mutual covenants and agreements contained herein, the parties hereto, intending to be legally bound, do hereby agree as follows: 1. PURCHASE AND SALE OF SHARES. 1.1 PURCHASE AND SALE OF MILESTONE SHARES. Subject to the terms and conditions hereof, upon SIGNAL's achievement of the milestone set forth in Section 5.4.2 of the Collaboration Agreement (the "Milestone Closing Event"), DPM shall purchase from SIGNAL, and SIGNAL shall issue and sell to DPM, shares of SIGNAL's Preferred Stock (unless an IPO, as described below, has been completed, in which case such stock shall be Common Stock) having an aggregate value of [***] (the "Milestone Shares") at a purchase price (the "Milestone Share Price") which is equal to [***]; provided, however, that if such Milestone Closing Event occurs more than six (6) months following an equity purchase as described in (i) and (ii), then DPM will purchase the Milestone Shares at a 1. ***Confidential Treatment Requested 3 [***] and provided further, that in the event that SIGNAL has completed an initial public offering of its Common Stock (the "IPO") as of the Milestone Closing Event, the Milestone Shares shall be purchased at a Milestone Share Price equal to the average closing price per share for Common Stock of SIGNAL on the Nasdaq National Market (or any other national securities exchange on which the Common Stock of SIGNAL is then traded) for the thirty (30) trading days immediately preceding the Milestone Closing Date (as defined below). The rights, preferences and privileges of any SIGNAL Preferred Stock that may be issued to DPM under this Section 1.1 would be substantially the same as SIGNAL's Series D Preferred Stock, except that the applicable provisions regarding dividends, liquidation preference and conversion would reflect the original issue price of the shares issued to DPM. 1.2 PURCHASE AND SALE OF IPO SHARES. Subject to the terms and conditions hereof, in the event that, at any time during the Research Term (as such term is defined in the Collaboration Agreement), SIGNAL completes its IPO in which SIGNAL realizes aggregate net proceeds in excess of $15 million, DPM shall purchase from SIGNAL, and SIGNAL shall issue and sell to DPM, shares of SIGNAL's Common Stock having an aggregate value of Two Million Dollars ($2,000,000) (the "IPO Shares") to be issued and sold in a private placement to close simultaneously with the completion of the IPO at the price per share to the public in the IPO. 2. CLOSING DATE; DELIVERY. 2.1 MILESTONE CLOSING. Subject to the terms of Section 5, the closing of the sale and purchase of the Milestone Shares under this Agreement (the "Milestone Closing") shall be held on the date specified by the parties within thirty (30) days after the Milestone Closing Event (the "Milestone Closing Date") at the offices of Cooley Godward LLP ("Cooley Godward"), 4365 Executive Drive, Suite 1100, San Diego, California, or at such time and place as SIGNAL and DPM may agree. 2.2 IPO CLOSING. Subject to the terms of Section 5, the closing of the sale and purchase of the IPO Shares under this Agreement (the "IPO Closing") shall be held at the time and date of the completion of the IPO (the "IPO Closing Date") at the offices of Cooley Godward, 4365 Executive Drive, Suite 1100, San Diego, California, or at such time and place as SIGNAL and DPM may agree. 2.3 DELIVERY. At the IPO Closing and, if applicable, the Milestone Closing, subject to the terms and conditions hereof, SIGNAL shall deliver to DPM a stock certificate, registered in the name of DPM, representing, respectively, the IPO Shares and the Milestone Shares, dated as of the IPO Closing Date and the Milestone Closing Date, respectively, against payment of the purchase price therefor by wire transfer, unless other means of payment shall have been agreed upon by SIGNAL and DPM. 2. ***Confidential Treatment Requested 4 3. REPRESENTATIONS AND WARRANTIES OF SIGNAL. Subject to and except as disclosed by SIGNAL in the Schedule of Exceptions attached hereto as Exhibit A, SIGNAL hereby represents and warrants to DPM as follows: 3.1 ORGANIZATION, GOOD STANDING AND QUALIFICATION. SIGNAL is a corporation duly organized, validly existing and in good standing under the laws of the State of California and has all requisite corporate power and authority to carry on its business as now conducted and as proposed to be conducted. SIGNAL is duly qualified to transact business and is in good standing in each jurisdiction in which the failure so to qualify would have a material adverse effect on its business or properties. 3.2 AUTHORIZATION. All corporate action on the part of SIGNAL, its officers, directors and stockholders necessary for the authorization, execution and delivery of this Agreement has been taken. SIGNAL has the requisite corporate power to enter into this Agreement and carry out and perform its obligations under the terms of this Agreement. At the IPO Closing and the Milestone Closing, SIGNAL will have the requisite corporate power to sell the IPO Shares and the Milestone Shares, respectively, to be sold at each such Closing. 3.3 DUE EXECUTION. This Agreement has been duly authorized, executed and delivered by SIGNAL and, upon due execution and delivery by DPM, this Agreement will be a valid and binding agreement of SIGNAL, enforceable in accordance with its terms, except as enforceability may be limited by bankruptcy, insolvency, reorganization, moratorium or similar laws affecting creditors' rights generally or by equitable principles. 3.4 NO CONFLICT WITH OTHER INSTRUMENTS. The execution, delivery and performance of this Agreement will not result in any violation of, be in conflict with, or constitute a default under, with or without the passage of time or the giving of notice: (a) any provision of SIGNAL's Articles of Incorporation, as amended, or Bylaws; (b) any provision of any judgment, decree or order to which SIGNAL is a party or by which it is bound; (c) any material contract or agreement to which SIGNAL is a party or by which it is bound; or (d) any statute, rule or governmental regulation applicable to SIGNAL. 3.5 ARTICLES OF INCORPORATION; BYLAWS. SIGNAL has delivered to DPM true, correct and complete copies of the Articles of Incorporation and Bylaws of SIGNAL, as in effect on the date hereof. 3.6 CAPITALIZATION. (a) The authorized capital stock of SIGNAL consists, or will consist prior to the Milestone Closing, of: 3. 5 (i) 24,453,931 shares of Preferred Stock (the "Preferred Stock"), of which 2,626,892 shares have been designated Series A Preferred Stock, all of which are issued and outstanding, of which 2,875,000 shares have been designated Series B Preferred Stock, all of which are issued and outstanding, of which 8,791,433 shares have been designated Series C Preferred Stock, of which 8,791,432 are issued and outstanding, of which 250,000 shares have been designated Series C-1 Preferred Stock, all of which are subject to issued and outstanding warrants, of which 732,601 shares have been designated Series D Preferred Stock, all of which are issued and outstanding, of which 6,455,493 shares have been designated Series E Preferred Stock, all of which are issued and outstanding, and of which 2,722,513 shares have been designated Series F Preferred Stock, all of which are issued and outstanding. The rights, privileges and preferences of the Series A, Series B, Series C, Series C-1, Series D, Series E and Series F Preferred Stock will be as stated in the Company's Amended and Restated Articles of Incorporation. (ii) 35,000,000 shares of common stock ("Common Stock"), of which 2,481,014 shares are issued and outstanding. (iii) Except for (A) the conversion privileges of the Series A Preferred Stock, the Series B Preferred Stock, the Series C Preferred Stock, the Series C-1 Preferred Stock, the Series D Preferred Stock, the Series E Preferred Stock and the Series F Preferred Stock, (B) 2,500,000 shares of Common Stock reserved for issuance pursuant to the Company's 1993 Stock Option Plan, of which 1,428,225 shares are subject to outstanding options and of which 1,015,014 shares are issued and outstanding, (C) 550,000 shares of Common Stock reserved for issuance pursuant to the Company's 1993 Founders' Stock Option Plan, 159,000 of which are subject to outstanding options and of which 373,000 shares are issued and outstanding, and (D) 1,000,000 shares of Common Stock reserved for issuance pursuant to the Company's 1997 Stock Option Plan, of which 774,870 shares are subject to outstanding options and 2,500 of which are issued and outstanding, there are not outstanding any options, warrants, rights (including conversion or preemptive rights) or agreements for the purchase or acquisition from the Company of any shares of its capital stock. The Company is not a party or subject to any agreement or understanding, and, to the Company's knowledge, there is no agreement or understanding between any persons and/or entities, which affects or relates to the voting or giving of written consents with respect to any security or by a director of the Company. (b) In the event of an IPO, SIGNAL will update the capitalization information set forth in subsection (a) above. 3.7 VALID ISSUANCE OF SHARES. The IPO Shares, and the Milestone Shares, when issued, sold and delivered in accordance with the terms hereof for the consideration set forth herein, will be duly authorized, validly issued, fully paid and nonassessable and, 4. 6 based in part upon the representations of DPM in this Agreement, will be issued in compliance with all applicable federal and state securities laws. 3.8 ABSENCE OF LITIGATION. There is no action, suit, proceeding nor, to the best of its knowledge, any investigation pending or currently threatened against SIGNAL that questions the validity of this Agreement or the Collaboration Agreement. 3.9 GOVERNMENTAL CONSENTS. No consent, approval, order or authorization of, or registration, qualification, designation, declaration or filing with, any federal, state, local or provincial governmental authority on the part of SIGNAL is required in connection with the consummation of the transactions contemplated by this Agreement, except for notices required or permitted to be filed with certain state and federal securities commissions after the IPO Closing and the Milestone Closing, which notices will be filed on a timely basis. 3.10 FINANCIAL INFORMATION. SIGNAL has provided to DPM audited financial statements (balance sheet and statement of operations) of SIGNAL as of and for the year ended December 31, 1996, and unaudited financial statements as of and for the nine-month period ended September 30, 1997 ("Financial Statements"). The Financial Statements have been prepared in accordance with generally accepted accounting principles consistently applied and fairly represent the financial position and operational results of SIGNAL as of the dates thereof. 4. REPRESENTATIONS AND WARRANTIES OF DPM. DPM hereby represents and warrants to SIGNAL as follows: 4.1 ORGANIZATION, GOOD STANDING AND QUALIFICATION. DPM is a general partnership duly formed and validly existing under the laws of the State of Delaware and has all requisite partnership power and authority to carry on its business as now conducted and as proposed to be conducted. DPM is duly qualified to transact business and is in good standing in each jurisdiction in which the failure so to qualify would have a material adverse effect on its business or properties. 4.2 AUTHORIZATION. DPM has the requisite partnership power to enter into this Agreement, to carry out and perform its obligations under the terms of this Agreement and, at the IPO Closing and the Milestone Closing, will have the requisite partnership power to purchase the IPO Shares and the Milestone Shares, respectively, to be purchased at each such Closing. 4.3 DUE EXECUTION. This Agreement has been duly authorized, executed and delivered by DPM, and, upon due execution and delivery by SIGNAL, this Agreement will be a valid and binding agreement of DPM, enforceable in accordance with its terms, 5. 7 except as enforceability may be limited by bankruptcy, insolvency, reorganization, moratorium or similar laws affecting creditors' rights generally or by equitable principles. 4.4 INVESTMENT REPRESENTATIONS. (a) DPM is acquiring the IPO Shares and the Milestone Shares for its own account, not as nominee or agent, for investment and not with a view to, or for resale in connection with, any distribution or public offering thereof within the meaning of the Securities Act of 1933, as amended (the "Securities Act"). By executing this Agreement, DPM further represents that it does not have any contract, undertaking, agreement or arrangement with any person to sell, transfer or grant participation to such person or to any third person, with respect to any of the IPO Shares or the Milestone Shares. (b) DPM understands that (x) the IPO Shares and the Milestone Shares have not been registered under the Securities Act by reason of a specific exemption therefrom, that such securities must be held by it indefinitely and that DPM must, therefore, bear the economic risk of such investment indefinitely, unless a subsequent disposition thereof is registered under the Securities Act or is exempt from such registration; (y) each certificate representing the IPO Shares and the Milestone Shares will be endorsed with the following legends: (i) THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED. THEY MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT AS TO THE SECURITIES UNDER SAID ACT OR AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED. (ii) Any legend required to be placed thereon under applicable state securities laws; and (z) SIGNAL will instruct any transfer agent not to register the transfer of either the IPO Shares (or any portion thereof) or the Milestone Shares (or any portion thereof) unless the conditions specified in the foregoing legends are satisfied, until such time as a transfer is made, pursuant to the terms of this Agreement, and in compliance with Rule 144 or pursuant to a registration statement or, if the opinion of counsel referred to above is to the further effect that such legend is not required in order to establish compliance with any provisions of the Securities Act or this Agreement. (c) DPM has been furnished with all information it considers necessary or appropriate for deciding whether to purchase the IPO Shares and the Milestone Shares. DPM has been afforded the opportunity to ask questions and receive answers from 6. 8 SIGNAL regarding the terms and conditions of the offering of the IPO Shares and the Milestone Shares. (d) DPM is an investor in securities of companies in the development stage and acknowledges that it can bear the economic risk of its investment and has such knowledge and experience in financial or business matters that it is capable of evaluating the merits and risks of the investment in the IPO Shares and the Milestone Shares. (e) DPM is an "accredited investor" as such term is defined in Rule 501 of the General Rules and Regulations prescribed by the Securities and Exchange Commission pursuant to the Securities Act, and DPM was not formed for the specific purpose of acquiring the IPO Shares or the Milestone Shares. 5. CONDITIONS TO CLOSING. 5.1 CONDITIONS TO OBLIGATIONS OF DPM AT CLOSING. DPM's obligation to purchase the IPO Shares at the IPO Closing and the Milestone Shares at the Milestone Closing is subject to the fulfillment to DPM's satisfaction, on or prior to the IPO Closing or the Milestone Closing, as applicable, of all of the following conditions, any of which may be waived by DPM: (a) REPRESENTATIONS AND WARRANTIES TRUE; PERFORMANCE OF OBLIGATIONS. The representations and warranties made by SIGNAL in Section 3 hereof, as modified by the Schedule of Exceptions, shall be true and correct in all material respects on the dates of the IPO Closing or the Milestone Closing, as applicable, with the same force and effect as if they had been made on and as of said dates; provided, however, that the Schedule of Exceptions and the representations and warranties shall be modified as required to reflect changes occurring between the date hereof and the date of the IPO Closing or Milestone Closing, as applicable; provided, further, that, in the event that any modification to the Schedule of Exceptions or the representations and warranties (excluding the representations and warranties set forth in Sections 3.6, 3.8 and 3.10) necessary to make such representations and warranties true and correct in all material respects on the date of the IPO Closing and the Milestone Closing shall be indicative of a materials adverse change in the business, financial condition, operations, property or affairs of SIGNAL, the condition to closing set forth in this Section 5.1(a) shall be deemed to be unsatisfied and DPM shall have no obligation to purchase the IPO Shares or the Milestone Shares, as the case may be. SIGNAL shall have performed and complied with all obligations and conditions herein required to be performed or complied with by it on or prior to the IPO Closing or the Milestone Closing, as applicable. A certificate duly executed by an officer of SIGNAL, to the effect of the foregoing, shall be delivered to DPM on the IPO Closing or the Milestone Closing, as applicable. 7. 9 (b) PROCEEDINGS AND DOCUMENTS. All corporate and other proceedings of SIGNAL in connection with the transactions contemplated at the IPO Closing or Milestone Closing, as applicable, and all documents and instruments incident to such transactions shall be reasonably satisfactory in substance and form to DPM, and DPM shall have received all such counterpart originals or certified or other copies of such documents as it may reasonably request. (c) OPINION OF SIGNAL'S COUNSEL. DPM shall have received an opinion dated as of the IPO Closing Date or the Milestone Closing Date, as applicable from Cooley Godward LLP, counsel to SIGNAL, in the form attached hereto as Exhibit B. 5.2 CONDITIONS TO OBLIGATIONS OF SIGNAL. SIGNAL's obligation to issue and sell the IPO Shares at the IPO Closing and, if applicable, the Milestone Shares at the Milestone Closing is subject to the fulfillment to SIGNAL's satisfaction, on or prior to the IPO Closing or the Milestone Closing, as applicable, of the following conditions, any of which may be waived by SIGNAL: (a) REPRESENTATIONS AND WARRANTIES TRUE; PERFORMANCE OF OBLIGATIONS. The representations and warranties made by DPM in Section 4 hereof shall be true and correct in all material respects on the dates of the IPO Closing and the Milestone Closing, as applicable, with the same force and effect as if they had been made on and as of said dates; provided, however, that the representations and warranties shall be modified as required to reflect changes occurring between the date hereof and the date of the IPO Closing or Milestone Closing, as applicable; provided, further, that, in the event that any modification to the representations and warranties necessary to make the representations and warranties true and correct in all material respects on the dates of the IPO Closing and the Milestone Closing shall be indicative of a material adverse change in the ability of DPM to consummate the transactions contemplated hereby, the condition to closing set forth in this Section 5.2(a) shall be deemed to be unsatisfied and SIGNAL shall have no obligation to issue and sell the IPO Shares or the Milestone Shares, as the case may be. DPM shall have performed and complied with all obligations and conditions herein required to be performed or complied with by it on or prior to the IPO Closing or the Milestone Closing, as applicable. A certificate duly executed by an officer of DPM, to the effect of the foregoing, shall be delivered to SIGNAL on the IPO Closing or the Milestone Closing, as applicable. (b) PROCEEDINGS AND DOCUMENTS. All partnership and other proceedings of DPM in connection with the transactions contemplated at the IPO Closing or Milestone Closing, as applicable, and all documents and instruments incident to such transactions shall be reasonably satisfactory in substance and form to SIGNAL, and 8. 10 SIGNAL shall have received all such counterpart originals or certified or other copies of such documents as it may reasonably request. (c) PAYMENT OF PURCHASE PRICE. DPM shall have tendered delivery of the purchase price for the IPO Shares specified in Section 1.2 at the IPO Closing or the purchase price for the Milestone Shares specified in Section 1.1 at the Milestone Closing by wire transfer to account number 4734-943186 at Wells Fargo Bank, 401 B Street, Suite 2201, San Diego, California 92101 (ABA# 121000248) or such other account as SIGNAL shall indicate by written notice to DPM. 6. ADDITIONAL AGREEMENTS. 6.1 STANDSTILL PROVISION. From and after the date of the first to occur of the IPO Closing or the Milestone Closing, DPM shall not, and shall cause its affiliates not to, in any manner, singly or as part of a partnership, limited partnership, syndicate or other "Group" (within the meaning of Section 13(d)(3) of the Securities Exchange Act of 1934, as amended (the "Securities Exchange Act")), directly or indirectly, acquire, or offer or agree to acquire, record ownership or beneficial ownership of any shares of capital stock of SIGNAL, any securities convertible into or exchangeable for capital stock or any other right to acquire capital stock from SIGNAL or any other person, without the prior written consent of SIGNAL; provided, however, that this clause shall not apply to (i) the IPO Shares and the Milestone Shares, (ii) any securities issued with respect to the IPO Shares and the Milestone Shares pursuant to a stock split, stock dividend, recapitalization or reclassification and (iii) any securities obtained or purchased by DPM pursuant to rights set forth in this Agreement. This Section 6.1 shall terminate as to the IPO Shares and the Milestone Shares ten (10) years from the IPO Closing Date and the Milestone Closing Date, respectively. 6.2 MARKET STAND-OFF PROVISION. DPM agrees that, during the period of duration specified by SIGNAL and an underwriter of Common Stock or other securities of SIGNAL following the effective date of a registration statement of SIGNAL filed under the Securities Act (which period shall not exceed 180 days), DPM shall not, to the extent requested by SIGNAL, directly or indirectly sell, contract to sell (including, without limitation, any short sale), grant any option to purchase or otherwise transfer or dispose of any securities of SIGNAL held by it at any time during such period. In order to enforce the provisions of this Section 6.2, SIGNAL may impose stop-transfer instructions with respect to the securities held by DPM that are subject to the foregoing restriction until the end of such period. 9. 11 7. REGISTRATION RIGHTS. 7.1 CERTAIN DEFINITIONS. When used in this Section 7 of this Agreement, the following terms shall have the following respective meanings: "COMMISSION" shall mean the Securities and Exchange Commission or any other federal agency at the time administering the Securities Act. "FORM S-3" shall mean Form S-3 under the Securities Act as in effect on the date of this Agreement, or any substantially similar, equivalent or successor form under the Securities Act. "HOLDER" shall mean DPM or any transferee of registration rights under Section 7.9 hereof who then holds any outstanding Registrable Securities. The terms "REGISTER," "REGISTERED" and "REGISTRATION" refer to a registration effected by preparing and filing a registration statement in compliance with the Securities Act, and the declaration or ordering of the effectiveness of such registration statement. "REGISTRABLE SECURITIES" means: (i) the Milestone Shares, if such shares are Common Stock of SIGNAL (or, if the Milestone Shares are shares of Preferred Stock of SIGNAL, the shares of SIGNAL Common Stock issued or issuable upon conversion of the Milestone Shares); (ii) the IPO Shares; and (iii) shares of SIGNAL Common Stock issued in respect of the shares of Common Stock referred to under the foregoing clauses (i) and (ii) by reason of any stock split, stock dividend, recapitalization or similar event which have not been sold to the public. "REGISTRATION EXPENSES" shall mean all expenses incurred by SIGNAL in complying with Sections 7.2 and 7.3 hereof, including, without limitation, all registration, qualification and filing fees, printing expenses, escrow fees, fees and disbursements of counsel, blue sky fees and expenses, and the expense of any special audits incident to or required by any such registration (but excluding the compensation of regular employees of SIGNAL which shall be paid in any event by SIGNAL). "SELLING EXPENSES" shall mean all underwriting discounts and selling commissions applicable to the applicable sale. 7.2 COMPANY REGISTRATION. (a) If, at any time or from time to time, SIGNAL shall determine to register any of its securities, either for its own account or the account of a security holder or holders exercising their respective demand registration rights, other than a registration relating solely to employee benefit plans on Form S-8 or similar forms which may be 10. 12 promulgated in the future or a registration on Form S-4 or similar forms which may be promulgated in the future relating solely to a Commission Rule 145 or similar transaction, SIGNAL will (i) promptly give to each Holder written notice thereof and (ii) include in such registration (and any related qualification under Blue Sky laws or other compliance), and in any underwriting involved therein, all Registrable Securities of such Holders as specified in a written request or requests made within 15 days after receipt of such written notice from SIGNAL. (b) If the registration of which SIGNAL gives notice is for a registered public offering involving an underwriting, SIGNAL shall so indicate in the notice given pursuant to Section 7.2(a). In such event the right of any Holder to registration pursuant to this Section 7.2 shall be conditioned upon such Holder's agreeing to participate in such underwriting and in the inclusion of such Holder's Registrable Securities in the underwriting to the extent provided herein. All Holders proposing to distribute their securities through such underwriting shall (together with SIGNAL and the other holders distributing their securities through such underwriting) enter into an underwriting agreement in customary form with the underwriter or underwriters selected for such underwriting by SIGNAL or by other holders exercising any demand registration rights. If any Holder disapproves of the terms of any such underwriting, such Holder may elect to withdraw therefrom by written notice to SIGNAL and the underwriter. Any securities excluded or withdrawn from such underwriting shall be withdrawn from such registration. Notwithstanding any other provision of this Section 7.2, if the underwriter determines that marketing factors require a limitation of the number of shares to be underwritten, the underwriter may exclude some or all of the shares of Registrable Securities from such registration and underwriting; provided, however, that there shall first be excluded shares proposed to be included by holders not possessing legal rights to include the same pursuant to this Section 7.2 or any similar provision. 7.3 FORM S-3 REGISTRATION RIGHTS. After the IPO, SIGNAL shall use its best efforts to qualify for registration on Form S-3, and to that end SIGNAL shall use its best efforts to comply with the reporting requirements of the Securities Exchange Act of 1934, as amended (the "EXCHANGE Act"), within twelve (12) months following the effective date of the IPO. After SIGNAL has qualified for the use of Form S-3, and subject to the provisions of Section 7.10, each Holder shall have the right to request registrations on Form S-3 (such requests shall be in writing and shall state the number of shares of Registrable Securities to be disposed of and the intended method of disposition of such shares by each such Holder), subject only to the following limitations: (a) SIGNAL shall not be obligated to cause a registration on Form S-3 to become effective prior to one hundred eighty (180) days following the effective date of a SIGNAL-initiated registration (other than a registration effected solely to qualify an employee benefit plan or to effect a business combination pursuant to Rule 145); 11. 13 (b) SIGNAL shall not be required to effect a registration pursuant to this Section 7.3 unless the Holder or Holders requesting such a registration propose to dispose of shares of Registrable Securities having an aggregate disposition price (before deduction of underwriting discounts and expenses of sale) of at least $1,000,000; (c) SIGNAL shall not be required to effect a registration pursuant to this Section 7.3 if SIGNAL shall furnish to the requesting Holders a certificate signed by the President of SIGNAL stating that in the good faith judgment of the Board of Directors of SIGNAL it would be seriously detrimental to SIGNAL or its stockholders for the registration statement to be filed at the date filing would be required, in which case SIGNAL shall have an additional period of not more than one hundred twenty (120) days within which to file such registration statement; provided, however, that SIGNAL shall not use this right more than once in any twelve (12) month period; and (d) SIGNAL shall not be required to effect a registration pursuant to this Section 7.3 more often than once in any twelve (12) month period. SIGNAL shall give notice to all Holders of the receipt of a request for registration pursuant to this Section 7.3 and shall use its best efforts to cause all Registrable Securities that such Holders have requested, within 15 days after receipt of such written notice, be registered in accordance with this Section 7.3 to be registered under the Securities Act. Subject to the foregoing, SIGNAL will use its best efforts to effect promptly any registration pursuant to this Section 7.3. 7.4 EXPENSES OF REGISTRATION. All Registration Expenses incurred in connection with any registration, qualification or compliance pursuant to Sections 7.2 and 7.3 (exclusive of Selling Expenses but inclusive of the reasonable fees and expenses of any special counsel to the selling Holders) shall be borne by SIGNAL. All Selling Expenses incurred in connection with any registrations hereunder shall be borne by the holders of the securities registered pro rata on the basis of the number of shares registered. 7.5 REGISTRATION PROCEDURES. In the case of each registration, qualification or compliance effected by SIGNAL pursuant to this Section 7, SIGNAL will keep each Holder advised in writing as to the initiation of each registration, qualification and compliance and as to the completion thereof. At its expense SIGNAL will: (a) Keep such registration, qualification or compliance effective for a period of one hundred twenty (120) days or until the Holder or Holders have completed the distribution described in the registration statement relating thereto, whichever first occurs; 12. 14 (b) Prepare and file with the Commission such amendments and supplements to such registration statement and the prospectus used in connection with such registration statement as may be necessary to comply with the provisions of the Securities Act with respect to the disposition of all securities covered by such registration statement; (c) Furnish to the Holders such numbers of copies of a prospectus, including a preliminary prospectus, in conformity with the requirements of the Securities Act, and such other documents as they may reasonably request in order to facilitate the disposition of Registrable Securities owned by them; (d) Use its reasonable efforts to register and qualify the securities covered by such registration statement under such other securities or Blue Sky laws of such jurisdictions as shall be reasonably requested by the Holders, provided that SIGNAL shall not be required in connection therewith or as a condition thereto to qualify to do business or to file a general consent to service of process in any such states or jurisdictions; (e) In the event of any underwritten public offering, enter into and perform its obligations under an underwriting agreement, in usual and customary form, with the managing underwriter of such offering. Each Holder participating in such underwriting shall also enter into and perform its obligations under such an agreement; and (f) Notify each Holder of Registrable Securities covered by such registration statement at any time when a prospectus relating thereto is required to be delivered under the Securities Act of the happening of any event as a result of which the prospectus included in such registration statement, as then in effect, includes an untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein not misleading in the light of the circumstances then existing. 7.6 INDEMNIFICATION. In the event any Registrable Securities are included in a registration statement under Section 7.2 or 7.3: (a) To the extent permitted by law, SIGNAL will indemnify each Holder, each of its officers, directors and partners, and each person controlling such Holder within the meaning of Section 15 of the Securities Act, with respect to which registration, qualification or compliance has been effected pursuant to this Section 7, and each underwriter, if any, and each person who controls any underwriter within the meaning of Section 15 of the Securities Act, against all expenses, claims, losses, damages and liabilities (or actions in respect thereof), including any of the foregoing incurred in 13. 15 settlement of any litigation, commenced or threatened, arising out of or based on any untrue statement (or alleged untrue statement) of a material fact contained in any registration statement, prospectus, offering circular or other document, or any amendment or supplement thereto, incident to any such registration, qualification or compliance, or based on any omission (or alleged omission) to state therein a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances in which they were made, not misleading, or any violation by SIGNAL of any rule or regulation promulgated under the Securities Act applicable to SIGNAL and relating to action or inaction required of SIGNAL in connection with any such registration, qualification or compliance, and will reimburse each such Holder, each of its officers and directors and partners, and each person controlling such Holder, each such underwriter and each person who controls any such underwriter, for any legal and any other expenses reasonably incurred in connection with investigating, preparing or defending any such claim, loss, damage, liability or action; provided, however, that the indemnity agreement set forth in this Section 7.6(a) shall not apply to amounts paid in settlement of any such claim, loss damage, liability or action if such settlement is effected without the consent of SIGNAL, which consent shall not be unreasonably withheld; provided further, that SIGNAL will not be liable in any such case to the extent that any such claim, loss, damage, liability or expense arises out of or is based on any untrue statement or omission or alleged untrue statement or omission, made in reliance upon and in conformity with written information furnished to SIGNAL by an instrument duly executed by such Holder or underwriter and stated to be specifically for use therein. (b) To the extent permitted by law, each Holder will, if Registrable Securities held by such Holder are included in the securities as to which such registration, qualification or compliance is being effected, indemnify SIGNAL, each of its directors and officers, each underwriter, if any, of SIGNAL's securities covered by such a registration statement, each person who controls SIGNAL or such underwriter within the meaning of Section 15 of the Securities Act, and each other such Holder, each of its officers and directors and partners and each person controlling such Holder within the meaning of Section 15 of the Securities Act, against all expenses, claims, losses, damages and liabilities (or actions in respect thereof) including any of the foregoing incurred in settlement of any litigation commenced or threatened, arising out of or based on any untrue statement (or alleged untrue statement) of a material fact contained in any such registration statement, prospectus, offering circular or other document, or any amendment or supplement thereto, incident to any such registration, qualification or compliance or based on any omission (or alleged omission) to state therein a material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances in which they were made, not misleading, or any violation by SIGNAL of any rule or regulation promulgated under the Securities Act applicable to SIGNAL in connection with any such registration, qualification, or compliance, and will reimburse 14. 16 SIGNAL, such Holders, such directors, officers, partners, persons, underwriters or control persons for any legal or any other expenses reasonably incurred in connection with investigation, preparing or defending any such claim, loss, damage, liability or action, in each case to the extent, but only to the extent, that such untrue statement (or alleged untrue statement) or omission (or alleged omission) is made in such registration statement, prospectus, offering circular or other document or any amendment or supplement thereto in reliance upon and in conformity with written information furnished to SIGNAL by an instrument duly executed by such Holder and stated to be specifically for use therein; provided, however, that the indemnity agreement set forth in this Section 7.6(b) shall not apply to amounts paid in settlement of any such claim, loss, damage, liability or action if such settlement is effected without the consent of the Holder, which consent shall not be unreasonably withheld; provided further, that the obligations of such Holders hereunder shall be limited to an amount equal to the proceeds to each such Holder of Registrable Securities sold as contemplated herein. (c) Each party entitled to indemnification under this Section 7.6 (the "INDEMNIFIED PARTY") shall give notice to the party required to provide indemnification (the "INDEMNIFYING PARTY") promptly after such Indemnified Party has actual knowledge of any claim as to which indemnity may be sought, and shall permit the Indemnifying Party to assume the defense of any such claim or any litigation resulting therefrom, provided that counsel for the Indemnifying Party, who shall conduct the defense of such claim or litigation, shall be approved by the Indemnified Party (whose approval shall not be unreasonably withheld), and the Indemnified Party may participate in such defense at its own expense, and provided further that the failure of any Indemnified Party to give notice as provided herein shall not relieve the Indemnifying Party of its obligations under this Section 7.6 unless such failure resulted in actual detriment to the Indemnifying Party. No Indemnifying Party, in the defense of any such claim or litigation, shall, except with the consent of each Indemnified Party, consent to entry of any judgment or enter into any settlement which does not include as an unconditional term thereof the giving by the claimant or plaintiff to such Indemnified Party a release from all liability in respect of such claim or litigation. (d) If the indemnification provided for in this Section 7.6 is held by a court of competent jurisdiction to be unavailable to an Indemnified Party with respect to any loss, liability, claim, damage, or expense referred to therein, then the Indemnifying Party, in lieu of indemnifying such Indemnified Party hereunder, shall contribute to the amount paid or payable by such Indemnified Party as a result of such loss, liability, claim, damage, or expense in such proportion as is appropriate to reflect the relative fault of the Indemnifying Party on the one hand and of the Indemnified Party on the other in connection with the statements or omissions that resulted in such loss, liability, claim, damage, or expense as well as any other relevant equitable considerations. The relative fault of the Indemnifying Party and of the Indemnified Party shall be determined by 15. 17 reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission to state a material fact relates to information supplied by the Indemnifying Party or by the Indemnified Party and the parties' relative intent, knowledge, access to information, and opportunity to correct or prevent such statement or omission. (e) The obligations of SIGNAL and Holders under this Section 7.6 shall survive the completion of any offering of Registrable Securities in a registration statement under this Section 7 and otherwise. 7.7 INFORMATION BY HOLDER. The Holder or Holders of Registrable Securities included in any registration shall furnish to SIGNAL such information as SIGNAL may request in writing regarding such Holder or Holders and the distribution proposed by such Holder or Holders and as shall be required in connection with any registration, qualification or compliance referred to in this Section 7. 7.8 RULE 144 REPORTING. With a view to making available the benefits of certain rules and regulations of the Commission which may at any time permit the sale of the Registrable Securities to the public without registration, after such time as a public market exists for the Common Stock of SIGNAL, SIGNAL agrees to: (a) Make and keep public information available, as those terms are understood and defined in Rule 144 under the Securities Act, at all times after the effective date of the first registration under the Securities Act filed by SIGNAL for an offering of its securities to the general public; (b) File with the Commission in a timely manner all reports and other documents required of SIGNAL under the Securities Exchange Act at any time after it has become subject to such reporting requirements; and (c) So long as a Holder owns any Registrable Securities, to furnish to such Holder forthwith upon request a written statement by SIGNAL as to its compliance with the reporting requirements of said Rule 144 (at any time after 90 days after the effective date of the first registration statement filed by SIGNAL for an offering of its securities to the general public) and of the Securities Act and the Securities Exchange Act (at any time after it has become subject to such reporting requirements), a copy of the most recent annual or quarterly report of SIGNAL, and such other reports and documents of SIGNAL as a Purchaser may reasonably request in availing itself of any rule or regulation of the Commission allowing a Purchaser to sell any such securities without registration. 7.9 TRANSFER OF REGISTRATION RIGHTS. The rights to cause SIGNAL to register securities granted under Sections 7.2 and 7.3 may be assigned or otherwise conveyed to a 16. 18 transferee or assignee of Registrable Securities, who shall be considered a "HOLDER" for purposes of this Section 7, provided that (a) SIGNAL is given written notice by such Holder at the time of or within a reasonable time (but not more than thirty (30) days) after said transfer, stating the name and address of said transferee or assignee and identifying the securities with respect to which such registration rights are being assigned and (b) the transferee acquires at least 50,000 Shares in a private transaction. 7.10 TERMINATION OF REGISTRATION RIGHTS. The registration rights granted pursuant to this Section 7 shall terminate (i) upon the third anniversary of the effective date of the IPO or (ii) as to any particular Holder, at such time after the IPO as all Registrable Securities held by such Holder can be sold without compliance with the registration requirements of the Securities Act pursuant to Rule 144 (including Rule 144(k)) promulgated thereunder. 8. MISCELLANEOUS. 8.1 WAIVER. Except as specifically provided for herein, the waiver from time to time by either of the parties of any of their rights or their failure to exercise any remedy shall not operate or be construed as a continuing waiver of same or of any other of such party's rights or remedies provided in this Agreement. 8.2 NOTICES. Any notices or communications provided for in this Agreement to be made by either of the parties to the other shall be in writing, in English, and shall be made by prepaid air mail with return receipt addressed to the other at its address set forth above. Any such notice or communication may also be given by hand, or facsimile to the appropriate designation. Either party may by like notice specify an address to which notices and communications shall thereafter be sent. Notices sent by mail, facsimile or cable shall be effective upon receipt and notices given by hand shall be effective when delivered. 8.3 GOVERNING LAW. This Agreement shall be governed by the laws of the State of California, as such laws are applied to contracts entered into and to be performed within such state. 8.4 DISPUTE RESOLUTION. Disputes arising under this Agreement shall be resolved in accordance with Article 12 of the Collaboration Agreement. 8.5 ENTIRE AGREEMENT. This Agreement and the Collaboration Agreement between the parties of even date herewith set forth all of the covenants, promises, agreements, warranties, representations, conditions and understandings between the parties hereto and supersede and terminate all prior agreements and understanding between the parties. There are no covenants, promises, agreements, warranties, representations conditions or understandings, either oral or written, between the parties 17. 19 other than as set forth herein and therein. No subsequent alteration, amendment, change or addition to this Agreement shall be binding upon the parties hereto unless reduced to writing and signed by the respective authorized officers of the parties. 8.6 SEVERABILITY. If any term, covenant or condition of this Agreement or the application thereof to any party or circumstance shall, to any extent, be held to be invalid or unenforceable, then (a) the remainder of this Agreement, or the application of such term, covenant or condition to parties or circumstances other than those as to which it is held invalid or unenforceable, shall not be affected thereby and each term, covenant or condition of this Agreement shall be valid and be enforced to the fullest extent permitted by law; and (b) the parties hereto covenant and agree to renegotiate any such term, covenant or application thereof in good faith in order to provide a reasonably acceptable alternative to the term, covenant or condition of this Agreement or the application thereof that is invalid or unenforceable, it being the intent of the parties that the basic purposes of this Agreement are to be effectuated. 8.7 ASSIGNMENT. (a) Notwithstanding any provision of this Agreement to the contrary, either party may assign any of its rights or obligations under this Agreement in any country to any Affiliates; provided, however, that such assignment shall not relieve the assigning party of its responsibilities for performance of its obligations under this Agreement. (b) Either party may also assign its rights or obligations under this Agreement in connection with the sale of all or substantially all of its assets, or otherwise with the prior written consent of the other party. This Agreement shall survive any merger of either party with or into another party and no consent for a merger or similar reorganization shall be required hereunder. (c) This Agreement shall be binding upon and inure to the benefit of the successors and permitted assigns of the parties. Any assignment not in accordance with this Agreement shall be void. 8.8 COUNTERPARTS. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. 8.9 BROKERS OR FINDERS. Each party represents that it neither is nor will be obligated for any broker's or finder's fees or commissions in connection with this transaction. SIGNAL agrees to indemnify, defend and hold harmless DPM from and against any and all claims, actions, damages, costs and expenses arising from any claim of entitlement to any such fee or similar payment from SIGNAL in connection with this 18. 20 transaction. DPM agrees to indemnify, defend and hold harmless SIGNAL from and against any and all claims, actions, damages, costs and expenses arising from any claim of entitlement to any such fee or similar payment from DPM in connection with this transaction. 19. 21 IN WITNESS WHEREOF, the parties have executed this Agreement in duplicate originals by their proper officers as of the date and year first above written. THE DUPONT MERCK PHARMACEUTICAL COMPANY By: [SIG] ------------------------------- Title: President & CEO ---------------------------- SIGNAL PHARMACEUTICALS, INC. By: [SIG] ------------------------------- Title: Pres/CEO ---------------------------- 20. EX-10.51 53 EXHIBIT 10.51 1 *** Text Omitted and Filed Separately Confidential Treatment Requested Under 17 C.F.R. Sections 200.80, 200.83 and 230.406. EXHIBIT 10.51 COLLABORATION AGREEMENT BETWEEN SIGNAL PHARMACEUTICALS, INC., A CALIFORNIA CORPORATION AND NIPPON KAYAKU CO., LTD., A JAPANESE CORPORATION 2 TABLE OF CONTENTS
PAGE ARTICLE 1 DEFINITIONS..............................................................2 1.1 "Affiliate"...................................................................2 1.2 "CNS".........................................................................2 1.3 "CNS Field"...................................................................2 1.4 "Collaboration"...............................................................2 1.5 "Collaboration Know-How"......................................................2 1.6 "Collaboration Patents".......................................................2 1.7 "Commercializing Party".......................................................3 1.8 "Compound"....................................................................3 1.9 "Control".....................................................................3 1.10 "Effective Date"..............................................................3 1.11 "FDA".........................................................................3 1.12 "Field".......................................................................3 1.13 "FTE".........................................................................3 1.14 "Joint Commercialization Agreement"...........................................3 1.15 "Joint Commercialization Alternative".........................................3 1.16 "Know-How"....................................................................3 1.17 "Net Sales of Other Products".................................................3 1.18 "Net Sales of Products".......................................................4 1.19 "Nippon Kayaku Know-How"......................................................4 1.20 "Nippon Kayaku Patents".......................................................4 1.21 [***] .....................................................................4 1.22 "Other Product"...............................................................4 1.23 "Patent"......................................................................4 1.24 "Patent Committee"............................................................4 1.25 "Patent Costs"................................................................5 1.26 "PNS Field"...................................................................5 1.27 "Product".....................................................................5 1.28 "Research"....................................................................5 1.29 "Research Lead"...............................................................5
i. ***Confidential Treatment Requested 3 TABLE OF CONTENTS (CONTINUED)
PAGE 1.30 "Research Management Committee"...............................................5 1.31 "Research Plan"...............................................................5 1.32 "Research Term"...............................................................5 1.33 "Rest of the World"...........................................................5 1.34 "Royalty Alternative".........................................................5 1.35 "Signal Know-How".............................................................5 1.36 "Signal Patents"..............................................................6 1.37 "Third Party".................................................................6 1.38 "Valid Claim".................................................................6 ARTICLE 2 RESEARCH PHASE OF COLLABORATION..........................................6 2.1 Research......................................................................6 2.2 Responsibilities of the RMC...................................................6 2.3 Determination of Research Lead................................................7 2.4 Know-How, Reports and Delivery of Compounds...................................7 2.5 Animal Models.................................................................8 2.6 Research Contributions........................................................9 2.7 Research Expenses.............................................................9 2.8 Visiting Scientists...........................................................9 ARTICLE 3 DEVELOPMENT AND COMMERCIALIZATION PHASE OF COLLABORATION..................10 3.1 Co-Development and Commercialization of the Products in the Field............10 3.2 Royalty Alternative in the Field.............................................11 ARTICLE 4 PAYMENTS..................................................................12 4.1 Funding for Research.........................................................12 4.2 Nippon Kayaku Royalties on Sales of Products in the PNS Field in Japan.......12 4.3 Royalties on Sales of Products Outside the Field.............................12 4.4 Royalties on Sales of Other Products in the Field............................12 4.5 Royalties on Sales of Other Products Outside the Field.......................13 4.6 Royalties Under Royalty Alternative..........................................13
ii. 4 TABLE OF CONTENTS (CONTINUED)
PAGE ARTICLE 5 ROYALTY OBLIGATIONS.....................................................13 5.1 Royalties For Sales of Products or Other Products............................13 5.2 Foreign Exchange.............................................................13 5.3 Blocked Currency.............................................................13 5.4 Taxes........................................................................13 5.5 Payment......................................................................14 5.6 Duration.....................................................................14 5.7 Accounting...................................................................14 5.8 Sales by Sublicensees........................................................14 ARTICLE 6 LICENSE GRANTS..........................................................15 6.1 Licenses During Collaboration................................................15 6.2 Commercialization Licenses...................................................17 6.3 Sublicenses..................................................................18 ARTICLE 7 CONFIDENTIALITY; PUBLICATIONS...........................................18 7.1 Confidentiality; Exceptions..................................................18 7.2 Authorized Disclosure........................................................19 7.3 Publications.................................................................19 7.4 Public Disclosure............................................................19 ARTICLE 8 OWNERSHIP OF INTELLECTUAL PROPERTY AND PATENT RIGHTS......................20 8.1 Ownership of Collaboration Patents; Nippon Kayaku Patents; Signal Patents......................................................................20 8.2 Patent Filings...............................................................20 8.3 Enforcement Rights...........................................................21 ARTICLE 9 REPRESENTATIONS AND WARRANTIES; EXCLUSIVITY.............................23 9.1 Representations and Warranties...............................................23 9.2 Limitation on Warranties.....................................................24 9.3 Negative Covenants...........................................................24 ARTICLE 10 TERM AND TERMINATION....................................................25 10.1 Term.........................................................................25 10.2 Termination For Breach.......................................................25
iii. 5 TABLE OF CONTENTS (CONTINUED)
PAGE 10.3 Termination For Bankruptcy...................................................25 10.4 Surviving Rights.............................................................25 10.5 Accrued Rights, Surviving....................................................25 10.6 Termination Not Sole Remedy..................................................26 ARTICLE 11 INDEMNIFICATION; INSURANCE..............................................26 11.1 Research and Development Indemnification.....................................26 11.2 Indemnification Procedures...................................................26 11.3 Insurance....................................................................27 ARTICLE 12 DISPUTE RESOLUTION......................................................27 12.1 Disputes.....................................................................27 12.2 Dispute Resolution Procedures................................................27 ARTICLE 13 MISCELLANEOUS...........................................................28 13.1 Assignment...................................................................28 13.2 Research and Development Entities............................................28 13.3 Consents Not Unreasonably Withheld...........................................28 13.4 Force Majeure................................................................29 13.5 Further Actions..............................................................29 13.6 No Trademark Rights..........................................................29 13.7 Notices......................................................................29 13.8 Waiver.......................................................................30 13.9 Severability.................................................................30 13.10 Ambiguities..................................................................30 13.11 Counterparts.................................................................30 13.12 Entire Agreement.............................................................30 13.13 Governing Law................................................................31 13.14 Headings.....................................................................31
iv. 6 COLLABORATION AGREEMENT THIS COLLABORATION AGREEMENT (the "Agreement") is made effective as of February 9, 1998 by and between SIGNAL PHARMACEUTICALS, INC., a California corporation having its principal place of business at 5555 Oberlin Drive, San Diego, California 92121 ("Signal"), and NIPPON KAYAKU CO., LTD., a Japanese corporation having its principal place of business at Tokyo Fujimi Building, 11-2, Fujimi 1-chome, Chiyoda-ku, Tokyo 102, Japan ("Nippon Kayaku"). Signal and Nippon Kayaku may be referred to herein as a "Party" or, collectively, as "Parties." RECITALS WHEREAS, Signal has developed and licensed certain technology and intellectual property in the area of drug discovery and lead optimization and is experienced in the research and development of small-molecule drugs; WHEREAS, Nippon Kayaku is a pharmaceutical company dedicated to the research, development and commercialization of pharmaceutical products; WHEREAS, Nippon Kayaku has identified the compound [***] (as described in Exhibit A hereto) and the derivatives thereof; WHEREAS, Signal and Nippon Kayaku concluded a secrecy agreement dated September 20, 1996 (the "Secrecy Agreement") and a material transfer agreement dated May 19, 1997 (the "Material Transfer Agreement"), under which Signal has conducted the evaluation of certain information and a sample of the compound [***] received from Nippon Kayaku, and Signal has notified Nippon Kayaku of its desire to conduct a pilot experiment to examine the effects of the compound [***] and to conclude a further agreement relating to a right to research and develop the compound [***] and the derivatives thereof jointly with Nippon Kayaku; WHEREAS, Nippon Kayaku has exclusive rights to the compound [***]; WHEREAS, Signal and Nippon Kayaku wish to establish a collaborative relationship to develop and commercialize novel products based on or derived from [***] for the treatment and prevention of diseases and disorders of the central nervous system and peripheral nervous system; and WHEREAS, Signal and Nippon Kayaku wish to enter into this Agreement to establish the collaboration on the terms and subject to the conditions set forth herein. NOW, THEREFORE, in consideration of the foregoing recitals and the mutual covenants and agreements contained herein, the Parties hereto, intending to be legally bound, do hereby agree as follows: 1. ***Confidential Treatment Requested 7 ARTICLE 1 DEFINITIONS The following terms shall have the following meanings as used in the Agreement: 1.1 "AFFILIATE" means an individual, trust, business trust, joint venture, partnership, corporation, association or any other entity which (directly or indirectly) is controlled by, controls or is under common control with a Party. For the purposes of this definition, the term "control" (including, with correlative meanings, the terms "controlled by" and "under common control with") as used with respect to any Party, shall mean the possession (directly or indirectly) of at least fifty percent (50%) of the outstanding voting securities of a corporation or comparable equity interest in any other type of entity, or, where the laws of the jurisdiction in which such entity operates prohibit ownership by a Party of fifty percent (50%), such ownership shall be at the maximum level of ownership allowed by such laws. 1.2 "CNS" means central nervous system. 1.3 "CNS FIELD" means the treatment or prevention of CNS diseases or disorders in humans. 1.4 "COLLABORATION" means the activities, rights and obligations of Signal and Nippon Kayaku encompassed in their relationship in accordance with the Research Plan during the Research Term and, in any further relationship between the Parties pursuant to the Joint Commercialization Agreement, during the life of such further relationship. 1.5 "COLLABORATION KNOW-HOW" means Know-How (i) relating to Compounds; (ii) relating to results and data from animal studies conducted as part of the Research under this Agreement in accordance with the Research Plan; or (iii) otherwise arising from or in connection with the conduct of the Research under this Agreement in accordance with the Research Plan and jointly owned by or within the common Control of the Parties or their respective Affiliates, but excluding Collaboration Patents. 1.6 "COLLABORATION PATENTS" means all Patents that claim or cover inventions (i) made jointly (as determined in accordance with the rules of inventorship under United States patent law) by officers, employees, consultants or agents of Signal or one of its Affiliates, on the one hand, and officers, employees, consultants or agents of Nippon Kayaku or one of its Affiliates, on the other hand, in connection with activities conducted pursuant to the Research Plan, (ii) which come under the common Control of Signal or one of its Affiliates, on the one hand, and Nippon Kayaku or one of its Affiliates, on the other hand, prior to the end of the Research Term or (iii) based on or derived from a Compound and conceived or reduced to practice during the Research Term by officers, employees, consultants or agents of one or both of the Parties. 2. 8 1.7 "COMMERCIALIZING PARTY" shall have the meaning assigned to it in Section 5.1. 1.8 "COMPOUND" shall mean a small-molecule compound based on or derived from [***], which is either synthesized through medicinal chemistry and combinatorial chemistry techniques or identified through searching the database of Signal's compound library as described in Section 2.4(c), that, in each case, is identified in the course of the Research by one or both of the Parties. 1.9 "CONTROL" means, with respect to an item of information or intellectual property right, possession of the ability to grant a license or sublicense as provided for herein under such item or right without violating the terms of any agreement or other arrangement with any Third Party. 1.10 "EFFECTIVE DATE" means the date first written above in this Agreement. 1.11 "FDA" means the United States Food and Drug Administration. 1.12 "FIELD" means the CNS Field and the PNS Field. 1.13 "FTE" means full-time equivalent scientific personnel. 1.14 "JOINT COMMERCIALIZATION AGREEMENT" shall have the meaning assigned to it in Section 3.1(a). 1.15 "JOINT COMMERCIALIZATION ALTERNATIVE" shall have the meaning assigned to it in Section 3.1(a). 1.16 "KNOW-HOW" means techniques, data, materials and chemicals materially relating to the Field, including, without limitation, inventions, practices, methods, knowledge, know-how, skill, experience, test data including pharmacological, toxicological and clinical test data, analytical and quality control data, patent and legal data or descriptions. 1.17 "NET SALES OF OTHER PRODUCTS" means the gross amounts invoiced for sales of Other Products by Signal or Nippon Kayaku, as the case may be, and its Affiliates and sublicensees to Third Parties pursuant to one or more of the licenses granted under Article 6 less (a) discounts actually granted, (b) credits or allowances actually granted upon claims, damaged goods, rejections or returns of any such Other Product, including recalls, (c) freight, postage, shipping and insurance charges actually allowed or paid for delivery of any such Other Product, to the extent billed and (d) taxes, duties or other governmental charges (other than income taxes) levied on, absorbed or otherwise imposed on sales of any such Other Products. Sales of Other Products for use in clinical trials prior to receipt of regulatory approval for such Other Products shall not be included in Net Sales of Other Products. 3. ***Confidential Treatment Requested 9 1.18 "NET SALES OF PRODUCTS" means the gross amounts invoiced for sales of Products by Signal or Nippon Kayaku, as the case may be, and its Affiliates and sublicensees to Third Parties pursuant to one or more of the licenses granted under Article 6 less (a) discounts actually granted, (b) credits or allowances actually granted upon claims, damaged goods, rejections or returns of any such Product, including recalls, (c) freight, postage, shipping and insurance charges actually allowed or paid for delivery of any such Product, to the extent billed and (d) taxes, duties or other governmental charges (other than income taxes) levied on, absorbed or otherwise imposed on sales of any such Products. Sales of Products for use in clinical trials prior to receipt of regulatory approval for such Products shall not be included in Net Sales of Products. 1.19 "NIPPON KAYAKU KNOW-HOW" means Know-How that is (i) owned or within the Control of Nippon Kayaku or an Affiliate of Nippon Kayaku prior to the end of the Research Term and (ii) necessary or useful for the manufacture, use, sale or import of products pursuant to one or more of the licenses granted under Article 6, but excluding Nippon Kayaku Patents and Collaboration Know-How. 1.20 "NIPPON KAYAKU PATENTS" means all Patents owned or Controlled by Nippon Kayaku or an Affiliate of Nippon Kayaku (excluding Collaboration Patents) necessary or useful for the manufacture, use, sale or import of products pursuant to one or more of the licenses granted under Article 6, including, without limitation, any such Patents related to [***], where such Patents cover (i) inventions made prior to the Effective Date of this Agreement, (ii) inventions made solely by employees or agents of Nippon Kayaku or an Affiliate of Nippon Kayaku after the Effective Date and prior to the end of the Research Term (but specifically excluding Collaboration Patents covered by Section 1.6(iii)), or (iii) inventions which come under the Control of Nippon Kayaku or its Affiliates after the Effective Date and prior to the end of the Research Term; a list of the Nippon Kayaku Patents as of the Effective Date is set forth on Schedule I. 1.21 "[***]" means the compound Controlled by Nippon Kayaku known as [***] and described on Exhibit A hereto. 1.22 "OTHER PRODUCT" shall mean any pharmaceutical product based on or derived from a Compound other than a Research Lead. 1.23 "PATENT" means (i) foreign and domestic Letters Patent including one or more Valid Claims, including any extension (including Supplemental Protection Certificate), registration, confirmation, reissue, continuation, divisional, continuation-in-part, reexamination or renewal thereof, and (ii) pending applications for any of the foregoing. 1.24 "PATENT COMMITTEE" means the committee established pursuant to Section 8.2(c) herein. 4. ***Confidential Treatment Requested 10 1.25 "PATENT COSTS" means the out-of-pocket fees and expenses paid to outside legal counsel and other Third Parties and filing, prosecution and maintenance expenses incurred in connection with the establishment and maintenance of rights under Patents. 1.26 "PNS FIELD" means the treatment or prevention of diabetic neuropathy, chemotherapy-induced neuropathy or other neuropathies in humans but specifically excluding therapeutic and diagnostic products directed at pain, lower urinary tract dysfunction and peripheral vascular disease. 1.27 "PRODUCT" shall mean any pharmaceutical product based on or derived from any Research Lead that is covered by one or more of Signal Patents, Signal Know-How, Nippon Kayaku Patents, Nippon Kayaku Know-How, Collaboration Patents or Collaboration Know-How. 1.28 "RESEARCH" means all work performed by the Parties or on their behalf pursuant to the Research Plan directed towards or in connection with the discovery, identification and investigation of Research Leads during the Research Term. 1.29 "RESEARCH LEAD" means a Compound identified by either Party (separately or jointly) pursuant to Research performed during the Research Term showing at least [***] more potency than [***], as decided by the RMC. [***] greater potency will be determined as follows: [***] 1.30 "RESEARCH MANAGEMENT COMMITTEE" or "RMC" means the committee established pursuant to Section 2.2 herein. 1.31 "RESEARCH PLAN" means the plan for conducting the Research as described in Section 2.1 hereof and attached as Exhibit B hereto, as such plan may be modified or amended by the RMC from time to time in writing. 1.32 "RESEARCH TERM" means the period commencing on the Effective Date and ending on the second anniversary of the Effective Date, unless terminated earlier pursuant to Sections 10.2 or 10.3. 1.33 "REST OF THE WORLD" means the entire world excluding Japan. 1.34 "ROYALTY ALTERNATIVE" shall have the meaning assigned to it in Section 3.2. 1.35 "SIGNAL KNOW-HOW" means Know-How that is (i) owned or within the Control of Signal or an Affiliate of Signal prior to the end of the Research Term and (ii) necessary or useful for the manufacture, use, sale or import of products pursuant to 5. ***Confidential Treatment Requested 11 one or more of the licenses granted under Article 6, but excluding Signal Patents and Collaboration Know-How. 1.36 "SIGNAL PATENTS" means all Patents owned or Controlled by Signal or an Affiliate of Signal (excluding Collaboration Patents) necessary or useful for the manufacture, use, sale or import of products pursuant to one or more of the licenses granted under Article 6 where such Patents cover (i) inventions made prior to the Effective Date of this Agreement, (ii) inventions made solely by employees or agents of Signal or an Affiliate of Signal after the Effective Date and prior to the end of the Research Term (but specifically excluding Collaboration Patents covered by Section 1.6(iii)), or (iii) inventions which come under the Control of Signal or an Affiliate of Signal after the Effective Date and prior to the end of the Research Term; a list of the Signal Patents as of the Effective Date is set forth on Schedule II. 1.37 "THIRD PARTY" means any entity or individual other than Signal, Nippon Kayaku and Affiliates of either. 1.38 "VALID CLAIM" means a claim of an issued patent which claim has not lapsed, been canceled or become abandoned and has not been declared invalid by a court or other appropriate body of competent jurisdiction, and which has not been admitted to be invalid or unenforceable through reissue or disclaimer. ARTICLE 2 RESEARCH PHASE OF COLLABORATION 2.1 RESEARCH. The purpose of the Research is to identify Research Leads that are suitable for development into Products for commercialization in the Field. The Parties agree that the Research shall be conducted as specified in the Research Plan attached hereto as Exhibit B, as such Research Plan may be amended from time to time in writing by the RMC, with each Party to use commercially reasonable and diligent efforts (as defined below) to perform its responsibilities under the Research Plan. 2.2 RESPONSIBILITIES OF THE RMC. The Parties shall establish a Research Management Committee ("RMC") promptly after the date of the execution of this Agreement. The RMC shall be comprised of three (3) representatives of each Party. The initial members of the RMC are set forth on Schedule III. Either Party may appoint substitute or replacement members of the RMC to serve as their representatives as long as any such substitutes or replacements are persons of comparable standing and authority within the Parties' organizations. Decisions by the RMC shall be made by unanimous vote. The RMC shall have the responsibility and authority to: (a) plan and monitor the Research; 6. 12 (b) review and modify the Research Plan; (c) evaluate the results of the Research; (d) discuss information relating to the Research; (e) review scientific publications of the Parties concerning the Research; (f) determine whether a Compound is a Research Lead; (g) determine whether a Compound is not suitable for pursuit under the Collaboration; and (h) review and approve a protocol of Research furnished by either Party with respect to animal models in the Field. Either Party may refer any dispute to the appropriate officers of the Parties for consideration and resolution pursuant to Article 12. The RMC shall meet at least once per calendar quarter, with two of such meetings per calendar year being conducted in each of San Diego, California and Tokyo, Japan, or at such other times and places agreed to by the Parties, until the end of the Research Term. 2.3 DETERMINATION OF RESEARCH LEAD. Upon the identification by one or both of the Parties in the course of the Research of a Research Lead, such Party or Parties shall promptly provide notice thereof (the "Research Lead Notice"), which notice shall include all relevant data regarding such Research Lead, to the RMC and, if applicable, the other Party. The identification of a Research Lead shall give rise to the Parties' rights set forth in Article 3 with respect to such Research Lead. In the event that no Research Lead has been identified on or before the end of the Research Term, the Collaboration shall terminate. 2.4 KNOW-HOW, REPORTS AND DELIVERY OF COMPOUNDS. (a) Each Party shall disclose to the other Party all Collaboration Know-How learned, acquired or discovered by such Party at any time on or before the end of the Research Term, as promptly as is reasonably practicable after such Collaboration Know-How is learned. At the time of effectiveness of any license granted hereunder, Signal and/or Nippon Kayaku, as appropriate under the license granted, (i) shall make available and disclose to the other Party such Signal Know-How or Nippon Kayaku Know-How, as the case may be, known by such Party as of such date, and (ii) shall also disclose any Signal Know-How or Nippon Kayaku Know-How, as the case may be, learned, acquired or discovered by such Party at any time thereafter for so long as such license continues in full force and effect, as promptly as is reasonably practicable after such Signal Know-How or Nippon Kayaku Know-How is learned. The Parties shall exchange at a minimum quarterly written reports (with copies to the RMC) presenting a meaningful summary of 7. 13 Research done under this Agreement. Each Party shall provide the other with raw data, including QSAR, for work carried out in the course of the Research, if reasonably requested by the other Party. Know-How and other information regarding the Research disclosed by one Party to the other Party pursuant hereto may be used only in accordance with the rights granted under this Agreement. (b) All Compounds synthesized in the course of the Research shall first be used for purposes of the Collaboration. When the RMC determines that Compounds are not suitable for pursuit under the Collaboration, then in order to avoid any conflict with its other corporate partners, Signal shall, within thirty (30) days following such determination, test such Compounds in assays under certain other Signal programs; a list of such Signal programs as of the Effective Date is set forth on Schedule IV. In the event that a Compound shows activity in any such assay, Signal shall not be obligated to disclose or provide such Compound to Nippon Kayaku, and no license granted to Nippon Kayaku hereunder with respect to such Compound shall be effective, unless and until such time as Signal is not contractually prohibited from disclosing, providing or licensing such Compound to Nippon Kayaku. In the event that a Compound shows no activity in any such assay or if development of such Compound is discontinued under any such other Signal program, such Compound shall be freely available for use outside the Field by each of the Parties in accordance with the terms of this Agreement. (c) It is understood, and the Parties hereby acknowledge and agree, that as Signal chemists develop structure-activity relationships from the active analogues of [***] in the course of the Collaboration, Signal shall, using its database management program, conduct sub-structure searches of the Signal compound library for compounds to screen in the Collaboration, which may include compounds made or acquired with financial support from Signal's existing collaborative partners, as set forth on Schedule IV hereto. Any of these compounds that are not active in such existing partners' assays shall be evaluated in the Collaboration, regardless of whether such compounds were made or acquired as part of such existing partners' programs. (d) The mechanism by which Signal will deliver samples and supplies of Compounds to Nippon Kayaku is described in Exhibit C hereto. Signal will provide Nippon Kayaku with the experimental details to reproduce any and all parts of the libraries provided under this Agreement. 2.5 ANIMAL MODELS. Studies in the Research with respect to animal models in the Field shall be done in the U.S. and in Japan with the RMC's approval. Signal shall be responsible for the conduct of any such studies done in the U.S., and Nippon Kayaku shall be responsible for the conduct of any such studies done in Japan. Costs of animal model studies conducted in the U.S. and in Japan shall be shared equally by the Parties; provided, however, that, at Nippon Kayaku's option and expense, Nippon Kayaku may conduct any such animal model studies Signal does not agree to do. 8. ***Confidential Treatment Requested 14 2.6 RESEARCH CONTRIBUTIONS. (a) BY SIGNAL. Signal agrees to exert commercially reasonable and diligent efforts to perform its obligations under the Research Plan. In the performance of such work, Signal shall maintain and utilize scientific and other staff (including consultants), laboratories, offices and other facilities consistent with such undertaking. Nippon Kayaku understands that Signal has engaged certain scientific collaborators and consultants to perform research services relating to the Field, and that the efforts of such collaborators and consultants relating to the Field shall be included within the Research to the extent contemplated by the Research Plan. Subject to Nippon Kayaku's fulfillment of its obligation to provide research funding as set forth in Section 4.1, Signal agrees to commit an average of at least [***] FTEs to the Research during the Research Term. Notwithstanding the foregoing, the Parties hereby acknowledge that during the initial calendar quarter of the Research Term, Signal may commit [***] FTEs to the Research. (b) BY NIPPON KAYAKU. Nippon Kayaku agrees to exert commercially reasonable and diligent efforts to perform its obligations under the Research Plan. In the performance of such work, Nippon Kayaku shall maintain and utilize scientific and other staff (including consultants), laboratories, offices and other facilities consistent with such undertaking. (c) COMMERCIALLY REASONABLE AND DILIGENT EFFORTS. As used herein, the term "commercially reasonable and diligent efforts" will mean, unless the Parties agree otherwise in writing, those efforts consistent with the exercise of prudent scientific and business judgment, as applied to research activities conducted with regard to other products of similar potential and market size. In the event of any unanticipated and severe changes in regulatory affairs or technical developments or in the event of extreme conditions or similar unforeseen events with respect to the Research, the Parties agree to discuss such changed circumstances and appropriate mechanisms to address them. 2.7 RESEARCH EXPENSES. All expenses of the Research shall be borne by the Party incurring such expenses without contribution from or offset by the other Party, unless otherwise agreed in writing by the Parties or expressly provided herein. 2.8 VISITING SCIENTISTS. Nippon Kayaku may, at its option, send up to [***] visiting scientists [***], each of whom must be acceptable to Signal) to Signal's facilities in San Diego. Nippon Kayaku shall be responsible for such scientists' salaries and living and other expenses, and Signal shall provide laboratory space and supervision. Such scientists shall sign Signal's standard form of Confidential Disclosure Agreement and shall work exclusively on projects relating to the Research while at Signal's facilities. 9. ***Confidential Treatment Requested 15 Signal shall give Nippon Kayaku's scientists full and correct instructions necessary to avoid any loss, damage, death or injury, and Nippon Kayaku shall cause such scientists to obey such instructions. ARTICLE 3 DEVELOPMENT AND COMMERCIALIZATION PHASE OF COLLABORATION 3.1 CO-DEVELOPMENT AND COMMERCIALIZATION OF THE PRODUCTS IN THE FIELD. (a) STRUCTURE. Within thirty (30) days following the date of any Research Lead Notice pursuant to which the RMC has determined that a Compound identified in the course of the Research is a Research Lead (the "Election Period"), the Parties will meet to discuss whether to pursue the development of such Research Lead jointly by entering into a joint venture arrangement through the creation of a separate entity or otherwise sharing the expenses and profits of the development and commercialization of Products based on such Research Lead worldwide in the CNS Field and in the Rest of the World in the PNS Field (the "Joint Commercialization Alternative"). If, during the Election Period, the Parties agree to pursue the Joint Commercialization Alternative, the Parties will negotiate in good faith the formal structure of such development and commercialization arrangement pursuant to separate agreement or arrangement (a "Joint Commercialization Agreement"), which shall include the principles set forth in this Section 3.1 and in Exhibit D, within six (6) months following delivery of the Research Lead Notice. A new six (6) month period will commence upon the subsequent delivery of a Research Lead Notice with respect to a different Research Lead or the substitution by the RMC or the Parties of one Research Lead for another. Any such Joint Commercialization Agreement shall specify the Parties' relative rights and responsibilities with respect to continued pre-clinical development, clinical development, and marketing and promotion rights, and shall include all appropriate licenses pursuant to Article 6 hereof. (b) PROFITS, LOSSES AND OPERATING EXPENSES. The Joint Commercialization Agreement shall reflect equal sharing by the Parties of Profits and Losses and Operating Expenses for Products based on the applicable Research Lead (except for Products developed and commercialized by Nippon Kayaku pursuant to the license granted under Section 6.1(b)(i)); provided, however, that in the event the Parties agree with respect to a particular country to some other cost-sharing arrangement, Profits and Losses and Operating Expenses in such country will be shared according to costs incurred. Royalties and license fees payable by either Party (or any joint venture entity formed by the Parties hereunder or under the Joint Commercialization Agreement by the Parties) to Third Parties with respect to such Products shall be treated as an expense. Under any 10. 16 such Joint Commercialization Agreement, the terms "Profits," "Losses" and "Operating Expenses" would have the meanings given them in Exhibit D. (c) CONTRACTING FOR SERVICES. Any such Joint Commercialization Agreement would further contemplate contracting with each Party and/or their Affiliates, or contracting with Third Parties, for services such as pre-clinical and clinical development, clinical trials, regulatory affairs, manufacturing, marketing, promotion, training, distribution and sales of Products. Any such contracting shall be determined by the Parties on a Product-by-Product basis. Each Party and its Affiliates shall provide any such service at cost plus a commercially reasonable mark-up determined with reference to prevailing standards in the industry for similar services. (d) SUPPLY OF BULK DRUG SUBSTANCE AND DRUG PRODUCT. The Joint Commercialization Agreement between the Parties shall, at Nippon Kayaku's option, provide for Nippon Kayaku to supply bulk drug substance on a worldwide basis for a percentage of Net Sales of Products on commercially reasonable terms to be negotiated in good faith by the Parties. In anticipation of this supply arrangement, Nippon Kayaku will provide compounds and formulations of Research Leads for all pre-clinical and clinical studies (including toxicology studies) at a price and on such other commercially reasonable terms to be negotiated in good faith by the Parties, and Nippon Kayaku will ensure that its facilities meet all GMP and GLP standards, maintain DMFs and comply with all regulatory requirements necessary to obtain regulatory and marketing approvals. In the event that Nippon Kayaku does not provide such bulk drug substance and such drug product for all pre-clinical and clinical studies (including toxicology studies), then the foregoing option to supply bulk drug substance on a worldwide basis for a percentage of Net Sales of Products shall lapse and be of no further force or effect. (e) ADDITIONAL TERMS. The Joint Commercialization Agreement would also provide for: (i) common Product brand names; (ii) common regulatory filings and indications; (iii) common Product positioning and marketing plans; and (iv) with respect to the development and commercialization of Products in the CNS Field, an option to seek Third Party support for funding and/or expertise; provided, however, that, notwithstanding any such Third Party support, Nippon Kayaku shall have the right to develop and commercialize Products jointly with any entity formed by the Parties hereunder or under the Joint Commercialization Agreement in the CNS Field in Japan. 3.2 ROYALTY ALTERNATIVE IN THE FIELD. In the event that, during the Election Period, one Party (the "non-participating Party") elects not to participate in the development and commercialization of Products, then the other Party, if it elects to proceed with development and commercialization of Products in the Field (the "Royalty Alternative"), shall be solely responsible for the costs of development and commercialization and shall pay to the non-participating Party a royalty of [***] of Net Sales of Products by such Commercializing Party (as defined below) or its Affiliates or sublicensees. In addition, in the event that the Parties have entered into a 11. ***Confidential Treatment Requested 17 Joint Commercialization Agreement, either Party may thereafter at any time elect by written notice to the other Party to convert to the Royalty Alternative in a particular country and receive the royalty described in the preceding sentence with respect to Net Sales of Products in such country. ARTICLE 4 PAYMENTS 4.1 FUNDING FOR RESEARCH. Nippon Kayaku agrees to fund the Research at Signal over a two (2) year period in the aggregate amount of [***] for (a) the costs and expenses for Signal's committing an average of at least [***] to the Research, (b) any supervision provided by Signal relating to the Research to the visiting scientists of Nippon Kayaku and (c) the use of Signal's facilities by such visiting scientists of Nippon Kayaku for the purposes of Research. Such amount shall be payable in advance in two (2) installments of [***] within one (1) week following each of the Effective Date and the first anniversary of the Effective Date. 4.2 NIPPON KAYAKU ROYALTIES ON SALES OF PRODUCTS IN THE PNS FIELD IN JAPAN. In consideration of the license granted to Nippon Kayaku pursuant to Section 6.1(b)(i), Nippon Kayaku shall pay to Signal a royalty of [***] of Net Sales of Products by Nippon Kayaku, its Affiliates or sublicensees of Products in the PNS Field in Japan. 4.3 ROYALTIES ON SALES OF PRODUCTS OUTSIDE THE FIELD. (a) In consideration of the license granted to Signal under Section 6.2.1(a), Signal shall pay to Nippon Kayaku a royalty of [***] of Net Sales of Products by Signal, its Affiliates or sublicensees outside the Field plus any pass-through royalties. (b) In consideration of the license granted to Nippon Kayaku under Section 6.2.1(b), Nippon Kayaku shall pay to Signal, a royalty of [***] of Net Sales of Products by Nippon Kayaku, its Affiliates or sublicensees outside the Field plus any pass through royalties. 4.4 ROYALTIES ON SALES OF OTHER PRODUCTS IN THE FIELD (a) In consideration of the license granted to Signal under Section 6.2.2(a), Signal shall pay to Nippon Kayaku a royalty of [***] of Net Sales of Other Products by Signal, its Affiliates or sublicensees in the Field plus any pass-through royalties. (b) In consideration of the license granted to Nippon Kayaku under Section 6.2.2(b), Nippon Kayaku shall pay to Signal, a royalty of [***] of Net 12. ***Confidential Treatment Requested 18 Sales of Other Products by Nippon Kayaku, its Affiliates or sublicensees in the Field plus any pass through royalties. 4.5 ROYALTIES ON SALES OF OTHER PRODUCTS OUTSIDE THE FIELD. (a) In consideration of the license granted to Signal under Section 6.2.3(a), Signal shall pay to Nippon Kayaku a royalty of [***] of Net Sales of Other Products by Signal, its Affiliates or sublicensees outside the Field plus any pass-through royalties. (b) In consideration of the license granted to Nippon Kayaku under Section 6.2.3(b), Nippon Kayaku shall pay to Signal, a royalty of [***] of Net Sales of Other Products by Nippon Kayaku, its Affiliates or sublicensees outside the Field plus any pass through royalties. 4.6 ROYALTIES UNDER ROYALTY ALTERNATIVE. In the event of election of the Royalty Alternative by a Party pursuant to Section 3.2, the Commercializing Party shall pay to the non-participating Party the royalty specified in Section 3.2. ARTICLE 5 ROYALTY OBLIGATIONS 5.1 ROYALTIES FOR SALES OF PRODUCTS OR OTHER PRODUCTS. Any royalty obligations of a Party (the "Commercializing Party") shall be subject to the provisions of this Article 4. 5.2 FOREIGN EXCHANGE. All amounts payable hereunder shall be paid in U.S. dollars. The remittance of royalties payable on Net Sales of Products or Net Sales of Other Products will be payable in U.S. dollars to the Party entitled to receive the royalty hereunder (the "Receiving Party") at a bank and to an account designated by the Receiving Party using the selling rate of exchange for the currency of the country from which the royalties are payable as published by the Wall Street Journal, New York, NY, USA, for the last business day of the quarterly period for which the royalties are due. 5.3 BLOCKED CURRENCY. In each country where the local currency is blocked and cannot be removed from the country, at the election of the Commercializing Party, royalties accrued in that country shall be paid to the Receiving Party in the country in local currency by deposit in a local bank designated by the Receiving Party. 5.4 TAXES. The Receiving Party shall pay any and all taxes levied on account of such payments it receives under this Agreement. If laws or regulations require that taxes be withheld, the Commercializing Party will (i) deduct those taxes from the remittable payment, (ii) timely pay the taxes to the proper taxing authority, and (iii) send 13. ***Confidential Treatment Requested 19 proof of payment to the Receiving Party and certify its receipt by the tax authorities within sixty (60) days following that payment. 5.5 PAYMENT. Royalty payments under this Agreement shall be made to the Receiving Party or its designee quarterly within sixty (60) days following the end of each calendar quarter for which royalties are due from the Commercializing Party. Each royalty payment shall be accompanied by a report summarizing the Net Sales of Products or Net Sales of Other Products during the relevant three-month period. 5.6 DURATION. The Commercializing Party shall pay royalties hereunder, on a country by country basis, until the later of: (i) the last to expire Signal Patent or Collaboration Patent (if Nippon Kayaku is the Commercializing Party) or Nippon Kayaku Patent or Collaboration Patent (if Signal is the Commercializing Party), a Valid Claim of which covers the manufacture, use or sale of such Product or Other Product in such country, or (ii) the date [***] after the date of first commercial sale of such Product or Other Product in such country by the Party, its Affiliates, or sublicensees; provided, however, that all royalty obligations of the Parties shall cease thirty (30) years after the Effective Date. 5.7 ACCOUNTING. The Commercializing Party shall maintain complete and accurate records, consistent with its general internal recordkeeping policies, which are relevant to costs, expenses and payments under this Agreement and shall make its internal sales ledgers for sales of Products or Other Products upon which royalties are payable available during reasonable business hours for a period of five (5) years from creation of individual records for examination of any one calendar year's records at the other Party's expense and not more often than once every two (2) years by a certified public accountant selected by the other Party and reasonably acceptable to the Commercializing Party, audited for the sole purpose of verifying for the inspecting Party the correctness of calculations of such costs, expenses or payments made under this Agreement. If any such audit fails to identify material underpayments (in excess of five percent (5%) of the amounts that should have been paid) by the Commercializing Party for any calendar year audited, the out-of-pocket expenses of both Parties in such audit shall be borne by the Party requesting the audit. If any such material discrepancies are identified by any such audit for any calendar year audited, the Commercializing Party shall reimburse the Party requesting the audit for such discrepancies and shall bear the out-of-pocket expenses of both Pparties in such audit. Any records or accounting information received from the other Party shall be Confidential Information for purposes of Article 7. 5.8 SALES BY SUBLICENSEES. In the event the Commercializing Party grants licenses or sublicenses to Third Parties to make, use and sell a Product or Other Product with respect to which a royalty payment is due hereunder, and the Commercializing Party is not otherwise supplying any Product or Other Product to such licensee or sublicensee, such licenses or sublicenses shall include an obligation for the licensee or sublicensee to 14. ***Confidential Treatment Requested 20 account for and report its Net Sales of such Products or Net Sales of such Other Products on the same basis as if such sales were Net Sales of such Products or Net Sales of such Other Products by the Party granting the license or sublicense, and such Party shall account for, report and pay appropriate royalties to the Party receiving royalties under this Agreement as if the Net Sales of such Products or Net Sales of such Other Products of the sublicensee were Net Sales of such Products or Net Sales of such Other Products of the Party granting the license or sublicense (regardless of whether such Party has actually received payment from the party to whom it granted such license or sublicense), subject to the provisions of Section 5.3 above regarding blocked currency payments. ARTICLE 6 LICENSE GRANTS 6.1 LICENSES DURING COLLABORATION. (a) RESEARCH TERM LICENSES. (i) Signal grants to Nippon Kayaku an exclusive, except as to Signal, royalty-free, worldwide license to make and use methods and materials solely to carry out the Research for the discovery, identification and investigation of Compounds in the Field, with the right to grant sublicenses to Affiliates only (except as agreed by the Parties in writing), under Signal Patents, Signal Know-How, Collaboration Patents and Collaboration Know-How, during the Research Term. (ii) Nippon Kayaku grants to Signal an exclusive, except as to Nippon Kayaku, royalty-free, worldwide license to make and use methods and materials solely to carry out the Research for the discovery, identification and investigation of Compounds in the Field, with the right to grant sublicenses to Affiliates only (except as agreed by the Parties in writing), under Nippon Kayaku Patents, Nippon Kayaku Know-How, Collaboration Patents and Collaboration Know-How, during the Research Term. (b) LICENSES IN THE PNS FIELD. (i) Signal shall and hereby does grant to Nippon Kayaku an exclusive (even as to Signal), royalty-bearing license, with the right to grant sublicenses, under Signal Patents, Signal Know-How, Collaboration Patents and Collaboration Know-How to make, have made, use and sell Products in the PNS Field solely in Japan. (ii) In the event of the election of the Joint Commercialization Alternative, effective upon execution or consummation by the Parties of a definitive Joint Commercialization Agreement, Signal shall and hereby does grant to Nippon Kayaku or to the joint venture (in the event that a separate joint venture entity is formed), such licenses under Signal Patents, Signal Know-How, Collaboration Patents and 15. 21 Collaboration Know-How, and Nippon Kayaku shall and does hereby grant to Signal or to the joint venture (in the event that a separate joint venture entity is formed) such licenses under the Nippon Kayaku Patents, Nippon Kayaku Know-How, Collaboration Patents and Collaboration Know-How, as are necessary or useful to make, have made, use, sell and import Products in the PNS Field in the Rest of the World in the manner agreed to by the Parties under the Joint Commercialization Agreement. (iii) In the event of election of the Royalty Alternative, the non-participating Party shall and hereby does grant to the Commercializing Party an exclusive (even as to the non-participating Party) license, with the right to grant sublicenses, under non-participating Party Patents, non-participating Party Know-How, Collaboration Patents and Collaboration Know-How to make, have made, use, sell and import Products in the PNS Field in those countries in the Rest of the World as to which the Royalty Alternative applies. (c) LICENSES IN THE CNS FIELD. (i) In the event of the election of the Joint Commercialization Alternative, effective upon execution or consummation by the Parties of a definitive Joint Commercialization Agreement, Signal shall and hereby does grant to Nippon Kayaku or to the joint venture (in the event that a separate joint venture entity is formed), such licenses under Signal Patents, Signal Know-How, Collaboration Patents and Collaboration Know-How, and Nippon Kayaku shall and does hereby grant to Signal or to the joint venture (in the event that a separate joint venture entity is formed) such licenses under the Nippon Kayaku Patents, Nippon Kayaku Know-How, Collaboration Patents and Collaboration Know-How, as are necessary or useful to make, have made, use, sell and import Products in the CNS Field in the manner agreed to by the Parties under the Joint Commercialization Agreement. (ii) In the event of election of the Royalty Alternative, the non-participating Party shall and hereby does grant to the Commercializing Party an-exclusive (even as to the non-participating Party) license, with the right to grant sublicenses, under non-participating Party Patents, non-participating Party Know-How, Collaboration Patents and Collaboration Know-How to make, have made, use, sell and import Products in the CNS Field in those countries as to which the Royalty Alternative applies. The licenses granted pursuant to subsections (b)(ii) and (c)(i) above shall be subject to the obligation of the Parties to share Profits and Losses and Operating Expenses in accordance with Section 3.1 above and shall not be royalty-bearing. 16. 22 6.2 COMMERCIALIZATION LICENSES. 6.2.1 PRODUCTS OUTSIDE THE FIELD. (a) Nippon Kayaku shall and hereby does grant to Signal a co-exclusive (with Nippon Kayaku), worldwide, royalty-bearing license, with the right to grant sublicenses, under Nippon Kayaku Patents, Nippon Kayaku Know-How, Collaboration Patents and Collaboration Know-How to make, have made, use and sell Products outside the Field, subject to the Parties' rights and obligations under Section 4.3; and (b) Signal shall and hereby does grant to Nippon Kayaku a co-exclusive (with Signal), worldwide, royalty-bearing license, with the right to grant sublicenses, under Signal Patents, Signal Know-How, Collaboration Patents and Collaboration Know-How to make, have made, use and sell Products outside the Field, subject to the Parties' rights and obligations under Section 4.3. Promptly following the effectiveness of such license grants, each Party shall deliver to the other Party copies of all confidential information and materials relating to the applicable Patents and Know-How to enable such other Party to fully utilize the license rights granted hereunder. 6.2.2 OTHER PRODUCTS IN THE FIELD. Effective upon expiration of the Research Term: (a) Nippon Kayaku shall and hereby does grant to Signal a co-exclusive (with Nippon Kayaku), worldwide, royalty-bearing license, with the right to grant sublicenses, under Nippon Kayaku Patents, Nippon Kayaku Know-How, Collaboration Patents and Collaboration Know-How to make, have made, use and sell Other Products in the Field, subject to the Parties' rights and obligations under Section 4.4; and (b) Signal shall and hereby does grant to Nippon Kayaku a co-exclusive (with Signal), worldwide, royalty-bearing license, with the right to grant sublicenses, under Signal Patents, Signal Know-How, Collaboration Patents and Collaboration Know-How to make, have made, use and sell Other Products in the Field, subject to the Parties' rights and obligations under Section 4.4. 6.2.3 OTHER PRODUCTS OUTSIDE THE FIELD. Effective upon expiration of the Research Term: (a) Nippon Kayaku shall and hereby does grant to Signal a co-exclusive (with Nippon Kayaku), worldwide, royalty-bearing license, with the right to grant sublicenses, under Nippon Kayaku Patents, Nippon Kayaku Know-How, Collaboration 17. 23 Patents and Collaboration Know-How to make, have made, use and sell Other Products outside the Field, subject to the Parties' rights and obligations under Section 4.5; and (b) Signal shall and hereby does grant to Nippon Kayaku a co-exclusive (with Signal), worldwide, royalty-bearing license, with the right to grant sublicenses, under Signal Patents, Signal Know-How, Collaboration Patents and Collaboration Know-How to make, have made, use and sell Other Products outside the Field, subject to the Parties' rights and obligations under Section 4.5. 6.3 SUBLICENSES. Each Party shall notify any permitted sublicensee hereunder of all rights and obligations of such Party under this Agreement licensed to such sublicensee. Upon termination of this Agreement for breach pursuant to Section 10.2, no existing sublicenses granted by the defaulting or terminating Party shall be affected by such termination, and all such sublicenses shall remain in effect according to their terms as sublicenses of the non-defaulting Party. ARTICLE 7 CONFIDENTIALITY; PUBLICATIONS 7.1 CONFIDENTIALITY; EXCEPTIONS. (a) NONDISCLOSURE. Except to the extent expressly authorized by this Agreement or otherwise agreed in writing, the Parties agree that, during the term of this Agreement and a ten (10) year period thereafter, the receiving Party shall keep confidential and shall not publish or otherwise disclose or use for any purpose, other than as provided for in this Agreement, any Know-How, information included in any pending application included in the applicable Patents or other materials furnished to it by the other Party pursuant to this Agreement or developed or acquired in connection with the Collaboration (collectively, "Confidential Information"). (b) EXCEPTIONS. The restrictions under this Section 7.1 shall not apply to the extent that it can be established by the receiving Party that such Confidential Information: (i) was already known to the receiving Party, other than under an obligation of confidentiality, at the time of disclosure by the other Party; (ii) was generally available to the public or otherwise part of the public domain at the time of its disclosure to the receiving Party; (iii) becomes generally available to the public or otherwise part of the public domain after its disclosure and other than through any act or omission of the receiving Party in breach of this Agreement; or 18. 24 (iv) is lawfully received by the receiving Party from a Third Party who does not acquire it, directly or indirectly, from the other Party under an obligation of confidence after its disclosure. 7.2 AUTHORIZED DISCLOSURE. Each Party may disclose Confidential Information hereunder to the extent such disclosure is reasonably necessary in filing or prosecuting patent applications, prosecuting or defending litigation, complying with applicable governmental regulations or conducting pre-clinical or clinical trials, provided that a Party making any such disclosure will give prompt notice to the other Party of such disclosure requirement and, except to the extent inappropriate in the case of patent applications, will use its reasonable efforts to secure confidential treatment of such Confidential Information required to be disclosed and to minimize the extent of such disclosure. Each Party also may disclose to its collaborators for the Collaboration, under confidentiality obligations, Confidential Information developed by such Party during the course of this Collaboration. 7.3 PUBLICATIONS. Either Party may publish or present the results of the Research subject to the prior review by the other Party for patentability and protection of Confidential Information. Each party (the "submitting Party") shall provide to the other the opportunity to review any proposed abstract, manuscript or presentation which covers the results of the Research by delivering a copy thereof to the other Party (the "reviewing Party") no less than forty-five (45) days before its intended submission for publication or presentation. The reviewing Party shall have thirty (30) days from its receipt of any such abstract, manuscript or presentation in which to notify the submitting Party in writing of any specific concern, based upon either the need to seek patent protection or concern regarding competitive disadvantage arising from the proposal. In the absence of such a notice within such thirty (30) day period, the publication or presentation of such abstract, manuscript or presentation shall be deemed approved by the reviewing Party. In the event of concern, the submitting Party agrees not to submit such publication or to make such presentation that contains such Confidential Information until the reviewing Party is given a reasonable period of time (not to exceed forty-five (45) days) to seek patent protection for any material in such publication or presentation which it believes is patentable or to resolve any other issues. Each Party also agrees to delete from any such proposed publication any Confidential Information of the other Party upon its reasonable request based upon the commercial value of the secrecy of such Confidential Information. 7.4 PUBLIC DISCLOSURE. The Parties shall agree to the public announcement of the execution of this Agreement excluding provisions relating to economical conditions; provided, however, that the Parties shall negotiate the contents of the public announcement with each other and decide on them prior to the public announcement. Thereafter, the Parties shall consult and agree with each other prior to the issuances of any press releases that discuss aspects of the Collaboration; provided, however, that each 19. 25 Party shall be entitled to make public disclosures required by law, including compliance with securities laws. ARTICLE 8 OWNERSHIP OF INTELLECTUAL PROPERTY AND PATENT RIGHTS 8.1 OWNERSHIP OF COLLABORATION PATENTS; NIPPON KAYAKU PATENTS; SIGNAL PATENTS. Nippon Kayaku and Signal shall be joint owners of all Collaboration Patents with all ownership rights under such Collaboration Patents as fully entitled by law, subject only to the licenses expressly granted herein. The Parties agree to take all such actions, including execution of all documents, necessary or appropriate so that the Collaboration Patents shall be owned jointly by Nippon Kayaku and Signal. Nippon Kayaku shall retain all right, title and interest in and to any Nippon Kayaku Patents, subject only to the licenses expressly granted herein. Signal shall retain all right, title and interest in and to any Signal Patents, subject only to the licenses expressly granted herein. Each Party acknowledges and agrees, subject to the first sentence of this Section 8.1, that any and all discoveries, know-how, inventions, methods and ideas and the like made or discovered solely by its officers, employees, consultants or agents shall be owned solely by it and that any and all discoveries, know-how, inventions, methods, ideas and the like made jointly by officers, employees, consultants or agents of each will be jointly owned, as determined in accordance with the rules of inventorship under United States patent law. 8.2 PATENT FILINGS. (a) NIPPON KAYAKU PATENTS. Nippon Kayaku shall supervise and direct patenting of all inventions covered by any Nippon Kayaku Patents, and shall file and prosecute all patent applications covering any Nippon Kayaku Patents. All Patent Costs and Nippon Kayaku's internal costs and expenses of filing, prosecuting and maintaining the Nippon Kayaku Patents shall be borne by Nippon Kayaku. Nippon Kayaku shall maintain all Patents that issue on such applications. (b) SIGNAL PATENTS. Signal shall supervise and direct patenting of all inventions covered by any Signal Patents, and shall file and prosecute all patent applications covering any Signal Patents. All Patent Costs and Signal's internal costs and expenses of filing, prosecuting and maintaining the Signal Patents shall be borne by Signal. Signal shall maintain all Patents that issue on such applications. (c) COLLABORATION PATENTS. The responsibility for the preparation, filing, prosecution and maintenance of Collaboration Patents will be administered through a Patent Committee comprised of two (2) members: one (1) appointed by Signal and one (1) appointed by Nippon Kayaku. The Parties intend that: 20. 26 (i) The Patent Committee shall meet together at such site and timing or conduct discussion by means of telephone calls, by letter, by telefax or by E-mail at such site and means, as may be agreed by the Parties. Each Party shall pay its own costs in attending Patent Committee meetings. The Patent Committee shall provide reports to the RMC on a semi-annual basis of the status of the Collaboration Patents. Either Party may refer any dispute to the appropriate officers of the Parties for consideration and resolution pursuant to Article 12; (ii) Unless otherwise determined by the Patent Committee, the supervision and direction of patenting of all inventions covered by the Collaboration Patents, and filing and prosecution of all patent applications covering Collaboration Patents, shall be the responsibility of Signal in the United States and shall be the responsibility of Nippon Kayaku in Japan; and (iii) The Parties shall share equally the Patent Costs of preparing, filing, prosecuting and maintaining the Collaboration Patents and shall each bear their own internal costs and expenses of filing, prosecuting and maintaining the Collaboration Patents. (d) COOPERATION. Each Party agrees to cooperate with the Party responsible for the filing, prosecution and maintenance of Patents. Such cooperation will include the execution of all documents necessary or appropriate for such responsible Party to fulfill its obligations hereunder. (e) RESTRICTIONS ON TRANSFER. No Collaboration Patents shall be assigned, transferred or licensed by a Party to any Third Party without the prior written consent of the other Party; provided, however, that a Party may, without the consent of the other Party, grant sublicenses under Section 6.2.2 or 6.2.3. (f) ELECTION NOT TO PURSUE. If a Party decides, at any time, not to file or maintain any Patent as provided hereunder, it shall give the other Party notice to this effect and upon such notice such other Party shall have the right, but not the obligation, to file and maintain such Patent, in its own name and at its own expense, and, if it so elects to file and maintain, then the Party deciding not to so file or maintain shall assign to such other Party the rights in such Patent. 8.3 ENFORCEMENT RIGHTS. (a) DEFENSE AND SETTLEMENT OF THIRD PARTY CLAIMS. If a Third Party asserts that a Patent or other right owned by it is infringed by the manufacture, use or sale of any pharmaceutical product subject to any of the licenses granted under Article 6 during the term of this Agreement, the Party commercializing such product shall control the defense of such claim at its initial cost and expense; provided, however, that in the event that such matter includes claims with respect to the Collaboration Patents or 21. 27 Collaboration Know-How, the RMC (or, if after the Research Term, the Parties mutually) shall determine how to respond to such claim, and shall control the defense of such claim, with the initial cost and expense of such defense to be shared equally by the Parties. No settlement shall be entered into without the prior written consent of the Party commercializing any such product if such settlement would adversely affect its interests, which consent shall not be unreasonably withheld. (b) INFRINGEMENT BY THIRD PARTIES WITH RESPECT TO PRODUCTS DURING RESEARCH TERM. If any Signal Patent, Nippon Kayaku Patent or Collaboration Patent is infringed by a Third Party in any country in connection with the manufacture, use and sale of any pharmaceutical product subject to any of the licenses granted under Article 6 in such country during the Research Term, the Party to this Agreement first having knowledge of such infringement shall promptly notify the other in writing. The notice shall set forth the facts of that infringement in reasonable detail. In the event a Collaboration Patent is infringed by a Third Party, the RMC shall control any action or proceeding with respect to such infringement, at its expense by counsel of its choice, and the Parties shall share equally in the costs thereof. In the case of Signal Patents or Nippon Kayaku Patents, the Party owning or Controlling such Patent shall have the primary right, but not the obligation, to institute, prosecute, and control any action or proceeding with respect to such infringement, by counsel of its own choice, and the other Party shall have the right, at its own expense, to be represented in any action involving any such Patent by counsel of its own choice. If the Party owning or Controlling such Patent fails to bring an action or proceeding within a period of sixty (60) days after having knowledge of infringement of such Patent and such infringement would have a commercially significant adverse effect on such products, the other Party shall have the right to bring and control any such action by counsel of its own choice, and the first Party shall have the right to be represented in any such action by counsel of its own choice at its own expense. If one Party brings any such action or proceeding, the other Party agrees to be joined as a Party plaintiff if necessary to prosecute the action and to give the first Party reasonable assistance and authority to file and prosecute the suit. (c) INFRINGEMENT BY THIRD PARTIES WITH RESPECT TO PRODUCTS AFTER RESEARCH TERM. If any Signal Patent, Nippon Kayaku Patent or Collaboration Patent is infringed by a Third Party in any country in connection with the manufacture, use or sale of any pharmaceutical product subject to this Agreement in such country following the Research Term and prior to any termination of the Collaboration, the Party to this Agreement first having knowledge of such infringement shall promptly notify the other in writing. The notice shall set forth the facts of that infringement in reasonable detail. In the event that the Parties have entered into a Joint Commercialization Agreement, infringement matters shall be handled in the manner specified in such Agreement. Otherwise, the Commercializing Party shall have the primary right, but not the obligation, to institute, prosecute, and control any action or proceeding with respect to such infringement of any Signal Patent, Nippon Kayaku Patent or Collaboration Patent, 22. 28 by counsel of its own choice, and the other Party shall have the right, at its own expense, to be represented in any action involving any of its Patents or any Collaboration Patent by counsel of its own choice. If the Commercializing Party fails to bring an action or proceeding within a period of sixty (60) days after having knowledge of infringement of such Patent and such infringement would have a commercially significant adverse effect on such products, the other Party shall have the right to bring and control any such action by counsel of its own choice, and the Commercializing Party shall have the right to be represented in any such action by counsel of its own choice at its own expense. If one Party brings any such action or proceeding, the other Party agrees to be joined as a party plaintiff if necessary to prosecute the action and to give the first Party reasonable assistance and authority to file and prosecute the suit. (d) MONETARY AWARDS. Any damages or other monetary awards recovered shall be allocated first, to the costs and expenses of the Party bringing suit, and the costs and expenses, if any, of the other Party. Any amounts remaining shall be allocated as follows: (i) in accordance with the allocation of Profits and Losses if the Parties have entered into a Joint Commercialization Agreement, or (ii) to the Party bringing the suit, which amounts shall be treated as Net Sales of Products or Net Sales of Other Products subject to the applicable royalty obligations set forth in this Agreement. A settlement or consent judgment or other voluntary final disposition of a suit under Sections 8.4(b) or (c) may not be entered into without the prior written consent of the Party not bringing the suit. (e) INFRINGEMENT OF COLLABORATION PATENTS OUTSIDE THE FIELD. With respect to infringement of the Collaboration Patents outside the Field, the Parties shall consult with each other regarding the institution, prosecution and control of any action or proceeding with respect to the infringement of any of the Collaboration Patents. In the absence of agreement, each Party may proceed in such manner as the law permits. Each Party shall bear its own expenses, with any recovery allocated pro rata according to costs and any excess shared equally by the Parties. ARTICLE 9 REPRESENTATIONS AND WARRANTIES; EXCLUSIVITY 9.1 REPRESENTATIONS AND WARRANTIES. Each of the Parties hereby represents and warrants and covenants as follows: (a) BINDING OBLIGATION. This Agreement is legally and validly binding upon each Party and enforceable in accordance with its terms. The execution, delivery and performance of the Agreement by each Party does not conflict with any agreement, instrument or understanding, oral or written, to which it is a party or by which it is bound, nor violate any law or regulation of any court, governmental body or administrative or other agency having jurisdiction over it. 23. 29 (b) NO CONFLICTING GRANTS. Except as set forth in Section 2.4(b) and Schedule IV hereto, each Party has not granted, and during the term of the Agreement will not grant, any right to any Third Party relating to its respective technology including Know-How and Patents in the Field which would conflict with the rights granted to the other Party hereunder. (c) VALID LICENSE. Each Party owns or Controls under valid licenses with right of sublicense all of the rights, title and interest in and to its Know-How. Each Party warrants that to the best of its knowledge, except as otherwise disclosed, no license, sublicense or any of its Patents for which the other Party is granted rights hereunder is invalid as of the Effective Date and each Party will inform the other Party immediately if it makes any determination to the contrary. (d) NO THIRD PARTY LICENSES NEEDED. Neither Party is currently aware of any license from any Third Party (other than any license such Party has previously obtained) necessary to enable the Parties to conduct the Research contemplated by the Research Plan or commercialize the pharmaceutical products contemplated by this Agreement. 9.2 LIMITATION ON WARRANTIES. Nothing herein shall be construed as a representation or warranty by either Party to the other that any Patent or Know-How or other intellectual property right owned or Controlled by such Party is valid, enforceable, or not infringed by any Third Party, or that the practice of such rights does not infringe any property right of any Third Party. Neither Party makes any warranties, express or implied, concerning the success of the Research, or the commercial utility of Research Leads or any pharmaceutical products developed or commercialized hereunder. EXCEPT AS EXPRESSLY MADE HEREIN, EACH PARTY DISCLAIMS ANY WARRANTY, EXPRESS OR IMPLIED, INCLUDING ANY WARRANTY OF NONINFRINGEMENT, MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE, OF ANY PRODUCT, OR ANY REPRESENTATION OR WARRANTY THAT A PRODUCT ENCOMPASSED BY THE RIGHTS LICENSED HEREUNDER WILL NOT INFRINGE ANY THIRD PARTY'S INTELLECTUAL PROPERTY RIGHTS. 9.3 NEGATIVE COVENANTS. Each Party hereby covenants to the other that such Party shall not use or practice the other Party's Patents or Know-How in any field or in any manner except as specifically licensed under this Agreement. 24. 30 ARTICLE 10 TERM AND TERMINATION 10.1 TERM. This Agreement shall commence as of the Effective Date and, unless sooner terminated as provided herein, shall continue in effect until the later of (i) the conclusion of the Collaboration between the Parties or (ii) the date on which all royalty obligations of the Parties cease pursuant to Section 5.6. 10.2 TERMINATION FOR BREACH. (a) BREACH BY SIGNAL. If Signal materially breaches this Agreement at any time, and has not cured such breach within ninety (90) days after written notice thereof from Nippon Kayaku, then Nippon Kayaku shall have the right to terminate this Agreement effective upon written notice thereof, whereupon (i) all licenses granted by Nippon Kayaku to Signal hereunder shall terminate and revert to Nippon Kayaku, (ii) all licenses granted to Nippon Kayaku shall remain in full force and effect so long as Nippon Kayaku is not in breach of its obligations to Signal under this Agreement and (iii) Signal shall return to Nippon Kayaku all Confidential Information of Nippon Kayaku. (b) BREACH BY NIPPON KAYAKU. If Nippon Kayaku materially breaches this Agreement, at any time, and has not cured such breach within ninety (90) days after written notice thereof from Signal, then Signal shall have the right to terminate this Agreement effective upon written notice thereof, whereupon (i) all licenses granted by Signal to Nippon Kayaku hereunder shall terminate and revert to Signal, (ii) all licenses granted to Signal shall remain in full force and effect so long as Signal is not in breach of its obligations to Nippon Kayaku under this Agreement and (iii) Nippon Kayaku shall return to Signal all Confidential Information of Signal. 10.3 TERMINATION FOR BANKRUPTCY. Either Party hereto shall have the right to terminate this Agreement forthwith by written notice to the other Party (i) if the other Party is declared insolvent or bankrupt by a court of competent jurisdiction, (ii) if a voluntary or involuntary petition in bankruptcy is filed in any court of competent jurisdiction against the other Party, or (iii) if the other Party shall make or execute an assignment for the benefit of creditors. 10.4 SURVIVING RIGHTS. In addition to the rights described in Section 10.2, the obligations and rights of the Parties under Sections 6.3, 8.1, 8.2(c), 8.2(d), 10.4, 10.5, 10.6, 11.1 and 11.2 and Articles 5, 7, 12 and 13 shall survive termination or expiration of this Agreement. 10.5 ACCRUED RIGHTS, SURVIVING. Termination or expiration of the Agreement for any reason shall be without prejudice to any rights which shall have accrued to the benefit of either Party prior to such termination or expiration, including, without 25. 31 limitation, any payment obligations of the Parties and any and all damages arising from any breach hereunder. Such termination or expiration shall not relieve either Party from obligations which are expressly indicated to survive termination or expiration of the Agreement. 10.6 TERMINATION NOT SOLE REMEDY. Termination is not the sole remedy under this Agreement and, whether or not termination is effected, all other remedies will remain available except as agreed to otherwise herein. ARTICLE 11 INDEMNIFICATION; INSURANCE 11.1 RESEARCH AND DEVELOPMENT INDEMNIFICATION. Each Party (the "Indemnifying Party") shall indemnify, defend and hold the other Party (the "Indemnified Party") harmless from and against any and all suits, judgments, damages, claims, actions, demands, liabilities, expenses and/or losses, including reasonable legal expenses and attorneys' fees ("Losses"): (a) arising out of (i) any injuries to person and/or damage to property resulting from negligent acts of the Indemnifying Party performed in carrying out the Research hereunder, including failure by the Indemnifying Party to provide the Indemnified Party with any Know-How of the Indemnifying Party which, if timely received, would have avoided injury, death or damage, provided such failure to provide such Know-How is due to negligence on the part of the Indemnifying Party, or (ii) personal injury to the Indemnified Party's employees or agents or damage to the Indemnified Party's property resulting from acts performed by, under the direction of, or at the request of the Indemnifying Party (other than acts otherwise required to be performed by the Indemnified Party by this Agreement) in carrying out activities contemplated by this Agreement; or (b) with respect to pharmaceutical products covered by this Agreement (determined on a country-by-country basis), resulting directly from the manufacture, use, handling, storage, sale or other disposition of chemical agents or such products by the Indemnifying Party, its Affiliates, agents or sublicensees, except to the extent such Losses result directly from the negligence of the Indemnified Party, its Affiliates, agents or sublicensees. 11.2 INDEMNIFICATION PROCEDURES. In the event that Indemnified Party is seeking indemnification under Section 11.1, it shall inform the Indemnifying Party of a claim as soon as reasonably practicable after it receives notice of the claim, shall permit the Indemnifying Party to assume direction and control of the defense of the claim (including the right to settle the claim solely for monetary consideration), and shall 26. 32 cooperate as requested (at the expense of the Indemnifying Party) in the defense of the claim. 11.3 INSURANCE. The Parties will work with one another to coordinate appropriate insurance coverage for the activities contemplated by the Parties under this Agreement. ARTICLE 12 DISPUTE RESOLUTION 12.1 DISPUTES. The Parties recognize that disputes as to certain matters may from time to time arise which relate to either Party's rights and/or obligations hereunder. It is the objective of the Parties to establish procedures to facilitate the resolution of such disputes in an expedient manner by mutual cooperation and without resort to litigation. To accomplish this objective, the Parties agree to follow the procedures set forth in this Article 12 if and when such a dispute arises between the Parties. 12.2 DISPUTE RESOLUTION PROCEDURES. (a) If the Parties or the RMC cannot resolve the dispute within twenty (20) days of formal request by either Party to the other, any Party may, by written notice to the other (the "Dispute Notice"), have such dispute referred to their respective officers designated below or their successors, for attempted resolution by good faith negotiations within thirty (30) days after such notice is received. Said designated officers are as follows: For Nippon Kayaku: Head, Research & Development Division Pharmaceuticals Group For Signal: Chief Executive Officer
(b) Any such dispute arising out of or relating to this Agreement which is not resolved between the Parties or the designated officers of the Parties pursuant to the foregoing shall be resolved by final and binding arbitration conducted in Honolulu, Hawaii, USA under the current Licensing Agreement Arbitration Rules of the American Arbitration Association ("AAA"); provided, however, that depositions shall be permitted as follows: each Party may take no more than seven (7) depositions with a maximum of six (6) hours of examination time per deposition, and each such deposition shall take place in Honolulu, Hawaii, USA, unless otherwise agreed by the Parties. The arbitration shall be conducted by three (3) arbitrators who are knowledgeable in the subject matter which is at issue in the dispute and who are selected by mutual agreement of the Parties or, failing such agreement, shall be selected according to the AAA rules. In conducting the arbitration, the arbitrators shall be able to decree any and all relief of an equitable 27. 33 nature, including but not limited to such relief as a temporary restraining order, a preliminary injunction, a permanent injunction or replevin of property. The arbitrators shall also be able to award actual, general or consequential damages, but shall not award any other form of damages (i.e., punitive damages). The Parties shall share equally the arbitrators' fees and expenses pending the resolution of the arbitration unless the arbitrators, pursuant to their right but not their obligations, require the nonprevailing Party to bear all or any portion of the costs of the prevailing Party. The decision of the arbitrators shall be final and may be sued on or enforced by the Party in whose favor it runs in any court of competent jurisdiction at the option of such Party. ARTICLE 13 MISCELLANEOUS 13.1 ASSIGNMENT. (a) TO AFFILIATES. Notwithstanding any provision of this Agreement to the contrary, either Party may assign any of its rights or obligations under this Agreement in any country to any Affiliates; provided, however, that such assignment shall not relieve the assigning Party of its responsibilities for performance of its obligations under this Agreement. (b) ON SALE OF COMPANY. Either Party may also assign its rights or obligations under this Agreement in connection with the sale of all or substantially all of its assets, or otherwise with the prior written consent of the other Party. This Agreement shall survive any merger of either Party with or into a Third Party and no consent for a merger or similar reorganization shall be required hereunder; provided, that in the event of such merger or in the event of a sale of all assets, no intellectual property rights of the acquiring corporation shall be included in the technology licensed hereunder. (c) SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon and inure to the benefit of the successors and permitted assigns of the Parties. Any assignment not in accordance with this Agreement shall be void. 13.2 RESEARCH AND DEVELOPMENT ENTITIES. Either Party may assign its rights and obligations under this Agreement to an entity or entities (e.g., partnership or corporation) that are specifically formed for financial purposes that would not jeopardize the collaboration hereunder and that finance research and development performed by such Party, which entity able to carry out such Party's obligations hereunder; provided, however, that such assignment shall not relieve the assigning Party of responsibility for performance of its obligations under this Agreement. 13.3 CONSENTS NOT UNREASONABLY WITHHELD. Whenever provision is made in this Agreement for either Party to secure the consent or approval of the other, that 28. 34 consent or approval shall not unreasonably be withheld, and whenever in this Agreement provision is made for one Party to object to or disapprove a matter, such objection or disapproval shall not unreasonably be exercised. 13.4 FORCE MAJEURE. Neither Party shall lose any rights hereunder or be liable to the other Party for damages or losses on account of failure of performance by the defaulting Party if the failure is occasioned by government action, war, fire, explosion, flood, strike, lockout, embargo, act of God, or any other similar cause beyond the control of the defaulting Party, provided that the Party claiming force majeure has exerted all reasonable efforts to avoid or remedy such force majeure; provided, however, that in no event shall a Party be required to settle any labor dispute or disturbance. 13.5 FURTHER ACTIONS. Each Party agrees to execute, acknowledge and deliver such further instruments, and to do all such other acts, as may be necessary or useful in order to carry out the purposes and intent of this Agreement. 13.6 NO TRADEMARK RIGHTS. Except as otherwise provided herein, no right, express or implied, is granted by the Agreement to use in any manner the name "Signal" or "Nippon Kayaku" or any other trade name or trademark of the other Party or its Affiliates in connection with the performance of the Agreement. 13.7 NOTICES. All notices hereunder shall be in writing and shall be deemed given if delivered personally, mailed by registered or certified mail (return receipt requested), postage prepaid, or sent by express courier service, to the Parties at the following addresses (or at such other address for a Party as shall be specified by like notice; provided, that notices of a change of address shall be effective only upon receipt thereof): If to Signal, to: Signal Pharmaceuticals, Inc. 5555 Oberlin Drive San Diego, CA 92121 Attention: Alan J. Lewis, Ph.D. Chief Executive Officer Telephone: (619) 558-7500 Telecopy: (619) 558-7513 29. 35 If to Nippon Kayaku, to: Nippon Kayaku Co., Ltd. Tokyo Fujimi Building 11-2, Fujimi 1-chome Chiyoda-ku, Tokyo 102 Japan Attention: Mr. Motonobu Yazaki Managing Director Telephone: 03-3237-5011 Telecopy: 03-3237-5081 13.8 WAIVER. Except as specifically provided for herein, the waiver from time to time by either of the Parties of any of their rights or their failure to exercise any remedy shall not operate or be construed as a continuing waiver of same or of any other of such Party's rights or remedies provided in this Agreement. 13.9 SEVERABILITY. If any term, covenant or condition of this Agreement or the application thereof to any Party or circumstance shall, to any extent, be held to be invalid or unenforceable, then (i) the remainder of this Agreement, or the application of such term, covenant or condition to Parties or circumstances other than those as to which it is held invalid or unenforceable, shall not be affected thereby and each term, covenant or condition of this Agreement shall be valid and be enforced to the fullest extent permitted by law; and (ii) the Parties hereto covenant and agree to renegotiate any such term, covenant or application thereof in good faith in order to provide a reasonably acceptable alternative to the term, covenant or condition of this Agreement or the application thereof that is invalid or unenforceable, it being the intent of the Parties that the basic purposes and economic terms of this Agreement are to be effectuated. 13.10 AMBIGUITIES. Ambiguities, if any, in this Agreement shall not be construed against any Party, irrespective of which Party may be deemed to have authored the ambiguous provision. 13.11 COUNTERPARTS. This Agreement may be executed in two (2) counterparts, each of which shall be deemed an original, but both of which together shall constitute one and the same instrument. 13.12 ENTIRE AGREEMENT. This Agreement sets forth all the covenants, promises, agreements, warranties, representations, conditions and understandings between the Parties hereto and supersedes and terminates all prior agreements and understanding between the Parties, except the Secrecy Agreement and the Material Transfer Agreement. There are no covenants, promises, agreements, warranties, representations conditions or understandings, either oral or written, between the Parties other than as set forth herein and therein. No subsequent alteration, amendment, change or addition to this Agreement shall be binding upon the Parties hereto unless reduced to writing and signed by the respective authorized officers of the Parties. 30. 36 13.13 GOVERNING LAW. Resolution of all disputes arising out of or related to this Agreement or the performance, enforcement, breach or termination of this Agreement and any remedies relating thereto, shall be governed by and construed under the substantive laws of the State of California and the federal law of the United States of America, without regard to conflicts of law rules. 13.14 HEADINGS. The Article headings and Section headings are placed herein merely as a matter of convenience and are not to be constructed as a part of this Agreement. 31. 37 IN WITNESS WHEREOF, the Parties have executed this Agreement in duplicate originals by their proper officers as of the date and year first above written. NIPPON KAYAKU CO., LTD. By: /s/ MOTONOBU YAZAKI -------------------------------------- Name: Motonobu Yazaki ------------------------------------ Title: Managing Director ----------------------------------- SIGNAL PHARMACEUTICALS, INC. By: /s/ ALAN LEWIS -------------------------------------- Name: Alan Lewis ------------------------------------ Title: Pres/CEO ----------------------------------- 32. 38 EXHIBIT A [***] 33. ***Confidential Treatment Requested 39 EXHIBIT B RESEARCH PLAN [***] 34. ***Confidential Treatment Requested 40 EXHIBIT C [***] 35. ***Confidential Treatment Requested 41 EXHIBIT D PROFITS, LOSSES AND OPERATING EXPENSES For purposes of the Joint Commercialization Agreement, the terms set forth below shall have the following meaning (all references to "overhead" in this Exhibit D shall be determined in accordance with generally accepted accounting principles): 1. "ADVERTISING AND EDUCATION EXPENSE" means costs, including direct overhead directly attributable to the Collaboration but excluding other overhead, incurred by a Party or for its account which are specifically identifiable to the advertising and marketing of Products, and related professional education, of a Product and consistent with a marketing plan and budget mutually acceptable to the Parties; provided, however, that such term shall exclude Selling and Promotion Expenses. 2. "CLINICAL DEVELOPMENT COSTS" means costs, including direct overhead directly attributable to the Collaboration but excluding other overhead, incurred by a Party or for its account, specifically identifiable to the development of a Product, which is aimed at achieving regulatory approval to market such Product or an expanded or significantly modified label for a Product as to which regulatory approval to market such Product has been previously obtained, including Cost of Goods for Product for use in clinical trials and costs incurred with regulatory submissions, wages and benefits to the extent employees work on clinical trials or regulatory submissions (calculated on a full-time equivalent basis) and investigator grants and laboratory materials. 3. "COST OF GOODS" means the cost of Products shipped in either bulk or final therapeutic form, as the Parties may then agree. As used herein, the cost of Products means (i) in the case of products and services acquired from Third Parties, payments made to such Third Parties, and (ii) in the case of manufacturing services performed by the Parties, including manufacturing services in support of Third Party manufacturing, the actual unit costs of manufacture in bulk form or final manufacturing, as the case may be, plus the variances and other costs specifically provided for herein. Actual unit costs shall consist of direct material and direct labor costs plus manufacturing overhead directly attributable to the Products at standard, all calculated in accordance with reasonable cost accounting methods, consistently applied, of the Party performing the work. Direct material costs shall include the costs incurred in purchasing materials, including sales and excise taxes imposed thereon and customs duty and charges levied by government authorities, and all costs of packaging components. Direct labor shall include the cost of employees engaged in direct manufacturing activities and direct or indirect quality control and quality assurance activities who are directly employed in Product manufacturing and packaging. 36. 42 Overhead attributable to the Products shall include a reasonable allocation of indirect labor (not previously included in direct labor), a reasonable allocation of administrative costs, and a reasonable allocation of facilities costs. Such allocations shall be in accordance with reasonable cost accounting methods, consistently applied, of the Party performing the work. 4. "DISTRIBUTION COSTS" means the costs, including direct overhead directly attributable to the Collaboration but excluding other overhead, incurred by a Party or for its account, specifically identifiable to the distribution of a Product to a Third Party including (i) handling and transportation to fulfill orders (excluding such costs, if any, treated as a deduction in the definition of Net Sales), (ii) customer services including order entry, billing and adjustments, inquiry and credit and collection, and (iii) direct cost of facilities utilized for the storage and distribution of Products. 5. "LOSSES" means Net Sales of Products less Operating Expenses, if such amount is less than zero (0). 6. "OPERATING EXPENSES" means (i) Clinical Development Costs, (ii) Cost of Goods, (iii) Distribution Costs, (iv) Selling and Promotion Expenses, (v) Advertising and Education Expenses, (vi) royalties payable to a Third Party for the manufacture, use or sale of Products, (vii) the direct costs of ongoing medical studies to support such Product, excluding overhead, (viii) direct expenses associated with market withdrawals, field adjustments or recalls, (ix) capital expenditures specifically identifiable to the development and commercialization of Products (and not otherwise included herein), and (x) direct expenses relating to selling by non-Affiliates, training, adverse event reporting, patents and trademarks. 7. "PROFITS" means Net Sales of Products less Operating Expenses, if such amount is greater than or equal to zero (0). 8. "SELLING AND PROMOTION EXPENSES" means costs incurred to operate and maintain the sales force which promotes Products, sales bulletins and other communications, sales meetings, specialty sales forces, consultants, call reporting and other monitoring/tracking costs, district and regional sales management, home office personnel who support the sales force, and other ancillary services. 37. 43 SCHEDULE I [***] ***Confidential Treatment Requested 44 SCHEDULE II [***] ***Confidential Treatment Requested 45 SCHEDULE III INITIAL MEMBERS OF RESEARCH MANAGEMENT COMMITTEE Initial Signal Representatives: [***] Initial Nippon Kayaku Representatives: [***] 42. ***Confidential Treatment Requested 46 SCHEDULE IV CERTAIN SIGNAL PROGRAMS 1. Molecular Targets [***] 2. Cell Based Targets [***] 3. Viral Targets [***] 43. ***Confidential Treatment Requested EX-10.52 54 EXHIBIT 10.52 1 Exhibit 10.52 PROMISSORY NOTE $62,000.00 San Diego, California May 8, 1998 FOR VALUE RECEIVED, the undersigned hereby unconditionally promises to pay to the order of SIGNAL PHARMACEUTICALS, INC., a California corporation (the "Company"), at 5555 Oberlin Drive, San Diego, California 92121, or at such other place as the holder hereof may designate in writing, in lawful money of the United States of America and in immediately available funds, the principal sum of Sixty-Two Thousand Dollars ($62,000.00) together with interest accrued from the date hereof on the unpaid principal at the rate of 5.69% per annum, or the maximum rate permissible by law (which under the laws of the State of California shall be deemed to be the laws relating to permissible rates of interest on commercial loans), whichever is less, as follows: PRINCIPAL REPAYMENT. The outstanding principal amount hereunder shall be due and payable in full on May 8, 2003. INTEREST PAYMENTS. Interest shall be payable annually in arrears and shall be calculated on the basis of a 360-day year for the actual number of days elapsed; provided, however, that in the event that the undersigned's employment by or association with the Company is terminated for any reason prior to payment in full of this Note, this Note shall be accelerated and all remaining unpaid principal and interest shall become due and payable ninety (90) days after such termination. If the undersigned fails to pay any of the principal and accrued interest when due, the Company, at its sole option, shall have the right to accelerate this Note, in which event the entire principal balance and all accrued interest shall become immediately due and payable, and immediately collectible by the Company pursuant to applicable law. This Note may be prepaid at any time without penalty. All money paid toward the satisfaction of this Note shall be applied first to the payment of interest as required hereunder and then to the retirement of the principal. The full amount of this Note is secured by a pledge of shares of Common Stock of the Company (the "Pledged Shares"), and is subject to all of the terms and provisions of the Stock Purchase Agreement and the Stock Pledge Agreement, each of even date herewith between the undersigned and the Company. If the undersigned sells or transfers any of the Pledged Shares (whether or not such sale or transfer is for consideration or for no consideration), this Note shall be accelerated and all remaining unpaid principal and interest shall become immediately due and payable after such sale or transfer. 1. 2 The undersigned hereby represents and agrees that the amounts due under this Note are not consumer debt, and are not incurred primarily for personal, family or household purposes, but are for business and commercial purposes only. The undersigned hereby waives presentment, protest and notice of protest, demand for payment, notice of dishonor and all other notices or demands in connection with the delivery, acceptance, performance, default or endorsement of this Note. The holder hereof shall be entitled to recover, and the undersigned agrees to pay when incurred, all costs and expenses of collection of this Note, including without limitation, reasonable attorneys' fees. This Note shall be governed by, and construed, enforced and interpreted in accordance with, the laws of the State of California, excluding conflict of laws principles that would cause the application of laws of any other jurisdiction. Signed /s/ ALAN J. LEWIS, PH.D. ------------------------------------ ALAN J. LEWIS, PH.D. EXHIBIT A - Stock Pledge Agreement 2. 3 EXHIBIT A STOCK PLEDGE AGREEMENT THIS STOCK PLEDGE AGREEMENT ("Pledge Agreement") is made by ALAN J. LEWIS PH.D., an individual residing at 6510 Monte Fuego, Rancho Santa Fe, California 92067 ("Pledgor"), in favor of SIGNAL PHARMACEUTICALS, INC., a California corporation with its principal place of business at 5555 Oberlin Drive, San Diego, California 92121 ("Pledgee"). WHEREAS, Pledgor has concurrently herewith executed that certain Promissory Note (the "Note") in favor of Pledgee in the amount of Sixty-Two Thousand Dollars ($62,000.00) in payment of the purchase price of Four Hundred Twenty-Five Thousand (425,000) shares of the Common Stock of Pledgee; and WHEREAS, Pledgee is willing to accept the Note from Pledgor, but only upon the condition, among others, that Pledgor shall have executed and delivered to Pledgee this Pledge Agreement and the Collateral (as defined below): NOW, THEREFORE, in consideration of the foregoing recitals and for other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, and intending to be legally bound, Pledgor hereby agrees as follows: 1. As security for the full, prompt and complete payment and performance when due (whether by stated maturity, by acceleration or otherwise) of all indebtedness of Pledgor to Pledgee created under the Note (all such indebtedness being the "Liabilities"), together with, without limitation, the prompt payment of all expenses, including, without limitation, reasonable attorneys' fees and legal expenses, incidental to the collection of the Liabilities and the enforcement or protection of Pledgee's lien in and to the collateral pledged hereunder, Pledgor hereby pledges to Pledgee, and grants to Pledgee, a first priority security interest in all of the following (collectively, the "Pledged Collateral"): (a) Four Hundred Twenty-Five Thousand (425,000) shares of Common Stock of Pledgee represented by Certificate No.(s) ____________ (the "Pledged Shares"), and all dividends, cash, instruments, and other property or proceeds from time to time received, receivable, or otherwise distributed in respect of or in exchange for any or all of the Pledged Shares; (b) all voting trust certificates held by Pledgor evidencing the right to vote any Pledged Shares subject to any voting trust; and (c) all additional shares and voting trust certificates from time to time acquired by Pledgor in any manner (which additional shares shall be deemed to be part of the Pledged Shares), and the certificates representing such additional shares, and all dividends, cash, instruments, and other property or proceeds from time to time received, receivable, or otherwise distributed in respect of or in exchange for any or all of such shares. 1. 4 The term "indebtedness" is used herein in its most comprehensive sense and includes any and all advances, debts, obligations and Liabilities heretofore, now or hereafter made, incurred or created, whether voluntary or involuntary and whether due or not due, absolute or contingent, liquidated or unliquidated, determined or undetermined, and whether recovery upon such indebtedness may be or hereafter becomes unenforceable. 2. At any time, without notice, and at the expense of Pledgor, Pledgee in its name or in the name of its nominee or of Pledgor may, but shall not be obligated to: (i) collect by legal proceedings or otherwise all dividends (except cash dividends other than liquidating dividends), interest, principal payments and other sums now or hereafter payable upon or on account of said Pledged Collateral; (ii) enter into any extension, reorganization, deposit, merger or consolidation agreement, or any agreement in any wise relating to or affecting the Pledged Collateral, and in connection therewith may deposit or surrender control of such Pledged Collateral thereunder, accept other property in exchange for such Pledged Collateral and do and perform such acts and things as it may deem proper, and any money or property received in exchange for such Pledged Collateral shall be applied to the indebtedness or thereafter held by it pursuant to the provisions hereof; (iii) insure, process and preserve the Pledged Collateral; (iv) cause the Pledged Collateral to be transferred to its name or to the name of its nominee; or (v) exercise as to such Pledged Collateral all the rights, powers and remedies of an owner, except that so long as no default exists under the Note or hereunder Pledgor shall retain all voting rights as to the Pledged Shares. 3. Pledgor agrees to pay prior to delinquency all taxes, charges, liens and assessments against the Pledged Collateral, and upon the failure of Pledgor to do so, Pledgee at its option may pay any of them and shall be the sole judge of the legality or validity thereof and the amount necessary to discharge the same. 4. At the option of Pledgee and without necessity of demand or notice, all or any part of the indebtedness of Pledgor shall immediately become due and payable irrespective of any agreed maturity, upon the happening of any of the following events: (i) failure to keep or perform any of the terms or provisions of this Pledge Agreement; (ii) failure to pay any installment of principal or interest on the Note when due; (iii) the levy of any attachment, execution or other process against the Pledged Collateral; or (iv) the insolvency, commission of an act of bankruptcy, general assignment for the benefit of creditors, filing of any petition in bankruptcy or for relief under the provisions of Title 11 of the United States Code of, by, or against Pledgor. 5. In the event of the nonpayment of any indebtedness when due, whether by acceleration or otherwise, or upon the happening of any of the events specified in the last preceding paragraph, Pledgee may then, or at any time thereafter, at its election, apply, set off, collect or sell in one or more sales, or take such steps as may be necessary to liquidate and reduce to cash in the hands of Pledgee in whole or in part, with or without any previous demands or demand of performance or notice or advertisement, the whole or any part of the Pledged Collateral in such order as Pledgee may elect, and any such sale may be made either at public or private sale at its place of business or elsewhere, or at any broker's board or securities exchange, either for cash or upon credit or for future delivery; provided, however, that if such disposition is 2. 5 at private sale, then the purchase price of the Pledged Collateral shall be equal to the public market price then in effect, or, if at the time of sale no public market for the Pledged Collateral exists, then, in recognition of the fact that the sale of the Pledged Collateral would have to be registered under the Securities Act of 1933 and that the expenses of such registration are commercially unreasonable for the type and amount of collateral pledged hereunder, Pledgee and Pledgor hereby agree that such private sale shall be at a purchase price mutually agreed to by Pledgee and Pledgor or, if the parties cannot agree upon a purchase price, then at a purchase price established by a majority of three independent appraisers knowledgeable of the value of such collateral, one named by Pledgor within 10 days after written request by the Pledgee to do so, one named by Pledgee within such 10 day period, and the third named by the two appraisers so selected, with the appraisal to be rendered by such body within 30 days of the appointment of the third appraiser. The cost of such appraisal, including all appraiser's fees, shall be charged against the proceeds of sale as an expense of such sale. Pledgee may be the purchaser of any or all Pledged Collateral so sold and hold the same thereafter in its own right free from any claim of Pledgor or right of redemption. Demands of performance, notices of sale, advertisements and presence of property at sale are hereby waived, and Pledgee is hereby authorized to sell hereunder any evidence of debt pledged to it. Any sale hereunder may be conducted by any officer or agent of Pledgee. 6. The proceeds of the sale of any of the Pledged Collateral and all sums received or collected by Pledgee from or on account of such Pledged Collateral shall be applied by Pledgee to the payment of expenses incurred or paid by Pledgee in connection with any sale, transfer or delivery of the Pledged Collateral, to the payment of any other costs, charges, attorneys' fees or expenses mentioned herein, and to the payment of the indebtedness or any part hereof, all in such order and manner as Pledgee in its discretion may determine. Pledgee shall then pay any balance to Pledgor. 7. Upon the transfer of all or any part of the indebtedness Pledgee may transfer all or any part of the Pledged Collateral and shall be fully discharged thereafter from all liability and responsibility with respect to such Pledged Collateral so transferred, and the transferee shall be vested with all the rights and powers of Pledgee hereunder with respect to such Pledged Collateral so transferred; but with respect to any Pledged Collateral not so transferred Pledgee shall retain all rights and powers hereby given. 8. Until all indebtedness shall have been paid in full the power of sale and all other rights, powers and remedies granted to Pledgee hereunder shall continue to exist and may be exercised by Pledgee at any time and from time to time irrespective of the fact that the indebtedness or any part thereof may have become barred by any statute of limitations, or that the personal liability of Pledgor may have ceased. 9. Pledgee agrees that so long as no default exists under the Note or hereunder, the Pledged Shares shall, upon the request of Pledgor, be released from pledge as the indebtedness is paid. Such releases shall be at the rate of one share for each fourteen cents ($0.14) of principal amount of indebtedness paid. Release from pledge, however, shall not result in release from the 3. 6 provisions of those certain Joint Escrow Instructions, if any, of even date herewith among the parties to this Pledge Agreement and the Escrow Agent named therein. 10. Pledgee may at any time deliver the Pledged Collateral or any part thereof to Pledgor and the receipt of Pledgor shall be a complete and full acquittance for the Pledged Collateral so delivered, and Pledgee shall thereafter be discharged from any liability or responsibility therefor. 11. The rights, powers and remedies given to Pledgee by this Pledge Agreement shall be in addition to all rights, powers and remedies given to Pledgee by virtue of any statute or rule of law. Any forbearance or failure or delay by Pledgee in exercising any right, power or remedy hereunder shall not be deemed to be a waiver of such right, power or remedy, and any single or partial exercise of any right, power or remedy hereunder shall not preclude the further exercise thereof; and every right, power and remedy of Pledgee shall continue in full force and effect until such right, power or remedy is specifically waived by an instrument in writing executed by Pledgee. 12. If any provision of this Pledge Agreement is held to be unenforceable for any reason, it shall be adjusted, if possible, rather than voided in order to achieve the intent of the parties to the extent possible. In any event, all other provisions of this Pledge Agreement shall be deemed valid and enforceable to the full extent possible. 13. This Pledge Agreement shall be governed by, and construed in accordance with, the laws of the State of California as applied to contracts made and performed entirely within the State of California by residents of such State. Dated: May 8, 1998 PLEDGOR /s/ ALAN J. LEWIS, Ph.D. - ------------------------------- ALAN J. LEWIS, Ph.D. 4. EX-11.1 55 EXHIBIT 11.1 1 EXHIBIT 11.1 STATEMENT OF COMPUTATION OF NET LOSS PER SHARE (IN THOUSANDS EXCEPT PER SHARE DATA)
Years ended December 31, March 31, 1995 1996 1997 1997 1998 -------- ------- ------- ------- ------- BASIC NET INCOME (LOSS) PER SHARE: Net income (loss) $ (6,482) $(6,209) $(5,740) $(1,674) $ 335 ======== ======= ======= ======= ======= Weighted average common shares outstanding 462 488 608 580 676 Adjustments to reflect unvested shares subject to repurchase (107) (62) (100) (106) (99) -------- ------- ------- ------- ------- Adjusted shares outstanding 355 426 508 474 577 ======== ======= ======= ======= ======= Basic net income (loss) per share $ (18.25) $(14.57) $(11.29) $ (3.53) $ 0.58 ======== ======= ======= ======= ======= DILUTED NET LOSS PER SHARE: Net income 335 ======= Weighted average common shares outstanding 676 Effect of assumed conversion at original date of issuance of preferred shares 6,051 Dilutive impact of stock options 148 ------- Adjusted shares outstanding 6,875 ======= Diluted net income per share $ 0.05 ======= PRO FORMA NET INCOME (LOSS) PER SHARE: Net income (loss) $(5,740) $ 335 ======= ======= Adjusted shares outstanding 508 577 Effect of assumed conversion at original date of issuance of preferred shares 4,268 6,051 ------- ------- Adjusted shares outstanding 4,776 6,628 ======= ======= Pro forma net income (loss) per share $ (1.20) $ 0.05 ======= =======
EX-23.1 56 EXHIBIT 23.1 1 EXHIBIT 23.1 CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS We consent to the references to our firm under the caption "Experts" and "Selected Financial Data" and to the use of our report dated January 16, 1998, except for Note 7, as to which the date is May 5, 1998, in the Registration Statement (Form S-1) and related Prospectus of Signal Pharmaceuticals, Inc. for the registration of its common stock. /s/ ERNST & YOUNG LLP San Diego, California May 14, 1998 EX-27 57 FINANCIAL DATA SCHEDULE
5 YEAR DEC-31-1997 JAN-01-1997 DEC-31-1997 8,736,469 12,129,506 90,449 0 0 21,145,790 4,588,819 (2,336,251) 23,837,796 5,766,380 1,548,281 0 6,051 664 15,156,999 23,837,796 0 7,579,613 0 13,128,402 0 0 516,709 (5,739,969) 0 (5,739,969) 0 0 0 (5,739,969) (1.20) (1.20) FOR PURPOSES OF THIS EXHIBIT, PRIMARY MEANS BASIC.
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