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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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SCHEDULE 14D-9
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SOLICITATION/RECOMMENDATION STATEMENT PURSUANT TO
SECTION 14(d)(4) OF THE SECURITIES EXCHANGE ACT OF 1934
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COMBICHEM, INC.
(Name of Subject Company)
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COMBICHEM, INC.
(Name of Person(s) Filing Statement)
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Common Stock, $.001 Par Value
(Title of Class of Securities)
20009P 10 3
(CUSIP Number of Class of Securities)
Dr. Vicente Anido, Jr.
President and Chief Executive Officer
CombiChem, Inc.
9050 Camino Santa Fe
San Diego, California 92121
(858) 530-0484
(Name, Address, and Telephone Number of Person Authorized to Receive Notice and
Communications on Behalf of Person(s) Filing Statement)
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Copies To:
Faye H. Russell, Esq.
Carey J. Fox, Esq.
Brobeck, Phleger & Harrison, LLP
550 West C Street, Suite 1300
San Diego, California 92101
(619) 234-1966
Justin P. Klein, Esq.
Ballard Spahr Andrews & Ingersoll LLP
1735 Market Street
Philadelphia, Pennsylvania 19103
(215) 864-8606
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Item 1. Security and Subject Company
The name of the subject company is CombiChem, Inc., a Delaware corporation
(the "Company"), and the address of the principal executive office of the
Company is 9050 Camino Santa Fe, San Diego, California 92121.
The title of the class of equity securities to which this statement relates
is Common Stock, $.001 par value of the Company (collectively, the "Shares").
Item 2. Tender Offer of the Offeror
This statement relates to the tender offer of DPC Newco, Inc., a Delaware
corporation ("Offeror") and wholly owned subsidiary of DuPont Pharma, Inc., a
Delaware corporation ("Purchaser") and an indirect wholly owned subsidiary of
E.I. du Pont de Nemours and Company, a Delaware corporation ("Parent")
disclosed in a Tender Offer Statement on Schedule 14D-1 (the "Schedule 14D-1")
dated October 12, 1999, to purchase all of the outstanding Shares at a price
of $6.75 per Share, net to the seller, in cash, upon the terms and subject to
the conditions set forth in the Offer to Purchase dated October 12, 1999 (the
"Offer to Purchase") and the related Letter of Transmittal (which together
shall constitute the "Offer"). Copies of the Offer to Purchase and the Letter
of Transmittal are filed as Exhibit 1 and Exhibit 2, respectively, and as more
specifically set forth herein, certain portions of such Offer to Purchase are
incorporated herein by reference. A copy of the joint press release issued by
the Company and the Parent on October 5, 1999, relating to the Offer is filed
as Exhibit 3 hereto and is incorporated herein by reference (the "Press
Release").
The Offer is being made by the Offeror pursuant to an Agreement and Plan of
Merger (the "Merger Agreement") entered into on October 5, 1999 between the
Company, Parent and Offeror. Pursuant to the terms of the Merger Agreement,
upon consummation of the Offer, the Offeror will be merged with and into the
Company (the "Merger") and the Company will become a wholly owned subsidiary
of Parent. A copy of the Merger Agreement is filed as Exhibit 6 hereto and is
incorporated herein by reference.
Upon the consummation of the Merger, each outstanding Share that was not
tendered into the Offer (other than Shares held in treasury of the Company or
owned by Parent or any subsidiary of Parent (collectively, "Ineligible
Shares") and other than Shares held by stockholders properly exercising
appraisal rights, if any, under Delaware or other applicable law ("Dissenting
Shares")) will be converted automatically into the right to receive $6.75 per
Share, net to the seller, in cash.
The obligation of the Offeror to accept for payment or pay for Shares
tendered pursuant to the Offer is subject to the condition that at least a
majority of the Shares outstanding on a fully diluted basis shall be validly
tendered, and not withdrawn, prior to the expiration date of the Offer. As of
October 5, 1999, certain stockholders of the Company (the "Stockholders")
entered into a Shareholders Agreement with Parent and Offeror pursuant to
which each Stockholder has, among other things, (i) agreed to validly tender
(and not withdraw) pursuant to the Offer, all Shares owned by such
stockholder, (ii) agreed to vote such Shares in favor of the Merger and the
Merger Agreement and against any acquisition proposal other than the Merger,
and (iii) granted to Offeror an irrevocable option to purchase such
stockholder's Shares in the event the Merger Agreement is terminated under
certain circumstances. An aggregate of 4,549,591 Shares are owned by the
Stockholders and subject to the Shareholders Agreement, representing
approximately 34% of the Shares outstanding as of September 27, 1999. In
addition, 428,258 shares issuable upon exercise of outstanding options and
warrants are subject to the Shareholders Agreement as of September 27, 1999.
Offeror's Schedule 14D-1 states that the address of the principal executive
offices of the Parent and Offeror is 1007 Market Street, Wilmington, Delaware
19898.
Item 3. Identity and Background
(a) The name and business address of the Company, which is the person filing
this statement, are set forth in Item 1 above.
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(b) Except as set forth below or in the attached Annex A, to the knowledge
of the Company, as of the date hereof, there are no material contracts,
agreements, arrangements or understandings and actual or potential conflicts
of interest between the Company and its affiliates and (i) the Company or its
executive officers, directors or affiliates or (ii) Parent, its executive
officers, directors or affiliates.
Confidentiality Agreement. In connection with granting access to certain
confidential information, Parent and Company entered into a Mutual Non-
Disclosure Agreement on March 10, 1999 (the "Confidentiality Agreement"). A
copy of the Confidentiality Agreement is filed as Exhibit 5 hereto and is
incorporated herein by reference. The Confidentiality Agreement provides,
among other things, that each of the parties may use the confidential
information provided to it by the other party solely for the purpose of
evaluating and discussing a proposed business relationship between the
parties. In addition, the Confidentiality Agreement provides generally that
the parties shall not disclose any such confidential information without the
prior written consent of the other party for a period of five years from the
date of the Confidentiality Agreement.
The Merger Agreement. A summary of the Merger Agreement is contained in Item
12 of the Offer to Purchase under the heading "The Transaction Documents--The
Merger Agreement" and is incorporated herein by reference. A copy of the
Merger Agreement is filed as Exhibit 6 hereto and is incorporated herein by
reference.
The Stock Option Agreement. A summary of the Stock Option Agreement between
Offeror and the Company dated October 5, 1999 (the "Stock Option Agreement")
is contained in Item 12 of the Offer to Purchase under the heading "The
Transaction Documents--The Stock Option Agreement" and is incorporated herein
by reference. A copy of the Stock Option Agreement is filed as Exhibit 7
hereto and is incorporated herein by reference.
The Shareholders Agreement. A summary of the Shareholders Agreement entered
into between each of First Union Trust Company, National Association, as
Voting Trustee Under that Certain Voting Trust Agreement dated May 5, 1998
(Sprout Capital VII, L.P.), DLJ Capital Corporation, Sequoia Capital VI,
Sequoia Technology Partners VI, Sequoia XXIV, Sequoia 1995, BVCF III, L.P.,
Brinson Trust Company, as Trustee of the Brinson MAP Venture Capital Fund III,
Vicente Anido, Jr., Peter Myers, Michael Pazzani, Philippe Chambon, William
Scott, Arthur Reidel, Lee McCracken and Klaus Gubernator on the one hand, and
Parent and Offeror on the other hand, is contained in Item 12 of the Offer to
Purchase under the heading "The Transaction Documents--The Shareholders
Agreement" and is incorporated herein by reference. A copy of the form of
Shareholders Agreement is filed as Exhibit 8 hereto and is incorporated herein
by reference.
Item 4. The Solicitation or Recommendation
Background of the Transaction.
At the regularly scheduled Board meeting on December 8, 1998, the Board and
the Company's management team discussed a number of strategic alternatives
designed to build on the Company's current business model and enhance
stockholder value. These alternatives centered around acquiring complementary
technologies or companies that would add to the Company's existing drug
discovery capabilities.
Between December 8, 1998 and February 24, 1999, the Company informally
explored several of these alternatives. On February 24, 1999, the Company
received an unsolicited expression of interest from a biotechnology company
("Corporation A") in potentially acquiring the Company. On March 16, 1999, the
Company's CEO visited the corporate headquarters of Corporation A to further
explore its interest in acquiring the Company. At the regularly scheduled
Board meeting on March 24, 1999, the Board discussed the Company's strategic
options and the decision was reached to engage Donaldson Lufkin & Jenrette
Securities Corporation ("DLJ") as the Company's financial advisor.
During the month of April 1999, DLJ contacted, on a confidential basis, 14
companies, including Corporation A and Parent, to solicit their interest in a
potential acquisition of, or merger with, the Company.
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At the time, Parent did not express interest in pursuing a potential
acquisition of the Company. During this time, the Company entered into a
confidentiality agreement with Corporation A and Corporation A conducted
scientific due diligence on the Company. In addition, one of the parties
contacted, Corporation B, indicated an interest in merging one of its
subsidiaries with the Company. DLJ assisted the Company in its discussions
with Corporation B regarding a potential merger with one of its subsidiaries,
but these discussions were terminated shortly thereafter.
Five of the companies initially contacted during April 1999 requested
nonconfidential information regarding the Company. DLJ provided these
companies with nonconfidential information and held discussions with them
through May 1999 to ascertain their interest in a potential acquisition of the
Company. At the same time, the Company became aware that Corporation C was for
sale and that its service offerings were consistent with the strategic
alternatives reviewed by the management and the Board at the December 1998
Board meeting. The Company entered into a confidentiality agreement with
Corporation C and conducted its initial due diligence meeting at the corporate
headquarters of Corporation C on May 20, 1999.
By early June 1999, Corporation A was the only party which had expressed
significant continued interest in an acquisition of the Company. On June 6,
1999, representatives of Corporation A visited the Company's San Diego
facilities and conducted extensive due diligence discussions and reviews.
During the month of June, additional due diligence meetings and conference
calls were scheduled between Corporation A and the Company. At the same time,
valuation discussions were held with representatives of Corporation A. During
this time, the Company also conducted further due diligence, including site
visits and conference calls, with Corporation C.
In July 1999, discussions with Corporation A ceased based on differences in
valuation. On July 13 and 14, 1999, Company executives and advisors held
extensive due diligence meetings at the offices of Corporation C. In addition,
preliminary discussions were held with representatives of Corporation C
concerning valuation expectations. A complete report was provided to the Board
at its July 22, 1999 Board meeting.
On August 5 and 6, 1999, representatives of Corporation C conducted a due
diligence visit at the Company's corporate headquarters. During the week of
August 9, 1999, representatives of the Company conducted due diligence visits
to all of Corporation C's operational sites. On August 17 and 18, 1999,
representatives of the Company and Corporation C, including legal and
financial advisors, met to negotiate the terms of a potential transaction
between the two companies. During the week of August 23, 1999, negotiations
continued on the terms of a transaction between the Company and Corporation C.
On August 25, 1999, an Executive Vice President and Chief Operating Officer
of Parent contacted the CEO of the Company concerning a possible acquisition
of the Company by Purchaser. On several occasions prior to August 25, 1999,
various representatives of Parent and Purchaser and the Company had discussed
the possibility of entering into a collaborative agreement. The Company and
Purchaser had entered into a confidentiality agreement in connection with such
discussions in March 1999. No collaborative agreement was entered into by the
Company and Purchaser.
On August 30, 1999, representatives and advisors of Parent and Purchaser met
with representatives and advisors of the Company at the Company's headquarters
to discuss the possibility of Parent and Purchaser acquiring the Company.
Various representatives of the Company delivered presentations reviewing the
Company's technology, business and strategy. Representatives of Parent and
Purchaser conducted initial due diligence of the Company at that time and
indicated to the Company that, subject to satisfactory completion of due
diligence and negotiation of a mutually satisfactory merger agreement, Parent
and Purchaser would consider acquiring the Company.
On August 31, 1999, a telephonic Board meeting, which included
representatives from DLJ, was conducted to discuss the acquisition of
Corporation C by the Company and Purchaser's interest in acquiring the
Company. The Board decided to delay discussions with Corporation C and further
investigate a possible transaction with Purchaser.
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From August 31, 1999 to September 15, 1999, Parent and Purchaser continued
their due diligence of the Company. In addition, various terms of the proposed
transaction, including valuation, were discussed between representatives of
the Company and Parent and Purchaser. On September 15, 1999, the Company
received a written term sheet which described a proposed offer by Parent and
Purchaser to acquire the Company at a price of $6.75 per share, subject to
certain terms and conditions, including the negotiation of a merger agreement,
a stock option agreement giving Parent the right to purchase up to 19.9% of
the shares of the Company under certain conditions, a shareholders' agreement
and various employment agreements with key employees of the Company.
On September 16, 1999, a telephonic Board meeting was held at which time the
Board was updated on the status of discussions with Parent and Purchaser and
the Board instructed management to continue negotiation of terms. On September
20, 1999, representatives of Parent, Purchaser and the Company agreed in
principle to a merger at a per share price of $6.75, subject to the terms and
conditions set forth in the written term sheet and subject to the approval of
their respective Boards of Directors. On September 22, 1999, representatives
of Parent and Purchaser provided a draft of the Merger Agreement to
representatives of the Company.
On September 23, 1999, representatives of the Company and Parent and
Purchaser, and their respective legal and financial advisors, met at the
offices of Purchaser to negotiate the Merger Agreement and related documents.
Negotiations continued between the Company and Purchaser during the week of
September 27.
On October 4, 1999, a telephonic Board meeting, which included
representatives of Brobeck, Phleger & Harrison, LLP ("Brobeck"), counsel to
the Company, and DLJ, was held to review and vote upon the Merger Agreement.
The representatives of Brobeck gave a detailed presentation to the Board
regarding the material terms of the Merger Agreement, the Stock Option
Agreement and the Shareholders Agreement, including the structure of the Offer
and Merger, the conditions to the Offer, covenants applicable to the Company
under the Merger Agreement (including restrictions on the ability to discuss
alternative transactions), the termination provisions and the circumstances
under which the Company would be required to pay a fee to Parent in the event
the Merger Agreement were terminated. In addition, representatives of DLJ made
a presentation regarding the financial terms of the proposed Offer, explaining
to the Board in detail the analyses undertaken by DLJ. After extensive
questions were asked by the Board, the DLJ representative then rendered the
opinion of DLJ, which was subsequently confirmed in writing, that, as of such
date and based upon and subject to certain assumptions and limitations set
forth in the written opinion, the consideration to be received by the
stockholders of the Company was fair, from a financial point of view, to the
stockholders of the Company. After such presentations and discussions, the
Board unanimously approved the Offer, the Merger and the Merger Agreement and
ancillary agreements, and determined that the Offer and the Merger were fair
to and in the best interests of the stockholders of the Company. The Board
also unanimously declared the Merger advisable and determined to recommend
that the stockholders of the Company accept the Offer and tender all of their
shares to Parent.
The Merger Agreement and related documents were executed on October 5, 1999,
at which time Parent and the Company issued a joint press release following
the close of trading for the day.
Recommendation
The Board unanimously approved the Offer, the Merger, the Merger Agreement,
the Stock Option Agreement and the transactions contemplated thereby and
unanimously recommends that the holders of Shares accept the Offer and tender
their Shares pursuant to the Offer.
Reasons For Recommendation
As set forth above, prior to approving the Merger Agreement and authorizing
the Company to enter into the Merger Agreement and the Stock Option Agreement,
the Board received presentations from representatives of DLJ regarding the
financial aspects of the proposed Offer and the Merger and from
representatives of Brobeck regarding the legal aspects of the Offer and the
Merger. In reaching its conclusion that the Offer and the Merger are in the
best interests of the Company and its stockholders, the Board principally
considered the following:
. the terms and conditions of the Offer and the Merger Agreement;
. the trading history of the Shares during the prior 12 months and the
expected trading prices for the foreseeable future;
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. the fact that the purchase price of $6.75 per Share in cash represents a
premium over recent and historical market prices for the Shares. On
October 1, 1999, the last trading day before the Board voted on the
Merger Agreement, the closing price for the Company's Common Stock as
quoted on the Nasdaq National Market was $5.125 and on September 3, 1999,
one month prior to the Board vote, the closing price was $3.5625;
. the presentation by representatives of DLJ to the Board at the October 4,
1999 Board meeting and the oral opinion (subsequently confirmed in
writing) of DLJ to the effect that, as of October 4, 1999 and based upon
and subject to certain assumptions and limitations set forth in the
written opinion, the $6.75 per Share price in cash to be received by the
stockholders of the Company pursuant to the Offer and Merger is fair from
a financial point of view to such stockholders. A copy of the DLJ written
opinion that was delivered to the Board is set forth as Exhibit 4 to this
Schedule 14D-9. STOCKHOLDERS ARE URGED TO READ THE DLJ OPINION IN ITS
ENTIRETY;
. the fact that the Offer and Merger are not contingent on Parent obtaining
financing and contain no other terms or conditions that, in the view of
the Board, could materially impair the consummation of the Offer or the
Merger;
. the fact that three significant stockholders, and their affiliates, as
well as members of the Board and executive management holding in the
aggregate approximately 33.7% of the outstanding Shares were willing to
enter into the Shareholders Agreement pursuant to which such stockholders
agreed, among other things, to tender into the Offer all of the Shares
held by them;
. the fact that DLJ had contacted 14 companies, including Parent, regarding
a potential acquisition of the Company and that only one other company
had significant continued interest in pursuing an acquisition of the
Company and that the terms of a potential agreement with that company and
the valuation which had been discussed with that company were less
favorable than the terms and valuation contemplated by the Offer and
Merger; and
. the financial condition, results of operations, business and prospects of
the Company.
The Company's Board recognized that, while the consummation of the Offer and
Merger would give the stockholders of the Company the opportunity to realize a
premium over the prices at which the Shares were traded prior to the public
announcement of the Offer and Merger, consummation of the Offer and the Merger
will eliminate the stockholders' ability to participate in the future growth
and possible profits of the Company.
The Board of Directors anticipates that if the Shares are not purchased by
the Parent in accordance with the terms of the Offer or if the Merger is not
consummated, the Company's current management, under the general direction of
the Company's Board of Directors, will continue to manage the Company as an
ongoing business in accordance with the Company's current business plan.
Item 5. Persons Retained, Employed or to be Compensated
The Board's financial advisor in connection with the Offer and other matters
arising in connection therewith is DLJ.
Pursuant to an engagement letter dated April 8, 1999 (the "Engagement
Letter"), the Company engaged DLJ to act as its financial advisor in
connection with the Company's consideration of a potential sale or merger of
the Company or other strategically or financially beneficial business
combination. Under the terms of the Engagement Letter, the Company is
obligated to pay DLJ a fee of $350,000 for the rendering of the fairness
opinion to the Company's Board, irrespective of the conclusion reached
therein, in connection with its approval of the Offer and the Merger. DLJ is
also entitled to receive additional compensation equal to 1 1/2% of the value
of the Offer and the Merger (representing the sum of the cash to be paid to
the stockholders and net cash to be paid to option and warrant holders of the
Company as well as debt assumed) up to $100 million and 2% of such value in
excess of $100 million, subject to a minimum of $1 million and less any
amounts paid in connection with the fairness opinion. The Company also has
agreed to reimburse DLJ for its reasonable out-of-pocket expenses, including
fees and expenses of counsel, and to indemnify DLJ against certain
liabilities, including liabilities under the federal securities laws or
relating to or arising out of DLJ's engagement as financial advisor.
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In connection with the Offer and the Merger, the Company will pay DLJ an
aggregate of approximately $1,500,000, in addition to out-of-pocket expenses,
for services provided to the Company.
DLJ is an internationally recognized investment banking firm and is
regularly engaged in the valuation of businesses and their securities in
connection with mergers and acquisitions, corporate restructurings, strategic
alliances, negotiated underwritings, secondary distributions of listed and
unlisted securities, private placements and valuations for corporate and other
purposes. The Board selected DLJ to act as its financial advisor in connection
with the Offer and the Merger on the basis of its experience in advising
companies in connection with similar offers.
Neither the Company nor any person acting on its behalf currently intends to
employ, retain or compensate any other person to make solicitations or
recommendations to holders of the Company's Common Stock on its behalf
concerning the Offer.
Item 6. Recent Transactions and Intent with Respect to Securities
No transactions in the Shares have been effected during the last 60 days by
the Company or, to the Company's knowledge, by any executive officer,
director, affiliate or subsidiary of the Company.
The Company believes, to the best of its knowledge, that its directors,
executive officers and the stockholders who are a party to the Shareholders
Agreement currently intend to tender Shares held or beneficially owned by them
in response to the Offer. In addition, the Company has granted to Parent an
irrevocable option to purchase up to 2,684,431 shares of Company Common Stock
pursuant to the Stock Option Agreement. Such option is exercisable in certain
circumstances that would give rise to the termination of the Merger Agreement.
Item 7. Certain Negotiations and Transactions by the Subject Company
(a) Except as set forth in this Schedule 14D-9, the Company is not engaged
in any negotiation in response to the Offer which relates to or would result
in: (1) an extraordinary transaction, such as a merger or reorganization,
involving the Company or any subsidiary of the Company; (2) a purchase, sale
or transfer of a material amount of assets of the Company or any subsidiary of
the Company; (3) a tender offer for or other acquisition of securities by or
of the Company; or (4) any material change in the present capitalization or
dividend policy of the Company.
(b) Except as described above in Items 3 or 4 above, there are no
transactions, Board of Directors' resolutions, agreements in principle or
signed contracts in response to the Offer that relate to or would result in
one or more of the events referred to in Item 7(a) above.
Item 8. Additional Information to be Furnished
See the Information Statement pursuant to Section 14(f) of the Exchange Act
and Rule 14f-1 thereunder, a copy of which is attached as Annex A hereto.
Item 9. Material to be Filed as Exhibits
<TABLE>
<CAPTION>
Exhibit Description
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<C> <S>
Exhibit 1 Offer to Purchase dated October 12, 1999 (incorporated by reference
to Exhibit (a)(1) of the Schedule 14D-1 of E.I. du Pont de Nemours
and Company, DuPont Pharma, Inc. and DPC Newco, Inc. filed with the
Securities and Exchange Commission on October 12, 1999 (the
"Schedule 14D-1")).**
Exhibit 2 Letter of Transmittal (incorporated by reference to Exhibit (a)(2)
of the Schedule 14D-1).**
Exhibit 3 Joint Press Release issued by the Company and the Parent, dated
October 5, 1999.
Exhibit 4 Opinion Letter of Donaldson Lufkin & Jenrette Securities Corporation
dated October 4, 1999.*
</TABLE>
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<TABLE>
<CAPTION>
Exhibit Description
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<C> <S>
Exhibit 5 Mutual Non-Disclosure Agreement dated March 10, 1999 between the
Company and DuPont Pharmaceuticals Company.
Exhibit 6 Agreement and Plan of Merger, dated as of October 5, 1999 between
the Company, the Parent and Offeror (incorporated by reference to
Exhibit (c)(1) of the Schedule 14D-1).
Exhibit 7 Stock Option Agreement dated as of October 5, 1999 among the Parent,
Offeror and the Company (incorporated by reference to Exhibit (c)(3)
of the Schedule 14D-1).
Exhibit 8 Shareholders Agreement dated as of October 5, 1999 between the
Parent, Offeror and certain stockholders of the Company
(incorporated by reference to Exhibit (c)(2) of the Schedule 14D-1).
Exhibit 9 Letter to Stockholders of the Company dated October 12, 1999.*
</TABLE>
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* Included in copies of Schedule 14D-9 mailed to stockholders of the Company.
** Included in the Offer to Purchase materials mailed to stockholders of the
Company.
7
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SIGNATURE
After reasonable inquiry and to the best of its knowledge and belief, the
undersigned certifies that the information set forth in this statement is
true, complete and correct.
COMBICHEM, INC.
Date: October 12, 1999
/s/ Dr. Vicente Anido, Jr.
Dr. Vicente Anido, Jr.
President & Chief Executive Officer
8
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ANNEX A
INFORMATION PROVIDED PURSUANT TO SECTION 14(f)
OF THE SECURITIES EXCHANGE ACT OF 1934
AND RULE 14f-1 THEREUNDER
General
This information is being mailed on or about October 12, 1999 to holders of
record of shares of Common Stock, par value $.001 per share (the "Shares"), of
CombiChem, Inc. (the "Company") in connection with the possible election of
persons designated by E.I. du Pont de Nemours and Company ("Parent") to the
Board of Directors of the Company other than at a meeting of the stockholders
of the Company. Such election would occur pursuant to the Agreement and Plan
of Merger dated October 5, 1999 (the "Merger Agreement") among the Company,
Parent and DPC Newco, Inc., a Delaware corporation and wholly owned subsidiary
of Parent ("Offeror"). The Merger Agreement is more fully described under Item
2 of the Company's Solicitation/Recommendation Statement on Schedule 14D-9
(the "Schedule 14D-9"), of which this Annex A is a part. Capitalized terms
used in this Annex A and not otherwise defined shall have the meanings given
to such terms in the Schedule 14D-9.
Pursuant to the Merger Agreement, the Offeror commenced the Offer on October
12, 1999. The Offer currently is scheduled to expire at 12:00 midnight, New
York City time, on November 8, 1999, at which time if the Offer is not
extended and all conditions to the Offer have been satisfied or waived, the
Offeror is obligated to purchase all Shares tendered and not validly
withdrawn.
If the Merger Agreement is terminated or if Offeror does not accept the
Shares tendered for payment, then Offeror will not have any right to designate
directors for election to the Company's Board of Directors.
The Parent Designees
Pursuant to the Merger Agreement, promptly upon acceptance and payment by
Offeror of at least that number of Shares greater than a majority of the
outstanding Shares on a fully diluted basis, Offeror shall be entitled to
designate such number of members to the Company's Board of Directors, rounded
up to the next whole number, equal to the product of the total number of
directors on the Company's Board of Directors (giving effect to the directors
elected pursuant to this sentence) multiplied by the percentage that such
number of shares owned in the aggregate by Offeror or Parent, upon acceptance
for payment of the Shares, bears to the number of Shares outstanding. The
Company has agreed, subject to compliance with Section 14(f) of the Exchange
Act and Rule 14f-1 promulgated thereunder, upon request of Offeror, to (i)
either increase the size of the Company's Board of Directors or use its
reasonable efforts to secure the resignations of such number of its incumbent
directors as is necessary to enable Parent's designees to be so elected to the
Company's Board of Directors, and (ii) cause Parent's designees to be so
elected.
It is expected that on the date that Offeror accepts for payment and
purchases the Shares under the Offer, which the Company expects to be on or
after November 9, 1999, the Company will promptly take such other action as
will be necessary to enable the Parent Designees (as defined below) to be
elected to the Company's Board of Directors.
Set forth below are the name, age and present principal occupation or
employment for each of the persons who may be designated by Parent (the
"Parent Designees") to serve on the Company's Board of Directors. Unless
otherwise indicated below, the business address for each of the individuals
listed below is 1007 Market Street, Wilmington, Delaware 19898. Each of the
individuals listed below is a citizen of the United States.
A-1
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<TABLE>
<CAPTION>
Present Occupation or Employment; Material
Name Positions Held During the Past Five Years Age
---- ------------------------------------------ ---
<C> <S> <C>
Paul A. Friedman, M.D. Dr. Friedman has served as the President of 56
DuPont Pharmaceuticals Research
Laboratories since April 1994.
Richard E. Gies Mr. Gies has served as the Senior Vice 51
President and Chief Financial Officer of
DuPont Pharmaceuticals Company since June
1999. From July 1998 to May 1999, Mr. Gies
served as the Vice President and Chief
Financial Officer of DuPont Canada, Inc.
From August 1994 to June 1998, Mr. Gies
served as the Finance Director, Corporate
Plans of Parent.
Robert E. Pelzer Mr. Pelzer has served as the Senior Vice 46
President and General Counsel of DuPont
Pharmaceuticals Company since August 1998.
From August 1997 to August 1998, Mr. Pelzer
served as the Director and General Manager,
European Legal and Security Department for
Conoco Europe. From August 1996 to August
1997, Mr. Pelzer served as the Corporate
Legal Advisor for Conoco U.K. Ltd. From
October 1994 to August 1996, Mr. Pelzer
served as Corporate Counsel for Parent.
Robert B. Stein, M.D., Ph.D. Dr. Stein has served as the Executive Vice 49
President, Research & Preclinical
Development of DuPont Pharmaceuticals
Company since September 1996. Prior to that
time, Dr. Stein served as the Senior Vice
President and Chief Scientific Officer of
Ligand Pharmaceuticals Incorporated.
</TABLE>
Any other officer of Parent or Offeror listed in Schedule I to the Offer to
Purchase dated October 12, 1999, filed as an Exhibit to the Tender Offer
Statement on Schedule 14D-1 of Parent and Offeror may also be designated by
Parent as a Parent Designee. The information with respect to Parent Designee's
has been provided by Parent for inclusion herein.
Certain Information Concerning the Company
The Shares are the only class of voting securities of the Company
outstanding. As of September 27, 1999, there were 13,489,604 Shares
outstanding and approximately 15,055,299 Shares outstanding on a fully diluted
basis. Each Share that is outstanding on the close of business on any
applicable record date for any matter to be acted upon by stockholders is
entitled to one vote on such matter.
Current Members of the Company's Board of Directors
The Board of Directors of the Company is currently composed of six members.
The Board of Directors is classified into three classes of directors serving
staggered three-year terms, with one class of directors to be elected at each
annual meeting of stockholders. To the extent that the Company Board of
Directors will consist of persons who are not among the Parent Designees, the
Company's Board of Directors is expected to consist of persons who are
currently directors of the Company who have not resigned.
The following sets forth as to each current director of the Company's Board
of Directors such persons age, year first elected as a director and business
experience for the past five years. The information set forth below was
provided to the Company by the respective directors.
Directors Whose Terms Expire at the Annual Meeting of Stockholders in 2000
Philippe O. Chambon, M.D., Ph.D., 41. Dr. Chambon has served as a Director
of the Company since August 1995. Dr. Chambon is a General Partner of the
Sprout Group. He joined Sprout in May 1995. From May 1993 to April 1995, Dr.
Chambon served as Manager in the Healthcare Practice of The Boston Consulting
Group, a leading management consulting firm. Previously, Dr. Chambon was an
executive with Sandoz Pharmaceuticals Corporation, a leading pharmaceutical
company, from September 1987 to April 1993. In his last capacity there, he was
the Executive Director of New Product Management. He is currently a director
of Deltagen, Gantech
A-2
<PAGE>
International, NxStage Medical, PharSight, Skila, Spotfire, Variagenics, VascA
and Xcyte Therapies. Dr. Chambon received an M.D. (with honors) and Ph.D. from
the University of Paris and an M.B.A. from Columbia University. Dr. Chambon
currently serves as a member of the Company's Audit Committee and Nominating
Committee.
William Scott, Ph.D., 59. Dr. Scott has served as a Director of the Company
since January 1997. Dr. Scott served as President and Chief Executive Officer
of Physiome Sciences from March of 1997 until July of 1999. From 1983 until
December 1996, Dr. Scott served in various executive positions with Bristol-
Myers Squibb Pharmaceutical Research Institute and as its Senior Vice
President, Drug Discovery Research since 1991. Dr. Scott received a B.S. in
Chemistry from the University of Illinois and a Ph.D. in Biochemistry from the
California Institute of Technology and was an NIH Postdoctoral Fellow at The
Rockefeller University. Dr. Scott serves on the Board of Directors of
Atherogenics. Dr. Scott currently serves as Chairman of the Company's
Compensation Committee.
Directors Whose Terms Expire at the Annual Meeting of Stockholders in 2001
Vicente Anido, Jr., Ph.D., 46. Dr. Anido has served as President and Chief
Executive Officer and as a Director of the Company since joining the Company
in March 1996. Prior to that, Dr. Anido served as President of the Americas
Region at Allergan, Inc. from June 1993, where he was responsible for that
company's commercial operations for North and South America with approximately
$500 million in revenue. Prior to that, Dr. Anido spent almost 18 years at
Marion Laboratories and Marion Merrell Dow, Inc. and served as Vice President,
Business Management of its U.S. Prescription Products Division from 1991 until
June 1993. Dr. Anido holds a B.S. in Pharmacy from West Virginia University,
an M.S. in Pharmaceutical Sciences from West Virginia University and a Ph.D.
in Pharmacy Administration from the University of Missouri, Kansas City. Dr.
Anido currently serves on the Board of Directors of Deltagen and Galileo Labs.
Dr. Anido also serves as a member of the Company's Nominating Committee.
Arthur Reidel, 48. Mr. Reidel has served as a Director of the Company since
September 1997. He currently serves as President, Chief Executive Officer and
Chairman of the Board of Pharsight Corporation, a privately held software
corporation, a position he has held since April 1996, and as a director from
April 1995. Prior to that, he was a private investor/consultant from April
1995 to March 1996. From October 1994 to March 1995, he served as Vice
President, Business Development of Viewlogic Systems, Inc., a publicly held
software firm. Mr. Reidel served as a director of MacNeil-Schwendler from
December 1993 until June 1998 and he is currently a director of Formation
Systems, Inc., a position he has held since 1996. Mr. Reidel has also served
as President and Chief Executive Officer, Sunrise Test Systems, Inc., a
privately held software firm, from December 1992 to March 1994 (Viewlogic
Systems, Inc. acquired Sunrise Test Systems, Inc. in September 1994), and Vice
President of Weitek Corporation from July 1991 to December 1992. Mr. Reidel
received a B.S. in mathematics from Massachusetts Institute of Technology. Mr.
Reidel also currently serves as a member of the Company's Compensation
Committee.
Directors Whose Terms Expire at the Annual Meeting of Stockholders in 2002
Peter L. Myers, Ph.D., 55. Dr. Myers has served as a Director, Vice
President and Chief Scientific Officer of the Company since joining the
Company in March 1995. Dr. Myers has also served as Chief Operating Officer of
the Company since September 1995 and served as the acting Chief Executive
Officer from September 1995 to March 1996. Prior to joining the Company, Dr.
Myers served as Vice President, Drug Discovery and Development at Onyx
Pharmaceuticals Inc. from November 1993 through March 1995, where he was
responsible for all aspects of drug discovery and development leading to
potential novel classes of anti-cancer drugs. Prior to that, Dr. Myers served
as Vice President, Chemistry Research of Glaxo Inc. Research Institute from
January 1991 through December 1993. Dr. Myers holds a B.S. in Chemistry and a
Ph.D. in Organic Chemistry from Leeds University.
Michael J. Pazzani, Ph.D., 41. Dr. Pazzani has served as a Director of the
Company since March 1999. Dr. Pazzani is Chair of the Department of
Information and Computer Science and a Professor of Information & Computer
Science and Cognitive Science at the University of California, Irvine. He has
been affiliated with the
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<PAGE>
University of California, Irvine, since 1988. Dr. Pazzani holds B.S. and M.S.
degrees in Computer Engineering from the University of Connecticut and a Ph.D.
in Computer Science from the University of California, Los Angeles. Dr.
Pazzani also currently serves as a member of the Company's Audit Committee.
Board Committees and Meetings
The Company's Board of Directors met a total of six times and acted by
unanimous written consent a total of two times during the year ended December
31, 1998. The Company has a standing Audit Committee, Compensation Committee
and Nominating Committee. On September 30, 1999, the committees of the Board
and the members of such committees were as follows:
The Audit Committee is currently composed of Dr. Pazzani and Dr. Chambon.
The Audit Committee met one time in 1998. The Audit Committee assists in
selecting the independent auditors, designating the services they are to
perform and in maintaining effective communication with those auditors.
The Compensation Committee is currently composed of Mr. Reidel and Dr.
Scott. The Compensation Committee met four times and acted by unanimous
written consent one time in 1998. The Compensation Committee reviews and acts
on matters relating to compensation levels and benefit plans for executive
officers and key employees of the Company, including salary and stock options.
The Compensation Committee is also responsible for granting stock awards,
stock options and stock appreciation rights and other awards to be made under
the Company's existing incentive compensation plans.
The Nominating Committee is currently composed of Dr. Anido and Dr. Chambon.
The Nominating Committee did not meet in 1998. The Nominating Committee is
responsible for putting forth names of suitable nominees to be elected to
serve as directors of the Corporation.
During the year ended December 31, 1998, each of the directors attended at
least 75% of the aggregate of (i) total meetings of the Board and (ii) the
total number of meetings held by all committees of the Board on which he
served (during the periods that he served).
Non-Director Executive Officers
Lee R. McCracken, 41, has served as Senior Vice President, Corporate
Development and New Business Ventures since January 1999. Previously, Mr.
McCracken held the position of Vice President, Business Development, a
position he held since joining the Company in May 1996. Prior to joining the
Company, Mr. McCracken served as Vice President, Business Development at
Watson Laboratories, the operating subsidiary of Watson Pharmaceuticals, from
January 1996 through May 1996. Prior to that, Mr. McCracken served as Managing
Director of Pacific Pharma and as Director, Business Development, for the
Americas Region at Allergan, Inc. from May 1992 through December 1995. Prior
to entering the pharmaceutical industry, Mr. McCracken was a venture
capitalist with 3i Capital and Union Venture Corporation. Mr. McCracken
received a B.S. in Marketing from Santa Clara University, an M.S. in Computer
Science from the University of Dayton and an M.B.A. from The Anderson School
at UCLA.
Klaus Gubernator, Ph.D., 46, joined the Company in August 1997 as Vice
President, Special Projects. Prior to joining the Company, he served as
Research Section Head in Pharmaceutical Research at F. Hoffmann-La Roche Ltd.
in Basel, Switzerland from January 1987 to June 1997, contributing to
cardiovascular and antibacterial projects as well as developing structure-
based design and bioinformatics technologies. Dr. Gubernator received his
undergraduate in 1979, and his Ph.D. degree in 1982, in Chemistry from the
University of Heidelberg.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act requires the Company's officers and
directors, and persons who own more than 10% of a registered class of the
Company's equity securities, to file reports of ownership and changes in
ownership with the SEC and the Nasdaq National Market System. Officers,
directors and greater than 10% beneficial owners are required by SEC
regulations to furnish the Company with copies of all Section 16(a) forms they
file.
Based solely on review of the copies of such forms furnished to the Company,
or written representations from certain reporting persons that no Forms 5 were
required, the Company believes that, during the 1998 fiscal year, all Section
16(a) filing requirements applicable to its officers, directors and greater
than 10% beneficial owners were satisfied.
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<PAGE>
EXECUTIVE COMPENSATION
Compensation of Directors
The Company reimburses its directors for all reasonable and necessary travel
and other incidental expenses incurred in connection with their attendance at
meetings of the Board. Directors are not currently compensated for serving on
the Board. Each individual who becomes a non-employee Board member will
receive a 20,000-share option grant on the date such individual joins the
Board. In addition, each such non-employee Board member who continues to serve
as a non-employee Board member will automatically be granted an option to
purchase 5,000 shares of Common Stock at each subsequent annual meeting,
provided such individual has served on the Board for at least six months.
These options will have an exercise price equal to 100% of the fair market
value of the Common Stock on the grant date. The shares subject to each
20,000-share automatic option grant will vest over a four-year period, with
25% of the option shares vesting upon completion of one year of Board service
from the grant date and the balance of the option shares vesting in equal
monthly installments over the optionee's continued period of Board service
over the next three years. The shares subject to each 5,000-share annual
automatic option will vest upon the optionee's completion of one year of Board
service measured from the grant date. In May 1998, Dr. Chambon and received a
20,000-share grant exercisable at $8.00 per share. In March 1999, Dr. Pazzani
received a 20,000-share grant exercisable at $4.25 per share. In May 1999, Mr.
Reidel, Dr. Chambon and Dr. Scott each received a 5,000-share grant
exercisable at $3.19 per share.
Compensation of Executive Officers
The following table sets forth the aggregate compensation earned by the
Company's President and Chief Executive Officer and each of the other four
most highly compensated executive officers whose salary and bonus for 1998
exceeded $100,000 and who were still employed by the Company as of September
30, 1999 (the "Named Executive Officers") for services rendered in all
capacities to the Company for the year ended December 31, 1998:
<TABLE>
<CAPTION>
Long-Term
Annual Compensation
Compensation Awards
----------------- ---------------
Other Securities
Annual Underlying All Other
Name and Principal Position Year Salary(1) Bonus Compensation Options/SARs(#) Compensation
- --------------------------- ---- --------- ------- ------------ --------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Vicente Anido, Jr.,
Ph.D.(2)............... 1998 $287,712 $64,735 $48,691(3)(4) 0 $2,240(5)
President, Chief 1997 273,593 58,227 0 100,001 0
Executive Officer and 1996 200,417 55,226 0 422,417 0
Director
Peter L. Myers,
Ph.D.(6)............... 1998 234,605 52,786 -- 0 3,855(5)
Vice President, Chief 1997 225,582 42,297 0 50,001 3,855(5)
Scientific Officer, 1996 215,250 43,050 -- 0 4,960(5)
Chief Operating Officer
and Director
Lee R. McCracken(7)..... 1998 158,036 23,705 34,872(4) 0 0
Senior Vice President, 1997 150,510 33,112 59,739(8) 12,500 0
Corporate Development 1996 101,740 16,917 -- 72,500 0
and New Business
Ventures
Klaus Gubernator,
Ph.D.(9)............... 1998 143,961 28,792 -- 0 0
Vice President, Special 1997 51,974 10,575 0 52,500 0
Projects
</TABLE>
- --------
(1) Includes amounts deferred under the Company's 401(k) Plan.
(2) Dr. Anido was hired in March 1996.
(3) Includes $48,000 related to the forgiveness of debt.
(4) Includes amounts reimbursed for the payment of taxes.
(5) Payments for life insurance premiums.
(6) Dr. Myers served as the Company's acting Chief Executive Officer from
August 1995 until March 1996.
(7) Mr. McCracken was hired in May 1996.
(8) Payments to cover relocation expenses.
(9) Dr. Gubernator was hired in July 1997.
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<PAGE>
Stock Options
No options or stock appreciation rights ("SARs") were granted to, or
exercised by, Named Executive Officers during 1998.
The following table provides information concerning the value of unexercised
options held by each of the Named Executive Officers as of December 31, 1998.
No SARs were exercised during 1998 or outstanding as of December 31, 1998.
Aggregate Option Exercises in Last Fiscal Year and
Fiscal Year-End Option Values
<TABLE>
<CAPTION>
Number of Securities
Underlying Value of Unexercised
Unexercised Options at in-the-Money Options at
December 31, 1998 December 31, 1998(2)
---------------------------- ----------------------------
Name Exercisable(1) Unexercisable Exercisable(1) Unexercisable
- ---- -------------- ------------- -------------- -------------
<S> <C> <C> <C> <C>
Vicente Anido, Jr.,
Ph.D. ................. 100,001 0 $53,300 $ 0
Peter L. Myers, Ph.D. .. 50,001 0 15,650 0
Lee R. McCracken........ 0 0 0 0
Klaus Gubernator,
Ph.D. ................. 0 0 0 0
</TABLE>
- --------
(1) The options are immediately exercisable, but any shares purchased
thereunder will be subject to repurchase by the Company, at the original
option exercise price paid per share, should the employee leave the
Company prior to vesting in the shares. As of December 31, 1998, none of
these shares had vested.
(2) "Value" is calculated in this table as the fair market price of the Common
Stock at fiscal year-end ($4.31) less exercise price.
Employment Arrangements and Change of Control Arrangements
In March 1996, the Company and Dr. Anido entered into an agreement whereby
Dr. Anido is employed as President and Chief Executive Officer of the Company.
Pursuant to his agreement, Dr. Anido was to receive an annual base salary of
$260,000 (his current annual salary is $302,092), which would be reviewed
annually by the Board of Directors, and would be eligible for a bonus of up to
25% (currently 35%) of his annual base salary to be awarded at the discretion
of the Board of Directors. In the event the Company terminates Dr. Anido's
employment without "cause," Dr. Anido will be entitled to receive an aggregate
severance benefit of 12 months of his base salary and benefits less amounts
received by Dr. Anido from other full-time employment during that period. In
addition, pursuant to his employment agreement Dr. Anido received options to
purchase 420,000 shares of Common Stock with an exercise price of $0.30 per
share. The shares subject to the option vest over Dr. Anido's four-year period
of service with the Company measured from the option grant date. Dr. Anido's
employment agreement also provides Dr. Anido with a right to maintain his pro
rata interest in the Company by purchasing new securities issued in a
financing other than a public offering, subject to certain exceptions.
In March 1995, the Company and Dr. Myers entered into an agreement whereby
Dr. Myers is employed as Vice President, Chief Scientific Officer and Chief
Operating Officer of the Company. Pursuant to his agreement, Dr. Myers (i)
received a signing bonus of $26,250 towards the purchase of Company stock,
(ii) was to receive an annual base salary of $210,000 (his current annual
salary is $250,324), which would be reviewed annually by the President and
Chief Executive Officer, and (iii) would be eligible for a bonus of up to 25%
of his annual base salary to be awarded at the discretion of the Board of
Directors. In connection with the employment agreement, Dr. Myers was provided
a home loan. In the event the Company terminates Dr. Myers' employment without
"cause," Dr. Myers will be entitled to receive an aggregate severance benefit
of nine months of his base salary and benefits, unless he obtains full-time
employment prior to the end of that period, and nine months accelerated
vesting to be applied to any vesting requirements under any stock option or
stock purchase agreements outstanding between Dr. Myers and the Company at the
time of his termination without cause.
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<PAGE>
Simultaneous with the execution of Dr. Myers' employment agreement, the
Company and Dr. Myers entered into a Stock Purchase Agreement whereby Dr.
Myers purchased 87,500 shares of Common Stock at $0.30 per share. Those shares
vest over Dr. Myers' four-year period of service with the Company measured
from the option grant date.
In May 1996, the Company and Mr. McCracken entered into an agreement whereby
he is employed as Vice President, Business Development of the Company.
Pursuant to his agreement, Mr. McCracken received a signing bonus of $10,000
and was to receive an annual base salary of $145,000 (his current annual
salary is $195,000), which would be reviewed annually by the President and
Chief Executive Officer. In addition, Mr. McCracken would be eligible for a
bonus of up to 20% of his annual base salary. In the event the Company
terminates Mr. McCracken's employment without "cause," Mr. McCracken will be
entitled to receive an aggregate severance benefit of nine months of his base
salary and benefits. Simultaneous with the execution of Mr. McCracken's
employment agreement, the Company and Mr. McCracken entered into a stock
option agreement granting Mr. McCracken an option to purchase 72,500 shares of
Common Stock with an exercise price of $0.30 per share. The shares subject to
the option vest over Mr. McCracken's four-year period of service measured from
the option grant date.
In connection with an acquisition of the Company by merger or asset sale,
each outstanding option held by individuals in the Company's employ or
service, including the Chief Executive Officer and the other Named Executive
Officers, under the 1997 Stock Incentive Plan and the 1995 Stock Option/Stock
Issuance Plan (the "1995 Plan") will automatically accelerate in full, except
to the extent such options are to be assumed by the successor corporation. In
addition, the Compensation Committee as Plan Administrator has provided for
the accelerated vesting of the shares of Common Stock subject to outstanding
options, or any unvested shares of Common Stock subject to direct issuances,
in connection with the termination of employment following: (i) a merger or
asset sale in which these options are assumed or the repurchase rights
applicable to those shares are assigned; or (ii) certain changes in control of
the Company.
Employee Benefit Plans
1997 Stock Incentive Plan
The Company maintains the 1997 Stock Incentive Plan (the "1997 Plan"). The
1997 Plan is divided into five separate components: (i) the Discretionary
Option Grant Program under which eligible individuals in the Company's employ
or service (including officers, non-employee Board members and consultants)
may, at the discretion of the Plan Administrator, be granted options to
purchase shares of Common Stock at an exercise price not less than 100% of
their fair market value on the grant date, (ii) the Stock Issuance Program
under which such individuals may, in the Plan Administrator's discretion, be
issued shares of Common Stock directly, through the purchase of such shares at
a price not less than 100% of their fair market value at the time of issuance
or as a bonus tied to the performance of services, (iii) the Salary Investment
Option Grant Program which may, in the Plan Administrator's sole discretion,
be activated for one or more calendar years and, if so activated, will allow
executive officers and other highly compensated employees the opportunity to
apply a portion of their base salary to the acquisition of special below-
market stock option grants, (iv) the Automatic Option Grant Program under
which option grants will automatically be made at periodic intervals to
eligible non-employee Board members to purchase shares of Common Stock at an
exercise price equal to 100% of their fair market value on the grant date and
(v) the Director Fee Option Grant Program which may, in the Plan
Administrator's sole discretion, be activated for one or more calendar years
and, if so activated, will allow non-employee Board members the opportunity to
apply a portion of the annual retainer fee, if any, otherwise payable to them
in cash each year to the acquisition of special below-market option grants.
Share Reserve
2,072,170 shares of Common Stock have been reserved for issuance over the 10
year term of the 1997 Plan, not including shares reserved for issuance under
the predecessor plan, the 1995 Plan.
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<PAGE>
Should any option terminate prior to exercise in full, the shares subject to
the unexercised portion of that option will be available for subsequent option
grants. In addition, any unvested shares issued under the 1997 Plan and
subsequently repurchased by the Company at the option exercise or direct issue
price paid per share pursuant to the Company's repurchase rights under the
1997 Plan will be added back to the number of shares of Common Stock reserved
for issuance under the 1997 Plan and will accordingly be available for
reissuance through one or more subsequent option grants or direct stock
issuances made under the 1997 Plan. However, shares subject to any option
surrendered in accordance with the stock appreciation right provisions of the
1997 Plan will not be available for subsequent issuance.
In no event may any one participant in the 1997 Plan be granted stock
options, separately exercisable stock appreciation rights and direct stock
issuances for more than 500,000 shares in the aggregate per calendar year
under the 1997 Plan.
Changes In Capitalization
In the event any change is made to the outstanding shares of Common Stock by
reason of any recapitalization, stock dividend, stock split, combination of
shares, exchange of shares or other change in corporate structure effected
without the Company's receipt of consideration, appropriate adjustments will
be made to (i) the maximum number and class of securities issuable under the
1997 Plan, (ii) the maximum number and class of securities for which any one
participant may be granted stock options, separately exercisable stock
appreciation rights and direct stock issuances under the 1997 Plan, (iii) the
number and class of securities for which option grants will subsequently be
made under the Automatic Option Grant Program to each newly-elected or
continuing non-employee Board member and (iv) the number and class of
securities and the exercise price per share in effect under each outstanding
option under the Plan. All such adjustments will be designed to preclude the
enlargement or dilution of participant rights and benefits under the 1997
Plan.
Eligibility
Employees, non-employee Board members, and independent consultants and
advisors to the Company and its subsidiaries (whether now existing or
subsequently established) will be eligible to participate in the Discretionary
Option Grant and Stock Issuance Programs. Non-employee members of the Board
will also be eligible to participate in the Automatic Option Grant Program. As
of September 30, 1999, four executive officers, four non-employee Board
members and approximately 93 other employees were eligible to participate in
the 1997 Plan, and the four non-employee Board members were also eligible to
participate in the Automatic Option Grant Program.
Valuation
The fair market value per share of Common Stock on any relevant date under
the 1997 Plan will be the closing selling price per share on that date on the
Nasdaq National Market. On September 30, 1999, the closing selling price of
the Company's Common Stock was $4.938 per share.
Discretionary Option Grant and Stock Issuance Programs
The Discretionary Option Grant Program and the Stock Issuance Program are
administered by the Compensation Committee of the Company. The Compensation
Committee as Plan Administrator has complete discretion to determine which
eligible individuals are to receive option grants or stock issuances under
those programs, the time or times when such option grants or stock issuances
are to be made, the number of shares subject to each such grant or issuance,
the status of any granted option as either an incentive stock option or a non-
statutory stock option under the Federal tax laws, the vesting schedule to be
in effect for the option grant or stock issuance and the maximum term for
which any granted option is to remain outstanding. The Compensation Committee
also has the exclusive authority to select the executive officers and other
highly compensated employees who may participate in the Salary Investment
Option Grant Program in the event that program is
A-8
<PAGE>
activated for one or more calendar years, but neither the Compensation
Committee nor the Board will exercise any administrative discretion with
respect to option grants under the Salary Investment Option Grant Program or
under the Automatic Option Grant or Director Fee Option Grant Program for the
non-employee Board members. All grants under those three latter programs will
be made in strict compliance with the express provisions of each such program.
The exercise price for the shares of Common Stock subject to option grants
made under the 1997 Plan may be paid in cash or in shares of Common Stock
valued at fair market value on the exercise date. The option may also be
exercised through a same-day sale program without any cash outlay by the
optionee. In addition, the Plan Administrator may provide financial assistance
to one or more optionees in the exercise of their outstanding options or the
purchase of their unvested shares by allowing such individuals to deliver a
full-recourse, interest-bearing promissory note in payment of the exercise
price and any associated withholding taxes incurred in connection with such
exercise or purchase.
The Plan Administrator has the authority, with the consent of the affected
option holders, to effect the cancellation of outstanding options under the
Discretionary Option Grant Program (including options incorporated from the
1995 Plan) in return for the grant of new options for the same or different
number of option shares with an exercise price per share based upon the fair
market value of the Common Stock on the new grant date.
Stock appreciation rights are authorized for issuance under the
Discretionary Option Grant Program which provide the holders with the election
to surrender their outstanding options for an appreciation distribution from
the Company equal to the excess of (i) the fair market value of the vested
shares of Common Stock subject to the surrendered option over (ii) the
aggregate exercise price payable for such shares. Such appreciation
distribution may be made in cash or in shares of Common Stock. None of the
incorporated options from the 1995 Plan contain any stock appreciation rights.
In the event that the Company is acquired by merger or asset sale, each
outstanding option under the Discretionary Option Grant Program which is not
to be assumed by the successor corporation will automatically accelerate in
full, and all unvested shares under the Discretionary Option Grant and Stock
Issuance Programs will immediately vest, except to the extent the Company's
repurchase rights with respect to those shares are to be assigned to the
successor corporation. The Plan Administrator will have complete discretion to
grant one or more options under the Discretionary Option Grant Program which
will become fully exercisable for all the option shares in the event those
options are assumed in the acquisition and the optionee's service with the
Company or the acquiring entity terminates within a designated period
following such acquisition. The vesting of outstanding shares under the Stock
Issuance Program may be accelerated upon similar terms and conditions. The
Plan Administrator also has the authority to grant options which will
immediately vest upon an acquisition of the Company, whether or not those
options are assumed by the successor corporation. The Plan Administrator is
also authorized under the Discretionary Option Grant and Stock Issuance
Programs to grant options and to structure repurchase rights so that the
shares subject to those options or repurchase rights will immediately vest in
connection with a change in control of the Company (whether by successful
tender offer for more than 50% of the outstanding voting stock or a change in
the majority of the Board by reason of one or more contested elections for
Board membership), with such vesting to occur either at the time of such
change in control or upon the subsequent termination of the individual's
service within a designated period following such change in control. The
options incorporated from the 1995 Plan will similarly accelerate and
immediately vest upon an acquisition of the Company by merger or asset sale,
unless those options are assumed by the successor entity.
Salary Investment Option Grant Program
In the event the Plan Administrator elects to activate the Salary Investment
Option Grant Program for one or more calendar years, each executive officer
and other highly compensated employee of the Company selected for
participation may elect, prior to the start of the calendar year, to reduce
his or her base salary for that calendar
A-9
<PAGE>
year by a specified dollar amount not less than $10,000 nor more than $50,000.
If such election is approved by the Plan Administrator, the individual will
automatically be granted, on the first trading day in January of the calendar
year for which that salary reduction is to be in effect, a non-statutory
option to purchase that number of shares of Common Stock determined by
dividing the salary reduction amount by two-thirds of the fair market value
per share of Common Stock on the grant date. The option will be exercisable at
a price per share equal to one-third of the fair market value of the option
shares on the grant date. As a result, the total spread on the option shares
at the time of grant (the fair market value of the option shares on the grant
date less the aggregate exercise price payable for those shares) will be equal
to the amount of salary invested in that option. The option will vest in a
series of 12 equal monthly installments over the calendar year for which the
salary reduction is to be in effect and will be subject to full and immediate
vesting upon certain changes in the ownership or control of the Company.
Automatic Option Grant Program
The Company has previously granted to certain non-employee Board members
options to purchase 20,000 shares of Common Stock, and each non-employee Board
member who is serving as such on the Plan Effective Date and who has not
received such a grant will automatically receive an option at that time to
purchase 20,000 shares of Common Stock. Each individual who first becomes a
non-employee Board member at any time after the Plan Effective Date will also
receive a 20,000-share option grant on the date such individual joins the
Board. In addition and on the date of each Annual Stockholders Meeting held
after the Plan Effective Date, each such non-employee Board member who is to
continue to serve as a non-employee Board member will automatically be granted
an option to purchase 5,000 shares of Common Stock, provided such individual
has served on the Board for at least six months.
Each automatic grant for the non-employee Board members will have a term of
10 years, subject to earlier termination following the optionee's cessation of
Board service. Each automatic option will be immediately exercisable for all
of the option shares; however, any unvested shares purchased under the option
will be subject to repurchase by the Company, at the exercise price paid per
share, should the optionee cease Board service prior to vesting in those
shares. The shares subject to each initial 20,000-share automatic option grant
will vest over a four-year period, as follows: (i) 25% of the option shares
upon the optionee's completion of one year of Board service measured from the
grant date and (ii) the balance of the option shares in a series of 36
successive equal monthly installments upon the optionee's completion of each
additional month of service measured from the first anniversary of the grant
date. The shares subject to each annual 5,000-share grant will vest upon the
optionee's completion of one year of Board service measured from the grant
date. However, the shares subject to each automatic option grant will
immediately vest in full upon certain changes in control or ownership of the
Company or upon the optionee's death or disability while a Board member.
Director Fee Option Grant Program
Should the Director Fee Option Grant Program be activated in the future,
each non-employee Board member will have the opportunity to apply all or a
portion of any annual retainer fee otherwise payable in cash to the
acquisition of a below-market option grant. The option grant will
automatically be made on the first trading day in January in the year for
which the retainer fee would otherwise be payable in cash. The option will
have an exercise price per share equal to one-third of the fair market value
of the option shares on the grant date, and the number of shares subject to
the option will be determined by dividing the amount of the retainer fee
applied to the program by two-thirds of the fair market value per share of
Common Stock on the grant date. As a result, the total spread on the option
(the fair market value of the option shares on the grant date less the
aggregate exercise price payable for those shares) will be equal to the
portion of the retainer fee invested in that option. The option will become
exercisable for the option shares in a series of 12 equal monthly installments
over the calendar year for which the election is to be in effect. However, the
option will become immediately exercisable for all the option shares upon (i)
certain changes in the ownership or control of the Company or (ii) the death
or disability of the optionee while serving as a Board member.
A-10
<PAGE>
General Provisions
Acceleration. The shares subject to each option under the Salary Investment
Option Grant, Automatic Option Grant and Director Fee Option Grant Programs
will immediately vest upon (i) an acquisition of the Company by merger or
asset sale or (ii) the successful completion of a tender offer for more than
50% of the Company's outstanding voting stock or a change in the majority of
the Board effected through one or more contested elections for Board
membership.
Stock Appreciation Rights. Limited stock appreciation rights will
automatically be included as part of each grant made under the Automatic
Option Grant, Salary Investment Option Grant and Director Fee Option Grant
Programs and may be granted to one or more officers of the Company as part of
their option grants under the Discretionary Option Grant Program. Options with
such a limited stock appreciation right may be surrendered to the Company upon
the successful completion of a hostile tender offer for more than 50% of the
Company's outstanding voting stock. In return for the surrendered option, the
optionee will be entitled to a cash distribution from the Company in an amount
per surrendered option share equal to the excess of (i) the highest price per
share of Common Stock paid in connection with the tender offer over (ii) the
exercise price payable for such share.
Financial Assistance. The Plan Administrator may institute a loan program to
assist one or more participants in financing the exercise of outstanding
options or the purchase of shares under the Discretionary Option Grant or
Stock Issuance Program. The Plan Administrator will have complete discretion
to determine the terms of any such financial assistance. However, the maximum
amount of financing provided any individual may not exceed the cash
consideration payable for the issued shares plus all applicable taxes. Any
such financing may be subject to forgiveness in whole or in part, at the
discretion of the Plan Administrator, over the participant's period of
service.
Special Tax Election. The Plan Administrator may provide one or more holders
of options or unvested shares with the right to have the Company withhold a
portion of the shares otherwise issuable to such individuals in satisfaction
of the tax liability incurred by such individuals in connection with the
exercise of those options or the vesting of those shares. Alternatively, the
Plan Administrator may allow such individuals to deliver previously acquired
shares of Common Stock in payment of such tax liability.
Amendment and Termination. The Board may amend or modify the 1997 Plan at
any time, subject to any required stockholder approval. The 1997 Plan will
terminate on the earliest of (i) October 31, 2007, (ii) the date on which all
shares available for issuance under the 1997 Plan have been issued as fully
vested shares or (iii) the termination of all outstanding options in
connection with certain changes in control or ownership of the Company.
Stock Awards
During the period from May 8, 1998 (the effective date of the Company's
initial public offering) through September 30, 1999, under the 1997 Plan, the
Company granted to all employees (excluding non-employee directors and
executive officers) and consultants as a group, options to purchase 527,350
shares of stock at exercise prices of $2.88 to $6.00 per share. The Company
also granted to each of Dr. Chambon, Mr. Reidel and Dr. Scott options to
purchase 5,000 shares at an exercise price of $3.19 per share. Additionally,
the Company granted to its Chief Executive Officer, Dr. Anido, options to
purchase 50,000 shares at an exercise price of $3.19 per share and to its
Chief Operating Officer, Dr. Myers, options to purchase 100,000 shares at an
exercise price of $3.19 per share.
Federal Income Tax Consequences
Options granted under the 1997 Plan may be either incentive stock options
which satisfy the requirements of Section 422 of the Internal Revenue Code or
non-statutory options which are not intended to meet such requirements. The
Federal income tax treatment for the two types of options differs as follows:
A-11
<PAGE>
Incentive Options. No taxable income is recognized by the optionee at the
time of the option grant, and no taxable income is generally recognized at the
time the option is exercised. The optionee will, however, recognize taxable
income in the year in which the purchased shares are sold or otherwise made
the subject of a taxable disposition. For Federal tax purposes, dispositions
are divided into two categories: qualifying and disqualifying. A qualifying
disposition occurs if the sale or other disposition is made after the optionee
has held the shares for more than two (2) years after the option grant date
and more than one (1) year after the exercise date. If either of these two
holding periods is not satisfied, then a disqualifying disposition will
result.
Upon a qualifying disposition, the optionee will recognize long-term capital
gain in an amount equal to the excess of (i) the amount realized upon the sale
or other disposition of the purchased shares over (ii) the exercise price paid
for the shares. If there is a disqualifying disposition of the shares, then
the excess of (i) the fair market value of those shares on the exercise date
over (ii) the exercise price paid for the shares will be taxable as ordinary
income to the optionee. Any additional gain or loss recognized upon the
disposition will be recognized as a capital gain or loss by the optionee.
If the optionee makes a disqualifying disposition of the purchased shares,
then the Company will be entitled to an income tax deduction, for the taxable
year in which such disposition occurs, equal to the excess of (i) the fair
market value of such shares on the option exercise date over (ii) the exercise
price paid for the shares. If the optionee makes a qualifying disposition, the
Company will not be entitled to any income tax deduction.
Non-Statutory Options. No taxable income is recognized by an optionee upon
the grant of a non-statutory option. The optionee will in general recognize
ordinary income, in the year in which the option is exercised, equal to the
excess of the fair market value of the purchased shares on the exercise date
over the exercise price paid for the shares, and the optionee will be required
to satisfy the tax withholding requirements applicable to such income.
If the shares acquired upon exercise of the non-statutory option are
unvested and subject to repurchase by the Company in the event of the
optionee's termination of service prior to vesting in those shares, then the
optionee will not recognize any taxable income at the time of exercise but
will have to report as ordinary income, as and when the Company's repurchase
right lapses, an amount equal to the excess of (i) the fair market value of
the shares on the date the repurchase right lapses over (ii) the exercise
price paid for the shares. The optionee may, however, elect under Section
83(b) of the Internal Revenue Code to include as ordinary income in the year
of exercise of the option an amount equal to the excess of (i) the fair market
value of the purchased shares on the exercise date over (ii) the exercise
price paid for such shares. If the Section 83(b) election is made, the
optionee will not recognize any additional income as and when the repurchase
right lapses.
The Company will be entitled to an income tax deduction equal to the amount
of ordinary income recognized by the optionee with respect to the exercised
non-statutory option. The deduction will in general be allowed for the taxable
year of the Company in which such ordinary income is recognized by the
optionee.
Stock Appreciation Rights. An optionee who is granted a stock appreciation
right will recognize ordinary income in the year of exercise equal to the
amount of the appreciation distribution. The Company will be entitled to an
income tax deduction equal to such distribution for the taxable year in which
the ordinary income is recognized by the optionee.
Direct Stock Issuance. The tax principles applicable to direct stock
issuances under the 1997 Plan will be substantially the same as those
summarized above for the exercise of non-statutory option grants.
Deductibility of Executive Compensation
The Company anticipates that any compensation deemed paid by it in
connection with the disqualifying disposition of incentive stock option shares
or the exercise of non-statutory options granted with exercise prices equal to
the fair market value of the shares on the grant date will qualify as
performance-based compensation for
A-12
<PAGE>
purposes of Internal Revenue Code Section 162(m) and will not have to be taken
into account for purposes of the $1 million limitation per covered individual
on the deductibility of the compensation paid to certain executive officers of
the Company. Accordingly, all compensation deemed paid under the 1997 Plan
will remain deductible by the Company without limitation under Internal
Revenue Code Section 162(m).
Accounting Treatment
Option grants or stock issuances with exercise or issue prices less than the
fair market value of the shares on the grant or issue date will result in a
direct compensation expense to the Company's earnings equal to the difference
between the exercise or issue price and the fair market value of the shares on
the grant or issue date. Such expense will be accruable by the Company over
the period that the option shares or issued shares are to vest. Option grants
or stock issuances at 100% of fair market value will not result in any direct
charge to the Company's earnings. However, the fair value of those options is
required to be disclosed in the notes to the Company's financial statements,
and the Company must also disclose, in pro-forma statements to the Company's
financial statements, the impact those options would have upon the Company's
reported earnings were the value of those options at the time of grant treated
as compensation expense. Whether or not granted at a discount, the number of
outstanding options may be a factor in determining the Company's earnings per
share on a fully-diluted basis.
Should one or more optionees be granted stock appreciation rights which have
no conditions upon exercisability other than a service or employment
requirement, then such rights will result in compensation expense to the
Company's earnings.
Employee Stock Purchase Plan
The Company maintains a 1997 Employee Stock Purchase Plan (the "Purchase
Plan"). The Purchase Plan is designed to allow eligible employees of the
Company and participating subsidiaries to purchase shares of Common Stock, at
semi-annual intervals, through their periodic payroll deductions under the
Purchase Plan, and a reserve of 150,000 shares of Common Stock has been
established for this purpose.
The Purchase Plan is implemented in a series of successive offering periods,
each with a maximum duration for 12 months. The most recent offering period
commenced on August 1, 1999.
Individuals who are eligible employees (scheduled to work more than 20 hours
per week for more than 5 calendar months per year) on the start date of any
offering period may enter the Purchase Plan on that start date or on any
subsequent semi-annual entry date (the first business day of February or
August each year). Individuals who become eligible employees after the start
date of the offering period may join the Purchase Plan on any subsequent semi-
annual entry date within that offering period.
Payroll deductions may not exceed 10% of the employee's base salary, and the
accumulated payroll deductions of each participant will be applied to the
purchase of shares on his or her behalf on each semi-annual purchase date (the
last business day in January and July each year) at a purchase price per share
equal to 85% of the lower of (i) the fair market value of the Common Stock on
the participant's entry date into the offering period or (ii) the fair market
value on the semi-annual purchase date. In no event, however, may any
participant purchase more than 1,250 shares on any one semi-annual purchase
date. Should the fair market value per share of Common Stock on any purchase
date be less than the fair market value per share on the start date of the
two-year offering period, then that offering period will automatically
terminate, and anew two-year offering period will begin on the next business
day, with all participants in the terminated offering to be automatically
transferred to the new offering period.
In the event the Company is acquired by merger or asset sale, all
outstanding purchase rights will automatically be exercised immediately prior
to the effective date of such acquisition. The purchase price will be equal to
85% of the lower of (i) the fair market value per share of Common Stock on the
participant's entry date
A-13
<PAGE>
into the offering period in which such acquisition occurs or (ii) the fair
market value per share of Common Stock immediately prior to such acquisition.
The Purchase Plan will terminate on the earlier of (i) the last business day
in July 2007, (ii) the date on which all shares available for issuance under
the Purchase Plan shall have been sold pursuant to purchase rights exercised
thereunder or (iii) the date on which all purchase rights are exercised in
connection with an acquisition of the Company by merger or asset sale.
The Board may at any time alter, suspend or discontinue the Purchase Plan.
However, certain amendments to the Purchase Plan may require stockholder
approval.
BOARD COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
The Compensation Committee presents this report regarding compensation for
the Company's executive officers and the Chief Executive Officer of the
Company.
General Compensation Policy
The Company's primary objective is to maximize the value of the Company's
shares over time. Accomplishing this objective requires achieving specific
Company milestones and developing and ultimately marketing superior
technologies that accelerate the drug discovery process. The overall goal of
the Compensation Committee is to develop compensation practices that will
allow the Company to attract and retain the people needed to achieve the
Company's objectives.
The Company compensates its executive officers with a combination of salary
and incentives designed to focus and balance their efforts on maximizing both
the near-term and long-term financial performance of the Company. In addition,
the Company's compensation structure rewards individual performance that
furthers Company goals. Elements of each officer's compensation include the
following:
. Base Salary
. Annual Incentives
. Long-term Incentives
. Benefits
Each officer's compensation package is designed to provide an appropriately
weighted mix of these elements which cumulatively provides a level of
compensation roughly equivalent to that paid by companies of similar size and
complexity in similar industries.
Base Salary. Base salary and increases in base salary are determined by
individual performance and the salary levels in effect for companies of
similar size and complexity in similar industries. The Compensation Committee
attempts to keep the base salaries of the Company's officers at a level
broadly in line with the median of the salaries of officers in comparative
companies. The Compensation Committee also evaluates individual experience and
performance and specific issues particular to the Company, such as success in
raising capital, creation of stockholder value and achievement of specific
Company milestones.
Annual Incentives. Annual Incentives are paid under an incentive
compensation program. Bonus awards are set at a level competitive among peer
group companies and early-stage high growth technology companies. Potential
cash incentive compensation paid under this plan is set as a significant
percentage of each officers' base salary. All of the incentive compensation is
directly tied to performance and is at risk. Each officer earns incentive
compensation based upon a mix of Company performance and personal performance.
Company performance is measured by achievement of specific Company milestones.
Compensation for personal performance under this plan is awarded by the
Compensation Committee based upon both an objective and
A-14
<PAGE>
subjective evaluation of the performance of each officer. No incentive
compensation is paid for Company performance or personal performance unless
specific Company and individual goals are achieved during the fiscal year. In
1997, incentive compensation earned by officers was approximately 20% of base
salary.
Long-Term Incentives. Long-term incentive compensation in the form of stock
options is expected to be the largest element of total compensation over time.
Grants of stock options are designed to align the long-term interests of each
officer with the long-term interests of the Company and its stockholders.
Stock options provide each officer with a significant incentive to manage the
Company from the perspective of an owner with an equity stake in the business.
The size of the option grant to each officer is based on the officer's current
and expected future contributions to the business and vesting position. Awards
of stock options are designed to have an expected aggregate exercise value
overtime equal to a multiple of salary which will create a significant
opportunity for stock ownership, motivation to remain with the Company and
incentive to increase stockholder value.
Benefits. Benefits offered to the Company's officers are substantially the
same as those offered to all the Company's regular employees and are
consistent with industry practice.
CEO Compensation
In setting compensation payable to the Company's Chief Executive Officer,
Dr. Anido, we have sought to be competitive with companies of similar size and
complexity in similar industries. Dr. Anido's incentive compensation is
dependent upon the Company's performance and our evaluation of his personal
contribution to the Company's performance. No incentive compensation is paid
to Dr. Anido unless progress is made toward specific Company goals or these
goals are achieved during the fiscal year. In 1997, incentive compensation
earned by Dr. Anido was approximately 21% of base salary.
We conclude our report with the acknowledgement that no member of the
Compensation Committee is a current officer or employee of CombiChem or any of
its subsidiaries.
Submitted by the Compensation Committee of the Company's Board of Directors.
COMPENSATION COMMITTEE
ARTHUR REIDEL
WILLIAM SCOTT
A-15
<PAGE>
CERTAIN TRANSACTIONS
In May 1998, the Company sold 250,000 shares of its Common Stock to Elan
Pharmaceutical Investments, Ltd. ("Elan") in connection with the Company's
initial public offering. From January 1, 1998 through September 30, 1999, the
Company received approximately $4.1 million from Athena Neurosciences, Inc.
("Athena") an affiliate of Elan, in connection with a collaborative agreement
between the Company and Athena.
In February 1997 as incentive for employment, and in June 1997 under an
employee loan program provided for the exercise of options, the Company made
loans in the amounts of $96,000 and $23,044, respectively, to Dr. Anido, the
President, Chief Executive Officer and a Director of the Company. Each loan is
secured by shares of Common Stock held by Dr. Anido. The loan for $96,000 is
represented by a promissory note which is due and payable on the earlier of
February 23, 2002, the expiration of the 60-day period following the date Dr.
Anido ceases to remain in the service of CombiChem, or the date that CombiChem
completes the consummation of any corporate transaction, as defined in the
promissory note agreement. This loan bears no interest. In December 1998, the
Compensation Committee of the Board of Directors forgave $48,000 of this loan
and in September 1999, the Compensation Committee forgave the remaining
$48,000 balance of this loan. The loan for $23,044 is represented by a
promissory note which is due and payable in three annual installments and is
due in full upon the third anniversary of the loan. This loan bears an
interest rate of 6.14%. The largest amount of indebtedness outstanding since
the beginning of the last fiscal year was $119,044.
In September 1995 as incentive for employment, and in June 1997 under an
employee loan program provided for the exercise of options, the Company made
loans in the amounts of $150,000 and $30,375, respectively, to Dr. Myers, the
Vice President, Chief Scientific Officer, Chief Operating Officer and a
Director of the Company, for an aggregate indebtedness as of September 30,
1999 of $196,234, which includes accrued interest. Each loan is secured by
shares of Common Stock held by Dr. Myers. The loan for $150,000 is represented
by a promissory note which is due and payable on the earlier of April 30, 2000
or the occurrence of certain events, such as the expiration of the 30-day
period following the date Dr. Myers ceases to remain in the employment of
CombiChem. This loan bears an interest rate equal to the applicable minimum
Federal rate on the date of the loan. The loan for $30,375 is represented by a
promissory note that is due and payable in three annual installments and is
due in full upon the third anniversary of the loan. This loan bears an
interest rate of 6.14%. The largest amount of indebtedness outstanding since
the beginning of the last fiscal year was $202,126.
For information regarding employment agreements with Named Executive
Officers, see "Executive Compensation--Employment Arrangements and Change of
Control Agreements."
All of the Company's officers are employed by the Company at will. The
Company has entered into indemnification agreements with each of its directors
and executive officers.
The Company expects that all future transactions between the Company and its
officers, directors and principal stockholders and their affiliates will be
approved in accordance with the Delaware General Corporation Law by a majority
of the Board, as well as by a majority of the independent and disinterested
directors of the Board, and will be on terms no less favorable to the Company
than could be obtained from unaffiliated third parties.
A-16
<PAGE>
OWNERSHIP OF SECURITIES
The following table sets forth certain information known to the Company
regarding the beneficial ownership of the Common Stock as of September 30,
1999, by (i) all persons who are beneficial owners of 5% or more of the
Company's Common Stock, (ii) each director of the Company, (iii) each of the
Company's officers named under "Executive Compensation--Compensation of
Executive Officers" and (iv) all directors and executive officers of the
Company as a group. Except as indicated in the footnotes to this table, the
persons named in the table have sole voting and investment power with respect
to all shares of Common Stock shown as beneficially owned by them. Share
ownership in each case includes shares issuable upon exercise of certain
outstanding options as described in the footnotes below. The address for those
individuals for which an address is not otherwise indicated is: 9050 Camino
Santa Fe, San Diego, CA 92121. Percentage of ownership is calculated pursuant
to Commission Rule 13d-3(d)(1).
<TABLE>
<CAPTION>
Percentage
Shares of Shares
Beneficially Options Beneficially
Name and Address of Beneficial Owner Owned Exercisable(1) Owned
------------------------------------ ------------ -------------- ------------
<S> <C> <C> <C>
Sprout Capital VII, L.P. and
affiliated entities(2)............... 1,501,729 25,000 11.3%
3000 Sand Hill Road
Building 3, Suite 170
Menlo Park, CA 94025
Elan Pharmaceutical Investments,
Ltd. ................................ 1,250,000 0 9.2%
c/o Coyners Dill & Pearman, Clarendon
House
Church Street, Hamilton
Bermuda
Sequoia Capital VI and affiliated
entities(3).......................... 1,237,998 0 9.2%
3000 Sand Hill Road
Building 4, Suite 280
Menlo Park, CA 94025
Brinson MAP Venture Capital Fund III
and affiliated entities(4)........... 956,453 0 7.1%
209 S. LaSalle Street
Chicago, IL 60604-1295
Sorrento Growth Partners I, L.P. and
affiliated entities(5)............... 865,867 0 6.4%
4370 La Jolla Village Drive, Suite
1040
San Diego, CA 92122
Philippe O. Chambon, M.D., Ph.D....... 1,501,729 25,000 11.3%
Michael Pazzani, Ph.D................. 0 20,000 *
Arthur Reidel......................... 20,000 25,000 *
William Scott, Ph.D................... 0 25,000 *
Vicente Anido, Jr., Ph.D.............. 480,417 150,001 4.6%
Klaus Gubernator, Ph.D................ 52,500 0 *
Lee R. McCracken(6)................... 93,750 15,000 *
Peter L. Myers, Ph.D.................. 225,000 150,001 2.7%
All directors and executive officers 2,373,396 410,002 20.0%
as a group (8 persons)...............
</TABLE>
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* Represents beneficial ownership of less than 1% of the outstanding shares
of the Company's Common Stock
(1) Represents options exercisable within 60 days of September 30, 1999.
(2) Includes 1,386,331 shares purchased by Sprout Capital VII, L.P., which are
held in a voting trust of which First Union Trust Company, National
Association ("First Union"), is the voting trustee. First Union has sole
voting power of these shares. The address for First Union is One Rodney
Square, 920 King Street, Wilmington, Delaware 19801. Also includes 115,398
shares purchased by DLJ Capital Corporation. DLJ Capital Corporation is
the managing general partner of Sprout Capital VII, L.P. Dr. Chambon is a
Director of the Company, a general partner of Sprout Capital VII, L.P. and
Divisional Vice President of DLJ Capital
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<PAGE>
Corporation. Dr. Chambon disclaims beneficial ownership of the 1,386,331
shares and the 115,398 shares except to the extent of his pecuniary
interest therein.
(3) Includes 1,109,962 shares held by Sequoia Capital VI, 60,988 shares held
by Sequoia Technology Partners VI, 33,012 shares held by Sequoia XXIV and
15,780 shares held by Sequoia 1995, each of which is affiliated with
Sequoia Partners. Sequoia Partners is the general partner of Sequoia
Capital VI. Sequoia Partners has eight general partners, who are also the
general partners of Sequoia Technology Partners VI. Also includes 16,613
shares, 913 shares and 730 shares held by Sequoia Capital VI, Sequoia
Technology Partners VI and Sequoia XXIV, respectively, issuable upon
exercise of warrants exercisable within 60 days of September 30, 1999.
(4) Includes 134,113 shares purchased by the First National Bank of Chicago as
Custodian to the Brinson Trust Company as Trustee of the Brinson MAP
Venture Capital Fund III and 822,340 shares purchased by The First
National Bank of Chicago as Custodian to the Brinson Venture Capital Fund
III, L.P.
(5) Includes 115,000 shares held by Sorrento Ventures IIB, L.P., 249,803
shares held by Sorrento Ventures II, L.P. and 501,064 shares held by
Sorrento Growth Partners I, L.P.
(6) Includes 8,750 shares held by the Rufus L. McCracken Trust, dated 6/21/91,
of which Mr. McCracken is the sole Trustee.
A-18
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Description
------- -----------
<C> <S>
Exhibit 1 Offer to Purchase dated October 12, 1999 (incorporated by reference
to Exhibit (a)(1) of the Schedule 14D-1 of E.I. du Pont de Nemours
and Company, DuPont Pharma, Inc. and DPC Newco, Inc. filed with the
Securities and Exchange Commission on October 12, 1999 (the
"Schedule 14D-1")).**
Exhibit 2 Letter of Transmittal (incorporated by reference to Exhibit (a)(2)
of Schedule 14D-1).**
Exhibit 3 Joint Press Release issued by the Company and the Parent, dated
October 5, 1999.
Exhibit 4 Opinion Letter of Donaldson Lufkin & Jenrette Securities Corporation
dated October 4, 1999.*
Exhibit 5 Mutual Non-Disclosure Agreement dated March 10, 1999 between the
Company and DuPont Pharmaceuticals Company.
Exhibit 6 Agreement and Plan of Merger, dated as of October 5, 1999 between
the Company, the Parent and Offeror (incorporated by reference to
Exhibit (c)(1) of the Schedule 14D-1).
Exhibit 7 Stock Option Agreement dated as of October 5, 1999 among the Parent,
Offeror and the Company (incorporated by reference to Exhibit (c)(3)
of the Schedule 14D-1).
Exhibit 8 Shareholders Agreement dated as of October 5, 1999 between the
Parent, Offeror and certain stockholders of the Company
(incorporated by reference to Exhibit (c)(2) of the Schedule 14D-1).
Exhibit 9 Letter to Stockholders of the Company dated October 12, 1999.*
</TABLE>
- --------
* Included in copies of Schedule 14D-9 mailed to stockholders of the Company.
** Included in the Offer to Purchase materials mailed to stockholders of the
Company.
<PAGE>
EXHIBIT 3
DuPont Plans to Acquire CombiChem To Assist in Drug Discovery
WILMINGTON, Del. and SAN DIEGO, Calif., Oct. 5--DuPont (NYSE: DD) and
CombiChem, Inc. (NASDAQ: CCHM) today announced they have entered into an
agreement that provides for DuPont to acquire CombiChem for $6.75 per share in
cash, or approximately $95 million. Once completed, this acquisition is
expected to drive DuPont's efforts in the discovery and development of new
medicines.
The planned acquisition is the second in a series of actions taken by DuPont
recently to strengthen its pharmaceuticals business through alliances and
acquisitions. The company announced a major research collaboration with
Pharmasset Limited on Sept. 27, which will focus on research and development
of proprietary HIV and hepatitis B virus antiviral compounds.
"This acquisition demonstrates DuPont's firm commitment to be a leader in
discovering, developing and delivering medicines that improve the health of
people worldwide," said Kurt M. Landgraf, DuPont executive vice president and
chief operating officer. "CombiChem is an outstanding company with
demonstrated performance in linking sophisticated computer technology with
chemistry to identify potential new medicines, as well as agricultural and
other biotechnology products.
"The combination of DuPont's position as a premier science company and
CombiChem's innovative approach to drug discovery is expected to produce
medicines with far-reaching health benefits."
"This agreement was approved unanimously by CombiChem's board of directors,"
said Vince Anido, president and chief executive officer of CombiChem. "We look
forward to being a part of DuPont and joining a team of scientists who, like
us, are dedicated to the discovery of new medicines."
Based in San Diego, CombiChem integrates proprietary computer modeling
technology with advanced chemistry expertise to discover potential new drug
compounds, as well as compounds that have applications in agriculture and
materials sciences. The company uses computer-based methods to shorten the
time of discovery, identify potential drug development problems early and to
point the way to new compounds not previously considered.
Following completion of the acquisition, CombiChem will operate as part of
DuPont Pharmaceuticals Laboratories and will remain in California, a center
for biotechnology and computer technology development.
"DuPont has an abundance of excellent drug discovery targets. We look
forward to having the CombiChem staff join the DuPont Pharmaceuticals research
team to move medicines acting on these targets into development," said Paul
Friedman, M.D., president of DuPont Pharmaceuticals Research Laboratories.
"This agreement with CombiChem exemplifies DuPont's commitment to the
pharmaceuticals industry," said Nicholas L. Teti, president of DuPont
Pharmaceuticals. "We fully expect the acquisition to add significant strength
to our product pipeline."
The agreement provides for a tender offer for all of the outstanding shares
of common stock of CombiChem at $6.75 per share, which will commence within
five business days. If successful, the tender offer will be followed by a
merger in which all of the shares not tendered will be purchased at the same
price. The tender offer will be made only by means of an Offer to Purchase
which will contain the specific terms of the transaction and which will be
provided to CombiChem stockholders.
CombiChem stockholders owning approximately 34 percent of CombiChem's
outstanding shares have committed to support the transaction and have entered
into voting and option agreements with DuPont. CombiChem has granted DuPont an
option to purchase other CombiChem shares under certain conditions. The
acquisition is subject to customary regulatory approvals and conditions, and
the receipt of a majority of
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CombiChem shares by DuPont. The two companies expect to complete the
transaction prior to the end of the year.
DuPont Pharmaceuticals is a worldwide business that focuses on research,
development and delivery of pharmaceuticals to treat unmet medical needs in
the fights against HIV infection, cardiovascular disease, central nervous
system disorders, cancer, arthritis and related disorders. The company also is
a leader in medical imaging.
DuPont is a science company, delivering science-based solutions that make a
difference in people's lives in food and nutrition; health care; apparel; home
and construction; electronics; and transportation. Founded in 1802, the
company operates in 65 countries and has 97,000 employees.
Forward-Looking Statements: This news release contains forward-looking
statements based on management's current expectations, estimates and
projections. All statements that address expectations or projections about the
future, including statements about the company's strategy for growth, product
development, market position, expected expenditures and financial results are
forward-looking statements. Some of the forward-looking statements may be
identified by words like "expects," "anticipates," "plans," "intends,"
"projects," "indicates," and similar expressions. These statements are not
guarantees of future performance and involve a number of risks, uncertainties
and assumptions. Many factors, including those discussed more fully elsewhere
in this release and in DuPont's filings with the Securities and Exchange
Commission, particularly its latest annual report on Form 10-K, as well as
others, could cause results to differ materially from those stated. These
factors include, but are not limited to successful completion of the tender
offer and subsequent merger, whether the merger will result in the discovery
and development of new medicines, changes in the laws, regulations, policies
and economic conditions of countries in which the company does business;
competitive pressures; successful integration of structural changes, including
acquisitions, divestitures and alliances; failure of the company or related
third parties to become Year 2000 capable; research and development of new
products, including regulatory approval and market acceptance.
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<PAGE>
EXHIBIT 4
[Logo appears here]
October 4, 1999
Board of Directors
CombiChem, Inc.
9050 Camino Santa Fe
San Diego, CA 92121
Dear Sirs:
You have requested our opinion as to the fairness from a financial point of
view to the stockholders of CombiChem, Inc. (the "Company") of the
consideration to be received by such stockholders pursuant to the terms of a
proposed Agreement and Plan of Merger, to be dated as of October 5, 1999 (the
"Agreement"), among the Company, E.I. du Pont de Nemours and Company
("Parent"), and DPC Newco, Inc., a wholly owned subsidiary of Parent ("Merger
Sub"), pursuant to which Merger Sub will be merged (the "Merger") with and
into the Company.
Pursuant to the Agreement, Merger Sub will promptly commence a tender offer
(the "Offer") for any and all outstanding shares of the Company's common stock
(the "Company Shares") at a price of $6.75 per share net to the seller in cash
(the "Price Per Share"). The Offer will be followed by the Merger in which all
Company Shares not tendered in the Offer will be converted into the right to
receive the Price Per Share.
In arriving at our opinion, we have reviewed the draft dated September 30,
1999 of the Agreement, and the drafts dated September 30, 1999 of the Stock
Option Agreement and the Shareholders Agreement (each as defined in the
Agreement). We also have reviewed financial and other information that was
publicly available or furnished to us by the Company including information
provided during discussions with management. Included in the information
provided during discussions with management was certain financial projections
of the Company for the period beginning January 1, 1999 and ending December
31, 2003 prepared by management of the Company. In addition, we have compared
certain financial and securities data of the Company with various other
companies whose securities are traded in public markets, reviewed the
historical stock prices and trading volumes of the Company Shares, reviewed
prices and premiums paid in certain other business combinations and conducted
such other financial studies, analyses and investigations as we deemed
appropriate for purposes of this opinion.
In rendering our opinion, we have relied upon and assumed the accuracy and
completeness of all of the financial and other information that was available
to us from public sources, that was provided to us by the Company or its
representatives, or that was otherwise reviewed by us. With respect to the
financial projections supplied to us, we have relied on representations that
they have been reasonably prepared on the basis reflecting the best currently
available estimates and judgments of the management of the Company as to the
future operating and financial performance of the Company. We have not assumed
any responsibility for making an independent evaluation of any assets or
liabilities or for making any independent verification of any of the
information reviewed by us. We have relied as to certain legal matters on
advice given by the Company's counsel to the Company.
Our opinion is necessarily based on economic, market, financial and other
conditions as they exist on, and on the information made available to us as
of, the date of this letter. It should be understood that, although subsequent
developments may affect this opinion, we do not have any obligation to update,
revise or reaffirm this opinion. Our opinion does not address the relative
merits of the Offer and the Merger and the other business strategies being
considered by the Company's Board of Directors, nor does it address the
Board's decision to proceed with the Offer and the Merger. Our opinion does
not constitute a recommendation to any stockholder as to whether such
stockholder should tender shares in the Offer or how such stockholder should
vote on the proposed Merger.
<PAGE>
Donaldson, Lufkin & Jenrette Securities Corporation ("DLJ"), as part of its
investment banking services, is regularly engaged in the valuation of
businesses and securities in connection with mergers, acquisitions,
underwritings, sales and distributions of listed and unlisted securities,
private placements and valuations for corporate and other purposes. In the
past, DLJ has performed investment banking services for the Company, including
acting as a co-manager in its initial public offering in May 1998, and for the
Parent and its affiliates and has been compensated for such services. In
addition, affiliates of DLJ owning approximately 11% of the currently
outstanding Company Shares have entered into an agreement with Parent pursuant
to which such affiliates have agreed to tender shares to Merger Sub in the
Offer and to vote in favor of the Merger, and one member of the Board of
Directors of the Company is an employee of an affiliate of DLJ.
Based upon the foregoing and such other factors as we deem relevant, we are
of the opinion that the Price Per Share to be received by the stockholders of
the Company pursuant to the Offer and the Merger is fair to such stockholders
from a financial point of view.
Very truly yours,
Donaldson, Lufkin & Jenrette
Securities Corporation
/s/ Dana A. Barsky
By: _________________________________
Dana A. Barsky
Vice President
<PAGE>
EXHIBIT 5
MUTUAL NON-DISCLOSURE AGREEMENT
Each undersigned party (the "Receiving Party") understands that the other
party (the "Disclosing Party") has disclosed or may disclose information
relating to the Disclosing Party's business particularly relating to uniform
informer libraries, chemi-informatic tools and the nature of chemical
libraries (including, without limitation, names and expertise of employees and
consultants, know-how, formulas, processes, ideas, inventions (whether
patentable or not), schematics, computer programs, software code, algorithms,
development tools, manufacturing capability or processes, chemical routes,
chemical structures, relationships with other businesses, business plans, and
other technical, business, financial, customer and product development plans,
forecasts, strategies and information), which to the extent previously,
presently, or subsequently disclosed to the Receiving Party is hereinafter
referred to as "Proprietary Information" of the Disclosing Party. Proprietary
Information also includes any information which the Disclosing Party has
received from a third party which the Disclosing Party is obligated to treat
as confidential or proprietary.
Notwithstanding the foregoing, nothing will be considered "Proprietary
Information" of the Disclosing Party unless either (1) it is first disclosed
in tangible form and is conspicuously marked "Confidential," "Proprietary" or
the like or (2) it is first disclosed in non-tangible form and orally
identified as confidential at the time of disclosure and is summarized in
tangible form conspicuously marked "Confidential" within thirty (30) days of
the original disclosure.
In consideration of and solely for the purpose of the parties' discussions
regarding a possible business transaction and any access the Receiving Party
may have to Proprietary Information of the Disclosing Party, each party (as
the Receiving Party) hereby agrees as follows:
1. Non-Disclosure and Non-Use Obligations. The Receiving Party agrees (i)
to hold the Disclosing Party's Proprietary Information in strict confidence
and to take all reasonable precautions to protect such Proprietary
Information (including, without limitation, all precautions the Receiving
Party employs with respect to its most confidential materials), (ii) not to
divulge any such Proprietary Information or any information derived
therefrom to any third person (except consultants or agents, subject to the
conditions stated below), (iii) not to make any use whatsoever at any time
of such Proprietary Information except to evaluate internally whether to
enter into a proposed business transaction with the Disclosing Party
without the prior written permission of the disclosing party, (iv) not to
remove or export from the United States or re-export any such Proprietary
Information or any direct product thereof except in compliance with all
licenses and approvals required under applicable export laws and
regulations, including without limitation, those of the U.S. Department of
Commerce, and (v) not to copy or reverse engineer any such Proprietary
Information. Any employee, consultant or agent given access to any such
Proprietary Information must have a legitimate "need to know" and shall be
similarly bound in writing. The parties shall be entitled to exchange
Proprietary Information under the terms of this Agreement for a period not
to exceed two (2) years from the date hereof, unless otherwise extended by
mutual written agreement of the parties or incorporated into a separate
agreement. Without granting any right or license, the Disclosing Party
agrees that the foregoing clauses (i), (ii), (iii) and (v) shall not apply
with respect to all obligations after five (5) years following the
disclosure thereof or any information that the Receiving Party can document
(i) is or (through no improper action or inaction by the Receiving Party or
any agent, consultant or employee) becomes generally known to the public,
(ii) was in its possession or the possession of an affiliate or consultant
or known by it prior to receipt from the Disclosing Party, (iii) was
rightfully disclosed to it, an affiliate or a consultant by a third party
without restriction, or (iv) was independently developed without use of any
Proprietary Information of the Disclosing Party by employees of the
Receiving Party who can be demonstrated to have had no access to such
information. The Receiving Party may make disclosures required by court
order provided the Receiving Party uses diligent efforts to limit
disclosure and to obtain confidential treatment or a protective order and
has allowed the Disclosing Party to participate in the proceeding.
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<PAGE>
2. Patent or Copyright Infringement. Nothing in this Agreement is
intended to grant any rights under any patent or copyright of the
Disclosing Party, nor shall this Agreement grant the Receiving Party any
rights in or to the Disclosing Party's Proprietary Information, except the
limited right to review such Proprietary Information solely for the purpose
of evaluating a possible business transaction.
3. Return of Materials. Immediately upon (i) the decision by either party
not to enter into a relationship as a result of the exchange of information
hereunder, or (ii) a request by the Disclosing Party at any time, the
Receiving Party will turn over to the Disclosing Party all Proprietary
Information of the Disclosing Party and all documents or media containing
any such Proprietary Information and any and all copies or extracts or
derivatives thereof to the extent it is requested by either party in
writing, except that a single copy may be retained for legal archival
purposes, subject to protection and non-disclosure in accordance with the
term of this Agreement. The Receiving Party understands that nothing herein
(i) requires the disclosure of any Proprietary Information of the
Disclosing Party, which shall be disclosed if at all solely at the option
of the Disclosing Party, or (ii) requires the Disclosing Party to proceed
with any proposed transaction or relationship in connection with which
Proprietary Information may be disclosed.
4. No Publicity. Except to the extent required by law, neither party
shall disclose the existence or subject matter of the negotiations or
business relationship contemplated by this Agreement.
5. Securities Law Considerations. Each party is aware, and will advise
its employees, consultants and agents who are informed of the matters that
are the subject of this Agreement, of the restrictions imposed by the
United States securities laws on the purchase and sale of securities by any
person who has received material, non-public information from the issuer of
such securities and on the communication of such information to any other
person when if is reasonably foreseeable that such other person is likely
to purchase or sell such securities in reliance upon such information.
6. Miscellaneous. The Receiving Party acknowledges and agrees that due to
the unique nature of the Disclosing Party's Proprietary Information, there
can be no adequate remedy at law for any breach of its obligations
hereunder, that any such breach may allow the Receiving Party or third
parties to unfairly compete with the Disclosing Party resulting in
irreparable harm to the Disclosing Party, and therefore, that upon any such
breach or any threat thereof, the Disclosing Party may seek appropriate
equitable relief (without the need to post bond or other security) in
addition to whatever remedies it might have at law. The Receiving Party
will notify the Disclosing Party in writing immediately upon the occurrence
of any such unauthorized release or other breach of which it is aware. In
the event that any of the provisions of this Agreement shall be held by a
court or other tribunal of competent jurisdiction to be to any extent
illegal, invalid or unenforceable, such provisions shall be limited or
eliminated to the minimum extent necessary so that this Agreement shall
otherwise remain in full force and effect. This Agreement shall be governed
by and construed in accordance with the laws of the State of California,
without regard to principles of conflicts of law. The parties agree that
any dispute regarding the interpretation or validity of this Agreement
shall be subject to the exclusive jurisdiction of the state and federal
courts in and for the County of San Diego, California, and each party
hereby agrees to submit to the personal and exclusive jurisdiction and
venue of such courts. This Agreement supersedes all prior discussions and
writings and constitutes the entire agreement between the parties with
respect to the subject matter hereof. This Agreement may not be amended
except in on express writing signed by officers of both parties. No waiver
or modification of this Agreement will be binding upon either party unless
made in writing and signed by a duly authorized representative of such
party and no failure or delay in enforcing any right will be deemed a
waiver.
Each party warrants to the other that it is duly authorized to enter into
this Agreement and that the terms of this Agreement are not inconsistent with
any of its respective outstanding contractual obligations. The execution and
performance of this Agreement does not obligate the parties to enter into any
other agreement or to perform any obligations other than as specified herein.
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<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the day
and year set forth below.
Date: March 10, 1999 Combichem, Inc., a Delaware general
partnership
/s/ Vicente Anido, Jr., Ph.D.
By: _________________________________
Vicente Anido, Jr., Ph.D.
Its: President and Chief Executive
Officer
DuPont Pharmaceuticals Company, a
Delaware general partnership
/s/ David S. Block, M.D.
By: _________________________________
David S. Block, M.D.
Its: Vice President, Product
Planning
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<PAGE>
[COMBICHEM LOGO APPEARS HERE]
October 12, 1999
Dear Stockholders:
I am pleased to inform you that on October 5, 1999, CombiChem, Inc. entered
into an Agreement and Plan of Merger with E.I. du Pont de Nemours and Company.
Under this merger agreement, a subsidiary of DuPont is commencing a cash
tender offer to purchase all of the outstanding shares of CombiChem's common
stock at a price of $6.75 per share. Following completion of the tender offer,
upon the terms and subject to the conditions of the merger agreement, the
DuPont subsidiary will be merged with and into CombiChem, and each share of
CombiChem's common stock not purchased in the tender offer (other than any
shares held in treasury or owned by DuPont or a DuPont subsidiary and shares
owned by any dissenting stockholders) will be converted into the right to
receive $6.75 per share in cash, without interest. Upon consummation of these
transactions, DuPont and its affiliates will own the entire equity interest in
CombiChem.
The board of directors of CombiChem has determined that the tender offer and
the merger are fair to and in the best interests of CombiChem stockholders and
has unanimously approved the merger agreement and the transactions
contemplated thereby, including the tender offer and the merger, and
unanimously recommends that the stockholders of CombiChem accept the DuPont
tender offer and tender their shares thereunder.
Accompanying this letter, in addition to the attached Schedule 14D-9
relating to the tender offer, is the Offer to Purchase, dated October 12,
1999, of the DuPont subsidiary making the tender offer together with related
materials including a Letter of Transmittal to be used for tendering your
shares. These documents set forth the terms and conditions of the offer and
the merger, provide detailed information about the transactions and include
instructions as to how to tender your shares. I urge you to read the enclosed
materials carefully.
Very truly yours,
/s/ Dr. Vicente Anido, Jr.
Dr. Vicente Anido, Jr.
President and Chief Executive
Officer
