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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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SIBIA NEUROSCIENCES, INC.
(NAME OF SUBJECT COMPANY)
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SIBIA NEUROSCIENCES, INC.
(NAME OF PERSON(S) FILING STATEMENT)
COMMON STOCK, $.001 PAR VALUE
(TITLE OF CLASS OF SECURITIES)
825732 10 0
(CUSIP NUMBER OF CLASS OF SECURITIES)
DR. WILLIAM T. COMER
PRESIDENT AND CHIEF EXECUTIVE OFFICER
SIBIA NEUROSCIENCES, INC.
505 COAST BOULEVARD SOUTH
SAN DIEGO, CALIFORNIA 92037
(858) 452-5892
(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:
THOMAS A. COLL, ESQ.
CARL R. SANCHEZ, ESQ.
COOLEY GODWARD LLP
4365 EXECUTIVE DRIVE, SUITE 1100
SAN DIEGO, CALIFORNIA 92121
(619) 550-6000
GARY P. COOPERSTEIN, ESQ.
FRIED, FRANK, HARRIS, SHRIVER & JACOBSON
ONE NEW YORK PLAZA
NEW YORK, NEW YORK 10004
(212) 859-8000
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ITEM 1. SECURITY AND SUBJECT COMPANY
The name of the subject company is SIBIA Neurosciences, Inc., a Delaware
corporation (the "Company"), and the address of the principal executive office
of the Company is 505 Coast Boulevard South, San Diego, California 92037.
The title of the class of equity securities to which this statement relates
is Common Stock, $.001 par value of the Company together with the associated
rights to purchase shares of Series A Junior Participating Preferred Stock
issued pursuant to a Rights Agreement dated as of March 17, 1997 and as amended
on July 30, 1999 (the "Rights Agreement") between the Company and ChaseMellon
Shareholder Services, L.L.C. (collectively, the "Shares").
ITEM 2. TENDER OFFER OF THE OFFEROR
This statement relates to the tender offer of MC Subsidiary Corp., a
Delaware corporation ("Offeror") and wholly owned subsidiary of Merck & Co.,
Inc., a New Jersey corporation, (the "Parent") disclosed in a Tender Offer
Statement on Schedule 14D-1 (the "Schedule 14D-1") dated August 6, 1999, to
purchase all of the outstanding Shares at a price of $8.50 per Share, net to the
seller, in cash, upon the terms and subject to the conditions set forth in the
Offer to Purchase dated August 6, 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 August 2,
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 July 30, 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 law ("Dissenting Shares")) will be converted
automatically into the right to receive $8.50 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
July 30, 1999, certain stockholders of the Company (the "Stockholders") entered
into Shareholders Agreements 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
3,377,847 Shares are beneficially owned by the Stockholders and subject to the
Shareholder Agreements, representing approximately 34.1% of the Shares
outstanding as of July 23, 1999.
Parent's Schedule 14D-1 states that the address of the principal executive
offices of the Parent and Offeror is One Merck Drive, P.O. Box 100, W53 AB-05,
Whitehouse Station, N.J. 08889-0100.
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 Parent and its
representatives access to certain confidential information of the Company,
Parent and the Company entered into a Confidential Disclosure Agreement on June
23, 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 Parent may use
the confidential information provided to it by the Company solely for the
purpose of evaluating and discussing a proposed business relationship between
the parties. In addition, the Confidentiality Agreement provides generally that
Parent shall not disclose any such confidential information without the prior
written consent of the Company 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 11 of the Offer to Purchase under the heading "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 July 30, 1999 (the "Stock Option Agreement") is
contained in Item 11 of the Offer to Purchase under the heading "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 The Salk Institute, Skandigen AB and William T. Comer, on
the one hand, and Parent on the other hand, is contained in Item 11 of the Offer
to Purchase under the heading "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.
In December 1998, the Company engaged CIBC World Markets Corp. ("CIBC") to
advise the Company on strategic alternatives aimed at enhancing stockholder
value. Strategic alternatives considered by CIBC included the acquisition of the
Company by or merger with small and large biotechnology and/or pharmaceutical
companies that could leverage the Company's extensive patent portfolio and drug
discovery capabilities.
During the period between March 17, 1999 and June 3, 1999, CIBC and the
Company contacted, on a confidential basis, 21 companies as potential merger or
acquisition parties and delivered certain nonconfidential information to 14 of
these companies at their request. As a result, seven of those companies executed
confidentiality agreements with the Company and sent representatives to visit
the Company to conduct business and legal due diligence. Five of such companies,
including Parent, expressed indications of interest in potentially acquiring the
Company and ultimately, two written proposals were received, one from a small
biotechnology company in May 1999 and one from Parent in June 1999, as described
below.
In May 1999, one biotechnology company contacted on behalf of the Company
proposed to acquire all of the outstanding Common Stock of the Company in a
stock-for-stock strategic combination at a value of between $4.75 to $5.25 per
share of Company Common Stock, conditioned on the completion of extensive due
diligence by such company. Upon consultation with CIBC, the value of such
proposal was considered low by Company management and the Board. As a result,
the Board directed Company management and CIBC to continue negotiations with
such company in an effort to increase the price of the offer.
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On June 18, 1999, a representative of Parent contacted a representative of
the Company to discuss a potential transaction with the Company. The respective
representatives discussed how the parties should proceed with negotiations and
due diligence.
On June 23, 1999, Parent and the Company entered into the Confidentiality
Agreement and the Company provided preliminary due diligence materials to
Parent. Between June 23, 1999 and July 22, 1999, representatives of Parent
visited the Company and participated in various due diligence meetings with
management and scientific personnel. During that period, the Company continued
to seek to identify potential merger or acquisition transactions as noted above.
On July 21, 1999, Parent submitted a written proposal to the Company
offering to acquire all of the outstanding shares of the Company's Common Stock
for $7.50 in cash per share by means of a cash tender offer (the "Parent
Proposal"), subject to limited confirmatory due diligence. The Parent Proposal
also required the receipt by Parent of an option to purchase up to 19.9% of the
Company's Common Stock under certain conditions, and required that certain
stockholders of the Company agree to tender, and to grant Parent an option to
purchase, exercisable under certain circumstances, the shares of Company Common
Stock held by such stockholders on substantially the terms contained in the
Shareholders Agreement. The Parent Proposal required the Company to respond to
such proposal by the end of the day on July 23, 1999.
On July 23, 1999, the Board held a telephonic meeting to discuss and
consider the Parent Proposal. The Board reviewed the terms of the Parent
Proposal and the terms of the Merger Agreement and related documents included
therewith with representatives from CIBC and the Company's outside legal
counsel. The CIBC representatives noted that, although some interest had been
expressed in the Company by some of the third parties contacted on behalf of the
Company, other than Parent and the small biotechnology company noted above no
such third party had submitted any oral or written proposal for the acquisition
of the Company and had not indicated any time frame under which a proposal, if
any, would be forthcoming. After full discussion of the Parent Proposal, the
Board authorized representatives of Company management, CIBC and Cooley Godward
LLP ("Cooley Godward"), the Company's outside counsel, to proceed with the
negotiations with Parent with the goal of obtaining the highest price per share
possible. In addition, the Board instructed management and representatives of
CIBC to follow-up with third parties already contacted and to contact additional
third parties, including certain strategic partners of the Company, to determine
whether such third parties had any interest in acquiring the Company.
Following the July 23, 1999 Board meeting, Parent and representatives for
the Company continued discussions regarding the Parent Proposal between July 24,
1999 and July 26, 1999. During such time, Parent increased the price per share
offered to acquire the Company first from $7.50 to $8.25, and then finally to
$8.50.
Between July 23 and July 28, 1999, representatives of the Company again
contacted the small biotechnology company that had previously submitted an offer
to acquire the Company and four large pharmaceutical companies to determine if
any of such companies were interested in making a proposal to acquire the
Company. Such Company representatives requested that such companies submit any
offers to the Company no later than the end of the day on July 29, 1999.
Representatives of the biotechnology company's financial advisors indicated that
such company was unwilling to increase its offer to acquire the Company. One of
the pharmaceutical companies contacted indicated that it was not interested in
pursuing a strategic transaction with the Company. Three other pharmaceutical
companies indicated that they were still in the evaluation process, but none of
these companies submitted any oral or written proposal to acquire the Company.
On July 28, 1999, the Board held a telephonic meeting to discuss the
progress of the negotiations related to the Parent Proposal and the status of
any discussions with other third parties regarding a potential acquisition
transaction with the Company. Representatives from CIBC reported to the Board
that Parent had increased the per share price of its proposal from $7.50 to
$8.50. CIBC also informed the Board that during the period between July 23, 1999
and July 28, 1999, no third party contacted by CIBC had, despite repeated
contacts with such third parties, submitted any proposal to acquire the Company.
The Board concluded that such companies had been given sufficient opportunity to
conduct extensive due diligence and make a proposal
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to acquire the Company. Representatives of Cooley Godward updated the Board on
the status of the negotiations related to the Merger Agreement and the ancillary
agreements. In addition, Cooley Godward noted one of the three stockholders whom
had been asked to agree to tender such stockholders shares in the Offer had
retained legal counsel and that such legal counsel had been negotiating
separately with Parent on behalf of such stockholder. After due consideration of
the Parent Proposal and upon consultation with representatives of CIBC, the
Board determined that, in light of the terms and conditions in the Merger
Agreement and the absence of any offers that had been received by the Company,
the $8.50 per share offer by Parent was the highest price that could be
obtained. The Board then instructed the management of the Company and
representatives of Cooley Godward to continue the negotiations related to the
Parent Proposal.
During the period from July 28, 1999 through July 30, 1999, representatives
of the Company and CIBC continued to follow-up with companies previously
contacted.
On the afternoon of July 30, 1999, the Board held a telephonic meeting to
discuss the status of the Parent Proposal. Company management and CIBC informed
the Board that between July 28, 1999 and July 30, 1999, no other party had
submitted a written proposal to the Company relating to any alternative
acquisition transaction. Representatives of Cooley Godward and CIBC 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 break-up
fee to Parent in the event the Merger Agreement were terminated. In addition,
representatives of CIBC made a presentation regarding the financial terms of the
proposed Offer, explaining to the Board in detail the analyses undertaken by
CIBC regarding the Parent Proposal. After extensive questions were asked by the
Board, the CIBC representative then rendered the opinion of CIBC, which was
subsequently confirmed in writing, that 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
approved the Parent Proposal by a unanimous vote of the directors present. (Mr.
William Miller, the Company's Chairman of the Board, was unable to attend the
Board meeting by telephone due to being on an airplane that was delayed on the
tarmac. Subsequently on the evening of July 30, 1999, Mr. Miller was briefed on
all of the events discussed at the Board meeting and indicated his approval of
the Offer and the Merger Agreement.) The Company entered into the Merger
Agreement and the Stock Option Agreement with Parent as of July 30, 1999.
On the morning of August 2, 1999, the Company and Parent announced the
Offer and the execution of the Merger Agreement in a joint press release issued
prior to the commencement of trading on the New York Stock Exchange.
In addition, on August 2, 1999, Mark Lampert, an affiliate of Biotechnology
Value Fund, L.P., a major stockholder of the Company ("BVF"), in a telephone
call with the Company's Chief Executive Officer, indicated that he was
disappointed in the Offer price and that BVF may be willing to purchase shares
of Company Common Stock held by The Salk Institute for Biological Studies,
another major stockholder of the Company, for $8.50 per share and arrange for
financing for the Company to be used in the Company's ongoing operations.
During the morning of August 3, 1999, a pharmaceutical company which the
Company had previously contacted indicated, in an unsolicited telephone call,
that it was interested in acquiring the Company and that it was prepared to make
an offer to acquire the Company that would be better than the offer of $8.50 per
share that was publicly reported. No price or other terms were identified by
such company. In addition, on August 4, 1999, a representative of an investment
banking firm contacted CIBC on behalf of such pharmaceutical company and
indicated that such pharmaceutical company was evaluating making a better offer
for the Company than Parent's offer. No price or other terms were identified by
such representative.
On August 4, 1999, the Board held a telephonic meeting and unanimously
(with all members present) ratified and approved the Merger Agreement, the Stock
Option Agreement and the transactions contemplated thereby.
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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 Parent Proposal and authorizing
the Company to enter into the Merger Agreement and the Stock Option Agreement,
the Board received presentations from representatives of CIBC regarding the
financial aspects of the proposed Offer and the Merger, and from representatives
of Cooley Godward regarding the legal aspects of the Offer and the Merger. In
reaching its conclusion that the Offer and the Merger is in the best interests
of the Company and its stockholders, the Board principally considered the
following:
(i) the terms and conditions of the Offer and the Merger Agreement;
(ii) the trading history of the Shares during the past several years,
a comparison of that trading history with those of other comparable
companies and expected trading prices for the foreseeable future;
(iii) the purchase price of $8.50 per Share in cash represents a
premium over recent and historical market prices for the Shares. On July
30, 1999, the last trading day before announcement of the Offer and the
Merger Agreement, the closing price for the Company's Common Stock as
quoted on the Nasdaq National Market was $5.25;
(iv) the presentation of the CIBC representatives to the Board at the
July 30, 1999 Board meeting and the oral opinion (subsequently confirmed in
writing) of CIBC to the effect that, as of July 30, 1999, the $8.50 per
Share in cash to be received by the stockholders of the Company in the
Offer and Merger, is fair, from a financial point of view, to such
stockholders. A copy of the CIBC written opinion that was delivered to the
Board is set forth as Annex B to this Schedule 14D-9. STOCKHOLDERS ARE
URGED TO READ THE CIBC OPINION IN ITS ENTIRETY;
(v) despite efforts by the Company's management and by representatives
of CIBC, the lack of any other third party proposals regarding a potential
acquisition transaction with the Company on terms more favorable than those
expressed in the Parent Proposal;
(vi) the fact that the Offer is not contingent on Parent obtaining
financing and contains no other terms or conditions that, in the view of
the Board, could materially impair the consummation of the Offer or the
Merger;
(vii) the fact that, to the extent the Board receives an unsolicited
written offer with respect to a merger, consolidation or sale of all or
substantially all of the Company's assets or an unsolicited tender or
exchange offer for the Shares is commenced, which the Board determines in
good faith (after consultation with counsel and the financial advisors to
the Company) is more favorable to the stockholders of the Company than the
Offer, from a financial point of view and is reasonably likely to be
consummated, the Board may, in accordance with the Merger Agreement and in
the proper exercise of its fiduciary duties, terminate the Merger Agreement
(subject to payment of a $2 million termination fee to the Parent and the
Parent's rights under the Stock Option Agreement) and adopt the more
favorable transaction;
(viii) the fact that three significant stockholders of the Company
beneficially holding in the aggregate approximately 34.1% of the
outstanding Shares were willing to enter into the Shareholder Agreements
pursuant to which such stockholders agreed to tender into the Offer all of
the Shares held by them;
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(ix) the fact that, in management's view, conducting an extensive
public auction process prior selling the Company would be detrimental to
the Company and would cause significant disruption in the existing
operations of the Company;
(x) the financial condition, results of operations, business and
prospects of the Company; and
(xi) the Company's ability to raise additional capital to fund
on-going and future operations.
The Company's Board of Directors recognized that, while the consummation of
the Offer gives the stockholders the opportunity to realize a premium over the
prices at which the Shares were traded prior to the public announcement of the
Merger and Offer, consummation of the Offer and the Merger will eliminate the
stockholder's 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 CIBC.
Pursuant to an engagement letter dated December 3, 1998 (the "Engagement
Letter"), the Company engaged CIBC to act as its financial advisor in connection
with the Company's review of its strategic and financial alternatives. Under the
terms of the Engagement Letter, the Company paid CIBC a retainer fee of $25,000
upon the signing of the engagement letter, and is required to pay CIBC an
additional $25,000 every three months until the completion of a business
transaction (including the Offer). In connection with the Offer, the Company is
obligated to pay CIBC a fee of $250,000 for the rendering of the fairness
opinion to the Company's Board in connection with its approval of the Offer and
the Merger. CIBC is also entitled to receive additional compensation equal to
1.1% of the value of the Offer and the Merger (including the cash to be paid to
the stockholders of the Company and the value of the stock options of the
Company to be assumed by Parent). The Company also has agreed to reimburse CIBC
for its reasonable out-of-pocket expenses, including fees and expenses of
counsel, and to indemnify CIBC against certain liabilities, including
liabilities under the federal securities laws or relating to or arising out of
CIBC's engagement as financial advisor.
In connection with the Offer and the Merger, the Company will pay CIBC an
aggregate of approximately $1,100,000 for services provided to the Company.
CIBC 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 underwriting, secondary distributions of listed and
unlisted securities, private placements and valuations for corporate and other
purposes. The Board selected CIBC to act as its financial advisor in connection
with the Offer 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
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irrevocable option to purchase up to 1,931,050 shares of Company Common Stock
pursuant to the Stock Option Agreement. Such option is exercisable in certain
circumstances that give rise to the ability to terminate 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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<S> <C>
Exhibit 1 Offer to Purchase dated August 6, 1999 (incorporated by
reference to Exhibit (a)(1) of the Schedule 14D-1 of Merck &
Co., Inc. and MC Subsidiary Corp. filed with the Securities
and Exchange Commission on August 6, 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 August 2, 1999.
Exhibit 4 Opinion Letter of CIBC World Markets Corp., dated July 30,
1999.*
Exhibit 5 Confidential Disclosure Agreement dated July 21, 1999
between the Company and Parent.
Exhibit 6 Agreement and Plan of Merger, dated July 30, 1999 between
the Company, the Parent and the Merger Sub (incorporated by
reference to Exhibit (c)(1) of the Schedule 14D-1).
Exhibit 7 Stock Option Agreement dated July 30, 1999 among the Parent,
the Merger Sub and the Company (incorporated by reference to
Exhibit (c)(3) of the Schedule 14D-1).
Exhibit 8 Shareholders Agreement dated July 30, 1999 between the
Parent, the Merger Sub 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 August 6, 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
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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.
SIBIA NEUROSCIENCES, INC.
Date: August 6, 1999 /s/ DR. WILLIAM T. COMER
--------------------------------------
Dr. William T. Comer
President and Chief Executive Officer
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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 August 6, 1999 to holders of
record of shares of Common Stock, par value $.001 per share, of SIBIA
Neurosciences, Inc. (the "Company") in connection with the possible election of
persons designated by Merck & Co., Inc. ("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 July 30,
1999 (the "Merger Agreement") among the Company, Parent and MC Subsidiary Corp.,
a Delaware corporation and wholly owned subsidiary of Parent ("Offeror"). The
Merger Agreement is more fully described under Item 3 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 August
6, 1999. The Offer currently is scheduled to expire at 12:00 midnight, New York
City time, on September 2, 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.
The Company has also agreed with Parent that, after the time that Parent's
designees constitute at least a majority of the Company's Board of Directors and
until the consummation of the Merger, the Company's Board of Directors shall
always have at least two independent directors who are neither officers of
Parent nor designees, shareholders or affiliates of Parent. Until the
consummation of the Merger, the vote of such independent directors will be
necessary to approve certain corporate transactions regarding the Company.
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 September 2, 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.
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<PAGE> 11
Set forth below is 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 One Merck Drive, P.O. Box 100, W53 AB-05, Whitehouse Station, N.J.
08889-0100. Each of the individuals listed below is a citizen of the United
States.
Judy C. Lewent (50)........... Senior Vice President and Chief Financial
Officer since January 1997 -- responsible for
financial and corporate development functions,
internal auditing and the Company's joint
venture relationships; prior to that since
September 1994 -- Senior Vice President and
Chief Financial Officer -- responsible for
financial and public affairs functions, The
Merck Company Foundation (a not-for-profit
charitable organization affiliated with the
Company), internal auditing and the Company's
joint venture relationships; prior to that
since December 1993 -- Senior Vice President
and Chief Financial Officer (since January
1993) -- responsible for financial and public
affairs functions and The Merck Company
Foundation.
Mary M. McDonald (54)......... Senior Vice President and General Counsel since
January 1999 -- responsible for legal and
public affairs functions and The Merck Company
Foundation (a not-for-profit charitable
organization affiliated with the Company);
prior to that since January, 1993 -- Senior
Vice President and General Counsel.
Roger M. Perlmutter (46)...... Executive Vice President, Worldwide Basic
Research and Preclinical Development, Merck
Research Laboratories since July 1999; prior to
that since February 1999 -- Executive Vice
President, Merck Research Laboratories; prior
to that since February 1997 -- Senior Vice
President, Merck Research Laboratories; prior
to that since May 1989 -- Chairman, Department
of Immunology, University of Washington.
Edward M. Scolnick, M.D.
(58).......................... Director since 1997; Executive Vice President,
Science and Technology and President, Merck
Research Laboratories for more than five years;
Member, National Academy of Sciences and its
Institute of Medicine.
Any other officer of Parent or Offeror listed in Schedule I to the Offer to
Purchase dated July 4, 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 July 30, 1999, there were 9,703,769 Shares outstanding and
approximately 12,277,750 Shares outstanding on a fully diluted basis (assuming
the Series B Convertible Preferred Stock would be convertible into 1,015,641
shares of Common Stock). 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 Company's Board of Directors currently consists of six members. 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.
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<PAGE> 12
The following table 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.
DR. JAMES D. WATSON, 71, has been a director of the Company since 1992. Dr.
Watson served as director of the Cold Spring Harbor Laboratory from 1968 to
1994, at which time he was appointed President. From 1956 to 1976, Dr. Watson
was a member of the Department of Biology (then Molecular Biology) at Harvard
University. Between 1988 and 1992, he directed the National Center for Human
Genome Research at the National Institute of Health. In 1962, Dr. Watson, along
with Drs. Francis H.C. Crick and Maurice Wilkins, was awarded the Nobel Prize in
Physiology or Medicine for discovering the structure of deoxyribonucleic acid.
Dr. Watson has won numerous awards in addition to the Nobel Prize and is a
member of the U.S. National Academy of Sciences, the Royal Society in London,
the Danish Academy of Arts and Sciences and the Academy of Sciences of Russia.
Dr. Watson holds a B.S. from the University of Chicago and a Ph.D. from Indiana
University and he has also received honorary degrees from 21 colleges and
universities. He is a director of the Pall Corporation and a director of
Diagnostic Products Corporation.
DR. STANLEY T. CROOKE, 54, has been a director of the Company since 1992.
He is the founder of Isis Pharmaceuticals, Inc., a publicly-held biotechnology
company, and has been its Chief Executive Officer since its inception in 1989
and Chairman of the Board of Directors since 1991. From 1980 until 1989, Dr.
Crooke was employed by SmithKline Beckman Corporation, a publicly-held
pharmaceutical company, most recently as President of Research and Development
of SmithKline & French Laboratories. Dr. Crooke received a Ph.D. and a M.D. from
Baylor College of Medicine. He is a director of Megabios Corp., a publicly-held
biotechnology company, a director of EPIX Medical, Inc. and an Adjunct Professor
of Pharmacology at UCSD.
DR. JEFFREY F. MCKELVY, 60, has served as the Company's Executive Vice
President and Chief Scientific Officer and a director of the Company since April
1998. Prior to his joining the Company, Dr. McKelvy was Senior Vice President,
Neuroscience of Allelix Biopharmaceuticals, Inc. and President of Allelix
Neuroscience, Inc. since 1997. In 1994, Dr. McKelvy founded Trophix
Pharmaceuticals, Inc. and served as its Chairman and Chief Executive Officer. In
1992, Dr. McKelvy joined Novartis AG (formerly CIBA-Geigy) as Vice President of
the CNS Strategic Business Unit with responsibility for all aspects of the
company's CNS portfolio. Prior to joining CIBA-Geigy, Dr. McKelvy was Area Head,
Neuroscience Discovery, and then Venture Head for Neuroscience at Abbott, where
he had responsibility for the global development of drugs for neurology and
psychiatry. Dr. McKelvy spent 18 years in academic neuroscience, lastly as
Professor of Neurobiology, Molecular Biology and Psychiatry at State University
of New York Stony Brook and Chairman of the Neuroscience Research Review
Committee of the National Institute of Mental Health. Dr. McKelvy received his
Ph.D. in Biochemistry from Johns Hopkins University.
MR. WILLIAM R. MILLER, 70, has been a director of the Company since 1991
and Chairman of the Board of Directors since 1992. In 1991, he retired as Vice
Chairman of the Board of Directors of Bristol-Myers Squibb, after six years in
the position. Mr. Miller is a director of ImClone Systems, Inc., Isis
Pharmaceuticals, Inc., Transkaryotic Therapies, Inc., Westvaco Corporation and
Xomed Surgical Products, Inc. He is Chairman of the Board of Directors of Vion
Pharmaceuticals, Inc. Mr. Miller is Chairman of the Board of Trustees of the
Cold Spring Harbor Laboratory and a past Chairman of the Board of Directors of
Pharmaceutical Manufacturers Association. Mr. Miller is a Trustee of the
Manhattan School of Music, Metropolitan Opera Association, Opera Orchestra of
New York, a member of Oxford University Chancellor's Court of Benefactors;
Honorary Fellow of St. Edmund Hall, and Chairman of the English-speaking Union
of the United States.
DR. WILLIAM T. COMER, 63, has been President, Chief Executive Officer and a
director of SIBIA since 1991. Prior to joining SIBIA, Dr. Comer worked for
Bristol-Myers Squibb Company, a publicly-held pharmaceutical company
("Bristol-Myers Squibb"), for nearly 30 years in various scientific and
management positions. He served as Executive Vice President, Science &
Technology, and then as President, Pharmaceutical Research & Licensing at
Bristol-Myers Squibb from 1989 until 1990. Thereafter, he served as Senior Vice
President, Strategic Management -- Pharmaceuticals and Nutritionals at
Bristol-Myers Squibb until 1991.
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<PAGE> 13
Dr. Comer is currently a director of Cytel Corporation, a publicly-held
biotechnology company, the University of California, San Diego ("UCSD") Cancer
Center Foundation and The San Diego Chamber Orchestra. He is also a member of
the Executive Committee of BIOCOM and the UCSD Industrial Advisory Committee for
the Department of Chemistry and Biochemistry. Dr. Comer received a B.A. degree
and Alumni Achievement Award from Carleton College and a Ph.D. in Organic
Chemistry and Pharmacology from the University of Iowa.
MR. GUNNAR EKDAHL, 56, has been a director of the Company since 1995. He is
currently a director of Skandigen AB and served as Chairman of its board of
directors from 1995 to 1998. Mr. Ekdahl has extensive experience with Swedish
finance and investment companies and was President and Chief Executive Officer
of Latour AB from 1985 to 1992, with controlling holdings in large Swedish
industrial companies. Mr. Ekdahl has been active as a non-executive board member
of several Swedish companies, including Chairman of Arcona AB, G&L Beijer AB,
Lofbergs Lila AB, and Philipson Bil AB. Mr. Ekdahl received his B.A. from the
Stockholm School of Economics in 1966.
BOARD COMMITTEES AND MEETINGS
During the fiscal year ended December 31, 1998, the Board held six
meetings. The Board has an Audit Committee, a Compensation and Stock Option
Committee and a Non-Officer Stock Option Committee.
As of August 6, 1999, the committees of the Board and the members of such
committees were as follows:
The Audit Committee is composed of two directors, Messers. Miller and
Ekdahl. The Audit Committee meets with the Company's independent auditors at
least annually to review the results of the annual audit and discuss the
financial statements, recommends to the Board the independent auditors to be
retained, and receives and considers the auditors' comments as to controls,
adequacy of staff and management performance and procedures in connection with
audit and financial controls. The Audit Committee met once during fiscal year
1998.
The Compensation and Stock Option Committee is composed of three
non-employee directors: Drs. Crooke and Watson. The Compensation and Stock
Option Committee makes recommendations to the Board concerning salaries and
incentive compensation, awards stock options to employees and consultants under
the Company's stock option plan and otherwise determines compensation levels and
performs such other functions regarding compensation as the Board may delegate.
The Compensation and Stock Option Committee met five times during fiscal year
1998.
The Board's Non-Officer Stock Option Committee consists of Dr. Comer as the
sole member. The function of the Non-Officer Stock Option Committee is to review
and approve stock option grants under the Company's 1996 Equity Incentive Plan
in accordance with guidelines approved by the Board to eligible persons under
the plan that are not subject to Section 16 of the Securities Exchange Act of
1934, as amended (the "Exchange Act"), by reason of their status as an officer,
director or stockholder of the Company. The Non-Officer Stock Option Committee
did not meet during fiscal year 1998, and its functions were performed by the
Compensation and Stock Option Committee.
During the fiscal year ended December 31, 1998, all directors except Dr.
Watson attended at least 75% of the aggregate of the meetings of the Board and
of the committees on which he served, held during the period for which he was a
director or committee member, respectively.
NON-DIRECTOR EXECUTIVE OFFICERS
MR. STEPHEN F. KEANE, 41, has served as the Company's Vice President,
Corporate Development since November 1998. From 1994 to 1998, Mr. Keane was
Director, Business Development at Molecular Biosystems, Inc. in San Diego, where
he was responsible for negotiating corporate partnerships. He previously served
as Director, Investor Relations at Molecular Biosystems, Inc. From 1993 to 1994,
he was Senior Account Executive -- Bioscience Division with Stoorza, Ziegus &
Metzger, responsible for all aspects of corporate communications programs for
biotechnology and healthcare clients. From 1989 to 1993, Mr. Keane
A-4
<PAGE> 14
held a position at UCSD Medical Center as Scientific Editor, Radiology
Department. Mr. Keane holds a B.A. from San Diego State University.
DR. G. KENNETH LLOYD, 55, has served as Vice President, Biology since 1998.
From 1994 to 1998, he served as the Company's Vice President,
Pharmaceuticals -- Biology. He joined the Company as Senior Director of
Pharmacology and Preclinical Development in 1992. Beginning in 1977, Dr. Lloyd
worked for Synthelabo S.A. where he held various management positions
culminating with six years as Associate Director, Biology with responsibility
for nervous system, cerebrovascular, bronchopulmonary, gastrointestinal and
inflammation research. From 1990 to 1992, Dr. Lloyd was Assistant Vice President
of Research and Director of Research (U.K.) for Wyeth-Ayerst Research. Dr. Lloyd
serves on the Scientific Advisory Boards of Epigenesis and the Huntington Chorea
Society of Canada. He received his B.S. and M.S. from McGill University and a
Ph.D. from the University of Toronto. He held a postdoctoral position at F.
Hoffman-La Roche & Co. Ltd. in Basel, Switzerland.
DR. DAVID E. MCCLURE, 51, has served as the Company's Vice President,
Clinical Development and Regulatory since 1996. From 1992 to 1996, Dr. McClure
served as Director, Product Development and Project Management at Molecular
Biosystems, Inc. From 1988 to 1992, he served as Assistant Director, Oncology
Clinical and Medical Affairs, and as Senior Project Development Manager, Drug
Development Department at ICI Pharmaceuticals Group. From 1983 to 1988, Dr.
McClure served as Development Team Chairperson and Section Head, Medicinal
Chemistry at McNeil Pharmaceutical (Johnson & Johnson). He started his career at
Merck Research Laboratories as a medicinal chemist. He received his B.S. in
Chemistry from Nebraska Wesleyan University, a Ph.D. in Organic Chemistry from
Stanford University, and conducted post-doctoral work from 1973 to 1975 at
Columbia University.
DR. IAN A. MCDONALD, 51, has served as the Company's Vice President,
Chemistry since 1998. From 1994 to 1998, he served as the Company's Vice
President, Pharmaceuticals -- Chemistry. He joined the Company as Director of
Chemistry in 1993. He has held senior scientist positions at the State Health
Laboratory Service in Perth, Australia, at the Australian National University,
and the Centre de Recherche Merrell International, Strasbourg, France, and he
was a Group Leader and Senior Research Scientist, Marion Merrell Dow Research
Institute (formerly Merrell Dow), Cincinnati, Ohio during the period 1985 to
1993. He received his B.S. and Ph.D. from the School of Chemistry, the
University of Western Australia. He completed his postdoctoral studies at the
Organic Chemistry Institute of the University of Zurich, Switzerland.
MR. THOMAS A. REED, 43, has been with the Company since 1981. He has been
Vice President, Finance/Administration and Chief Financial Officer since 1995.
From 1991 to 1995, he was Director, Finance and was Manager of Business and
Market Evaluation from 1989 to 1991. He received his B.A. from the University of
California, Berkeley and his M.B.A. from the University of San Diego.
DR. CARLA SUTO, 40, has served as the Company's Vice President, High
Throughput Screening and Technology Development since April 1999. Dr. Suto
joined SIBIA as Director of High Throughput Screening in 1996. Prior to joining
SIBIA, Dr. Suto held the position of Group Leader in the Department of
Pharmacology and Drug Discovery at Signal Pharmaceuticals, Inc. Previous to
Signal, Dr. Suto was a Senior Research Scientist in the Department of New Leads
Discovery at Ligand Pharmaceuticals, Inc. From 1987 to 1993, she held positions
at Parke-Davis Pharmaceutical Research Division of the Warner-Lambert Company in
Ann Arbor, Michigan. Dr. Suto received her B.S. in Biology from Simmons College
in 1981, a Ph.D. in Biology in 1985 from Brown University and did her
post-doctoral training at the M. D. Anderson Hospital and Tumor Institute in
Houston, Texas.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Exchange Act requires the Company's directors and
executive officers, and persons who own more than ten percent of a registered
class of the Company's equity securities (the "10% Stockholders"), to file with
the SEC initial reports of ownership and reports of changes in ownership of
Common Stock and other equity securities of the Company. Officers, directors and
greater than ten percent
A-5
<PAGE> 15
stockholders are required by SEC regulation to furnish the Company with copies
of all Section 16(a) forms they file.
To the Company's knowledge, based solely on a review of the copies of such
reports furnished to the Company and written representations that no other
reports were required, during the fiscal year ended December 31, 1998, its
officers, directors and greater than 10% beneficial owners complied with all
applicable Section 16(a) filing requirements.
EXECUTIVE COMPENSATION
COMPENSATION OF DIRECTORS
Currently, each non-employee director of the Company receives an annual
retainer of $15,000, while the Chairman of the Board receives $25,000. The
members of the Board are also eligible for reimbursement for their expenses
incurred in connection with attendance at Board meetings in accordance with
Company policy. Furthermore, during 1998, Dr. Watson received compensation of
$10,000 for his services as a member of the Company's Scientific Advisory Board.
For the year ended December 31, 1998, total cash compensation paid to
non-employee directors for service on the Board and/or committees of the Board
was $85,000, not including the $10,000 payment to Dr. Watson for his service on
the Company's Scientific Advisory Board.
In addition to cash compensation, non-employee directors are eligible to
receive annual grants of options to purchase Common Stock of the Company. See
"Employee Benefit Plans -- 1996 Non-Employee Directors' Stock Option Plan."
During fiscal year 1998, the Company granted an option to purchase 3,000
shares of Common Stock of the Company to each non-employee director and an
option to purchase 5,000 shares of Common Stock of the Company to the Chairman
of the Board, in each case at an exercise price per share of $5.63. The fair
market value of the Company's Common Stock on the date of grant was $5.63 per
share (based upon the closing sales price reported in the Nasdaq National Market
System on the date of grant). As of January 31, 1999, options to purchase
105,750 shares of Common Stock of the Company granted to the current
non-employee directors had been exercised.
A-6
<PAGE> 16
COMPENSATION OF EXECUTIVE OFFICERS
The following table shows for the fiscal years ending December 31, 1998,
1997 and 1996, compensation awarded or paid to, or earned by, the Company's
Chief Executive Officer and its four other most highly compensated executive
officers at December 31, 1998 and one former executive officer who was no longer
serving as an executive officer at the end of fiscal year 1998 (the "Named
Executive Officers"):
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
ANNUAL COMPENSATION(1) AWARDS(2)
-------------------------------------------- -------------
OTHER ANNUAL SHARES ALL OTHER
FISCAL COMPENSATION UNDERLYING COMPENSATION
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) ($) OPTIONS(#)(3) ($)(4)
--------------------------- ------ --------- -------- ------------ ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
William T. Comer, Ph.D......... 1998 276,258 42,400 -- 30,000 6,933
Chief Executive Officer and 1997 261,756 63,000 -- 12,825 4,917
President 1996 249,000 28,800 -- 15,040 4,491
Michael M. Harpold, Ph.D.(5)... 1998 193,500 20,000 43,600(6) -- 4,993
Vice President 1997 191,400 37,000 -- 8,950 5,680
1996 182,500 16,000 -- 8,225 5,253
G. Kenneth Lloyd, Ph.D......... 1998 197,500 20,000 10,000(7) 15,000
Vice President, Biology 1997 187,500 40,000 10,000(7) 8,950 6,432
1996 178,000 15,200 10,000(7) 8,225 5,248
David E. McClure, Ph.D......... 1998 167,500 20,000 -- 16,000 6,191
Vice President, Clinical 1997 158,750 20,000 -- 5,198 5,556
Development and Regulatory 1996 51,667(8) 10,000(8) -- 33,500 --
Ian A. McDonald, Ph.D.......... 1998 170,550 20,100 10,000(7) 16,000 6,209
Vice President, Chemistry 1997 161,000 32,100 10,000(7) 8,950 5,548
1996 153,250 13,300 10,000(7) 7,050 5,144
Jeffrey F. McKelvy, Ph.D.(9)... 1998 180,877 30,000 34,875(10) 100,000 912
Executive Vice President and 1997 -- -- -- -- --
Chief Scientific Officer 1996 -- -- -- -- --
</TABLE>
- ---------------
(1) As permitted by rules promulgated by the SEC, no amounts are shown with
respect to certain perquisites where such amounts do not exceed the lesser
of (i) 10% of the sum of the amounts reflected in the salary and bonus
columns, or (ii) $50,000.
(2) None of the Named Executive Officers held restricted stock awards as of
December 31, 1998.
(3) Unless otherwise noted, all options were granted under the Company's 1996
Equity Incentive Plan or 1992 Stock Option Plan.
(4) All amounts include the value of excess group term life insurance premiums
and matching 401(k) Plan contributions paid on behalf of the Named
Executive Officers.
(5) Dr. Harpold ceased serving as Vice President, Research in April 1998 and
became Vice President.
(6) Consists of forgiveness of debt related to amounts loaned to Dr. Harpold
pursuant to a promissory note dated July 1992. See "-- Employment
Agreements."
(7) Includes forgiveness of $10,000 of principal amount owed to the Company for
certain indebtedness.
(8) Dr. McClure joined the Company in September 1996. Salary amount represents
the total amount of salary actually paid to Dr. McClure in 1996. Dr.
McClure's annual base salary for 1996 was $155,000. The bonus amount of
$10,000 represents Dr. McClure's signing bonus. Upon joining the Company,
Dr. McClure was granted an option to purchase 33,500 shares of Common Stock
of the Company at an exercise price of $6.63 per share. The option vests
and becomes exercisable in four equal annual installments commencing on
September 1, 1997.
(9) Dr. McKelvy joined the Company in April 1998. Salary amount represents the
total amount of salary actually paid to Dr. McKelvy in 1998. Dr. McKelvy's
annual base salary for 1998 was $250,000. Bonus amount of $30,000
represents Dr. McKelvy's sign-on bonus. Upon joining the Company, Dr.
McKelvy
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<PAGE> 17
was granted an option to purchase 100,000 shares of Common Stock of the
Company at an exercise price of $5.00 per share. The option vests and
becomes exercisable in four equal annual installments commencing on April
9, 1999.
(10) Consists of relocation costs paid by the Company.
STOCK OPTION GRANTS AND EXERCISES
The Company currently grants options to its executive officers under the
Incentive Plan. As of January 31, 1999, options to purchase a total of 825,825
shares were outstanding under the Incentive Plan and options to purchase 686,840
shares remained available for grant thereunder. The following tables show for
the fiscal year ended December 31, 1998, certain information regarding options
granted to, exercised by, and held at year end by, the Named Executive Officers:
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
INDIVIDUAL GRANTS ANNUAL RATES OF
----------------------------------------------------------- STOCK PRICE
NUMBER OF % OF TOTAL APPRECIATION
SECURITIES OPTIONS FOR OPTION
UNDERLYING GRANTED TERM($)(3)
OPTIONS TO EMPLOYEES IN EXERCISE EXPIRATION --------------------
NAME GRANTED(#)(1) FISCAL YEAR(2) PRICE($/SH) DATE 5% 10%
---- ------------- --------------- ----------- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
William T. Comer......... 30,000 5.9 5.00 4/8/08 94,500 238,500
G. Kenneth Lloyd......... 15,000 3.0 5.00 4/8/08 47,250 119,250
David E. McClure......... 16,000 3.2 5.00 4/8/08 50,400 127,200
Ian A. McDonald.......... 16,000 3.2 5.00 4/8/08 50,400 127,200
Jeffrey F. McKelvy....... 100,000(4) 19.7 5.00 4/8/08 315,000 795,000
</TABLE>
- ---------------
(1) Except otherwise noted, options were granted under the Incentive Plan. The
options vest 20% on date of grant and 20% annually over the next 4 years.
(2) Based on options to purchase 506,288 shares of the Company's Common Stock
granted to employees, including Named Executive Officers, under the
Incentive Plan during fiscal year 1998.
(3) The potential realizable value is calculated based on the term of the option
at its time of grant, which in each case is 10 years. It is calculated
assuming that the stock price on the date of grant appreciates at the
indicated annual rate, compounded annually for the entire term of the option
and that the option is exercised and sold on the last day of its term for
the appreciated stock price. The total appreciation of the options over
their 10-year terms at 5% and 10% is 63% and 159%, respectively. These
amounts represent certain assumed rates of appreciation only, in accordance
with the rules of the SEC, and do not reflect the Company's estimate or
projection of future stock price performance. Actual gains, if any, are
dependent on the actual future performance of the Company's Common Stock,
and no gain to the optionee is possible unless the stock price increases
over the option term, which will benefit all stockholders. The Board has the
authority to reprice options under the Incentive Plan. See Proposal
2 -- "Terms of Options -- Repricing."
(4) Options vest 25% annually over the next 4 years.
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<PAGE> 18
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED IN
OPTIONS AT THE MONEY OPTIONS AT
SHARES DECEMBER 31, 1998(#)(1) DECEMBER 31, 1998($)(2)
ACQUIRED ON VALUE ------------------------- -------------------------
NAME EXERCISE(#) REALIZED($) EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
---- ----------- ----------- ------------------------- -------------------------
<S> <C> <C> <C> <C>
William T. Comer.............. 0 0 108,244/65,946 $356,967/$123,669
Michael M. Harpold............ 0 0 62,919/25,931 218,896/74,772
G. Kenneth Lloyd.............. 17,700 75,589 45,043/37,872 137,585/74,577
David E. McClure.............. 0 0 22,030/32,668 0/0
Ian A. McDonald............... 20,000 95,400 63,476/37,849 210,738/72,132
Jeffrey F. McKelvy............ 0 0 0/100,000 0/0
</TABLE>
- ---------------
(1) Includes both "in-the-money" and "out-of-the-money" options. "In-the-money"
options are options with an exercise price below the fair market value of
the Company's Common Stock.
(2) Calculation based on the fair market value of the Company's Common Stock at
December 31, 1998 ($4.75 per share), minus the exercise price.
"Out-of-the-money" options are ignored.
EMPLOYMENT AGREEMENTS
Effective April 1998, the Company entered into an employment agreement (the
"McKelvy Agreement") with Dr. Jeffrey McKelvy whereby Dr. McKelvy agreed to
serve as the Company's Executive Vice President and Chief Scientific Officer.
Under the McKelvy Agreement, Dr. McKelvy will receive an annual base salary of
$250,000 and will be eligible to receive a discretionary performance-based cash
bonus of up to 20% of such base salary. In addition, Dr. McKelvy was granted a
stock option under the Company's 1996 Equity Incentive Plan to acquire up to
100,000 shares of the Company's Common Stock at an exercise price of $5 per
share. Such options vest at an annual rate of 25% over a period of four years
from the date of grant. Dr. McKelvy also received a sign-on bonus of $30,000 and
is eligible to receive a loan from the Company of up to $100,000 to assist him
in relocating to San Diego, the principal and interest of such loan to be
forgiven over a period of five years based upon the achievement of personal and
company objectives. The McKelvy Agreement is terminable at any time for any
reason or no reason by either party.
Effective April 1998, the Company entered into an employment agreement (the
"Harpold Agreement") with Michael M. Harpold, Ph.D. whereby Dr. Harpold agreed
to continue his employment with the Company by performing a special assignment
with the title of Vice President through March 31, 1999. Under the Harpold
Agreement, Dr. Harpold will continue to receive his annual base salary of
$193,500. In addition, the Company forgave Dr. Harpold's outstanding employee
loan in the amount of $43,600, as described under the caption "Certain
Transactions." The Harpold Agreement is terminable at any time or for any reason
by either party. If Dr. Harpold remains an employee through March 31, 1999,
subject to certain conditions, the Company will continue his salary for a period
of six months after such time and accelerate vesting of his stock options (dated
November 10, 1994 covering a total of 58,750 shares at an exercise price of
$0.85 cents per share, May 9, 1995 covering a total of 7,050 shares at an
exercise price of $1.45 per share and February 22, 1996 covering a total of
6,169 shares at an exercise price of $1.91 per share).
Effective November 1998, the Company entered into an employment agreement
(the "Keane Agreement") with Stephen F. Keane whereby Mr. Keane agreed to serve
as the Company's Vice President, Corporate Development. Under the Keane
Agreement, Mr. Keane will receive an annual base salary of $150,000 and will be
eligible to receive a discretionary performance-based cash bonus of up to 15% of
such base salary. In addition, Mr. Keane was granted a stock option under the
Incentive Plan to acquire up to 60,000 shares of the Company's Common Stock at
an exercise price of $4.50 per share. Such options vest at an annual rate of 25%
over a period of four years from the date of grant. Mr. Keane also received a
sign-on bonus of $5,000. The Keane Agreement is terminable at any time for any
reason or no reason by either party.
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CHANGE IN CONTROL ARRANGEMENTS
The Company's Management Change of Control Plan, as amended in June 1999,
(the "Change of Control Plan"), is applicable to William T. Comer, G. Kenneth
Lloyd, Ian A. McDonald, Thomas A. Reed and, with respect to certain provisions,
David E. McClure, Stephen F. Keane, Jeffrey F. McKelvy and Ms. Carla Suto. The
Change of Control Plan generally provides for the payment of benefits to its
participants upon the occurrence of certain defined change of control events.
Among the benefits provided are generally: (i) cash bonuses of up to 25% of
annual base salary, depending on the valuation of the Company at the time of the
change of control; (ii) acceleration of vesting of certain stock options granted
to certain participants; (iii) severance payments of up to two times annual base
salary, depending on the participant's position with the Company at the time of
a change of control; and (iv) the payment of health insurance premiums and
outplacement expenses incurred upon a change of control.
Under the Change of Control Plan, a "change of control" of the Company is
deemed to have occurred upon the consummation of a merger or consolidation in
which the Company is not the surviving entity (other than a transaction the
principal purpose of which is to change the jurisdiction of the Company's
incorporation), the sale, transfer or other disposition of all or substantially
all of the assets of the Company or a reverse merger in which the Company is the
surviving entity, but in which 50% or more of the Company's outstanding voting
stock is transferred to holders different from those who held such stock
immediately prior to such merger.
EMPLOYEE BENEFIT PLANS
1996 EQUITY INCENTIVE PLAN
The Company maintains a 1996 Equity Incentive Plan (the "Incentive Plan").
The Incentive Plan provides for the grant of incentive stock options,
nonstatutory stock options, stock appreciation rights, stock bonuses and
restricted stock purchase awards (collectively "awards"). Incentive stock
options granted under the Incentive Plan are intended to qualify as "incentive
stock options" within the meaning of Section 422 of the Internal Revenue Code of
1986, as amended (the "Code"). Nonstatutory stock options granted under the
Incentive Plan are not intended to qualify as incentive stock options under the
Code. Stock appreciation rights granted under the Incentive Plan may be tandem
rights, concurrent rights or independent rights. See "Federal Income Tax
Information" for a discussion of the tax treatment of awards. To date, the
Company has granted only stock options under the Plan.
Purpose
The Board adopted the Incentive Plan to provide a means by which employees,
directors and consultants of the Company and its affiliates may be given an
opportunity to purchase stock in the Company, to assist in retaining the
services of such persons, to secure and retain the services of persons capable
of filling such positions and to provide incentives for such persons to exert
maximum efforts for the success of the Company and its affiliates. Approximately
136 of the approximately 140 employees, directors and consultants of the Company
and its affiliates are eligible to participate in the Incentive Plan.
Administration
The Board administers the Incentive Plan. Subject to the provisions of the
Incentive Plan, the Board has the power to construe and interpret the Incentive
Plan and to determine the persons to whom and the dates on which awards will be
granted, the number of shares of Common Stock to be subject to each award, the
time or times during the term of each award within which all or a portion of
such award may be exercised, the exercise price, the type of consideration and
other terms of the award.
The Board has the power to delegate administration of the Incentive Plan to
a committee composed of not fewer than two members of the Board. In the
discretion of the Board, a committee may consist solely of two or more outside
directors in accordance with Section 162(m) of the Code or solely of two or more
non-
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employee directors in accordance with Rule 16b-3 of the Exchange Act. The Board
has delegated administration of the Incentive Plan to the Compensation and Stock
Option Committee of the Board. The Board may also delegate to a committee of one
or more members of the Board the authority to grant awards under the Incentive
Plan to eligible persons who are not subject to Section 16 of the Exchange Act
in accordance with guidelines approved by the Board. The Board has delegated
such authority to the Non-Officer Stock Option Committee. See "Board Committees
and Meetings." As used herein with respect to the Incentive Plan, the "Board"
refers to any committee the Board appoints as well as to the Board itself.
The regulations under Section 162(m) of the Code require that the directors
who serve as members of the committee must be "outside directors." The Incentive
Plan provides that, in the Board's discretion, directors serving on the
committee may be "outside directors" within the meaning of Section 162(m). This
limitation would exclude from the committee directors who are (i) current
employees of the Company or an affiliate, (ii) former employees of the Company
or an affiliate receiving compensation for past services (other than benefits
under a tax-qualified pension Incentive Plan), (iii) current and former officers
of the Company or an affiliate, (iv) directors currently receiving direct or
indirect remuneration from the Company or an affiliate in any capacity (other
than as a director), and (v) any other person who is otherwise considered an
"outside director" for purposes of Section 162(m). The definition of an "outside
director" under Section 162(m) is generally narrower than the definition of a
"non-employee director" under Rule 16b-3 of the Exchange Act.
Eligibility
Incentive stock options and stock appreciation rights appurtenant thereto
may be granted under the Incentive Plan only to employees (including officers)
of the Company and its affiliates. Employees (including officers), directors and
consultants of both the Company and its affiliates are eligible to receive all
other types of awards under the Incentive Plan.
No option may be granted under the Incentive Plan to any person who, at the
time of the grant, owns (or is deemed to own) stock possessing more than 10% of
the total combined voting power of the Company or any affiliate of the Company,
unless the exercise price is at least 110% of the fair market value of the stock
subject to the option on the date of grant and the term of the option does not
exceed five years from the date of grant. Likewise, no restricted stock award
may be granted under the Incentive Plan to any such 10% stockholder unless the
exercise price is at least 100% of the fair market value of the stock subject to
the award. In addition, the aggregate fair market value, determined at the time
of grant, of the shares of Common Stock with respect to which incentive stock
options are exercisable for the first time by a participant during any calendar
year (under the Incentive Plan and all other such plans of the Company and its
affiliates) may not exceed $100,000.
No person may be granted options and stock appreciation rights under the
Incentive Plan exercisable for more than 500,000 shares of Common Stock during
any twelve (12) month period ("Section 162(m) Limitation").
Stock Subject to the Incentive Plan
Subject to stockholder approval of this Proposal, an aggregate of 2,513,141
shares of Common Stock is reserved for issuance under the Incentive Plan. If
awards granted under the Incentive Plan expire or otherwise terminate without
being exercised, the shares of Common Stock not acquired pursuant to such awards
again becomes available for issuance under that Incentive Plan. If the Company
reacquires unvested stock issued under the Incentive Plan, the reacquired stock
will revert to and again become available for reissuance under the Incentive
Plan for awards other than incentive stock options.
Terms of Options
The following is a description of the permissible terms of options under
the Incentive Plan. Individual option grants may be more restrictive as to any
or all of the permissible terms described below.
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Exercise Price; Payment. The exercise price of incentive stock options may
not be less than 100% of the fair market value of the stock subject to the
option on the date of the grant and, in some cases (see "Eligibility" above),
may not be less than 110% of such fair market value. The exercise price of
nonstatutory options may not be less than 85% of the fair market value of the
stock on the date of grant and, in some cases (see "Eligibility" above), may not
be less than 110% of such fair market value. If options were granted with
exercise prices below market value, deductions for compensation attributable to
the exercise of such options could be limited by Section 162(m) of the Code. See
"Federal Income Tax Information." As of the close of business on April 1, 1999,
the closing price of the Company's Common Stock as reported on the Nasdaq
National Market System was $5.00 per share.
The exercise price of options granted under the Incentive Plan must be paid
either in cash at the time the option is exercised or at the discretion of the
Board (i) by delivery of other Common Stock of the Company, (ii) pursuant to a
deferred payment arrangement or (iii) in any other form of legal consideration
acceptable to the Board.
Repricing. In the event of a decline in the value of the Company's Common
Stock, the Board has the authority to offer participants the opportunity to
replace outstanding higher priced options with new lower priced options. To the
extent required by Section 162(m) of the Code, a repriced option is deemed to be
canceled and a new option granted. Both the option deemed to be canceled and the
new option deemed to be granted will be counted against the Section 162(m)
Limitation.
Option Exercise. Options granted under the Incentive Plan may become
exercisable in cumulative increments ("vest") as determined by the Board. Shares
covered by currently outstanding options under the Incentive Plan typically vest
at the rate of at least twenty percent (20%) per year of the total number of
shares subject to the option during the participant's employment by, or service
as a director or consultant to, the Company or an affiliate (collectively,
"service"). Shares covered by options granted in the future under the Incentive
Plan may be subject to different vesting terms. The Board has the power to
accelerate the time during which an option may vest or be exercised. In
addition, options granted under the Incentive Plan may permit exercise prior to
vesting, but in such event the participant may be required to enter into an
early exercise stock purchase agreement that allows the Company to repurchase
unvested shares, generally at their exercise price, should the participant's
service terminate before vesting. To the extent provided by the terms of an
option, a participant may satisfy any federal, state or local tax withholding
obligation relating to the exercise of such option by a cash payment upon
exercise, by authorizing the Company to withhold a portion of the stock
otherwise issuable to the participant, by delivering already-owned Common Stock
of the Company or by a combination of these means.
Term. The maximum term of options under the Incentive Plan is 10 years,
except that in certain cases (see "Eligibility") the maximum term is five years.
Options under the Incentive Plan generally terminate three months after
termination of the participant's service unless (i) such termination is due to
the participant's disability, in which case the option may, but need not,
provide that it may be exercised (to the extent the option was exercisable at
the time of the termination of service) at any time within 12 months of such
termination; (ii) the participant dies before the participant's service has
terminated, or within the period specified in the option agreement, in which
case the option may, but need not, provide that it may be exercised (to the
extent the option was exercisable at the time of the participant's death) within
18 months of the participant's death by the person or persons to whom the rights
to such option pass by will or by the laws of descent and distribution; or (iii)
the option by its terms specifically provides otherwise. A participant may
designate a beneficiary who may exercise the option following the participant's
death.
Individual option grants by their terms may provide for exercise within a
longer period of time following termination of service.
The option term generally is not extended in the event that exercise of the
option within these periods is prohibited. A participant's option agreement may
provide that if the exercise of the option following the termination of the
participant's service would result in liability under Section 16(b) of the
Exchange Act, then the option shall terminate on the earlier of (i) the
expiration of the term of the option or (ii) the 10th day after the last date on
which such exercise would result in such liability under Section 16(b). A
participant's
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option agreement also may provide that if the exercise of the option following
the termination of the participant's service would be prohibited because the
issuance of stock would violate the registration requirements under the
Securities Act of 1933, as amended (the "Securities Act"), then the option will
terminate on the earlier of (i) the expiration of the term of the option or (ii)
three months after the termination of the participant's service during which the
exercise of the option would not be in violation of such registration
requirements.
Terms of Stock Bonuses and Purchases of Restricted Stock
Payment. The Board determines the purchase price under a restricted stock
purchase agreement, but the purchase price may not be less than 85% of the fair
market value of the Company's Common Stock on the date of grant. The Board may
award stock bonuses in consideration of past services without a purchase
payment.
The purchase price of stock acquired pursuant to a restricted stock
purchase agreement under the Incentive Plan must be paid either in cash at the
time the option is exercised or at the discretion of the Board, (i) by delivery
of other Common Stock of the Company, (ii) pursuant to a deferred payment
arrangement or (iii) in any other form of legal consideration acceptable to the
Board.
Vesting. Shares of stock sold or awarded under the Incentive Plan may, but
need not be, subject to a repurchase option in favor of the Company in
accordance with a vesting schedule as determined by the Board. The Board has the
power to accelerate the vesting of stock acquired pursuant to a restricted stock
purchase agreement under the Incentive Plan.
Restrictions on Transfer. Rights under a stock bonus or restricted stock
bonus agreement may not be transferred except where such assignment is required
by law.
Stock Appreciation Rights
The Incentive Plan authorizes three types of stock appreciation rights.
Tandem Stock Appreciation Rights. Tandem stock appreciation rights are tied
to an underlying option and require the participant to elect whether to exercise
the underlying option or to surrender the option for an appreciation
distribution equal to the market price of the vested shares purchasable under
the surrendered option less the aggregate exercise price payable for such
shares. Appreciation distributions payable upon exercise of tandem stock
appreciation rights must be made in cash.
Concurrent Stock Appreciation Rights. Concurrent stock appreciation rights
are tied to an underlying option and are exercised automatically at the same
time the underlying option is exercised. The participant receives an
appreciation distribution equal to the market price of the vested shares
purchased under the option less the aggregate exercise price payable for such
shares. Appreciation distributions payable upon exercise of concurrent stock
appreciation rights must be made in cash.
Independent Stock Appreciation Rights. Independent stock appreciation
rights are granted independently of any option and entitle the participant to
receive upon exercise an appreciation distribution equal to the market price of
a number of shares equal to the number of share equivalents to which the
participant is vested under the independent stock appreciation right less than
fair market value of such number of shares of stock on the date of grant of the
independent stock appreciation rights. Appreciation distributions payable upon
exercise of independent stock appreciation rights may, at the Board's
discretion, be made in cash, in shares of stock or a combination thereof.
Repricing. In the event of a decline in the value of the Company's Common
Stock, the Board has the authority to offer participants the opportunity to
replace outstanding higher priced stock appreciation rights with new lower
priced stock appreciation rights. To the extent required by Section 162(m) of
the Code, a repriced stock appreciation right is deemed to be canceled and a new
stock appreciation right granted. Both the stock appreciation right deemed to be
canceled and the new stock appreciation right deemed to be granted will be
counted against the Section 162(m) Limitation.
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Restrictions on Transfer
The participant may not transfer an incentive stock option otherwise than
by will or by the laws of descent and distribution. During the lifetime of the
participant, only the participant may exercise an incentive stock option. The
Board may not grant nonstatutory stock options that are transferable except as
provided in the stock option agreement. Shares subject to repurchase by the
Company under an early exercise stock purchase agreement may be subject to
restrictions on transfer that the Board deems appropriate.
Adjustment Provisions
Transactions not involving receipt of consideration by the Company, such as
a merger, consolidation, reorganization, stock dividend, or stock split, may
change the class and number of shares of Common Stock subject to the Incentive
Plan and outstanding awards. In that event, the Incentive Plan will be
appropriately adjusted as to the class and the maximum number of shares of
Common Stock subject to the Incentive Plan, and outstanding awards will be
adjusted as to the class, number of shares and price per share of Common Stock
subject to such awards.
Effect of Certain Corporate Events
The Incentive Plan provides that, in the event of a dissolution,
liquidation or sale of substantially all of the assets of the Company, specified
types of merger, or other corporate reorganization ("change in control"), to the
extent permitted by law any surviving corporation will be required to either
assume awards outstanding under the Incentive Plan or substitute similar awards
for those outstanding under the Incentive Plan, or such outstanding awards will
continue in full force and effect. If any surviving corporation declines to
assume awards outstanding under the Incentive Plan, or to substitute similar
awards, then the vesting and the time during which such awards may be exercised
will be accelerated. An outstanding award will terminate if the participant does
not exercise it before a change in control, except that in the event of certain
specified types of change in control, participants will have 15 days from the
date of the change in control to exercise such award, following which time it
will terminate if not exercised. The acceleration of an award in the event of an
acquisition or similar corporate event may be viewed as an anti-takeover
provision, which may have the effect of discouraging a proposal to acquire or
otherwise obtain control of the Company.
Duration, Amendment and Termination
The Board may suspend or terminate the Incentive Plan without stockholder
approval or ratification at any time or from time to time. Unless sooner
terminated, the Incentive Plan will terminate on February 21, 2006.
The Board may also amend the Incentive Plan at any time or from time to
time. However, no amendment will be effective unless approved by the
stockholders of the Company within 12 months before or after its adoption by the
Board if the amendment would (i) modify the requirements as to eligibility for
participation (to the extent such modification requires stockholder approval in
order for the Incentive Plan to satisfy Section 422 of the Code, if applicable,
or Rule 16b-3 of the Exchange Act; (ii) increase the number of shares reserved
for issuance upon exercise of awards; or (iii) change any other provision of the
Incentive Plan in any other way if such modification requires stockholder
approval in order to comply with Rule 16b-3 of the Exchange Act or satisfy the
requirements of Section 422 of the Code or any securities exchange listing
requirements. The Board may submit any other amendment to the Incentive Plan for
stockholder approval, including, but not limited to, amendments intended to
satisfy the requirements of Section 162(m) of the Code regarding the exclusion
of performance-based compensation from the limitation on the deductibility of
compensation paid to certain employees.
Federal Income Tax Information
Long-term capital gains currently are generally subject to lower tax rates
than ordinary income or short-term capital gains. The maximum long-term capital
gains rate for federal income tax purposes is currently 20% while the maximum
ordinary income rate and short-term capital gains rate is effectively 39.6%.
Slightly
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different rules may apply to participants who acquire stock subject to certain
repurchase options or who are subject to Section 16(b) of the Exchange Act.
Incentive Stock Options. Incentive stock options under the Incentive Plan
are intended to be eligible for the favorable federal income tax treatment
accorded "incentive stock options" under the Code.
There generally are no federal income tax consequences to the participant
or the Company by reason of the grant or exercise of an incentive stock option.
However, the exercise of an incentive stock option may increase the
participant's alternative minimum tax liability, if any.
If a participant holds stock acquired through exercise of an incentive
stock option for at least two years from the date on which the option is granted
and at least one year from the date on which the shares are transferred to the
participant upon exercise of the option, any gain or loss on a disposition of
such stock will be a long-term capital gain or loss if the participant held the
stock for more than one year.
Generally, if the participant disposes of the stock before the expiration
of either of these holding periods (a "disqualifying disposition"), then at the
time of disposition the participant will realize taxable ordinary income equal
to the lesser of (i) the excess of the stock's fair market value on the date of
exercise over the exercise price, or (ii) the participant's actual gain, if any,
on the purchase and sale. The participant's additional gain or any loss upon the
disqualifying disposition will be a capital gain or loss, which will be long-
term or short-term depending on whether the stock was held for more than one
year.
To the extent the participant recognizes ordinary income by reason of a
disqualifying disposition, the Company will generally be entitled (subject to
the requirement of reasonableness, the provisions of Section 162(m) of the Code
and the satisfaction of a tax reporting obligation) to a corresponding business
expense deduction in the tax year in which the disqualifying disposition occurs.
Nonstatutory Stock Options, Restricted Stock Purchase Awards and Stock
Bonuses. Nonstatutory stock options, restricted stock purchase awards and stock
bonuses granted under the Incentive Plan generally have the following federal
income tax consequences:
There are no tax consequences to the participant or the Company by reason
of the grant. Upon acquisition of the stock, the participant normally will
recognize taxable ordinary income equal to the excess, if any, of the stock's
fair market value on the acquisition date over the purchase price. However, to
the extent the stock is subject to certain types of vesting restrictions, the
taxable event will be delayed until the vesting restrictions lapse unless the
participant elects to be taxed on receipt of the stock. With respect to
employees, the Company is generally required to withhold from regular wages or
supplemental wage payments an amount based on the ordinary income recognized.
Subject to the requirement of reasonableness, the provisions of Section 162(m)
of the Code and the satisfaction of a tax reporting obligation, the Company will
generally be entitled to a business expense deduction equal to the taxable
ordinary income realized by the participant.
Upon disposition of the stock, the participant will recognize a capital
gain or loss equal to the difference between the selling price and the sum of
the amount paid for such stock plus any amount recognized as ordinary income
upon acquisition (or vesting) of the stock. Such gain or loss will be long-term
or short-term depending on whether the stock was held for more than one year.
Slightly different rules may apply to participants who acquire stock subject to
certain repurchase options or who are subject to Section 16(b) of the Exchange
Act.
Stock Appreciation Rights. No taxable income is realized upon the receipt
of a stock appreciation right, but upon exercise of the stock appreciation right
the fair market value of the shares (or cash in lieu of shares) received must be
treated as compensation taxable as ordinary income to the participant in the
year of such exercise. Generally, with respect to employees, the Company is
required to withhold from the payment made on exercise of the stock appreciation
right or from regular wages or supplemental wage payments an amount based on the
ordinary income recognized. Subject to the requirement of reasonableness,
Section 162(m) of the Code and the satisfaction of a reporting obligation, the
Company will be entitled to a business expense deduction equal to the taxable
ordinary income recognized by the participant.
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Potential Limitation on Company Deductions. Section 162(m) of the Code
denies a deduction to any publicly-held corporation for compensation paid to
certain "covered employees" in a taxable year to the extent that compensation to
such covered employee exceeds $1 million. It is possible that compensation
attributable to awards, when combined with all other types of compensation
received by a covered employee from the Company, may cause this limitation to be
exceeded in any particular year.
Certain kinds of compensation, including qualified "performance-based
compensation," are disregarded for purposes of the deduction limitation. In
accordance with Treasury regulations issued under Section 162(m), compensation
attributable to stock options and stock appreciation rights will qualify as
performance-based compensation if the award is granted by a compensation
committee comprised solely of "outside directors" and either (i) the plan
contains a per-employee limitation on the number of shares for which such awards
may be granted during a specified period, the per-employee limitation is
approved by the stockholders, and the exercise price of the award is no less
than the fair market value of the stock on the date of grant, or (ii) the award
is granted (or exercisable) only upon the achievement (as certified in writing
by the compensation committee) of an objective performance goal established in
writing by the compensation committee while the outcome is substantially
uncertain, and the award is approved by stockholders.
Compensation attributable to restricted stock and stock bonuses will
qualify as performance-based compensation, provided that: (i) the award is
granted by a compensation committee comprised solely of "outside directors" and
(ii) the purchase price of the award is no less than the fair market value of
the stock on the date of grant. Stock bonuses qualify as performance-based
compensation under the Treasury regulations only if (i) the award is granted by
a compensation committee comprised solely of "outside directors," (ii) the award
is granted (or exercisable) only upon the achievement of an objective
performance goal established in writing by the compensation committee while the
outcome is substantially uncertain, (iii) the compensation committee certifies
in writing prior to the granting (or exercisability) of the award that the
performance goal has been satisfied and (iv) prior to the granting (or
exercisability) of the award, stockholders have approved the material terms of
the award (including the class of employees eligible for such award, the
business criteria on which the performance goal is based, and the maximum
amount -- or formula used to calculate the amount -- payable upon attainment of
the performance goal).
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NEW PLAN BENEFITS
The following table presents certain information with respect to options
granted under the Incentive Plan for the fiscal year ended December 31, 1998 to
(i) the Named Executive Officers (as named in the Summary Compensation Table);
(ii) all executive officers as a group, (iii) all non-executive officer
employees as a group and (iv) all non-employee directors as a group.
1996 EQUITY INCENTIVE PLAN
<TABLE>
<CAPTION>
NUMBER OF SHARES
UNDERLYING
NAME AND POSITION DOLLAR VALUE($)(1) OPTIONS GRANTED
----------------- ------------------ ----------------
<S> <C> <C>
William T. Comer, Ph.D...................................... 150,000 30,000
Chief Executive Officer and President
Michael M. Harpold, Ph.D.................................... 0 0
Vice President
G. Kenneth Lloyd, Ph.D...................................... 75,000 15,000
Vice President, Biology
David E. McClure, Ph.D...................................... 80,000 16,000
Vice President, Clinical Development and Regulatory
Ian A. McDonald, Ph.D....................................... 80,000 16,000
Vice President, Chemistry
Jeffrey F. McKelvy, Ph.D.................................... 500,000 100,000
Executive Vice President and Chief Scientific Officer
All executive officers as a group(2)........................ 1,235,000 253,000
All non-executive officer employees as a group(2)........... 1,148,289 237,288
All non-employee directors as a group....................... 0 0
</TABLE>
- ---------------
(1) Exercise Price multiplied by the number of shares underlying the option(s).
(2) Represents the number of executive officers as a group and all non-executive
officer employees as a group as of March 31, 1999.
EMPLOYEE STOCK PURCHASE PLAN
In February 1996, the Board of Directors adopted, and the stockholders
subsequently approved, the Employee Stock Purchase Plan (the "Purchase Plan").
The purpose of the Purchase Plan is to assist the Company in retaining the
services of its employees, to secure and retain the services of new employees
and to provide incentives for such persons to exert maximum efforts for the
success of the Company. The Purchase Plan provides a means by which employees of
the Company and its affiliates may purchase Common Stock of the Company at a
discount through accumulated payroll deductions. The rights to purchase Common
Stock granted under the Purchase Plan are intended to qualify as options issued
under an "employee stock purchase plan" as that term is defined in Section
423(b) of the Code. The maximum number of shares of Common Stock that may be
issued under the Purchase Plan is 500,000. As of January 31, 1999, all of the
Company's 130 employees were eligible to participate in the Purchase Plan.
Under the Purchase Plan, the Board may provide for the grant of rights to
purchase Common Stock to eligible employees (an "Offering") on a date or dates
to be selected by the Board of Directors. The first Offering under the Purchase
Plan began May 9, 1996, the effective date of the Company's initial public
offering, and extended until April 30, 1998. Subsequent Offerings commence on
May 1 every year, beginning with calendar year 1998 and end on the day prior to
the first anniversary of the date the Offering commences. As of January 31,
1999, the Company had issued 63,631 shares of Common Stock to employees under
the Purchase Plan.
1996 NON-EMPLOYEE DIRECTORS' STOCK OPTION PLAN
In February 1996, the Board of Directors adopted, and the stockholders
subsequently approved, the 1996 Non-Employee Directors' Stock Option Plan (the
"Directors' Plan"). The purpose of the Directors' Plan is to
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attract and retain the services of persons capable of serving as non-employee
directors on the Board of Directors and to provide incentives for such persons
to exert maximum efforts to promote the success of the Company. The Directors'
Plan provides for the automatic grant of nonstatutory stock options to purchase
shares of Common Stock to non-employee directors of the Company. The maximum
number of shares of Common Stock that may be issued pursuant to options granted
under the Directors' Plan is 235,000. Option grants under the Directors' Plan
are non-discretionary.
Under the Directors' Plan, each person who for the first time becomes a
non-employee director shall be granted upon the date of his or her initial
election to the Board of Directors, an option to purchase 10,000 shares of
Common Stock of the Company. In addition, on the date of each annual meeting of
stockholders, each non-employee director who is reelected at such meeting shall
be granted an option to purchase 3,000 shares of Common Stock of the Company;
provided, however, that a non-employee director who is then serving as the
Chairman of the Board shall be granted an option to purchase 5,000 shares of
Common Stock of the Company. As of January 31, 1999, options to purchase 54,000
shares had been granted under the Directors' Plan. Options granted under the
Directors' Plan are not intended to qualify as incentive stock options under the
Code.
401(K) PLAN
The Company adopted a tax-qualified employee savings and retirement plan
under Section 401(k) of the Code (the "401(k) Plan") covering all of the
Company's employees. Pursuant to the 401(k) Plan, employees may elect to reduce
their current compensation by up to 15% of their salaries, but not in excess of
the statutory prescribed annual limit ($10,000 in 1998) and have the amount of
such reduction contributed to the 401(k) Plan. The Company currently matches 50%
of employee contributions up to 6% of an employee's salary, limited to the
maximum contribution allowable for income tax purposes. Employer contributions
vest proportionally over five years of service. Contributions to the 401(k) Plan
made by employees or by the Company, and income earned on such contributions
made by the Company, if any, will be deductible by the Company when made. The
401(k) Plan may be amended or discontinued at any time by the Company.
REPORT OF THE COMPENSATION AND STOCK OPTION COMMITTEE OF THE
BOARD OF DIRECTORS ON EXECUTIVE COMPENSATION(1)
The Company's executive compensation program is administered by the
Compensation and Stock Option Committee (the "Committee") of the Board. The
Committee is appointed by the Board and is comprised of three non-employee
directors. The non-employee directors that served on the Committee during fiscal
year 1998 were Messrs. Miller and Ekdahl and Dr. Watson.
The Committee is responsible for establishing and maintaining the Company's
policies governing employee compensation and administering the Company's
employee benefit plans. More specifically, the Committee establishes
compensation packages, bonus programs and employee benefit plans. In addition,
the Committee reviews and approves proposals made by management with respect to
the adoption of new plans or modification to existing plans, compensation
packages involving amounts over $100,000 per year and modifications to the bonus
plans.
COMPENSATION PHILOSOPHY
The Company's executive compensation philosophy strongly links management
pay with both the individual's and the Company's annual and long-term
performance. The Company's current compensation programs are designed to
attract, motivate, and retain senior management by providing compensation
- ---------------
(1) The material in this report is not "soliciting material," is not deemed
filed with the SEC and is not to be incorporated by reference into any
filing of the Company under the Securities Act of 1933, as amended, or the
Exchange Act whether made before or after the date hereof and irrespective
of any general incorporation language contained in such filing.
A-18
<PAGE> 28
packages that are competitive with local and national biotech companies. The
Company engages outside consultants to advise it with respect to its
compensation programs and consults various industry compensation surveys
including the Biotechnology Employee Development Coalition and Radford National
Salary and Benefits surveys.(2)
During the first quarter of each year, the Company's management proposes to
the Committee specific Company-wide objectives to be used as benchmark
performance indicators for that year. The Committee uses such objectives to
evaluate the Company's overall performance for the year, and subjectively
assesses each individual's contribution to such performance. Corporate
objectives for 1998 included (i) securing additional research support by
establishing and renewing collaborative research and license agreements; (ii)
advancing the Company's various drug discovery and development programs; (iii)
generating additional revenues by licensing various technologies; and (iv)
engaging additional corporate partners to further research and develop certain
of the Company's compounds.
COMPONENTS OF EXECUTIVE COMPENSATION
The components of the Company's executive compensation packages and the
objective criteria on which they are based are as follows:
Base Salary. With respect to determining the base salary of executive
officers, the Committee considers a variety of factors including the executive's
prior relevant experience, the level of responsibility, the individual's
performance, and the salaries of similar positions in the Company compared with
the salaries set forth in the local Biotechnology Employee Development Coalition
and Radford National Salary and Benefits surveys. Based on the foregoing factors
and the data generated in the surveys, the Committee then sets target salary
levels applicable to each executive officer. For fiscal 1998, the Committee set
established target salaries for each executive officer at levels within the
range of salary levels reflected in the surveys. The Committee made its target
salary determinations subjectively after considering the competitive nature of
the biotechnology industry and the Company's need to attract and retain talented
executive officers.
The Committee believes that its process for determining and adjusting the
base salary of executive officers is consistent and equitable with sound
personnel practices and the Company's general compensation philosophy. Annual
adjustments in base salaries are determined consistent with the foregoing and
typically are made at the end of the first quarter.
Annual Cash Bonuses. Annual cash bonus awards are an integral component of
an executive's overall compensation package and are intended to maintain
competitive compensation levels with other leading biotechnology companies as
well as to reinforce team building and provide a merit-based means of earning
additional compensation. The amount of each executive's cash bonus is determined
each year subjectively by the Committee based upon the factors outlined above
for base salary with the goal of establishing combined base salary and bonus
within the range of salary levels determined using the surveys. Cash bonuses are
also awarded if certain minimum corporate earning thresholds are met, even if
certain other objectives are not met. During the fiscal year 1998, cash bonuses
were paid to all executive officers of the Company.
Equity Incentive Awards. Generally, the Company grants equity incentive
awards in the form of stock options to executive officers concurrent with their
joining the Company. The amount of such grants are intended to reflect a new
hire's level of experience and position for which such person was hired. In
addition, annual grants of stock options are made with the objective to
strengthen the mutuality of interest between management and the Company's
stockholders. Grants made under the 1996 Equity Incentive Plan generally have a
term of 10 years and are normally tied to the market valuation of the Company's
Common Stock,
- ---------------
(2) The companies included in the survey are not necessarily the same as the
companies included in the market indices included in the performance graph
in this Proxy Statement. Although the compensation (salary and bonus)
surveys referred to above and the market indices included in the
performance graph are broad and include companies in related industries,
the surveys and indices were created for different purposes and accordingly
are not comparable.
A-19
<PAGE> 29
thereby providing an additional incentive for executives to build stockholder
value. In addition, grants are generally subject to vesting over four years,
with vesting tied to continued employment. Executives receive value from these
grants only if strategic goals are achieved and the Company's Common Stock
appreciates accordingly. This component of an executive's compensation package
is intended to retain and motivate executives to improve long-term stock market
performance. Additional long-term incentives are provided through the Company's
Employee Stock Purchase Plan in which all eligible employees may participate.
The level of the annual discretionary stock awards are based, in part, on
the executive's level of contribution to the Company during the prior year as
determined by the Committee using the factors specified above. The terms of the
Company's equity incentive plans pursuant to which it grants options to its
executive officers are comparable, in all material respects, to equity incentive
plans which are generally employed in the industry and which the Company
believes are competitive and reasonable.
CHIEF EXECUTIVE OFFICER COMPENSATION
The Committee uses the same procedures described above in setting the total
compensation package paid to the Company's Chief Executive Officer. The Chief
Executive Officer's total salary is based on comparisons with other companies
included in the surveys referred to above. In awarding annual stock options, the
Committee considers the Chief Executive Officer's performance with respect to
objective criteria established by the Committee and overall contribution to the
Company during the prior year. During 1998, the Chief Executive Officer was paid
a salary of $276,258, a cash bonus of $42,400 and was granted options to
purchase 30,000 shares of Common Stock of the Company. The Committee believes
that the total compensation package received by the Chief Executive Officer for
fiscal year 1998 was competitive within the industry and reflected his overall
contribution to the Company.
SECTION 162(M) OF THE INTERNAL REVENUE CODE
Section 162(m) of the Code limits the Company to a deduction for federal
income tax purposes of no more than $1 million of compensation paid to certain
Named Executive Officers in a taxable year. Compensation above $1 million may be
deducted if it is "performance-based compensation" within the meaning of the
Code.
The statute containing this law and the applicable regulations offer a
number of transitional exceptions to the 162(m) limitations on deductions for
pre-existing compensation plans, arrangements and binding contracts. As a
result, the Committee believes that at the present time it is quite unlikely
that the compensation paid to any Named Executive Officer in a taxable year
which is subject to the deduction limit will exceed $1 million. Therefore, the
Committee has not yet established a policy for determining which forms of
incentive compensation awarded to its executive officers shall be designed to
qualify as "performance-based compensation." The Committee intends to continue
to evaluate the effects of the statute and to comply with Section 162(m) of the
Code in the future to the extent consistent with the best interests of the
Company and its stockholders.
SUBMITTED BY THE COMPENSATION AND STOCK OPTION COMMITTEE OF THE BOARD OF
DIRECTORS
Gunnar Ekdahl William R. Miller James D. Watson
CERTAIN TRANSACTIONS
In July 1992, the Company loaned to Dr. Harpold $43,600 pursuant to a
promissory note bearing interest at the rate of 7.5% per annum. The entire loan
balance of $43,600 was forgiven as a provision of Dr. Harpold's June 1998
employment agreement. See "Executive Compensation -- Employment Agreements."
In February 1996, the Company loaned to Dr. Harpold $44,100 as the purchase
price for certain options to purchase Common Stock of the Company pursuant to a
promissory note bearing interest at the rate of 7.0% per annum. As of March 31,
1999, the total amount of principal and interest outstanding under the
promissory note was $53,771.
A-20
<PAGE> 30
The Company has entered into certain transactions with its directors, as
described under the caption "Executive Compensation -- Compensation of
Directors."
The Company has also entered into certain agreements with certain of its
current and former executive officers, as described under the captions
"Executive Compensation -- Employment Agreements" and "-- Change in Control
Arrangements."
The Company's Bylaws provide that the Company will indemnify its directors
and executive officers and may indemnify its other officers, employees and other
agents to the fullest extent permitted by Delaware law. The Company is also
empowered under its Bylaws to enter into indemnification contracts with its
directors and officers and to purchase insurance on behalf of any person whom it
is required or permitted to indemnify. Pursuant to this provision, the Company
has entered into indemnity agreements with each of its directors and officers.
In addition, the Company's Restated Certificate of Incorporation provides
that to the fullest extent permitted by Delaware law, the Company's directors
will not be liable for monetary damages for breach of the directors' fiduciary
duty of care to the Company and its stockholders. This provision in the
Certificate of Incorporation does not eliminate the duty of care, and in
appropriate circumstances equitable remedies such as an injunction or other
forms of non-monetary relief would remain available under Delaware law. Each
director will continue to be subject to liability for breach of the director's
duty of loyalty to the Company, for acts or omissions not in good faith or
involving intentional misconduct or knowing violations of law, for acts or
omissions that the director believes to be contrary to the best interests of the
Company or its stockholders, for any transaction from which the director derived
an improper personal benefit, for acts or omissions involving a reckless
disregard for the director's duty to the Company or its stockholders when the
director was aware or should have been aware of a risk of serious injury to the
Company or its stockholders, for acts or omissions that constitute an unexcused
pattern of inattention that amounts to an abdication of the director's duty to
the Company or its stockholders, for improper transactions between the director
and the Company, and for improper distributions to stockholders and loans to
directors and officers. This provision also does not affect a director's
responsibilities under any other laws, such as the federal securities laws or
state or federal environmental laws.
There is no pending litigation or proceeding involving a director, officer,
employee or other agent of the Company as to which indemnification is being
sought, nor is the Company aware of any pending or threatened litigation that
may result in claims for indemnification by any director, officer, employee or
other agent.
A-21
<PAGE> 31
SECURITY OWNERSHIP OF
CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the ownership
of the Company's Common Stock as of January 31, 1999 by: (i) each director; (ii)
each of the Named Executive Officers (as named in the Summary Compensation
Table); (iii) all directors and executive officers of the Company as a group;
and (iv) all those known by the Company to be beneficial owners of more than
five percent of the outstanding shares of Common Stock.
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP(1)
------------------------------------
BENEFICIAL OWNER NUMBER OF SHARES PERCENT OF TOTAL
---------------- ---------------- ----------------
<S> <C> <C>
The Salk Institute for Biological Studies..... 1,933,461 20.3%
10010 North Torrey Pines Road
La Jolla, California 92037
Biotechnology Value Fund, L.P.(2)............. 1,043,400 11.0%
333 West Wacker Drive, Suite 1600
Chicago, IL 60606
Novartis AG................................... 1,035,324 10.9%
Huenincerstrase
4056 Basel, Switzerland
Skandigen AB.................................. 986,696 10.4%
Norrlandsgatan 15
S-111 43 Stockholm, Sweden
Bristol-Myers Squibb Company.................. 658,000 6.9%
345 Park Avenue
New York, NY 10154
William T. Comer, Ph.D.(3).................... 374,885 3.9%
Stanley T. Crooke, M.D., Ph.D.(4)............. 20,250 *
Gunnar Ekdahl(5).............................. 23,500 *
Michael M. Harpold, Ph.D.(6).................. 157,234 1.6%
G. Kenneth Lloyd, Ph.D.(7).................... 64,662 *
David E. McClure, Ph.D.(8).................... 25,115 *
Ian A. McDonald, Ph.D.(9)..................... 77,706 *
Jeffrey F. McKelvy, Ph.D.(10)................. 0 *
William R. Miller(11)......................... 65,375 *
Frederick B. Rentschler(12)................... 29,250 *
James D. Watson, Ph.D.(13).................... 45,000 *
All executive officers and directors as a
group (12 persons)(14)...................... 810,627 8.2%
</TABLE>
- ---------------
* Less than one percent.
(1) This table is based upon information supplied by officers, directors and
principal stockholders and Schedules 13D and 13G, if any, filed with the
Securities and Exchange Commission (the "SEC"). Unless otherwise indicated
in the footnotes to this table and subject to community property laws where
applicable, the Company believes that each of the stockholders named in
this table has sole voting and investment power with respect to the shares
indicated as beneficially owned. Applicable percentages are based on
9,517,947 shares outstanding on January 31, 1999, adjusted as required by
the rules promulgated by the SEC.
(2) BVF Partners L.P., a Delaware limited partnership ("Partners"), is the
general partner of Biotechnology Value Fund, L.P., a Delaware limited
partnership ("BVF"). BVF Inc., a Delaware corporation ("BVF Inc."), is an
investment adviser to and the general partner of Partners. Mark N. Lampert,
an individual, is the sole stockholder, sole director and an officer of BVF
Inc. BVF may be deemed to have beneficial ownership of 495,500 shares of
Common Stock of the Company, and Partners and BVF Inc. may be deemed to
have beneficial ownership of 1,043,400 shares of Common Stock of the
Company.
A-22
<PAGE> 32
BVF shares voting and dispositive power over the 495,500 shares of Common
Stock it beneficially owns with Partners. Partners and BVF Inc. share
voting and dispositive power over the 1,043,400 shares of Common Stock they
beneficially own with, in addition to BVF, the managed accounts on whose
behalf Partners, as investment managers, purchased such shares.
(3) Includes 115,235 shares subject to options exercisable within 60 days of
January 31, 1999 and 259,650 shares held by the Comer Family Trust. Does
not include 235,000 shares held by the Comer Family Irrevocable Trust.
(4) Includes 19,250 shares subject to options exercisable within 60 days of
January 31, 1999.
(5) Includes 17,500 shares subject to options exercisable within 60 days of
January 31, 1999. Does not include 986,696 shares beneficially owned by
Skandigen AG, of which Mr. Ekdahl is a board member.
(6) Includes 81,424 shares subject to options exercisable within 60 days of
January 31, 1999, of which 14,687 shares were subject to accelerated
vesting as of March 31, 1999 pursuant to Mr. Harpold's employment agreement
with the Company. See "-- Employment Agreements."
(7) Includes 48,802 shares subject to options exercisable within 60 days of
January 31, 1999.
(8) Includes 22,030 shares subject to options exercisable within 60 days of
January 31, 1999.
(9) Includes 66,706 shares subject to options exercisable within 60 days of
January 31, 1999.
(10) Jeffrey F. McKelvy, Ph.D., joined the company as a director and Executive
Vice President and Chief Scientific Officer in April 1998.
(11) Includes 12,500 shares subject to options exercisable within 60 days of
January 31, 1999.
(12) Includes 29,250 shares subject to options exercisable within 60 days of
January 31, 1999. Does not include 1,933,461 shares beneficially owned by
The Salk Institute. Mr. Rentschler is currently the Chairman of the Board
of Trustees for The Salk Institute for Biological Studies.
(13) Includes 15,625 shares subject to options exercisable within 60 days of
January 31, 1999.
(14) Includes 364,081 shares subject to options exercisable within 60 days of
January 31, 1999.
A-23
<PAGE> 33
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
------- -----------
<S> <C>
Exhibit 1 Offer to Purchase dated August 6, 1999 (incorporated by
reference to Exhibit (a)(1) of the Schedule 14D-1 of Merck &
Co., Inc. and MC Subsidiary Corp. filed with the Securities
and Exchange Commission on August 6, 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 August 2, 1999.
Exhibit 4 Opinion Letter of CIBC World Markets Corp., dated July 30,
1999.*
Exhibit 5 Confidential Disclosure Agreement dated July 21, 1999
between the Company and Parent.
Exhibit 6 Agreement and Plan of Merger, dated July 30, 1999 between
the Company, the Parent and the Merger Sub (incorporated by
reference to Exhibit (c)(1) of the Schedule 14D-1).
Exhibit 7 Stock Option Agreement dated July 30, 1999 among the Parent,
the Merger Sub and the Company (incorporated by reference to
Exhibit (c)(3) of the Schedule 14D-1).
Exhibit 8 Shareholders Agreement dated July 30, 1999 between the
Parent, the Merger Sub 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 August 6, 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> 1
EXHIBIT 3
MERCK ACQUIRES SIBIA NEUROSCIENCES, INC., A CALIFORNIA-BASED
BIOTECHNOLOGY FIRM; ACQUISITION AUGMENTS MERCK'S DRUG DISCOVERY PROGRAM
WHITEHOUSE STATION, N.J. and LA JOLLA, Calif., Aug. 2 /PRNewswire/ --
Merck & Co., Inc., (NYSE: MRK), a research-driven pharmaceutical company, and
SIBIA Neurosciences, Inc., (Nasdaq: SIBI), a leading company in the biology and
chemistry of discovering drugs for central nervous system disorders, today
announced they have entered into a definitive agreement under which Merck will
acquire SIBIA for $8.50 per share in cash. Merck will commence a tender offer
for SIBIA shares by Aug. 6. The transaction will total approximately $87
million.
"Acquiring SIBIA will significantly enhance Merck's excellent basic
research capability in the field of central nervous system disorders," said
Bennett M. Shapiro, executive vice president of worldwide licensing and external
research, Merck Research Laboratories. "SIBIA researchers, who are among the
best in the biotechnology industry, have opened several avenues for potential
scientific discovery, and now we can further exploit them together."
William T. Comer, Ph.D., president, chief executive officer and director
of SIBIA, said: "By joining Merck, we will gain significant scientific,
technological and financial support to help exploit our broad drug discovery
platform and bring our basic research discoveries to the market. Merck has a
rich tradition of biomedical research, and we are proud to be joining it."
Richard N. Kender, Merck vice president of corporate development, said:
"In the search to discover and develop important medicines, Merck Research
Laboratories relies on its strong internal capability, and complements that with
external research collaborations. The acquisition of SIBIA strengthens our drug
discovery research capability."
"Merck already has a major CNS research facility in the United Kingdom
and it has been very successful," Dr. Shapiro said. "SIBIA augments our already
excellent CNS research and gives us a presence in the CNS research community in
the United States."
Upon closing of the agreement, SIBIA employees will become Merck
employees. Merck intends to keep SIBIA's existing facilities in La Jolla, Calif.
SIBIA stockholders owning approximately 33 percent of SIBIA's
outstanding shares have committed to support the transaction and have entered
into voting and option agreements, and SIBIA has granted Merck an option to
purchase other SIBIA shares under certain conditions. The acquisition is subject
to clearance under the Hart-Scott-Rodino Antitrust Improvements Act and the
acquisition of a majority of SIBIA shares by Merck, as well as other customary
conditions. The two companies expect to complete the acquisition in September
1999.
Founded in 1981, SIBIA is engaged in the discovery and development of
novel small molecule therapeutics for the treatment of neurodegenerative,
neuropsychiatric and neurological disorders. The company, which went public in
1996, is a leader in the development of proprietary drug discovery platforms and
technologies.
1.
<PAGE> 2
Merck is a global, research-driven pharmaceutical company that
discovers, develops, manufactures and markets a broad range of human and animal
health products, directly and through its joint ventures, and provides
pharmaceutical benefit services through Merck-Medco Managed Care.
SIBIA was represented by the investment banking firm CIBC World Markets.
(For more information about the companies, visit http://www.sibia.com
and http://www.merck.com.)
2.
<PAGE> 1
EXHIBIT 4
FAIRNESS OPINION LETTER
[CIBC WORLD MARKETS CORP. LETTERHEAD]
July 30, 1999
Personal and Confidential
The Board of Directors
SIBIA Neurosciences, Inc.
505 Coast Boulevard South, Suite 300
La Jolla, CA 92037
Gentlemen:
You have asked CIBC World Markets Corp. ("CIBC") to render a written
opinion ("Fairness Opinion") to the Board of Directors (the "Board") of SIBIA
Neurosciences, Inc. ("SIBIA" or the "Company") as to the fairness to the
shareholders of the common stock of the Company, from a financial point of view,
of the consideration to be received pursuant to the Agreement and Plan of Merger
(the "Merger Agreement") of even date herewith by and among Merck & Co., Inc.
("Merck"), MC Subsidiary Corp. ("MCS"), a wholly owned subsidiary of Merck, and
SIBIA. The Merger Agreement provides for, among other things, a transaction
whereby MCS will commence a tender offer to purchase all of the outstanding
common stock of SIBIA (the "Acquisition"). The purchase price shall be $8.50 per
share in cash for all of the outstanding shares of common stock and common stock
issuable upon the conversion of the Series B convertible preferred stock or
issued upon the exercise of outstanding options (the "Consideration").
In arriving at our Fairness Opinion, we:
(a) reviewed the Merger Agreement;
(b) reviewed the Shareholders Agreement;
(c) reviewed the Stock Option Agreement;
(d) reviewed SIBIA's annual reports to stockholders and its annual
report on Form 10-K for the fiscal years ended December 31, 1996, 1997, and
1998;
(e) reviewed SIBIA's quarterly report on Form 10-Q for the three
months ended March 31, 1998 and 1999;
(f) reviewed preliminary estimated statement of operations data for
the three months ended June 30, 1999 and financial projections of SIBIA
prepared by the Company's management;
(g) reviewed the historical market prices and trading volume for the
Company's common stock;
(h) held discussions with senior management of SIBIA with respect to
the business and prospects for future growth of the Company;
(i) reviewed and analyzed certain publicly available financial data
for certain companies we deemed comparable to SIBIA;
<PAGE> 2
The Board of Directors
SIBIA Neurosciences, Inc.
July 30, 1999
(j) performed discounted cash flow analyses of SIBIA using certain
assumptions of future performance provided to us by the management of the
Company;
(k) reviewed and analyzed certain publicly available financial
information for transactions that we deemed comparable to the Acquisition;
and
(l) performed such other analyses and reviewed such other information
as we deemed appropriate.
In rendering our Fairness Opinion we relied upon and assumed, without
independent verification or investigation, the accuracy and completeness of all
of the financial and other information provided to us by the Company and their
respective employees, representatives and affiliates. With respect to forecasts
of future financial condition and operating results of SIBIA provided to us, we
assumed at the direction of the Company's management, without independent
verification or investigation, that such forecasts were reasonably prepared on
bases reflecting the best available information, estimates and judgement of
SIBIA's management. We have neither made nor obtained any independent
evaluations or appraisals of the assets or the liabilities of SIBIA or such
other affiliated entities. We are not expressing any opinion as to the
underlying valuation, future performance or long term viability of SIBIA
following the Acquisition. Our Fairness Opinion is necessarily based on the
information available to us and general economic, financial and stock market
conditions and circumstances as they exist and can be evaluated by us on the
date hereof. It should be understood that, although subsequent developments may
affect this Fairness Opinion, we do not have any obligation to update, revise or
reaffirm the Fairness Opinion. We have not been requested to, and do not express
any opinion relating to the terms of the Shareholders Agreement pursuant to
which such holders have made certain agreements with respect to the shares of
SIBIA common stock held by them.
As part of our investment banking business, we are regularly engaged in
valuations of businesses and securities in connection with acquisitions and
mergers, underwritings, secondary distributions of securities, private
placements and valuations for other purposes.
We acted as financial advisor to SIBIA in connection with the Acquisition
and to the Board in rendering this Fairness Opinion and will receive a fee for
our services. In the ordinary course of its business, CIBC and its affiliates
may actively trade securities of SIBIA for their own account and for the
accounts of customers and, accordingly, may at any time hold a long or short
position in such securities.
Based upon and subject to the foregoing, it is our opinion that, as of the
date hereof, the Consideration to be received by holders of shares of SIBIA
common stock (other than Merck, MCS and any affiliates thereof) pursuant to the
Merger Agreement is fair to such holders from a financial point of view. This
Fairness Opinion is for the use of the Board. Neither this Fairness Opinion nor
the services provided by CIBC in connection herewith may be publicly disclosed
or referred to in any manner by SIBIA without the prior written approval by
CIBC. CIBC consents to the inclusion of this Fairness Opinion in its entirety
and any reference to this Fairness Opinion in any prospectus, proxy statement or
solicitation/recommendation statement, as the case may be.
Very Truly Yours,
/s/ CIBC World Markets Corp.
CIBC World Markets Corp.
<PAGE> 1
EXHIBIT 5
CONFIDENTIAL DISCLOSURE AGREEMENT
This Agreement (the "Agreement") is entered into as of this 23rd day of June
1999 by and between SIBIA Neurosciences, Inc., having a business address of 505
Coast Boulevard South, Suite 300, La Jolla, CA 92037 ("SIBIA") and Merck & Co.,
Inc., with an address of One Merck Drive, Whitehouse Station, NJ 08889-0100
("Recipient").
1. PROPOSED RELATIONSHIP. SIBIA wishes to assure the protection and
preservation of the confidential and/or proprietary nature of information to be
disclosed to Recipient in connection with a possible business relationship
between the parties (the "Proposed Relationship").
2. CONFIDENTIAL INFORMATION. Except as set forth in Paragraph 3, all
information disclosed by SIBIA to Recipient relating to the Proposed
Relationship is "Confidential Information" and shall include all information
relating to the existence and contents of this Agreement and SIBIA's
pharmaceutical business including patents, copyrights, patent or copyrights
applications, trade secrets, techniques, formulas, products, protocols, test
data, results, conclusions or reports relating to the Proposed Relationship or
studies conducted by SIBIA or authorized by SIBIA to be conducted, whether in
oral, written, graphic or electronic form. Recipient shall, upon the request of
SIBIA, return all Confidential Information and any copies of such to SIBIA.
Information disclosed orally shall be identified as confidential at the time of
disclosure, and summarized in writing promptly following such disclosure.
3. NONCONFIDENTIAL INFORMATION. Confidential Information shall not include
information which (i) at the time of disclosure is readily available in the
public domain, or thereafter becomes publicly available other than through a
breach of this Agreement; (ii) was already known to Recipient prior to its
disclosure by SIBIA as documented in Recipient's written records made prior to
such disclosure by SIBIA; (iii) is disclosed to Recipient by a third party who
has the right to disclose such information and does not restrict its
disclosure; (iv) is independently developed by an employee or agent of
Recipient without knowledge of SIBIA's Confidential Information; or (v) is
required by law to be disclosed by Recipient.
4. PERMITTED USE AND DISCLOSURE. Recipient may use Confidential Information
only for the purposes of evaluating or discussing the Proposed Relationship.
Recipient may disclose Confidential Information only to its directors,
officers, employees and agents (including, in the case of Merck, officers and
employees of Merck & Co., Inc.) who have a need to know in order to properly
evaluate the Proposed Relationship and who have been apprised of its
confidential and proprietary nature.
5. NONUSE AND NONDISCLOSURE. Recipient shall exercise at least the same
standard of care in safeguarding Confidential Information as Recipient
exercises in safeguarding its highest level of confidential or proprietary
information. Recipient shall not, for a period of five (5) years from the date
of this Agreement (i) disclose Confidential Information to any person who does
not have a need to know such information or to any third party, without SIBIA's
prior written consent; (ii) permit or engage in any use of Confidential
Information not authorized by this Agreement; or (iii) reproduce in any form
any Confidential Information, except as required to evaluate the Proposed
Relationship.
<PAGE> 2
Confidential Disclosure Act Page 2
6. NO LICENSE. This Agreement does not grant to Recipient any license to or
right in the Confidential Information. Nothing in this Agreement shall be
construed, by implication or otherwise, as an obligation to enter into any
further agreement concerning the Confidential Information, or as a grant of a
license to Recipient to use the Confidential Information other than for the
purposes set forth in this Agreement. If Recipient expresses an interest in
acquiring rights in the Confidential Information, the parties will explore the
possibility of working out a mutually satisfactory agreement for the commercial
use of said Confidential Information.
7. SPECIFIC PERFORMANCE. In the event of a material breach of this Agreement
by Recipient, Recipient agrees that SIBIA shall be entitled to seek specific
performance of Recipient's obligations under this Agreement, as well as for
such further relief as may be granted by a court of competent jurisdiction or
other body chosen by the parties to settle disputes.
8. NO AGENT RELATIONSHIP. Recipient is not an agent of SIBIA and Recipient
shall have no authority to act as an agent of SIBIA.
9. ENTIRE AGREEMENT. This Agreement contains the entire understandings
between the parties. Nothing contained in this Agreement shall be construed as
an obligation of either party to enter into further agreement or negotiations.
10. GOVERNING LAW. This Agreement shall be governed by the laws of the state
of California.
SIBIA NEUROSCIENCES, INC. MERCK & CO., INC.
By: /s/ STEPHEN F. KEANE By: /s/ RICHARD N. KENDER
------------------------------- -------------------------------
Name: Stephen F. Keane Name: Richard N. Kender
Title: VP Corporate Development Title: Vice President, FE&A
Business Development
Date: 6/23/99 Date: 6/21/99
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<PAGE> 1
EXHIBIT 9
[SIBIA NEUROSCIENCES, INC. LETTERHEAD]
August 6, 1999
To Our Stockholders:
I am pleased to inform you that on July 30, 1999, SIBIA Neurosciences, Inc.
(the "Company") entered into an Agreement and Plan of Merger (the "Merger
Agreement") with Merck & Co., Inc. ("Merck") and MC Subsidiary Corp., a wholly
owned subsidiary of Merck ("Offeror") pursuant to which Merck and Offeror have
commenced a cash tender offer to purchase all of the outstanding shares of
common stock of the Company (the "Shares") for $8.50 per Share, net to the
seller, in cash, through an Offer to Purchase dated August 6, 1999, which
together with the related Letter of Transmittal constitutes the "Offer." Under
the Merger Agreement, the Offer will be followed by a merger of Offeror into the
Company (the "Merger") in which any remaining Shares (other than Shares as to
which appraisal rights have been properly exercised and perfected, Shares held
in treasury by the Company or Shares owned by Merck or its affiliates) will be
converted into the right to receive $8.50 per Share in cash, without interest.
The tender offer is currently scheduled to expire at 12:00 midnight, New York
City time, on Thursday, September 2, 1999.
YOUR BOARD OF DIRECTORS HAS UNANIMOUSLY APPROVED THE OFFER AND THE MERGER,
UNANIMOUSLY DETERMINED THAT THE OFFER AND THE MERGER ARE FAIR TO, AND IN THE
BEST INTERESTS OF, THE COMPANY'S STOCKHOLDERS AND UNANIMOUSLY RECOMMENDS THAT
THE STOCKHOLDERS ACCEPT THE OFFER AND TENDER THEIR SHARES PURSUANT TO THE OFFER.
In arriving at its recommendations, the Board of Directors gave careful
consideration to a number of factors described in the attached Schedule 14D-9
that has been filed with the Securities and Exchange Commission, including,
among other things, the opinion of CIBC World Markets Corp. dated July 30, 1999
(a copy of which is included with the Schedule 14D-9), the financial adviser
retained by the Board of Directors, to the effect that the $8.50 in cash, to be
received by the holders of Shares in the Offer and Merger is fair, from a
financial point of view, to such holders.
In a separate arrangement, each of The Salk Institute for Biological
Studies, Skandigen AB and Dr. William Comer has agreed with Merck to tender
Shares held by such stockholder into the Offer and otherwise to support the
Merger. Such stockholders collectively beneficially own Shares representing
approximately 34.1% of the total Shares outstanding as of July 23, 1999.
In addition to the attached Schedule 14D-9 relating to the Offer, also
enclosed is the Offer to Purchase, dated August 6, 1999, of Offeror, 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 and provide instructions as to how to tender your Shares.
We urge you to read the enclosed material carefully.
The Board of Directors and the Company's management thank you for your
loyalty and support over the years.
Very truly yours,
/s/ WILLIAM T. COMER
President, Chief Executive Officer and
Director
