-----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, TfPeI3ely61PYTtbl+4PEwmSRQJC5GZFdpOlqcLL1P5YFTF/Ao/0mr8kwvA7UqkR O5d5GdXb7O6Vkf/v0ouCWw== 0000936392-98-000886.txt : 19980527 0000936392-98-000886.hdr.sgml : 19980527 ACCESSION NUMBER: 0000936392-98-000886 CONFORMED SUBMISSION TYPE: S-1/A PUBLIC DOCUMENT COUNT: 8 FILED AS OF DATE: 19980526 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: SIGNAL PHARMACEUTICALS INC CENTRAL INDEX KEY: 0001029201 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMMERCIAL PHYSICAL & BIOLOGICAL RESEARCH [8731] IRS NUMBER: 943174286 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-1/A SEC ACT: SEC FILE NUMBER: 333-52901 FILM NUMBER: 98631733 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/A 1 AMENDMENT #1 TO FORM S-1 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 26, 1998 REGISTRATION NO. 333-52901 ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------------------ AMENDMENT NO. 1 TO 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. [ ] ------------------------------------ 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 26, 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. 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 owns or has licensed 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. In March 1998, Signal and Tanabe mutually agreed to conclude their research collaboration and Tanabe paid an additional license fee to Signal for an exclusive worldwide license to a lead compound that was discovered during the collaboration. 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 8 10 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 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 9 11 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 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's business, financial condition and results of operations. 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 10 12 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's business, financial condition and results of operations. 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's business, financial condition and results of operations. 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 pharmaceu- 11 13 tical 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 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 12 14 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. 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, basic and diluted(1)................. $ (1.20) $ 0.05 ======= ======= 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's 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 assay development and compound libraries, lead discovery, lead optimization, and 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-Fos Gene Regulating Pathway The transcription factor c-Fos 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-Fos 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-Fos in bone metabolism and to evaluate c-Fos inhibitors identified in its screens. The Company believes that drugs which inhibit the expression or activation of c-Fos will slow the overactive bone resorption associated with osteoporosis. Signal is working to map the c-Fos signaling pathway and identify key molecular targets that regulate increased c-Fos expression. In addition to regulating bone metabolism, c-Fos 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-Fos has been validated, in part, by animal studies in which tumors induced in mice lacking c-Fos did not metastasize. Conversely, over-expression of c-Fos 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-Fos 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's business, financial condition and results of operations. 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's business, financial condition and results of operations. 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's business, financial condition and results of operations. 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 47 49 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 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. 48 50 Failure to compete effectively could have a material adverse effect on the Company's business, financial condition and results of operations. 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 49 51 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. 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 a 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 50 52 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 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 a 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 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 1998 Plan, and had granted additional Options to purchase an aggregate of 662,676 shares of Common Stock. As of March 31, 1998, 918,421 shares of Common Stock remained available for future grants under the 1998 Plan. 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 on January 1, 1998 (the "401(k) Plan"), covering the Company's employees. Pursuant to the 401(k) Plan, eligible employees may elect 59 61 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 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 428 University Avenue Palo Alto, California 94301 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 48.2 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 499,600 shares held by Venrock Associates and 234,056 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. (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 198,750 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 5% 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 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 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. 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) . 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 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. 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 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 payments to Signal based on the achievement of certain research and development milestones and to pay Signal royalties on any future product sales. 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) 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, totaling $4.0 million, 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 Second 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 Certificate of Incorporation of the Company's Delaware subsidiary. 3.4 Form of Amended and Restated Certificate of Incorporation, to be filed and become effective prior to the effectiveness of this Registration Statement. 3.5 Form of Second Amended and Restated Certificate of Incorporation, to be filed and become effective upon completion of the offering. 3.6 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, 3.5 and 3.6. 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.
II-3 99
EXHIBIT NUMBER DESCRIPTION OF DOCUMENT - -------- ----------------------- 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 Employees Retirement Investment 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, as amended, 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.
II-4 100
EXHIBIT NUMBER DESCRIPTION OF DOCUMENT - -------- ----------------------- 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. 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.
II-5 101
EXHIBIT NUMBER DESCRIPTION OF DOCUMENT - -------- ----------------------- 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.
- ------------------------------ * 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. + Previously filed. ++ 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 II-6 102 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. (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 Amendment No. 1 to 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 26th day of May 1998. /s/ BRADLEY B. GORDON By: -------------------------------- Bradley B. Gordon Vice President, Finance, Chief Financial Officer and Secretary Pursuant to the requirements of the Securities Act of 1933, this Amendment No. 1 to Registration Statement has been signed by the following persons in the capacities and on the dates indicated.
SIGNATURE TITLE DATE --------- ----- ---- * President, Chief Executive Officer and May 26, 1998 - --------------------------------------------- Director (Principal Executive Officer) Alan J. Lewis, Ph.D. /s/ BRADLEY B. GORDON Vice President, Finance, Chief Financial May 26, 1998 - --------------------------------------------- Officer and Secretary (Principal Bradley B. Gordon Financial and Accounting Officer) * Chairman of the Board May 26, 1998 - --------------------------------------------- John P. Walker * Director May 26, 1998 - --------------------------------------------- Brook H. Byers * Director May 26, 1998 - --------------------------------------------- Luke B. Evnin, Ph.D. * Director May 26, 1998 - --------------------------------------------- Harry F. Hixson, Ph.D. * Director May 26, 1998 - --------------------------------------------- Patrick F. Latterell * Director May 26, 1998 - --------------------------------------------- Arnold Oronsky, Ph.D.
*By: /s/ BRADLEY B. GORDON --------------------------- (Bradley B. Gordon) (Attorney-in-fact) II-8 104 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 Certificate of Incorporation of the Company's Delaware subsidiary. 3.4 Form of Amended and Restated Certificate of Incorporation, to be filed and become effective prior to the effectiveness of this Registration Statement. 3.5 Form of Second Amended and Restated Certificate of Incorporation, to be filed and become effective upon completion of the offering. 3.6 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, 3.5 and 3.6. 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 Employees Retirement Investment 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.
105
EXHIBIT NUMBER DESCRIPTION OF DOCUMENT - ------- ----------------------- 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, as amended, 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.
106
EXHIBIT NUMBER DESCRIPTION OF DOCUMENT - ------- ----------------------- 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. 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.
- ------------------------------ * 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. + Previously filed. ++ To be filed by amendment. EX-1.1 2 EXHIBIT 1.1 1 Exhibit 1.1 SIGNAL PHARMACEUTICALS, INC. 2,500,000 SHARES(1) COMMON STOCK UNDERWRITING AGREEMENT _________, 1998 HAMBRECHT & QUIST LLC BANCAMERICA ROBERTSON STEPHENS LEHMAN BROTHERS INC. c/o Hambrecht & Quist LLC One Bush Street San Francisco, CA 94104 Ladies and Gentlemen: Signal Pharmaceuticals, Inc., a Delaware corporation (herein called the "Company"), proposes to issue and sell up to 2,500,000 shares of its authorized but unissued Common Stock, $0.001 par value (herein called the "Common Stock") (said 2,500,000 shares of Common Stock being herein called the "Underwritten Stock"). The Company proposes to grant to the Underwriters (as hereinafter defined) an option to purchase up to 375,000 additional shares of Common Stock (herein called the "Option Stock" and with the Underwritten Stock, herein collectively called the "Stock"). The Common Stock is more fully described in the Registration Statement and the Prospectus hereinafter mentioned. The Company hereby confirms the agreements made with respect to the purchase of the Stock by the several underwriters, for whom you are acting, named in Schedule I hereto (herein collectively called the "Underwriters", which term shall also include any underwriter purchasing Stock pursuant to Section 3(b) hereof). You represent and warrant that you have been authorized by each of the other Underwriters to enter into this Agreement on its behalf and to act for it in the manner herein provided. 1. REGISTRATION STATEMENT. The Company has filed with the Securities and Exchange Commission (herein called the "Commission") a registration statement on Form S-1 (No. 333-52901), including the related preliminary prospectus, for the registration under the Securities Act of 1933, as amended (herein called the "Securities Act"), of the Stock. Copies of such registration statement and of each amendment thereto, if any, including the related preliminary prospectus (meeting the requirements of Rule 430A of the rules and regulations of the Commission) heretofore filed by the Company with the Commission have been delivered to you. - -------- (1) Plus an option to purchase from the Company up to 375,000 additional shares to cover over-allotments. 2 The term Registration Statement as used in this agreement shall mean such registration statement, including all exhibits and financial statements, all information omitted therefrom in reliance upon Rule 430A and contained in the Prospectus referred to below, in the form in which it became effective, and any registration statement filed pursuant to Rule 462(b) of the rules and regulations of the Commission with respect to the Stock (herein called a Rule 462(b) registration statement), and, in the event of any amendment thereto after the effective date of such registration statement (herein called the Effective Date), shall also mean (from and after the effectiveness of such amendment) such registration statement as so amended (including any Rule 462(b) registration statement). The term Prospectus as used in this Agreement shall mean the prospectus relating to the Stock first filed with the Commission pursuant to Rule 424(b) and Rule 430A (or if no such filing is required, as included in the Registration Statement) and, in the event of any supplement or amendment to such prospectus after the Effective Date, shall also mean (from and after the filing with the Commission of such supplement or the effectiveness of such amendment) such prospectus as so supplemented or amended. The term Preliminary Prospectus as used in this Agreement shall mean each preliminary prospectus included in such registration statement prior to the time it becomes effective. The Registration Statement has been declared effective under the Securities Act, and no post-effective amendment to the Registration Statement has been filed as of the date of this Agreement. The Company has caused to be delivered to you copies of each Preliminary Prospectus and has consented to the use of such copies for the purposes permitted by the Securities Act. 2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company hereby represents and warrants as follows: (a) The Company has been duly incorporated and is validly existing as a corporation in good standing under the laws of the jurisdiction of its incorporation, has full corporate power and authority to own or lease its properties and to conduct its business as described in the Registration Statement and the Prospectus and as being conducted, and is duly qualified as a foreign corporation and in good standing in all jurisdictions in which the character of the property owned or leased or the nature of the business transacted by it makes qualification necessary, except where the failure to be so qualified would not have a material adverse effect on the business, properties, operation, condition (financial or other), results of operations or prospects of the Company (herein called a "Material Adverse Effect"). (b) The Company has an authorized capitalization as set forth in the Prospectus, and all of the issued shares of capital stock of the Company have been duly and validly authorized and issued, are fully paid and non-assessable and conform to the description thereof contained in the Prospectus. (c) This Agreement has been duly authorized, executed and delivered by the Company and constitutes a valid and binding obligation, enforceable in accordance with its terms, except as such enforcement may be limited by applicable laws relating to bankruptcy, insolvency, reorganization, moratorium or similar laws relating to or affecting creditors' rights generally or by general equitable principles. 2 3 (d) The execution, delivery and performance of this Agreement by the Company and the consummation of the transactions contemplated hereby will not conflict with or result in a breach or violation of any of the terms or provisions of, or constitute a default under, any indenture, mortgage, deed of trust, loan agreement or other agreement or instrument to which the Company is a party or by which the Company is bound or to which any of the property or assets of the Company is subject, except for breaches or violations as would not have a Material Adverse Effect, nor will such actions result in any violation of the provisions of any statute or any order, rule or regulation of any court or governmental agency or body having jurisdiction over the Company or any of its properties or assets, except for violations as would not have a Material Adverse Effect, nor will such actions result in any violation of the provisions of the charter or bylaws of the Company; and except for the registration of the Stock under the Securities Act and such consents, approvals, authorizations, registrations or qualifications as have been obtained or may be required under the Securities Exchange Act of 1934, as amended (herein called the "Exchange Act") and applicable state or foreign securities laws in connection with the purchase and distribution of the Stock by the Underwriters, no consent, approval, authorization or order of, or filing or registration with, any such court or governmental agency or body is required for the execution, delivery and performance of this Agreement by the Company and the consummation of the transactions contemplated hereby. (e) There are no contracts, agreements or understandings between the Company and any person holding securities of the Company granting such person (A) the right (other than rights which have been waived or satisfied) to require the Company to include such securities in the securities registered pursuant to the Registration Statement, or (B) additional registration rights as a result of the filing of the Registration Statement. No preemptive rights or rights of first refusal or co-sale exist with respect to the Stock or the transactions contemplated by this Agreement, other than such as have been waived in writing prior to the date hereof. (f) Since the respective dates as of which information is given in the Registration Statement and the Prospectus, there has not been any material adverse change, or any development involving a prospective material adverse change, in or affecting the business, properties, management, prospects, condition (financial or other), stockholders' equity or results of operations of the Company, whether or not arising from transactions in the ordinary course of business, other than as set forth in the Registration Statement and the Prospectus, and since such dates, except in the ordinary course of business, the Company has not entered into any material transaction not referred to in the Registration Statement and the Prospectus. (g) The Registration Statement and the Prospectus comply, and on the Closing Date (as hereinafter defined) and any later date on which Option Stock is to be purchased, the Prospectus will comply, in all material respects, with the provisions of the Securities Act and the rules and regulations of the Commission thereunder (the "Rules and Regulations"); on the Effective Date, the Registration Statement did not contain any untrue statement of a material fact and did not omit to state any material fact required to be stated therein or necessary in order to make the statements therein not misleading; and, on the Effective Date, the Prospectus did not and, on the Closing Date and any later date on which Option Stock is to be purchased, will not contain any untrue statement of a material fact or omit to state any material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading; provided, however, that none of the representations and warranties in this 3 4 subparagraph (g) shall apply to statements in, or omissions from, the Registration Statement or the Prospectus made in reliance upon and in conformity with written information furnished to the Company by or on behalf of the Underwriters specifically for use in the Registration Statement or the Prospectus. (h) The Stock has been duly and validly authorized and, when issued and sold to the Underwriters as provided herein, will be duly and validly issued, fully paid and nonassessable; and the Stock conforms to the description thereof in the Prospectus. No further approval or authority of the stockholders or the Board of Directors of the Company will be required for the issuance and sale of the Stock as contemplated herein. (i) Prior to the Closing Date the Stock to be issued and sold by the Company will be approved for inclusion on The Nasdaq National Market upon official notice of issuance. (j) The Company has not sustained, since the date of the latest audited financial statements included in the Prospectus, any material loss or interference with its business from fire, explosion, flood or other calamity, whether or not covered by insurance, or from any labor dispute or court or governmental action, order or decree, otherwise than as set forth or contemplated in the Prospectus; and, since such date, there has not been any material change in the capital stock or, except in the ordinary course of business, long-term debt of the Company, or any material adverse change, or any development involving a prospective material adverse change, in or affecting the business, properties, management, prospects, condition (financial or other), stockholders' equity or results of operations of the Company, otherwise than as set forth or contemplated in the Prospectus. (k) The audited financial statements of the Company, together with the related notes and supporting schedules, and the unaudited financial statements, filed as part of the Registration Statement or included in the Prospectus, fairly present the financial condition and results of operations of the Company at the dates and for the periods indicated, in conformity with generally accepted accounting principles applied on a consistent basis throughout the periods involved. The unaudited financial statements (including related notes) filed as part of the Registration Statement or included in the Prospectus include all adjustments, consisting of normal recurring adjustments, that the Company considers necessary for a fair presentation of the financial position and results of operations for these periods (except for the footnotes and more detailed information with respect to the three-month numbers announced and noted in the Registration Statement). The selected and summary financial and statistical data included in the Registration Statement present fairly the information shown therein and have been compiled on a basis consistent with the audited financial statements presented therein. No other financial statements or schedules are required to be included in the Registration Statement. (l) Ernst & Young LLP, who has audited the financial statements of the Company, together with the related schedules and notes, as of December 31, 1997 and for each of the years in the three (3) years ended December 31, 1997, whose report appears in the Registration Statement and in the Prospectus and who have delivered the Original Letter referred to in Section 9(h) hereof, are independent public accountants as required by and within the meaning of the Securities Act and the Rules and Regulations. 4 5 (m) All real property and buildings held under lease by the Company are held by it under valid, subsisting and, to the best of the Company's knowledge, enforceable leases, with such exceptions as are not material and do not interfere with the use made and proposed to be made of such property and buildings by the Company. (n) The Company carries, or is covered by, insurance in such amounts and covering such risks as is reasonably adequate for the conduct of its business and the value of its properties. (o) Except as disclosed in the Prospectus, the Company (A) to its knowledge after diligent investigation for the purposes hereof, owns, or possesses adequate rights to use, all patents, patent rights, inventions, trade secrets, know-how, proprietary techniques, including processes and substances, trademarks, service marks, trade names and copyrights described or referred to in the Prospectus or owned or used by it or which are necessary for the conduct of its business as currently conducted and as proposed in the Prospectus to be conducted in the future, except for any failure to own or possess any such rights as would not individually or in the aggregate have a Material Adverse Effect, and (B) has no reason to believe, and is not aware of any claim, that the conduct of its business conflicts or will conflict with any such rights of others which conflict or claim is or may be material to the business, properties, operations, condition (financial or other), results of operations or prospects of the Company. (p) Except as described in the Prospectus, there are no legal or governmental proceedings pending to which the Company is a party or of which any property or assets of the Company is the subject which, if determined adversely to the Company, might have a Material Adverse Effect, and, to the Company's knowledge, no such proceedings are threatened or contemplated by governmental authorities or threatened by others. (q) There are no contracts or other documents which are required to be described in the Prospectus or filed as exhibits to the Registration Statement by the Securities Act or by the Rules and Regulations which have not been described in the Prospectus or filed as exhibits to the Registration Statement or incorporated therein by reference as permitted by the Rules and Regulations. (r) No relationship, direct or indirect, exists between or among the Company on the one hand, and the directors, officers, stockholders, collaboration partners, joint venturers, licensees, licensors, consultants, customers or suppliers of the Company on the other hand, which is required to be described in the Prospectus which is not so described. (s) No labor disturbance by the employees of the Company exists or, to the knowledge of the Company, is imminent which might be expected to have a Material Adverse Effect. (t) The Company has filed all federal, state and local income and franchise tax returns required to be filed through the date hereof and has paid all taxes due thereon, and no tax deficiency has been determined adversely to the Company which will have (nor does the Company have any knowledge of any tax deficiency which, if determined adversely to the Company, might have) a Material Adverse Effect. 5 6 (u) Since the date as of which information is given in the Prospectus through the date hereof, and except as may otherwise be disclosed in the Prospectus, the Company has not (i) issued or granted any securities, other than option grants and exercises and stock purchases pursuant to the Company's stock option and employee stock purchase plans in the ordinary course of business or pursuant to the exercise of warrants in the ordinary course of business, (ii) incurred any liability or obligation, direct or contingent, other than liabilities and obligations which were incurred in the ordinary course of business, (iii) entered into any transaction not in the ordinary course of business or (iv) declared or paid any dividend on its capital stock. (v) The Company (i) makes and keeps accurate books and records and (ii) maintains internal accounting controls which provide reasonable assurance that (A) transactions are executed in accordance with management's authorization, (B) transactions are recorded as necessary to permit preparation of its financial statements and to maintain accountability for its assets, (C) access to its assets is permitted only in accordance with management's authorization and (D) the reported accountability for its assets is compared with existing assets at reasonable intervals. (w) The Company (i) is not in violation of its charter or bylaws, (ii) is not in default in any material respect, and no event has occurred which, with notice or lapse of time or both, would constitute such a default, in the due performance or observance of any term, covenant or condition contained in any license agreement, collaboration agreement, material indenture, mortgage, deed of trust, loan agreement or other material agreement or instrument to which it is a party or by which it is bound or to which any of its properties or assets is subject, other than as would not cause a Material Adverse Effect (and, to its knowledge, no other party to any such agreement is in default thereof and no event has occurred which, with notice, lapse of time or both, would constitute such a default), or (iii) is not in violation in any material respect of any law, ordinance, governmental rule, regulation or court decree to which it or its property or assets may be subject and the Company has not failed to obtain any material license, permit, certificate, franchise or other governmental authorization or permit necessary to the ownership of its property or to the conduct of its business, other than as would not cause a Material Adverse Effect. (x) There has been no storage, disposal, generation, manufacture, refinement, transportation, handling or treatment of toxic wastes, medical wastes, hazardous wastes or hazardous substances by the Company (or, to the knowledge of the Company, any of its predecessors in interest) at, upon or from any of the property now or previously owned or leased by the Company in violation of any applicable law, ordinance, rule, regulation, order, judgment, decree or permit or which would require remedial action under any applicable law, ordinance, rule, regulation, order, judgment, decree or permit, except for any violation or remedial action which would not have, or could not be reasonably likely to have, singularly or in the aggregate with all such violations and remedial actions, a Material Adverse Effect; there has been no material spill, discharge, leak, emission, injection, escape, dumping or release of any kind onto such property or into the environment surrounding such property of any toxic wastes, medical wastes, solid wastes, hazardous wastes or hazardous substances due to or caused by the Company or with respect to which the Company has knowledge, except for any such spill, discharge, leak, emission, injection, escape, dumping or release which would not have or would 6 7 not be reasonably likely to have, singularly or in the aggregate with all such spills, discharges, leaks, emissions, injections, escapes, dumpings and releases, a Material Adverse Effect; and the terms "hazardous wastes", "toxic wastes", "hazardous substances" and "medical wastes" shall have the meanings specified in any applicable local, state, federal and foreign laws or regulations with respect to environmental protection. (y) The Company is not an "investment company" within the meaning of such term under the United States Investment Company Act of 1940 and the rules and regulations of the Commission thereunder. 3. PURCHASE OF THE STOCK BY THE UNDERWRITERS. (a) On the basis of the representations and warranties and subject to the terms and conditions herein set forth, the Company agrees to issue and sell shares of the Underwritten Stock to the several Underwriters and each of the Underwriters agrees to purchase from the Company the respective aggregate number of shares of Underwritten Stock set forth opposite its name in Schedule I. The price at which such shares of Underwritten Stock shall be sold by the Company and purchased by the several Underwriters shall be $___ per share [IPO PRICE LESS DISCOUNT]. In making this Agreement, each Underwriter is contracting severally and not jointly; except as provided in paragraphs (b) and (c) of this Section 3, the agreement of each Underwriter is to purchase only the respective number of shares of the Underwritten Stock specified in Schedule I. (b) If for any reason one or more of the Underwriters shall fail or refuse (otherwise than for a reason sufficient to justify the termination of this Agreement under the provisions of Section 8 or 9 hereof) to purchase and pay for the number of shares of the Stock agreed to be purchased by such Underwriter or Underwriters, the Company shall immediately give notice thereof to you, and the non-defaulting Underwriters shall have the right within 24 hours after the receipt by you of such notice to purchase, or procure one or more other Underwriters (the identity of which are subject to the Company's approval, which shall not be unreasonably withheld) to purchase, in such proportions as may be agreed upon between you and such purchasing Underwriter or Underwriters and upon the terms herein set forth, all or any part of the shares of the Stock which such defaulting Underwriter or Underwriters agreed to purchase. If the non-defaulting Underwriters fail so to make such arrangements with respect to all such shares and portion, the number of shares of the Stock which each non-defaulting Underwriter is otherwise obligated to purchase under this Agreement shall be automatically increased on a pro rata basis to absorb the remaining shares and portion which the defaulting Underwriter or Underwriters agreed to purchase; provided, however, that the non-defaulting Underwriters shall not be obligated to purchase the shares and portion which the defaulting Underwriter or Underwriters agreed to purchase if the aggregate number of such shares of the Stock exceeds 10% of the total number of shares of the Stock which all Underwriters agreed to purchase hereunder. If the total number of shares of the Stock which the defaulting Underwriter or Underwriters agreed to purchase shall not be purchased or absorbed in accordance with the two preceding sentences, the Company shall have the right, within the 24 hours next succeeding the 24-hour period above referred to, to make arrangements with other underwriters or purchasers satisfactory to you for purchase of such shares and portion on the terms herein set forth. In any such case, either you or the Company shall have the right to postpone the Closing Date 7 8 determined as provided in Section 5 hereof for not more than seven business days after the date originally fixed as the Closing Date pursuant to said Section 5 in order that any necessary changes in the Registration Statement, the Prospectus, this Agreement or any other documents or arrangements may be made. If neither the non-defaulting Underwriters nor the Company shall make arrangements within the 24-hour periods stated above for the purchase of all the shares of the Stock which the defaulting Underwriter or Underwriters agreed to purchase hereunder, this Agreement shall be terminated without further act or deed and without any liability on the part of the Company to any non-defaulting Underwriter and without any liability on the part of any non-defaulting Underwriter to the Company. Nothing in this paragraph (b), and no action taken hereunder, shall relieve any defaulting Underwriter from liability in respect of any default of such Underwriter under this Agreement. (c) On the basis of the representations, warranties and covenants herein contained, and subject to the terms and conditions herein set forth, the Company grants an option to the several Underwriters to purchase, severally and not jointly, up to all of the shares in the aggregate of the Option Stock from the Company at the same price per share as the Underwriters shall pay for the Underwritten Stock. Said option may be exercised only to cover over-allotments in the sale of the Underwritten Stock by the Underwriters and may be exercised in whole or in part at any time (but not more than once) on or before the thirtieth day after the date of this Agreement upon written or telegraphic notice by you to the Company setting forth the aggregate number of shares of the Option Stock as to which the several Underwriters are exercising the option. Delivery of certificates for the shares of Option Stock, and payment therefor, shall be made as provided in Section 5 hereof. The number of shares of the Option Stock to be purchased by each Underwriter shall be the same percentage of the total number of shares of the Option Stock to be purchased by the several Underwriters as such Underwriter is purchasing of the Underwritten Stock, as adjusted by you in such manner as you deem advisable to avoid fractional shares. 4. OFFERING BY UNDERWRITERS. (a) The terms of the initial public offering by the Underwriters of the Stock to be purchased by them shall be as set forth in the Prospectus. The Underwriters may from time to time change the public offering price after the closing of the initial public offering and increase or decrease the concessions and discounts to dealers as they may determine. (b) The information set forth in the last paragraph on the front cover page of the Prospectus and any Preliminary Prospectus and under "Underwriting" in the Registration Statement, any Preliminary Prospectus and the Prospectus relating to the Stock filed by the Company (insofar as such information relates to the Underwriters) constitutes the only information furnished by the Underwriters to the Company for inclusion in the Registration Statement, any Preliminary Prospectus, and the Prospectus, and you on behalf of the respective Underwriters represent and warrant to the Company that the statements made therein are correct. 5. DELIVERY OF AND PAYMENT FOR THE STOCK. (a) Delivery of certificates for the shares of the Underwritten Stock and the Option Stock (if the option granted by Section 3(c) hereof shall have been exercised not later 8 9 than 7:00 a.m., San Francisco time, on the date two business days preceding the Closing Date), and payment therefor, shall be made at the office of Cooley Godward LLP, 4365 Executive Drive, Suite 1100, San Diego, California 92121, at 7:00 a.m., San Francisco time, on the fourth business day after the date of this Agreement, or at such time on such other day, not later than seven full business days after such fourth business day, as shall be agreed upon in writing by the Company and you. The date and hour of such delivery and payment (which may be postponed as provided in Section 3(b) hereof) are herein called the "Closing Date." (b) If the option granted by Section 3(c) hereof shall be exercised after 7:00 a.m., San Francisco time, on the date two business days preceding the Closing Date, delivery of certificates for the shares of Option Stock, and payment therefor, shall be made at the office of Cooley Godward LLP, 4365 Executive Drive, Suite 1100, San Diego, California 92121, at 7:00 a.m., San Francisco time, on the third business day after the exercise of such option. (c) Payment for the Stock purchased from the Company shall be made to the Company or its order by wire transfer of immediately available funds or one or more certified or official bank check or checks in same day funds. Such payment shall be made upon delivery of certificates for the Stock to you for the respective accounts of the several Underwriters against receipt therefor signed by you. Certificates for the Stock to be delivered to you shall be registered in such name or names and shall be in such denominations as you may request at least one business day before the Closing Date, in the case of Underwritten Stock, and at least one business day prior to the purchase thereof, in the case of the Option Stock. Such certificates will be made available to the Underwriters for inspection, checking and packaging at the offices of Lewco Securities Corporation, 2 Broadway, New York, New York 10004 on the business day prior to the Closing Date or, in the case of the Option Stock, by 3:00 p.m., New York time, on the business day preceding the date of purchase. If the Representatives so elect, delivery of the Shares purchased from the Company may be made by credit through full fast transfer to the accounts at The Depository Trust Company designated by the Representatives. It is understood that you, individually and not on behalf of the Underwriters, may (but shall not be obligated to) make payment to the Company for shares to be purchased by any Underwriter whose check or wire shall not have been received by you on the Closing Date or any later date on which Option Stock is purchased for the account of such Underwriter. Any such payment by you shall not relieve such Underwriter from any of its obligations hereunder. 6. FURTHER AGREEMENTS OF THE COMPANY. The Company covenants and agrees as follows: (a) The Company will (i) prepare and timely file with the Commission under Rule 424(b) a Prospectus containing information previously omitted at the time of effectiveness of the Registration Statement in reliance on Rule 430A and (ii) not file any amendment to the Registration Statement or supplement to the Prospectus of which you shall not previously have been advised and furnished with a copy or to which you shall have reasonably objected in writing or which is not in compliance with the Securities Act or the Rules and Regulations. (b) The Company will promptly notify each Underwriter in the event of (i) the request by the Commission for amendment of the Registration Statement or for supplement to 9 10 the Prospectus or for any additional information, (ii) the issuance by the Commission of any stop order suspending the effectiveness of the Registration Statement, (iii) the institution or notice of intended institution of any action or proceeding for that purpose, (iv) the receipt by the Company of any notification with respect to the suspension of the qualification of the Stock for sale in any jurisdiction, or (v) the receipt by it of notice of the initiation or threatening of any proceeding for such purpose. The Company will make every reasonable effort to prevent the issuance of such a stop order and, if such an order shall at any time be issued, to obtain the withdrawal thereof at the earliest possible moment. (c) The Company will (i) on or before the Closing Date, deliver to you a signed copy of the Registration Statement as originally filed and of each amendment thereto filed prior to the time the Registration Statement becomes effective and, promptly upon the filing thereof, a signed copy of each post-effective amendment, if any, to the Registration Statement (together with, in each case, all exhibits thereto) and will also deliver to you, for distribution to the Underwriters, a sufficient number of additional conformed copies of each of the foregoing (but without exhibits) so that one copy of each may be distributed to each Underwriter, (ii) as promptly as possible deliver to you and send to the several Underwriters, at such office or offices as you may designate, as many copies of the Prospectus as you may reasonably request, and (iii) thereafter from time to time during the period in which a prospectus is required by law to be delivered by an Underwriter or dealer, likewise send to the Underwriters as many additional copies of the Prospectus and as many copies of any supplement to the Prospectus and of any amended prospectus, filed by the Company with the Commission, as you may reasonably request for the purposes contemplated by the Securities Act. (d) If at any time during the period in which a prospectus is required by law to be delivered by an Underwriter or dealer any event relating to or affecting the Company, or of which the Company shall be advised in writing by you, shall occur as a result of which it is necessary, in the opinion of counsel for the Company or of counsel for the Underwriters, to supplement or amend the Prospectus in order to make the Prospectus not misleading in the light of the circumstances existing at the time it is delivered to a purchaser of the Stock, the Company will forthwith prepare and file with the Commission a supplement to the Prospectus or an amended prospectus so that the Prospectus as so supplemented or amended will not contain any untrue statement of a material fact or omit to state any material fact necessary in order to make the statements therein, in the light of the circumstances existing at the time such Prospectus is delivered to such purchaser, not misleading. If, after the initial public offering of the Stock by the Underwriters and during such period, the Underwriters shall propose to vary the terms of offering thereof by reason of changes in general market conditions or otherwise, you will advise the Company in writing of the proposed variation and, if in the opinion either of counsel for the Company or of counsel for the Underwriters, such proposed variation requires that the Prospectus be supplemented or amended, the Company will forthwith prepare and file with the Commission a supplement to the Prospectus or an amended prospectus setting forth such variation. The Company authorizes the Underwriters and all dealers to whom any of the Stock may be sold by the several Underwriters to use the Prospectus, as from time to time amended or supplemented, in connection with the sale of the Stock in accordance with the applicable provisions of the Securities Act and the applicable Rules and Regulations for such period. 10 11 (e) Prior to the filing thereof with the Commission, the Company will submit to you, for your information, a copy of any post-effective amendment to the Registration Statement and any supplement to the Prospectus or any amended prospectus proposed to be filed. (f) The Company will cooperate, when and as requested by you, in the qualification of the Stock for offer and sale under the securities or blue sky laws of such jurisdictions as you may designate and, during the period in which a prospectus is required by law to be delivered by an Underwriter or dealer, in keeping such qualifications in good standing under said securities or blue sky laws; provided, however, that the Company shall not be obligated to file any general consent to service of process or to qualify as a foreign corporation in any jurisdiction in which it is not so qualified. The Company will, from time to time, prepare and file such statements, reports, and other documents as are or may be required to continue such qualifications in effect for so long a period as you may reasonably request for distribution of the Stock. (g) During a period of five years commencing with the date hereof, the Company will furnish to you, and to each Underwriter who may so request in writing, copies of all periodic and special reports furnished to stockholders of the Company and of all information, documents and reports filed with the Commission. (h) Not later than the 45th day following the end of the fiscal quarter first occurring after the first anniversary of the Effective Date, the Company will make generally available to its security holders an earnings statement in accordance with Section 11(a) of the Securities Act and Rule 158 thereunder. (i) The Company agrees to pay all costs and expenses incident to the performance of its obligations under this Agreement, including all costs and expenses incident to (i) the preparation, printing and filing with the Commission and the National Association of Securities Dealers, Inc. of the Registration Statement, any Preliminary Prospectus and the Prospectus, (ii) the furnishing to the Underwriters of copies of any Preliminary Prospectus and of the several documents required by paragraph (c) of this Section 6 to be so furnished, (iii) the printing of this Agreement and related documents delivered to the Underwriters, (iv) the preparation, printing and filing of all supplements and amendments to the Prospectus referred to in paragraph (d) of this Section 6, (v) the furnishing to you and the Underwriters of the reports and information referred to in paragraph (g) of this Section 6 and (vi) the printing and issuance of stock certificates, including the transfer agent's fees. (j) The Company agrees to reimburse you, for the account of the several Underwriters, for blue sky fees and related disbursements (including counsel fees and disbursements and cost of printing memoranda for the Underwriters) paid by or for the account of the Underwriters or their counsel in qualifying the Stock under state securities or blue sky laws and in the review of the offering by the National Association of Securities Dealers. (k) The Company hereby agrees that, without the prior written consent of Hambrecht & Quist LLC on behalf of the Underwriters, the Company will not, for a period of 180 days following the commencement of the public offering of the Stock by the Underwriters, directly or indirectly, (i) sell, offer, contract to sell, make any short sale, pledge, sell any option 11 12 or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase or otherwise transfer or dispose of any shares of Common Stock or any securities convertible into or exchangeable or exercisable for or any rights to purchase or acquire Common Stock or (ii) enter into any swap or other agreement that transfers, in whole or in part, any of the economic consequences or ownership of Common Stock, whether any such transaction described in clause (i) or (ii) above is to be settled by delivery of Common Stock or such other securities, in cash or otherwise. The foregoing sentence shall not apply to (A) the Stock to be sold to the Underwriters pursuant to this Agreement, (B) shares of Common Stock issued by the Company under the stock option and stock purchase plans of the Company (the "Plans"), including shares of Common Stock issued upon the exercise of options granted under the Plans, or upon the exercise of warrants outstanding as of the date hereof, all as described in footnote (___) to the table under the caption "Capitalization" in the Preliminary Prospectus, (C) options to purchase Common Stock granted under the Company's 1998 Equity Incentive Plan, (D) shares of Common Stock to be issued to The DuPont Merck Pharmaceutical in accordance with the Stock Purchase Agreement dated December 26, 1997, and (E) shares of Common Stock issued by the Company in connection with additional collaborative arrangements or license agreements similar to those described in the Prospectus, provided, however, that in each of (A) through (E), the Company shall cause the person to whom such securities are issued to enter into an agreement restricting the transfer of any securities held by such holder for a period of 180 days from the commencement of the public offering of the Stock without the prior written consent of Hambrecht & Quist LLC. (l) The Company agrees to use its best efforts to cause all directors, officers and securityholders to agree that, without the prior written consent of Hambrecht & Quist LLC on behalf of the Underwriters, such person or entity will not, for a period of 180 days following the commencement of the public offering of the Stock by the Underwriters, directly or indirectly, (i) sell, offer, contract to sell, lend, make any short sale, pledge, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase or otherwise transfer or dispose of any shares of Common Stock or any securities convertible into or exchangeable or exercisable for or any rights to purchase or acquire Common Stock or (ii) enter into any swap or other agreement that transfers, in whole or in part, any of the economic consequences or ownership of Common Stock, whether any such transaction described in clause (i) or (ii) above is to be settled by delivery of Common Stock or such other securities, in cash or otherwise. (m) If at any time during the 271-day period after the Registration Statement becomes effective any rumor, publication or event relating to or affecting the Company shall occur as a result of which in your opinion the market price for the Stock has been or is likely to be materially affected (regardless of whether such rumor, publication or event necessitates a supplement to or amendment of the Prospectus), the Company will, after written notice from you advising the Company to the effect set forth above, forthwith prepare, consult with you concerning the substance of, and disseminate a press release or other public statement, reasonably satisfactory to you, responding to or commenting on such rumor, publication or event. 12 13 (n) Prior to the Effective Date, to apply for the listing of the Stock on The Nasdaq National Market and to use its best efforts to complete that listing, subject only to official notice of issuance, prior to the Closing Date. (o) To apply the net proceeds from the sale of the Stock being sold by the Company as set forth in the Prospectus. (p) The Company is familiar with the Investment Company Act of 1940, as amended, and has in the past conducted its affairs, and will in the future conduct its affairs, in such a manner to ensure that the Company was not and will not be an "investment company" or a company "controlled" by an "investment company" within the meaning of the Investment Company Act of 1940, as amended, and the rules and regulations thereunder. (q) The Company will complete, prior to the consummation of the sale of the Stock, (i) the Company's reincorporation under Delaware law and (ii) the 4-for-1 reverse stock split to be effected concurrently therewith. 7. INDEMNIFICATION AND CONTRIBUTION. (a) The Company agrees to indemnify and hold harmless each Underwriter and each person (including each partner or officer thereof) who controls any Underwriter within the meaning of Section 15 of the Securities Act from and against any and all losses, claims, damages or liabilities, joint or several, to which such indemnified parties or any of them may become subject under the Securities Act, the Exchange Act, or the common law or otherwise, and the Company agrees to reimburse each such Underwriter and controlling person for any legal or other expenses (including, except as otherwise hereinafter provided, reasonable fees and disbursements of counsel) incurred by the respective indemnified parties in connection with defending against any such losses, claims, damages or liabilities or in connection with any investigation or inquiry of, or other proceeding which may be brought against, the respective indemnified parties, in each case arising out of or based upon (i) any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement (including the Prospectus as part thereof and any Rule 462(b) registration statement) or any post-effective amendment thereto (including any Rule 462(b) registration statement), or the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, or (ii) any untrue statement or alleged untrue statement of a material fact contained in any Preliminary Prospectus or the Prospectus (as amended or as supplemented if the Company shall have filed with the Commission any amendment thereof or supplement thereto) or the omission or alleged omission to state therein a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading; provided, however, that (1) the indemnity agreements of the Company contained in this paragraph (a) shall not apply to any such losses, claims, 13 14 damages, liabilities or expenses if such statement or omission was made in reliance upon and in conformity with information furnished as herein stated or otherwise furnished in writing to the Company by or on behalf of any Underwriter for use in any Preliminary Prospectus or the Registration Statement or the Prospectus or any such amendment thereof or supplement thereto and (2) the indemnity agreement contained in this paragraph (a) with respect to any Preliminary Prospectus shall not inure to the benefit of any Underwriter from whom the person asserting any such losses, claims, damages, liabilities or expenses purchased the Stock which is the subject thereof (or to the benefit of any person controlling such Underwriter) if at or prior to the written confirmation of the sale of such Stock a copy of the Prospectus (or the Prospectus as amended or supplemented) was not sent or delivered to such person and the untrue statement or omission of a material fact contained in such Preliminary Prospectus was corrected in the Prospectus (or the Prospectus as amended or supplemented) unless the failure is the result of noncompliance by the Company with paragraph (c) of Section 6 hereof. The indemnity agreements of the Company contained in this paragraph (a) and the representations and warranties of the Company contained in Section 2 hereof shall remain operative and in full force and effect regardless of any investigation made by or on behalf of any indemnified party and shall survive the delivery of and payment for the Stock. (b) Each Underwriter severally agrees to indemnify and hold harmless the Company, each of its officers who signs the Registration Statement on his own behalf or pursuant to a power of attorney, each of its directors, each other Underwriter and each person (including each partner or officer thereof) who controls the Company or any such other Underwriter within the meaning of Section 15 of the Securities Act, from and against any and all losses, claims, damages or liabilities, joint or several, to which such indemnified parties or any of them may become subject under the Securities Act, the Exchange Act, or the common law or otherwise and to reimburse each of them for any legal or other expenses (including, except as otherwise hereinafter provided, reasonable fees and disbursements of counsel) incurred by the respective indemnified parties in connection with defending against any such losses, claims, damages or liabilities or in connection with any investigation or inquiry of, or other proceeding which may be brought against, the respective indemnified parties, in each case arising out of or based upon (i) any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement (including the Prospectus as part thereof and any Rule 462(b) registration statement) or any post-effective amendment thereto (including any Rule 462(b) registration statement) or the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading or (ii) any untrue statement or alleged untrue statement of a material fact contained in the Prospectus (as amended or as supplemented if the Company shall have filed with the Commission any amendment thereof or supplement thereto) or the omission or alleged omission to state therein a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading, if such statement or omission was made in reliance upon and in conformity with information furnished as herein stated or otherwise furnished in writing to the Company by or on behalf of such indemnifying Underwriter for use in the Registration Statement or the Prospectus or any such amendment thereof or supplement thereto. Notwithstanding the provisions of this paragraph 7(b), no Underwriter shall be liable for any amount in excess of the underwriting discount applicable to the Stock purchased by such Underwriter. The indemnity agreement of each Underwriter contained in this paragraph (b) shall remain operative and in full force and effect regardless of any investigation made by or on behalf of any indemnified party and shall survive the delivery of and payment for the Stock. (c) Each party indemnified under the provision of paragraphs (a) and (b) of this Section 7 agrees that, upon the service of a summons or other initial legal process upon it in any action or suit instituted against it or upon its receipt of written notification of the commencement of any investigation or inquiry of, or proceeding against, it in respect of which 14 15 indemnity may be sought on account of any indemnity agreement contained in such paragraphs, it will promptly give written notice (herein called the Notice) of such service or notification to the party or parties from whom indemnification may be sought hereunder. No indemnification provided for in such paragraphs shall be available to any party who shall fail so to give the Notice if the party to whom such Notice was not given was unaware of the action, suit, investigation, inquiry or proceeding to which the Notice would have related and was prejudiced by the failure to give the Notice, but the omission so to notify such indemnifying party or parties of any such service or notification shall not relieve such indemnifying party or parties from any liability which it or they may have to the indemnified party for contribution or otherwise than on account of such indemnity agreement. Any indemnifying party shall be entitled at its own expense to participate in the defense of any action, suit or proceeding against, or investigation or inquiry of, an indemnified party. Any indemnifying party shall be entitled, if it so elects within a reasonable time after receipt of the Notice by giving written notice (herein called the Notice of Defense) to the indemnified party, to assume (alone or in conjunction with any other indemnifying party or parties) the entire defense of such action, suit, investigation, inquiry or proceeding, in which event such defense shall be conducted, at the expense of the indemnifying party or parties, by counsel chosen by such indemnifying party or parties and reasonably satisfactory to the indemnified party or parties; provided, however, that (i) if the indemnified party or parties reasonably determine that there may be a conflict between the positions of the indemnifying party or parties and of the indemnified party or parties in conducting the defense of such action, suit, investigation, inquiry or proceeding or that there may be legal defenses available to such indemnified party or parties different from or in addition to those available to the indemnifying party or parties, then counsel for the indemnified party or parties shall be entitled to conduct the defense to the extent reasonably determined by such counsel to be necessary to protect the interests of the indemnified party or parties and (ii) in any event, the indemnified party or parties shall be entitled to have counsel chosen by such indemnified party or parties participate in, but not conduct, the defense. If, within a reasonable time after receipt of the Notice, an indemnifying party gives a Notice of Defense and the counsel chosen by the indemnifying party or parties is reasonably satisfactory to the indemnified party or parties, the indemnifying party or parties will not be liable under paragraphs (a) through (c) of this Section 7 for any legal or other expenses subsequently incurred by the indemnified party or parties in connection with the defense of the action, suit, investigation, inquiry or proceeding, except that (A) the indemnifying party or parties shall bear the legal and other expenses incurred in connection with the conduct of the defense as referred to in clause (i) of the proviso to the preceding sentence and (B) the indemnifying party or parties shall bear such other expenses as it or they have authorized to be incurred by the indemnified party or parties. If, within a reasonable time after receipt of the Notice, no Notice of Defense has been given, the indemnifying party or parties shall be responsible for any legal or other expenses incurred by the indemnified party or parties in connection with the defense of the action, suit, investigation, inquiry or proceeding. (d) If the indemnification provided for in this Section 7 is unavailable or insufficient to hold harmless an indemnified party under paragraph (a) or (b) of this Section 7, then each indemnifying party, in lieu of indemnifying such indemnified party, shall contribute to the amount paid or payable by such indemnified party as a result of the losses, claims, damages or liabilities referred to in paragraph (a) or (b) of this Section 7 (i) in such proportion as is appropriate to reflect the relative benefits received by each indemnifying party from the offering 15 16 of the Stock or (ii) if the allocation provided by clause (i) above is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause (i) above but also the relative fault of each indemnifying party in connection with the statements or omissions that resulted in such losses, claims, damages or liabilities, or actions in respect thereof, as well as any other relevant equitable considerations. The relative benefits received by the Company and the Underwriters shall be deemed to be in the same respective proportions as the total net proceeds from the offering of the Stock received by the Company and the total underwriting discount received by the Underwriters, as set forth in the table on the cover page of the Prospectus, bear to the aggregate public offering price of the Stock. Relative fault shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by each indemnifying party and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such untrue statement or omission. The parties agree that it would not be just and equitable if contributions pursuant to this paragraph (d) were to be determined by pro rata allocation (even if the Underwriters were treated as one entity for such purpose) or by any other method of allocation which does not take into account the equitable considerations referred to in the first sentence of this paragraph (d). The amount paid by an indemnified party as a result of the losses, claims, damages or liabilities, or actions in respect thereof, referred to in the first sentence of this paragraph (d) shall be deemed to include any legal or other expenses reasonably incurred by such indemnified party in connection with investigation, preparing to defend or defending against any action or claim which is the subject of this paragraph (d). Notwithstanding the provisions of this paragraph (d), no Underwriter shall be required to contribute any amount in excess of the underwriting discount applicable to the Stock purchased by such Underwriter. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. The Underwriters' obligations in this paragraph (d) to contribute are several in proportion to their respective underwriting obligations and not joint. Each party entitled to contribution agrees that upon the service of a summons or other initial legal process upon it in any action instituted against it in respect of which contribution may be sought, it will promptly give written notice of such service to the party or parties from whom contribution may be sought, but the omission so to notify such party or parties of any such service shall not relieve the party from whom contribution may be sought from any obligation it may have hereunder or otherwise (except as specifically provided in paragraph (c) of this Section 7). (e) The Company will not, without the prior written consent of each Underwriter, settle or compromise or consent to the entry of any judgment in any pending or threatened claim, action, suit or proceeding in respect of which indemnification may be sought hereunder (whether or not such Underwriter or any person who controls such Underwriter within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act is a party to such claim, action, suit or proceeding) unless such settlement, compromise or consent includes an unconditional release of such Underwriter and each such controlling person from all liability arising out of such claim, action, suit or proceeding. 16 17 8. TERMINATION. This Agreement may be terminated by you at any time prior to the Closing Date by giving written notice to the Company if after the date of this Agreement trading in the Common Stock shall have been suspended, or if there shall have occurred (i) the engagement in hostilities or an escalation of major hostilities by the United States or the declaration of war or a national emergency by the United States on or after the date hereof, (ii) any outbreak of hostilities or other national or international calamity or crisis or change in economic or political conditions if the effect of such outbreak, calamity, crisis or change in economic or political conditions in the financial markets of the United States would, in the Underwriters' reasonable judgment, make the offering or delivery of the Stock impracticable, (iii) suspension of trading in securities generally or a material adverse decline in value of securities generally on the New York Stock Exchange, the American Stock Exchange, The Nasdaq Stock Market, or limitations on prices (other than limitations on hours or numbers of days of trading) for securities on either such exchange or system, (iv) the enactment, publication, decree or other promulgation of any federal or state statute, regulation, rule or order of, or commencement of any proceeding or investigation by, any court, legislative body, agency or other governmental authority which in the Underwriters' reasonable opinion materially and adversely affects or will materially and adversely affect the business or operations of the Company, (v) declaration of a banking moratorium by either federal or New York State authorities or (vi) the taking of any action by any federal, state or local government or agency in respect of its monetary or fiscal affairs which in the Underwriters' reasonable opinion has a material adverse effect on the securities markets in the United States. If this Agreement shall be terminated pursuant to this Section 8, there shall be no liability of the Company to the Underwriters and no liability of the Underwriters to the Company; provided, however, that in the event of any such termination the Company agrees to indemnify and hold harmless the Underwriters from all costs or expenses incident to the performance of the obligations of the Company under this Agreement, including all costs and expenses referred to in paragraphs (i) and (j) of Section 6 hereof. 9. CONDITIONS OF UNDERWRITERS' OBLIGATIONS. The obligations of the several Underwriters to purchase and pay for the Stock shall be subject to the accuracy, as of the date hereof and the Closing Date and any later date on which Option Stock is to be purchased, as the case may be, of the representations and warranties of the Company herein, to the performance by the Company of all its obligations to be performed hereunder at or prior to the Closing Date or any later date on which Option Stock is to be purchased, as the case may be, and to the following further conditions: (a) The Registration Statement and Prospectus shall have been timely filed with the Commission in accordance with Section 5(a) and shall have become effective as of the date hereof; no stop order suspending the effectiveness of the Registration Statement or any part thereof shall have been issued and no proceeding for that purpose shall have been initiated or threatened by the Commission; and any request of the Commission for inclusion of additional information in the Registration Statement or the Prospectus or otherwise shall have been complied with. (b) No Underwriter shall have discovered and disclosed to the Company on or prior to the Closing Date or any later date on which Option Stock is to be purchased that the Registration Statement or the Prospectus or any amendment or supplement thereto contains an 17 18 untrue statement of a fact which, in the opinion of Brobeck, Phleger & Harrison LLP, counsel for the Underwriters, is material or omits to state a fact which, in the opinion of such counsel, is material and is required to be stated therein or is necessary to make the statements therein not misleading. (c) All corporate proceedings and other legal matters incident to the authorization, form and validity of this Agreement, the Registration Statement, the Prospectus and the certificates representing the Stock, and the registration, authorization, issue, sale and delivery of the Stock, and all other legal matters relating to this Agreement and the transactions contemplated hereby, shall be, on or prior to the Closing Date or any later date on which Option Stock is to be purchased, reasonably satisfactory to Brobeck, Phleger & Harrison LLP, counsel for the Underwriters, and the Company shall have furnished to such counsel all documents and information that they may have reasonably requested to enable them to pass upon such matters. (d) You shall be satisfied that (i) as of the Effective Date, the statements made in the Registration Statement and the Prospectus were true and correct in all material respects and neither the Registration Statement nor the Prospectus omitted to state any material fact required to be stated therein or necessary in order to make the statements therein, respectively, not misleading, (ii) since the Effective Date, no event has occurred which should have been set forth in a supplement or amendment to the Prospectus which has not been set forth in such a supplement or amendment, (iii) since the respective dates as of which information is given in the Registration Statement in the form in which it originally became effective and the Prospectus contained therein, there has not been any material adverse change or any development involving a prospective material adverse change in or affecting the business, business prospects, properties, condition (financial or other) or results of operations of the Company, whether or not arising from transactions in the ordinary course of business, and, since such dates, except in the ordinary course of business, the Company has not entered into any material transaction not referred to in the Registration Statement in the form in which it originally became effective and the Prospectus contained therein, (iv) the Company does not have any material contingent obligations which are not disclosed in the Registration Statement and the Prospectus, (v) there are not any pending or known threatened legal proceedings to which the Company is a party or of which property of the Company is the subject which are material and which are not disclosed in the Registration Statement and the Prospectus, (vi) there are not any franchises, contracts, leases or other documents which are required to be filed as exhibits to the Registration Statement which have not been filed as required, (vii) the representations and warranties of the Company herein are true and correct in all material respects as of the Closing Date or any later date on which Option Stock is to be purchased, as the case may be, and (viii) there has not been any material change in the market for securities in general or in political, financial or economic conditions from those reasonably foreseeable so as to render it impracticable in your reasonable judgment to make a public offering of the Stock, or a material adverse change in market levels for securities in general (or those of companies in particular) or financial or economic conditions which render it inadvisable to proceed. (e) You shall have received from Cooley Godward LLP, counsel for the Company, an opinion, addressed to the Underwriters and dated the Closing Date, in form and substance reasonably satisfactory to the Representatives covering the matters set forth in Annex A hereto, and if Option Stock is purchased at any date after the Closing Date, such counsel will 18 19 provide an additional opinion, addressed to the Underwriters and dated such later date, confirming that the statements expressed as of the Closing Date in such opinion remain valid as of such later date. (f) You shall have received from Seed and Berry LLP, patent counsel for the Company, an opinion, addressed to the Underwriters and dated the Closing Date, in form and substance reasonably satisfactory to the Representatives covering the matters set forth in Annex B hereto, and if Option Stock is purchased at any date after the Closing Date, such counsel will provide an additional opinion, addressed to the Underwriters and dated such later date, confirming that the statements expressed as of the Closing Date in such opinion remain valid as of such later date. (g) You shall have received from Brobeck, Phleger & Harrison LLP, counsel for the Underwriters, an opinion, dated the Closing Date and any later date on which Option Stock is to be purchased, with respect to the sufficiency of all such corporate proceedings and other legal matters relating to this Agreement and the transactions contemplated hereby as you may reasonably require, and the Company shall have furnished to such counsel such documents as they may have requested for the purpose of enabling them to pass upon such matters. (h) You shall have received from Ernst & Young LLP a letter, in form and substance satisfactory to the Representatives, addressed to or for the use of the Underwriters and dated as of the date hereof (the "Original Letter") (i) confirming that they are independent certified public accountants with respect to the Company within the meaning of the Securities Act and the applicable published Rules and Regulations and (ii) stating, as of the date hereof (or, with respect to matters involving changes or developments since the respective dates as of which specified financial information is given in the Prospectus, as of a date not more than five days prior to the date hereof), the conclusions and findings of such firm with respect to the financial information and other matters ordinarily covered by accountants' "comfort letters" to underwriters in connection with registered public offerings. (i) With respect to the Original Letter, the Company shall have furnished to the Representatives a letter (the "Bring-Down Letter") of such accountants, addressed to the Underwriters and dated the Closing Date and any later date on which Option Stock is to be purchased (i) confirming that they are independent public accountants within the meaning of the Securities Act and the applicable Rules and Regulations, (ii) confirming, as of the date of the Bring-Down Letter (or, with respect to matters involving changes or developments since the respective dates as of which specified financial information is given in the Prospectus, as of a date not more than five days prior to the date of the Bring-Down Letter), the conclusions and findings of such firm with respect to the financial information and other matters covered by the Original Letter, and (iii) setting forth any revisions and additions to the statements and conclusions set forth in the Original Letter which are necessary to reflect any changes in the facts described in the Original Letter since the date of the Original Letter or to reflect the availability of more recent financial statements, data or information. The Original Letter and the Bring-Down Letter shall not disclose any change, or any development involving a prospective change, in or affecting the condition (financial or otherwise), earnings, operations, properties, business or business prospects of the Company which, in your sole judgment, makes it impractical or 19 20 inadvisable to proceed with the public offering of the Stock or the purchase of the Option Stock as contemplated by the Prospectus. In addition, you shall have received from Ernst & Young LLP a letter stating that their review of the Company's system of internal accounting controls, to the extent they deemed necessary in establishing the scope of their examination of the Company's financial statements as of and at December 31, 1997, did not disclose any weakness in internal controls that they considered to be material weaknesses. (j) You shall have received on the Closing Date and on any later date on which Option Stock is purchased, a certificate of the Company dated the Closing Date or such later date, as the case may be, and signed by the President and the Chief Financial Officer of the Company, stating that: (i) The representations, warranties and agreements of the Company in this Agreement are true and correct in all material respects as if made on and as of the Closing Date and any later date on which the Option Stock is to be purchased, as the case may be; the Company has complied with all the agreements contained herein and satisfied all the conditions on its part to be performed or satisfied at or prior to the Closing Date or any later date on which Option Stock is to be purchased, as the case may be; (ii) No stop order suspending the effectiveness of the Registration Statement has been issued and no proceedings for that purpose have been instituted or are pending or threatened under the Securities Act; (iii) When the Registration Statement became effective and at all times subsequent thereto up to the delivery of such certificate, the Registration Statement and the Prospectus, and any amendments or supplements thereto, contained all material information required to be included therein by the Securities Act and the Rules and Regulations and in all material respects conformed to the requirements of the Securities Act and the Rules and Regulations, the Registration Statement, and any amendment or supplement thereto, did not and does not include any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading, the Prospectus, and any amendment or supplement thereto, did not and does not include any untrue statement of a material fact or omit to state a material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading, and, since the effective date of the Registration Statement, there has occurred no event required to be set forth in an amended or supplemented Prospectus which has not been so set forth; and (iv) Subsequent to the respective dates as of which information is given in the Registration Statement and Prospectus, there has not been (a) any material adverse change in the business, business prospects, properties, condition (financial or other) or results of operations of the Company, (b) any transaction 20 21 that is material to the Company, except transactions entered into in the ordinary course of business, (c) any obligation, direct or contingent, incurred by the Company that is material to the Company, except obligations incurred in the ordinary course of business, (d) any change in the capital stock or, except in the ordinary course of business, outstanding indebtedness of the Company that is material to the Company, (e) any dividend or distribution of any kind declared, paid or made on the capital stock of the Company, or (f) any loss or damage (whether or not insured) to the property of the Company which has been sustained or will have been sustained which has a material adverse effect on the business, business prospects, properties, condition (financial or other) or results of operations of the Company. (k) The Company shall have furnished to you such further certificates and documents as you shall reasonably request (including certificates of officers of the Company) as to the accuracy of the representations and warranties of the Company herein, as to the performance by the Company of their respective obligations hereunder and as to the other conditions concurrent and precedent to the obligations of the Underwriters hereunder. (l) You shall have been furnished evidence in usual written form from the appropriate authorities of the several jurisdictions, or other evidence satisfactory to you, of the qualification referred to in paragraph (f) of Section 6 hereof. (m) Prior to the Closing Date, the Stock to be issued and sold by the Company shall have been approved for inclusion on The Nasdaq National Market and the Company's registration statement pursuant to Section 12(g) of the Exchange Act shall have been declared effective by the Commission. (n) On or prior to the Closing Date, you shall have received, from all officers, directors and securityholders, agreements, in form reasonably satisfactory to Hambrecht & Quist LLC, stating that without the prior written consent of Hambrecht & Quist LLC on behalf of the Underwriters, such person or entity will not, for a period of 180 days following the commencement of the public offering of the Stock by the Underwriters, directly or indirectly, (i) sell, offer, lend, contract to sell, make any short sale, pledge, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase or otherwise transfer or dispose of any shares of Common Stock or any securities convertible into or exchangeable or exercisable for or any rights to purchase or acquire Common Stock or (ii) enter into any swap or other agreement that transfers, in whole or in part, any of the economic consequences or ownership of Common Stock, whether any such transaction described in clause (i) or (ii) above is to be settled by delivery of Common Stock or such other securities, in cash or otherwise. (o) The Company shall have completed, prior to the consummation of the sale of the Stock, (i) the Company's reincorporation under Delaware law and (ii) the 4-for-1 reverse stock split to be effected concurrently therewith. All the agreements, opinions, certificates and letters mentioned above or elsewhere in this Agreement shall be deemed to be in compliance with the provisions hereof only 21 22 if Brobeck, Phleger & Harrison LLP, counsel for the Underwriters, shall be satisfied that they comply in form and scope. In case any of the conditions specified in this Section 9 shall not be fulfilled, this Agreement may be terminated by you by giving written notice to the Company. Any such termination shall be without liability of the Company to the Underwriters and without liability of the Underwriters to the Company; provided, however, that (i) in the event of such termination, the Company agrees to indemnify and hold harmless the Underwriters from all costs or expenses incident to the performance of the obligations of the Company under this Agreement, including all costs and expenses referred to in paragraphs (i) and (j) of Section 6 hereof, and (ii) if this Agreement is terminated by you because of any refusal, inability or failure on the part of the Company to perform any agreement herein, to fulfill any of the conditions herein, or to comply with any provision hereof other than by reason of a default by any of the Underwriters, the Company will reimburse the Underwriters severally upon demand for all out-of-pocket expenses (including reasonable fees and disbursements of counsel) that shall have been incurred by them in connection with the transactions contemplated hereby. 10. CONDITIONS OF THE OBLIGATION OF THE COMPANY. The obligation of the Company to deliver the Stock shall be subject to the conditions that (a) the Registration Statement shall have become effective and (b) no stop order suspending the effectiveness thereof shall be in effect and no proceedings therefor shall be pending or threatened by the Commission. In case either of the conditions specified in this Section 10 shall not be fulfilled, this Agreement may be terminated by the Company by giving notice to you. Any such termination shall be without liability of the Company to the Underwriters and without liability of the Underwriters to the Company; provided, however, that in the event of any such termination the Company agrees to indemnify and hold harmless the Underwriters from all costs or expenses incident to the performance of the obligations of the Company under this Agreement, including all costs and expenses referred to in paragraphs (i) and (j) of Section 6 hereof. 11. REIMBURSEMENT OF CERTAIN EXPENSES. In addition to its other obligations under Section 7 of this Agreement, the Company hereby agrees to reimburse on a quarterly basis the Underwriters for all reasonable legal and other expenses incurred in connection with investigating or defending any claim, action, investigation, inquiry or other proceeding arising out of or based upon any statement or omission, or any alleged statement or omission, described in paragraph (a) of Section 7 of this Agreement, notwithstanding the absence of a judicial determination as to the propriety and enforceability of the obligations under this Section 11 and the possibility that such payments might later be held to be improper; provided, however, that (i) to the extent any such payment is ultimately held to be improper, the persons receiving such payments shall promptly refund them and (ii) such persons shall provide to the Company, upon request, reasonable assurances of their ability to effect any refund, when and if due. 12. PERSONS ENTITLED TO BENEFIT OF AGREEMENT. This Agreement shall inure to the benefit of the Company and the several Underwriters and, with respect to the provisions of Section 7 hereof, the several parties (in addition to the Company and the several Underwriters) indemnified under the provisions of said Section 7, and their respective personal representatives, successors and assigns. Nothing in this Agreement is intended or shall be construed to give to 22 23 any other person, firm or corporation any legal or equitable remedy or claim under or in respect of this Agreement or any provision herein contained. The term "successors and assigns" as herein used shall not include any purchaser, as such purchaser, of any of the Stock from any of the several Underwriters. 13. NOTICES. Except as otherwise provided herein, all communications hereunder shall be in writing and, if to the Underwriters, shall be mailed or delivered to Hambrecht & Quist LLC, One Bush Street, San Francisco, California 94104, with a copy to Brobeck, Phleger & Harrison LLP, Two Embarcadero Place, 2200 Geng Road, Palo Alto, California 94303, Attention: J. Stephan Dolezalek, Esq.; and if to the Company, shall be mailed or delivered to it at its office, Attention: Alan J. Lewis, Ph.D., with a copy to Cooley Godward LLP, 4365 Executive Drive, Suite 1100, San Diego, California 92121, Attention: Frederick T. Muto, Esq. 14. MISCELLANEOUS. The reimbursement, indemnification and contribution agreements contained in this Agreement and the representations, warranties and covenants in this Agreement shall remain in full force and effect regardless of (a) any termination of this Agreement, (b) any investigation made by or on behalf of any Underwriter or controlling person thereof, or by or on behalf of the Company or their respective directors or officers, and (c) delivery and payment for the Stock under this Agreement; provided, however, that if this Agreement is terminated prior to the Closing Date, the provisions of paragraphs (k) and (l) of Section 6 hereof shall be of no further force or effect. 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. This Agreement shall be governed by, and construed in accordance with, the laws of the State of California, without respect to the conflicts of law provisions thereof. [remainder of page intentionally blank] 23 24 Please sign and return to the Company the enclosed duplicates of this letter, whereupon this letter will become a binding agreement between the Company and the several Underwriters in accordance with its terms. Very truly yours, SIGNAL PHARMACEUTICALS, INC. By: Alan J. Lewis, Ph.D. President and Chief Executive Officer The foregoing Agreement is hereby confirmed and accepted as of the date first above written. HAMBRECHT & QUIST LLC BANCAMERICA ROBERTSON STEPHENS LEHMAN BROTHERS INC. By Hambrecht & Quist LLC By_____________________________ Managing Director Acting on behalf of the several Underwriters, including themselves, named in Schedule I hereto. 24 25 SCHEDULE I UNDERWRITERS
Shares to be Underwriters Purchased - ------------ ------------ Hambrecht & Quist LLC.............................................. BancAmerica Robertson Stephens .................................... Lehman Brothers Inc................................................ --------- TOTAL ..................................................... 2,500,000
26 ANNEX A MATTERS TO BE COVERED IN THE OPINION OF COOLEY GODWARD LLP, COUNSEL FOR THE COMPANY (i) The Company has been duly incorporated and is validly existing as a corporation in good standing under the laws of the jurisdiction of its incorporation, to the best of such counsel's knowledge, is duly qualified as a foreign corporation and in good standing in each state of the United States of America in which its ownership or leasing of property requires such qualification (except where the failure to be so qualified would not have a material adverse effect on the business, properties, financial condition or results of operations of the Company), and has full corporate power and authority to own or lease its properties and conduct its business as described in the Registration Statement; (ii) To the best of such counsel's knowledge, the Company does not own or control, directly or indirectly, any corporation, association or other entity. (iii) The Stock to be issued by the Company pursuant to the terms of the Underwriting Agreement has been duly authorized and, upon issuance and delivery against payment therefor in accordance with the terms thereof, will be duly and validly issued and fully paid and nonassessable, and no preemptive rights of, or rights of refusal in favor of, any third party, including any stockholders of the Company exist with respect to the Stock, or the issue and sale thereof, pursuant to the Certificate of Incorporation or Bylaws of the Company and, to the best of such counsel's knowledge, there are no contractual preemptive rights that have not been waived, or rights of first refusal or rights of co-sale which exist with respect to the issue and sale of the Stock; (iv) The Company has the corporate power and authority to enter into the Underwriting Agreement and to issue, sell and deliver to the Underwriters the Stock to be issued and sold by it thereunder; (v) The Underwriting Agreement and the transactions contemplated thereby have been duly authorized by all necessary corporate action on the part of the Company and the Underwriting Agreement has been duly executed and delivered by the Company and is a valid and binding agreement of the Company, enforceable in accordance with its terms, except as limited by bankruptcy, insolvency, reorganization, moratorium or similar laws relating to or affecting creditors' rights generally or by general equitable principles or the availability of equitable remedies; provided that such counsel need not express any opinion with respect to the indemnification or contribution provisions thereof; (vi) The Registration Statement has become effective under the Securities Act and to our knowledge no stop order suspending the effectiveness of the Registration Statement or 27 suspending or preventing the use of the Prospectus has been issued and no proceedings for that purpose have been instituted or are pending, threatened or contemplated by the Commission; (vii) The Registration Statement and the Prospectus (other than the financial statements (including supporting schedules), other financial data and statistical data derived therefrom as to which such counsel need express no opinion), as of the effective date of the Registration Statement, complied as to form in all material respects with the requirements of the Securities Act and the applicable rules and regulations promulgated thereunder; (viii) The authorized, issued and outstanding capital stock of the Company was and is as set forth in the Prospectus under the caption "Capitalization" as of the dates stated therein; the issued and outstanding shares of capital stock of the Company have been duly and validly issued and are fully paid and nonassessable, and have not been issued in violation of or subject to any preemptive right or, to the best of such counsel's knowledge, co-sale right, registration right, right of first refusal or other similar right; except as disclosed in or specifically contemplated by the Registration Statement and the Prospectus, to the best of such counsel's knowledge, there are no outstanding options, warrants or other rights calling for the issuance of, and no commitments, plans or arrangements to issue, any shares of capital stock of the Company or any security convertible into or exchangeable for capital stock of the Company and all outstanding shares of Preferred Stock of the Company have been duly and validly converted into Common Stock of the Company; (ix) The information required to be set forth in the Registration Statement in answer to Items 9 (Description of Securities) and 10 (Interest of Counsel) (insofar as it relates to such counsel) and, to the best of such counsel's knowledge, in Items 11(c) (Legal Proceedings), 11(n) (Certain Relationships and Related Transactions) of Form S-1 is accurately set forth therein to the extent required under the Securities Act and the applicable Rules and Regulations or no response is required with respect to such Items, and, the description of the Company's stock option plans, the options granted and which may be granted thereunder, and the Company's employee stock purchase plans set forth in the Prospectus accurately presents the information required to be shown with respect to said plans and options to the extent required by the Securities Act and the applicable Rules and Regulations; and the form of certificate evidencing the Common Stock and filed as an exhibit to the Registration Statement complies with Delaware law; (x) The descriptions in the Registration Statement and the Prospectus of the charter and bylaws of the Company and of the Delaware General Corporation Law and under the captions "Management -- Executive Officers, Directors and Key Employees," "Management -- Limitation on Directors' and Executive Officers' Liability and Indemnification," "Description of Capital Stock" and Item 14 (Indemnification of Directors and Officers), as applicable, are accurate in all material respects and present the information required to be presented by the Securities Act and the applicable Rules and Regulations; 28 (xi) Such counsel does not know of any agreement, license, franchise, contract, lease, document or legal or government action, suit or proceeding, pending or overtly threatened, which in the opinion of such counsel is of a character required to be described or referred to in the Registration Statement or the Prospectus or to be filed as an exhibit to the Registration Statement that is not described or referred to therein or filed as required by the Securities Act and the applicable Rules and Regulations; (xii) The performance of this Agreement and the consummation of the transactions herein contemplated will not (a) result in any violation of the Company's charter or bylaws or (b) result in a material breach or violation of any of the terms and provisions of, or constitute a default under, any bond, debenture, note or other evidence of indebtedness, or any material lease, contract, indenture, mortgage, deed of trust, loan agreement, joint venture or other agreement or instrument to which the Company is a party or by which its properties are bound and which is filed as an exhibit to the Registration Statement, or any applicable statute, rule or regulation, other than state securities or blue sky laws, or any order, writ or decree known to such counsel of any court, government or governmental agency or body having jurisdiction over the Company or any of its properties or operations; (xiv) The Company is not presently (a) in material violation of its charter or bylaws, (b) in material breach of any applicable statute, rule or regulation or any order, writ or decree of any court or governmental agency or body having jurisdiction over the Company or any of its properties or operations, or (c) in breach of or default with respect to any material provision of any material agreement, mortgage, license, lease or other instrument to which the Company is a party or by which any of its properties are bound, except for such default or breach as would not have a material adverse effect on the condition (financial or otherwise), earnings, operations or business of the Company; (xv) Except as set forth in the Registration Statement and Prospectus, to the best of such counsel's knowledge, no holders of Common Stock or other securities of the Company have registration rights with respect to securities of the Company and, except as set forth in the Registration Statement and Prospectus, all holders of securities of the Company having such rights to registration of such shares of Common Stock or other securities, because of the filing of the Registration Statement by the Company have, with respect to the offering contemplated thereby, waived such rights or such rights have expired by reason of lapse of time following notification of the Company's intent to file the Registration Statement or have included securities in the Registration Statement pursuant to the exercise of and in full satisfaction of such rights; (xvi) No consent, approval, authorization or order of or qualification with any court or governmental agency or body having jurisdiction over the Company or any of its properties or operations is required for the consummation of the transactions contemplated in the Underwriting Agreement, except such as have been obtained under the Securities Act and such as may be required under state securities or blue sky laws in connection with the purchase and distribution of the Stock by the Underwriters; and 29 (xvii) The Stock issued and sold by the Company has been duly approved for inclusion on the Nasdaq National Market upon official notice of issuance. (xviii)Such counsel has participated in conferences with officials and other representatives of the Company, the Representatives, Underwriters' Counsel and the independent certified public accountants of the Company, at which such conferences the contents of the Registration Statement and Prospectus and related matters were discussed, and, while such counsel has not independently verified and is not passing upon the accuracy, completeness or fairness of the Registration Statement or Prospectus, on the basis of the foregoing, no facts have come to such counsel's attention that have caused such counsel to believe that the Registration Statement (except as to the financial statements and schedules, other financial data and statistical data derived therefrom contained or incorporated by reference therein, as to which such counsel need not express any opinion or belief) at the Effective Date contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading, or that the Prospectus (except as to the financial statements and schedules, other financial data and statistical data derived therefrom contained or incorporated by reference therein, as to which such counsel need not express any opinion or belief) as of its date or at the Closing Date (or any later date on which Option Stock is purchased), contained or contains any untrue statement of a material fact or omitted or omits to state a material fact necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading; -------------------------------------------- Counsel rendering the foregoing opinion may rely as to questions of law not involving the laws of the United States or of the State of California or the General Corporation Law of the State of Delaware, upon opinions of local counsel satisfactory in form and scope to counsel for the Underwriters, in which case their opinion is to state that they are so relying, and that they have no knowledge of any material misstatement or inaccuracy in any such opinion. Copies of any opinions so relied upon shall be delivered to the Representatives and to counsel for the Underwriters and the foregoing opinion shall also state that counsel knows of no reason the Underwriters are not entitled to rely upon the opinions of such local counsel. 30 ANNEX B FORM OF OPINION OF SEED AND BERRY LLP, PATENT COUNSEL FOR THE COMPANY Such counsel are familiar with the technology used by the Company in its business and the manner of its use thereof and have read the Registration Statement and the Prospectus, including particularly the portions of the Registration Statement and the Prospectus referring to patents, trade secrets, trademarks, service marks or other proprietary information or materials and: It is the opinion of this firm that statements under the captions "Risk Factors - Dependence on Patents and Proprietary Rights" and "Business - Patents and Proprietary Rights" in the Prospectus, to the extent that such statements relate solely to and constitute a description or summary of the legal matters, documents or proceedings relating to the Representation and to the extent such legal matters, documents or proceedings have been disclosed to us during the course of the Representation, are accurate and complete statements, and nothing has come to our attention that causes us to believe that the above-described portions of the Prospectus contain any untrue statement or omission of a material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, and when read in conjunction with the remainder of the Prospectus, not misleading. In addition, it is the opinion of the firm that: (a) based solely upon a review of matters which counsel has been engaged to provide direct substantive attention, this firm has no reason to believe that there are any legal or governmental proceedings pending relating to patent rights, trade secrets, trademarks, or service marks of the Company, and to the best of such counsel's knowledge no proceedings are threatened by governmental authorities or others; (b) based solely upon a review of matters which counsel has been engaged to provide direct substantive attention, this firm has no reason to believe that the Company is infringing or otherwise violating any patents, including the allowed patent referred to above, trade secrets, trademarks, or service marks of others, and to the best of such counsel's knowledge there are no infringements by others of any of the Company's patents, trade secrets, trademarks, or service marks, which in the judgment of such counsel could affect materially the use thereof by the Company; and (c) based solely upon a review of matters which counsel has been engaged to provide direct substantive attention, this firm has no reason to believe that the Company does not own or possess adequate licenses or other rights to (i) use all material patents, patent applications, trademarks, trade secrets, service marks or other proprietary information or materials described in the Prospectus and, (ii) conduct the business now being or proposed to be conducted by the Company as described in the Prospectus. SEED and BERRY LLP EX-3.3 3 EXHIBIT 3.3 1 Exhibit 3.3 CERTIFICATE OF INCORPORATION OF SIGNAL PHARMACEUTICALS, INC. The undersigned, a natural person (the "Sole Incorporator"), for the purpose of organizing a corporation to conduct the business and promote the purposes hereinafter stated, under the provisions and subject to the requirements of the laws of the State of Delaware hereby certifies that: I. The name of this corporation is Signal Pharmaceuticals, Inc. II. The address of the registered office of the corporation in the State of Delaware is 9 East Loockerman Street, City of Dover, County of Kent, and the name of the registered agent of the corporation in the State of Delaware at such address is National Registered Agents, Inc. III. 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 the State of Delaware. 1. 2 IV. A. CLASSES OF STOCK. This corporation is authorized to issue two classes of stock to be designated, respectively, "Common Stock" and "Preferred Stock." The total number of shares which the corporation is authorized to issue is Thirty One Million One Hundred Thirteen Thousand Four Hundred Eighty Five (31,113,485) shares, each having a par value of one-tenth of one cent ($.001). Twenty Five Million (25,000,000) shares shall be Common Stock, $.001 par value, and Six Million One Hundred Thirteen Thousand Four Hundred Eighty Five (6,113,485) shares shall be Preferred Stock, $.001 par value. The Preferred Stock may be issued from time to time in one or more series. The Board of Directors is hereby authorized, by filing a certificate (a "Preferred Stock Designation") pursuant to the Delaware General Corporation Law, to fix or alter from time to time the designation, powers, preferences and rights of the shares of each such series and the qualifications, limitations or restrictions of 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. In case the number of shares of any series shall be decreased in accordance with the foregoing sentence, the shares constituting such decrease shall resume the status that they had prior to the adoption of the resolution originally fixing the number of shares of such series. V. For the management of the business and for the conduct of the affairs of the corporation, and in further definition, limitation and regulation of the powers of the corporation, of its directors and of its stockholders or any class thereof, as the case may be, it is further provided that: A. 1. The management of the business and the conduct of the affairs of the corporation shall be vested in its Board of Directors. The number of directors which shall constitute the whole Board of Directors shall be fixed exclusively by one or more resolutions adopted by the Board of Directors. 2. Subject to the rights of the holders of any series of Preferred Stock to elect additional directors under specified circumstances, directors shall be elected at each annual meeting of stockholders for a term of one year. Each director shall serve until his successor is duly elected and qualified or until his death, resignation or removal. No decrease in the number of directors constituting the Board of Directors shall shorten the term of any incumbent director. 2. 3 3. Subject to the rights of the holders of any series of Preferred Stock, the Board of Directors or any individual director may be removed from office at any time (i) with cause by the affirmative vote of the holders of a majority of the voting power of all the then-outstanding shares of voting stock of the corporation, entitled to vote at an election of directors (the "Voting Stock") or (ii) without cause by the affirmative vote of the holders of at least sixty-six and two-thirds percent (66 2/3%) of the voting power of all the then-outstanding shares of the Voting Stock. 4. Subject to the rights of the holders of any series of Preferred Stock, any vacancies on the Board of Directors resulting from death, resignation, disqualification, removal or other causes and any newly created directorships resulting from any increase in the number of directors, shall, unless the Board of Directors determines by resolution that any such vacancies or newly created directorships shall be filled by the stockholders, except as otherwise provided by law, be filled only by the affirmative vote of a majority of the directors then in office, even though less than a quorum of the Board of Directors, and not by the stockholders. Any director elected in accordance with the preceding sentence shall hold office for the remainder of the full term of the director for which the vacancy was created or occurred and until such director's successor shall have been elected and qualified. B. 1. Subject to paragraph (h) of Section 42 of the Bylaws, the Bylaws may be altered or amended or new Bylaws adopted by the affirmative vote of at least sixty-six and two-thirds percent (66-2/3%) of the voting power of all of the then-outstanding shares of the Voting Stock. The Board of Directors shall also have the power to adopt, amend, or repeal Bylaws. 2. The directors of the corporation need not be elected by written ballot unless the Bylaws so provide. 3. No action shall be taken by the stockholders of the corporation except by written consent to the extent provided for in the Bylaws or at an annual or special meeting of stockholders called in accordance with the Bylaws. 4. Advance notice of stockholder nominations for the election of directors and of business to be brought by stockholders before any meeting of the stockholders of the corporation shall be given in the manner provided in the Bylaws of the corporation. VI. A. A director of the corporation shall not be personally liable to the corporation 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 corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law (iii) under Section 174 of the Delaware General Corporation Law, or (iv) for any 3. 4 transaction from which the director derived an improper personal benefit. If the Delaware General Corporation Law is amended after approval by the stockholders of this Article to authorize corporate action further eliminating or limiting the personal liability of directors, then the liability of a director shall be eliminated or limited to the fullest extent permitted by the Delaware General Corporation Law, as so amended. B. Any repeal or modification of this Article VI shall be prospective and shall not affect the rights under this Article VI in effect at the time of the alleged occurrence of any act or omission to act giving rise to liability or indemnification. VII. A. The corporation reserves the right to amend, alter, change or repeal any provision contained in this Certificate of Incorporation, in the manner now or hereafter prescribed by statute, except as provided in paragraph B. of this Article VII, and all rights conferred upon the stockholders herein are granted subject to this reservation. B. Notwithstanding any other provisions of this Certificate of Incorporation or any provision of law which might otherwise permit a lesser vote or no vote, but in addition to any affirmative vote of the holders of any particular class or series of the Voting Stock required by law, this Certificate of Incorporation or any Preferred Stock Designation, the affirmative vote of the holders of at least sixty-six and two-thirds percent (66-2/3%) of the voting power of all of the then-outstanding shares of the Voting Stock, voting together as a single class, shall be required to alter, amend or repeal sections V, VI and VII. VIII. The name and the mailing address of the Sole Incorporator is as follows:
NAME MAILING ADDRESS ---- --------------- Kelly A. Nelle Cooley Godward LLP 4365 Executive Drive, Suite 1100 San Diego, CA 92121-2128
IN WITNESS WHEREOF, this Certificate has been subscribed this ____ day of May, 1998 by the undersigned who affirms that the statements made herein are true and correct. ------------------------------- KELLY A. NELLE Sole Incorporator 4. EX-3.4 4 EXHIBIT 3.4 1 Exhibit 3.4 AMENDED AND RESTATED CERTIFICATE OF INCORPORATION SIGNAL PHARMACEUTICALS, INC., a corporation organized and existing under and by virtue of the General Corporation Law of the State of Delaware, hereby certifies as follows: 1. The name of the corporation is Signal Pharmaceuticals, Inc. 2. The corporation's original Certificate of Incorporation was filed with the Secretary of State on _________________, 1998. 3. The Amended and Restated Certificate of Incorporation of this corporation, in the form attached hereto as Exhibit A, has been duly adopted by the Board of Directors and by the stockholders of the corporation in accordance with Sections 228, 242 and 245 of the General Corporation Law of the State of Delaware. 4. The Amended and Restated Certificate of Incorporation so adopted reads in full as set forth in Exhibit A attached hereto and hereby incorporated by reference. IN WITNESS WHEREOF, Signal Pharmaceuticals, Inc. has caused this Amended and Restated Certificate of Incorporation to be signed by its President and Chief Executive Officer and attested to by its Chief Financial Officer and Secretary this ____ day of ____________, 1998. ------------------------------- Alan J. Lewis President and Chief Executive Officer ATTEST: - ------------------------------- Bradley B. Gordon Chief Financial Officer and Secretary 1. 2 EXHIBIT A AMENDED AND RESTATED CERTIFICATE OF INCORPORATION OF SIGNAL PHARMACEUTICALS, INC. I. The name of this corporation is SIGNAL PHARMACEUTICALS, INC. II. The address of the registered office of the corporation in the State of Delaware is 9 East Loockerman Street, City of Dover, County of Kent, and the name of the registered agent of the corporation in the State of Delaware at such address is National Registered Agents, Inc. III. 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 the State of Delaware. IV. A. CLASSES OF STOCK. This corporation is authorized to issue two classes of stock to be designated, respectively, "Common Stock" and "Preferred Stock." The total number of shares which the corporation is authorized to issue is Thirty One Million One Hundred Thirteen Thousand Four Hundred Eighty Five (31,113,485) shares, each having a par value of one-tenth of one cent ($.001). Twenty Five Million (25,000,000) shares shall be Common Stock, $.001 par value, and Six Million One Hundred Thirteen Thousand Four Hundred Eighty Five (6,113,485) shares shall be Preferred Stock, $.001 par value. B. RIGHTS, PREFERENCES AND RESTRICTIONS OF PREFERRED STOCK. The Preferred Stock authorized by this Certificate of Incorporation may be issued from time to time in series. The rights, preferences, privileges, and restrictions granted to and imposed on the Series A Preferred Stock, which series shall consist of 656,723 shares, the Series B Preferred Stock, which series shall consist of 718,750 shares, the Series C Preferred Stock, which series shall consist of 2,197,858 shares, the Series C-1 Preferred Stock, which series shall consist of 62,500 shares, the Series D Preferred Stock, which series shall consist of 183,151 shares, the Series E Preferred Stock, which series shall consist of 1,613,874 shares, and the Series F Preferred Stock, which series shall consist of 680,629 shares, are set forth below in this Article IV(B). 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 3 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 $0.32, $0.384, $0.448, $0.672, $1.28, $0.6112 and $0.9638, 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) $4.00 for each outstanding share of Series A Preferred Stock (the "Original Series A Issue Price") and (ii) $4.80 for each outstanding share of Series B Preferred Stock (the "Original Series B Issue Price") and (iii) $5.60 for each outstanding share of Series C Preferred Stock (the "Original Series C Issue Price") and (iv) $8.40 for each outstanding share of Series C-1 Preferred Stock (the "Original Series C-1 Issue Price") and (v) $10.92 for each outstanding share of Series D Preferred Stock (the "Original Series D Issue Price") and (vi) $7.64 for each outstanding share of Series E Preferred Stock (the "Original Series E Issue Price") and (vii) $12.04768 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. 2. 4 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 $0.40 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 stockholders 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 $20.00 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 substantially all of the assets of the corporation; unless the corporation's stockholders 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. 5 (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 stockholder'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 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 stockholders' 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 4. 6 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 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 $20.00 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 25,000 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 5. 7 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 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) 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 6. 8 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 $7.64. (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 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- 7. 9 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 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: 8. 10 (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 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 9. 11 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. g. NO IMPAIRMENT. The corporation will not, by amendment of its Certificate 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 10. 12 is to be taken for the purpose of such 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 stockholder approval of any necessary amendment to this Certificate 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 One Million Two Hundred Fifty Thousand (1,250,000) 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 stockholders. 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 stockholders' 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. 6. PROTECTIVE PROVISIONS. a. Notwithstanding anything to the contrary in the foregoing provisions, and provided that at least 250,000 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, 11. 13 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 (vii) amend the corporation's certificate 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; 12. 14 c. Notwithstanding anything to the contrary in the foregoing provisions, and provided that at least 125,000 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 $8.40 (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 Certificate 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 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 IV 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 stockholders. Except as set forth in this Section 4 of subsection (C) of this Article IV and in Section 5 of subsection (B) of this Article IV, 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 stockholders' 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. 13. 15 V. For the management of the business and for the conduct of the affairs of the corporation, and in further definition, limitation and regulation of the powers of the corporation, of its directors and of its stockholders or any class thereof, as the case may be, it is further provided that: A. 1. The management of the business and the conduct of the affairs of the corporation shall be vested in its Board of Directors. The number of directors which shall constitute the whole Board of Directors shall be fixed exclusively by one or more resolutions adopted by the Board of Directors. 2. Subject to the rights of the holders of any series of Preferred Stock to elect additional directors under specified circumstances, following the closing of the initial public offering pursuant to an effective registration statement under the Securities Act of 1933, as amended (the "1933 Act"), covering the offer and sale of Common Stock to the public (the "Initial Public Offering"), the directors shall be divided into three classes designated as Class I, Class II and Class III, respectively. Directors shall be assigned to each class in accordance with a resolution or resolutions adopted by the Board of Directors. At the first annual meeting of stockholders following the closing of the Initial Public Offering, the term of office of the Class I directors shall expire and Class I directors shall be elected for a full term of three years. At the second annual meeting of stockholders following the closing of the Initial Public Offering, the term of office of the Class II directors shall expire and Class II directors shall be elected for a full term of three years. At the third annual meeting of stockholders following the closing of the Initial Public Offering, the term of office of the Class III directors shall expire and Class III directors shall be elected for a full term of three years. At each succeeding annual meeting of stockholders, directors shall be elected for a full term of three years to succeed the directors of the class whose terms expire at such annual meeting. Notwithstanding the foregoing provisions of this Section, each director shall serve until his successor is duly elected and qualified or until his death, resignation or removal. No decrease in the number of directors constituting the Board of Directors shall shorten the term of any incumbent director. 3. Subject to the rights of the holders of any series of Preferred Stock, the Board of Directors or any individual director may be removed from office at any time (i) with cause by the affirmative vote of the holders of a majority of the voting power of all the then-outstanding shares of voting stock of the corporation, entitled to vote at an election of directors (the "Voting Stock") or (ii) without cause by the affirmative vote of the holders of at least sixty-six and two-thirds percent (66 2/3%) of the voting power of all the then-outstanding shares of the Voting Stock. 4. Subject to the rights of the holders of any series of Preferred Stock, any vacancies on the Board of Directors resulting from death, resignation, disqualification, removal or other causes and any newly created directorships resulting from any increase in the number of 14. 16 directors, shall, unless the Board of Directors determines by resolution that any such vacancies or newly created directorships shall be filled by the stockholders, except as otherwise provided by law, be filled only by the affirmative vote of a majority of the directors then in office, even though less than a quorum of the Board of Directors, and not by the stockholders. Any director elected in accordance with the preceding sentence shall hold office for the remainder of the full term of the director for which the vacancy was created or occurred and until such director's successor shall have been elected and qualified. B. 1. Subject to paragraph (h) of Section 42 of the Bylaws, the Bylaws may be altered or amended or new Bylaws adopted by the affirmative vote of at least sixty-six and two-thirds percent (66-2/3%) of the voting power of all of the then-outstanding shares of the Voting Stock. The Board of Directors shall also have the power to adopt, amend, or repeal Bylaws. 2. The directors of the corporation need not be elected by written ballot unless the Bylaws so provide. 3. No action shall be taken by the stockholders of the corporation except by written consent to the extent provided for in the Bylaws or at an annual or special meeting of stockholders called in accordance with the Bylaws; and following the closing of the Initial Public Offering no action shall be taken by the stockholders by written consent. 4. Advance notice of stockholder nominations for the election of directors and of business to be brought by stockholders before any meeting of the stockholders of the corporation shall be given in the manner provided in the Bylaws of the corporation. VI. A. A director of the corporation shall not be personally liable to the corporation 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 corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law (iii) under Section 174 of the Delaware General Corporation Law, or (iv) for any transaction from which the director derived an improper personal benefit. If the Delaware General Corporation Law is amended after approval by the stockholders of this Article to authorize corporate action further eliminating or limiting the personal liability of directors, then the liability of a director shall be eliminated or limited to the fullest extent permitted by the Delaware General Corporation Law, as so amended. B. Any repeal or modification of this Article VI shall be prospective and shall not affect the rights under this Article VI in effect at the time of the alleged occurrence of any act or omission to act giving rise to liability or indemnification. VII. A. The corporation reserves the right to amend, alter, change or repeal any provision contained in this Certificate of Incorporation, in the manner now or hereafter prescribed by 15. 17 statute, except as provided in Section VII.B., and all rights conferred upon the stockholders herein are granted subject to this reservation. B. Notwithstanding any other provisions of this Certificate of Incorporation or any provision of law which might otherwise permit a lesser vote or no vote, but in addition to any affirmative vote of the holders of any particular class or series of the Voting Stock required by law, this Certificate of Incorporation or any document relating thereto filed with the Delaware Secretary of State, the affirmative vote of the holders of at least sixty-six and two-thirds percent (66-2/3%) of the voting power of all of the then-outstanding shares of the Voting Stock, voting together as a single class, shall be required to alter, amend or repeal Articles V, VI, and VII. 16. EX-3.5 5 EXHIBIT 3.5 1 Exhibit 3.5 SECOND AMENDED AND RESTATED CERTIFICATE OF INCORPORATION SIGNAL PHARMACEUTICALS, INC., a corporation organized and existing under and by virtue of the General Corporation Law of the State of Delaware, hereby certifies as follows: 1. The name of the corporation is Signal Pharmaceuticals, Inc. 2. The corporation's original Certificate of Incorporation was filed with the Secretary of State on _________________, 1998. 3. The Second Amended and Restated Certificate of Incorporation of this corporation, in the form attached hereto as Exhibit A, has been duly adopted by the Board of Directors and by the stockholders of the corporation in accordance with Sections 228, 242 and 245 of the General Corporation Law of the State of Delaware. 4. The Second Amended and Restated Certificate of Incorporation so adopted reads in full as set forth in Exhibit A attached hereto and hereby incorporated by reference. IN WITNESS WHEREOF, Signal Pharmaceuticals, Inc. has caused this Second Amended and Restated Certificate of Incorporation to be signed by its President and Chief Executive Officer and attested to by its Chief Financial Officer and Secretary this ____ day of ____________, 1998. ------------------------------- Alan J. Lewis President and Chief Executive Officer ATTEST: - ------------------------------- Bradley B. Gordon Chief Financial Officer and Secretary 2 EXHIBIT A SECOND AMENDED AND RESTATED CERTIFICATE OF INCORPORATION OF SIGNAL PHARMACEUTICALS, INC. I. The name of this corporation is SIGNAL PHARMACEUTICALS, INC. II. The address of the registered office of the corporation in the State of Delaware is 9 East Loockerman Street, City of Dover, County of Kent, and the name of the registered agent of the corporation in the State of Delaware at such address is National Registered Agents, Inc. III. 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 the State of Delaware. IV. A. 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 thirty million (30,000,000) shares. Twenty-five million (25,000,000) shares shall be Common Stock, each having a par value of one-tenth of one cent ($.001). Five million (5,000,000) shares shall be Preferred Stock, each having a par value of one-tenth of one cent ($.001). The Preferred Stock may be issued from time to time in one or more series. The Board of Directors is hereby authorized, by filing a certificate (a "Preferred Stock Designation") pursuant to the Delaware General Corporation Law, to fix or alter from time to time the designation, powers, preferences and rights of the shares of each such series and the qualifications, limitations or restrictions of any wholly unissued series of Preferred Stock, and to establish from time to time the number of shares constituting any 3 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. In case the number of shares of any series shall be decreased in accordance with the foregoing sentence, the shares constituting such decrease shall resume the status that they had prior to the adoption of the resolution originally fixing the number of shares of such series. V. For the management of the business and for the conduct of the affairs of the corporation, and in further definition, limitation and regulation of the powers of the corporation, of its directors and of its stockholders or any class thereof, as the case may be, it is further provided that: A. 1. The management of the business and the conduct of the affairs of the corporation shall be vested in its Board of Directors. The number of directors which shall constitute the whole Board of Directors shall be fixed exclusively by one or more resolutions adopted by the Board of Directors. 2. Subject to the rights of the holders of any series of Preferred Stock to elect additional directors under specified circumstances, following the closing of the initial public offering pursuant to an effective registration statement under the Securities Act of 1933, as amended (the "1933 Act"), covering the offer and sale of Common Stock to the public (the "Initial Public Offering"), the directors shall be divided into three classes designated as Class I, Class II and Class III, respectively. Directors shall be assigned to each class in accordance with a resolution or resolutions adopted by the Board of Directors. At the first annual meeting of stockholders following the closing of the Initial Public Offering, the term of office of the Class I directors shall expire and Class I directors shall be elected for a full term of three years. At the second annual meeting of stockholders following the Closing of the Initial Public Offering, the term of office of the Class II directors shall expire and Class II directors shall be elected for a full term of three years. At the third annual meeting of stockholders following the closing of the Initial Public Offering, the term of office of the Class III directors shall expire and Class III directors shall be elected for a full-term of three years. At each succeeding annual meeting of stockholders, directors shall be elected for a full term of three years to succeed the directors of the class whose terms expire at such annual meeting. Notwithstanding the foregoing provisions of this Article, each director shall serve until his successor is duly elected and qualified or until his death, resignation or 2. 4 removal. No decrease in the number of directors constituting the Board of Directors shall shorten the term of any incumbent director. 3. Subject to the rights of the holders of any series of Preferred Stock, the Board of Directors or any individual director may be removed from office at any time (i) with cause by the affirmative vote of the holders of a majority of the voting power of all the then-outstanding shares of voting stock of the corporation, entitled to vote at an election of directors (the "Voting Stock") or (ii) without cause by the affirmative vote of the holders of at least sixty-six and two-thirds percent (66 2/3%) of the voting power of all the then-outstanding shares of the Voting Stock. 4. Subject to the rights of the holders of any series of Preferred Stock, any vacancies on the Board of Directors resulting from death, resignation, disqualification, removal or other causes and any newly created directorships resulting from any increase in the number of directors, shall, unless the Board of Directors determines by resolution that any such vacancies or newly created directorships shall be filled by the stockholders, except as otherwise provided by law, be filled only by the affirmative vote of a majority of the directors then in office, even though less than a quorum of the Board of Directors, and not by the stockholders. Any director elected in accordance with the preceding sentence shall hold office for the remainder of the full term of the director for which the vacancy was created or occurred and until such director's successor shall have been elected and qualified. B. 1. Subject to paragraph (h) of Section 42 of the Bylaws, the Bylaws may be altered or amended or new Bylaws adopted by the affirmative vote of at least sixty-six and two-thirds percent (66-2/3%) of the voting power of all of the then-outstanding shares of the Voting Stock. The Board of Directors shall also have the power to adopt, amend, or repeal Bylaws. 2. The directors of the corporation need not be elected by written ballot unless the Bylaws so provide. 3. No action shall be taken by the stockholders of the corporation except by written consent to the extent provided for in the Bylaws or at an annual or special meeting of stockholders called in accordance with the Bylaws; and following the closing of the Initial Public Offering no action shall be taken by the stockholders by written consent. 4. Advance notice of stockholder nominations for the election of directors and of business to be brought by stockholders before any meeting of the 3. 5 stockholders of the corporation shall be given in the manner provided in the Bylaws of the corporation. VI. A. A director of the corporation shall not be personally liable to the corporation 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 corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) under Section 174 of the Delaware General Corporation Law, or (iv) for any transaction from which the director derived an improper personal benefit. If the Delaware General Corporation Law is amended after approval by the stockholders of this Article to authorize corporate action further eliminating or limiting the personal liability of directors, then the liability of a director shall be eliminated or limited to the fullest extent permitted by the Delaware General Corporation Law, as so amended. B. Any repeal or modification of this Article VI shall be prospective and shall not affect the rights under this Article VI in effect at the time of the alleged occurrence of any act or omission to act giving rise to liability or indemnification. VII. A. The corporation reserves the right to amend, alter, change or repeal any provision contained in this Certificate of Incorporation, in the manner now or hereafter prescribed by statute, except as provided in Section VII.B., and all rights conferred upon the stockholders herein are granted subject to this reservation. B. Notwithstanding any other provisions of this Certificate of Incorporation or any provision of law which might otherwise permit a lesser vote or no vote, but in addition to any affirmative vote of the holders of any particular class or series of the Voting Stock required by law, this Certificate of Incorporation or any Preferred Stock Designation, the affirmative vote of the holders of at least sixty-six and two-thirds percent (66-2/3%) of the voting power of all of the then-outstanding shares of the Voting Stock, voting together as a single class, shall be required to alter, amend or repeal Articles V, VI, and VII. 4. EX-3.6 6 EXHIBIT 3.6 1 Exhibit 3.6 BYLAWS OF SIGNAL PHARMACEUTICALS, INC. (A DELAWARE CORPORATION) 2 ARTICLE I OFFICES .............................................. 1 Section 1. Registered Office ........................... 1 Section 2. Other Offices ............................... 1 ARTICLE II CORPORATE SEAL ...................................... 1 Section 3. Corporate Seal .............................. 1 ARTICLE III STOCKHOLDERS' MEETINGS ............................. 1 Section 4. Place Of Meetings ........................... 1 Section 5. Annual Meetings ............................. 2 Section 6. Special Meetings ............................ 4 Section 7. Notice Of Meetings .......................... 4 Section 8. Quorum ...................................... 5 Section 9. Adjournment And Notice Of Adjourned Meetings 5 Section 10. Voting Rights .............................. 6 Section 11. Joint Owners Of Stock ...................... 6 Section 12. List Of Stockholders ....................... 6 Section 13. Action Without Meeting ..................... 7 Section 14. Organization ............................... 7 ARTICLE IV DIRECTORS ........................................... 8 Section 15. Number And Term Of Office .................. 8 Section 16. Powers ..................................... 8 Section 17. Classes Of Directors ....................... 8 Section 18. Vacancies .................................. 9 Section 19. Resignation ................................ 10 Section 20. Meetings ................................... 10 (a) Annual Meetings ............................. 10 (b) Regular Meetings ............................ 10 (c) Special Meetings ............................ 11 (d) Telephone Meetings .......................... 11 (e) Notice Of Meetings .......................... 11
i. 3 (f) Waiver Of Notice ............................ 11 Section 21. Quorum And Voting .......................... 11 Section 22. Action Without Meeting ..................... 12 Section 23. Fees And Compensation ...................... 12 Section 24. Committees ................................. 12 (a) Executive Committee ......................... 12 (b) Other Committees ............................ 13 (c) Term ........................................ 13 (d) Meetings .................................... 13 Section 25. Organization ............................... 14 ARTICLE V OFFICERS ............................................. 14 Section 26. Officers Designated ........................ 14 Section 27. Tenure And Duties Of Officers .............. 14 (a) General ..................................... 14 (b) Duties Of Chairman Of The Board Of Directors 14 (c) Duties Of President ......................... 15 (d) Duties Of Vice Presidents ................... 15 (e) Duties Of Secretary ......................... 15 (f) Duties Of Chief Financial Officer ........... 15 Section 28. Delegation Of Authority .................... 16 Section 29. Resignations ............................... 16 Section 30. Removal .................................... 16 ARTICLE VI EXECUTION OF CORPORATE INSTRUMENTS AND VOTING OF SECURITIES OWNED BY THE CORPORATION ................. 17 Section 31. Execution Of Corporate Instruments ......... 17 Section 32. Voting Of Securities Owned By The Corporation ................................ 17 ARTICLE VII SHARES OF STOCK .................................... 18 Section 33. Form And Execution Of Certificates ......... 18 Section 34. Lost Certificates .......................... 18 Section 35. Transfers .................................. 19
ii. 4 Section 36. Fixing Record Dates ........................ 19 Section 37. Registered Stockholders .................... 20 ARTICLE VIII OTHER SECURITIES OF THE CORPORATION ............... 20 Section 38. Execution Of Other Securities .............. 20 ARTICLE IX DIVIDENDS ........................................... 21 Section 39. Declaration Of Dividends ................... 21 Section 40. Dividend Reserve ........................... 21 ARTICLE X FISCAL YEAR .......................................... 21 Section 41. Fiscal Year ................................ 21 ARTICLE XI INDEMNIFICATION ..................................... 22 Section 42. Indemnification Of Directors, Executive Officers, Other Officers, Employees And Other Agents ........................... 22 (a) Directors And Executive Officers ............ 22 (b) Other Officers, Employees and Other Agents .. 22 (c) Expenses .................................... 22 (d) Enforcement ................................. 23 (e) Non-Exclusivity Of Rights ................... 24 (f) Survival Of Rights .......................... 24 (g) Insurance ................................... 24 (h) Amendments .................................. 24 (i) Saving Clause ............................... 24 (j) Certain Definitions ......................... 24 ARTICLE XII NOTICES ............................................ 25 Section 43. Notices .................................... 25 (a) Notice To Stockholders ...................... 25 (b) Notice To Directors ......................... 26 (c) Address Unknown ............................. 26 (d) Affidavit Of Mailing ........................ 26 (e) Time Notices Deemed Given ................... 26 (f) Methods Of Notice ........................... 26
iii. 5 (g) Failure To Receive Notice ................... 26 (h) Notice To Person With Whom Communication Is Unlawful ................... 26 (i) Notice To Person With Undeliverable Address ..................................... 27 ARTICLE XIII AMENDMENTS ........................................ 27 Section 44. Amendments ................................. 27 ARTICLE XIV LOANS TO OFFICERS .................................. 27 Section 45. Loans To Officers .......................... 27
iv. 6 BYLAWS OF SIGNAL PHARMACEUTICALS, INC. (A DELAWARE CORPORATION) ARTICLE I OFFICES SECTION 1. REGISTERED OFFICE. The registered office of the corporation in the State of Delaware shall be in the City of Dover, County of Kent. SECTION 2. OTHER OFFICES. The corporation shall also have and maintain an office or principal place of business at 5555 Oberlin Drive, San Diego, California 92121, or at such other place as may be fixed by the Board of Directors, and may also have offices at such other places, both within and without the State of Delaware as the Board of Directors may from time to time determine or the business of the corporation may require. ARTICLE II CORPORATE SEAL SECTION 3. CORPORATE SEAL. The corporate seal shall consist of a die bearing the name of the corporation and the inscription, "Corporate Seal-Delaware." Said seal may be used by causing it or a facsimile thereof to be impressed or affixed or reproduced or otherwise. ARTICLE III STOCKHOLDERS' MEETINGS SECTION 4. PLACE OF MEETINGS. Meetings of the stockholders of the corporation shall be held at such place, either within or without the State of Delaware, as may be designated from time to time by the Board of Directors, or, if not so designated, then at the office of the corporation required to be maintained pursuant to Section 2 hereof. 1. 7 SECTION 5. ANNUAL MEETINGS. (a) The annual meeting of the stockholders of the corporation, for the purpose of election of directors and for such other business as may lawfully come before it, shall be held on such date and at such time as may be designated from time to time by the Board of Directors. (b) At an annual meeting of the stockholders, only such business shall be conducted as shall have been properly brought before the meeting. To be properly brought before an annual meeting, business must be: (A) specified in the notice of meeting (or any supplement thereto) given by or at the direction of the Board of Directors, (B) otherwise properly brought before the meeting by or at the direction of the Board of Directors, or (C) otherwise properly brought before the meeting by a stockholder. For business to be properly brought before an annual meeting by a stockholder, the stockholder must have given timely notice thereof in writing to the Secretary of the corporation. To be timely, a stockholder's notice must be delivered to or mailed and received at the principal executive offices of the corporation not later than the close of business on the sixtieth (60th) day nor earlier than the close of business on the ninetieth (90th) day prior to the first anniversary of the preceding year's annual meeting; provided, however, that in the event that no annual meeting was held in the previous year or the date of the annual meeting has been changed by more than thirty (30) days from the date contemplated at the time of the previous year's proxy statement, notice by the stockholder to be timely must be so received not earlier than the close of business on the ninetieth (90th) day prior to such annual meeting and not later than the close of business on the later of the sixtieth (60th) day prior to such annual meeting or, in the event public announcement of the date of such annual meeting is first made by the corporation fewer than seventy (70) days prior to the date of such annual meeting, the close of business on the tenth (10th) day following the day on which public announcement of the date of such meeting is first made by the corporation. A stockholder's notice to the Secretary shall set forth as to each matter the stockholder proposes to bring before the annual meeting: (i) a brief description of the business desired to be brought before the annual meeting and the reasons for conducting such business at the annual meeting, (ii) the name and address, as they appear on the corporation's books, of the stockholder proposing such business, (iii) the class and number of shares of the corporation which are beneficially owned by the stockholder, (iv) any material interest of the stockholder in such business and (v) any other information that is required to be provided by the stockholder pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended (the "1934 Act"), in his capacity as a proponent to a stockholder proposal. Notwithstanding the foregoing, in order to include information with respect to a stockholder proposal in the proxy statement and form of proxy for a stockholder's meeting, stockholders must provide notice as required by the regulations promulgated under the 1934 Act. 2. 8 Notwithstanding anything in these Bylaws to the contrary, no business shall be conducted at any annual meeting except in accordance with the procedures set forth in this paragraph (b). The chairman of the annual meeting shall, if the facts warrant, determine and declare at the meeting that business was not properly brought before the meeting and in accordance with the provisions of this paragraph (b), and, if he should so determine, he shall so declare at the meeting that any such business not properly brought before the meeting shall not be transacted. (c) Only persons who are nominated in accordance with the procedures set forth in this paragraph (c) shall be eligible for election as directors. Nominations of persons for election to the Board of Directors of the corporation may be made at a meeting of stockholders by or at the direction of the Board of Directors or by any stockholder of the corporation entitled to vote in the election of directors at the meeting who complies with the notice procedures set forth in this paragraph (c). Such nominations, other than those made by or at the direction of the Board of Directors, shall be made pursuant to timely notice in writing to the Secretary of the corporation in accordance with the provisions of paragraph (b) of this Section 5. Such stockholder's notice shall set forth (i) as to each person, if any, whom the stockholder proposes to nominate for election or re-election as a director: (A) the name, age, business address and residence address of such person, (B) the principal occupation or employment of such person, (C) the class and number of shares of the corporation which are beneficially owned by such person, (D) a description of all arrangements or understandings between the stockholder and each nominee and any other person or persons (naming such person or persons) pursuant to which the nominations are to be made by the stockholder, and (E) any other information relating to such person that is required to be disclosed in solicitations of proxies for election of directors, or is otherwise required, in each case pursuant to Regulation 14A under the 1934 Act (including without limitation such person's written consent to being named in the proxy statement, if any, as a nominee and to serving as a director if elected); and (ii) as to such stockholder giving notice, the information required to be provided pursuant to paragraph (b) of this Section 5. At the request of the Board of Directors, any person nominated by a stockholder for election as a director shall furnish to the Secretary of the corporation that information required to be set forth in the stockholder's notice of nomination which pertains to the nominee. Except as may be required pursuant to the Certificate of Incorporation, no person shall be eligible for election as a director of the corporation unless nominated in accordance with the procedures set forth in this paragraph (c). The chairman of the meeting shall, if the facts warrant, determine and declare at the meeting that a nomination was not made in accordance with the procedures prescribed by these Bylaws, and if he should so determine, he shall so declare at the meeting, and the defective nomination shall be disregarded. 3. 9 (d) For purposes of this Section 5, "public announcement" shall mean disclosure in a press release reported by the Dow Jones News Service, Associated Press or comparable national news service or in a document publicly filed by the corporation with the Securities and Exchange Commission pursuant to Section 13, 14 or 15(d) of the Exchange Act. SECTION 6. SPECIAL MEETINGS. (a) Special meetings of the stockholders of the corporation may be called, for any purpose or purposes, by (i) the Chairman of the Board of Directors, (ii) the Chief Executive Officer, (iii) the Board of Directors pursuant to a resolution adopted by a majority of the total number of authorized directors (whether or not there exist any vacancies in previously authorized directorships at the time any such resolution is presented to the Board of Directors for adoption) or (iv) by the holders of shares entitled to cast not less than fifty percent (50%) of the votes at the meeting, and shall be held at such place, on such date, and at such time as the Board of Directors, shall fix. At any time or times that the corporation is subject to Section 2115(b) of the California General Corporation Law ("CGCL"), stockholders holding five percent (5%) or more of the outstanding shares shall have the right to call a special meeting of stockholders as set forth in Section 18(c) herein. (b) If a special meeting is called by any person or persons other than the Board of Directors, the request shall be in writing, specifying the general nature of the business proposed to be transacted, and shall be delivered personally or sent by registered mail or by telegraphic or other facsimile transmission to the Chairman of the Board of Directors, the Chief Executive Officer, or the Secretary of the corporation. No business may be transacted at such special meeting otherwise than specified in such notice. The Board of Directors shall determine the time and place of such special meeting, which shall be held not less than thirty-five (35) nor more than one hundred twenty (120) days after the date of the receipt of the request. Upon determination of the time and place of the meeting, the officer receiving the request shall cause notice to be given to the stockholders entitled to vote, in accordance with the provisions of Section 7 of these Bylaws. If the notice is not given within sixty (60) days after the receipt of the request, the person or persons requesting the meeting may set the time and place of the meeting and give the notice. Nothing contained in this paragraph (b) shall be construed as limiting, fixing, or affecting the time when a meeting of stockholders called by action of the Board of Directors may be held. SECTION 7. NOTICE OF MEETINGS. Except as otherwise provided by law or the Certificate of Incorporation, written notice of each meeting of stockholders shall be given not less than ten (10) nor more than sixty (60) days before the date of the meeting to each stockholder entitled to vote at such meeting, such notice to specify the place, date and 4. 10 hour and purpose or purposes of the meeting. Notice of the time, place and purpose of any meeting of stockholders may be waived in writing, signed by the person entitled to notice thereof, either before or after such meeting, and will be waived by any stockholder by his attendance thereat in person or by proxy, except when the stockholder attends a meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. Any stockholder so waiving notice of such meeting shall be bound by the proceedings of any such meeting in all respects as if due notice thereof had been given. SECTION 8. QUORUM. At all meetings of stockholders, except where otherwise provided by statute or by the Certificate of Incorporation, or by these Bylaws, the presence, in person or by proxy duly authorized, of the holders of a majority of the outstanding shares of stock entitled to vote shall constitute a quorum for the transaction of business. In the absence of a quorum, any meeting of stockholders may be adjourned, from time to time, either by the chairman of the meeting or by vote of the holders of a majority of the shares represented thereat, but no other business shall be transacted at such meeting. The stockholders present at a duly called or convened meeting, at which a quorum is present, may continue to transact business until adjournment, notwithstanding the withdrawal of enough stockholders to leave less than a quorum. Except as otherwise provided by law, the Certificate of Incorporation or these Bylaws, all action taken by the holders of a majority of the vote cast, excluding abstentions, at any meeting at which a quorum is present shall be valid and binding upon the corporation; provided, however, that, except as set forth in Section 17 herein, directors shall be elected by a plurality of the votes of the shares present in person or represented by proxy at the meeting and entitled to vote on the election of directors. Where a separate vote by a class or classes or series is required, except where otherwise provided by the statute or by the Certificate of Incorporation or these Bylaws, a majority of the outstanding shares of such class or classes or series, present in person or represented by proxy, shall constitute a quorum entitled to take action with respect to that vote on that matter and, except where otherwise provided by the statute or by the Certificate of Incorporation or these Bylaws, the affirmative vote of the majority (plurality, in the case of the election of directors) of the votes cast, including abstentions, by the holders of shares of such class or classes or series shall be the act of such class or classes or series. SECTION 9. ADJOURNMENT AND NOTICE OF ADJOURNED MEETINGS. Any meeting of stockholders, whether annual or special, may be adjourned from time to time either by the chairman of the meeting or by the vote of a majority of the shares casting votes, excluding abstentions. When a meeting is adjourned to another time or place, notice need not be given of the adjourned meeting if the time and place thereof are announced at the meeting at which the adjournment is taken. At the adjourned meeting, the corporation may transact any business which might have been transacted at the original meeting. If 5. 11 the adjournment is for more than thirty (30) days or if after the adjournment a new record date is fixed for the adjourned meeting, a notice of the adjourned meeting shall be given to each stockholder of record entitled to vote at the meeting. SECTION 10. VOTING RIGHTS. For the purpose of determining those stockholders entitled to vote at any meeting of the stockholders, except as otherwise provided by law, only persons in whose names shares stand on the stock records of the corporation on the record date, as provided in Section 12 of these Bylaws, shall be entitled to vote at any meeting of stockholders. Every person entitled to vote shall have the right to do so either in person or by an agent or agents authorized by a proxy granted in accordance with Delaware law. An agent so appointed need not be a stockholder. No proxy shall be voted after three (3) years from its date of creation unless the proxy provides for a longer period. SECTION 11. JOINT OWNERS OF STOCK. If shares or other securities having voting power stand of record in the names of two (2) or more persons, whether fiduciaries, members of a partnership, joint tenants, tenants in common, tenants by the entirety, or otherwise, or if two (2) or more persons have the same fiduciary relationship respecting the same shares, unless the Secretary is given written notice to the contrary and is furnished with a copy of the instrument or order appointing them or creating the relationship wherein it is so provided, their acts with respect to voting shall have the following effect: (a) if only one (1) votes, his act binds all; (b) if more than one (1) votes, the act of the majority so voting binds all; (c) if more than one (1) votes, but the vote is evenly split on any particular matter, each faction may vote the securities in question proportionally, or may apply to the Delaware Court of Chancery for relief as provided in the Delaware General Corporation Law, Section 217(b). If the instrument filed with the Secretary shows that any such tenancy is held in unequal interests, a majority or even-split for the purpose of subsection (c) shall be a majority or even-split in interest. SECTION 12. LIST OF STOCKHOLDERS. The Secretary shall prepare and make, at least ten (10) days before every meeting of stockholders, a complete list of the stockholders entitled to vote at said meeting, arranged in alphabetical order, showing the address of each stockholder and the number of shares registered in the name of each stockholder. Such list shall be open to the examination of any stockholder, for any purpose germane to the meeting, during ordinary business hours, for a period of at least ten (10) days prior to the meeting, either at a place within the city where the meeting is to be held, which place shall be specified in the notice of the meeting, or, if not specified, at the place where the meeting is to be held. The list shall be produced and kept at the time and place of meeting during the whole time thereof and may be inspected by any stockholder who is present. 6. 12 SECTION 13. ACTION WITHOUT MEETING. (a) Unless otherwise provided in the Certificate of Incorporation, any action required by statute to be taken at any annual or special meeting of the stockholders, or any action which may be taken at any annual or special meeting of the stockholders, may be taken without a meeting, without prior notice and without a vote, if a consent in writing, setting forth the action so taken, shall be signed by the holders of outstanding stock having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted. (b) Every written consent shall bear the date of signature of each stockholder who signs the consent, and no written consent shall be effective to take the corporate action referred to therein unless, within sixty (60) days of the earliest dated consent delivered to the corporation in the manner herein required, written consents signed by a sufficient number of stockholders to take action are delivered to the corporation by delivery to its registered office in the State of Delaware, its principal place of business or an officer or agent of the corporation having custody of the book in which proceedings of meetings of stockholders are recorded. Delivery made to a corporation's registered office shall be by hand or by certified or registered mail, return receipt requested. (c) Prompt notice of the taking of the corporate action without a meeting by less than unanimous written consent shall be given to those stockholders who have not consented in writing. If the action which is consented to is such as would have required the filing of a certificate under any section of the Delaware General Corporation Law if such action had been voted on by stockholders at a meeting thereof, then the certificate filed under such section shall state, in lieu of any statement required by such section concerning any vote of stockholders, that written consent has been given as provided in Section 228 of the Delaware General Corporation Law. (d) Notwithstanding the foregoing, no such action by written consent may be taken following the closing of the initial public offering pursuant to an effective registration statement under the Securities Act of 1933, as amended (the "1933 Act"), covering the offer and sale of Common Stock of the corporation (the "Initial Public Offering"). SECTION 14. ORGANIZATION. (a) At every meeting of stockholders, the Chairman of the Board of Directors, or, if a Chairman has not been appointed or is absent, the President, or, if the President is absent, a chairman of the meeting chosen by a majority in interest of the 7. 13 stockholders entitled to vote, present in person or by proxy, shall act as chairman. The Secretary, or, in his absence, an Assistant Secretary directed to do so by the President, shall act as secretary of the meeting. (b) The Board of Directors of the corporation shall be entitled to make such rules or regulations for the conduct of meetings of stockholders as it shall deem necessary, appropriate or convenient. Subject to such rules and regulations of the Board of Directors, if any, the chairman of the meeting shall have the right and authority to prescribe such rules, regulations and procedures and to do all such acts as, in the judgment of such chairman, are necessary, appropriate or convenient for the proper conduct of the meeting, including, without limitation, establishing an agenda or order of business for the meeting, rules and procedures for maintaining order at the meeting and the safety of those present, limitations on participation in such meeting to stockholders of record of the corporation and their duly authorized and constituted proxies and such other persons as the chairman shall permit, restrictions on entry to the meeting after the time fixed for the commencement thereof, limitations on the time allotted to questions or comments by participants and regulation of the opening and closing of the polls for balloting on matters which are to be voted on by ballot. Unless and to the extent determined by the Board of Directors or the chairman of the meeting, meetings of stockholders shall not be required to be held in accordance with rules of parliamentary procedure. ARTICLE IV DIRECTORS SECTION 15. NUMBER AND TERM OF OFFICE. The authorized number of directors of the corporation shall be fixed in accordance with the Certificate of Incorporation. Directors need not be stockholders unless so required by the Certificate of Incorporation. If for any cause, the directors shall not have been elected at an annual meeting, they may be elected as soon thereafter as convenient at a special meeting of the stockholders called for that purpose in the manner provided in these Bylaws. No reduction of the authorized number of directors shall have the effect of removing any director before the director's term of office expires. SECTION 16. POWERS. The powers of the corporation shall be exercised, its business conducted and its property controlled by the Board of Directors, except as may be otherwise provided by statute or by the Certificate of Incorporation. SECTION 17. CLASSES OF DIRECTORS. Subject to the rights of the holders of any series of Preferred Stock to elect additional directors under specified circumstances, following the closing of the Initial Public Offering, the directors shall be divided into 8. 14 three classes designated as Class I, Class II and Class III, respectively. Directors shall be assigned to each class in accordance with a resolution or resolutions adopted by the Board of Directors. At the first annual meeting of stockholders following the closing of the Initial Public Offering, the term of office of the Class I directors shall expire and Class I directors shall be elected for a full term of three years. At the second annual meeting of stockholders following the closing of the Initial Public Offering, the term of office of the Class II directors shall expire and Class II directors shall be elected for a full term of three years. At the third annual meeting of stockholders following the closing of the Initial Public Offering, the term of office of the Class III directors shall expire and Class III directors shall be elected for a full term of three years. At each succeeding annual meeting of stockholders, directors shall be elected for a full term of three years to succeed the directors of the class whose terms expire at such annual meeting. Notwithstanding the foregoing provisions of this Section, each director shall serve until his successor is duly elected and qualified or until his death, resignation or removal. No decrease in the number of directors constituting the Board of Directors shall shorten the term of any incumbent director. SECTION 18. VACANCIES. (a) Unless otherwise provided in the Certificate of Incorporation, any vacancies on the Board of Directors resulting from death, resignation, disqualification, removal or other causes and any newly created directorships resulting from any increase in the number of directors, shall unless the Board of Directors determines by resolution that any such vacancies or newly created directorships shall be filled by stockholders, be filled only by the affirmative vote of a majority of the directors then in office, even though less than a quorum of the Board of Directors. Any director elected in accordance with the preceding sentence shall hold office for the remainder of the full term of the director for which the vacancy was created or occurred and until such director's successor shall have been elected and qualified. A vacancy in the Board of Directors shall be deemed to exist under this Bylaw in the case of the death, removal or resignation of any director. (b) If at the time of filling any vacancy or any newly created directorship, the directors then in office shall constitute less than a majority of the whole board (as constituted immediately prior to any such increase), the Delaware Court of Chancery may, upon application of any stockholder holding at least ten percent (10%) of the total number of the shares at the time outstanding having the right to vote for such directors, summarily order an election to be held to fill any such vacancies or newly created directorships, or to replace the directors chosen by the directors then in offices as aforesaid, which election shall be governed by Section 211 of the Delaware General Corporation Law. 9. 15 (c) At any time or times that the corporation is subject to Section 2115(b) of the CGCL, if, after the filling of any vacancy by the directors then in office who have been elected by stockholders shall constitute less than a majority of the directors then in office, then (i) Any holder or holders of an aggregate of five percent (5%) or more of the total number of shares at the time outstanding having the right to vote for those directors may call a special meeting of stockholders; or (ii) The Superior Court of the proper county shall, upon application of such stockholder or stockholders, summarily order a special meeting of stockholders, to be held to elect the entire board, all in accordance with Section 305(c) of the CGCL. The term of office of any director shall terminate upon that election of a successor. SECTION 19. RESIGNATION. Any director may resign at any time by delivering his written resignation to the Secretary, such resignation to specify whether it will be effective at a particular time, upon receipt by the Secretary or at the pleasure of the Board of Directors. If no such specification is made, it shall be deemed effective at the pleasure of the Board of Directors. When one or more directors shall resign from the Board of Directors, effective at a future date, a majority of the directors then in office, including those who have so resigned, shall have power to fill such vacancy or vacancies, the vote thereon to take effect when such resignation or resignations shall become effective, and each Director so chosen shall hold office for the unexpired portion of the term of the Director whose place shall be vacated and until his successor shall have been duly elected and qualified. SECTION 20. MEETINGS. (a) ANNUAL MEETINGS. The annual meeting of the Board of Directors shall be held immediately before or after the annual meeting of stockholders and at the place where such meeting is held. No notice of an annual meeting of the Board of Directors shall be necessary and such meeting shall be held for the purpose of electing officers and transacting such other business as may lawfully come before it. (b) REGULAR MEETINGS. Except as hereinafter otherwise provided, regular meetings of the Board of Directors shall be held in the office of the corporation required to be maintained pursuant to Section 2 hereof. Unless otherwise restricted by the Certificate of Incorporation, regular meetings of the Board of Directors may also be held at any place within or without the State of Delaware which has been designated by resolution of the Board of Directors or the written consent of all directors. 10. 16 (c) SPECIAL MEETINGS. Unless otherwise restricted by the Certificate of Incorporation, special meetings of the Board of Directors may be held at any time and place within or without the State of Delaware whenever called by the Chairman of the Board, the President or any two of the directors. (d) TELEPHONE MEETINGS. Any member of the Board of Directors, or of any committee thereof, may participate in a meeting by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, and participation in a meeting by such means shall constitute presence in person at such meeting. (e) NOTICE OF MEETINGS. Notice of the time and place of all special meetings of the Board of Directors shall be orally or in writing, by telephone, facsimile, telegraph or telex, during normal business hours, at least twenty-four (24) hours before the date and time of the meeting, or sent in writing to each director by first class mail, charges prepaid, at least three (3) days before the date of the meeting. Notice of any meeting may be waived in writing at any time before or after the meeting and will be waived by any director by attendance thereat, except when the director attends the meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. (f) WAIVER OF NOTICE. The transaction of all business at any meeting of the Board of Directors, or any committee thereof, however called or noticed, or wherever held, shall be as valid as though had at a meeting duly held after regular call and notice, if a quorum be present and if, either before or after the meeting, each of the directors not present shall sign a written waiver of notice. All such waivers shall be filed with the corporate records or made a part of the minutes of the meeting. SECTION 21. QUORUM AND VOTING. (a) Unless the Certificate of Incorporation requires a greater number and except with respect to indemnification questions arising under Section 42 hereof, for which a quorum shall be one-third of the exact number of directors fixed from time to time in accordance with the Certificate of Incorporation, a quorum of the Board of Directors shall consist of a majority of the exact number of directors fixed from time to time by the Board of Directors in accordance with the Certificate of Incorporation; provided, however, at any meeting whether a quorum be present or otherwise, a majority of the directors present may adjourn from time to time until the time fixed for the next regular meeting of the Board of Directors, without notice other than by announcement at the meeting. 11. 17 (b) At each meeting of the Board of Directors at which a quorum is present, all questions and business shall be determined by the affirmative vote of a majority of the directors present, unless a different vote be required by law, the Certificate of Incorporation or these Bylaws. SECTION 22. ACTION WITHOUT MEETING. Unless otherwise restricted by the Certificate of Incorporation or these Bylaws, any action required or permitted to be taken at any meeting of the Board of Directors or of any committee thereof may be taken without a meeting, if all members of the Board of Directors or committee, as the case may be, consent thereto in writing, and such writing or writings are filed with the minutes of proceedings of the Board of Directors or committee. SECTION 23. FEES AND COMPENSATION. Directors shall be entitled to such compensation for their services as may be approved by the Board of Directors, including, if so approved, by resolution of the Board of Directors, a fixed sum and expenses of attendance, if any, for attendance at each regular or special meeting of the Board of Directors and at any meeting of a committee of the Board of Directors. Nothing herein contained shall be construed to preclude any director from serving the corporation in any other capacity as an officer, agent, employee, or otherwise and receiving compensation therefor. SECTION 24. COMMITTEES. (a) EXECUTIVE COMMITTEE. The Board of Directors may by resolution passed by a majority of the whole Board of Directors appoint an Executive Committee to consist of one (1) or more members of the Board of Directors. The Executive Committee, to the extent permitted by law and provided in the resolution of the Board of Directors shall have and may exercise all the powers and authority of the Board of Directors in the management of the business and affairs of the corporation, including without limitation the power or authority to declare a dividend, to authorize the issuance of stock and to adopt a certificate of ownership and merger, and may authorize the seal of the corporation to be affixed to all papers which may require it; but no such committee shall have the power or authority in reference to amending the Certificate of Incorporation (except that a committee may, to the extent authorized in the resolution or resolutions providing for the issuance of shares of stock adopted by the Board of Directors fix the designations and any of the preferences or rights of such shares relating to dividends, redemption, dissolution, any distribution of assets of the corporation or the conversion into, or the exchange of such shares for, shares of any other class or classes or any other series of the same or any other class or classes of stock of the corporation or fix the number of shares of any series of stock or authorize the increase or decrease of the shares of any series), adopting an agreement of merger or consolidation, recommending to the stockholders the sale, lease or exchange of all or substantially all of the corporation's property and assets, 12. 18 recommending to the stockholders a dissolution of the corporation or a revocation of a dissolution, or amending the bylaws of the corporation. (b) OTHER COMMITTEES. The Board of Directors may, by resolution passed by a majority of the whole Board of Directors, from time to time appoint such other committees as may be permitted by law. Such other committees appointed by the Board of Directors shall consist of one (1) or more members of the Board of Directors and shall have such powers and perform such duties as may be prescribed by the resolution or resolutions creating such committees, but in no event shall such committee have the powers denied to the Executive Committee in these Bylaws. (c) TERM. Each member of a committee of the Board of Directors shall serve a term on the committee coexistent with such member's term on the Board of Directors. The Board of Directors, subject to the provisions of subsections (a) or (b) of this Bylaw may at any time increase or decrease the number of members of a committee or terminate the existence of a committee. The membership of a committee member shall terminate on the date of his death or voluntary resignation from the committee or from the Board of Directors. The Board of Directors may at any time for any reason remove any individual committee member and the Board of Directors may fill any committee vacancy created by death, resignation, removal or increase in the number of members of the committee. The Board of Directors may designate one or more directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of the committee, and, in addition, in the absence or disqualification of any member of a committee, the member or members thereof present at any meeting and not disqualified from voting, whether or not he or they constitute a quorum, may unanimously appoint another member of the Board of Directors to act at the meeting in the place of any such absent or disqualified member. (d) MEETINGS. Unless the Board of Directors shall otherwise provide, regular meetings of the Executive Committee or any other committee appointed pursuant to this Section 24 shall be held at such times and places as are determined by the Board of Directors, or by any such committee, and when notice thereof has been given to each member of such committee, no further notice of such regular meetings need be given thereafter. Special meetings of any such committee may be held at any place which has been determined from time to time by such committee, and may be called by any director who is a member of such committee, upon written notice to the members of such committee of the time and place of such special meeting given in the manner provided for the giving of written notice to members of the Board of Directors of the time and place of special meetings of the Board of Directors. Notice of any special meeting of any committee may be waived in writing at any time before or after the meeting and will be waived by any director by attendance thereat, except when the director attends such special meeting for the express purpose of objecting, at the beginning of the meeting, to 13. 19 the transaction of any business because the meeting is not lawfully called or convened. A majority of the authorized number of members of any such committee shall constitute a quorum for the transaction of business, and the act of a majority of those present at any meeting at which a quorum is present shall be the act of such committee. SECTION 25. ORGANIZATION. At every meeting of the directors, the Chairman of the Board of Directors, or, if a Chairman has not been appointed or is absent, the President, or if the President is absent, the most senior Vice President, or, in the absence of any such officer, a chairman of the meeting chosen by a majority of the directors present, shall preside over the meeting. The Secretary, or in his absence, an Assistant Secretary directed to do so by the President, shall act as secretary of the meeting. ARTICLE V OFFICERS SECTION 26. OFFICERS DESIGNATED. The officers of the corporation shall include, if and when designated by the Board of Directors, the Chairman of the Board of Directors, the Chief Executive Officer, the President, one or more Vice Presidents, the Secretary, the Chief Financial Officer, the Treasurer, the Controller, all of whom shall be elected at the annual organizational meeting of the Board of Directors. The Board of Directors may also appoint one or more Assistant Secretaries, Assistant Treasurers, Assistant Controllers and such other officers and agents with such powers and duties as it shall deem necessary. The Board of Directors may assign such additional titles to one or more of the officers as it shall deem appropriate. Any one person may hold any number of offices of the corporation at any one time unless specifically prohibited therefrom by law. The salaries and other compensation of the officers of the corporation shall be fixed by or in the manner designated by the Board of Directors. SECTION 27. TENURE AND DUTIES OF OFFICERS. (a) GENERAL. All officers shall hold office at the pleasure of the Board of Directors and until their successors shall have been duly elected and qualified, unless sooner removed. Any officer elected or appointed by the Board of Directors may be removed at any time by the Board of Directors. If the office of any officer becomes vacant for any reason, the vacancy may be filled by the Board of Directors. (b) DUTIES OF CHAIRMAN OF THE BOARD OF DIRECTORS. The Chairman of the Board of Directors, when present, shall preside at all meetings of the stockholders and the Board of Directors. The Chairman of the Board of Directors shall perform other duties commonly incident to his office and shall also perform such other duties and have such other powers as the Board of Directors shall designate from time to time. If there is 14. 20 no President, then the Chairman of the Board of Directors shall also serve as the Chief Executive Officer of the corporation and shall have the powers and duties prescribed in paragraph (c) of this Section 27. (c) DUTIES OF PRESIDENT. The President shall preside at all meetings of the stockholders and at all meetings of the Board of Directors, unless the Chairman of the Board of Directors has been appointed and is present. Unless some other officer has been elected Chief Executive Officer of the corporation, the President shall be the chief executive officer of the corporation and shall, subject to the control of the Board of Directors, have general supervision, direction and control of the business and officers of the corporation. The President shall perform other duties commonly incident to his office and shall also perform such other duties and have such other powers as the Board of Directors shall designate from time to time. (d) DUTIES OF VICE PRESIDENTS. The Vice Presidents may assume and perform the duties of the President in the absence or disability of the President or whenever the office of President is vacant. The Vice Presidents shall perform other duties commonly incident to their office and shall also perform such other duties and have such other powers as the Board of Directors or the President shall designate from time to time. (e) DUTIES OF SECRETARY. The Secretary shall attend all meetings of the stockholders and of the Board of Directors and shall record all acts and proceedings thereof in the minute book of the corporation. The Secretary shall give notice in conformity with these Bylaws of all meetings of the stockholders and of all meetings of the Board of Directors and any committee thereof requiring notice. The Secretary shall perform all other duties given him in these Bylaws and other duties commonly incident to his office and shall also perform such other duties and have such other powers as the Board of Directors shall designate from time to time. The President may direct any Assistant Secretary to assume and perform the duties of the Secretary in the absence or disability of the Secretary, and each Assistant Secretary shall perform other duties commonly incident to his office and shall also perform such other duties and have such other powers as the Board of Directors or the President shall designate from time to time. (f) DUTIES OF CHIEF FINANCIAL OFFICER. The Chief Financial Officer shall keep or cause to be kept the books of account of the corporation in a thorough and proper manner and shall render statements of the financial affairs of the corporation in such form and as often as required by the Board of Directors or the President. The Chief Financial Officer, subject to the order of the Board of Directors, shall have the custody of all funds and securities of the corporation. The Chief Financial Officer shall perform other duties commonly incident to his office and shall also perform such other duties and have such other powers as the Board of Directors or the President shall designate from 15. 21 time to time. The President may direct the Treasurer or any Assistant Treasurer, or the Controller or any Assistant Controller, to the extent such officers have been designated by the Board of Directors, to assume and perform the duties of the Chief Financial Officer in the absence or disability of the Chief Financial Officer, and each Treasurer and Assistant Treasurer and each Controller and Assistant Controller shall perform other duties commonly incident to his office and shall also perform such other duties and have such other powers as the Board of Directors or the President shall designate from time to time. SECTION 28. DELEGATION OF AUTHORITY. The Board of Directors may from time to time delegate the powers or duties of any officer to any other officer or agent, notwithstanding any provision hereof. SECTION 29. RESIGNATIONS. Any officer may resign at any time by giving written notice to the Board of Directors or to the President or to the Secretary. Any such resignation shall be effective when received by the person or persons to whom such notice is given, unless a later time is specified therein, in which event the resignation shall become effective at such later time. Unless otherwise specified in such notice, the acceptance of any such resignation shall not be necessary to make it effective. Any resignation shall be without prejudice to the rights, if any, of the corporation under any contract with the resigning officer. SECTION 30. REMOVAL. Any officer may be removed from office at any time, either with or without cause, by the affirmative vote of a majority of the directors in office at the time, or by the unanimous written consent of the directors in office at the time, or by any committee or superior officers upon whom such power of removal may have been conferred by the Board of Directors. 16. 22 ARTICLE VI EXECUTION OF CORPORATE INSTRUMENTS AND VOTING OF SECURITIES OWNED BY THE CORPORATION SECTION 31. EXECUTION OF CORPORATE INSTRUMENTS. The Board of Directors may, in its discretion, determine the method and designate the signatory officer or officers, or other person or persons, to execute on behalf of the corporation any corporate instrument or document, or to sign on behalf of the corporation the corporate name without limitation, or to enter into contracts on behalf of the corporation, except where otherwise provided by law or these Bylaws, and such execution or signature shall be binding upon the corporation. Unless otherwise specifically determined by the Board of Directors or otherwise required by law, promissory notes, deeds of trust, mortgages and other evidences of indebtedness of the corporation, and other corporate instruments or documents requiring the corporate seal, and certificates of shares of stock owned by the corporation, shall be executed, signed or endorsed by the Chairman of the Board of Directors, or the President or any Vice President, and by the Secretary or Treasurer or any Assistant Secretary or Assistant Treasurer. All other instruments and documents requiring the corporate signature, but not requiring the corporate seal, may be executed as aforesaid or in such other manner as may be directed by the Board of Directors. All checks and drafts drawn on banks or other depositories on funds to the credit of the corporation or in special accounts of the corporation shall be signed by such person or persons as the Board of Directors shall authorize so to do. Unless authorized or ratified by the Board of Directors or within the agency power of an officer, no officer, agent or employee shall have any power or authority to bind the corporation by any contract or engagement or to pledge its credit or to render it liable for any purpose or for any amount. SECTION 32. VOTING OF SECURITIES OWNED BY THE CORPORATION. All stock and other securities of other corporations owned or held by the corporation for itself, or for other parties in any capacity, shall be voted, and all proxies with respect thereto shall be executed, by the person authorized so to do by resolution of the Board of Directors, or, in the absence of such authorization, by the Chairman of the Board of Directors, the Chief Executive Officer, the President, or any Vice President. 17. 23 ARTICLE VII SHARES OF STOCK SECTION 33. FORM AND EXECUTION OF CERTIFICATES. Certificates for the shares of stock of the corporation shall be in such form as is consistent with the Certificate of Incorporation and applicable law. Every holder of stock in the corporation shall be entitled to have a certificate signed by or in the name of the corporation by the Chairman of the Board of Directors, or the President or any Vice President and by the Treasurer or Assistant Treasurer or the Secretary or Assistant Secretary, certifying the number of shares owned by him in the corporation. Any or all of the signatures on the certificate may be facsimiles. 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 with the same effect as if he were such officer, transfer agent, or registrar at the date of issue. Each certificate shall state upon the face or back thereof, in full or in summary, all of the powers, designations, preferences, and rights, and the limitations or restrictions of the shares authorized to be issued or shall, except as otherwise required by law, set forth on the face or back a statement that the corporation will furnish without charge to each stockholder who so requests the powers, designations, preferences and relative, participating, optional, or other special rights of each class of stock or series thereof and the qualifications, limitations or restrictions of such preferences and/or rights. Within a reasonable time after the issuance or transfer of uncertificated stock, the corporation shall send to the registered owner thereof a written notice containing the information required to be set forth or stated on certificates pursuant to this section or otherwise required by law or with respect to this section a statement that the corporation will furnish without charge to each stockholder who so requests the powers, designations, preferences and relative participating, optional or other special rights of each class of stock or series thereof and the qualifications, limitations or restrictions of such preferences and/or rights. Except as otherwise expressly provided by law, the rights and obligations of the holders of certificates representing stock of the same class and series shall be identical. SECTION 34. LOST CERTIFICATES. A new certificate or certificates shall be issued in place of any certificate or certificates theretofore issued by the corporation alleged to have been lost, stolen, or destroyed, upon the making of an affidavit of that fact by the person claiming the certificate of stock to be lost, stolen, or destroyed. The corporation may require, as a condition precedent to the issuance of a new certificate or certificates, the owner of such lost, stolen, or destroyed certificate or certificates, or his legal representative, to advertise the same in such manner as it shall require or to give the corporation a surety bond in such form and amount as it may direct as indemnity against 18. 24 any claim that may be made against the corporation with respect to the certificate alleged to have been lost, stolen, or destroyed. SECTION 35. TRANSFERS. (a) Transfers of record of shares of stock of the corporation shall be made only upon its books by the holders thereof, in person or by attorney duly authorized, and upon the surrender of a properly endorsed certificate or certificates for a like number of shares. (b) The corporation shall have power to enter into and perform any agreement with any number of stockholders of any one or more classes of stock of the corporation to restrict the transfer of shares of stock of the corporation of any one or more classes owned by such stockholders in any manner not prohibited by the General Corporation Law of Delaware. SECTION 36. FIXING RECORD DATES. (a) In order that the corporation may determine the stockholders entitled to notice of or to vote at any meeting of stockholders or any adjournment thereof, the Board of Directors may fix, in advance, a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted by the Board of Directors, and which record date shall not be more than sixty (60) nor less than ten (10) days before the date of such meeting. If no record date is fixed by the Board of Directors, the record date for determining stockholders entitled to notice of or to vote at a meeting of stockholders shall be at the close of business on the day next preceding the day on which notice is given, or if notice is waived, at the close of business on the day next preceding the day on which the meeting is held. A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting; provided, however that the Board of Directors may fix a new record date for the adjourned meeting. (b) Prior to the Initial Public Offering, in order that the corporation may determine the stockholders entitled to consent to corporate action in writing without a meeting, the Board of Directors may fix a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted by the Board of Directors, and which date shall not be more than 10 days after the date upon which the resolution fixing the record date is adopted by the Board of Directors. Any stockholder of record seeking to have the stockholders authorize or take corporate action by written consent shall, by written notice to the Secretary, request the Board of Directors to fix a record date. The Board of Directors shall promptly, but in all events within 10 days after the date on which such a request is received, adopt a resolution fixing the record date. If 19. 25 no record date has been fixed by the Board of Directors within 10 days of the date on which such a request is received, the record date for determining stockholders entitled to consent to corporate action in writing without a meeting, when no prior action by the Board of Directors is required by applicable law, shall be the first date on which a signed written consent setting forth the action taken or proposed to be taken is delivered to the corporation by delivery to its registered office in the State of Delaware, its principal place of business or an officer or agent of the corporation having custody of the book in which proceedings of meetings of stockholders are recorded. Delivery made to the corporation's registered office shall be by hand or by certified or registered mail, return receipt requested. If no record date has been fixed by the Board of Directors and prior action by the Board of Directors is required by law, the record date for determining stockholders entitled to consent to corporate action in writing without a meeting shall be at the close of business on the day on which the Board of Directors adopts the resolution taking such prior action. (c) In order that the corporation may determine the stockholders entitled to receive payment of any dividend or other distribution or allotment of any rights or the stockholders entitled to exercise any rights in respect of any change, conversion or exchange of stock, or for the purpose of any other lawful action, the Board of Directors may fix, in advance, a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted, and which record date shall be not more than sixty (60) days prior to such action. If no record date is fixed, the record date for determining stockholders for any such purpose shall be at the close of business on the day on which the Board of Directors adopts the resolution relating thereto. SECTION 37. REGISTERED STOCKHOLDERS. The corporation shall be entitled to recognize the exclusive right of a person registered on its books as the owner of shares to receive dividends, and to vote as such owner, and shall not be bound to recognize any equitable or other claim to or interest in such share or shares on the part of any other person whether or not it shall have express or other notice thereof, except as otherwise provided by the laws of Delaware. ARTICLE VIII OTHER SECURITIES OF THE CORPORATION SECTION 38. EXECUTION OF OTHER SECURITIES. All bonds, debentures and other corporate securities of the corporation, other than stock certificates (covered in Section 33), may be signed by the Chairman of the Board of Directors, the President or any Vice President, or such other person as may be authorized by the Board of Directors, and the corporate seal impressed thereon or a facsimile of such seal imprinted thereon and attested by the signature of the Secretary or an Assistant Secretary, or the Chief Financial 20. 26 Officer or Treasurer or an Assistant Treasurer; provided, however, that where any such bond, debenture or other corporate security shall be authenticated by the manual signature, or where permissible facsimile signature, of a trustee under an indenture pursuant to which such bond, debenture or other corporate security shall be issued, the signatures of the persons signing and attesting the corporate seal on such bond, debenture or other corporate security may be the imprinted facsimile of the signatures of such persons. Interest coupons appertaining to any such bond, debenture or other corporate security, authenticated by a trustee as aforesaid, shall be signed by the Treasurer or an Assistant Treasurer of the corporation or such other person as may be authorized by the Board of Directors, or bear imprinted thereon the facsimile signature of such person. In case any officer who shall have signed or attested any bond, debenture or other corporate security, or whose facsimile signature shall appear thereon or on any such interest coupon, shall have ceased to be such officer before the bond, debenture or other corporate security so signed or attested shall have been delivered, such bond, debenture or other corporate security nevertheless may be adopted by the corporation and issued and delivered as though the person who signed the same or whose facsimile signature shall have been used thereon had not ceased to be such officer of the corporation. ARTICLE IX DIVIDENDS SECTION 39. DECLARATION OF DIVIDENDS. Dividends upon the capital stock of the corporation, subject to the provisions of the Certificate of Incorporation, if any, may be declared by the Board of Directors pursuant to law at any regular or special meeting. Dividends may be paid in cash, in property, or in shares of the capital stock, subject to the provisions of the Certificate of Incorporation. SECTION 40. DIVIDEND RESERVE. Before payment of any dividend, there may be set aside out of any funds of the corporation available for dividends such sum or sums as the Board of Directors from time to time, in their absolute discretion, think proper as a reserve or reserves to meet contingencies, or for equalizing dividends, or for repairing or maintaining any property of the corporation, or for such other purpose as the Board of Directors shall think conducive to the interests of the corporation, and the Board of Directors may modify or abolish any such reserve in the manner in which it was created. ARTICLE X FISCAL YEAR SECTION 41. FISCAL YEAR. The fiscal year of the corporation shall be fixed by resolution of the Board of Directors. 21. 27 ARTICLE XI INDEMNIFICATION SECTION 42. INDEMNIFICATION OF DIRECTORS, EXECUTIVE OFFICERS, OTHER OFFICERS, EMPLOYEES AND OTHER AGENTS. (a) DIRECTORS AND EXECUTIVE OFFICERS. The corporation shall indemnify its directors and executive officers (for the purposes of this Article XI, "executive officers shall have the meaning defined in Rule 3b-7 promulgated under the 1934 Act) to the fullest extent not prohibited by the Delaware General Corporation Law; provided, however, that the corporation may modify the extent of such indemnification by individual contracts with its directors and executive officers; and, provided, further, that the corporation shall not be required to indemnify any director in connection with any proceeding (or part thereof) initiated by such person unless (i) such indemnification is expressly required to be made by law, (ii) the proceeding was authorized by the Board of Directors of the corporation, (iii) such indemnification is provided by the corporation, in its sole discretion, pursuant to the powers vested in the corporation under the Delaware General Corporation Law or (iv) such indemnification is required to be made under subsection (d). (b) OTHER OFFICERS, EMPLOYEES AND OTHER AGENTS. The corporation shall have power to indemnify its other officers, employees and other agents as set forth in the Delaware General Corporation Law. (c) EXPENSES. The corporation shall advance to any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative, by reason of the fact that he is or was a director or executive officer, of the corporation, or is or was serving at the request of the corporation as a director or executive officer of another corporation, partnership, joint venture, trust or other enterprise, prior to the final disposition of the proceeding, promptly following request therefor, all expenses incurred by any director or executive officer in connection with such proceeding upon receipt of an undertaking by or on behalf of such person to repay said amounts if it should be determined ultimately that such person is not entitled to be indemnified under this Bylaw or otherwise. Notwithstanding the foregoing, unless otherwise determined pursuant to paragraph (e) of this Bylaw, no advance shall be made by the corporation to an executive officer of the corporation (except by reason of the fact that such executive officer is or was a director of the corporation in which event this paragraph shall not apply) in any action, suit or proceeding, whether civil, criminal, administrative or investigative, if a 22. 28 determination is reasonably and promptly made (i) by the Board of Directors by a majority vote of a quorum consisting of directors who were not parties to the proceeding, or (ii) if such quorum is not obtainable, or, even if obtainable, a quorum of disinterested directors so directs, by independent legal counsel in a written opinion, that the facts known to the decision-making party at the time such determination is made demonstrate clearly and convincingly that such person acted in bad faith or in a manner that such person did not believe to be in or not opposed to the best interests of the corporation. (d) ENFORCEMENT. Without the necessity of entering into an express contract, all rights to indemnification and advances to directors and executive officers under this Bylaw shall be deemed to be contractual rights and be effective to the same extent and as if provided for in a contract between the corporation and the director or executive officer. Any right to indemnification or advances granted by this Bylaw to a director or executive officer shall be enforceable by or on behalf of the person holding such right in any court of competent jurisdiction if (i) the claim for indemnification or advances is denied, in whole or in part, or (ii) no disposition of such claim is made within ninety (90) days of request therefor. The claimant in such enforcement action, if successful in whole or in part, shall be entitled to be paid also the expense of prosecuting his claim. In connection with any claim for indemnification, the corporation shall be entitled to raise as a defense to any such action that the claimant has not met the standards of conduct that make it permissible under the Delaware General Corporation Law for the corporation to indemnify the claimant for the amount claimed. In connection with any claim by an executive officer of the corporation (except in any action, suit or proceeding, whether civil, criminal, administrative or investigative, by reason of the fact that such executive officer is or was a director of the corporation) for advances, the corporation shall be entitled to raise a defense as to any such action clear and convincing evidence that such person acted in bad faith or in a manner that such person did not believe to be in or not opposed to the best interests of the corporation, or with respect to any criminal action or proceeding that such person acted without reasonable cause to believe that his conduct was lawful. Neither the failure of the corporation (including its Board of Directors, independent legal counsel or its stockholders) to have made a determination prior to the commencement of such action that indemnification of the claimant is proper in the circumstances because he has met the applicable standard of conduct set forth in the Delaware General Corporation Law, nor an actual determination by the corporation (including its Board of Directors, independent legal counsel or its stockholders) that the claimant has not met such applicable standard of conduct, shall be a defense to the action or create a presumption that claimant has not met the applicable standard of conduct. In any suit brought by a director or executive officer to enforce a right to indemnification or to an advancement of expenses hereunder, the burden of proving that the director or executive officer is not entitled to be indemnified, or to such advancement of expenses, under this Article XI or otherwise shall be on the corporation. 23. 29 (e) NON-EXCLUSIVITY OF RIGHTS. The rights conferred on any person by this Bylaw shall not be exclusive of any other right which such person may have or hereafter acquire under any statute, provision of the Certificate of Incorporation, Bylaws, agreement, vote of stockholders or disinterested directors or otherwise, both as to action in his official capacity and as to action in another capacity while holding office. The corporation is specifically authorized to enter into individual contracts with any or all of its directors, officers, employees or agents respecting indemnification and advances, to the fullest extent not prohibited by the Delaware General Corporation Law. (f) SURVIVAL OF RIGHTS. The rights conferred on any person by this Bylaw shall continue as to a person who has ceased to be a director, officer, employee or other agent and shall inure to the benefit of the heirs, executors and administrators of such a person. (g) INSURANCE. To the fullest extent permitted by the Delaware General Corporation Law, the corporation, upon approval by the Board of Directors, may purchase insurance on behalf of any person required or permitted to be indemnified pursuant to this Bylaw. (h) AMENDMENTS. Any repeal or modification of this Bylaw shall only be prospective and shall not affect the rights under this Bylaw in effect at the time of the alleged occurrence of any action or omission to act that is the cause of any proceeding against any agent of the corporation. (i) SAVING CLAUSE. If this Bylaw or any portion hereof shall be invalidated on any ground by any court of competent jurisdiction, then the corporation shall nevertheless indemnify each director and executive officer to the full extent not prohibited by any applicable portion of this Bylaw that shall not have been invalidated, or by any other applicable law. (j) CERTAIN DEFINITIONS. For the purposes of this Bylaw, the following definitions shall apply: (i) The term "proceeding" shall be broadly construed and shall include, without limitation, the investigation, preparation, prosecution, defense, settlement, arbitration and appeal of, and the giving of testimony in, any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative. (ii) The term "expenses" shall be broadly construed and shall include, without limitation, court costs, attorneys' fees, witness fees, fines, amounts paid in settlement or judgment and any other costs and expenses of any nature or kind incurred in connection with any proceeding. 24. 30 (iii) The term the "corporation" shall include, in addition to the resulting corporation, any constituent corporation (including any constituent of a constituent) absorbed in a consolidation or merger which, if its separate existence had continued, would have had power and authority to indemnify its directors, officers, and employees or agents, so that any person who is or was a director, officer, employee or agent of such constituent corporation, or is or was serving at the request of such constituent corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, shall stand in the same position under the provisions of this Bylaw with respect to the resulting or surviving corporation as he would have with respect to such constituent corporation if its separate existence had continued. (iv) References to a "director," "executive officer," "officer," "employee," or "agent" of the corporation shall include, without limitation, situations where such person is serving at the request of the corporation as, respectively, a director, executive officer, officer, employee, trustee or agent of another corporation, partnership, joint venture, trust or other enterprise. (v) References to "other enterprises" shall include employee benefit plans; references to "fines" shall include any excise taxes assessed on a person with respect to an employee benefit plan; and references to "serving at the request of the corporation" shall include any service as a director, officer, employee or agent of the corporation which imposes duties on, or involves services by, such director, officer, employee, or agent with respect to an employee benefit plan, its participants, or beneficiaries; and a person who acted in good faith and in a manner he reasonably believed to be in the interest of the participants and beneficiaries of an employee benefit plan shall be deemed to have acted in a manner "not opposed to the best interests of the corporation" as referred to in this Bylaw. ARTICLE XII NOTICES SECTION 43. NOTICES. (a) NOTICE TO STOCKHOLDERS. Whenever, under any provisions of these Bylaws, notice is required to be given to any stockholder, it shall be given in writing, timely and duly deposited in the United States mail, postage prepaid, and addressed to his last known post office address as shown by the stock record of the corporation or its transfer agent. 25. 31 (b) NOTICE TO DIRECTORS. Any notice required to be given to any director may be given by the method stated in subsection (a), or by facsimile, telex or telegram, except that such notice other than one which is delivered personally shall be sent to such address as such director shall have filed in writing with the Secretary, or, in the absence of such filing, to the last known post office address of such director. (c) ADDRESS UNKNOWN. If no address of a stockholder or Director be known, notice may be sent to the office of the corporation required to be maintained pursuant to Section 2 hereof. (d) AFFIDAVIT OF MAILING. An affidavit of mailing, executed by a duly authorized and competent employee of the corporation or its transfer agent appointed with respect to the class of stock affected, specifying the name and address or the names and addresses of the stockholder or stockholders, or director or directors, to whom any such notice or notices was or were given, and the time and method of giving the same, shall in the absence of fraud, be prima facie evidence of the facts therein contained. (e) TIME NOTICES DEEMED GIVEN. All notices given by mail, as above provided, shall be deemed to have been given as at the time of mailing, and all notices given by facsimile, telex or telegram shall be deemed to have been given as of the sending time recorded at time of transmission. (f) METHODS OF NOTICE. It shall not be necessary that the same method of giving notice be employed in respect of all directors, but one permissible method may be employed in respect of any one or more, and any other permissible method or methods may be employed in respect of any other or others. (g) FAILURE TO RECEIVE NOTICE. The period or limitation of time within which any stockholder may exercise any option or right, or enjoy any privilege or benefit, or be required to act, or within which any director may exercise any power or right, or enjoy any privilege, pursuant to any notice sent him in the manner above provided, shall not be affected or extended in any manner by the failure of such stockholder or such director to receive such notice. (h) NOTICE TO PERSON WITH WHOM COMMUNICATION IS UNLAWFUL. Whenever notice is required to be given, under any provision of law or of the Certificate of Incorporation or Bylaws of the corporation, to any person with whom communication is unlawful, the giving of such notice to such person shall not be required and there shall be no duty to apply to any governmental authority or agency for a license or permit to give such notice to such person. Any action or meeting which shall be taken or held without notice to any such person with whom communication is unlawful shall have the same force and effect as if such notice had been duly given. In the event that the action 26. 32 taken by the corporation is such as to require the filing of a certificate under any provision of the Delaware General Corporation Law, the certificate shall state, if such is the fact and if notice is required, that notice was given to all persons entitled to receive notice except such persons with whom communication is unlawful. (i) NOTICE TO PERSON WITH UNDELIVERABLE ADDRESS. Whenever notice is required to be given, under any provision of law or the Certificate of Incorporation or Bylaws of the corporation, to any stockholder to whom (i) notice of two consecutive annual meetings, and all notices of meetings or of the taking of action by written consent without a meeting to such person during the period between such two consecutive annual meetings, or (ii) all, and at least two, payments (if sent by first class mail) of dividends or interest on securities during a twelve-month period, have been mailed addressed to such person at his address as shown on the records of the corporation and have been returned undeliverable, the giving of such notice to such person shall not be required. Any action or meeting which shall be taken or held without notice to such person shall have the same force and effect as if such notice had been duly given. If any such person shall deliver to the corporation a written notice setting forth his then current address, the requirement that notice be given to such person shall be reinstated. In the event that the action taken by the corporation is such as to require the filing of a certificate under any provision of the Delaware General Corporation Law, the certificate need not state that notice was not given to persons to whom notice was not required to be given pursuant to this paragraph. ARTICLE XIII AMENDMENTS SECTION 44. AMENDMENTS. Subject to paragraph (h) of Section 42 of the Bylaws, the Bylaws may be altered or amended or new Bylaws adopted by the affirmative vote of at least sixty-six and two-thirds percent (66-2/3%) of the voting power of all of the then-outstanding shares of the Voting Stock. The Board of Directors shall also have the power to adopt, amend, or repeal Bylaws. ARTICLE XIV LOANS TO OFFICERS SECTION 45. LOANS TO OFFICERS. The corporation may lend money to, or guarantee any obligation of, or otherwise assist any officer or other employee of the corporation or of its subsidiaries, including any officer or employee who is a Director of the corporation or its subsidiaries, whenever, in the judgment of the Board of Directors, such loan, guarantee or assistance may reasonably be expected to benefit the corporation. The loan, guarantee or other assistance may be with or without interest and may be 27. 33 unsecured, or secured in such manner as the Board of Directors shall approve, including, without limitation, a pledge of shares of stock of the corporation. Nothing in these Bylaws shall be deemed to deny, limit or restrict the powers of guaranty or warranty of the corporation at common law or under any statute. 28. EX-10.42 7 EXHIBIT 10.42 1 *** Text Omitted and Filed Separately Confidential Treatment Requested Under 17 C.F.R. Sections 200.80, 200.83 and 230.406. EXHIBIT 10.42 FIRST AMENDMENT TO AGREEMENT THIS FIRST AMENDMENT (the "First Amendment") to the Agreement by and between N.V. ORGANON, Molenstraat 110, P.O. Box 20, 5340 BH Oss, the Netherlands (hereinafter referred to as "Organon"), and SIGNAL PHARMACEUTICALS, INC., 5555 Oberlin Drive, San Diego, California 92121, USA (hereinafter referred to as "Signal"), dated as of July 30, 1996 (the "Agreement") is entered into as of March 17, 1998 (the "First Amendment Date"). Capitalized terms used but not otherwise defined in this First Amendment shall have the meanings given such terms in the Agreement. RECITALS WHEREAS, Organon and Signal entered into the Agreement to collaborate in the discovery and development of new assays for the targets selected as provided in the Agreement; and WHEREAS, Organon and Signal wish to amend the Agreement in the manner set forth in this First 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. AMENDMENT AND RESTATEMENT OF SECTION 3. The first and second paragraphs of Section 3 of the Agreement are hereby amended and restated in their entirety as follows: "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 First Amendment Date, Organon at its sole discretion may forthwith terminate the Target Research by written notice effective as of the [***]. If the milestone described in Exhibit C is not met within [***] after the First Amendment Date, Organon at its sole discretion may terminate the Target Research effective as of the end of the [***] following the First Amendment Date. 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 1. ***Confidential Treatment Requested 2 Signal shall use reasonable efforts to deliver up to [***] Research Assays to Organon. If Organon elects to terminate the Target Research (a) as of the [***] as provided above 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." 2. AMENDMENT AND RESTATEMENT OF SECTION 3.4. Section 3.4 of the Agreement is hereby amended and restated in its entirety as follows: "3.4. LICENSES AND OPTION RIGHTS 3.4.1. Subject to the terms and conditions of this Agreement, Signal hereby grants to Organon a worldwide, 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. 3.4.2. Subject to the terms and conditions of this Agreement, Signal hereby grants to Organon a worldwide, exclusive (except as to Signal) license to use any cell lines which are developed in the conduct of the Target Research (whether solely by Signal or jointly by the parties) for Organon's internal research purposes during the term of this Agreement. Notwithstanding any other provision of this Agreement, Organon shall not have the right to sublicense the rights granted under this Section 3.4.2 to any third party without the prior written consent of Signal, which consent may be given or withheld in Signal's sole discretion; provided, however, that Organon may, without Signal's prior written consent, sublicense such rights to an Affiliate of Organon that is controlled by Organon. The parties hereby acknowledge that Signal retains the right to use the cell lines licensed hereunder for any purpose. 3.4.3. Subject to the terms of this Agreement, Signal hereby grants to Organon a worldwide, 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 2. ***Confidential Treatment Requested 3 the scope of the foregoing license. If, however, a compound has been selected in the Target Research Field that potentially is [***], 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. 3.4.4. Subject to the terms of this Agreement, Signal hereby grants to Organon a worldwide, 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. 3.4.5. Except as set forth in Section 3.4.2 above, 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." 3. AMENDMENT AND RESTATEMENT OF RESEARCH PLAN. The Research Plan is hereby amended and restated in its entirety as attached hereto. 4. AMENDMENT AND RESTATEMENT OF EXHIBIT B. Exhibit B of the Agreement is hereby amended and restated in its entirety as attached hereto. 5. FULL FORCE AND EFFECT. Except as specifically amended by this First Amendment, the terms and conditions of the Agreement shall remain in full force and effect. 6. GOVERNING LAW. This First Amendment shall be governed by and construed in accordance with the laws of the State of Delaware. 7. COUNTERPARTS. This First 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. 3. ***Confidential Treatment Requested 4 IN WITNESS WHEREOF, the parties have executed this First Amendment on the day and year first written above. N.V. ORGANON SIGNAL PHARMACEUTICALS, INC. By: [SIG] By: [SIG] -------------------------- -------------------------- Title: Managing Director R&D Title: E.V.P. ----------------------- ----------------------- By: [SIG] -------------------------- Title: Director Research ----------------------- 5 ORGANON-SIGNAL RESEARCH OUTLINE [***] ***Confidential Treatment Requested 6 ORGANON-SIGNAL RESEARCH OUTLINE CONFIDENTIAL ================================================================================ EXHIBIT B Project Goals [***] ***Confidential Treatment Requested EX-23.1 8 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 Amendment No. 1 to the Registration Statement (Form S-1 No. 333-52901) and related Prospectus of Signal Pharmaceuticals, Inc. for the registration of its common stock. /s/ ERNST & YOUNG LLP San Diego, California May 26, 1998 -----END PRIVACY-ENHANCED MESSAGE-----