<PAGE> 1
SCHEDULE 14C
INFORMATION REQUIRED IN INFORMATION STATEMENT
SCHEDULE 14C INFORMATION
Information Statement Pursuant to Section 14(c) of the Securities Exchange Act
of 1934
Check the appropriate box:
[X] Preliminary Information Statement
[_] Confidential, for Use of the Commission Only (as permitted by Rule 14c-
5(d)(2))
[_] Definitive Information Statement
SIBIA NEUROSCIENCES, INC.
(Name of Registrant As Specified In Its Charter)
Payment of Filing Fee (Check the appropriate box):
[_] No fee required.
[X] Fee computed on table below per Exchange Act Rules 14c-5(g) and 0-11.
(1) Title of each class of securities to which transaction applies:
COMMON STOCK, $.001 PAR VALUE PER SHARE
(2) Aggregate number of securities to which transaction applies:
9,703,769 SHARES OF COMMON STOCK
(3) Per unit price or other underlying value of transaction
computed pursuant to Exchange Act Rule 0-11 (Set forth the
amount on which the filing fee is calculated and state how it
was determined):
$8.50 PER SHARE OF COMMON STOCK
(4) Proposed maximum aggregate value of transaction:
$85,935,212
(5) Total fee paid:
$17,187.04
[_] Fee paid previously with preliminary materials.
[X] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee
was paid previously. Identify the previous filing by registration
statement number, or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
$17,187.04
(2) Form, Schedule or Registration Statement No.:
SCHEDULE 14D-1
(3) Filing Party:
MERCK & CO., INC. AND MC SUBSIDIARY CORP.
(4) Date Filed:
AUGUST 6, 1999
<PAGE> 2
Preliminary Copies
SIBIA NEUROSCIENCES, INC.
505 Coast Boulevard, Suite 300
La Jolla, California 92037-4641
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON [____________ __], 1999
To the Stockholders of SIBIA NEUROSCIENCES, INC.:
A Special Meeting of Stockholders of SIBIA Neurosciences, Inc. (the
"Company"), a Delaware corporation, will be held on [________], [____________
__], 1999 at 9:00 a.m. (local time) at the executive offices of Merck & Co.,
Inc., which are located at One Merck Drive, Whitehouse Station, New Jersey
08889-0100, for the following purposes:
1. To consider and vote upon a proposal to approve and adopt an
Agreement and Plan of Merger (the "Merger Agreement") by and
among the Company, Merck & Co., Inc. ("Merck") and MC
Subsidiary Corp. ("Purchaser"), a Delaware corporation and a
direct wholly owned subsidiary of Merck, pursuant to which
Purchaser will be merged with and into the Company (the
"Merger") and each then outstanding share of common stock,
$.001 par value, including the associated rights (together
with the common stock, the "Shares"), of the Company (other
than Shares held by the Company, or owned by Merck, Purchaser
or any other subsidiary of Merck, which shall be canceled, and
other than Shares, if any (collectively, "Dissenting Shares"),
held by stockholders who have properly exercised appraisal
rights under Section 262 of the Delaware General Corporation
Law (the "DGCL")) will be converted into the right to receive
$8.50 per Share net to the seller in cash (subject to
reduction for any applicable federal backup withholding or
stock transfer taxes payable by the seller), without interest
thereon; and
2. To transact such other business as may properly come before
the Special Meeting.
WE ARE NOT ASKING YOU FOR A PROXY AND
YOU ARE REQUESTED NOT TO SEND US A PROXY
The Merger is the second step of a two-step transaction pursuant to
which Merck, as the owner of all of the capital stock of Purchaser, will acquire
the entire equity interest in the Company. The first step was a tender offer by
Purchaser for all of the Shares at $8.50 per Share net to the seller in cash
(subject to reduction for any applicable federal backup withholding or stock
transfer taxes payable by the seller), without interest thereon (the "Offer").
Purchaser purchased approximately 6,694,639 Shares upon the expiration of the
Offer on September 2, 1999, representing approximately 69% of the issued and
outstanding Shares.
As a result of the Offer, Purchaser has the right to vote at the
Special Meeting a sufficient number of the Shares to approve and adopt the
Merger Agreement without the affirmative vote of any other stockholder, thereby
assuring such approval and adoption. Pursuant to the Merger Agreement, Purchaser
is obligated to vote the Shares owned by it in favor of approving and adopting
the Merger Agreement. The Company currently anticipates that the Merger will be
effected on [________ __], 1999, or as promptly as possible thereafter.
On July 30, 1999, the Board of Directors of the Company unanimously
determined that the Merger Agreement and the transactions contemplated thereby,
including the Offer and the Merger, are fair to and in the best interests of the
stockholders of the Company, and approved the Merger Agreement and the
transactions contemplated thereby, including the Offer and the Merger.
By Order of the Board of Directors,
William R. Miller
Chairman of the Board of Directors
La Jolla, California
October [__], 1999
<PAGE> 3
SIBIA NEUROSCIENCES, INC.
505 COAST BOULEVARD SOUTH, SUITE 300
LA JOLLA, CALIFORNIA 92037-4641
INFORMATION STATEMENT
October [__], 1999
This Information Statement is being furnished by the Board of Directors
(hereinafter the "Board" or "Board of Directors") of SIBIA Neurosciences, Inc.,
a Delaware corporation (the "Company"), to the holders of the outstanding shares
of Common Stock, par value $.001 per share (the "Common Stock"), including the
associated preferred stock purchase rights issued pursuant to the Rights
Agreement, dated as of March 17, 1997, and amended as of July 30, 1999, between
the Company and ChaseMellon Shareholder Services L.L.C., as Rights Agent (the
"Rights" and, together with the Common Stock, the "Shares"), of the Company, in
connection with the proposed merger (the "Merger") of MC Subsidiary Corp., a
Delaware corporation ("Purchaser"), with and into the Company pursuant to an
Agreement and Plan of Merger, dated as of July 30, 1999 (the "Merger
Agreement"), by and among the Company, Purchaser, and Merck & Co., Inc., a New
Jersey corporation ("Parent" or "Merck"), a copy of which is attached hereto as
Annex I. As a result of the Merger, the Company will become a direct wholly
owned subsidiary of Parent and each issued and outstanding Share (other than any
Shares owned by the Company or by any subsidiary of the Company, or owned by
Purchaser, Parent or any other subsidiary of Parent and any Shares that are held
by stockholders who have not voted in favor of the Merger or consented thereto
in writing and who shall have demanded appraisal for such Shares in accordance
with Delaware law) shall be automatically converted into the right to receive
$8.50, in cash, without interest.
The Merger is the second step of a two-step transaction pursuant to
which Parent, as the owner of all of the capital stock of Purchaser, will
acquire the entire equity interest in the Company for an aggregate purchase
price of approximately $86 million in cash. The first step was a tender offer by
Purchaser for the outstanding Shares at $8.50 per Share net to the seller in
cash (the "Offer"). Purchaser acquired approximately 6,694,639 Shares upon the
consummation of the Offer on September 2, 1999, representing approximately 69%
of the issued and outstanding Shares on such date.
This Information Statement accompanies a Notice of Special Meeting of
Stockholders (the "Special Meeting") of the Company to be held on [______ __],
1999, at which time the Company's stockholders will be asked to consider and
vote upon a proposal to approve and adopt the Merger Agreement and such other
business as may properly come before the Special Meeting.
As a result of the consummation of Offer, Purchaser has the right to
vote a sufficient number of outstanding Shares at the Special Meeting to approve
and adopt the Merger Agreement without the affirmative vote of any other holder
of Shares, thereby assuring such approval and adoption. Pursuant to the terms of
the Merger Agreement, Purchaser is obligated to vote the Shares owned by it in
favor of approving and adopting the Merger Agreement. THE COMPANY CURRENTLY
ANTICIPATES THAT THE MERGER WILL BE CONSUMMATED ON [______ __], 1999, OR AS
PROMPTLY AS PRACTICABLE THEREAFTER.
WE ARE NOT ASKING YOU FOR A PROXY AND YOU ARE REQUESTED NOT TO SEND US
A PROXY.
This Information Statement is first being mailed to stockholders on or
about October [__], 1999.
This Information Statement is dated October [__], 1999.
<PAGE> 4
TABLE OF CONTENTS
Page
----
Summary.................................................................... 1
Selected Financial Information of the Company.............................. 4
Market Prices and Dividends................................................ 6
General; Special Meeting of Stockholders; Required Vote.................... 7
Payment for Shares......................................................... 7
Appraisal Rights........................................................... 9
The Merger................................................................. 10
Interests of Certain Persons in the Merger................................. 20
Certain Federal Income Tax Consequences of the Merger...................... 21
Regulatory Matters......................................................... 22
The Merger Agreement....................................................... 23
Stock Option Agreement..................................................... 32
Shareholders Agreement..................................................... 35
Selected Financial Data.................................................... 37
Source and Amount of Funds................................................. 40
Principal Stockholders and Stock Ownership of Management................... 40
Incorporation of Certain Documents by Reference............................ 42
Available Information...................................................... 43
Annex I - Merger Agreement
Annex II - Section 262 of the Delaware General Corporation Law
Annex III - CIBC World Markets Corp. Fairness Opinion
Annex IV - Complaint
Annex V - Annual Report on Form 10-K of SIBIA Neurosciences, Inc. for
Fiscal Year Ended December 31, 1998
Annex VI - Quarterly Report on Form 10-Q of SIBIA Neurosciences, Inc. for
the Quarterly Period Ended June 30, 1999
i
<PAGE> 5
SUMMARY
The following is a summary of certain information contained elsewhere
in this Information Statement. This summary may not contain all of the
information that is important to you. Reference is made to the more detailed
information contained, or incorporated by reference, in this Information
Statement and the Annexes hereto. Unless otherwise defined herein, capitalized
terms used in this summary have the respective meanings ascribed to them
elsewhere in this Information Statement.
YOU ARE URGED TO READ THIS INFORMATION STATEMENT AND THE ANNEXES HERETO
IN THEIR ENTIRETY. WE ARE NOT ASKING YOU FOR A PROXY AND YOU ARE REQUESTED NOT
TO SEND US A PROXY.
THE COMPANIES
The Company. According to the Company Form 10-K for the period ending
December 31, 1998, as filed with the Securities and Exchange Commission (the
"SEC"), the Company is engaged in the discovery and development of novel small
molecule therapeutics for the treatment of neurodegenerative, neuropsychiatric
and neurological disorders. The Company is a leader in the development of
proprietary drug discovery platforms that combine key tools necessary for modern
drug discovery, including genomics, high throughput screening, advanced
combinatorial chemistry techniques and pharmacology. The Company is a Delaware
corporation with its principal executive offices located at 505 Coast Boulevard
South, Suite 300, La Jolla, California, 92037-4641. The telephone number of the
Company at such offices is (858) 452-5892.
Purchaser. Purchaser is a newly incorporated Delaware corporation
organized in connection with the Offer and the Merger and a direct wholly owned
subsidiary of Parent. To date Purchaser has not conducted any business other
than in connection with the Offer and the Merger. The principal executive
offices of Purchaser are located at One Merck Drive, Whitehouse Station, New
Jersey 08889-0100. The telephone number of Purchaser at such offices is (908)
423-1000.
Parent. Parent 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.
Parent's operations are principally managed on a products and services
basis. At the end of 1998, Parent had 57,300 employees worldwide. For the year
ended December 31, 1998, Parent had sales of approximately $26.9 billion, and
net income of approximately $5.2 billion. Parent's stockholders' equity at
December 31,1998 was approximately $12.8 billion. Parent is a New Jersey
corporation with its principal executive offices located at One Merck Drive,
Whitehouse Station, New Jersey 08889-0100. The telephone number of Parent at
such offices is (908) 423-1000.
Each of the Company and Parent is subject to the informational
requirements of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), and in accordance therewith, files reports, proxy statements and other
information with the SEC. Such reports, proxy statements and other information
can be inspected and copied at the public reference facilities of the SEC as set
forth under "Available Information" below.
GENERAL
This Information Statement is being furnished by the Company in
connection with the proposed Merger of Purchaser into the Company pursuant to
the Merger Agreement. As a result of the Merger, the Company will become a
direct wholly owned subsidiary of Parent and each issued and outstanding Share
(other than any Shares owned by the Company or by any subsidiary of the Company,
or owned by Purchaser, Parent or any other subsidiary of Parent and any Shares
that are held by stockholders who have not voted in favor of the Merger or
consented thereto in writing and who shall have demanded appraisal for such
Shares in accordance with Delaware law) will be converted into the right to
receive $8.50 in cash, without interest.
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<PAGE> 6
The Merger is the second step of a two-step transaction pursuant to
which Parent, as the owner of all of the capital stock of Purchaser, will
acquire the entire equity interest in the Company for an aggregate purchase
price of approximately $86 million in cash. The first step was the Offer.
Purchaser acquired approximately 6,694,639 Shares at $8.50 per Share upon the
consummation of the Offer on September 2, 1999, representing approximately 69%
of the issued and outstanding Shares on such date.
Pursuant to the Merger Agreement, and effective upon the consummation
of the Offer, four of the six members of the Board of Directors resigned as
directors, and four persons designated by Parent were appointed as members of
the Board of Directors to fill vacancies on the Board by the remaining
directors, all in accordance with the Company's Certificate of Incorporation and
Bylaws, both as amended.
SPECIAL MEETING OF STOCKHOLDERS; REQUIRED VOTE
The Special Meeting of Stockholders will be held on [_______ __], 1999,
at 9:00 a.m. (local time) at the principal executive offices of Merck at One
Merck Drive, Whitehouse Station, New Jersey 08889-0100. At the Special Meeting,
stockholders will be asked to consider and vote upon a proposal to approve and
adopt the Merger Agreement and such other proposals as may be properly brought
before the Special Meeting.
Under Delaware law and the Company's Certificate of Incorporation, the
affirmative vote of a majority of the issued and outstanding Shares is required
to approve and adopt the Merger Agreement at the Special Meeting. Only holders
of record of Shares at the close of business on [_______ __], 1999 (the "Record
Date") are entitled to notice of and to vote at the Special Meeting. At such
date there were [_______] Shares outstanding, each of which will be entitled to
one vote on each matter to be acted upon or which may properly come before the
Special Meeting.
As a result of the Offer, Purchaser was the holder of record of
[_______] Shares on the Record Date, constituting approximately [___]% of the
[_______] Shares issued and outstanding on the Record Date. Pursuant to the
terms of the Merger Agreement, Purchaser is obligated to vote all such Shares in
favor of approving and adopting the Merger Agreement. Under Delaware law and the
Company's Certificate of Incorporation, the affirmative vote such Shares owned
by Purchaser is sufficient to approve and adopt the Merger Agreement without the
affirmative vote of any other holder of Shares, thereby assuring such approval
and adoption.
PAYMENT FOR SHARES
Upon consummation of the Merger, the Company will make available to
Norwest Bank Minnesota, N.A., as paying agent (the "Paying Agent"), for the
holders of record of Shares, as needed, the aggregate amount of cash to be paid
in respect of the Shares converted into the right to receive $8.50 per Share, in
cash, without interest, pursuant to the Merger. Holders of record should use the
Letter of Transmittal to be provided under separate cover to effect the
surrender of certificates evidencing Shares in exchange for $8.50 per Share, in
cash, without interest. All certificates so surrendered will be cancelled. Upon
consummation of the Merger and surrender of a certificate evidencing Shares,
together with a duly executed Letter of Transmittal, the holder thereof will
receive $8.50 per Share, in cash, without interest. Any cash held by the Paying
Agent that remains unclaimed by stockholders for six months after the effective
time of the Merger will be returned to the Company, as the Surviving Corporation
(the "Surviving Corporation") in the Merger, upon demand and thereafter
stockholders may look, subject to applicable abandoned property, escheat and
other similar laws, only to the Company for payment thereof.
A Letter of Transmittal will be sent to all stockholders of the Company
under separate cover after the effective time of the Merger. The Letter of
Transmittal will advise such holder of the procedures for surrendering to the
Paying Agent certificates evidencing Shares in exchange for $8.50 per Share, in
cash, without interest. See "Payment for Shares."
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<PAGE> 7
APPRAISAL RIGHTS
Under Delaware law, holders of Shares who do not vote to approve the
Merger each of whom otherwise strictly comply with applicable requirements of
the General Corporation Law of the State of Delaware (the "DGCL") may dissent
from the Merger and demand payment in cash from the Company of the fair value of
their Shares. See "Appraisal Rights."
THE MERGER
Background of the Merger. For a description of the events leading up to
the approval of the Merger Agreement by the Board of Directors, see "The
Merger--Background of the Offer and the Merger."
Recommendation of the Company's Board of Directors; The Company's
Reasons for the Merger. On July 30, 1999, the Board of Directors determined that
the Merger Agreement and the transactions contemplated thereby, including the
Offer and the Merger, are advisable, fair to and in the best interests of the
stockholders of the Company, and approved the Merger Agreement and the
transactions contemplated thereby, including the Offer and the Merger.
The Board of Directors' decision to approve the Merger Agreement and
the Merger was, among other things, based upon its analysis of the Company's
current financial condition including its significant need to raise additional
capital, the nature and strength of competing companies and the opinion of its
financial advisor that the consideration to be received by the stockholders in
the Offer and the Merger is fair to such stockholders from a financial point of
view. See "The Merger--Background of the Offer and the Merger."
Parent's Reasons for the Merger. The purpose for the Merger is for
Parent to acquire all Shares not purchased pursuant to the Offer. Parent
acquired control of, and a majority of the entire equity interest in, the
Company, and, upon consummation of the Merger, the Company will become a direct
or indirect wholly owned subsidiary of Parent. See "The Merger--Parent's Reasons
for the Merger."
Opinion of Financial Advisor. CIBC World Markets Corp. ("CIBC"), the
Company's financial advisor, has delivered to the Company its written opinion to
the effect that, as of July 30, 1999, the date of the Merger Agreement, and
subject to the various assumptions and limitations stated therein, the cash
consideration to be received by the stockholders of the Company pursuant to the
Offer and the Merger is fair to such stockholders from a financial point of
view. CIBC was not requested to, and has not, updated its opinion. The complete
opinion of CIBC which sets forth the assumptions made, matters considered and
limits of its review, is attached to this Information Statement as Annex III and
should be read in its entirety. See "The Merger--Opinion of Financial Advisor."
Interests of Certain Persons in the Merger. Certain existing and former
members of the Company's management and the Board of Directors (as well as
employees of the Company) have interests in the Merger other than as
stockholders relating to, among other things, (i) the acceleration of the
exercisability of outstanding options to purchase Shares and (ii) the terms of
the Company's severance plan for eligible officers, providing for cash payments
and other benefits upon termination of employment. See "Interests of Certain
Persons in the Merger."
Accounting Treatment of the Merger. The Merger will be accounted for
under the purchase method of accounting whereby the purchase price will be
allocated based on the fair value of the assets acquired and the liabilities
assumed by Parent. See "The Merger--Accounting Treatment of the Merger."
Purpose of the Merger. The purpose of the Merger is to enable Parent,
through Purchaser, to acquire the remaining equity interest in the Company not
currently owned by Purchaser.
Conditions to the Merger. The Merger is subject to the approval of the
Company's stockholders and to the condition that no legal restraint or
prohibition shall be in effect which would prevent the consummation of the
Merger. The Company is not currently aware of the existence of any such
restraint or prohibition. Assuming the satisfaction of such conditions, it is
expected that the Merger will be consummated on [_______ __], 1999, or as
promptly as practicable thereafter. See "The Merger Agreement--Conditions to the
Merger."
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<PAGE> 8
Federal Income Tax Consequences of the Merger. The receipt of cash
pursuant to the Merger Agreement or the exercise of appraisal rights will be a
taxable transaction for federal income tax purposes. See "The Merger--Certain
Federal Income Tax Consequences of the Merger." Stockholders are urged to
consult their own tax advisors as to the particular tax consequences of the
Merger to them, including the applicability and the effect of federal, state,
local, foreign and other tax laws. See "Federal Income Tax Consequences of the
Merger."
Regulatory Matters. The parties received early termination of the
waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976,
as amended (the "HSR Act"), on August 20, 1999. The Company is not aware of any
other federal, state or foreign regulatory requirements that remain to be
complied with in order to consummate the Merger. See "Regulatory Matters."
SELECTED FINANCIAL INFORMATION OF THE COMPANY
Set forth below is certain selected historical consolidated financial
data with respect to the Company, excerpted or derived from the company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1998, as well as the
Company's Quarterly Report on Form 10-Q for the quarterly period ending June 30,
1999, each as filed with the SEC pursuant to the Exchange Act. More
comprehensive financial information is included in such reports and other
documents filed by the Company with the SEC. Such reports and other documents
are available for inspection, and copies thereof are obtainable in the manner
set forth below under "Available Information" below. All amounts shown are in
thousands, except per share data.
SIBIA NEUROSCIENCES, INC.
SELECTED HISTORICAL FINANCIAL DATA
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1998 1997 1996 1995 1994
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Total Revenue............................... $ 7,043 $ 11,197 $ 8,481 $ 10,448 $ 4,852
Research and development expenses........... $ 18,247 $ 15,819 $ 12,268 $ 8,949 $ 8,663
Net income (loss)........................... $ (15,807) $ (7,593) $ (5,564) $ 2,926 $ (27)
Basic net income (loss) per common share....
$ (1.68) $ (0.82) $ (0.73) $ 0.60
Diluted net income (loss) per common share..
$ (1.68) $ (0.82) $ (0.73) $ 0.47
Shares used in computing basic net income
(loss) per common share.................. 9,421 9,248 7,596 4,893
Shares used in computing diluted net
income (loss) per common share........... 9,421 9,248 7,596 6,164
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31,
1998 1997 1996 1995 1994
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and investment
securities.......................... $ 17,187 $ 33,347 $ 37,464 $ 16,488 $ 5,944
Working Capital........................ $ 13,662 $ 31,214 $ 35,324 $ 14,338 $ 4,523
</TABLE>
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<PAGE> 9
<TABLE>
<S> <C> <C> <C> <C> <C>
Total Assets........................... $ 21,199 $ 36,180 $ 39,983 $ 18,251 $ 8,005
Long-term debt, less current portion... $ 1,350 $ 695 $ 519 $ 721 $ 860
Accumulated deficit.................... $ (45,093) $ (29,286) $ (21,693) $ (16,129) $ (19,055)
Total stockholders' equity............. $ 15,140 $ 32,214 $ 36,572 $ 15,107 $ 5,166
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30,
1999 1998
---- ----
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
STATEMENT OF OPERATIONS DATA (UNAUDITED):
<S> <C> <C>
Total revenue (A)........................................................ $ 4,221 $ 2,361
Research and development expenses........................................ $ 3,951 $ 4,514
Net loss................................................................. $ (499) $(2,451)
Basic and diluted net loss per common share (B).......................... $ (0.05) $ (0.26)
Shares used in computing basic and diluted net loss per common share..... 9,662 9,391
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
1999 1998
---- ----
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
STATEMENT OF OPERATIONS DATA (UNAUDITED):
<S> <C> <C>
Total revenue (A)........................................................ $ 6,736 $ 3,895
Research and development expenses........................................ $ 8,453 $ 9,310
Net loss................................................................. $(3,339) $(6,503)
Basic and diluted net loss per common share (B).......................... $ (0.35) $ (0.69)
Shares used in computing basic and diluted net loss per common share..... 9,593 9,378
</TABLE>
<TABLE>
<CAPTION>
AT JUNE 30, 1999
BALANCE SHEET DATA (UNAUDITED): (IN THOUSANDS)
<S> <C>
Cash and cash equivalents............................................ $ 15,809
Investment securities................................................ 2,779
Total assets......................................................... 23,708
Long-term debt, less current portion................................. 1,296
Accumulated deficit.................................................. (48,432)
Total stockholders' equity.................................. 16,975
</TABLE>
(A) During the first six months of 1999, the Company entered into licensing
agreements with Bristol-Myers Squibb, SmithKline Beecham, and American Home
Products. The agreements grant the licensees non-exclusive
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<PAGE> 10
rights to use the Company's patented transcription-based assay technology. The
Company expects to receive annual maintenance payments as well as royalties on
the sales of any products identified using the licensed technology.
In May 1999, the Company entered into a collaborative agreement with
Eli Lilly and Company to research and develop compounds effective in treating
disorders of the central nervous system. The Company and Lilly will work
together to identify and optimize compounds selective for subtypes of nicotinic
acetylcholine receptors (nAChRs). Under the terms of the agreement, Lilly made a
$5 million equity investment, for one share of the Company's Series B
Convertible Non-Voting Preferred Stock, and will make payments of approximately
$5.5 million per year for research support. The agreement has a minimum initial
term of two years, although it may be terminated earlier in connection with a
change in control of the Company. Eli Lilly was granted exclusive worldwide
rights, subject to some limitations, to manufacture and market products it or
the Company discovers during the research collaboration. The Company is entitled
to receive milestone payments at certain stages of development of product
candidates, if any are identified, and royalties on sales of products that are
developed.
In July 1999, the Company entered into an agreement with Pharmacia & Upjohn
Company. Under the agreement, the Company licensed to Pharmacia & Upjohn
non-exclusive rights to use its patented transcription-based assay technology.
The Company will receive annual maintenance payments as well as royalties on the
sales of any products identified using the licensed technology.
In August 1999, the Company entered into a non-exclusive license agreement for
its transcription-based assay patent portfolio with Glaxo Wellcome. The
agreement grants Glaxo Wellcome and its affiliates a fully paid-up, worldwide
license to certain patents in the Company's transcription-based assay patent
portfolio. Glaxo Wellcome also has the option of obtaining a fully paid-up
license to two additional patents at the conclusion of certain proceedings.
Under the terms of the agreement, the Company will receive an up-front payment
and additional payments should Glaxo Wellcome exercise its options.
(B) For all periods presented, both basic and diluted loss per common share are
computed based on the weighted average number of shares of Common Stock
outstanding during the period. Stock options and conversion of the Series B
Convertible Preferred Stock, could potentially dilute basic earnings per share
in the future but were excluded from the computation of diluted loss per share
as their effect is antidilutive for the periods presented. Common share
equivalents that would have been included in the computation of diluted loss per
common share if they were not antidilutive totaled 494,700, and 596,260 for the
three months ended June 30, 1999 and June 30, 1998, respectively, and 423,020,
and 576,646 for the six months ended June 30, 1999 and June 30, 1998,
respectively.
MARKET PRICES AND DIVIDENDS
The Shares are included for trading on the National Association of
Securities Dealers Automated Quotation National Market System ("NASDAQ/NMS")
under the trading symbol "SIBI." The following table sets forth, for the periods
indicated, the high and low bid quotations per Share on the NASDAQ/NMS for the
applicable periods.
<TABLE>
<CAPTION>
HIGH LOW
<S> <C> <C>
1997
First Quarter......................................................... $9 1/2 $7 1/2
Second Quarter........................................................ 9 5 1/4
Third Quarter......................................................... 9 1/8 6
Fourth Quarter........................................................ 9 5 5/8
1998
First Quarter......................................................... $7 1/4 $5
Second Quarter........................................................ 7 3/4 4 7/8
Third Quarter......................................................... 5 1/4 2 1/2
Fourth Quarter........................................................ 6 3/4 3
1999
First Quarter......................................................... $6 3/8 $3 1/2
Second Quarter........................................................ 5 3/4 3 11/16
Third Quarter (through [ ], 1999)......................... [____] [____]
</TABLE>
On July 30, 1999, the last full trading day prior to the announcement
of the execution of the Merger Agreement and of Purchaser's intention to
commence the Offer, the closing price per Share as reported on the NASDAQ/NMS
was $5-1/4. On August 5, 1999, the last full trading day prior to the
commencement of the Offer, the closing price per Share as reported on the
NASDAQ/NMS was $8-7/16. On October [__], 1999, the last full trading prior to
the commencement of the mailing of this Information Statement, the closing price
per Share as reported on the NASDAQ/NMS was [$_______]. Stockholders are urged
to obtain current market quotations for the Shares.
The Company has never declared or paid cash dividends on the Shares.
The Merger Agreement provides that, except as may be agreed to in writing by
Parent, the Company may not declare, set aside or pay any dividends
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<PAGE> 11
on or make any other distributions in respect of any of its capital stock.
GENERAL; SPECIAL MEETING OF STOCKHOLDERS; REQUIRED VOTE
The Offer and Merger. This Information Statement is being furnished by
the Company in connection with the proposed Merger of Purchaser into the Company
pursuant to the Merger Agreement. As a result of the Merger, the Company will
become a direct wholly owned subsidiary of Parent and each issued and
outstanding Share (other than any Shares owned by the Company or by any
subsidiary of the Company, or owned by Purchaser, Parent or any other subsidiary
of Parent and any Shares that are held by stockholders who have not voted in
favor of the Merger or consented thereto in writing and who shall have demanded
appraisal for such Shares in accordance with Delaware law) shall be
automatically converted into, and exchanged for, the right to receive $8.50, in
cash, without interest.
The Merger is the second step of a two-step transaction pursuant to
which Parent, as the owner of all of the capital stock of Purchaser, will
acquire the entire equity interest in the Company for an aggregate purchase
price of approximately $86 million in cash. The first step was the Offer.
Purchaser acquired approximately 6,694,639 Shares upon the consummation of the
Offer on September 2, 1999 for $8.50 per Share in cash, representing
approximately 69% of the issued and outstanding Shares on such date.
Pursuant to the Merger Agreement, and effective upon the consummation of
the Offer, four of the six members of the Board of Directors (Dr. Stanley T.
Crooke, Dr. Jeffrey F. McKelvy, Dr. James D. Watson and Mr. Gunnar Ekdahl)
resigned as directors, and four persons designated by Parent (Judy C. Lewent,
Mary M. McDonald, Roger M. Perlmutter and Edward M. Scolnick, M.D.) were
appointed as members of the Board of Directors to fill vacancies on the Board by
the remaining directors, all in accordance with the Company's Certificate of
Incorporation and Bylaws, both as amended.
Time and Location of the Special Meeting. The Special Meeting will be
held on [_______ __], 1999, at 9:00 a.m. (local time) at the principal executive
offices of Merck at One Merck Drive, Whitehouse Station, New Jersey 08889-0100.
At the Special Meeting, stockholders will be asked to consider and vote upon a
proposal to approve and adopt the Merger Agreement and such other proposals as
may be properly brought before the Special Meeting. Representatives of the
Company's accountants are not expected to be present at the Special Meeting.
Required Vote. Under Delaware law and the Company's Certificate of
Incorporation, the affirmative vote of a majority of the issued and outstanding
Shares is required to approve and adopt the Merger Agreement at the Special
Meeting. Only holders of record of Shares at the close of business on the Record
Date are entitled to notice of and to vote at the Special Meeting. At such date
there were [_______] Shares outstanding, each of which will be entitled to one
vote on each matter to be acted upon or which may properly come before the
Special Meeting.
As a result of the Offer, Purchaser was the holder of record of
approximately 6,694,639 Shares on the Record Date, constituting approximately
69% of the [_______] Shares outstanding on the Record Date. Pursuant to the
terms of the Merger Agreement, Purchaser is obligated to vote all such Shares in
favor of approving and adopting the Merger Agreement. Under Delaware law and the
Company's Certificate of Incorporation, the affirmative vote of such Shares is
sufficient to approve and adopt the Merger Agreement without the affirmative
vote of any other holder of Shares, thereby assuring such approval and adoption.
The Company currently anticipates that the Merger will be effected on
[_______ __], 1999, or as promptly as practicable thereafter. The Merger will
become effective upon the filing of a certificate of merger with the Secretary
of State of the State of Delaware in accordance with the General Corporation Law
of the State of Delaware. As used in this Information Statement, "Effective
Time" means the effective time of the Merger under the DGCL.
PAYMENT FOR SHARES
General. Upon consummation of the Merger, the Company will make
available to the Paying Agent for the holders of record of Shares, as needed,
the aggregate amount of cash to be paid in respect of the Shares converted into
the right to receive $8.50 per share, in cash, without interest, pursuant to the
Merger. Holders of
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<PAGE> 12
record should use a Letter of Transmittal to effect the surrender of
certificates evidencing Shares in exchange for $8.50 per Share, in cash, without
interest. All certificates so surrendered will be cancelled. Upon consummation
of the Merger and surrender of certificates evidencing Shares, together with a
duty executed Letter of Transmittal, the holder of record thereof will receive
$8.50 per Share, in cash, without interest. Any cash held by the Paying Agent
that remains unclaimed by stockholders for six months after the Effective Time
will be returned to the Surviving Corporation upon demand and thereafter
stockholders may look only to the Surviving Corporation for payment thereof.
Letter of Transmittal. A Letter of Transmittal will be sent to all
stockholders of record of the Company after the Effective Time under separate
cover. The Letter of Transmittal will advise such holders of the procedures for
surrendering to the Paying Agent certificates evidencing Shares in exchange for
$8.50 per Share, in cash, without interest.
Valid Surrender of Shares. For Shares to be validly surrendered
pursuant to the Merger, a Letter of Transmittal (or a manually signed facsimile
thereof), properly completed and duly executed, with any required signature
guarantees, must be received by the Paying Agent, at one of its addresses set
forth in the Letter of Transmittal and either (i) certificates representing
Shares must be received by the Paying Agent or (ii) such Shares must be
delivered by book-entry transfer.
Book-Entry Transfer. The Paying Agent will establish an account with
respect to the Shares at The Depository Trust Company (the "Book-Entry Transfer
Facility") for purposes of the Merger. Any financial institution that is a
participant in the Book-Entry Transfer Facility's systems may make book-entry
delivery of Shares by causing the Book-Entry Transfer Facility to transfer such
Shares into the Paying Agent's account at the Book-Entry Transfer Facility in
accordance with the Book-Entry Transfer Facility's procedure for such transfer.
Signature Guarantees. No signature guarantee is required on the Letter
of Transmittal (i) if the Letter of Transmittal is signed by the registered
holder (which term includes any participant in the Book-Entry Transfer
Facility's systems whose name appears on a security position listing as the
owner of the Shares) of Shares delivered therewith and such registered holder
has not completed either the box entitled "Special Delivery Instructions" or the
box entitled "Special Payment Instructions" on the Letter of Transmittal or (ii)
if such Shares are delivered for the account of a financial institution
(including most commercial banks, savings and loan associations and brokerage
houses) that is a participant in the Securities Transfer Agents Medallion
Program (an "Eligible Institution"). In all other cases, all signatures on the
Letter of Transmittal must be guaranteed by an Eligible Institution. If
certificates are registered in the name of a person other than the signer of the
Letter of Transmittal, or if payment is to be made to a person other than the
registered holder of the certificates surrendered, the delivered certificates
must be endorsed or accompanied by appropriate stock powers, signed exactly as
the name or names of the registered holders appear on the certificates, with the
signatures on the certificates or stock powers guaranteed as described above and
as provided in the Letter of Transmittal.
THE METHOD OF DELIVERY OF CERTIFICATES FOR SHARES, THE LETTER OF
TRANSMITTAL AND ANY OTHER REQUIRED DOCUMENTS, INCLUDING DELIVERY THROUGH THE
BOOK-ENTRY TRANSFER FACILITY, IS AT THE OPTION AND RISK OF THE STOCKHOLDER AND
THE DELIVERY WILL BE DEEMED MADE ONLY WHEN ACTUALLY RECEIVED BY THE PAYING
AGENT. IF DELIVERY IS MADE BY MAIL, REGISTERED MAIL WITH RETURN RECEIPT
REQUESTED, PROPERLY INSURED, IS RECOMMENDED.
Backup Federal Income Tax Withholding. Under the federal income tax
laws, unless an exception applies under the applicable rules and regulations,
the Paying Agent will be required to withhold 31% of the amount of any payments
made to stockholders pursuant to the Merger. To prevent such backup federal
income tax withholding with respect to the $8.50 per Share, in cash, without
interest, payable to a stockholder, such stockholder must generally provide the
Paying Agent with such stockholder's correct taxpayer identification number and
certify that such stockholder is not subject to backup federal income tax
withholding by completing the substitute Form W-9 included in the Letter of
Transmittal. If the stockholder is a nonresident alien or foreign entity not
subject to backup withholding, such stockholder must give the Paying Agent a
completed Form W-8 Certificate of Foreign Status prior to the receipt of any
payments.
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<PAGE> 13
APPRAISAL RIGHTS
Stockholders of the Company are entitled to appraisal rights under
Section 262 of the DGCL ("Section 262") as to Shares owned by them. Set forth
below is a summary description of Section 262. Section 262 is reprinted in its
entirety as Annex II to this Information Statement. All references in Section
262 and in this summary to a "stockholder" are to the record holder of the
Shares as to which appraisal rights are asserted. A person having a beneficial
interest in Shares that are held of record in the name of another person, such
as a broker or nominee, must act promptly to cause the record holder to follow
the steps summarized below properly and in a timely manner to perfect whatever
appraisal rights the beneficial owner may have.
FOR MORE DETAIL REGARDING APPRAISAL RIGHTS, SEE ANNEX II. THIS SUMMARY
AND ANNEX II SHOULD BE REVIEWED CAREFULLY BY ANY HOLDER WHO WISHES TO EXERCISE
STATUTORY APPRAISAL RIGHTS OR WHO WISHES TO PRESERVE THE RIGHT TO DO SO BECAUSE
FAILURE TO COMPLY STRICTLY WITH THE PROCEDURES SET FORTH HEREIN AND THEREIN WILL
RESULT IN THE LOSS OF APPRAISAL RIGHTS.
In accordance with Section 262, any stockholder may, before the vote at
the Special Meeting upon the proposal to approve and adopt the Merger Agreement,
demand in writing from the Company the appraisal of the fair value of such
stockholder's Shares. Such demand must reasonably inform the Company of the
identity of the stockholder and that the stockholder intends thereby to demand
the appraisal of such stockholder's Shares. A written demand for appraisal will
be ineffective if, among other things, (i) the demand is not executed by the
record owner, on the date of such demand of the Shares for which appraisal is
sought (or a duly authorized agent of such record owner), (ii) the record owner
fails to hold such Shares continuously through the Effective Time, (iii) the
record owner does not properly demand an appraisal as summarized in this
paragraph and the following paragraphs (and more fully in Section 262), (iv) the
Shares for which appraisal is sought are voted in favor of the proposal to
approve and adopt the Merger Agreement, (v) the Shares for which appraisal is
sought are exchanged for the merger consideration, or (vi) no petition for
appraisal is filed with the Delaware Court of Chancery within 120 days after the
Effective Time. A stockholder who elects to exercise appraisal rights must mail
or deliver such stockholder's written demand to the Company at 505 Coastal
Boulevard South, Suite 300, La Jolla, California 92037, Attention: Thomas A.
Reed, Chief Financial Officer. A demand for appraisal will not be effective if
it is not actually received by the Company before the vote at the Special
Meeting upon the proposal to approve and adopt the Merger Agreement. A vote
against the Merger or a failure to vote for the Merger would not by itself
constitute sufficient notice of a stockholder's election to exercise appraisal
rights.
Only a stockholder of record on the date a demand for appraisal is made
is entitled to assert appraisal rights for Shares registered in the name of such
stockholder. A demand for appraisal must be executed by or for the stockholder
of record, fully and correctly, as such stockholder's name appears on the
certificate or certificates representing his Shares. If the Shares are owned of
record in a fiduciary capacity, such as by a trustee, guardian, or custodian,
such demand must be executed by the fiduciary. If the Shares are owned of record
by more than one person, as in a joint tenancy or tenancy in common, such demand
must be executed by all joint owners. An authorized agent, including an agent
for two or more joint owners, may execute the demand for appraisal for a
stockholder of record; however, the agent must identify the record owner and
expressly disclose the fact that, in exercising the demand, such person is
acting as agent for the record owner.
If a person holds Shares through a broker who in turn holds the Shares
through a central depositary nominee, such as Cede & Co., a demand for appraisal
of such Shares must be made by or on behalf of the depositary nominee and must
identify the depositary nominee as the holder of record.
A stockholder, such as a broker, a central depositary nominee, or other
stockholder who holds Shares as a nominee for the benefit of others, may
exercise appraisal rights with respect to the Shares held for all or less than
all beneficial owners of Shares as to which such person is the record owner, and
for all or less than all of the Shares beneficially owned by any particular
beneficial owner. In addition, any stockholder who holds Shares for such
stockholder's own account or for one beneficial owner, may demand appraisal for
less than all of such Shares. In such case, the written demand must set forth
the number of Shares covered by such demand. Where the number of Shares is not
expressly stated, the demand will be presumed to cover all Shares outstanding in
the name of such record owner. Beneficial owners who are not record owners and
who intend to exercise appraisal rights should
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<PAGE> 14
instruct the record owner to comply strictly with the statutory requirements
with respect to the exercise of appraisal rights.
Within 120 days after the Effective Time, either the Surviving
Corporation or any stockholder of record who has complied with the required
conditions of Section 262 may file a petition in the Delaware Court of Chancery
(the "Delaware Chancery Court") demanding a determination of the fair value of
the Shares of the dissenting stockholders. If a petition for an appraisal is
timely filed, after a hearing on such petition, the Delaware Chancery Court will
determine which stockholders are entitled to appraisal rights and will appraise
the Shares formerly owned by such stockholders, determining the fair value of
such Shares, exclusive of any element of value arising from the accomplishment
or expectation of the Merger, together with a fair rate of interest, if any, to
be paid upon the amount determined to be the fair value. In determining such
fair value, the Delaware Chancery Court is to take into account all relevant
factors.
Stockholders considering seeking appraisal should note that the "fair
value" of their Shares determined under Section 262 could be more than, the same
as or less than $8.50 per Share, and that opinions of investment banking firms
as to fairness, from a financial point of view, are not opinions as to fair
value under Section 262. The cost of the appraisal proceeding may be determined
by the Delaware Chancery Court and taxed against the parties as the Delaware
Chancery Court deems equitable in the circumstances. Upon application of a
dissenting stockholder, the Delaware Chancery Court may order that all or a
portion of the expenses incurred by any dissenting stockholder in connection
with the appraisal proceeding, including without limitation, reasonable
attorneys' fees and the fees and expenses of experts, be charged pro rata
against the value of all Shares entitled to appraisal.
From and after the Effective Time, no stockholder who has duly demanded
appraisal in compliance with Section 262 will be entitled to vote for any
purpose the Shares subject to such demand or to receive payment of dividends or
other distributions on such Shares, except for dividends or distributions
payable to stockholders of record at a date prior to the Effective Time.
At any time within 60 days after the Effective Time, any stockholder
shall have the right to withdraw such stockholder's demand for appraisal and to
accept the terms offered in the Merger Agreement; after this period, a
stockholder may withdraw such stockholder's demand for appraisal only with the
consent of the Surviving Corporation. If no petition for appraisal is filed with
the Delaware Chancery Court within 120 days after the Effective Time,
stockholders' rights to appraisal shall cease, and all stockholders who had
previously demanded appraisal shall thereafter be entitled to receive the $8.50
per Share, in cash, without interest thereon, upon valid surrender of the
certificates that formerly represented their Shares. Inasmuch as the Company has
no obligation to file such a petition, and has no present intention to do so,
any stockholder who desires such a petition to be filed is advised to file it on
a timely basis. No petition timely filed in the Delaware Chancery Court
demanding appraisal shall be dismissed as to any stockholder without the
approval of the Delaware Chancery Court, and such approval may be conditioned
upon such terms as the Delaware Chancery Court deems just.
THE MERGER
BACKGROUND OF THE OFFER AND THE MERGER
Set forth below is a description of the background of the Offer and the
Merger, including a brief description of the material contacts between Parent
and its affiliates and the Company and its affiliates regarding the transactions
described herein. Until the consummation of the Offer, the Board of Directors
consisted of the following individuals: Dr. James D. Watson, Dr. Stanley T.
Crooke, Dr. Jeffrey F. McKelvy, Mr. William R. Miller, Dr. William T. Comer and
Mr. Gunnar Ekdahl.
In December 1998, the Company engaged 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
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<PAGE> 15
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, 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.
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 a Confidential
Disclosure Agreement, dated as of June 23, 1999 (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.
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<PAGE> 16
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 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 that 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
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<PAGE> 17
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.
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/NMS 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 III to this Information Statement.
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 would not be 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 Agreement pursuant to which such stockholders agreed
to tender into the Offer all of the Shares held by them;
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<PAGE> 18
(ix) the fact that, in management's view, conducting an
extensive public auction process prior to 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 Board of Directors recognized that, while the consummation of the
Offer would give 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 the Offer, consummation of the Offer and the Merger will eliminate
the stockholders' ability to participate in the future growth and possible
profits of the Company.
In light of all of the factors set forth above, the Board unanimously
(a) determined that the Merger Agreement, and the transactions contemplated
thereby, including each of the Offer and the Merger, are advisable, fair to and
in the best interests of the holders of the Shares, (b) approved and adopted the
Merger Agreement and the transactions contemplated thereby, and (c) resolved to
recommend that the stockholders of the Company accept the Offer, tender their
shares of Common Stock pursuant to the Offer and approve and adopt the Merger
Agreement and approve the transactions contemplated thereby.
On August 6, 1999, Purchaser commenced the Offer. Purchaser offered to
purchase all of the outstanding Shares at a price of $8.50 per Share, in cash,
without interest, subject to reduction for any applicable federal backup or
other withholding taxes, upon the terms and subject to the conditions set forth
in the Offer to Purchase on Schedule 14D-1, as amended, initially filed with the
SEC on August 6, 1999, and in the related Letter of Transmittal. See "Available
Information." The Offer was conditioned upon, among other things, (i) there
being validly tendered and not withdrawn prior to the expiration of the offer
that number of Shares that constituted a majority of the then outstanding Shares
on a fully diluted basis and (ii) the expiration or termination of all waiting
periods imposed by the HSR Act.
On August 16, 1999, a putative shareholder class action lawsuit (the
"Complaint") was filed in the Superior Court of the State of California, County
of San Diego, by Steve Pellinger, on behalf of himself and all others similarly
situated, against the Company and its Board of Directors and "DOES 1-25". The
Complaint alleges, among other things, that the defendants have breached their
fiduciary duties in connection with the execution of the Merger Agreement and
related events. The Complaint, among other things, seeks to (i) declare the
Merger Agreement unenforceable, (ii) enjoin the Offer and the Merger and any
other transaction until the Company adopts a procedure to obtain the highest
possible price for the Company and (iii) recover unspecified monetary damages,
costs and attorneys' fees. The foregoing description of the Complaint is
qualified in its entirety by reference to the Complaint, a copy of which is
attached hereto as Annex IV and is incorporated herein by reference.
Subsequent to the filing of the Complaint, the Company filed Amendment
No. 1 to its Schedule 14D-9 on August 19, 1999, containing a brief description
of the Complaint and attaching a copy of the Complaint as an exhibit. In
addition, Purchaser filed Amendment No. 1 to its Schedule 14D-1, containing a
brief description of the Complaint and attaching a copy of the Complaint as an
exhibit.
In response to the litigation, the Company filed Amendment No. 2 to its
Schedule 14D-9, containing the following disclosure:
As previously disclosed in Amendment No. 1 to this Schedule
14D-9 and Exhibit 10 thereto, on the afternoon of August 16,
1999, a putative class action lawsuit (the "Complaint") was
filed in the Superior Court of the State of California in the
County of San Diego alleging, among other things, that SIBIA and
its directors had breached their fiduciary duty by failing in
the initial Schedule 14D-9 to disclose the existence of an $18
million judgment entered in favor of the Company (which is
currently on appeal) as the result of a favorable jury verdict
in a patent infringement suit that had been brought by the
Company against Cadus Pharmaceuticals Corporation (the "Cadus
Judgement") (See Exhibit 10 of this Schedule 14D-9/A at pages 8
and 11). The Company and the directors deny this allegation and
all of the material allegations
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<PAGE> 19
contained in the Complaint. In fact, the Cadus Judgement has
been disclosed in the Company's Annual Report on Form 10-K for
the period ended December 31, 1998 which was filed with the SEC
on March 31, 1999 and mailed to all shareholders of record on or
about March 31, 1999. The Cadus Judgment also has been reported
in the Wall Street Journal on December 22, 1998, as well as in
other media. Although the Cadus Judgement previously has been
disclosed, SIBIA hereby again discloses, in response to the
Complaint, that on December 18, 1998, the jury in the Cadus
litigation returned a verdict in favor of the Company in its
patent infringement claim against Cadus, awarding the Company
damages in the amount of $18 million for such infringement. The
Cadus Judgment is now on appeal and the full amount of the award
has been placed in escrow pending final resolution of such
appeal.
The Offer expired at 12:00 midnight New York City time, on September 2,
1999. Following the expiration of the Offer, Purchaser accepted for payment
approximately 6,694,639 Shares (approximately 69% of the issued and outstanding
Shares on such date) validly tendered and not withdrawn pursuant to the Offer.
On September 9, 1999, the resignations of four of the six existing directors of
the Company (Stanley T. Crooke, Dr. Jeffrey F. McKelvy, Dr. James D. Watson and
Mr. Gunnar Ekdahl) became effective, and four persons designated by Purchaser
(Judy C. Lewent, Mary M. McDonald, Roger M. Perlmutter and Edward M. Scolnick,
M.D.) were elected to the Board of Directors to fill vacancies on the Board by
the remaining directors, all in accordance with the Company's Certificate of
Incorporation and Bylaws, both as amended.
PARENT'S REASONS FOR THE MERGER
The purpose for the Merger is for Parent to acquire all Shares not
purchased pursuant to the Offer. As a result of the Offer, Parent acquired
control of, and a majority of the entire equity interest in, the Company. Upon
consummation of the Merger, the Company will become a direct wholly owned
subsidiary of Parent. Parent indicated that it regards the acquisition of the
Company as an opportunity to strengthen its central nervous system disorders
research. Parent believes that the acquisition strengthens Parent's drug
discovery efforts, in keeping with its core strategy of developing important
therapeutic advances.
ACCOUNTING TREATMENT OF THE MERGER
The Merger will be accounted for by Parent under the purchase method of
accounting whereby the purchase price will be allocated based on the fair value
of the assets acquired and the liabilities assumed by Parent.
GOING PRIVATE TRANSACTIONS
The Commission has adopted Rule 13e-3 under the Exchange Act which is
applicable to certain "going private" transactions and which may under certain
circumstances be applicable to the Merger following the purchase of Shares
pursuant to the Offer in which Purchaser is seeking to acquire the remaining
Shares not held by it. Parent believes, however, that Rule 13e-3 will not be
applicable to the Merger because, as currently contemplated, the Merger will be
effected within one (1) year following consummation of the Offer and in the
Merger stockholders will receive the same price per Share as paid in the Offer.
If Rule 13e-3 were applicable to the Merger, it would require, among other
things, that certain financial information concerning the Company, and certain
information relating to the fairness of the proposed transaction and the
consideration offered to minority stockholders in such a transaction, be filed
with the Commission and disclosed to minority stockholders prior to consummation
of the transaction.
OPINION OF FINANCIAL ADVISOR
The Company retained CIBC to act as its financial advisor and to render
an opinion to the Board of Directors of the Company (the "Board of Directors")
as to the fairness of the Merger, from a financial point of view, to the
shareholders of the common stock of the Company. The Company selected CIBC based
on its qualifications and familiarity with the biotechnology industry, and with
the Company in particular.
CIBC delivered its written opinion, dated July 30, 1999, to the Company
Board of Directors to the effect that, subject to the various considerations set
forth in such opinion, as of such date, the consideration to be received
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<PAGE> 20
by shareholders of the Company common stock (other than Merck, Purchaser and any
affiliates thereof) pursuant to the Merger Agreement (the "Consideration") was
fair, from a financial point of view, to such shareholders (the "Opinion"). CIBC
did not recommend to the Company that any specific amount of consideration
constituted the appropriate consideration for the Merger. The Consideration was
established by the parties to the Merger. No limitations were imposed by the
Company Board of Directors on CIBC with respect to the investigations made or
procedures followed by it in rendering the Opinion. The Opinion addresses only
the fairness, from a financial point of view, of the Consideration to be
received by shareholders of the Company common stock and does not constitute a
recommendation to any shareholder of the Company common stock as to whether such
shareholder should support Merck's tender offer or whether such shareholder
should tender shares to Merck. CIBC has not been requested to, and did not
express any opinion relating to the terms of the Shareholders Agreement.
The summary of the Opinion set forth in this Information Statement is
qualified in its entirety by reference to the full text of the Opinion attached
hereto as Annex III. The Company's shareholders are urged to read the Opinion
carefully in its entirety in conjunction with this Information Statement for the
assumptions made, procedures followed, matters considered and limits of the
review by CIBC.
As set forth in the Opinion, CIBC relied upon and assumed the accuracy
and completeness of all of the financial and other information available to it
from public sources and provided to it by the management of the Company and
their respective representatives. The Company provided CIBC with its financial
projections. CIBC assumed that all such projections were reasonably prepared on
bases reflecting the best available information, estimates and judgment of the
Company management and that such projections will be realized in the amounts and
time periods currently estimated by the management of the Company. In arriving
at its Opinion, CIBC neither made nor obtained any independent valuation or
appraisal of the assets or liabilities of the Company. CIBC also assumed the
accuracy of the advice and conclusions of the Company's legal counsel and
accountants with respect to tax and accounting matters as provided to CIBC by
the Company's management. The Opinion is based upon CIBC's analyses of certain
factors in light of its assessment of general economic, financial and market
conditions that could be evaluated by it as of the date of the Opinion. In all
cases, historical results were adjusted for extraordinary items and other
non-recurring or non-operating charges.
In rendering the Opinion, CIBC, among other things: (i) reviewed the
Merger Agreement dated July 30, 1999; (ii) reviewed the Shareholders Agreement
dated July 30, 1999; (iii) reviewed the Stock Option Agreement dated July 30,
1999; (iv) reviewed the Company's annual reports to shareholders and its annual
report on Form 10-K for the fiscal years ended December 31, 1996, 1997 and 1998;
(v) reviewed the Company's quarterly report on Form 10-Q for the three months
ended March 31, 1998 and 1999; (vi) reviewed preliminary estimated statement of
operations data for the three months ended June 30, 1999 and financial
projections of the Company for the period from June 30, 1999 to December 31,
2004 as prepared by the Company's management; (vii) reviewed the historical
market prices and trading volume for the Company's common stock; (viii) held
discussions with senior management of the Company with respect to the business
and prospects for future growth of the Company; (ix) reviewed and analyzed
certain publicly available financial data for certain companies we deemed
comparable to the Company; (x) performed discounted cash flow analyses of the
Company using the financial projections provided to us by the management of the
Company; (xi) reviewed and analyzed certain publicly available financial
information for transactions that we deemed comparable to the Acquisition; and
(xii) performed such other analyses and reviewed such other information as we
deemed appropriate.
Valuation of the Company. CIBC performed three primary valuation
analyses of the Company: (i) a comparison of the Company with certain publicly
traded neurosciences companies (the "Neurosciences Companies") which analysis
consisted of reviewing and considering certain financial and market data for the
Neurosciences Companies (the "Company Comparable Companies Analysis"); (ii) a
comparison of the premiums to stock price paid in (a) all merger and acquisition
transactions with an equity value of $300 million or less between January 1,
1997 and July 26, 1999 (b) merger and acquisition transactions within the life
sciences (biotechnology, pharmaceuticals and medical devices) sector with an
equity value of $300 million or less between January 1, 1997 and July 26, 1999
and (c) merger and acquisition transactions within the biotechnology sector
between January 1, 1997 and July 26, 1999 (the "Company Merger and Acquisition
Transactions Analysis"); and (iii) a discounted cash flow analysis which
consisted of calculating the discounted present value of the terminal value of
the Company, based on a range of multiples of net income projected for the
fiscal year ended December 31, 2004 and adjusted for the Company's projected net
cash position on December 31, 2004 (the "Company Discounted Cash Flow
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<PAGE> 21
Analysis").
The Company Stock Analysis. CIBC reviewed current and historical market
closing prices and trading data of the Company's Common Stock over the past
year. CIBC noted that over the past 52 weeks ended July 28, 1999, the high
trading price was $6.75, low trading price was $2.50, average trading price was
$4.39 and median trading price was $4.50.
The Company Comparable Companies Analysis. CIBC analyzed the Company's
valuation compared to the following eight independent, publicly traded
Neurosciences Companies: Allelix Biopharmaceuticals Inc., Cambridge NeuroScience
Inc., Guilford Pharmaceuticals Inc., Neurocrine Biosciences, Inc., Neurogen
Corporation, NPS Pharmaceuticals, Inc., Synaptic Pharmaceutical Corporation and
Titan Pharmaceuticals, Inc. Given that these companies and the Company are in
the development stage, conventional valuation techniques based on multiples of
financial parameters, such as revenues and net income, are not applicable. As a
result, CIBC analyzed the Company's technology value (treasury method diluted
market value on July 28, 1999, less cash, plus debt) relative to the other eight
companies. The average and median technology values were $71.4 million and $37.1
million, respectively.
Using the average and median technology values of the Neurosciences
Companies, adding the Company's cash balance on June 30, 1999 of $25.3 million
(assuming receipt of the proceeds from the exercise of all outstanding options
with exercise prices of $8.50 or less), subtracting the Company's total debt on
June 30, 1999 of $1.3 million and based on 11.7 million shares of the Company
common stock outstanding (assuming the conversion of Series B convertible
preferred stock and the exercise of all outstanding options with exercise price
of $8.50 or less) implies an average and median equity value per share for the
Company of $8.16 and $5.23, respectively.
The Company Merger and Acquisition Transactions Analysis. CIBC reviewed
the premiums paid in all mergers and acquisitions with an equity value of $300
million or less between January 1, 1997 and July 26, 1999 ("All M&A
Transactions"), certain mergers and acquisitions with an equity value of $300
million or less in the life sciences sector between January 1, 1997 and July 26,
1999 ("Life Sciences M&A Transactions") and certain mergers and acquisitions in
the biotechnology sector between January 1, 1997 and July 26, 1999
("Biotechnology M&A Transactions").
The Biotechnology M&A Transactions (in descending order of effective
date) include the following acquisitions: Houston Biotechnology, Inc. by
Medarex, Inc.; Somatix Therapy Corporation by Cell Genesys, Inc.; Somatogen,
Inc. by Baxter International Inc.; Neurex Corporation by Elan Corp PLC; Virus
Research Institute, Inc. by T Cell Sciences Inc.; Gamma Biologicals, Inc. by
Immucor, Inc.; CN Biosciences, Inc. by EM Industries (subsidiary of Merck AG);
SEQUUS Pharmaceuticals, Inc. by ALZA Corporation; GeneMedicine, Inc. by MegaBios
Corporation; Agouron Pharmaceuticals, Inc. by Warner-Lambert Company and
Endogen, Inc. by PerBio Science AB (subsidiary of Perstorp AB). In three of
these transactions, cash was the sole consideration received: Gamma Biologicals,
Inc. by Immucor, Inc.; CN Biosciences, Inc. by EM Industries (subsidiary of
Merck AG) and Endogen, Inc. by PerBio Science AB (subsidiary of Perstorp AB).
CIBC calculated premiums paid to the average trading prices one day,
one week and one month prior to announcement of each transaction. CIBC then used
the Company's closing share price on July 28, 1999 ($5.00 per share), one week
average trading price ($5.03 per share) and one month average trading price
($4.98 per share) to calculate implied per share values for the Company based on
such transactions.
In analyzing the premiums paid within each category of transactions,
CIBC considered both (i) the premiums paid within each category, regardless of
the form of consideration received and (ii) the premiums paid within each
category in transactions in which cash was the only form of consideration
received.
The following tables detail the average and median premiums observed
within each category of transactions and the average and median per share values
for the Company implied by these premiums.
PREMIUMS PAID IN MERGER AND ACQUISITION TRANSACTIONS
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<PAGE> 22
<TABLE>
<CAPTION>
ONE DAY ONE WEEK ONE MONTH
AVERAGE MEDIAN AVERAGE MEDIAN AVERAGE MEDIAN
ALL M&A TRANSACTIONS
<S> <C> <C> <C> <C> <C> <C>
All Transactions 28.3% 21.6% 34.7% 27.8% 41.3% 33.2%
Cash Transactions 29.8% 22.9% 36.5% 28.0% 42.9% 34.5%
LIFE SCIENCES M&A TRANSACTIONS
All Transactions 32.1% 20.5% 40.9% 27.1% 49.1% 41.0%
Cash Transactions 36.5% 18.3% 49.3% 25.0% 57.9% 42.9%
BIOTECHNOLOGY M&A TRANSACTIONS
All Transactions 41.1% 35.8% 42.4% 39.8% 48.0% 41.4%
Cash Transactions 42.1% 30.4% 49.4% 25.0% 21.9% 23.4%
</TABLE>
<TABLE>
<CAPTION>
IMPLIED PER SHARE VALUE OF
THE COMPANY ONE DAY ONE WEEK ONE MONTH
AVERAGE MEDIAN AVERAGE MEDIAN AVERAGE MEDIAN
<S> <C> <C> <C> <C> <C> <C>
ALL M&A TRANSACTIONS
All Transactions $6.42 $6.08 $6.77 $6.42 $7.03 $6.63
Cash Transactions $6.49 $6.15 $6.86 $6.43 $7.12 $6.70
LIFE SCIENCES M&A TRANSACTIONS
All Transactions $6.61 $6.03 $7.08 $6.39 $7.42 $7.02
Cash Transactions $6.82 $5.91 $7.50 $6.28 $7.86 $7.11
BIOTECHNOLOGY M&A TRANSACTIONS
All Transactions $7.05 $6.79 $7.16 $7.03 $7.37 $7.04
Cash Transactions $7.11 $6.52 $7.51 $6.28 $6.07 $6.14
</TABLE>
The overall average and median implied per share values for the Company
based on the premiums paid (i) for All M&A Transactions were $6.56 and $6.52,
respectively; (ii) for Life Sciences M&A Transactions were $6.76 and $6.81,
respectively; and (iii) for Biotechnology M&A Transactions were $7.07 and $7.05,
respectively.
The overall average and median implied per share values for the Company
based on the premiums paid (i) for All M&A Transactions where cash was the sole
consideration received were $6.62 and $6.59, respectively; (ii) for Life
Sciences M&A Transactions where cash was the sole consideration received were
$6.91 and $6.97, respectively; and (iii) for Biotechnology M&A Transactions
where cash was the sole consideration received were $6.60 and $6.40,
respectively.
The overall average and median implied per share values for the Company
based on the premiums paid for All M&A Transactions, Life Sciences M&A
Transactions and Biotechnology M&A Transactions were $6.74 and $6.69,
respectively.
The Company Discounted Cash Flow Analysis. CIBC performed a discounted
cash flow analysis, based on the financial projections provided by the Company's
management (the "Company Management Projections"). The Company Management
Projections were not risk adjusted by CIBC. These projections assume that the
Company will be successful in signing 19 partnerships covering certain of its
future product candidates and technologies. Each of these deals involve up front
payments and royalties and many involve R&D reimbursement and milestone
payments. Total revenues for these partnerships are $192.8 million for the
projected period. The Company's ability to produce the results contemplated in
the financial projections are highly dependent on management's ability to
identify and successfully negotiate contracts with corporate partners,
successful results in clinical trials, market acceptance of untested products
and the selling and marketing efforts of corporate partners.
An intrinsic value of the Company's equity was determined by the
present value discounted cash flow method, calculating the present value of the
sum of (i) the Company's terminal value obtained by capitalizing the Company's
projected net income for the year ending December 31, 2004 at multiples of
20.0x, 22.5x and 25.0x, plus (ii) the Company's projected cash balance at
December 31, 2004, less (iii) the Company's projected debt
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<PAGE> 23
outstanding at December 31, 2004. The range of these terminal value multiples
was based on an historical range of multiples of net income at which small
capitalization biopharmaceuticals companies trade.
CIBC applied discount rates of 50.0%, 55.0% and 60.0% to calculate the
present value of the terminal value calculated based on a multiple of the
Company's December 31, 2004 projected net income. This range of discount rates
was derived using certain assumptions as to the Company's weighted average cost
of capital and the risk associated with achievement of the Company Management
Projections.
The range of present values derived for the Company using the present
value discounted cash flow approach based upon the Company Management
Projections was $68.1 million ($5.83 per share) to $117.0 million ($10.01 per
share), with an average value of $90.6 million ($7.75 per share) and a median
value of $89.4 million ($7.65 per share).
The foregoing summary does not purport to be a complete description of
the analyses performed by CIBC World Markets. A fairness opinion is the product
of a complex process and cannot necessarily be partially analyzed or readily
summarized. Examining portions of the analyses summarized above, without
considering the analyses as a whole, could create an incomplete view of the
processes underlying the Opinion. In arriving at the Opinion, CIBC did not
attribute any particular weight to any analysis or fact considered by it, but
rather made qualitative judgments as to the significance and relevance of each
analysis and factor. The analyses were prepared by CIBC solely for purposes of
providing its Opinion as to the fairness of the Consideration, from a financial
point of view, to the shareholders of the Company common stock. Analyses based
upon projections of future results are inherently subject to substantial
uncertainties and are not necessarily indicative of actual future results, which
may be significantly more or less favorable than suggested by any analysis.
Additionally, analyses relating to the values of business do not purport to be
appraisals or to reflect the prices at which businesses may actually be sold or
combined. As described above, CIBC's Opinion and presentation to the Company's
Board of Directors was one of many factors taken into consideration by the
Company's Board of Directors in making its determination to support the Merger.
CIBC is a nationally recognized investment banking firm. As part of its
investment banking services, it is regularly engaged in the valuation of
businesses and securities in connection with mergers and acquisitions and for
other purposes.
In the ordinary course of its business, CIBC may actively trade the
securities of both the Company and Merck for its own account or for the accounts
of its customers and, accordingly, may at any time hold a long or short position
in such securities. CIBC also provides equity research coverage of Merck.
The Company has agreed to pay CIBC a fee of $250,000 for rendering the
Opinion in connection with the Merger, which was payable at the time CIBC
delivered such Opinion to the Board of Directors. Further, CIBC will be paid a
fee of approximately $1.1 million upon the closing of the Merger. The fee
payable for the Opinion will be credited against the fee payable upon the
closing of the Merger. The Company has also agreed to reimburse CIBC for its
reasonable out-of-pocket expenses (including fees of its counsel), subject to
certain adjustments, and to indemnify CIBC and certain related persons against
certain potential liabilities in connection with the engagement of CIBC,
including certain potential liabilities under the federal securities laws.
THE FULL TEXT OF THE FAIRNESS OPINION, WHICH SETS FORTH, AMONG OTHER
THINGS, ASSUMPTIONS MADE, PROCEDURES FOLLOWED, MATTERS CONSIDERED, AND
LIMITATIONS ON THE SCOPE OF THE REVIEW UNDERTAKEN BY CIBC IN RENDERING THE
OPINION, IS ATTACHED AS ANNEX III HERETO AND IS INCORPORATED HEREIN BY
REFERENCE. THE COMPANY'S STOCKHOLDERS ARE URGED TO, AND SHOULD, READ THE OPINION
CAREFULLY AND IN ITS ENTIRETY. THE FAIRNESS OPINION ADDRESSES ONLY THE FAIRNESS
FROM A FINANCIAL POINT OF VIEW TO THE HOLDERS OF SHARES AS OF THE DATE OF THE
FAIRNESS OPINION OF THE CASH CONSIDERATION TO BE RECEIVED BY SUCH HOLDERS IN THE
OFFER AND THE MERGER, AND DOES NOT CONSTITUTE A RECOMMENDATION TO THE
STOCKHOLDERS OF THE COMPANY AS TO WHETHER OR NOT TO TENDER SHARES OF THE
COMPANY'S COMMON STOCK PURSUANT TO THE OFFER OR AS TO HOW SUCH HOLDER SHOULD
VOTE WITH RESPECT TO THE MERGER.
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<PAGE> 24
INTERESTS OF CERTAIN PERSONS IN THE MERGER
Certain members of the Company's management and the Board of Directors
(as well as other employees of the Company) have certain interests in the Merger
that are described below that are in addition to their interests as stockholders
generally. The Board of Directors took these interests into account in approving
and adopting the Merger Agreement and the transactions contemplated thereby.
Treatment of Stock Options and Purchase Rights. The Merger Agreement
provides that at the Effective Time, each outstanding option to purchase Shares
under the Company stock plans (the "Company Options"), whether vested or
unvested, shall be deemed to constitute an option to acquire (a "New Parent
Option"), on the same terms and conditions as were applicable under such Company
Option, the number of shares of common stock of Parent (rounded to the nearest
whole number) equal to the product of (A) the number of Shares issuable upon
exercise of such Company Option and (B) the Offer Price divided by the average
of the closing sales prices of common stock of Parent on the New York Stock
Exchange for the 10 consecutive days immediately prior to and including the day
preceding the Effective Time, at an exercise price per share (rounded to the
nearest whole cent) equal to (x) the aggregate exercise price for the Shares
otherwise purchasable pursuant to such Company Option divided by (y) the
aggregate number of shares of Common Stock of Parent purchasable pursuant to the
New Parent Option (as calculated immediately above); provided, however, that in
the case of any Company Option to which Section 422 of the Code applies, the
option price, the number of shares purchasable pursuant to such option and the
terms and conditions of exercise of such option shall be determined in
accordance with the foregoing, subject to such adjustments as are necessary in
order to satisfy the requirements of Section 424(a) of the Code. At or prior to
the Effective Time, the Company has agreed to take all necessary actions to
permit the assumption of the unexercised Company Options by Parent pursuant to
this paragraph and shall take all action necessary to cause the funds held in
the Company's Employee Stock Purchase Plan to be used to purchase outstanding
Shares through open market transactions so that such Shares will be converted
into the right to receive cash in the Merger; provided that thereafter the
Company shall terminate the Company's Employee Stock Purchase Plan.
The Merger Agreement further provides that effective at the Effective
Time, Parent shall assume, as a New Parent Option, each outstanding Company
Option in accordance with the prior paragraph and with the terms of the Company
stock plan under which it was issued and the stock option agreement by which it
is evidenced. Parent has further agreed that not later than thirty calendar days
after the closing date of the Merger, Parent shall file a registration statement
under the Securities Act of 1933, as amended (the "Securities Act"), on Form
S-8, or other appropriate form, covering shares of Parent common stock subject
to such New Parent Options.
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.
Indemnification; Directors' and Officers' Insurance. The Merger
Agreement provides that from and after the earliest date on which Purchaser owns
a majority of the outstanding Shares on a fully diluted basis, Parent will
indemnify, defend and hold harmless each individual and every person who is or
was a director or officer of the Company or any of its subsidiaries prior to the
Effective Time (the "Indemnified Parties"), against any costs or
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<PAGE> 25
expenses (including reasonable attorneys' fees), judgments, fines, losses,
claims, damages, liabilities and amounts paid in settlement incurred in
connection with any claim, action, suit, proceeding, inquiry or investigation,
whether civil, criminal, administrative or investigative, arising out of matters
existing or occurring at or prior to the Effective Time (including transactions
contemplated by the Merger Agreement), whether asserted or claimed prior to, at
or after the Effective Time (and Parent shall also advance expenses as incurred
to the fullest extent permitted under applicable law, provided the person to
whom expenses are advanced provides an undertaking to repay such advances if it
is ultimately determined that such person is not entitled to indemnification).
The Merger Agreement also provides that from and after the earliest
date on which Purchaser owns a majority of the outstanding Shares on a fully
diluted basis, Parent will cause the Surviving Corporation to fulfill and honor
in all respects the obligations of the Company pursuant to each indemnification
agreement previously disclosed to Parent and any indemnification provision or
any exculpation provision set forth in the Company's Certificate of
Incorporation or Bylaws in effect on the date of the Merger Agreement. In
addition, the Certificate of Incorporation and Bylaws of the Surviving
Corporation shall contain the provisions with respect to indemnification and
exculpation from liability set forth in the Company's Certificate of
Incorporation and Bylaws on the date of the Merger Agreement, and during the
period commencing on the earliest date on which Purchaser purchases Shares
pursuant to the Offer and ending on the sixth anniversary of the Effective Time,
such provisions shall not be amended, repealed or otherwise modified in any
manner that would adversely affect the rights thereunder of any of the
Indemnified Parties.
Any Indemnified Party wishing to make a claim of indemnification under
the Merger Agreement, upon learning of any such claim, action, suit, proceeding,
inquiry or investigation, is required to promptly notify Parent thereof. In the
event of any such claim, action, suit, proceeding, inquiry or investigation
(whether arising before or after the Effective Time), (i) Parent or the
Surviving Corporation shall have the right to assume the defense thereof and
Parent shall be liable to such Indemnified Parties for the legal expenses of one
counsel or any other expenses subsequently incurred by such Indemnified Parties
in connection with the defense thereof unless there is a conflict of interest
between the Indemnified Parties and Parent, in which event Parent shall be
liable to the Indemnified Parties for the fees and expenses of each Indemnified
Party's counsel, (ii) the Indemnified Parties will cooperate in the defense of
any such matter and (iii) Parent shall not be liable for any settlement effected
without its prior written consent and no Indemnified Party shall be liable for
any settlement effected without its prior written consent unless such settlement
includes a complete unconditional release of all claims against all Indemnified
Parties; provided that Parent shall not have any obligation hereunder to any
Indemnified Party if and when a court of competent jurisdiction shall ultimately
determine, and such determination shall have become final, that the
indemnification of such Indemnified Party in the manner contemplated hereby is
prohibited by applicable law. Parent and the Surviving Corporation jointly and
severally have agreed to pay all expenses, including attorneys' fees, that may
be incurred by the Indemnified Parties in enforcing the indemnity and other
obligations described above.
The Merger Agreement also provides that prior to the Effective Time,
the Company may purchase insurance coverage extending for a period of six years
after the Effective Time the level and scope of the Company's directors' and
officers' liability insurance coverage in effect as of the date of the Merger
Agreement; provided that the aggregate annual premium payable for such insurance
shall not exceed 175% of the last annual premium paid for such coverage prior to
the date of the Merger Agreement. In addition, Parent has agreed that through
the sixth anniversary of the Effective Time, Parent shall maintain in effect,
for the benefit of the Indemnified Parties, such insurance coverage, and subject
to the limitations in the preceding sentence, shall pay the annual premium for
such insurance coverage. In the event the annual premium payable for such
insurance coverage exceeds 175% of the last annual premium paid by the Company
for such coverage, Parent shall be obligated to obtain and maintain in effect a
policy with the greatest amount of coverage available for a cost not exceeding
175% of such amount.
The Merger Agreement further provides that if the Surviving Corporation
or any of its successors or assigns (i) shall consolidate with or merge into any
other corporation or entity and shall not be the continuing or surviving
corporation or entity of such consolidation or merger or (ii) shall transfer all
or substantially all of its properties and assets to any individual, corporation
or other entity, then and in each such case, proper provisions shall be made so
that the successors and assigns of the surviving corporation shall assume all of
the obligations described above with respect to indemnification under the Merger
Agreement.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER
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The following discussion, subject to the limitations set forth herein,
describes the material federal income tax consequences of the Merger to holders
of Shares who hold their Shares as capital assets and exchange their Shares for
cash pursuant to the Merger (including any cash amounts received by dissenting
stockholders pursuant to the exercise of appraisal rights). The tax consequences
to a specific stockholder may vary depending upon such stockholder's particular
tax situation, and the discussion set forth below may not apply to certain
categories of holders of Shares subject to special treatment under the Internal
Revenue Code of 1986, as amended (the "Code"), such as foreign stockholders,
securities dealers, broker-dealers, insurance companies, financial institutions,
tax-exempt entities and stockholders who acquired their Shares pursuant to an
exercise of an employee stock option or otherwise as compensation or who hold
restricted stock. The discussion is based on the Code as in effect on the date
of this Information Statement, as well as the rules and regulations thereunder,
existing administrative interpretations and court decisions currently in effect,
all of which are subject to change, retroactively or prospectively, and to
possible differing interpretations and does not address state, local or foreign
tax laws.
The receipt of cash for Shares in the Merger will be a taxable
transaction for federal income tax purposes and may also be a taxable
transaction under applicable state, local or foreign tax laws. In general, a
stockholder will recognize gain or loss for federal income tax purposes equal to
the difference between the amount of cash received in exchange for the Shares
surrendered in the Merger and such stockholder's adjusted tax basis in such
Shares. Assuming the Shares constitute capital assets in the hands of the
stockholder, such gain or loss will be capital gain or loss. If, at the time of
the Merger, the Shares surrendered in the Merger have been held for more than
one year, such gain or loss will be a long-term capital gain or loss. Under
current law, long-term capital gains of individuals are, under certain
circumstances, taxed at lower rates than items of ordinary income.
A stockholder (other than certain exempt stockholders including, among
others, all corporations and certain foreign individuals and entities) that
sells Shares may be subject to a 31% backup withholding unless the stockholder
provides its Taxpayer Identification Number, or unless an exemption applies. If
backup withholding applies to a stockholder, the Paying Agent is required to
withhold 31% from payments to such stockholder. Backup withholding is not an
additional tax. Rather, the amount of the backup withholding can be credited
against the federal income tax liability of the person subject to the backup
withholding, provided that the required information is given to the Internal
Revenue Service. If backup withholding results in an overpayment of tax, a
refund can be obtained by the stockholder upon filing an income tax return.
THE FOREGOING DISCUSSION MAY NOT BE APPLICABLE TO CERTAIN TYPES OF
STOCKHOLDERS SUBJECT TO SPECIAL TREATMENT UNDER THE CODE, INCLUDING STOCKHOLDERS
WHO ACQUIRED SHARES PURSUANT TO THE EXERCISE OF EMPLOYEE STOCK OPTIONS OR
OTHERWISE AS COMPENSATION, INDIVIDUALS WHO ARE NOT CITIZENS OR RESIDENTS OF THE
UNITED STATES AND FOREIGN CORPORATIONS, OR STOCKHOLDERS WHO HOLD RESTRICTED
STOCK.
THE FEDERAL INCOME TAX DISCUSSION SET FORTH ABOVE IS INCLUDED FOR
GENERAL INFORMATION ONLY AND IS BASED UPON PRESENT LAW. STOCKHOLDERS ARE URGED
TO CONSULT THEIR OWN TAX ADVISORS WITH RESPECT TO THE SPECIFIC TAX CONSEQUENCES
OF THE MERGER AND THE APPLICATION AND EFFECT OF THE ALTERNATIVE MINIMUM TAX, AND
STATE, LOCAL AND FOREIGN TAX LAWS.
REGULATORY MATTERS
The parties received early termination of the waiting period under the
HSR Act on August 20, 1999. The Company is not aware of any other federal, state
or foreign regulatory requirements that remain to be complied with in order to
consummate the Merger.
The Federal Trade Commission (the "FTC") and the Antitrust Division of
the Department of Justice frequently scrutinize the legality under the U.S.
antitrust laws of transactions such as Purchaser's acquisition of the Company.
At any time, the FTC or the Antitrust Division could take such action under the
antitrust laws as it deems necessary or desirable in the public interest,
including seeking to enjoin the consummation of the Merger or seeking the
divestiture of Shares acquired by Purchaser or the divestiture of substantial
assets of Parent or its subsidiaries, or the Company or its subsidiaries.
Private parties and state attorneys general may also bring legal action under
certain
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circumstances. There can be no assurance that a challenge to the Merger
on antitrust grounds will not be made or, if such a challenge is made, what the
result would be.
THE MERGER AGREEMENT
THE MERGER AGREEMENT
The following is a summary of the material terms of the Merger
Agreement. This summary is not a complete description of the terms and
conditions thereof and is qualified in its entirety by reference to the full
text thereof, which is attached as Annex I to this Information Statement.
Capitalized terms not otherwise defined herein have the respective meanings
ascribed to them in the Merger Agreement.
The Offer. The Merger Agreement provides for the commencement of the
Offer, in connection with which Parent and Purchaser have expressly reserved the
right to waive certain conditions to the Offer, but without the prior written
consent of the Company, Purchaser has agreed not to (i) decrease the amount or
change the form of consideration payable in the Offer, (ii) decrease the number
of Shares sought in the Offer, (iii) impose additional conditions to the Offer,
(iv) change any conditions to the Offer or amend any other term of the Offer if
any such change or amendment would be adverse in any respect to the holders of
Shares (other than Parent or Purchaser), (v) except as provided below, extend
the Offer if all of the conditions to the Offer have been satisfied or (vi)
amend or waive the Minimum Condition. Notwithstanding the foregoing, Purchaser
may, without the consent of the Board of Directors, (A) extend the Offer, if on
the scheduled Expiration Date of the Offer any of the conditions to the Offer
shall not have been satisfied or waived, for one or more periods (none of which
shall exceed ten business days) but in no event past 90 days from the date of
the Merger Agreement unless the waiting period applicable to the transactions
contemplated by the Merger Agreement under the HSR Act has not terminated or
expired, and then in any event not later than March 1, 2000, (B) extend the
Offer for such period as may be required by any rule, regulation, interpretation
or position of the SEC or its staff applicable to the offer or (C) extend the
Offer for one or more periods (each such period to be for not more than three
business days and such extensions to be for an aggregate period of not more than
ten business days beyond the latest expiration date that would otherwise be
permitted under clause (A) or (B) of this sentence) if on such expiration date
the conditions to the Offer shall have been satisfied or waived but there shall
not have been tendered that number of Shares which would equal more than 90% of
the issued and outstanding Shares. So long as the Merger Agreement is in effect
and the conditions to the Offer have not been satisfied on any scheduled
Expiration Date of the Offer, then, provided that all such conditions are and
continue to be reasonably probable of being satisfied by the date that is 60
business days after the commencement of the Offer, Purchaser shall extend the
Offer for one or more periods of not more than 10 business days each if
requested to do so by the Company; provided that Purchaser shall not be required
to extend the Offer beyond 60 business days after commencement of the Offer or,
if earlier, the date of termination of the Merger Agreement in accordance with
the terms thereof.
Consideration to be Paid in the Merger. The Merger Agreement provides
that subject to the terms and conditions set forth in the Merger Agreement and
the applicable provisions of the DGCL, Purchaser shall be merged with and into
the Company and the separate existence of Purchaser will cease, and the Company
shall be the Surviving Corporation and shall be a wholly owned subsidiary of
Parent. In the Merger, each share of common stock, $.01 par value per share, of
Purchaser issued and outstanding immediately prior to the time of filing of a
certificate of merger relating to the Merger with the Secretary of State of the
State of Delaware, or such later time as is set forth therein, shall continue to
remain outstanding and shall constitute one share of common stock of the
Surviving Corporation. At the Effective Time, each outstanding Share (other than
Shares owned by Parent or any direct or indirect subsidiary of Parent or the
Excluded Shareholders or shares owned by the Company or any direct or indirect
subsidiary of the Company), shall, by virtue of the Merger and without any
action on the part of the holder thereof, be converted into the right to receive
the Merger Consideration, without interest. The Merger Agreement provides that
(subject to the provisions of the Merger Agreement and the applicable provisions
of the Delaware Law) the closing of the Merger shall occur on the later to occur
of (i) the business day on which the condition set forth in Section 8.1(a) of
the Merger Agreement is satisfied or waived in accordance with the Merger
Agreement and (ii) the first business day following the date on which the last
to be satisfied or waived of the other conditions set forth in Article VIII of
the Merger Agreement (other than those conditions that by their nature are to be
satisfied at the closing of the Merger, but subject to the satisfaction or
waiver of those conditions) are satisfied or waived in accordance with the
Merger Agreement.
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Treatment of Stock Options and Purchase Rights. The Merger Agreement
provides that at the Effective Time, each outstanding option to purchase Shares
under the Company stock plans (the "Company Options"), whether vested or
unvested, shall be deemed to constitute an option to acquire (a "New Parent
Option"), on the same terms and conditions as were applicable under such Company
Option, the number of shares of common stock of Parent (rounded to the nearest
whole number) equal to the product of (A) the number of Shares issuable upon
exercise of such Company Option and (B) the Offer Price divided by the average
of the closing sales prices of common stock of Parent on the New York Stock
Exchange for the 10 consecutive days immediately prior to and including the day
preceding the Effective Time, at an exercise price per share (rounded to the
nearest whole cent) equal to (x) the aggregate exercise price for the Shares
otherwise purchasable pursuant to such Company Option divided by (y) the
aggregate number of shares of Common Stock of Parent purchasable pursuant to the
New Parent Option (as calculated immediately above); provided, however, that in
the case of any Company Option to which Section 422 of the Code applies, the
option price, the number of shares purchasable pursuant to such option and the
terms and conditions of exercise of such option shall be determined in
accordance with the foregoing, subject to such adjustments as are necessary in
order to satisfy the requirements of Section 424(a) of the Code. At or prior to
the Effective Time, the Company has agreed to take all necessary actions to
permit the assumption of the unexercised Company Options by Parent pursuant to
this paragraph and shall take all action necessary to cause the funds held in
the Company's Employee Stock Purchase Plan to be used to purchase outstanding
Shares through open market transactions so that such Shares will be converted
into the right to receive cash in the Merger; provided that thereafter the
Company shall terminate the Company's Employee Stock Purchase Plan.
The Merger Agreement further provides that effective at the Effective
Time, Parent shall assume, as a New Parent Option, each outstanding Company
Option in accordance with the prior paragraph and with the terms of the Company
stock plan under which it was issued and the stock option agreement by which it
is evidenced. Parent has further agreed that not later than thirty calendar days
after the closing date of the Merger, Parent shall file a registration statement
under the Securities Act of 1933, as amended (the "Securities Act"), on Form
S-8, or other appropriate form, covering shares of Parent common stock subject
to such New Parent Options.
Board Representation. The Merger Agreement provides that, promptly upon
the acceptance for payment of, and payment by Purchaser in accordance with the
Offer for, not less than that number of Shares equal to the Minimum Shares,
Purchaser shall be entitled to designate such number of directors, rounded up to
the next whole number, as will give Purchaser representation on the Board of
Directors equal to the product of (i) the total number of directors on the Board
of Directors (giving effect to the directors elected pursuant to this sentence
and (ii) the percentage that such number of Shares owned in the aggregate by
Purchaser or Parent, upon such acceptance for payment, bears to the number of
Shares outstanding. Upon the written request of Purchaser, the Company shall, on
the date of such request, (x) either increase the size of the 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 Board of Directors and (y) cause Parent's designees to be so
elected. The Company's obligations to appoint designees to the Board of
Directors are subject to Section 14(f) of the Exchange Act.
The Merger Agreement also provides that from and after the time that
Parent's designees constitute at least a majority of the Board of Directors and
until the Effective Time, the Board of Directors shall always have at least two
members (the "Independent Directors") who are neither officers of Parent nor
designees, shareholders or affiliates of Parent or Parent's affiliates. During
such period, any (i) amendment or termination of the Merger Agreement, (ii)
extension of time for the performance or waiver of the obligations or other acts
of Parent or Purchaser or waiver of the Company's rights under the Merger
Agreement or (iii) action by the Company with respect to the Merger Agreement
and the transactions contemplated hereby which adversely affects the interests
of the stockholders of the Company, shall require the approval of a majority of
the Independent Directors in addition to any required approval thereof by the
full Board of Directors.
Stockholders Meeting. The Merger Agreement provides that, if approval
or action in respect of the Merger by the stockholders of the Company is
required by applicable law, the Company, acting through the Board of Directors,
shall (i) call as promptly as practicable following consummation of the offer, a
meeting of its stockholders (the "Stockholders Meeting") for the purpose of
voting upon the Merger, (ii) hold the Stockholders Meeting as soon as
practicable following the purchase of Shares pursuant to the Offer, and (iii)
recommend to its stockholders the approval of the Merger. At the Stockholders
Meeting, Parent and Purchaser shall cause all Shares then owned by them to be
voted in favor of approval and adoption of the Merger. The Merger Agreement
provides
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that, notwithstanding the foregoing, if Parent, Purchaser or any other
subsidiary of Parent shall acquire at least 90% of the outstanding Shares and
preferred stock, the parties thereto shall take all necessary and appropriate
action to cause the Merger to become effective as soon as practicable after the
expiration of the Offer without a stockholders meeting in accordance with
Section 253 of the DGCL. Parent expects during the pendency of the offer to seek
to have discussions with the holder of the Series B Convertible Preferred Stock
regarding the sale by such holder to Parent after consummation of the Offer.
However, Parent cannot under Rule 10b-13 under the Exchange Act, directly or
indirectly, purchase, or make any arrangement to purchase, the Series B
Convertible Preferred Stock until after consummation of the Offer. If the
outstanding share of Series B Convertible Preferred Stock is not converted and
tendered in the Offer or Parent does not purchase the Series B Convertible
Preferred Stock following consummation of the Offer, Parent will be unable to
effect a "short-form" merger.
Representations and Warranties. The Merger Agreement contains various
representations and warranties of the parties thereto. These include
representations and warranties by the Company with respect to (i) the due
organization, existence, qualification, good standing, corporate power and
authority of the Company and its subsidiaries; (ii) the capital structure of the
Company; (iii) the due authorization, execution, delivery and performance of the
Merger Agreement and the Stock Option Agreement and the consummation of
transactions contemplated thereby, and the validity and enforceability thereof;
(iv) required filings, consents and approvals and the absence of any violations,
breaches or defaults which would result from performance by the Company of the
Merger Agreement and the Stock Option Agreement; (v) the accuracy of reports
filed by the Company with the SEC (including financial statements) since January
1, 1998; (vi) the absence of certain changes or events; (vii) the absence of any
material litigation; (viii) the absence of any undisclosed material liabilities;
(ix) certain employee benefit matters; (x) compliance with applicable laws,
licenses and permits and the absence of any default or violation with respect to
material contracts; (xi) antitakeover statutes: (xii) environmental matters
relating to the Company and its subsidiaries; (xii) the opinion of the Financial
Advisor; (xiii) certain tax matters; (xiv) certain regulatory matters, including
Food and Drug Administration warning letters, problem reports, product recalls
and material regulatory communications and regulatory filings; (xv) certain
intellectual property matters; (xvi) matters relating to product registration
files; (xvi) year 2000 compliance; (xvii) labor matters; (xviii) the Rights
Agreement; (xix) the absence of brokers or finders other than the Financial
Advisor; (xx) supply arrangements; (xxi) investigational compounds; (xxii) the
validity and enforceability of material contracts; (xxiii) the documents
supplied by the Company relating to the Offer; and (xxiv) stockholder approvals.
Parent and Purchaser have also made certain representations and
warranties, including with respect to (i) the capital structure of the
Purchaser; (ii) the due organization, existence, good standing and corporate
power and authority of Parent and its subsidiaries; (iii) the due authorization,
execution, delivery and performance of the Merger Agreement and the Stock Option
Agreement and the consummation of transactions contemplated thereby, and the
validity and enforceability thereof; (iv) required filings, consents and
approvals and the absence of any violations, breaches or defaults which would
result from performance by Parent or Purchaser with the Merger Agreement and the
Stock Option Agreement; (v) the absence of any material litigation; (vi)
compliance with applicable laws and the absence of any default or violation with
respect to material contracts; (vii) the absence of brokers or finders; (viii)
the sufficiency of funds available to Parent and Purchaser for the consummation
of the Offer and the Merger; and (ix) documents related to the Offer and the
Merger.
Conduct of Interim Operations. The Company has agreed that from the
date of the Merger Agreement to the Effective Time, with certain exceptions,
unless Parent has consented in writing thereto (such consent not to be
unreasonably withhold or delayed), the Company shall, and shall cause each of
its subsidiaries to: (i) conduct its business, in all material respects, in the
ordinary and usual course, and use its commercially reasonable best efforts to
preserve its business organization substantially intact and substantially
maintain its existing relations and goodwill with customers, suppliers,
distributors, creditors, lessors, employees and business associates; (ii) not
issue, sell, pledge, dispose of or encumber any capital stock owned by it in any
of its subsidiaries; (iii) not amend its certificate or bylaws or amend, modify
or terminate the Rights Agreement; (iv) not split, combine or reclassify its
outstanding shares of capital stock; (v) not declare, set aside or pay any
dividend payable in cash, stock or other property in respect of any capital
stock; (vi) not repurchase, redeem or otherwise acquire, except in connection
with its stock option and stock purchase plans, any shares of its capital stock
or any securities convertible into or exchangeable or exercisable for any shares
of its capital stock; (vii) not issue, sell, pledge, dispose of or encumber any
shares of, or securities convertible into or exchangeable or exercisable for, or
options, warrants, calls, commitments or rights of any kind to acquire, any
shares of its capital stock of any class or any voting debt or any
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other property or assets, with certain exceptions; (viii) not transfer, lease,
license, guarantee, sell, mortgage, pledge, dispose of or encumber any other
property or assets (including capital stock of any of its subsidiaries) or incur
or modify any material indebtedness or other liability; (ix) not make any
commitments for, make or authorize any capital expenditures or, by any means,
make any acquisition of, or investment in, assets or stock of any other person
or entity in each case, involving amounts in excess of $100,000 in the aggregate
other than in the ordinary and usual course; (x) not, except as may be required
by existing contractual commitments or as required by applicable law, enter into
any new agreements or commitments for any severance or termination pay to, or
enter into an employment or severance agreement with, any of its directors,
officers or employees, including adding new participants to the Company's
Management Change of control Plan, or terminate, establish, adopt, enter into,
make any new grants or awards under, amend or otherwise modify, any compensation
and benefit plans or increase or accelerate the salary, wage, bonus or other
compensation of any employees, officers or directors (except for increases in
salaries, wages and cash bonuses of nonexecutive employees made in the ordinary
course of business consistent with past practice) or pay or agree to pay any
pension, retirement allowance or other employee benefit not required by any
existing compensation and benefit plan; (xi) not settle or compromise any
material claims or litigation or modify, amend or terminate any of its material
contracts or waive, release or assign any material rights or claims; (xii) not
make any tax election or permit any insurance policy naming it as a beneficiary
or loss-payable payee to be canceled or terminated except in the ordinary and
usual course of business; (xiii) not, except as may be required as a result of a
change in law or in generally accepted accounting principles, change any of the
accounting practices or principles used by it or its subsidiaries; (xiv) not
adopt a plan of complete or partial liquidation, dissolution, merger,
consolidation, restructuring, recapitalization, or other reorganization of the
Company or any of its subsidiaries not constituting an inactive subsidiary
(other than the Merger); (xv) not suffer or permit capital expenditures made or
incurred by the Company and its subsidiaries for any period to exceed $100,000
except for expenses incurred in connection with the transactions contemplated by
the Merger Agreement; and (xvi) not offer to, or enter into an agreement to, do
any of the foregoing.
Access to Information. Under the Merger Agreement, from the date of the
Merger Agreement to the Effective Time or the termination of the Merger
Agreement, the Company has agreed to afford to the officers, employees,
accountants, counsel, financial advisor and other representatives of Parent
reasonable access to all of its and its subsidiaries properties, books,
contracts, commitments and records (including security position listings or
other information concerning beneficial and record owners of the Company's
securities) and its officers, management employees and representatives and,
during such period, the Company has agreed to furnish promptly to Parent,
consistent with its legal obligations, all information concerning its business,
properties and personnel as the other party may reasonably request. Such
information shall be hold in confidence to the extent required by, and in
accordance with, the provisions of the Confidentiality Agreement, which shall
remain in full force and effect.
No Solicitation. The Company has agreed in the Merger Agreement that
the Company shall, and shall use its best efforts to cause its nonstockholder
affiliates and the officers, directors and employees of the Company and its
subsidiaries to, and shall instruct its stockholder affiliates and the
representatives and agents of the Company and its subsidiaries (including,
without limitation, any investment banker, attorney or accountant retained by
the Company or any of its subsidiaries) to, immediately cease and terminate any
existing activities, discussions or negotiations, if any, with any parties
(other than Parent and Purchaser, any affiliate or associate of Parent and
Purchaser or any designees of Parent and Purchaser) conducted heretofore with
respect to any acquisition or exchange of all or any material portion of the
assets of, or more than 20% of the equity interest in, the Company or any of its
subsidiaries (by direct purchase from the Company, tender or exchange offer or
otherwise) or any business combination, merger or similar transaction (including
an exchange of stock or assets) with or involving the Company or any subsidiary
of the Company (an "Acquisition Transaction"), other than the Offer and the
Merger. Except as otherwise set forth in this paragraph, the Company has also
agreed that it shall not, and shall use its best efforts to cause its
nonstockholder affiliates and the officers, directors and employees of the
Company and its subsidiaries not to, and shall instruct its stockholder
affiliates and the representatives and agents of the Company and its
subsidiaries (including, without limitation, any investment banker, attorney or
accountant retained by the Company or any of its subsidiaries) not to, directly
or indirectly, knowingly encourage, solicit, participate in or initiate
discussions or negotiations with, or provide any nonpublic information or data
(other than the Company's standard public information package) to, any
corporation, partnership, person or other entity or group (other than Parent
and Purchaser, any affiliate or associate of Parent and Purchaser or any
designees of Parent and Purchaser) with respect to any inquiries or the making
of any offer or proposal (including, without limitation, any offer or proposal
to the stockholders of the Company) concerning an Acquisition Transaction (an
"Acquisition Proposal" (it
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being understood that an Acquisition Proposal that is conditioned upon the
completion of due diligence shall be deemed to constitute a bona fide
Acquisition Proposal if such proposal otherwise meets the definition of
Acquisition Proposal)) or otherwise knowingly facilitate any effort or attempt
to make or implement an Acquisition Proposal; provided, however, that prior to
Purchaser beneficially owning a majority of then outstanding Shares, the Company
may furnish information and access, but only in response to a request for
information or access, to any person or entity making a bona fide written
Acquisition Proposal to the Board of Directors after the date of the Merger
Agreement which was not knowingly encouraged, solicited or initiated by the
Company or any of its affiliates or any director, employee, representative or
agent of the Company or any of its subsidiaries (including, without limitation,
any investment banker, attorney or accountant retained by the Company or any of
its subsidiaries) on or after the date of the Merger Agreement and may
participate in discussions and negotiate with such person or entity concerning
any such Acquisition Proposal and may authorize the Company to enter into a
binding written agreement concerning a Superior Proposal (as defined below), if
and only if, in any such case, (i) the Board of Directors determines in good
faith, (A) after consultation with outside counsel to the Company to the effect
that failing to provide such information or access or to participate in such
discussions or negotiations or so to authorize, as the case may be, is
reasonably likely to constitute a breach of the Board of Directors' fiduciary
duties under applicable law and (B) after consultation with the financial
advisors to the Company to such effect, that such Acquisition Proposal, if
accepted, is reasonably likely to be consummated, taking into account all legal,
financial and regulatory aspects of the proposal and the person or entity making
the proposal and would, if consummated, result in a transaction more favorable
to the Company's stockholders from a financial point of view than the
transaction contemplated by the Merger Agreement (any such more favorable
Acquisition Proposal as to which both of the determinations referred to in
subclauses (A) and (B) above have been made being referred to as a "Superior
Proposal"), and (ii) the Company receives from the person or entity making such
bona fide written Acquisition Proposal an executed confidentiality agreement the
terms of which are (without regard to the terms of such Acquisition Proposal)
(A) no less favorable to the Company, and (B) no less restrictive to the person
or entity making such bona fide written Acquisition Proposal than those
contained in the Confidentiality Agreement. Nothing in the Merger Agreement
shall prohibit the Board of Directors from, to the extent applicable, complying
with Rule 14e-2 or 14d-9 promulgated under the Exchange Act with regard to an
Acquisition Proposal. The Company has further agreed to notify Parent within 48
hours if any such inquiries or proposals are received by, any such information
is requested from, or any such negotiations or discussions are sought to be
initiated or continued with the Company and shall in such notice indicate the
identity of the Purchaser and the material terms and conditions of any such
proposal and thereafter shall keep Parent reasonably informed, on a current
basis, of the status and material terms of such proposals and the status of such
negotiations or discussions, providing copies to Parent of any Acquisition
Proposals made in writing. The Company is required to provide Parent with three
business days advance notice of, in each and every case, its intention to either
enter into any agreement with or to provide any information to any person or
entity making any such inquiry or proposal. The Company has also agreed not to
release any third party from, or waive any provisions of, any confidentiality or
standstill agreement to which the Company is a party and will use its best
efforts to enforce any such agreements at the request of and on behalf of
Parent. The Company is required to inform the individuals or entities referred
to in the first sentence of this paragraph of the obligations undertaken in this
paragraph. The Company also is required to promptly request each person or
entity which has executed, within 12 months prior to the date of the Merger
Agreement, a confidentiality agreement in connection with its consideration of
acquiring the Company to return or destroy all confidential information
furnished to such person or entity by or on behalf of the Company.
Fees and Expenses. Pursuant to the Merger Agreement, the Surviving
Corporation shall pay all charges and expenses, including those of the exchange
agent for the Merger, in connection with the Merger, and Parent shall reimburse
the Surviving Corporation for such charges and expenses. The Merger Agreement
also provides that except as otherwise described below, whether or not the
Merger is consummated, all costs and expenses incurred in connection with the
Merger Agreement, the Stock Option Agreement, the Shareholders Agreement, the
Offer and the Merger and the other transactions contemplated by the Merger
Agreement, the Stock Option Agreement and the Shareholders Agreement shall be
paid by the party incurring such expense.
The Merger Agreement provides that, under certain circumstances, the
Company shall pay to Parent a one-time fee equal to $2.0 million (the
"Termination Fee") and to reimburse Parent all of the charges and expenses
incurred by Parent or Purchaser in connection with the Merger Agreement, the
Stock Option Agreement and the Shareholders Agreement and the transactions
contemplated by the Merger Agreement and the Stock Option Agreement and the
Shareholders Agreement, including, without limitation, fees and expenses of
accountants,
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attorneys and financial advisors, up to a maximum of $500,000 in the aggregate.
The Company is obligated to pay the Termination Fee under the following
circumstances: (i)(A) a bona fide Acquisition Proposal shall have been made to
the Company or any of its stockholders or any person shall have announced an
intention (whether or not conditional) to make an Acquisition Proposal with
respect to the Company, and on or following the date of the Merger Agreement but
prior to the date that the Offer is consummated and Parent owns a majority of
the outstanding Shares, such Acquisition Proposal, announcement or intention is
or becomes publicly known, (B) on or following the date of the Merger
Agreement and prior to the time such Acquisition Proposal, announcement or
intention is or becomes publicly known, the occurrence of an event which would
have a material adverse effect on the ability of Parent and Purchaser to
consummate the Merger shall not have become publicly known, and (C) on or
following the date on which such Acquisition Proposal, announcement or intention
is or becomes publicly known, the Merger Agreement is terminated by either
Parent or the Company because the Merger shall not have been consummated by
February 1, 2000 (subject to extension, in certain circumstances, to March 1,
2000), whether such date is before or after the date of approval by the
stockholders of the Company, and if terminated by Parent or Purchaser, they
shall not collectively beneficially own a majority of the outstanding Shares on
a fully diluted basis, or (ii) the Merger Agreement is terminated (x) by the
Company because it has determined to enter into a binding written agreement
concerning a Superior Proposal and the Company notifies Parent in writing that
it intends to enter into such an agreement, attaching the most current version
of such agreement to such notice, and Parent does not make, within three
business days of receipt of the Company's written notification of its intention
to enter into such an agreement, a written offer that is at least as favorable,
from a financial point of view, to the stockholders of the Company as the
Superior Proposal, (y) by Parent if the Board of Directors shall have failed
to recommend, or shall have withdrawn or adversely modified its approval or
recommendation of, the Offer or the Merger or failed to reconfirm its
recommendation of the Offer or the Merger within five calendar days after a
written request by Parent to do so, or shall have resolved to do any of the
foregoing, or (z) because of the failure of the conditions to the Offer
described in paragraphs (e) and (f) of Section 14, provided, however, that the
Termination Fee shall not be payable to Parent in accordance with clause (i)
above unless and until (I) any person or entity (other than Parent) (an
"Acquiring Party") has within 9 months of such termination entered into a
definitive agreement to acquire, by purchase, merger, consolidation, sale,
assignment, lease, transfer or otherwise, in one transaction or any related
series of transactions, a majority of the voting power of the outstanding
securities of the Company or (II) a definitive agreement has been entered into
with respect to a merger, consolidation or similar business combination between
the Company and an Acquiring Party or an affiliate thereof as a result of which
the stockholders of the Company immediately prior to the transaction do not own
at least 50% of the surviving entity.
Pursuant to the Merger Agreement, any Termination Fee described above
required to be paid to Parent would be reduced (but not below zero) to the
extent necessary so that the sum of (1) the portion of any Termination Fee
actually paid to Parent, (2) the aggregate of all Cancellation Amounts (as
defined below) paid to Parent pursuant to the Stock Option Agreement and (3) the
proceeds actually received by Parent as the result of selling Shares issued to
Parent pursuant to the Stock Option Agreement to a third party that acquires
more than 50% of the Company's outstanding voting securities (other than the
Company or any of its affiliates) shall not exceed $4.4 million. Parent and the
Company have agreed that in no event shall (i) the sum of the portion of any
Termination Fee actually paid to Parent and the cash proceeds actually received
by Parent as the result of selling Shares issued to Parent pursuant to the Stock
Option Agreement to a third party that acquires more than 50% of the Company's
outstanding voting securities (other than the Company or any of its affiliates)
exceed $4.4 million, or (ii) the sum of the portion of any Termination Fees
actually paid to Parent, the aggregate Cancellation Amounts paid to Parent
pursuant to the Stock Option Agreement and the cash proceeds actually received
by Parent as the result of selling Shares issued to Parent pursuant to the Stock
Option Agreement to a third party that acquires more than 50% of the Company's
outstanding voting securities (other than the Company or any of its affiliates)
exceed $4.4 million.
Other Agreements. The Merger Agreement provides that the Company and
Parent shall cooperate with each other and use (and shall cause their respective
subsidiaries to use) their respective commercially reasonable best efforts to
take or cause to be taken all actions, and do or cause to be done all things,
necessary, proper or advisable under the Merger Agreement, the Stock Option
Agreement, the Shareholders Agreement and applicable laws to consummate and make
effective the Merger and the other transactions contemplated by the Merger
Agreement, the Stock Option Agreement and the Shareholders Agreement as soon as
practicable, including preparing and filing as promptly as practicable all
documentation to effect all necessary applications, notices, petitions, filings
and other documents and to obtain as promptly as practicable all permits,
consents, approvals and authorizations necessary or advisable to be obtained
from any third party and/or any U.S. governmental or
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<PAGE> 33
regulatory authority, agency, commission, body or other governmental entity
("Governmental Entity") in order to consummate the Offer and the Merger or any
of the other transactions contemplated by the Merger Agreement, the Stock Option
Agreement and the Shareholders Agreement.
Conditions to the Merger. The Merger Agreement provides that the respective
obligation of each party to effect the Merger is subject to the satisfaction or
waiver at or prior to the closing of the Merger of each of the following
conditions: (i) if the approval of the Merger Agreement and the Merger by the
holders of Shares is required by applicable law, the Merger Agreement shall have
been duly adopted by holders of a majority of the Shares outstanding; (ii) any
waiting period applicable to the consummation of the Merger under the HSR Act
shall have expired or been terminated; (iii) (A) no court or Governmental Entity
of competent jurisdiction shall have enacted, issued, enforced or entered any
statute, rule, regulation, judgment, decree, injunction or other order (whether
temporary, preliminary or permanent) that is in effect and restrains, enjoins or
otherwise prohibits consummation of the Offer or Merger (collectively, an
"Order"); provided however, that prior to invoking this provision, each party
shall use its commercially reasonable best efforts to have any such Order lifted
or withdrawn, and (B) no Governmental Entity shall have instituted any
proceeding seeking any such Order; and (iv) Purchaser shall have (A) commenced
the Offer and (B) purchased, pursuant to the terms and conditions of such Offer,
all Shares duly tendered and not withdrawn; provided, however, that neither
Parent nor Purchaser shall be entitled to rely on the condition described in
clause (iv)(B) above if either of them shall have failed to purchase Shares
pursuant to the Offer in breach of their obligations under the Merger Agreement.
Termination. The Merger Agreement, notwithstanding approval thereof by
the stockholders of the Company, may be terminated at any time prior to the
Effective Time:
(a) by mutual written consent of the Company, Parent and Purchaser;
(b) by Parent or the Company:
(i) if the Merger shall not have been consummated by February
1, 2000, whether such date is before or after the date of approval by
the stockholders of the Company; provided, however, that if a request
for additional information is received from the FTC or the Antitrust
Division of the United States Department of Justice pursuant to the HSR
Act or additional information is requested by a governmental authority
pursuant to the antitrust, competition, foreign investment, or similar
laws or any foreign countries or supranational commissions or boards
that require pre-merger notifications or filings with respect to the
Merger, then such date shall be extended to the 30th day following
certification by Parent and/or the Company, as applicable, that Parent
and/or the Company, as applicable, have substantially complied with
such request, but in any event not later than March 1, 2000; provided
that the right to terminate the Merger Agreement described in this
clause (i) shall not be available to any party that has breached in any
material respect its obligations under the Merger Agreement in any
manner that shall have been the proximate cause of, or resulted in, the
failure to consummate the Merger by the date referred to in this clause
(i);
(ii) if the Stockholders Meeting shall have been convened,
held and completed and the approval of the Company stockholders shall
not have been obtained thereat or at any adjournment or postponement
thereof, provided however, that Parent shall not be permitted to
terminate the Merger Agreement pursuant to the circumstances described
in this clause (ii) if Parent or Purchaser shall not have voted all
Shares then owned beneficially or of record by them in favor of
approval and adoption of the Merger Agreement, the Merger and the
transactions contemplated hereby;
(iii) if any Order permanently restraining, enjoining or
otherwise prohibiting the Offer or the Merger shall become final and
non-appealable (whether before or after the approval of the Company
Stockholders); provided, however, that the fight to terminate the
Merger Agreement pursuant to the circumstances described in this clause
(iii) shall not be available to any party that fails to use
commercially reasonable best efforts to prevent such Order from being
issued and to use commercially reasonable best efforts to cause such
Order to be vacated, withdrawn or lifted; or
(iv) if the Offer terminates or expires on account of the
failure of any condition described in Section 14 of the Merger
Agreement without Purchaser having purchased any Shares thereunder.
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<PAGE> 34
(c) by the Company:
(i) if (a) the Company is not in material breach of any of its
covenants and agreements in the Merger Agreement, (b) the Board of
Directors authorizes the Company, prior to Parent beneficially owning a
majority of the Shares, and subject to complying with the terms of the
Merger Agreement, to enter into a binding written agreement concerning
a Superior Proposal and the Company notifies Parent in writing that it
intends to enter into such an agreement, attaching the most current
version of such agreement to such notice, and (c) Parent does not make,
within three business days of receipt of the Company's written
notification of its intention to enter into such an agreement, a
written offer that is at least as favorable, from a financial point of
view, to the stockholders of the Company as the Superior Proposal;
provided that the Company agreed (x) that it would not enter into a
binding agreement referred to in clause (b) until at least the first
calendar day following the third business day after it has provided the
written notice to Parent described therein, (y) to notify Parent
promptly if its intention to enter into a written agreement referred to
in such notice shall change at any time after giving such notification
and (z) that it will not terminate the Merger Agreement or enter into a
binding agreement referred to in clause (b) if Parent has, within the
period referred to in clause (x) of this sentence, made a written offer
that is at least as favorable to the Company's stockholders from a
financial point of view as the Superior Proposal;
(ii) if, prior to consummation of the Offer and prior to
Parent beneficially owning a majority of the outstanding shares of
Common Stock, there has been a material breach by Parent or Purchaser
of any representation, warranty, covenant or agreement of Parent or
Purchaser contained in the Merger Agreement which has had, or is
reasonably likely to have, the effect of materially impairing the
ability of Parent or Purchaser to consummate the Offer or the Merger (a
"Terminating Parent Breach"); provided, however, that, if such
Terminating Parent Breach is curable by Parent through the exercise of
reasonable best efforts and such cure is reasonably likely to be
completed prior to the termination date of the Merger Agreement
described in (b)(i) above, then for so long as Parent continues to
exercise reasonable best efforts to cure such Terminating Parent
Breach, the Company may not terminate the Merger Agreement under the
circumstances described in this clause (ii); or
(iii) if Purchaser shall have failed to commence the Offer
within five business days after the date of the Merger Agreement.
(d) by Parent, prior to the Parent and Purchaser collectively
beneficially owning (excluding from the determination of beneficial
ownership shares of Common Stock issuable upon exercise of or subject to
the Stock Option Agreement and the Shareholders Agreement) a majority of
the outstanding shares on a fully diluted basis (excluding from the
determination of outstanding shares on a fully diluted basis, shares
subject to the Stock Option Agreement):
(i) if the Board of Directors shall have failed to recommend,
or shall have withdrawn or adversely modified its approval or
recommendation of, the Offer or the Merger or failed to reconfirm its
recommendation of the Offer or the Merger within five calendar days
after a written request by Parent to do so, or shall have resolved to
do any of the foregoing; or
(ii) if there has been a material breach by the Company of any
representation, warranty, covenant or agreement of the Company
contained in the Merger Agreement which would give rise to the failure
of the condition to the Offer that (A) the representations and
warranties of the Company set forth in the Merger Agreement shall be
true and correct as of the date of the Merger Agreement and as of the
consummation of the Offer (except for those representations and
warranties made as of a specific date, which shall be true and correct
as of such date), and considered without regard to any qualification
by, or references to, "material," "in all material respects" or
"Company Material Adverse Effect," except for such failures of such
representations and warranties to be true and correct that individually
or in the aggregate, do not have and are not reasonably likely to have
a Company Material Adverse Effect; or (B) the Company shall have
breached or failed to comply in any material respect with any of its
material obligations, covenants or agreements under the Merger
Agreement and any such breach or failure shall not have been
substantially cured by the Company within five business days after
Parent provides written notice to the Company of such breach or failure
(a "Terminating Company Breach"); provided, however, that, if such
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Terminating Company Breach is curable by the Company through the
exercise of reasonable best efforts and such cure is reasonably likely
to be completed prior to the termination date of the Merger Agreement,
then for so long as the Company continues to exercise reasonable best
efforts, Parent may not terminate the Merger Agreement under the
circumstances described in this clause (ii).
Indemnification; Directors' and Officers' Insurance. The Merger
Agreement provides that from and after the earliest date on which Purchaser owns
a majority of the outstanding Shares on a fully diluted basis, Parent will
indemnify, defend and hold harmless Indemnified Parties, against any costs or
expenses (including reasonable attorneys' fees), judgments, fines, losses,
claims, damages, liabilities and amounts paid in settlement incurred in
connection with any claim, action, suit, proceeding, inquiry or investigation,
whether civil, criminal, administrative or investigative, arising out of matters
existing or occurring at or prior to the Effective Time (including transactions
contemplated by the Merger Agreement), whether asserted or claimed prior to, at
or after the Effective Time (and Parent shall also advance expenses as incurred
to the fullest extent permitted under applicable law, provided the person to
whom expenses are advanced provides an undertaking to repay such advances if it
is ultimately determined that such person is not entitled to indemnification).
The Merger Agreement also provides that from and after the earliest
date on which Purchaser owns a majority of the outstanding Shares on a fully
diluted basis, Parent will cause the Surviving Corporation to fulfill and honor
in all respects the obligations of the Company pursuant to each indemnification
agreement previously disclosed to Parent and any indemnification provision or
any exculpation provision set forth in the Company's Certificate of
Incorporation or Bylaws in effect on the date of the Merger Agreement. In
addition, the Certificate of Incorporation and Bylaws of the Surviving
Corporation shall contain the provisions with respect to indemnification and
exculpation from liability set forth in the Company's Certificate of
Incorporation and Bylaws on the date of the Merger Agreement, and during the
period commencing on the earliest date on which Purchaser purchases Shares
pursuant to the Offer and ending on the sixth anniversary of the Effective Time,
such provisions shall not be amended, repealed or otherwise modified in any
manner that would adversely affect the rights thereunder of any of the
Indemnified Parties.
Any Indemnified Party wishing to make a claim of indemnification under
the Merger Agreement, upon learning of any such claim, action, suit, proceeding,
inquiry or investigation, is required to promptly notify Parent thereof. In the
event of any such claim, action, suit, proceeding, inquiry or investigation
(whether arising before or after the Effective Time), (i) Parent or the
Surviving Corporation shall have the right to assume the defense thereof and
Parent shall be liable to such Indemnified Parties for the legal expenses of one
counsel or any other expenses subsequently incurred by such Indemnified Parties
in connection with the defense thereof unless there is a conflict of interest
between the Indemnified Parties and Parent, in which event Parent shall be
liable to the Indemnified Parties for the fees and expenses of each Indemnified
Party's counsel, (ii) the Indemnified Parties will cooperate in the defense of
any such matter and (iii) Parent shall not be liable for any settlement effected
without its prior written consent and no Indemnified Party shall be liable for
any settlement effected without its prior written consent unless such settlement
includes a complete unconditional release of all claims against all Indemnified
Parties; provided that Parent shall not have any obligation hereunder to any
Indemnified Party if and when a court of competent jurisdiction shall ultimately
determine, and such determination shall have become final, that the
indemnification of such Indemnified Party in the manner contemplated hereby is
prohibited by applicable law. Parent and the Surviving Corporation jointly and
severally have agreed to pay all expenses, including attorneys' fees, that may
be incurred by the Indemnified Parties in enforcing the indemnity and other
obligations described above.
The Merger Agreement also provides that prior to the Effective Time,
the Company may purchase insurance coverage extending for a period of six years
after the Effective Time the level and scope of the Company's directors' and
officers' liability insurance coverage in effect as of the date of the Merger
Agreement; provided that the aggregate annual premium payable for such insurance
shall not exceed 175% of the last annual premium paid for such coverage prior to
the date of the Merger Agreement. In addition, Parent has agreed that through
the sixth anniversary of the Effective Time, Parent shall maintain in effect,
for the benefit of the Indemnified Parties, such insurance coverage, and subject
to the limitations in the preceding sentence, shall pay the annual premium for
such insurance coverage. In the event the annual premium payable for such
insurance coverage exceeds 175% of the last annual premium paid by the Company
for such coverage, Parent shall be obligated to obtain and maintain in effect a
policy with the greatest amount of coverage available for a cost not exceeding
175% of such amount.
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The Merger Agreement further provides that if the Surviving Corporation
or any of its successors or assigns (i) shall consolidate with or merge into any
other corporation or entity and shall not be the continuing or surviving
corporation or entity of such consolidation or merger or (ii) shall transfer all
or substantially all of its properties and assets to any individual, corporation
or other entity, then and in each such case, proper provisions shall be made so
that the successors and assigns of the surviving corporation shall assume all of
the obligations described above with respect to indemnification under the Merger
Agreement.
Certain Employee Matters. The Merger Agreement provides that during the
period commencing at the Effective Time and ending on the first anniversary
thereof, the employees will continue to be provided with benefits under employee
benefit plans (other than stock options or other plans involving the issuance of
securities of the Company or Parent) which in the aggregate are substantially
comparable to those currently provided by the Company to such employees. Parent
has agreed to cause each employee benefit plan of Parent in which employees are
eligible to participate to take into account for purposes of eligibility and
vesting thereunder the service of such employees with the Company as if such
service were with Parent, to the same extent that such service was credited
under a comparable plan of the Company and such service period would have been
credited to an employee of Parent participating in the relevant plan. Parent has
further agreed that for the first plan year ending after the Effective Time, any
pre-existing condition exclusion under any Parent benefit plan providing medical
or dental benefits shall be no more restrictive for any employee who,
immediately prior to commencing participation in such Parent benefit plan, was
participating in a Company benefit plan providing medical or dental benefits and
had satisfied any pre-existing condition provision under such Company benefit
plan. In addition, any expenses that were taken into account under a Company
benefit plan providing medical or dental benefits in which the employee
participated immediately prior to commencing participation in a Parent benefit
plan providing medical or dental benefits shall be taken into account to the
same extent under such Parent benefit plan, in accordance with the terms of such
Parent benefit plan, for purposes of satisfying applicable deductible,
coinsurance and maximum out-of-pocket provisions and life-time benefit limits.
Parent has further agreed that it will, and will cause the Surviving Corporation
to, honor in accordance with their terms (i) all employee benefit obligations to
employees accrued as of the Effective Time and (ii) all employee severance plans
in existence on the date of the Merger Agreement (and previously disclosed to
Parent) and all employment or severance agreements entered into prior to the
date of the Merger Agreement.
Amendment. Subject to the provisions of applicable law, at any time
prior to the Effective Time, the parties to the Merger Agreement may modify or
amend the Merger Agreement, by written agreement executed and delivered by duly
authorized officers of the respective parties.
Timing. The exact timing and details of the Merger will depend upon
legal requirements and a variety of other factors, including the number of
Shares acquired by Purchaser pursuant to the Offer. Although Parent has agreed
to cause the Merger to be consummated on the terms contained in the Merger
Agreement, there can be no assurance as to the timing of the Merger.
STOCK OPTION AGREEMENT
The following is a summary of the material terms of the Stock Option
Agreement. This summary is not a complete description of the terms and
conditions thereof and is qualified in its entirety by reference to the full
text thereof, which is incorporated herein by reference and a copy of which has
been filed with the SEC as an exhibit to the Schedule 14D-1. See "Available
Information."
Concurrently with the execution and delivery of the Merger Agreement,
the Company granted to Parent an option to purchase Shares on the terms and
conditions set forth in the Stock Option Agreement dated July 30, 1999, among
the Company, Parent and Purchaser (the "Stock Option Agreement"). Pursuant to
the Stock Option Agreement, the Company has agreed, on the terms and subject to
the conditions thereof, to grant an option to purchase up to 1,931,050 Shares.
Any reference to a majority of the issued and outstanding Shares or Shares
outstanding on a fully diluted basis, or similar references, as provided in the
documents described herein, exclude from the determination thereof any shares of
Common Stock issuable upon the exercise of the Stock Option Agreement and any
reference to beneficial ownership of Shares, or similar references, exclude from
the determination thereof any Shares issuable upon exercise of or subject to the
Shareholders Agreement or the Stock Option Agreement.
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Grant of Purchase Option. Under the Stock Option Agreement, the Company
granted to Parent an irrevocable option (the "Option") to purchase up to
1,931,050 Shares at a cash purchase price equal to $8.50 per share (the
"Purchase Price"). The Option may be exercised by Parent, in whole or in part,
at any time, but only on one occasion, following (but not prior to) the
occurrence of the events set forth in any of clauses (i) or (ii) below, and
prior to the Option Termination Date (as defined below). The Option is subject
to appropriate adjustment in the event of any change in the number of issued and
outstanding shares of capital stock of the Company to maintain Parent's rights
under the Stock Option Agreement, including the right to purchase 19.9% of the
capital stock of the Company entitled to vote generally for election of
directors of the Company outstanding immediately prior to exercise.
Exercise of Option. The Option may be exercised if:
(i) (A) a bona fide Acquisition Proposal shall have been made
to the Company or any of its stockholders or any person or entity shall
have announced an intention (whether or not conditional) to make an
Acquisition Proposal with respect to the Company, and on or following
the date of the Merger Agreement but prior to the date that the Offer
is consummated and Parent owns a majority of the outstanding Shares of
Common Stock, such Acquisition Proposal, announcement or intention is
or becomes publicly known, and (B) on or following the date of the
Merger Agreement but prior to the time such Acquisition Proposal,
announcement or intention is or becomes publicly known, the occurrence
of an event that would have a material adverse effect on the ability of
Parent or Purchaser to consummate the Merger shall not have become
publicly known, and (C) on or following the date on which such
Acquisition Proposal, announcement or intention is or becomes publicly
known, the Merger Agreement is terminated by either Parent or the
Company because, subject to certain exceptions, the Merger shall not
have been consummated by February 1, 2000 (subject, in certain
circumstances, to extension to March 1, 2000), and if terminated by
Parent and Parent or the Purchaser, Parent or the Purchaser shall not
collectively beneficially own a majority of the outstanding Shares on a
fully diluted basis, and the Termination Fee under the Merger Agreement
has become payable; or
(ii) the Merger Agreement is terminated (x) by the Company
because it has determined to enter into a binding written agreement
concerning a Superior Proposal and the Company notifies Parent in
writing that it intends to enter into such an agreement, attaching the
most current version of such agreement to such notice, and Parent does
not make, within three business days of receipt of the Company's
written notification of its intention to enter into such an agreement,
a written offer that is at least as favorable, from a financial point
of view, to the stockholders of the Company as the Superior Proposal or
(y) by Parent if the Board of Directors shall have failed to recommend,
or shall have withdrawn or adversely modified its approval or
recommendation of, the Offer or the Merger or failed to reconfirm its
recommendation of the Offer or the Merger within five calendar days
after a written request by Parent to do so, or shall have resolved to
do any of the foregoing, or (z) because of the failure of certain
conditions to the Offer described in paragraphs (e) and (f) of Section
14 of the Merger Agreement.
Under the Stock Option Agreement, if at any time the Option is then
exercisable and at or prior to such time the Termination Fee shall have become
payable, Parent may on one occasion elect, in lieu of exercising the Option to
purchase Shares, to send a written notice to the Company (a "Cash Exercise
Notice") specifying a date not later than 20 business days and not earlier than
10 business days following the date such notice is given on which date the
Company shall pay to Parent an amount in cash (the "Cancellation Amount") equal
to the Spread (as defined below) multiplied by all or such portion of the Shares
subject to the Option as Parent shall specify. As used in the Stock Option
Agreement, "Spread" means the excess, if any, over the Purchase Price of the
higher of (x) if applicable, the highest price per Share (including any
brokerage commissions, transfer taxes and soliciting dealers' fees) paid or
proposed to be paid by any person pursuant to any Acquisition Proposal occurring
after the date of the Stock Option Agreement and prior to the Option Termination
Date (the "Alternative Purchase Price") or (y) the average of the closing bid
and asked prices of the Shares on the NASDAQ/NMS or on such other national
securities exchange on which the Shares are then listed for the last five
trading days immediately prior to the date of the Cash Exercise Notice (the
"Closing Price"). If the Alternative Purchase Price includes any property other
than cash, the Alternative Purchase Price shall be the sum of (i) the fixed cash
amount, if any, included in the Alternative Purchase Price plus (ii) the fair
market value of such other property. If such other property consists of
securities with an existing public trading market, the average of the closing
prices (or the average of the closing bid and asked prices if
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<PAGE> 38
closing prices are unavailable) for such securities in their principal public
trading market on the five trading days ending five days prior to the date of
the Cash Exercise Notice shall be deemed to equal the fair market value of such
property. If such other property consists of something other than cash or
securities with an existing public trading market and, as of the payment date
for the Spread, agreement on the value of such other property has not been
reached, the Alternative Purchase Price shall be deemed to equal the Closing
Price. Upon exercise of its right to receive cash described in this paragraph,
the obligations of the Company to deliver Shares pursuant to the Option shall be
terminated with respect to such number of Shares for which Parent shall have
elected to be paid the Spread.
Profit Limitation. The Stock Option Agreement provides that any
Cancellation Amount shall be reduced (but not below zero) to the extent
necessary so that the sum of (1) the portion of any Termination Fee actually
paid to Parent (such portion actually paid, the "Actual Termination Fee"), (2)
the aggregate of all Cancellation Amounts paid to Parent pursuant to the Stock
Option Agreement and (3) the cash proceeds actually received by Parent as the
result of selling Shares issued to Parent pursuant to the Stock Option Agreement
to a third party that acquires more than 50% of the Company's outstanding voting
securities (other than any such acquisitions by the Company or any of its
affiliates) shall not exceed $4.4 million. The Stock Option Agreement further
provides that in no event shall (i) the sum of the Actual Termination Fee and
the cash proceeds actually received by Parent as the result of selling Shares
issued to Parent pursuant to the Stock Option Agreement to a third party that
acquires more than 50% of the Company's outstanding voting securities (other
than the Company or any of its affiliates) exceed $4.4 million, or (ii) the sum
of the Actual Termination Fee, the aggregate Cancellation Amounts paid to Parent
pursuant to the Stock Option Agreement and the cash proceeds actually received
by Parent as the result of selling Shares issued to Parent pursuant to the Stock
Option Agreement to a third party that acquires more than 50% of the Company's
outstanding voting securities (other than any such acquisitions by the Company
or any of its affiliates) exceed $4.4 million.
Registration Rights. The Stock Option Agreement provides that, in the
event that the Parent shall desire to sell any of the Shares within two years
after the purchase of such Shares pursuant to the Option, and such sale
requires, in the opinion of counsel to Parent, which opinion shall be reasonably
satisfactory to the Company and its counsel, registration of such Shares under
the Securities Act, the Company will cooperate with Parent and any underwriters
(which underwriters must be reasonably satisfactory to the Company) in
registering such Shares for resale, including, without limitation, promptly
filing a registration statement which complies with the requirements of
applicable federal and state securities laws, and entering into an underwriting
agreement with such underwriters upon such terms and conditions as are
customarily contained in underwriting agreements with respect to secondary
distributions; provided that the Company shall not be required to have declared
effective more than two registration statements and shall be entitled to delay
the filing or effectiveness of any registration statement and may suspend the
use of any registration statement (and related prospectus) for one or more
periods of time not exceeding an aggregate of 60 days in any one-year period if
the offering would, in the judgment of the Board of Directors, require premature
disclosure of any material corporate development or material transaction
involving the Company or interfere with any previously planned securities
offering by the Company. The Stock Option Agreement also provides that the
Company shall bear the cost of the registration, including, but not limited to,
all registration and filing fees, printing expenses, and fees and disbursements
of counsel and accountants for the Company, except that Parent shall pay the
fees and disbursements of its counsel, and the underwriting fees and selling
commissions applicable to the Shares sold by Parent. The Stock Option Agreement
further provides that the Company shall indemnify and hold harmless (i) Parent,
its affiliates and its officers and directors and (ii) each underwriter and each
person who controls any underwriter within the meaning of the Securities Act or
the Exchange Act (collectively, the "Underwriters") ((i) and (ii) being referred
to as "Registration Indemnified Parties") against any losses, claims, damages,
liabilities or expenses, to which the Registration Indemnified Parties may
become subject, insofar as such losses, claims, damages, liabilities (or actions
in respect thereof) and expenses arise out of or are based upon any untrue
statement or alleged untrue statement of any material fact contained or
incorporated by reference in any registration statement filed pursuant to the
registration rights under the Stock Option Agreement, or arise out of or are
based upon the omission or alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements therein not
misleading; provided, however, that the Company will not be liable in any such
case to the extent that any such loss, liability, claim, damage or expense
arises out of or is based upon (A) an untrue statement or alleged untrue
statement in or omission or alleged omission from any such documents in reliance
upon and in conformity with written information furnished to the Company by the
Registration Indemnified Parties expressly for use or incorporation by reference
therein, or (B) the fact that the person asserting any such loss, liability,
claim, damage or expense did not receive a copy of an amended preliminary
prospectus or the final prospectus (or the final prospectus as amended or
supplemented) at or prior to the written confirmation of the sale of
-34-
<PAGE> 39
the Shares to such person because of the failure of Parent to so provide such
amended preliminary or final prospectus. In addition, Parent has agreed and the
Underwriters will be required to agree to indemnify and hold harmless the
Company, its affiliates and its officers and directors against any losses,
claims, damages, liabilities or expenses to which the Company, its affiliates
and its officers and directors may become subject, insofar as such losses,
claims, damages, liabilities (or actions in respect thereof) and expenses arise
out of or are based upon (i) any untrue statement of any material fact contained
or incorporated by reference in any registration statement filed pursuant to the
registration rights under the Stock Option Agreement, or arise out of or are
based upon the omission or alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements therein not
misleading, in each case to the extent, but only to the extent, that such untrue
statement or alleged untrue statement or omission or alleged omission was made
in reliance upon and in conformity with written information furnished to the
Company by the Indemnified Parties, as applicable, specifically for use or
incorporation by reference therein, or (ii) the fact that the person asserting
any such loss, liability, claim, damage or expense did not receive a copy of an
amended preliminary prospectus or the final prospectus (or the final prospectus
as amended or supplemented) at or prior to the written confirmation of the sale
of the Shares to such person because of the failure of Parent to so provide such
amended preliminary or final prospectus.
Other Agreements. The Stock Option Agreement provides that after the
Option becomes exercisable, the Company will promptly file an application to
list the Shares on NASDAQ/NMS or on such other national securities exchange on
which the Shares are then listed and will use its reasonable best efforts to
obtain approval of such listing and to effect all necessary filings by the
Company under the HSR Act and any other necessary consents.
Conditions. The Stock Option Agreement provides that the Company's
obligation to deliver Shares upon exercise of the Option is subject to the
conditions that: (i) no preliminary or permanent injunction or other order
issued by any federal or state court of competent jurisdiction prohibiting the
delivery of the Shares shall be in effect; (ii) any applicable waiting periods
under the HSR Act shall have expired or been terminated; (iii) the
representations and warranties of Parent made in the Stock Option Agreement
shall be true and correct in all material respects as of the date of the closing
of the issuance of the Shares; and (iv) the existence of the circumstances
described in clause (i) and (ii) under "-- Exercise of Option."
Termination. The Stock Option Agreement provides that the right to
exercise the Option shall terminate at (and the Option shall no longer be
exercisable after) the earliest of (i) the Effective Time, (ii) the nine month
anniversary of the earliest to occur of the events set forth in Exercise of
Options, and (iii) the fifteenth day following the termination of the Merger
Agreement if prior to such fifteenth day the events set forth in clause (i) or
(ii) of the Exercise of Options shall not have occurred (such earliest date the
"Option Termination Date"); provided that, if the Option cannot be exercised or
the Shares cannot be delivered to Parent upon such exercise because one or more
of the conditions set forth in clause (i) or (ii) in "-- Conditions" above have
not yet been satisfied, the Option Termination Date shall be extended until
fifteen days after such impediment to exercise or delivery has been removed.
Other. Because the rights and obligations of Parent and the Company
under the Stock Option Agreement are subject to compliance with the HSR Act,
Parent will include in its merger notifications to be filed with the Department
of Justice and FTC a description of its rights under the Stock Option Agreement.
SHAREHOLDERS AGREEMENT
The following is a summary of the material terms of the Shareholders
Agreement. This summary is not a complete description of the terms and
conditions thereof and is qualified in its entirety by reference to the full
text thereof, which is incorporated herein by reference and a copy of which has
been filed with the SEC as an exhibit to the Schedule 14D-1. See "Available
Information."
Tender of Shares. Concurrently with the execution and delivery of the
Merger Agreement, and in order to induce Parent and Purchaser to enter into the
Merger Agreement, the Major Stockholders who beneficially own in the aggregate,
as of July 30, 1999 approximately 34.1%, of the outstanding Shares including
3,188,057 shares of Common Stock and options representing the right to purchase
189,790 Shares (collectively, the "Optioned Securities") or have the right to
vote Shares or other securities (the "Voting Securities") have entered into a
Shareholders Agreement, dated as of July 30, 1999, with Parent and Purchaser
(the "Shareholders Agreement").
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<PAGE> 40
Pursuant to the Shareholders Agreement, the Major Stockholders have agreed to
tender the Optioned Securities in the Offer and not to withdraw such Optioned
Securities prior to the expiration of the Offer. The obligation to sell any of
such Optioned Securities under the Shareholders Agreement, as described below,
shall be satisfied, solely with respect to the Shares so tendered, upon the
purchase of such Shares by Purchaser pursuant to the Offer. In the event of any
change in the Optioned Securities by reason of stock dividends, split-up,
recapitalizations, combinations, exchanges or the like, the number of Optioned
Securities subject to the Shareholders Agreement will be appropriately adjusted.
Shareholder Option. Pursuant to the Shareholder Agreement, the Major
Stockholders have granted to Purchaser an irrevocable option (the "Shareholder
Option") to purchase (i) all Optioned Securities at the Offer Price; and (ii)
any additional Optioned Securities acquired by the Major Stockholders during the
term of the Shareholders Agreement. The Shareholder Option may be exercised by
Purchaser at any time after the date on which all waiting periods under the HSR
Act applicable to the exercise of the Shareholder Option have expired or been
terminated, but only if:
(i) (A) a bona fide Acquisition Proposal shall have been made
to the Company or any of its stockholders or any person or entity shall
have announced an intention (whether or not conditional) to make an
Acquisition Proposal with respect to the Company, and on or following
the date of the Merger Agreement but prior to the date that the Offer
is consummated and Parent owns a majority of the outstanding shares of
Common Stock, such Acquisition Proposal, announcement or intention is
or becomes publicly known, and (B) on or following the date of the
Merger Agreement but prior to the time such Acquisition Proposal,
announcement or intention is or becomes publicly known, the occurrence
of an event that would have a material adverse effect on the ability of
Parent or Purchaser to consummate the Merger shall not have become
publicly known, and (C) on or following the date on which such
Acquisition Proposal, announcement or intention is or becomes publicly
known, the Merger Agreement is terminated by either Parent or the
Company because, subject to certain exceptions, the Merger shall not
have been consummated by February 1, 2000 (subject, in certain
circumstances, to extension to March 1, 2000), and if terminated by
Parent and Parent or the Purchaser, Parent or the Purchaser shall not
collectively beneficially own a majority of the outstanding Shares on a
fully diluted basis, and the Termination Fee under the Merger Agreement
has become payable; or
(ii) the Merger Agreement is terminated (x) by the Company
because it has determined to enter into a binding written agreement
concerning a Superior Proposal and the Company notifies Parent in
writing that it intends to enter into such an agreement, attaching the
most current version of such agreement to such notice, and Parent does
not make, within three business days of receipt of the Company's
written notification of its intention to enter into such an agreement,
a written offer that is at least as favorable, from a financial point
of view to the stockholders of the Company as the Superior Proposal or
(y) by Parent if the Board of Directors shall have failed to recommend,
or shall have withdrawn or adversely modified its approval or
recommendation of, the Offer or the Merger or failed to reconfirm its
recommendation of the Offer or the Merger within five calendar days
after a written request by Parent to do so, or shall have resolved to
do any of the foregoing, or (z) because of the failure of certain
conditions to the Offer.
Agreement to Vote and Irrevocable Proxy. The Major Stockholders have
further agreed to (a) vote all of their respective Voting Securities in favor of
the Merger; (b) not vote any Voting Securities in favor of any action or
agreement which would result in a breach in any material respect of any
covenant, representation or warranty or any other obligation of the Company
under the Merger Agreement; and (c) vote all Voting Securities of such Major
Stockholder against any action or agreement which would impede, interfere with
or attempt to discourage the Offer or the Merger, including, but not limited to:
(i) any Acquisition Proposal (other than the Offer and the Merger) involving the
Company or any of its subsidiaries; (ii) any change in the management or board
of directors of the Company, except as otherwise agreed to in writing by the
Purchaser; (iii) any material change in the present capitalization or dividend
policy of the Company; or (iv) any other material change in the Company's
corporate structure or business. The Major Stockholders have also granted
Purchaser or its designees an irrevocable proxy to vote their Shares for all
purposes whatsoever.
No Inconsistent Agreements; Non Solicitation. Pursuant to the
Shareholders Agreement, the Major Stockholders also agreed that while the
agreement was in effect they would not make any disposition of or enter
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<PAGE> 41
into any voting arrangement with respect to the subject securities or initiate
or solicit or enter into or endorse any Acquisition Proposal, or otherwise
engage in any action inconsistent with their performance of the Shareholders
Agreement.
Representations and Warranties. The Shareholders Agreement contains
certain customary representations and warranties, including, without limitation,
representations by the Major Stockholders as to ownership of the Shares and
power and authority.
Termination. The Shareholder Option shall expire on the earliest of (1)
the Effective Time (as defined in the Merger Agreement), (2) the nine month
anniversary of the earliest to occur of the events set forth in clause (i) and
(ii) described under Shareholder Option, and (3) the fifteenth day following the
termination of the Merger Agreement if prior to such fifteenth day the events
set forth in clause (i) and (ii) described under Shareholder Option shall not
have occurred (such earliest date being referred to as the "Shareholder Option
Expiration Date"); provided that, if the Shareholder Option cannot be exercised
or the Optioned Securities cannot be delivered to Purchaser upon such exercise
because (x) there shall be in effect a preliminary or permanent injunction or
other order issued by any federal or state court of competent jurisdiction
prohibiting delivery of the Optioned Securities or (y) any applicable waiting
periods under the HSR Act shall not have expired or been terminated, then the
Shareholder Option Expiration Date shall be extended until 30 days after such
impediment to exercise or delivery has been removed.
SELECTED FINANCIAL DATA
Set forth below is certain selected historical consolidated financial
information with respect to the Company and its subsidiaries excerpted or
derived from the audited consolidated financial statements included in the
Company Form 10-K for period ending December 31, 1998 and from the unaudited
consolidated financial statements included in the Company's Quarterly Report on
Form 10-Q for the quarter ended June 30, 1999. More comprehensive financial
information is included in such reports and other documents filed by the Company
with the SEC, and the following summary is qualified in its entirety by
reference to such reports and such other documents and all the financial
information (including any related notes) contained therein. The reports and
other documents filed with the SEC should be available for inspection and copies
thereof should be obtainable in the manner set forth under "Available
Information."
SIBIA NEUROSCIENCES, INC.
SELECTED HISTORICAL FINANCIAL DATA
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1998 1997 1996 1995 1994
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Total revenue...................................... $ 7,043 $ 11,197 $ 8,481 $ 10,448 $ 4,852
Research and development expenses.................. $ 18,247 $ 15,819 $ 12,268 $ 8,949 $ 8,663
Net income (loss).................................. $ (15,807) $ (7,593) $ (5,564) $ 2,926 $ (27)
Basic net income (loss) per common share........... $ (1.68) $ (0.82) $ (0.73) $ 0.60
Diluted net income (loss) per common share......... $ (1.68) $ (0.82) $ (0.73) $ 0.47
Shares used in computing basic net income (loss) per
common share.................................... 9,421 9,248 7,596 4,893
Shares used in computing diluted net income (loss) per
common share.................................... 9,421 9,248 7,596 6,164
</TABLE>
-37-
<PAGE> 42
<TABLE>
<CAPTION>
AT DECEMBER 31,
1998 1997 1996 1995 1994
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
BALANCE SHEET DATA:
<S> <C> <C> <C> <C> <C>
Cash, cash equivalents and
investment securities........................... $ 17,187 $ 33,347 $ 37,464 $ 16,488 $ 5,944
Working capital.................................... $ 13,662 $ 31,214 $ 35,324 $ 14,338 $ 4,523
Total assets....................................... $ 21,199 $ 36,180 $ 39,983 $ 18,251 $ 8,005
Long-term debt, less current
portion......................................... $ 1,350 $ 695 $ 519 $ 721 $ 860
Accumulated deficit................................ $(45,093) $(29,286) $(21,693) $(16,129) $ (19,055)
Total stockholders' equity......................... $ 15,140 $ 32,214 $ 36,572 $ 15,107 $ 5,166
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30,
1999 1998
---- ----
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
STATEMENT OF OPERATIONS DATA (UNAUDITED)
<S> <C> <C>
Total revenue (A)........................................................ $ 4,221 $ 2,361
Research and development expenses........................................ $ 3,951 $ 4,514
Net loss................................................................. $ (499) $(2,451)
Basic and diluted net loss per common share (B).......................... $ (0.05) $ (0.26)
Shares used in computing basic and diluted net loss per common share..... 9,662 9,391
</TABLE>
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<PAGE> 43
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
1999 1998
---- ----
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
STATEMENT OF OPERATIONS DATA (UNAUDITED)
<S> <C> <C>
Total revenue (A)........................................................ $ 6,736 $ 3,895
Research and development expenses........................................ $ 8,453 $ 9,310
Net loss................................................................. $(3,339) $(6,503)
Basic and diluted net loss per common share (B).......................... $ (0.35) $ (0.69)
Shares used in computing basic and diluted net loss per common share..... 9,593 9,378
</TABLE>
<TABLE>
<CAPTION>
AT JUNE 30, 1999
BALANCE SHEET DATA (UNAUDITED): (IN THOUSANDS)
<S> <C>
Cash and cash equivalents............................................ $ 15,809
Investment securities................................................ 2,779
Total assets......................................................... 23,708
Long-term debt, less current portion................................. 1,296
Accumulated deficit.................................................. (48,432)
Total stockholders' equity.................................. 16,975
</TABLE>
(A) During the first six months of 1999, the Company entered into licensing
agreements with Bristol-Myers Squibb, SmithKline Beecham, and American Home
Products. The agreements grant the licensees non-exclusive rights to use the
Company's patented transcription-based assay technology. The Company expects to
receive annual maintenance payments as well as royalties on the sales of any
products identified using the licensed technology.
In May 1999, the Company entered into a collaborative agreement with Eli Lilly
and Company to research and develop compounds effective in treating disorders of
the central nervous system. The Company and Lilly will work together to identify
and optimize compounds selective for subtypes of nicotinic acetylcholine
receptors (nAChRs). Under the terms of the agreement, Lilly made a $5 million
equity investment, for one share of the Company's Series B Convertible
Non-Voting Preferred Stock, and will make payments of approximately $5.5 million
per year for research support. The agreement has a minimum initial term of two
years, although it may be terminated earlier in connection with a change in
control of the Company. Eli Lilly was granted exclusive worldwide rights,
subject to some limitations, to manufacture and market products it or the
Company discovers during the research collaboration. The Company is entitled to
receive milestone payments at certain stages of development of product
candidates, if any are identified, and royalties on sales of products that are
developed.
In July 1999, the Company entered into an agreement with Pharmacia & Upjohn
Company. Under the agreement, the Company licensed to Pharmacia & Upjohn
non-exclusive rights to use its patented transcription-based assay technology.
The Company will receive annual maintenance payments as well as royalties on the
sales of any products identified using the licensed technology.
In August 1999, the Company entered into a non-exclusive license agreement for
its transcription-based assay patent portfolio with Glaxo Wellcome. The
agreement grants Glaxo Wellcome and its affiliates a fully paid-up, worldwide
license to certain patents in the Company's transcription-based assay patent
portfolio. Glaxo Wellcome also has the option of obtaining a fully paid-up
license to two additional patents at the conclusion of certain proceedings.
Under the terms of the agreement, the Company will receive an up-front payment
and additional payments should Glaxo Wellcome exercise its options.
(B) For all periods presented, both basic and diluted loss per common share are
computed based on the weighted average number of shares of Common Stock
outstanding during the period. Stock options and conversion of the Series B
Convertible Preferred Stock, could potentially dilute basic earnings per share
in the future but were excluded from the computation of diluted loss per share
as their effect is antidilutive for the periods presented. Common share
equivalents that would have been included in the computation of diluted loss per
common share if they were not antidilutive totaled 494,700, and 596,260 for the
three months ended June 30, 1999 and June 30, 1998, respectively, and 423,020,
and 576,646 for the six months ended June 30, 1999 and June 30, 1998,
respectively.
CERTAIN COMPANY PROJECTIONS
To the knowledge of Parent and Purchaser, the Company does not as a
matter of course make public
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<PAGE> 44
forecasts as to its future financial performance. However, in connection with
the preliminary discussions concerning the feasibility of the Offer and the
Merger, the Company furnished Parent with certain financial projections.
The projections set forth below (the "Projections") are derived or
excerpted from information provided by the Company and are based on numerous
assumptions concerning future events. The Projections have not been adjusted to
reflect the effects of the Offer or the Merger. The Projections should be read
together with the other information contained in this Section.
The projections included operating projections for the Company for the
years 1999 through 2004 (the Company reports its financial results based on a
December 31 year end) developed by the Company's senior management predicated on
their then preliminary assumptions for revenue resulting form existing and
projected new technology licensing and research collaboration arrangements and
operating expenses. The Projections estimated total revenue of $21.4 million,
total expenses of $20.9 million and net income of $1.5 million for the year
ending December 31, 1999; total revenue of $29.7 million, total expenses of
$22.5 million and net income of $9.0 million for year ending December 31, 2000;
total revenue of $44.5 million, total expenses of $24.6 million and net income
of $22.7 million for the year ending December 31, 2001; total revenue of $53.5
million, total expenses of $26.3 million and net income of $23.4 million for the
year ending December 31, 2002; total revenue of $79.0 million, total expenses of
$28.3 million and net income of $33.7 million for the year ending December 31,
2003; and total revenue of $83.7 million, total expenses of $30.1 million and
net income of $36.4 million for the year ending December 31, 2004.
THE PROJECTIONS WERE NOT PREPARED WITH A VIEW TO PUBLIC DISCLOSURE OR
COMPLIANCE WITH PUBLISHED GUIDELINES OF THE COMMISSION OR THE GUIDELINES
ESTABLISHED BY THE AMERICAN INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS REGARDING
PROJECTION OR FORECASTS AND ARE INCLUDED HEREIN ONLY BECAUSE SUCH INFORMATION
WAS PROVIDED TO PARENT. THESE FORWARD-LOOKING STATEMENTS ARE SUBJECT TO CERTAIN
RISKS AND UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY
FROM THE PROJECTIONS. THE PROJECTIONS REFLECT NUMEROUS ASSUMPTIONS (NOT ALL OF
WHICH WERE STATED IN THE PROJECTIONS AND NOT ALL OF WHICH WERE PROVIDED TO
PARENT), ALL MADE BY MANAGEMENT OF THE COMPANY, WITH RESPECT TO INDUSTRY
PERFORMANCE, GENERAL BUSINESS, ECONOMIC, MARKET AND FINANCIAL CONDITIONS AND
OTHER MATTERS, ALL OF WHICH ARE DIFFICULT TO PREDICT, MANY OF WHICH ARE BEYOND
THE COMPANY'S CONTROL AND NONE OF WHICH WERE SUBJECT TO APPROVAL BY PARENT OR
OFFEROR. ACCORDINGLY, THERE CAN BE NO ASSURANCE THAT THE ASSUMPTIONS MADE IN
PREPARING THE PROJECTIONS WILL PROVE ACCURATE, AND ACTUAL RESULTS MAY BE
MATERIALLY GREATER OR LESS THAN THOSE CONTAINED IN THE PROJECTIONS. THE
INCLUSION OF THE PROJECTIONS HEREIN SHOULD NOT BE REGARDED AS AN INDICATION THAT
ANY OF PARENT OR OFFEROR OR THEIR RESPECTIVE REPRESENTATIVES CONSIDERED OR
CONSIDER THE PROJECTIONS TO BE A RELIABLE PREDICTION OF FUTURE EVENTS, AND THE
PROJECTIONS SHOULD NOT BE RELIED UPON AS SUCH. NONE OF PARENT OR OFFEROR AND
THEIR RESPECTIVE REPRESENTATIVES ASSUMES ANY RESPONSIBILITY FOR THE VALIDITY,
REASONABLENESS, ACCURACY OR COMPLETENESS OF THE PROJECTIONS. NONE OF PARENT OR
OFFEROR AND ANY OF THEIR REPRESENTATIVES HAS MADE, OR MAKES, ANY REPRESENTATION
TO ANY PERSON REGARDING THE INFORMATION CONTAINED IN THE PROJECTIONS AND NONE OF
THEM INTENDS TO UPDATE OR OTHERWISE REVISE THE PROJECTIONS TO REFLECT
CIRCUMSTANCES EXISTING AFTER THE DATE WHEN MADE OR TO REFLECT THE OCCURRENCE OF
FUTURE EVENTS EVEN IN THE EVENT THAT ANY OR ALL OF THE ASSUMPTIONS UNDERLYING
THE PROJECTIONS ARE SHOWN TO BE IN ERROR.
SOURCE AND AMOUNT OF FUNDS
The amount payable by Purchaser to acquire all Shares outstanding as of
June 30, 1999, and all Shares issuable upon the conversion of all shares of the
Company's Preferred Stock to the Company's Common Stock totals approximately $86
million. Purchaser will obtain all such funds from Parent, which in turn Parent
will provide from its working capital. Neither the Offer nor the Merger is
contingent upon obtaining financing. At June 30, 1999, Parent had cash and cash
equivalents of approximately $2.2 billion and working capital (total
current assets minus total current liabilities) of approximately $3.9 billion.
PRINCIPAL STOCKHOLDERS AND STOCK OWNERSHIP OF MANAGEMENT
SECURITY OWNERSHIP OF
CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the ownership
of the Company's Common Stock
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<PAGE> 45
as of September 13, 1999 by: (i) each director; (ii) the Company's Chief
Executive Officer and its four other most highly compensated executive officers
and one former executive officer who was no longer serving as an executive
officer at the end of fiscal year 1998; (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>
MC Subsidiary Corp..................................... 6,694,639 69%
One Merck Drive, Whitehouse Station
New Jersey 08889-0100
Biotechnology Value Fund, L.P. (2)..................... 1,421,000 14.6%
333 West Wacker Drive, Suite 1600
Chicago, IL 60606
Novartis AG............................................ 1,035,324 10.6%
Huenincerstrase
4056 Basel, Switzerland
William T. Comer, Ph.D. (3)............................ 142,900 1.4%
Stanley T. Crooke, M.D., Ph.D. (4)..................... 23,750 *
Gunnar Ekdahl (5)...................................... 22,000 *
G. Kenneth Lloyd, Ph.D. (6)............................ 65,404 *
David E. McClure, Ph.D. (7)............................ 37,645 *
Ian A. McDonald, Ph.D. (8)............................. 84,683 *
Jeffrey F. McKelvy, Ph.D. (9).......................... 29,000 *
William R. Miller (10)................................. 17,500 *
James D. Watson, Ph.D. (11)............................ 20,125 *
Judy C. Lewent (12) 0 0%
Mary M. McDonald (12) 0 0%
Roger M. Perlmutter (12) 0 0%
Edward M. Scolnick, M.D. (12) 0 0%
All executive officers and directors as a
group (15 persons) (13)........................... 377,132 3.7%
</TABLE>
- -----------------------
* Less than one percent.
(l) This table is based upon information supplied by officers, directors
and principal stockholders and Schedules 13D and 13G, if any, filed
with 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 9,762,751
shares outstanding on September 13, 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 1,421,000 Shares of
Common Stock of the Company.
BVF shares voting and dispositive power over the 495,500 Shares of
Common Stock it beneficially owns
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<PAGE> 46
with Partners. Partners and BVF Inc. share voting and dispositive power
over the 1,421,000 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 142,900 Shares subject to options exercisable within 60 days
of September 13, 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 23,750 Shares subject to options exercisable within 60 days of
September 13, 1999. Dr. Crooke resigned from the Board of Directors
effective September 9, 1999.
(5) Includes 22,000 Shares subject to options exercisable within 60 days of
September 13, 1999. Mr. Ekdahl resigned from the Board of Directors
effective September 9, 1999.
(6) Includes 65,404 Shares subject to options exercisable within 60 days of
September 13, 1999.
(7) Includes 37,645 Shares subject to options exercisable within 60 days of
September 13, 1999.
(8) Includes 84,683 Shares subject to options exercisable within 60 days of
September 13, 1999.
(9) Includes 29,000 Shares subject to options exercisable within 60 days of
September 13, 1999. Resigned from the Board of Directors effective
September 9, 1999.
(10) Includes 17,500 Shares subject to options exercisable within 60 days of
September 13, 1999.
(11) Includes 20,125 Shares subject to options exercisable within 60 days of
September 13, 1999. Resigned from the Board of Directors effective
September 9, 1999.
(12) Appointed to the Board of Directors effective September 9, 1999.
(13) Includes 364,081 Shares subject to options exercisable within 60 days
of September 13, 1999.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The Company incorporates by reference herein the following documents
filed with the SEC pursuant to the Exchange Act:
1. The Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1998;
2. The Company's Quarterly Report on Form 10-Q for the quarter ended
March 31, 1999.
3. The Company's Quarterly Report on Form 10-Q for the quarter ended
June 30, 1999.
4. The Company's Current Reports on Form 8-K dated August 4, 1999,
August 6, and September 13, 1999.
Copies of the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1998 and the Quarterly Report on form 10-Q for the quarter
ended June 30, 1999 are being furnished to stockholders along with this
Information Statement as Annex V and Annex VI.
All documents filed by the Company pursuant to Sections 13(a), 13(c),
14 and 15(d) of the Exchange Act after the date hereof and until the date of the
Special Meeting shall be deemed to be incorporated by reference herein and made
a part hereof from the date any such document is filed. The information relating
to the Company contained in this Information Statement does not purport to be
complete and should be read together with the information in the documents
incorporated by reference herein. Any statement contained herein or in a
document incorporated herein by reference shall be deemed to be modified or
superseded for purposes hereof to the extent that a subsequent statement
contained herein or in any other subsequently filed document incorporated by
reference herein modifies or supersedes such statement. Any such statement so
modified or superseded shall not be deemed,
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<PAGE> 47
except as so modified or superseded, to constitute a part hereof.
THIS INFORMATION STATEMENT INCORPORATES DOCUMENTS BY REFERENCE WHICH
ARE NOT PRESENTED HEREIN OR DELIVERED HEREWITH. SUCH DOCUMENTS (OTHER THAN
EXHIBITS TO SUCH DOCUMENTS UNLESS SUCH EXHIBITS ARE SPECIFICALLY INCORPORATED BY
REFERENCE) ARE AVAILABLE, WITHOUT CHARGE, TO ANY PERSON, INCLUDING ANY
BENEFICIAL OWNER, TO WHOM THIS INFORMATION STATEMENT IS DELIVERED, ON WRITTEN OR
ORAL REQUEST TO SIBIA NEUROSCIENCES, INC., 505 COAST BOULEVARD SOUTH, SUITE 300,
LA JOLLA, CALIFORNIA 92037-4641 (TELEPHONE NUMBER (858) 452-5892), ATTENTION:
THOMAS A. REED, CHIEF FINANCIAL OFFICER OF THE COMPANY.
AVAILABLE INFORMATION
Both Parent and the Company are subject to the information filing
requirements of the Exchange Act and in accordance therewith files reports,
proxy and information statements and other information with the SEC. The Tender
Offer Statement on Schedule 14D-1, as amended, filed by Purchaser and the
Solicitation/Recommendation Statement on Schedule 14D-9, as amended, filed by
the Company, each in connection with the Offer, and the respective exhibits
thereto, as well as such reports, proxy and information statements and other
information filed by Parent and the Company with the SEC may be inspected and
copied at the public reference facilities maintained by the SEC at Judiciary
Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 and at the SEC's regional
offices at Seven World Trade Center, 13th Floor, New York, New York 10007 and at
the Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661-2551. Copies of such material can also be obtained from the
principal office of the SEC at Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549 at prescribed rates. The SEC also maintains an internet
website at http://www.sec.gov that contains reports, proxy statements and other
information.
All information contained in this Information Statement with respect to
the Company has been derived from the Company's Annual Reports on Form 10-K for
the fiscal year ended December 31, 1998, from its Quarterly Report on Form 10-Q
for the fiscal quarter ended June 30,1999 and from the Solicitation/
Recommendation Statement on Schedule 14D-9, as amended, initially filed by the
Company with the SEC on August 6, 1999. All information with respect to Parent
and Purchaser has been supplied by Parent.
October [ ], 1999 SIBIA NEUROSCIENCES, INC.
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<PAGE> 48
ANNEX I
AGREEMENT AND PLAN OF MERGER
among
SIBIA NEUROSCIENCES, INC.,
MERCK & CO., INC.
and
MC SUBSIDIARY CORP.
Dated as of July 30, 1999
<PAGE> 49
Table of Contents
<TABLE>
<CAPTION>
Section Page
- ------- ----
<S> <C>
ARTICLE I The Tender Offer...................................................................................... 2
1.1. The Offer........................................................................................... 2
1.2. SEC Filings......................................................................................... 3
1.3. Company Action...................................................................................... 5
1.4 Composition of the Company Board..................................................................... 5
ARTICLE II The Merger; Closing; Effective Time.................................................................. 6
2.1. The Merger.......................................................................................... 6
2.2. Closing............................................................................................. 7
2.3. Effective Time...................................................................................... 7
ARTICLE III Certificate of Incorporation and Bylaws of the Surviving Corporation................................ 7
3.1. The Certificate of Incorporation.................................................................... 7
3.2. The Bylaws.......................................................................................... 8
ARTICLE IV Officers and Directors of the Surviving Corporation.................................................. 8
4.1. Directors........................................................................................... 8
4.2. Officers............................................................................................ 8
ARTICLE V Effect of the Merger on Capital Stock; Exchange of Certificates....................................... 8
5.1. Effect on Capital Stock............................................................................. 8
5.2. Surrender and Payment............................................................................... 9
5.3. Adjustment of Merger Consideration.................................................................. 12
5.4. Merger Without Meeting of Stockholders.............................................................. 12
5.5. Treatment of Convertible Preferred Stock............................................................ 12
ARTICLE VI Representations and Warranties....................................................................... 12
6.1. Representations and Warranties of the Company....................................................... 13
6.2. Representations and Warranties of Parent and Merger Sub............................................. 30
ARTICLE VII Covenants........................................................................................... 33
7.1. Company Interim Operations.......................................................................... 33
7.2. Acquisition Proposals............................................................................... 35
7.3. Company Stockholder Approval; Proxy Statement....................................................... 37
7.4. Approvals and Consents; Cooperation................................................................. 39
7.5. Filings; Other Actions; Notification................................................................ 40
7.6. Access.............................................................................................. 40
7.7. De-registration..................................................................................... 41
7.8. Publicity........................................................................................... 41
</TABLE>
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<PAGE> 50
<TABLE>
<S> <C>
7.9. Benefits............................................................................................ 41
7.10. Expenses........................................................................................... 43
7.11. Indemnification; Directors' and Officers' Insurance................................................ 43
7.12. Other Actions by the Company and Parent............................................................ 45
7.13. Convertible Preferred Stock........................................................................ 46
ARTICLE VIII Conditions......................................................................................... 46
8.1. Conditions to Each Party's Obligation to Effect the Merger.......................................... 46
ARTICLE IX Termination.......................................................................................... 47
9.1. Termination by Mutual Consent....................................................................... 47
9.2. Termination by Either Parent or the Company......................................................... 47
9.3. Termination by the Company.......................................................................... 48
9.4. Termination by Parent............................................................................... 49
9.5. Effect of Termination and Abandonment............................................................... 49
ARTICLE X Miscellaneous and General............................................................................. 51
10.1. Survival........................................................................................... 52
10.2. Modification or Amendment.......................................................................... 52
10.3. Waiver of Conditions............................................................................... 52
10.4. Counterparts....................................................................................... 52
10.5. GOVERNING LAW AND VENUE; WAIVER OF JURY TRIAL...................................................... 52
10.6. Notices............................................................................................ 53
10.7. Entire Agreement................................................................................... 54
10.8. No Third Party Beneficiaries....................................................................... 55
10.9. Obligations of Parent and of the Company........................................................... 55
10.10. Severability...................................................................................... 55
10.11. Specific Performance.............................................................................. 55
10.12. Interpretation.................................................................................... 56
10.13. Assignment........................................................................................ 56
10.14. Captions.......................................................................................... 56
</TABLE>
-ii-
<PAGE> 51
AGREEMENT AND PLAN OF MERGER (hereinafter called this
"Agreement"), dated as of July 30, 1999, among SIBIA Neurosciences, Inc., a
Delaware corporation (the "Company"), Merck & Co., Inc., a New Jersey
corporation ("Parent"), and MC Subsidiary Corp., a Delaware corporation and a
wholly owned subsidiary of Parent ("Merger Sub," the Company and Merger Sub
sometimes being hereinafter collectively referred to as the "Constituent
Corporations").
RECITALS
WHEREAS, the respective Boards of Directors of Parent, Merger
Sub and the Company have each approved the Offer (as defined herein) and the
Merger (as defined herein) and have determined that it is in the best interests
of their respective companies and stockholders for Parent to acquire the Company
upon the terms and subject to the conditions set forth herein;
WHEREAS, in order to complete such acquisition, the respective
Boards of Directors of Parent, Merger Sub and the Company have each approved the
merger of Merger Sub with and into the Company (the "Merger"), upon the terms
and subject to the conditions of this Agreement and in accordance with the
Delaware General Corporation Law (the "DGCL"), whereby each issued and
outstanding Share (as defined herein) not owned directly or indirectly by Parent
or the Company will be converted into the right to receive the highest price per
share in cash actually paid in the Offer;
WHEREAS, the Board of Directors of the Company has unanimously
approved this Agreement, the Offer and the Merger, has determined that the Offer
and the Merger are fair to and in the best interests of the Company's
stockholders and is recommending that the Company's stockholders accept the
Offer, tender their Shares thereunder and adopt this Agreement;
WHEREAS, contemporaneously with the execution and delivery of
this Agreement, the Company is entering into a stock option agreement with
Parent (the "Stock Option Agreement"), pursuant to which the Company has granted
to Parent an option to purchase Shares (as defined in Section 1.1(a)) under the
terms and conditions set forth in the Stock Option Agreement; and
WHEREAS, contemporaneously with the execution and delivery of
this Agreement, certain holders of Shares are entering into an agreement with
Parent (the "Shareholders Agreement") pursuant to which such holders have made
certain agreements with respect to the Shares held by them.
NOW, THEREFORE, in consideration of the premises, and of the
representations, warranties, covenants and agreements contained herein and in
the Stock Option Agreement, the parties hereto agree as follows:
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<PAGE> 52
ARTICLE I
The Tender Offer
1.1. The Offer.
(a) Provided that this Agreement shall not have been
terminated in accordance with Article IX hereof and none of the events set forth
in Annex A hereto (the "Offer Conditions") shall be existing, within five
Business Days of the date hereof, Merger Sub will commence a tender offer (the
"Offer") for all of the outstanding shares of common stock, par value $0.001 per
share, of the Company (each a "Share" or, collectively, the "Shares") at a price
per Share of U.S. $8.50 net to the Seller in cash (such price, or any higher
price paid in the Offer, the "Price Per Share") upon the terms and conditions
set forth in this Agreement, including Annex A hereto.
(b) The obligation of Merger Sub to accept for payment,
purchase and pay for any Shares tendered pursuant to the Offer shall be subject
only to the satisfaction or waiver of the Offer Conditions, including the Offer
Condition that at least that number of Shares equivalent to a majority of the
total issued and outstanding Shares on a fully diluted basis on the date such
shares are purchased pursuant to the Offer shall have been validly tendered and
not withdrawn prior to the expiration of the Offer (the "Minimum Condition").
Merger Sub will not, without the prior written consent of the Company (such
consent to be authorized by the Company Board) (i) decrease the amount or change
the form of consideration payable in the Offer, (ii) decrease the number of
Shares sought in the Offer, (iii) impose additional conditions to the Offer,
(iv) change any Offer Condition or amend any other term of the Offer if any such
change or amendment would be adverse in any respect to the holders of Shares
(other than Parent or Merger Sub), (v) except as provided below, extend the
Offer if all of the Offer Conditions have been satisfied or (vi) amend or waive
the Minimum Condition. Subject to the terms and conditions hereof, the Offer
shall expire at midnight, New York City time, on the date that is twenty (20)
Business Days after the Offer is commenced (within the meaning of Rule 14d-2
under the Securities Exchange Act of 1934, as amended (the "Exchange Act")) (the
"Scheduled Expiration Date"); provided, however, that without the consent of the
Company Board, Merger Sub may (x) extend the Offer, if on the Scheduled
Expiration Date of the Offer any of the Offer Conditions shall not have been
satisfied or waived, for one (1) or more periods (none of which shall exceed ten
(10) Business Days) but in no event past 90 days from the date of this Agreement
unless the waiting period applicable to the transactions contemplated by this
Agreement under the HSR Act has not terminated or expired in which case not past
the date set forth in Section 9.2(i), (y) extend the Offer for such period as
may be required by any rule, regulation, interpretation or position of the
Securities and Exchange Commission ("SEC") or the staff thereof applicable to
the Offer or (z) extend the Offer for one (1) or more periods (each such period
to be for not more than three (3) Business Days and such extensions to be for an
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<PAGE> 53
aggregate period of not more than ten (10) Business Days beyond the latest
expiration date that would otherwise be permitted under clause (x) or (y) of
this sentence) if on such expiration date the Offer Conditions shall have been
satisfied or waived but there shall not have been tendered that number of Shares
which would equal more than ninety percent (90%) of the issued and outstanding
Shares. Merger Sub agrees that if all of the Offer Conditions are not satisfied
on the Scheduled Expiration Date, then, provided that all such conditions are
and continue to be reasonably probable of being satisfied by the date that is 60
business days after the commencement of the Offer, Merger Sub shall extend the
Offer for one or more periods of not more than ten (10) Business Days each if
requested to do so by the Company; provided that Merger Sub shall not be
required to extend the Offer beyond 60 business days after commencement of the
Offer or, if earlier, the date of termination of this Agreement in accordance
with the terms hereof. On the terms of the Offer and subject to the satisfaction
or waiver of the Offer Conditions and the terms of this Agreement, Merger Sub
shall be obligated to purchase all Shares tendered and not validly withdrawn on
the earliest date that all of the Offer Conditions are first satisfied or waived
and shall pay for all Shares validly tendered and not withdrawn pursuant to the
Offer that Merger Sub becomes obligated to purchase pursuant to the Offer as
soon as practicable after the Scheduled Expiration Date of the Offer.
Notwithstanding any other provision of this Agreement, the Stock Option
Agreement or the Shareholders Agreement, any reference to a majority of the
total issued and outstanding shares or Shares, or shares or Shares outstanding
on a fully diluted basis, or similar references, shall, for purposes of such
agreements, exclude from the determination thereof any shares of Common Stock
issuable upon exercise of or subject to the Stock Option Agreement and any
reference to beneficial ownership of shares of Common Stock or similar
references shall, for purposes of such agreements, exclude from the
determination thereof any shares of Common Stock issuable upon exercise of or
subject to the Stock Option Agreement and/or the Shareholders Agreement.
1.2. SEC Filings.
(a) As soon as reasonably practicable after the execution of
this Agreement, but in any event no later than the date of commencement of the
Offer, Parent and Merger Sub shall file with the SEC a Tender Offer Statement on
Schedule 14D-l with respect to the Offer (as supplemented or amended from time
to time, the "Schedule 14D-l") to provide for the purchase of the issued and
outstanding Shares in accordance with the terms hereof. Parent and Merger Sub
agree, as to this Schedule 14D-l, the Offer to Purchase and related Letter of
Transmittal (which documents, as supplemented or amended from time to time,
together constitute the "Offer Documents") will comply as to form and content in
all material respects with the applicable provisions of the federal securities
laws. The Company and its counsel shall be given an opportunity to review and
comment upon the Offer Documents and any amendment or supplement thereto prior
to the filing thereof with the SEC and Parent and Merger Sub shall consider such
comments in good faith. Parent and Merger Sub agree to provide to the Company
and its
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<PAGE> 54
counsel any comments which Parent, Merger Sub or their counsel may receive from
the Staff of the SEC promptly after receipt thereof, and any proposed responses
thereto, with respect to the Offer Documents and any amendment or supplement
thereto. Parent, Merger Sub and the Company agree to correct promptly any
information provided by any of them for use in the Offer Documents which shall
have become false or misleading in any material respect, and Parent and Merger
Sub further agree to take all steps necessary to cause the Schedule 14D-l as so
corrected to be filed with the SEC and to disseminate any revised Offer
Documents to the Company's stockholders, in each case as and to the extent
required by the applicable provisions of the federal securities laws.
(b) The Company Board shall recommend acceptance of the Offer
to its Stockholders in a Solicitation/Recommendation on Schedule 14D-9 (as
supplemented or amended from time to time, the "Schedule 14D-9"), provided,
however, that the Company Board may thereafter amend or withdraw its
recommendation if it has received an Acquisition Proposal which in accordance
with Section 7.2 is a Superior Proposal. The Company shall file the Schedule
14D-9 with the SEC upon commencement of the Offer which will comply as to form
and content in all material respects with the applicable provisions of the
federal securities laws. The Company will cooperate with Parent and Merger Sub
in mailing or otherwise disseminating the Schedule 14D-9 with the appropriate
Offer Documents to the stockholders of the Company. Parent and its counsel shall
be given an opportunity to review and comment upon the Schedule 14D-9 and any
amendment or supplement thereto prior to the filing thereof with the SEC, and
the Company shall consider any such comments in good faith. The Company agrees
to provide to Parent and Merger Sub and their counsel any comments which the
Company or its counsel may receive from the Staff of the SEC promptly after
receipt thereof, and any proposed responses thereto, with respect to the
Schedule 14D-9 and any amendment or supplement thereto. The Company, Parent and
Merger Sub agree to correct promptly any information provided by any of them for
use in the Schedule 14D-9 which shall have become false or misleading in any
material respect, and the Company further agrees to take all steps necessary to
cause such Schedule 14D-9 as so corrected to be filed with the SEC and
disseminated to the Company's stockholders, in each case as and to the extent
required by the applicable provisions of the federal securities laws. Parent,
Merger Sub and the Company each hereby agree to provide promptly such
information necessary to the preparation of the exhibits and schedules to the
Schedule 14D-9 and the Offer Documents which the respective party responsible
therefor shall reasonably request. The Company represents that CIBC World
Markets Corp. has delivered to the Company Board a written opinion, as of the
date hereof, that the consideration to be paid in the Offer and the Merger is
fair to the holders of the Shares from a financial point of view. The Company
hereby consents to the inclusion in the Offer Documents of the recommendations
and approvals referred to in this Section 1.2, unless the Company Board has
changed or withdrawn its recommendation after receipt of an Acquisition Proposal
that in accordance with Section 7.2 is a Superior Proposal.
-4-
<PAGE> 55
1.3. Company Action.
(a) In connection with the Offer, the Company shall promptly
furnish Merger Sub with such information (including a list of the record holders
of the Company Common Stock and their addresses, as well as mailing labels
containing the names and addresses of all record holders of Shares, any
non-objecting beneficial owner lists and lists of security positions of Shares
held in stock depositories in the Company's possession or control, in each case
as of a recent date), and shall thereafter render such assistance as Parent,
Merger Sub or their agents may reasonably request in communicating the Offer to
the record and beneficial holders of Shares. Subject to the requirements of
applicable law and except for such steps as are necessary to disseminate the
Offer Documents and any other documents necessary to consummate the Offer and
the Merger, Parent and Merger Sub shall (a) hold in confidence the information
contained in any of such labels and lists, (b) use such information only in
connection with the Offer and the Merger and (c) if this Agreement is
terminated, shall, upon request, deliver to the Company or destroy all copies of
such information then in their possession.
1.4 Composition of the Company Board.
(a) Promptly upon the acceptance for payment of, and payment
by Merger Sub in accordance with the Offer for, not less than that number of
Shares equal to the Minimum Condition, Merger Sub shall be entitled to designate
such number of members of the Company Board, rounded up to the next whole
number, equal to that number of directors which equals the product of the total
number of directors on the Company Board (giving effect to the directors elected
pursuant to this sentence) multiplied by the percentage that such number of
Shares owned in the aggregate by Merger Sub or Parent, upon such acceptance for
payment, bears to the number of Shares outstanding. Upon the written request of
Merger Sub, the Company shall, on the date of such request, (i) either increase
the size of the Company Board 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 Board and (ii) cause Parent's
designees to be so elected, in each case as may be necessary to comply with the
foregoing provisions of this Section 1.4(a).
(b) The Company's obligation to cause designees of Merger Sub
to be elected or appointed to the Company Board shall be subject to Section
14(f) of the Exchange Act and Rule 14f-l promulgated thereunder. The Company
shall promptly take all actions required pursuant to Section 14(f) and Rule
14f-l in order to fulfill its obligations under this Section 1.4, and shall
include in the Schedule 14D-9 such information with respect to Merger Sub and
its designees as is required under Section 14(f) and Rule 14f-l. Parent and
Merger Sub will supply to the Company in writing and be solely responsible for
any information with respect to any of them and their designees, officers,
directors and affiliates required by Section 14(f) and Rule 14f-l and applicable
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<PAGE> 56
rules and regulations.
(c) After the time that Merger Sub's designees constitute at
least a majority of the Company Board and until the Effective Time, the Company
Board shall always have at least two members (the "Independent Directors") who
are neither officers of Parent nor designees, shareholders or affiliates of
Parent or Parent's affiliates. During such period, any (i) amendment or
termination of this Agreement, (ii) extension of time for the performance or
waiver of the obligations or other acts of Parent or Merger Sub or waiver of the
Company's rights hereunder or (iii) action by the Company with respect to this
Agreement and the transactions contemplated hereby which adversely affects the
interests of the stockholders of the Company, shall require the approval of a
majority of the Independent Directors in addition to any required approval
thereof by the full Company Board. Notwithstanding the foregoing, any amendment
or withdrawal by the Company's Board of its recommendation of the Merger
pursuant to Section 7.3(a) shall require only the approval of the Independent
Directors, and no other action on the part of the Company or any other director
of the Company shall be required to authorize or approve such matter. If the
number of Independent Directors shall be reduced below two for any reason
whatsoever, any remaining Independent Director shall be entitled to designate a
person to fill the vacancy, which designee shall not be a current or former
officer, affiliate of Parent or any of Parent's affiliates, or, if no
Independent Directors then remain, the other directors shall designate two
persons to fill such vacancies who shall not be current or former officers,
affiliates of Parent or any of Parent's affiliates, and such persons shall be
deemed to be Independent Directors for purposes of this Agreement. The Company
Board shall not delegate any matter set forth in this Section 1.4(c) to any
committee of the Company Board.
ARTICLE II
The Merger; Closing; Effective Time
2.1. The Merger. Upon the terms and subject to the conditions
set forth in this Agreement, at the Effective Time (as defined in Section 2.3)
Merger Sub shall be merged with and into the Company and the separate corporate
existence of Merger Sub shall thereupon cease. The Company shall be the
surviving corporation in the Merger (sometimes hereinafter referred to as the
"Surviving Corporation") and shall continue to be governed by the laws of the
State of Delaware, and the separate corporate existence of the Company with all
its rights, privileges, immunities, powers and franchises shall continue
unaffected by the Merger, except as set forth in Articles III and IV. The Merger
shall have the effects specified in the DGCL. Parent, as the sole stockholder of
Merger Sub, hereby approves the Merger and this Agreement.
2.2. Closing. The closing of the Merger (the "Closing") shall
take place (i) at the offices of Fried, Frank, Harris, Shriver & Jacobson, One
New York Plaza, New
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<PAGE> 57
York, New York at 10:00 a.m. on the latest to occur of (A) the business day on
which the condition set forth in Section 8.1(a) shall be satisfied or waived in
accordance with this Agreement and (B) the first business day following the date
on which the last to be satisfied or waived of the other conditions set forth in
Article VIII (other than those conditions that by their nature are to be
satisfied at the Closing, but subject to the satisfaction or waiver of those
conditions) shall be satisfied or waived in accordance with this Agreement, or
(ii) at such other place and time and/or on such other date as the Company and
Parent may agree in writing (the "Closing Date").
2.3. Effective Time. As soon as practicable following the
Closing, the Company will cause a Certificate of Merger (the "Certificate of
Merger") to be executed, acknowledged and filed with the Secretary of State of
Delaware as provided in Section 251 of the DGCL. The Merger shall become
effective at the time when the Certificate of Merger has been duly filed with
the Secretary of State of the State of Delaware or, if agreed to by Parent and
the Company, such later time or date set forth in the Certificate of Merger (the
"Effective Time").
ARTICLE III
Certificate of Incorporation
and Bylaws of the Surviving Corporation
3.1. The Certificate of Incorporation. The certificate of
incorporation of Merger Sub as in effect immediately prior to the Effective Time
shall be the certificate of incorporation of the Surviving Corporation (the
"Charter"), except that Article FIRST of the Charter shall be amended to provide
that the name of the Surviving Corporation shall be the name of the Company.
3.2. The Bylaws. The bylaws of Merger Sub in effect
immediately prior to the Effective Time shall be the bylaws of the Surviving
Corporation (the "Bylaws"), until thereafter amended as provided therein or by
applicable law.
ARTICLE IV
Officers and Directors
of the Surviving Corporation
4.1. Directors. The directors of Merger Sub immediately prior
to the Effective Time shall, from and after the Effective Time, be the directors
of the Surviving Corporation until their successors have been duly elected or
appointed and qualified or until their earlier death, resignation or removal in
accordance with the Charter and Bylaws. Subject to the consummation of the Offer
and the purchase by Merger Sub of at
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least that number of shares equal to the Minimum Condition, prior to the
Effective Time, the Company shall take all actions necessary to obtain any
resignations of its directors necessary to give effect to the provisions of this
Section.
4.2. Officers. The officers of the Company immediately prior
to the Effective Time shall, from and after the Effective Time, be the officers
of the Surviving Corporation until their successors have been duly elected or
appointed and qualified or until their earlier death, resignation or removal in
accordance with the Charter and Bylaws.
ARTICLE V
Effect of the Merger on Capital Stock;
Exchange of Certificates
5.1. Effect on Capital Stock. At the Effective Time, as a
result of the Merger and without any action on the part of the Company, Parent,
Merger Sub or any holder of any capital stock of the Company:
(a) Merger Consideration. (i) Each Share issued and
outstanding immediately prior to the Effective Time (other than (A) Shares owned
by Parent or any direct or indirect Subsidiary of Parent (collectively, the
"Parent Companies"), (B) Dissenting Shares (as defined below), (C) or Shares
that are owned by the Company or any direct or indirect Subsidiary of the
Company (and in each case not held on behalf of third Parties) (collectively,
"Excluded Shares")) shall be converted into, and become exchangeable for the
right to receive the Price Per Share in cash (the "Merger Consideration").
(ii) At the Effective Time, all Shares shall no longer be
outstanding and shall be canceled and retired and shall cease to exist, and each
certificate (a "Certificate") formerly representing any of such Shares (other
than Excluded Shares) shall thereafter represent only the right to receive the
Merger Consideration.
(b) Cancellation of Excluded Shares. Each Excluded Share
issued and outstanding immediately prior to the Effective Time shall, by virtue
of the Merger and without any action on the part of the holder thereof, cease to
be outstanding, shall be canceled and retired without payment of any
consideration therefor and shall cease to exist.
(c) Merger Sub. As of and following the Effective Time, each
share of Common Stock, par value $.01 per share, of Merger Sub issued and
outstanding immediately prior to the Effective Time shall continue to remain
outstanding and shall constitute one share of common stock of the Surviving
Corporation.
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5.2. Surrender and Payment.
(a) Exchange Agent. Prior to the Effective Time, Parent shall
designate a bank or trust company reasonably acceptable to the Company to act as
agent for the holders of Shares in connection with the Merger (the "Exchange
Agent") to receive the Merger Consideration to which holders of Shares shall
become entitled pursuant to Section 5.1. Prior to the filing of the Certificate
of Merger with the Secretary of State of the State of Delaware, Parent or Merger
Sub shall deposit with the Exchange Agent cash in an aggregate amount equal to
the product of (i) the number of Shares outstanding (and not to be canceled
pursuant to Section 5.1(b)) immediately prior to the Effective Time, multiplied
by (ii) the Merger Consideration. The deposit made by Parent or Merger Sub
pursuant to the preceding sentence is hereinafter referred to as (the "Payment
Fund") . The Exchange Agent shall cause the Payment Fund to be (i) held for the
benefit of the holders of Shares and (ii) promptly applied to making the
payments provided for in Section 5.1(a). The Payment Fund shall not be used for
any purpose that is not provided for herein.
(b) Exchange Procedures. As soon as reasonably practicable
after the Effective Time, Parent shall cause the Exchange Agent to mail to each
holder of record of a certificate or certificates (the "Certificates") which
immediately prior to the Effective Time represented outstanding Shares, other
than shares to be canceled in accordance with Section 5.1(b), (i) a Letter of
Transmittal (which shall specify that delivery shall be effected, and risk of
loss and title to the Certificates shall pass, only upon delivery of the
Certificates to the Exchange Agent) and (ii) instructions for use in effecting
the surrender of the Certificates in exchange for the Merger Consideration. Upon
surrender of a Certificate for cancellation to the Exchange Agent, together with
such Letter of Transmittal, duly executed, and such other documents as may
reasonably be required by the Exchange Agent, the Exchange Agent shall pay the
holder of such Certificate the Merger Consideration in respect of such
Certificate, less any required withholding taxes, and the Certificate so
surrendered shall forthwith be canceled. If any portion of the Merger
Consideration is to be paid to a Person other than the registered holder of the
shares represented by the Certificate or Certificates surrendered in exchange
therefor, it shall be a condition to such payment that the Certificate or
Certificates so surrendered shall be properly endorsed or otherwise be in proper
form for transfer and that the Person requesting such payment shall pay to the
Exchange Agent any transfer or other taxes required as a result of such payment
to a Person other than the registered holder of such shares or establish to the
satisfaction of the Exchange Agent that such tax has been paid or is not
payable. Until surrendered as contemplated by this Section 5.2, each Certificate
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(other than Certificates representing Dissenting Shares (as defined below) or
Shares to be canceled pursuant to Section 5.1(b)) shall be deemed at any time
after the Effective Time to represent only the right to receive the Merger
Consideration upon such surrender.
(c) No Further Ownership Rights in Company Common Stock. All
Merger Consideration paid upon the surrender for exchange of Certificates in
accordance with the terms of this Article V shall be deemed to have been paid in
full satisfaction of all rights pertaining to the Shares theretofore represented
by such Certificates. There shall be no further registration of transfers on the
stock transfer books of the Surviving Corporation of the Shares which were
outstanding immediately prior to the Effective Time. If, after the Effective
Time, Certificates are presented to the Surviving Corporation or the Exchange
Agent for any reason, they shall be canceled and exchanged as provided in this
Article V, except as otherwise provided by law.
(d) Unclaimed Funds. Any portion of the Payment Fund made
available to the Exchange Agent pursuant to Section 5.2(a) that remains
unclaimed by holders of the Certificates for six months after the Effective Time
shall be delivered to the Surviving Corporation or a United States parent
thereof, upon demand, and any holders of Certificates who have not theretofore
complied with this Article V shall thereafter look only to Parent for payment of
their claim for Merger Consideration.
(e) No Liability. None of Parent, Merger Sub, the Company or
the Exchange Agent shall be liable to any Person in respect of any Merger
Consideration delivered to a public official pursuant to any applicable
abandoned property, escheat or similar law. If any Certificate has not been
surrendered prior to five years after the Effective Time (or immediately prior
to such earlier date on which Merger Consideration in respect of such
Certificate would otherwise escheat to or become the property of any public
official), any such shares, cash, dividends or distributions in respect of such
Certificate shall, to the extent permitted by applicable law, become the
property of the Surviving Corporation, free and clear of all claims or interest
of any person previously entitled thereto.
(f) Investment of Funds. The Payment Fund shall be invested by
the Exchange Agent in obligations of, or guaranteed by, the United States of
America, in commercial paper obligations rated A-l or P-l or better by Moody's
Investor Services or Standard & Poor's Corporation, respectively, in each case
with maturities not exceeding seven days. All earnings thereon shall inure to
the benefit of Parent or Merger Sub.
(g) Lost Certificates. In the event that any Certificate shall
have been lost, stolen or destroyed, upon the making of an affidavit of that
fact by the Person claiming such Certificate to be lost, stolen or destroyed
and, if required by Parent, the granting of an indemnity reasonably satisfactory
to Parent against any claim that may be made against it, the Surviving
Corporation or the Exchange Agent, with respect to such
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Certificate, the Exchange Agent will issue in exchange for such lost, stolen or
destroyed Certificate the Merger Consideration with respect to such Certificate,
to which such Person is entitled pursuant hereto.
(h) Dissenting Shares. Notwithstanding anything in this
Agreement to the contrary, Shares outstanding immediately prior to the Effective
Time and held by a holder who has not voted in favor of the Merger or consented
thereto in writing and who has demanded appraisal for such shares in accordance
with the DCCL (the "Dissenting Shares"), shall not be converted into a right to
receive the Merger Consideration, unless such holder fails to perfect or
withdraws or otherwise loses its right to appraisal. If after the Effective Time
such holder fails to perfect or withdraws or loses its right to appraisal, such
shares shall be treated as if they had been converted as of the Effective Time
into a right to receive the Merger Consideration. The Company shall give Parent
prompt notice of any demands received by the Company for appraisal of Shares,
and Parent shall have the right to participate in all negotiations and
proceedings with respect to such demands. The Company shall not, except with the
prior written consent of Parent, make any payment with respect to, or settle or
offer to settle, any such demands except as otherwise required under applicable
law.
5.3. Adjustment of Merger Consideration. In the event that,
subsequent to the date of this Agreement but prior to the Effective Time, the
outstanding Shares shall have been changed into a different number of shares or
a different class as a result of a stock split, reverse stock split, stock
dividend, subdivision, reclassification, split, combination, exchange,
recapitalization or other similar transaction, the Merger Consideration shall be
appropriately adjusted.
5.4. Merger Without Meeting of Stockholders. In the event that
Merger Sub, or any other direct or indirect subsidiary of Purchaser, shall
acquire at least 90 percent of the outstanding Shares, the parties hereto shall
take all necessary and appropriate action to cause the Merger to become
effective as soon as practicable after the expiration of the Offer without a
vote of stockholders of the Company, in accordance with Section 253 of the DGCL.
5.5. Treatment of Convertible Preferred Stock. The Convertible
Preferred Stock (as defined in Section 6.1(b)) shall be treated as set forth in
Section 7.13.
ARTICLE VI
Representations and Warranties
6.1. Representations and Warranties of the Company. The
Company hereby represents and warrants to Parent and Merger Sub, except as set
forth in the Company Reports (as defined in Section 6.1(e)) or in the Disclosure
Schedule delivered
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to Parent on the date of this Agreement (the "Company Disclosure Schedule"), as
follows:
(a) Organization, Good Standing and Qualification. Each of the
Company and its Subsidiaries is a corporation duly organized, validly existing
and in good standing (where such concept is recognized) under the laws of its
respective jurisdiction of organization and has all requisite corporate power
and authority to own and operate its properties and assets and to carry on its
business as presently conducted and is qualified to do business and is in good
standing as a foreign corporation in each jurisdiction (where such concept is
recognized) where the ownership or operation of its properties or conduct of its
business requires such qualification, except where the failure to be so
qualified or in such good standing, when taken together with all other such
failures, is not reasonably likely to have a Company Material Adverse Effect (as
defined below) or materially impair the ability of the Company, the Surviving
Corporation, Parent or any of their respective affiliates, following
consummation of the Offer or the Merger, to conduct any material business or
operations in any jurisdiction where they are now being conducted. The Company
has made available to Parent a complete and correct copy of the Company's and
its Subsidiaries' certificates of incorporation and bylaws (or documents of a
similar scope for corporations organized in jurisdictions outside the United
States), each as amended to date. The Company's and its Subsidiaries'
certificates of incorporation and bylaws (or similar documents) so made
available are in full force and effect.
As used in this Agreement, (i) "Subsidiary" means, with
respect to the Company, Parent or Merger Sub, as the case may be, any entity,
whether incorporated or unincorporated, of which at least a majority of the
securities or ownership interests having by their terms ordinary voting power to
elect a majority of the board of directors or other persons performing similar
functions is directly or indirectly owned or controlled by such party or by one
or more of its respective Subsidiaries or by such party and any one or more of
its respective Subsidiaries, and (ii) "Company Material Adverse Effect" means
any change in or effect on the business of the Company and its Subsidiaries that
is, or is reasonably likely to be, materially adverse to the business,
operations or assets (including intangible assets), liabilities (contingent or
otherwise), prospects, condition (financial or otherwise) of the Company and its
Subsidiaries, taken as a whole. In no event shall any of the following
constitute, or be taken into account in determining whether there has been or is
likely to be, a "Company Material Adverse Effect": (i) an adverse change in the
trading price of the Company's Common Stock between the date of this Agreement
and the Effective Time, in and of itself, (ii) any adverse conditions, events,
circumstances, changes or effects generally affecting the industry in which the
Company operates or arising from changes in general business or economic
conditions, (iii) any adverse conditions, events, circumstances, changes or
effects attributable to expenses (including without limitation legal, accounting
and financial consulting fees and expenses) incurred in connection with the
transactions contemplated by this Agreement,
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(iv) any conditions events, circumstances, changes or effects resulting from any
change in law or generally accepted accounting principles, which affect
generally entities such as the Company, or (v) any adverse conditions, events,
circumstances, changes or effects resulting from compliance by the Company with,
or the taking of any action required or contemplated by, the terms of this
Agreement or any other agreement entered into by the Company with Parent or
Merger Sub in connection with the transactions contemplated by this Agreement or
(vi) any event or condition referred to on Schedule 6.1(a).
(b) Capital Structure. The authorized capital stock of the
Company consists of 25,000,000 Shares, of which only 9,703,769 Shares were
outstanding as of the close of business on July 23, 1999, and 5,000,000 shares
of Preferred Stock, par value $0.001 per share (the "Preferred Shares"), of
which 150,000 shares have been designated Series A Junior Participating
Preferred Stock, none of which were outstanding as of the close of business on
July 23, 1999, one share has been designated as Series B Convertible Preferred
Stock, which share was outstanding as of the close of business on July 23, 1999.
All of the outstanding Shares have been duly authorized and are validly issued,
fully paid and nonassessable. Other than Shares reserved for issuance pursuant
to the Stock Option Agreement, the Company has no Shares or Preferred Shares
subject to issuance, except (i) 150,000 Preferred Shares, designated Series A
Junior Participating Preferred Stock, subject to issuance upon exercise of the
Rights (the "Rights") issued pursuant to the Rights Agreement, dated as of March
17, 1997 (the "Rights Agreement"), between the Company and ChaseMellon
Shareholder Services, L.L.C., as Rights Agent, (ii) one share of Series B
Convertible Preferred Stock, which was outstanding as of July 23, 1999, (iii)
2,513,141 shares reserved for issuance under the Company's 1996 Equity Incentive
Plan, as amended, of which options to acquire 1,057,205 shares are outstanding
as of July 23, 1999, (iv) 500,000 shares reserved for issuance under the
Company's Employee Stock Purchase Plan, of which 416,581 shares are available
for purchase as of July 23, 1999, (v) 235,000 shares reserved for issuance under
the Company's 1996 Non-Employee Directors' Stock Option Plan, of which options
to acquire 65,000 shares are outstanding as of July 23, 1999, (vi) 219,304
shares reserved for issuance under the Company's Amended and Restated 1992 Stock
Option and Restricted Stock Plan, of which options to acquire 219,304 shares are
outstanding as of July 23, 1999, (vii) 205,487 shares outstanding under the
Management Change of Control Plan and (viii) 1,410 shares outstanding under the
1981 Employee Stock Option Plan. The Company Disclosure Schedule sets forth a
correct and complete list of each outstanding option to purchase Shares under
the Stock Plans, as defined below (each a "Company Option"), as of July 23,
1999, including the holder, date of grant, exercise price and number of Shares
subject thereto. As of July 23, 1999, there are no shares of capital stock of
the Company authorized, issued or outstanding and except as set forth above,
there are no preemptive rights or any outstanding subscriptions, options,
warrants, rights, convertible securities or other agreements or commitments of
any character to which the Company is a party or may be bound relating to the
issued or unissued capital stock or other securities of the Company and the
Shares subject to the Stock Option Agreement
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shall not be subject to any preemptive rights. The Company does not have
outstanding any bonds, debentures, notes or other obligations the holders of
which have the right to vote (or convertible into or exercisable for securities
having the right to vote) with the stockholders of the Company on any matter
("Voting Debt"). Except for the Company's 1996 Equity Incentive Plan, 1996
Non-Employee Directors' Stock Option Plan, Employee Stock Purchase Plan, the
Amended and Restated 1992 Stock Option and Restricted Stock Plan and Management
Change of Control Plan and the 1981 Employee Stock Option Plan (such plans
collectively, the "Stock Plans"), at or after the Effective Time, neither the
Surviving Corporation nor Parent nor their respective affiliates will have any
obligation to issue, transfer or sell any shares or securities of the Surviving
Corporation, Parent or any of their respective affiliates pursuant to any
Compensation and Benefit Plan (as defined in Section 6.1(h)(i)) which
obligations were outstanding as of July 23, 1999. No Shares, Preferred Shares or
other securities of the Company, the Surviving Corporation, Parent or any of
their respective affiliates will be subject to issuance pursuant to the Rights
Agreement as a result of the Offer, the Merger or the other transactions
contemplated by this Agreement, the Stock Option Agreement and the Shareholders
Agreement and no Distribution Date or Shares Acquisition Date (as such terms are
defined in the Rights Agreement) shall have occurred as a result of the Offer,
the Merger or the other transactions contemplated by this Agreement, the Stock
Option Agreement or the Shareholders Agreement.
(c) Corporate Authority; Approval. (i) The Company has all
requisite corporate power and authority and has taken all corporate action
necessary in order to execute, deliver and perform its obligations under this
Agreement and the Stock Option Agreement and to consummate the Offer and,
subject only to obtaining the adoption of this Agreement by a majority of the
Shares outstanding as of the record date of the Company's stockholders meeting
(the "Company Requisite Vote"), the Merger. This Agreement and the Stock Option
Agreement are valid and binding agreements of the Company, enforceable against
the Company in accordance with their respective terms subject to (i) applicable
bankruptcy, insolvency, reorganization, fraudulent transfer, moratorium or
similar laws from time to time in effect affecting creditors' rights generally,
and (ii) general principles of equity including, without limitation, standards
of materiality, good faith, fair dealing and reasonableness, whether such
principles are considered in a proceeding of law or in equity.
(ii) The Company Board has, at a meeting duly called and held,
(A) unanimously approved this Agreement and the Stock Option Agreement, the
Offer and the Merger and the transactions contemplated hereby in accordance with
the DGCL, (B) determined that the Offer and the Merger are fair to and in the
best interests of the Company's stockholders, and (C) recommended that the
stockholders of the Company tender their shares of Company Common Stock into the
Offer and adopt this Agreement.
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(d) Governmental Filings; No Violations. (i) Other than any
filings and/or notices required (A) pursuant to Section 2.3, (B) under the
Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR Act")
the Exchange Act and state securities or "blue sky" laws and (C) such filings or
consents, registrations, approvals, permits or authorizations as may be required
under the competition or antitrust laws of jurisdictions outside the United
States, no notices or other filings are required to be made with, nor are any
consents, registrations, approvals, permits or authorizations required to be
obtained by the Company from, any U.S. governmental or regulatory authority,
agency, commission, body or other governmental entity ("Governmental Entity"),
in connection with the execution and delivery of this Agreement and the Stock
Option Agreement by the Company and the consummation by the Company of the Offer
and the Merger and the other transactions contemplated hereby and thereby,
except those that the failure to make or obtain are not, individually or in the
aggregate, reasonably likely to have a Company Material Adverse Effect or
prevent, materially delay or materially impair the ability of the Company to
consummate the transactions contemplated by this Agreement and the Stock Option
Agreement.
(ii) Except as set forth in Schedule 6.1(d) (ii), the
execution, delivery and performance of this Agreement and the Stock Option
Agreement by the Company do not and will not, and the consummation by the
Company of the Offer and the Merger and the other transactions contemplated
hereby and thereby will not, constitute or result in (A) a breach or violation
of, or a default under, the certificate or bylaws of the Company or the
comparable governing instruments of any of its Subsidiaries, (B) a breach or
violation of, or a default under, the acceleration of any obligations or the
creation of a lien, pledge, security interest or other encumbrance on the assets
of the Company or any of its Subsidiaries (with or without notice, lapse of time
or both) pursuant to, any agreement, lease, contract, note, mortgage, indenture
or other obligation ("Contracts") binding upon the Company or any of its
Subsidiaries or any Law (as defined in Section 6.1(i)) or governmental or
non-governmental permit or license to which the Company or any of its
Subsidiaries is subject, or (C) any change in the rights or obligations of any
party under any of the Contracts, except, in the case of clause (B) or (C)
above, for any breach, violation, default, acceleration, creation or change
that, individually or in the aggregate, is not reasonably likely to have a
Company Material Adverse Effect or prevent, materially delay or materially
impair the ability of the Company to consummate the transactions contemplated by
this Agreement and the Stock Option Agreement. Schedule 6.1(d)(ii) sets forth a
correct and complete list of all consents and waivers which are or may be
required in connection with the consummation of the transactions contemplated by
this Agreement and the Stock Option Agreement (whether or not subject to the
exception set forth with respect to clause (B) or (C) above) under Contracts to
which the Company or any of its Subsidiaries is a party, other than any consent
or waiver (other than consents or waivers pursuant to Contracts relating to
indebtedness, securities or the guarantee thereof) the failure to obtain which
is not reasonably likely to have a Company Material Adverse Effect.
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(e) Company Reports; Financial Statements. The Company and, to
the extent applicable, each of its then or current Subsidiaries has made all
filings required to be made by it with the SEC since January 1, 1998
(collectively, including any such reports filed subsequent to the date hereof,
the "Company Reports"). The Company has made available to Parent each
registration statement, report, proxy statement or information statement filed
with the SEC by it since December 31, 1996, including, without limitation, (i)
the Company's Annual Report on Form 10-K for the year ended December 31, 1998,
(ii) the Company's Quarterly Report for the quarter ended March 31, 1999, as
amended, (iii) the Company's Proxy Statement filed on April 12, 1999, all in the
form (including exhibits, annexes and any amendments thereto) filed with the
SEC. Except as set forth in Schedule 6.1(e), as of their respective dates, the
Company Reports did not, and any Company Reports filed with the SEC prior to the
expiration of the Offer will not, contain any untrue statement of a material
fact or omit to state a material fact required to be stated therein or necessary
to make the statements made therein, in light of the circumstances in which they
were made, not misleading. Each of the consolidated balance sheets included in
or incorporated by reference into the Company Reports (including the related
notes and schedules) presents fairly, or will present fairly, in all material
respects, the consolidated financial position of the Company and its
Subsidiaries as of its date and each of the consolidated statements of income
and of changes in financial position included in or incorporated by reference
into the Company Reports (including any related notes and schedules) presents
fairly, or will present fairly, in all material respects, the results of
operations, retained earnings and changes in financial position, as the case may
be, of the Company and its Subsidiaries for the periods set forth therein
(except as otherwise noted therein and subject, in the case of unaudited
statements, to notes and normal year-end audit adjustments that will not be
material in amount or effect), in each case in accordance with generally
accepted accounting principles ("GAAP") consistently applied during the periods
involved, except, in the case of unaudited financial statements, as permitted by
SEC Form 10-Q, and except as may be noted therein. Other than the Company
Reports specifically recited in clauses (i) through (v) of the first sentence of
this Section 6.1(e), the Company has not, on or prior to the date hereof, filed
any other definitive reports or statements with the SEC since the Audit Date (as
defined in Section 6.1(f)).
(f) Absence of Certain Changes. Except as disclosed in the
Company Reports filed prior to the date of this Agreement or in Schedule 6.1(f),
since December 31, 1998 (the "Audit Date") the Company and its Subsidiaries have
conducted their respective businesses in all material respects only in, and have
not engaged in any material transaction other than according to, the ordinary
and usual course of such businesses and there has not been (i) any change in the
financial condition, properties, business or results of operations of the
Company or any of its Subsidiaries or any occurrence or combination of
occurrences of which the Company has knowledge that, individually or in the
aggregate, has had or is reasonably likely to have a Company Material Adverse
Effect; (ii) any material damage, destruction or other casualty loss with
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respect to any material asset or property owned, leased or otherwise used by the
Company or any of its Subsidiaries, that has had or is reasonably likely to have
a Company Material Adverse Effect; (iii) any declaration, setting aside or
payment of any dividend or other distribution in respect of the capital stock of
the Company; or (iv) other than as set forth in Schedule 6.1(f), any material
change by the Company in accounting principles, practices or methods. Schedule
6.1(f) contains a document setting forth the name, title, salary and other
compensation of each employee of the Company as of July 23, 1999. Since the date
of such document, there has not been any increase in the compensation payable or
that could become payable by the Company or any of its Subsidiaries to officers
or key employees of the Company or its Subsidiaries, or any amendment of any of
the Stock Plans or compensation and Benefit Plans.
(g) Litigation and Liabilities. Except as disclosed in
Schedule 6.1(g) or as disclosed in the Company Reports filed prior to the date
of this Agreement, and except for matters which are not, individually or in the
aggregate, reasonably likely to have a Company Material Adverse Effect or
prevent or materially delay or materially impair the ability of the Company to
consummate the transactions contemplated by this Agreement, the Stock Option
Agreement and the License Agreement, there are no (i) civil, criminal,
administrative or regulatory actions, suits, claims, hearings, investigations or
proceedings pending or, to the knowledge of the Company, overtly threatened
against the Company or any of its Subsidiaries or (ii) material obligations or
liabilities, whether or not accrued, contingent or otherwise and whether or not
required to be disclosed, including those relating to matters involving any
Environmental Law (as defined in Section 6.1(k)).
(h) Employee Benefits.
(i) The Company Reports accurately describe in all
material respects all material incentive, bonus, deferred compensation, pension,
retirement, profit-sharing, thrift, savings, employee stock ownership, stock
bonus, stock purchase, restricted stock, stock option and other stock based
plans, all employment or severance agreements, plans, policies or arrangements,
other employee benefit plans and any applicable "change of control" or similar
provisions in any plan, agreement, policy or arrangement which covers current or
former employees of the Company and its Subsidiaries (the "Compensation and
Benefit Plans") or with respect to which the Company or any of its Subsidiaries
may have any liability. The Compensation and Benefit Plans and all other benefit
plans, agreements, policies or arrangements covering current or former employees
or directors of the Company and its Subsidiaries (the "Employees"), including,
but not limited to, "employee benefit plans" within the meaning of Section 3(3)
of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"),
are listed in Schedule 6.1(h)(i). True and complete copies of all documents
embodying the Compensation and Benefit Plans, including written interpretations
thereof, and such other benefit plans, agreements, policies or arrangements,
including, but not limited to, any
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trust instruments and/or insurance contracts, if any, forming a part of any such
plans and agreements, and all amendments thereto have been provided or made
available to Parent.
(ii) The Compensation and Benefit Plans have been
administered in compliance with their terms and all applicable law, except where
the failure to administer in compliance would not have or be reasonably likely
to have a Company Material Adverse Effect. Each Plan which is an "employee
pension benefit plan" within the meaning of Section 3(2) of ERISA ("Pension
Plan") and which is intended to be qualified under Section 401(a) of the
Internal Revenue Code of 1986, as amended (the "Code") is so qualified, and has
received a favorable determination letter from the Internal Revenue Service, and
the Company is not aware of any circumstances likely to result in revocation of
any such favorable determination letter. There is no material pending or, to the
knowledge of the Company, threatened, litigation, audit or investigation
relating to any Compensation and Benefit Plan. Neither the Company nor any of
its Subsidiaries has engaged in a transaction with respect to any Compensation
and Benefit Plan that, assuming the taxable period of such transaction expired
as of the date hereof, could subject the Company or any of its Subsidiaries to a
tax or penalty imposed by either Section 4975 of the Code or Section 502(i) of
ERISA in an amount which would be material.
(iii) Neither the Company nor any of its Subsidiaries
has, nor has ever had, any obligation or liability with respect to an employee
benefit plan which is subject to Title IV of ERISA. There is no entity (other
than the Company or any of its Subsidiaries) which is or was considered one
employer with the Company or any of its Subsidiaries under Section 4001 of ERISA
or Section 414 of the Code (an "ERISA Affiliate"). No notice of a "reportable
event," within the meaning of Section 4043 of ERISA for which the 30-day
reporting requirement has not been waived, has been required to be filed for any
Compensation and Benefit Plan within the 12-month period ending on the date
hereof.
(iv) Except as set forth in Schedule 6.1(h)(iv), all
contributions required to be made under the terms of any Compensation and
Benefit Plan have been timely made or accrued on the Company's financial
statements.
(v) Neither the Company nor any of its Subsidiaries has
any obligations for retiree health and life benefits under any Compensation and
Benefit Plan, except as set forth on Schedule 6.1(h)(v). The Company or its
Subsidiaries may amend or terminate any Compensation and Benefit Plan at any
time without incurring any material liability thereunder.
(vi) Except as set forth on Schedule 6.1(h)(vi), the
consummation of the transactions contemplated by this Agreement will not (x)
entitle any Employees to severance pay, (y) accelerate the time of payment or
vesting or trigger any material
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payment or funding (through a grantor trust or otherwise) of compensation or
benefits under, materially increase the amount payable or trigger any other
material obligation pursuant to, any of the Compensation and Benefit Plans or
(z) result in payments under any of the Compensation and Benefit Plans which may
not be deductible under Section 162(m) or Section 280G of the Code.
(i) Compliance. Except as set forth in Schedule 6.1(i),
neither the Company nor any of its Subsidiaries is in default or violation of,
(i) any law, ordinance, rule, regulation, order, judgment, decree, arbitration
award, license or permit of any Governmental Entity (collectively, "Laws")
applicable to the Company or any of its Subsidiaries or by which its or any of
their respective properties are bound, or (ii) any Contract to which the Company
or any of its Subsidiaries is a party or by which the Company or any of its
Subsidiaries or its or any of their respective properties are bound or affected,
except for any such defaults or violations that, individually or in the
aggregate, are not reasonably likely to have a Company Material Adverse Effect,
or prevent or materially delay the transactions contemplated by this Agreement.
To the knowledge of the Company, no material change is required in the Company's
or any of its Subsidiaries' processes, properties or procedures in order to
comply in all material respects with any material Laws, and the Company has not
received any notice or overt communication of any material noncompliance with
any such material Laws that has not been cured.
(j) Antitakeover Statutes. The board of directors of the
Company has taken all necessary action to approve the transactions contemplated
by this Agreement, the Stock Option Agreement and the Shareholders Agreement
such that the restrictions under Section 203 of the DGCL shall not apply to such
transactions. No "fair price," "moratorium," "control share acquisition" or
other similar antitakeover statute or regulation (each, an "Antitakeover
Statute") is applicable to the Company, the Shares, the Offer, the Merger, this
Agreement, the Stock Option Agreement, the Shareholders Agreement or the other
transactions hereby or thereby.
(k) Environmental Matters. Except as disclosed in the Company
Reports filed with the Commission to the date of this Agreement or in Schedule
6.1(k) and except as would not have or be reasonably likely to have a Company
Material Adverse Effect, (i) the Company and its Subsidiaries have complied in
all material respects at all times with all applicable Environmental Laws; (ii)
to the knowledge of the Company, no property currently or formerly owned or
operated by the Company or any of its Subsidiaries (including soils,
groundwater, surface water, buildings or other structures) has been contaminated
with any Hazardous Substance; (iii) to the knowledge of the Company, neither the
Company nor any of its Subsidiaries is subject to any liability for Hazardous
Substance disposal or contamination on any third party property; (iv) to the
knowledge of the Company, neither the Company nor any of its Subsidiaries is
subject to liability for any release or threat of release of any Hazardous
Substance; (v)
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neither the Company nor any of its Subsidiaries has received any notice, demand,
letter, claim or request for information indicating that it may be in violation
of or subject to liability under any Environmental Law; (vi) neither the Company
nor any of its Subsidiaries is subject to any order, decree, injunction or other
arrangement with any Governmental Entity or any indemnity or other agreement
with any third party relating to liability under any Environmental Law; (vii) to
the knowledge or the Company, none of the properties of the Company or any of
its Subsidiaries contain any underground storage tanks, asbestos-containing
material, lead products, or polychlorinated biphenyls; (viii) to the knowledge
of the Company, there are no other circumstances or conditions involving the
Company or any of its Subsidiaries that could reasonably be expected to result
in any claims, liability, investigations, costs or restrictions on the
ownership, use, or transfer of any property in connection with any Environmental
Law; and (ix) the Company has delivered or made available to Parent copies of
all environmental reports, studies, assessments, sampling data and other
environmental information in its possession relating to the Company or any of
its Subsidiaries or any of their current or former properties or operations.
"Environmental Law" means any federal, state or local law,
regulation, order, decree, permit, authorization, common law or agency
requirement relating to (A) the protection, investigation or restoration of the
environment, health, safety, or natural resources, (B) the handling, use,
presence, disposal, release or threatened release of any Hazardous Substance or
(C) noise, odor, indoor air, employee exposure, wetlands, pollution,
contamination or any injury or threat of injury to persons or property relating
to any Hazardous Substance.
"Hazardous Substance" means any substance that is (A) listed,
classified or regulated pursuant to any Environmental Law; (B) any chemical,
petroleum product or by-product, asbestos-containing material, lead-containing
paint or plumbing, polychlorinated biphenyls, radioactive materials or radon,
pharmaceutical, biological and/or medical waste or materials; or (C) any other
substance which may be the subject of regulatory action by any Governmental
Authority in connection with any Environmental Law.
(l) Opinion of Financial Advisor. The Company's Board has
received the written opinion of CIBC World Markets Corp. to the effect that, as
of the date hereof, the consideration to be received by the holders of Shares
pursuant to the Offer and the Merger is fair to such holders from a financial
point of view.
(m) Taxation. The Company and each of its Subsidiaries, and
any consolidated, combined or unitary group for tax purposes of which the
Company or any of its Subsidiaries is or has been a member, has timely filed all
Tax Returns required to be filed by it in the manner provided by law except
where the failure to have so filed would not have or be reasonably likely to
have a Company Material Adverse Effect. All
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such Tax Returns are true, correct and complete in all material respects. The
Company and each of its Subsidiaries have timely paid all Taxes due or required
to be withheld from amounts owing to any employee, creditor or third party or
have provided adequate reserves in their financial statements for any Taxes that
have not been paid, whether or not shown as being due on any Tax Returns. Except
as has been disclosed to Parent in Schedule 6.1(m): (i) no material claim for
unpaid Taxes has become a lien or encumbrance of any kind against the property
of the Company or any of its Subsidiaries or is being asserted against the
Company or any of its Subsidiaries; (ii) no audit, examination, investigation or
other proceeding in respect of Taxes is pending being conducted, or to the
knowledge of the Company, threatened by a Tax authority; (iii) no material
issues have been raised by the relevant taxing authority in connection with any
examination of the Tax Returns filed by the Company and its Subsidiaries; (iv)
no extension or waiver of the statute of limitations on the assessment of any
Taxes has been granted by the Company or any of its Subsidiaries and is
currently in effect; (v) neither the Company nor any of its Subsidiaries is a
party to, is bound by, or has any obligation under, or potential liability with
regards to, any Tax sharing agreement, Tax indemnification agreement or similar
contract or arrangement; (vi) no power of attorney has been granted by or with
respect to the Company or any of its Subsidiaries with respect to any matter
relating to Taxes; (vii) neither the Company nor any of its Subsidiaries is a
party to any agreement, plan, contract or arrangement that would result,
separately or in the aggregate, in the payment of any "excess parachute
payments" within the meaning of Section 280G of the Code; (viii) neither the
Company nor any of its Subsidiaries has any deferred intercompany gain or loss
arising as a result of a deferred intercompany transaction within the meaning of
Treasury Regulation Section 1.1502-13 (or similar provision under state, local
or foreign law) or any excess loss accounts within the meaning of Treasury
Regulation Section 1.1502-19; (ix) the Company is not and has not been a United
States real property holding corporation (as defined in Section 897(c)(2) of the
Code) during the applicable period specified in Section 897(c)(1)(ii) of the
Code; (x) neither the Company nor any of its Subsidiaries has been the subject
to a Tax ruling that has continuing effect; and (xi) neither the Company nor any
of its Subsidiaries has agreed to include, or is required to include, in income
any adjustment under either Section 481(a) or 482 of the Code (or an analogous
provision of state, local or foreign law) by reason of a change in accounting
method or otherwise.
"Taxes" means any taxes of any kind, including but not limited
to those on or measured by or referred to as income, gross receipts, capital,
sales, use, ad valorem, franchise, profits, license, withholding, employment,
payroll, premium, value added, property or windfall profits taxes, environmental
transfer taxes, customs, duties or similar fees, assessments or charges of any
kind whatsoever, together with any interest and any penalties, additions to tax
or additional amounts imposed by any governmental authority, domestic or
foreign.
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"Tax Return" means any return, report or statement required to
be filed with any governmental authority with respect to Taxes.
(n) Certain Regulatory Matters. (i) Schedule 6.1(n) sets forth
a complete and accurate list for the last five years, of (a) all Warning Letters
(as defined below), Section 305 notices and similar letters or notices issued by
the Food and Drug Administration (the "FDA") or any other governmental entity,
domestic or foreign, that is concerned with the quality, identity, strength,
purity, safety, efficacy, marketing or manufacturing of the pharmaceutical
compounds or products tested or sold by the Company or its Subsidiaries (any
such governmental entity, a "Pharmaceutical Regulatory Agency") to the Company
or any of its Subsidiaries; (B) all United States product problem reporting
program complaints or reports, MedWatch form FDA-3500A, FDA-1639 or Form CIMOS I
filed by the Company or any of its Subsidiaries, which complaints or reports
pertain to any incident involving death or serious injury, and for which
incident there has been (I) a notice or follow-up inquiry to the Company or any
of its Subsidiaries by the FDA, (II) a litigation or arbitration claim or cause
of action commenced, or (III) a notice to any insurance carrier of the Company
or any of its Subsidiaries tendering the defense or giving any notice of a
possible or actual claim against the Company or such subsidiary; (C) all product
recalls conducted by or issued to the Company or any of its Subsidiaries and any
requests from the FDA or any other Pharmaceutical Regulatory Agency requesting
the Company or any of its Subsidiaries to cease to investigate, test or market
any compound or product; and (D) any civil penalty actions begun by the FDA or
any other Pharmaceutical Regulatory Agency against the Company or any of its
Subsidiaries and all consent decrees and all documents relating to the
negotiation of and compliance with such consent decree issued with respect to
the Company or any of its Subsidiaries. The Company has made available to Parent
copies of all documents referred to in Schedule 6.1(n) and any other written
communications between the Company or any of its Subsidiaries, on the one hand,
and the FDA or any other Pharmaceutical Regulatory Agency on the other hand that
describe matters that could have a material adverse effect on the projected
sales or revenues attributable to any compound, product or product line of the
Company or its Subsidiaries or discuss material issues concerning the quality,
identity, strength, purity, safety or efficacy of any such compound, product or
product line as well as copies of all complaints and other information required
to be maintained by the Company pursuant to the United States Federal Food, Drug
and Cosmetic Act and Comprehensive Drug Abuse Prevention and Control Act of 1970
and the corresponding laws of jurisdictions other than the United States. For
purposes of this subparagraph (i), "Warning Letter" means a letter characterized
by the FDA or any other Pharmaceutical Regulatory Agency as a warning letter, a
notice of adverse finding, observation of noncompliance or a similar letter or
report in which FDA or any other Pharmaceutical Regulatory Agency expresses the
opinion that violations of law, regulation or guideline have occurred.
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(ii) With such exceptions as will not have or be reasonably
likely to have a Company Material Adverse Effect and except as set forth in
Schedule 6.l(n), (A) the Company (or, if applicable, one of its Subsidiaries)
has obtained all consents, approvals, certifications, authorizations and permits
of, and has made all filings with, or notifications to, all Pharmaceutical
Regulatory Agencies pursuant to applicable requirements of all FDA regulations
and consent decrees, and all applicable state and foreign laws, and regulations
applicable to the Company or any of its Subsidiaries; (B) all representations
made by the Company or any of its Subsidiaries in connection with any such
consents, approvals, certifications, authorizations, permits, filings and
notifications were true and correct in all material respects at the time such
representations and warranties were made, and the Company's compounds and
products, and the compounds and products of its Subsidiaries, substantially
comply with, and perform in accordance with the specifications described in,
such representations; (C) the Company and its Subsidiaries and their respective
products and all of the facilities and entities which manufacture such compounds
and products, are in substantial compliance with all applicable FDA rules,
regulations and consent decrees, and all applicable state and foreign laws,
rules and regulations (including Good Manufacturing Practices) relating to
pharmaceutical manufacturers and distributors or otherwise applicable to the
Company's or its Subsidiaries' business; and (D) the Company has no reason to
believe that any of the consents, approvals, authorizations, registrations,
certifications, permits, filings or notifications that it or any of its
Subsidiaries has received or made to operate their respective businesses have
been or are being revoked or challenged.
(o) Intellectual Property.
(i) Set forth in Schedule 6.1(o)(i) is a complete list
of each of the following items (1) all patents and applications therefor,
registrations of trademarks (including service marks) and applications therefor,
and registrations of copyrights and applications therefor that are owned by the
Company or any of its Subsidiaries or licensed to the Company or any of its
Subsidiaries (collectively, the "Company Owned IP"), (2) all licenses,
agreements and contracts relating to the Company Intellectual Property (as
defined in Section 6.1(o) (ii) of this Agreement) pursuant to which the Company
or any of its Subsidiaries are entitled to use any Company Intellectual Property
owned by any third party (the "Third Party Licenses") and (3) all agreements
under which the Company or any of its Subsidiaries has granted any third party
the right to use any Company Intellectual Property, including the unexpired
material transfer agreements.
(ii) Except to the extent identified in Schedule
6.1(o)(ii) and except for any failures of this representation and warranty to be
true and accurate that have or would be reasonably likely to have a Company
Material Adverse Effect that arise from instances involving the infringement by
the Company or its Subsidiaries on the intellectual property rights of others or
the infringement by others on intellectual property rights of the Company or its
Subsidiaries of which, in either such case, the Company does
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not have any knowledge after due investigation, the Company, or its Subsidiaries
where expressly indicated, is the owner of, or is licensed to use, or otherwise
possesses legally enforceable rights in, all intellectual property, including,
without limitation, all patents and patent applications, supplementary
protection certificates and patent extensions, trademarks and trademark
applications, service mark and service mark registrations, logos, commercial
symbols, business name registrations, trade names, copyrights and copyright
registrations, computer software, mask works and mask work registration
applications, industrial designs and applications for registration of such
industrial designs, including, without limitation, any and all applications for
renewal, extensions, reexaminations and reissues of any of the foregoing
intellectual property rights where applicable, inventions, biological materials,
trade secrets, formulae, know-how, technical information, research data,
research raw data, laboratory notebooks, procedures, designs, proprietary
technology and information held or used in the business of the Company and its
Subsidiaries (hereinafter the "Company Intellectual Property").
(iii) Except to the extent identified in Schedule
6.1(o)(iii), the Company and its Subsidiaries are the sole legal and beneficial
owners of all the Company Intellectual Property (except for the Company
Intellectual Property that is the subject of any Third Party Licenses) and all
the Company Intellectual Property is valid and subsisting.
(iv) The Company has not entered into any agreements,
licenses or created any mortgages, liens, security interests, leases, pledges,
encumbrances, equities, claims, charges, options, restrictions, rights of first
refusal, title retention agreements or other exceptions to title which
materially affect the Company Intellectual Property or materially restrict the
use by the Company or any of its Subsidiaries of the Company Intellectual
Property, except as provided in agreements and instruments disclosed in Schedule
6.1(o)(i) and furnished or made available to Parent prior to the date of this
Agreement.
(v) Except as listed in Schedule 6.1(o)(v), to the
knowledge of the Company, the Company and its Subsidiaries are in compliance in
all material respects with the Third Party Licenses that are material to the
conduct of the business of the Company.
(vi) The Company and its Subsidiaries are not, and will
not be as a result of the execution, delivery or performance of this Agreement
or the Stock Option Agreement or the consummation of the Offer and the Merger or
the other transactions contemplated hereby or thereby in breach, violation or
default of any Third Party Licenses that are material to the conduct of the
business of the Company. Except as indicated in Schedule 6.1(o)(vi), the rights
of the Company or any of its Subsidiaries to the Company Intellectual Property
will not be affected by the execution, delivery or
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performance of this Agreement or the Stock Option Agreement or the consummation
of the Offer and the Merger or the other transactions contemplated hereby or
thereby.
(vii) The Company and its Subsidiaries have the right to
license to third parties the use of the Company Owned IP.
(viii) Except as listed in Schedule 6.1(o)(viii), all
registrations and filings relating to the Company Owned IP are in good standing.
All maintenance and renewal fees necessary to preserve the rights of the Company
in respect of the Company Owned IP have been made. Except as indicated in
Schedule 6.1(o)(viii), the registrations and filings relating to the Company
Owned IP are proceeding and there are no material facts of which the Company has
knowledge after due investigation which could significantly undermine those
registrations or filings or reduce to a significant extent the scope of
protection of any patents arising from such applications.
(ix) The manufacturing, marketing, distribution, sale
and use of compounds by the Company or its Subsidiaries, licensees or
sublicensees in the countries where the Company has conducted or proposes to
conduct such activities, to the knowledge of the Company after due
investigation, does not and would not infringe the patents, patent applications,
trademarks, trademark applications, service marks, service mark applications,
copyrights, copyright applications, and proprietary trade names, publication
rights, computer programs (including source code and object code), inventions,
know-how, trade secrets, technology, processes, confidential information and all
other intellectual property rights throughout the world (collectively,
"Intellectual Property Rights") of any third party.
(x) Except for the matters set forth in Schedule
6.1(o)(x), there are no allegations, claims or proceedings instituted or pending
which challenge the rights possessed by the Company or its Subsidiaries to use
the Company Intellectual Property or the validity or effectiveness of the
Company Intellectual Property, including without limitation any interferences,
oppositions, cancellations or other contested proceedings.
(xi) There are no outstanding claims or proceedings
instituted or pending by any third party challenging the ownership, priority,
scope or validity or effectiveness of any Company Intellectual Property.
(xii) To the knowledge of the Company, there are no
Intellectual Property Rights of any third party that have been or would be
infringed by the identification, manufacture, marketing, distribution and sale
and use of any products that have been identified for development by the
Company.
(xiii) To the knowledge of the Company, there are no
Intellectual Property Rights of any third party that would be infringed by the
continued practice of any technologies previously used or presently in use by
the Company.
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(xiv) To the knowledge of the Company, except for the
matters set forth in Schedule 6.1(o)(xiv) or as would not have or be reasonably
likely to have a Company Material Adverse Effect, there is no unauthorized use,
infringement or misappropriation of the Company Intellectual Property by any
third party, including any employee or former employee of the Company or any of
its Subsidiaries.
(xv) Except for the matters set forth in Schedule
6.1(o)(xv), the Company and its Subsidiaries have not granted any licenses,
immunities, options or other rights to the Company Intellectual Property which
could provide a third party with a defense to patent infringement proceedings,
whether domestic or foreign.
(xvi) Commercially reasonable measures have been taken
to maintain the confidentiality of the inventions, trade secrets, formulae,
know-how, technical information, research data, research raw data, laboratory
notebooks, procedures, designs, proprietary technology and information of the
Company and its Subsidiaries, and all other information the value of which to
the Company or any of its Subsidiaries is contingent upon maintenance of the
confidentiality thereof. Without limiting the generality of the foregoing, (1)
each employee of the Company and each consultant to the Company who has had
access to proprietary information with respect to the Company has entered into
an agreement suitable to vest ownership rights to any inventions, creations,
developments, and works in the Company and has entered into an agreement for
maintaining the confidential information of the Company and (2) each officer and
director of the Company has entered into an agreement to maintain the
confidential information of the Company, except for those individuals listed in
Schedule 6.1(o) (xvi) whose involvement in the business of the Company is
described with specificity therein.
(p) Product Registration Files. The product registration files
and dossiers of the Company and its Subsidiaries have been maintained in
accordance with reasonable industry standards. The Company and each of its
Subsidiaries has in its possession copies of all the material documentation
filed in connection with filings made by the Company or any of its Subsidiaries
for regulatory approval or registration of the compounds and products of the
Company or any of its Subsidiaries, as the case may be. To the knowledge of the
Company, the filings made by the Company and its Subsidiaries for regulatory
approval or registration of the products of the Company or any of its
Subsidiaries did not contain any untrue statement of a material fact or omit to
state any material fact necessary to make the statements therein not misleading.
(q) Year 2000 Compliance. Schedule 6.1(q) contains the
Company's Year 2000 plan, which indicates the actions to be taken pursuant to
such plan that have been completed as of the date of this Agreement and the
actions to be taken pursuant to such plan that have not been completed as of the
date of this Agreement and the aggregate expense expected to be incurred by the
Company in connection with the actions to be
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taken pursuant to such plan that have not been completed as of the date of this
Agreement.
(r) Labor Matters. Neither the Company nor any of its
Subsidiaries is a party to or otherwise bound by any collective bargaining
agreement, contract or other agreement or understanding with a labor union or
labor organization, nor is the Company or any of its Subsidiaries the subject of
any material proceeding asserting that the Company or any of its Subsidiaries
has committed an unfair labor practice or is seeking to compel it to bargain
with any labor union or labor organization nor is there pending or, to the
knowledge of the Company, threatened, any labor strike, walkout, work stoppage,
slow-down or lockout involving the Company or any of its Subsidiaries.
(s) Rights Agreement. The Company has irrevocably amended the
Rights Agreement to provide that neither Parent nor Merger Sub nor any of their
respective affiliates shall be deemed to be an Acquiring Person (as such term is
defined in the Rights Agreement), that neither a Distribution Date nor a Shares
Acquisition Date (as each such term is defined in the Rights Agreement) shall be
deemed to occur, and the Rights will not separate from the Shares, as a result
of the execution, delivery or performance of this Agreement, the Stock Option
Agreement or the Shareholders Agreement or the consummation of the Offer and the
Merger or the other transactions contemplated hereby or thereby, and that none
of the Company, Parent, Merger Sub, nor the Surviving Corporation, nor any of
their respective affiliates, shall have any obligations under the Rights
Agreement to any holder (or former holder) of Rights as of and following the
consummation of the Offer and/or the Effective Time.
(t) Brokers and Finders. Except as disclosed in Schedule
6.1(t), neither the Company nor any of its Subsidiaries, officers, directors or
employees has employed any broker or finder or incurred any liability for any
brokerage fees, commissions or finders' fees in connection with the Offer and
the Merger or the other transactions contemplated by this Agreement, the Stock
Option Agreement or the Shareholders Agreement, except that the Company has
employed CIBC World Markets Corp. as its financial advisor, the arrangements
with which have been disclosed to Parent prior to the date hereof.
(u) Supply Arrangements. As of the date of this Agreement, to
the Company's knowledge, there are no facts or circumstances that have
materially adversely affected or are reasonably likely to materially adversely
affect the continued supply (either for clinical purposes or in bulk) of the
active ingredients of the compounds of the Company and its Subsidiaries
currently used in clinical trials.
(v) Investigational Compounds. As of the date of this
Agreement, to the Company's knowledge, there are no facts or circumstances that
have materially adversely affected or that management of the Company has
determined are reasonably likely to
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materially adversely affect the commercialization of its compounds, other than
factors that are generally applicable to the development and commercialization
of pharmaceutical compounds that are not specific to the Company or such
compounds.
(w) Certain Agreements. (i) All contracts listed as an exhibit
to the Company's Annual Report on Form 10-K under the rules and regulations of
the SEC relating to the business of the Company and its Subsidiaries and (ii)
any other agreement within the meaning set forth in item 601(b)(10) of
Regulation S-K of Title 17, Part 229 of the Code of Federal Regulations (all of
which are listed on Schedule 6.1(w)) (the "Company Material Contracts") are
valid and in full force and effect, except to the extent they have previously
expired in accordance with their terms and other than as is not reasonably
likely to have, individually or in the aggregate, a Material Adverse Effect on
the Company. Neither the Company nor its Subsidiaries has violated any provision
of, or committed or failed to perform any act which, with or without notice,
lapse of time, or both, is reasonably likely to constitute a default under the
provisions of, any such Company Material Contract, and neither the Company nor
any of its Subsidiaries has received notice that any party to any Company
Material Contract intends to cancel, terminate or otherwise modify the terms of
any applicable Company Material Contract, except in each case, as is not
reasonably likely to have, individually or in the aggregate, a Material Adverse
Effect on the Company. To the knowledge of the Company, no counterparty to any
such Company Material Contract has violated any provision of, or committed or
failed to perform any act which, with or without notice, lapse of time, or both,
is reasonably likely to constitute a default or other breach under the
provisions of, such Company Material Contract, except for defaults or breaches
which are not reasonably likely, individually or in the aggregate, to have a
Material Adverse Effect on the Company. Neither the Company nor any of its
Subsidiaries is a party to, nor are any of their assets bound by, any agreement,
arrangement, commitment or understanding with any company engaged primarily in
the pharmaceutical business, other than as listed on Schedule 6.1(w).
(x) Schedule 14D-9; Offer Documents. Neither the Schedule
14D-9, any other document required to be filed by the Company with the SEC in
connection with the transactions contemplated hereby, nor any information
supplied by the Company for inclusion in the Offer Documents shall, at the
respective times the Schedule 14D-9, any such other filings by the Company, the
Offer Documents or any amendments or supplements thereto are filed with the SEC
or are first published, sent or given to stockholders of the Company, as the
case may be, contain any untrue statement of a material fact or omit to state
any material fact required to be stated therein or necessary in order to make
the statements made therein, in light of the circumstances under which they are
made, not misleading. The Schedule 14D-9, any other document required to be
filed by the Company with the SEC in connection with the transactions
contemplated by this Agreement will, when filed by the Company with the SEC,
comply as to form in all material respects with the applicable provisions of the
Exchange Act and the rules and
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regulations thereunder. Notwithstanding the foregoing, the Company makes no
representation or warranty with respect to the statements made in any of the
foregoing documents based on and in conformity with information supplied by or
on behalf of Parent or Merger Sub in writing specifically for inclusion therein.
(y) Required Vote of Company Stockholders. Unless the Merger
may be consummated in accordance with Section 253 of the DGCL, the only vote of
the stockholders of the Company required to adopt this Agreement and the Stock
Option Agreement and to approve the Merger and the transactions contemplated
hereby and thereby, is the affirmative vote of the holders of a majority of the
outstanding shares of Common Stock (the "Company Requisite Vote").
6.2. Representations and Warranties of Parent and Merger Sub.
Parent and Merger Sub each hereby represent and warrant to the Company, except
as set forth in the Disclosure Schedule delivered to the Company on the date of
this Agreement (the "Parent Disclosure Schedule"), as follows:
(a) Capitalization of Merger Sub. The authorized capital stock
of Merger Sub consists of one thousand (1,000) shares of Common Stock, par value
$.01 per share, all of which are validly issued and outstanding. All of the
issued and outstanding capital stock of Merger Sub is, and upon the consummation
of the Offer and at the Effective Time will be, owned by Parent, and there are
(i) no other shares of capital stock or other voting securities of Merger Sub,
(ii) no securities of Merger Sub convertible into or exchangeable for shares of
capital stock or voting securities of Merger Sub and (iii) no options or other
rights to acquire from Merger Sub, and no obligations of Merger Sub to issue,
any capital stock, voting securities or securities convertible into or
exchangeable for capital stock or voting securities of Merger Sub. Merger Sub
has not conducted any business prior to the date hereof and has no, and prior to
the Effective Time will have no, assets, liabilities or obligations of any
nature other than those incident to its formation and pursuant to this
Agreement, the Offer and the Merger and the other transactions contemplated by
this Agreement.
(b) Organization, Good Standing and Qualification. Each of
Parent and its Subsidiaries is a corporation duly organized, validly existing
and in good standing (where such concept is recognized) under the laws of its
respective jurisdiction of organization and has all requisite corporate or
similar power and authority to own and operate its properties and assets and to
carry on its business as presently conducted and is qualified to do business and
is in good standing as a foreign corporation in each jurisdiction (where such
concept is recognized) where the ownership or operation of its properties or
conduct of its business requires such qualification, except where the failure to
be so qualified or in such good standing, when taken together with all other
such failures, is not reasonably likely to prevent, materially delay or
materially impair the ability of Parent and Merger Sub to consummate the
transactions contemplated by this
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Agreement, the Stock Option Agreement and the Shareholders Agreement. Parent has
made available to the Company a complete and correct copy of Parent's and Merger
Sub's certificate of incorporation and bylaws, as amended to the date hereof.
Parent's and Merger Sub's certificate of incorporation and bylaws so delivered
are in full force and effect.
(c) Corporate Authority. No vote of holders of capital stock
of Parent is necessary to approve this Agreement, the Offer and the Merger and
the other transactions contemplated hereby. Each of Parent and Merger Sub has
all requisite corporate power and authority and each has taken all corporate
action (including approval of the shareholders of Merger Sub) necessary in order
to execute, deliver and perform its obligations under this Agreement and to
consummate the Offer and the Merger. Parent has all requisite power and
authority and has taken all corporate action necessary in order to execute,
deliver and perform its obligations under the Stock Option Agreement. This
Agreement is a valid and binding agreement of Parent and Merger Sub, enforceable
against each of Parent and Merger Sub in accordance with its terms. The Stock
Option Agreement is a valid and binding agreements of Parent enforceable against
Parent in accordance with its respective terms.
(d) Governmental Filings; No Violations. (i) Other than any
filings and/or notices required (A) pursuant to Section 2.3, (B) under the HSR
Act and the Exchange Act and (C) such filings or consents, registrations,
approvals, permits or authorizations as may be required under the laws of the
competition or antitrust laws of jurisdictions outside the United States, no
notices or other filings are required to be made by Parent or Merger Sub with,
nor are any consents, registrations, approvals, permits or authorizations
required to be obtained by Parent or Merger Sub from, any Governmental Entity,
in connection with the execution and delivery of this Agreement by Parent and
Merger Sub or the execution and delivery of the Stock Option Agreement and the
License Agreement by Parent or the consummation by Parent and Merger Sub of the
Offer and the Merger and the other transactions contemplated hereby and by the
Stock Option Agreement, except those that the failure to make or obtain are not,
individually or in the aggregate, reasonably likely to prevent, materially delay
or materially impair the ability of Parent or Merger Sub to consummate the
transactions contemplated by this Agreement, the Stock Option Agreement and the
License Agreement.
(ii) The execution, delivery and performance of this
Agreement and the Stock Option Agreement, by Parent and Merger Sub, as the case
may be, do not and will not, and the consummation by Parent and Merger Sub of
the Offer and the Merger and the other transactions contemplated hereby and by
the Stock Option Agreement, will not, constitute or result in (A) a breach or
violation of, or a default under, the certificate or bylaws of Parent and Merger
Sub or the comparable governing instruments of any of its Subsidiaries, (B) a
breach or violation of, or a default under, the acceleration of or the creation
of a lien, pledge, security interest or other encumbrance on
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the assets of Parent or any of its Subsidiaries (with or without notice, lapse
of time or both) pursuant to, any Contracts binding upon Parent or any of its
Subsidiaries or any Law or governmental or non-governmental permit or license to
which Parent or any of its Subsidiaries is subject, or (C) any change in the
rights or obligations of any party under any of the Contracts, except, in the
case of clause (B) or (C) above, for breach, violation, default, acceleration,
creation or change that, individually or in the aggregate, is not reasonably
likely to prevent, materially delay or materially impair the ability of Parent
or Merger Sub to consummate the transactions contemplated by this Agreement.
(e) Litigation. Except as disclosed in the Parent Reports
filed prior to the date hereof, and except for matters which are not,
individually or in the aggregate, reasonably likely to prevent or materially
delay or materially impair the ability of Parent or Merger Sub to consummate the
transactions contemplated by this Agreement, the Stock Option Agreement and the
License Agreement, there are no civil, criminal, administrative or regulatory
actions, suits, claims, hearings, investigations or proceedings pending or, to
the knowledge of Parent, overtly threatened against Parent or any of its
Subsidiaries.
(f) Compliance. Neither Parent nor any of its Subsidiaries is
in default or violation of, (i) any Law applicable to Parent or any of its
Subsidiaries or by which its or any of their respective properties are bound, or
(ii) any Contract to which Parent or any or its Subsidiaries is a party or by
which Parent or any of its Subsidiaries or its or any of their respective
properties are bound or affected, except for any such defaults or violations
that, individually or in the aggregate, are not reasonably likely to prevent,
materially delay or materially impair the ability of Parent or Merger Sub to
consummate the transactions contemplated by this Agreement.
(g) Brokers and Finders. Neither Parent nor any of its
Subsidiaries, officers, directors or employees has employed any broker or finder
or incurred any liability for any brokerage fees, commissions or finders' fees
in connection with the Merger or the other transactions contemplated by this
Agreement, the Stock Option Agreement or the Shareholders Agreement.
(h) Financing. Parent will have the funds necessary to
consummate the Offer and the Merger on the terms contemplated by this Agreement
and will provide such funds to Merger Sub at or prior to the consummation of the
Offer and the Merger, as applicable.
(i) Offer Documents. The Offer Documents and any other
documents to be filed by Parent with the SEC or any other Government Entity in
connection with the Merger and the other transactions contemplated hereby will
(in the case of the Offer Documents and any such other documents filed with the
SEC under the Securities Act or the Exchange Act) comply as to form in all
material respects with applicable provisions
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of the Exchange Act and the Securities Act, respectively, and the rules and
regulations thereunder. None of the Offer Documents, any other documents
required to be filed by Parent with the SEC in connection with the transactions
contemplated hereby, nor any information supplied by Parent for inclusion in the
Schedule 14D-9 or in the information required to be distributed to the
stockholders of the Company pursuant to Section 14(f) of the Exchange Act and
Rule 14f-1 promulgated thereunder as is necessary to enable Parent's designees
to be elected to the Company's Board pursuant to Section 1.4 hereof shall, at
the respective times the Offer Documents or any amendments and supplements
thereto, any such other filings by Parent or Purchaser are filed with SEC or are
first published, sent or given to stockholders of the Company, as the case may
be, contain any untrue statement of a material fact, or omit to state any
material fact required to be stated therein or necessary in order to make the
statements made therein, in the light of the circumstances under which they are
made, not misleading. Notwithstanding the foregoing, neither Parent nor Merger
Sub makes any representation or warranty with respect to the statements made in
any of the foregoing documents based on and in conformity with information
supplied by or on behalf of the Company in writing specifically for inclusion
therein.
ARTICLE VII
Covenants
7.1. Company Interim Operations. Except as set forth in the
document entitled "Schedule 7.1" furnished to the Company by Parent prior to the
execution and delivery of this Agreement, the Company covenants and agrees as to
itself and its Subsidiaries that, after the date hereof and prior to the
Effective Time (unless Parent shall otherwise consent in writing (such consent
not to be unreasonably withheld or delayed) and except as otherwise expressly
contemplated by this Agreement and the Stock Option Agreement):
(a) the business of it and its Subsidiaries shall be
conducted, in all material respects, in the ordinary and usual course and, to
the extent consistent therewith, it and its Subsidiaries shall use their
respective commercially reasonable best efforts to preserve its business
organization substantially intact and substantially maintain its existing
relations and goodwill with customers, suppliers, distributors, creditors,
lessors, employees and business associates;
(b) it shall not (i) issue, sell, pledge, dispose of or
encumber any capital stock owned by it in any of its Subsidiaries; (ii) amend
its certificate or bylaws or amend, modify or terminate the Rights Agreement,
except as set forth in Section 6.1(s) hereof; (iii) split, combine or reclassify
its outstanding shares of capital stock; (iv) declare, set aside or pay any
dividend payable in cash, stock or property in respect of any capital stock, or
(v) repurchase, redeem or otherwise acquire, except in connection with the
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Stock Plans, or permit any of its Subsidiaries to purchase or otherwise acquire,
any shares of its capital stock or any securities convertible into or
exchangeable or exercisable for any shares of its capital stock;
(c) neither it nor any of its Subsidiaries shall (i) issue,
sell, pledge, dispose of or encumber any shares of, or securities convertible
into or exchangeable or exercisable for, or options, warrants, calls,
commitments or rights of any kind to acquire, any shares of its capital stock of
any class or any Voting Debt or any other property or assets (other than (A) the
issuance of Shares pursuant to options outstanding on the date of this Agreement
under the Stock Plans and the issuance of Shares under the Company's Employee
Stock Purchase Plan and (B) the issuance of Shares upon conversion of
Convertible Preferred Stock outstanding on the date of this Agreement); (ii)
transfer, lease, license, guarantee, sell, mortgage, pledge, dispose of or
encumber any other property or assets (including capital stock of any of its
Subsidiaries) or incur or modify any material indebtedness or other liability;
or (iii) make any commitments for, make or authorize any capital expenditures
or, by any means, make any acquisition of, or investment in, assets or stock of
any other Person or entity in each case, involving amounts in excess of $100,000
in the aggregate other than in the ordinary and usual course;
(d) Except as may be required by existing contractual
commitments or as required by applicable law, neither it nor any of its
Subsidiaries shall (i) enter into any new agreements or commitments for any
severance or termination pay to, or enter into employment or severance agreement
with, any of its directors, officers or employees, including adding new
participants to the Company's Management Change of Control Plan or (ii)
terminate, establish, adopt, enter into, make any new grants or awards under,
amend or otherwise modify, any Compensation and Benefit Plans or increase or
accelerate the salary, wage, bonus or other compensation of any employees,
officers or directors (except for increases in salaries, wages and cash bonuses
of nonexecutive employees made in the ordinary course of business consistent
with past practice) or pay or agree to pay any pension, retirement allowance or
other employee benefit not required by any existing Compensation and Benefit
Plan;
(e) neither it nor any of its Subsidiaries shall settle or
compromise any material claims or litigation or modify, amend or terminate any
of its material Contracts or waive, release or assign any material rights or
claims;
(f) neither it nor any of its Subsidiaries shall make any Tax
election or permit any insurance policy naming it as a beneficiary or
loss-payable payee to be canceled or terminated except in the ordinary and usual
course of business;
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(g) except as may be required as a result of a change in law
or in generally accepted accounting principles, neither it nor any of its
Subsidiaries shall change any of the accounting practices or principles used by
it;
(h) neither it nor any of its Subsidiaries shall adopt a plan
of complete or partial liquidation, dissolution, merger, consolidation,
restructuring, recapitalization, or other reorganization of the Company or any
of its subsidiaries not constituting an inactive Subsidiary (other than the
Merger);
(i) it shall not suffer or permit capital expenditures made or
incurred by the Company and its Subsidiaries for any period to exceed $100,000
except for expenses incurred in connection with the transactions contemplated by
this Agreement; and
(j) neither it nor any of its Subsidiaries will offer to, or
enter into an agreement to, do any of the foregoing.
7.2. Acquisition Proposals. The Company shall, and shall use
its best efforts to cause its nonstockholder affiliates and the officers,
directors and employees of the Company and its Subsidiaries to, and shall
instruct its stockholder affiliates and the representatives and agents of the
Company and its Subsidiaries (including, without limitation, any investment
banker, attorney or accountant retained by the Company or any of its
Subsidiaries) to, immediately cease and terminate any existing activities,
discussions or negotiations, if any, with any parties (other than Parent and
Merger Sub, any affiliate or associate of Parent and Merger Sub or any designees
of Parent and Merger Sub) conducted heretofore with respect to any acquisition
or exchange of all or any material portion of the assets of, or more than 20% of
the equity interest in, the Company or any of its Subsidiaries (by direct
purchase from the Company, tender or exchange offer or otherwise) or any
business combination, merger or similar transaction (including an exchange of
stock or assets) with or involving the Company or any Subsidiary of the Company
(an "Acquisition Transaction"), other than the Offer and the Merger. Except as
set forth in this Section 7.2, the Company shall not, and shall use its best
efforts to cause its nonstockholder affiliates and the officers, directors and
employees of the Company and its Subsidiaries not to, and shall instruct its
stockholder affiliates and the representatives and agents of the Company and its
Subsidiaries (including, without limitation, any investment banker, attorney or
accountant retained by the Company or any of its subsidiaries) not to, directly
or indirectly, knowingly encourage, solicit, participate in or initiate
discussions or negotiations with, or provide any nonpublic information or data
(other than the Company's standard public information package) to, any
corporation, partnership, person or other entity or group (other than Parent and
Merger Sub, any affiliate or associate of Parent and Merger Sub or any designees
of Parent and Merger Sub) with respect to any inquiries or the making of any
offer or proposal (including, without limitation, any offer or proposal to the
stockholders of the Company) concerning an Acquisition Transaction (an
"Acquisition Proposal" (it being understood that an
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Acquisition Proposal that is conditioned upon the completion of due diligence
shall be deemed to constitute a bona fide Acquisition Proposal if such proposal
otherwise meets the definition of Acquisition Proposal)) or otherwise knowingly
facilitate any effort or attempt to make or implement an Acquisition Proposal;
provided, however, that prior to the Merger Sub beneficially owning a majority
of the then outstanding Shares, the Company may furnish information and access,
but only in response to a request for information or access, to any person or
entity making a bona fide written Acquisition Proposal to the board of directors
of the Company after the date hereof which was not knowingly encouraged,
solicited or initiated by the Company or any of its affiliates or any director,
employee, representative or agent of the Company or any of its Subsidiaries
(including, without limitation, any investment banker, attorney or accountant
retained by the Company or any of its Subsidiaries) on or after the date hereof
and may participate in discussions and negotiate with such person or entity
concerning any such Acquisition Proposal and may authorize the Company to enter
into a binding written agreement concerning a Superior Proposal (as defined
below), if and only if, in any such case, (i) the board of directors of the
Company determines in good faith, (A) after consultation with outside counsel to
the Company to the effect that failing to provide such information or access or
to participate in such discussions or negotiations or so to authorize, as the
case may be, is reasonably likely to constitute a breach of such board's
fiduciary duties under applicable law, that failing to provide such information
or access or to participate in such discussions or negotiations or to so
authorize, as the case may be, is reasonably likely to constitute a breach of
such board's fiduciary duties under applicable law, and (B) after consultation
with the financial advisors to the Company to such effect, that such Acquisition
Proposal, if accepted, is reasonably likely to be consummated, taking into
account all legal, financial and regulatory aspects of the proposal and the
person or entity making the proposal and would, if consummated, result in a
transaction more favorable to the Company's stockholders from a financial point
of view than the transaction contemplated by this Agreement (any such more
favorable Acquisition Proposal as to which both of the determinations referred
to in subclauses (A) and (B) above have been made being referred to in this
Agreement as a "Superior Proposal"), and (ii) the Company receives from the
person or entity making such bona fide written Acquisition Proposal an executed
confidentiality agreement the terms of which are (without regard to the terms of
such Acquisition Proposal) (A) no less favorable to the Company, and (B) no less
restrictive to the person or entity making such bona fide written Acquisition
Proposal than those contained in the Confidentiality Agreement, dated as of June
21, 1999, referring to Parent as the "Recipient" (the "Company Confidentiality
Agreement"), between the Company and Parent. Nothing in this Agreement shall
prohibit the Board of Directors of the Company from, to the extent applicable,
complying with Rule 14e-2 or 14D-9 promulgated under the Exchange Act with
regard to an Acquisition Proposal. The Company will notify Parent within 48
hours if any such inquiries or proposals are received by, any such information
is requested from, or any such negotiations or discussions are sought to be
initiated or continued with the Company and shall in such
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notice indicate the identity of the offeror and the material terms and
conditions of any such proposal and thereafter shall keep Parent reasonably
informed, on a current basis, of the status and material terms of such proposals
and the status of such negotiations or discussions, providing copies to Parent
of any Acquisition Proposals made in writing. The Company shall provide Parent
with three business days advance notice of, in each and every case, its
intention to either enter into any agreement with or to provide any information
to any person or entity making any such inquiry or proposal. The Company agrees
not to release any third party from, or waive any provisions of, any
confidentiality or standstill agreement to which the Company is a party and will
use its best efforts to enforce any such agreements at the request of and on
behalf of Parent. The Company will inform the individuals or entities referred
to in the first sentence of this Section 7.2 of the obligations undertaken in
this Section 7.2. The Company also will promptly request each person or entity
which has executed, within 12 months prior to the date of this Agreement, a
confidentiality agreement in connection with its consideration of acquiring the
Company to return or destroy all confidential information heretofore furnished
to such person or entity by or on behalf of the Company.
7.3. Company Stockholder Approval; Proxy Statement
(a) If approval or action in respect of the Merger by the
stockholders of the Company is required by applicable law, the Company, acting
through the Company Board, shall (i) call as promptly as practicable following
consummation of the Offer, a meeting of its stockholders (the "Company
Stockholders Meeting") for the purpose of voting upon the Merger, (ii) hold the
Company Stockholders Meeting as soon as practicable following the purchase of
Shares pursuant to the Offer, and (iii) recommend to its stockholders the
approval of the Merger. Notwithstanding the foregoing, the Company Board may
withdraw, modify or amend any recommendation that the Stockholders approve the
merger if the Company has received an Acquisition Proposal which in accordance
with Section 7.2 is a Superior Proposal. The record date for the Company
Stockholders Meeting shall be a date subsequent to the date on which Parent or
Merger Sub becomes the a record holder of Shares purchased pursuant to the
Offer. At the Company Stockholders Meeting, Parent and Merger Sub shall cause
all shares then owned beneficially or of record by them to be voted in favor of
approval and adoption of this Agreement, the Merger and the transactions
contemplated hereby. Notwithstanding the foregoing, if Parent, Merger Sub or any
other subsidiary of Parent shall acquire at least 90% of the outstanding Shares
and outstanding Preferred Stock, the parties shall take all necessary and
appropriate action to cause the Merger to become effective as soon as
practicable after the expiration of the Offer without a stockholders meeting in
accordance with Section 253 of the DGCL.
(b) If required by applicable Law, the Company will, as soon
as practicable following the expiration of the Offer, prepare and file a
preliminary Proxy Statement (such proxy statement, and any amendments or
supplements thereto, the
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"Proxy Statement") or , if applicable, an information statement with the SEC
with respect to the Company Stockholders Meeting and will use its best efforts
to respond to any comments of the SEC or its staff and of any request by the SEC
or its staff for amendments or supplements to the Proxy Statement or for
additional information and will supply Parent with copies of all correspondence
between the Company or any of its representatives, on the one hand, and the SEC
or its staff, on the other hand, with respect to the Proxy Statement or the
Merger. Parent and Merger Sub shall furnish to the Company all information
regarding Parent, Merger Sub and their affiliates that may be required (pursuant
to the Exchange Act and other applicable Laws) to be set forth in the Proxy
Statement. The Company shall give Parent and its counsel the opportunity to
review the Proxy Statement prior to it being filed with the SEC and shall give
Parent and its counsel the opportunity to review all amendments and supplements
to the Proxy Statement and all responses to requests for additional information
and replies to comments prior to their being filed with, or sent to, the SEC.
Each of the Company and Parent agrees to use its best efforts, after
consultation with the other parties hereto, to respond promptly to all such
comments of and requests by the SEC. As promptly as practicable after the Proxy
Statement has been cleared by the SEC, the Company shall mail the Proxy
Statement to the stockholders of the Company. If at any time prior to the
approval of this Agreement by the Company's stockholders there shall occur any
event which should be set forth in an amendment or supplement to the Proxy
Statement, the Company will prepare and mail to its stockholders such an
amendment or supplement.
(c) The Company represents and warrants that the Proxy
Statement will comply in all material respects with the Exchange Act and, at the
respective times filed with the SEC and distributed to stockholders of the
Company, will not contain any untrue statement of a material fact or omit to
state any material fact required to be stated therein or necessary in order to
make the statements therein, in light of the circumstances under which they were
made, not misleading; provided that the Company makes no representation or
warranty as to any information included in the Proxy Statement that was provided
by Parent or Merger Sub. Parent represents and warrants that none of the
information supplied by Parent or Merger Sub for inclusion in the Proxy
Statement will, at the respective times filed with the SEC and distributed to
stockholders of the Company, contain any untrue statement of a material fact or
omit to state any material fact required to be stated therein or necessary in
order to make the statements therein, in light of the circumstances under which
they were made, not misleading.
(d) Following the consummation of the Offer, the Company shall
use its best efforts to obtain the necessary approvals by its stockholders of
the Merger, this Agreement and the transactions contemplated hereby.
7.4. Approvals and Consents; Cooperation. The Company and
Parent shall cooperate with each other and use (and shall cause their respective
Subsidiaries to use) their respective commercially reasonable best efforts to
take or cause to be taken all
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actions, and do or cause to be done all things, necessary, proper or advisable
under this Agreement, the Stock Option Agreement, the Shareholders Agreement and
applicable Laws to consummate and make effective the Merger and the other
transactions contemplated by this Agreement, the Stock Option Agreement and the
Shareholders Agreement as soon as practicable, including preparing and filing as
promptly as practicable all documentation to effect all necessary applications,
notices, petitions, filings and other documents and to obtain as promptly as
practicable all permits, consents, approvals and authorizations necessary or
advisable to be obtained from any third party and/or any Governmental Entity in
order to consummate the Offer and the Merger or any of the other transactions
contemplated by this Agreement, the Stock Option Agreement and the Shareholders
Agreement. In particular, the Company and Parent each agree to use commercially
reasonable efforts to take, or cause to be taken, all appropriate action, and
do, or cause to be done, such things as may be necessary under federal or state
securities laws or the HSR Act applicable to or necessary for, and will file as
soon as reasonably practicable and, if appropriate, use commercially reasonable
efforts to have declared effective or approved, all documents and notifications
with the SEC and other governmental or regulatory bodies (including, without
limitation, the FDA) that they deem necessary or appropriate for, the
consummation of the Offer and the Merger or any of the other transactions
contemplated hereby and each party shall give the other information reasonably
requested by such other party pertaining to it and its subsidiaries and
affiliates to enable such other party to take such actions. Each of the Company,
Parent and Merger Sub agrees to use commercially reasonable efforts to contest
and resist any action, including legislative, administrative or judicial action,
and to have vacated, lifted, reversed or overturned any decree, judgment,
injunction or other order (whether temporary, preliminary or permanent) that is
in effect and that restricts, prevents or prohibits the consummation of the
Offer and the Merger or any of the other transactions contemplated by this
Agreement, including, without limitation, by pursuing available avenues of
administrative and judicial appeal. Each of the Company, Parent and Merger Sub
also agrees to use commercially reasonable efforts to take any and all actions
necessary to avoid or eliminate each and every impediment under any antitrust
law that may be asserted by any governmental antitrust authority or any other
party so as to enable the parties to close by the date specified in Section
9.2(i) the transactions contemplated hereby; provided, however, that nothing in
this Section 7.4 shall require, or be construed to require, Parent to proffer
to, or agree to, sell or hold separate and agree to sell, before or after the
Effective Time, any assets, businesses, or interest in any assets or businesses
of Parent, the Company or any of their respective affiliates (or to consent to
any sale, or agreement to sell, by the Company of any of its assets or
businesses) or to agree to any material changes or restriction in the operations
of any such assets or businesses; and provided, further, that nothing in this
Section 7.4 shall require, or be construed to require, a proffer or agreement
that would, in the good faith judgment of Parent, be reasonably likely to have a
material adverse effect on the benefits to Parent of the transactions
contemplated by this Agreement. Subject to applicable Laws relating to the
exchange of
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information, Parent and the Company shall have the right to review in advance,
and to the extent practicable each will consult the other on, all the
information relating to Parent or the Company, as the case may be, and any of
their respective Subsidiaries, that appear in any filing made with, or written
materials submitted to, any third party and/or any Governmental Entity in
connection with the Offer or the Merger and the other transactions contemplated
by this Agreement, the Stock Option Agreement and the Shareholders Agreement. In
exercising the foregoing right, each of the Company and Parent shall act
reasonably and as promptly as practicable.
7.5. Filings; Other Actions; Notification. (a) The Company and
Parent each shall, upon request by the other, furnish the other with all
information concerning itself, its subsidiaries, directors, officers and
stockholders and such other matters as may be reasonably necessary or advisable
in connection with the Proxy Statement or any other statement, filing, notice or
application made by or on behalf of Parent, the Company or any of their
respective subsidiaries to any Governmental Entity in connection with the Offer
or the Merger and the transactions contemplated by this Agreement, the Stock
Option Agreement and the Shareholders Agreement.
(b) The Company and Parent each shall keep the other apprised
of the status of matters relating to completion of the transactions contemplated
hereby, including promptly furnishing the other with copies of notice or other
communications received by Parent or the Company, as the case may be, or any of
their respective subsidiaries, from any third party or any Governmental Entity
with respect to the Offer or the Merger and the other transactions contemplated
by this Agreement, the Stock Option Agreement and the Shareholders Agreement.
The Company shall give prompt notice to Parent of any change that has resulted
in or is reasonably likely to result in a Company Material Adverse Effect and
Parent shall give the Company prompt notice of any event, fact, circumstance or
occurrence that would be reasonably likely to have an adverse effect on Parent's
or Merger Sub's ability to complete the Offer or the Merger or to comply with
their obligations contained in this Agreement or in the Stock Option Agreement.
7.6. Access. From the date hereof until the earlier of the
Effective Time or the termination of this Agreement, upon reasonable notice, the
Company shall afford to the officers, employees, accountants, counsel, financial
advisors and other representatives of Parent ("Parent Representatives")
reasonable access to all of its and its Subsidiaries properties, books,
contracts, commitments and records (including security position listings or
other information concerning beneficial and record owners of the Company's
securities) and its officers, management employees and representatives and,
during such period, the Company shall furnish promptly to Parent, consistent
with its legal obligations, all information concerning its business, properties
and personnel as the other party may reasonably request. Such information shall
be held in confidence to the
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extent required by, and in accordance with, the provisions of the Company
Confidentiality Agreement which shall remain in full force and effect.
7.7. De-registration. The Company shall use its best efforts
to cause the Shares to be de-registered from the NASDAQ National Market and
de-registered under the Exchange Act as soon as practicable following the
Effective Time.
7.8. Publicity. The initial press release relating to the
Offer and this Agreement shall be a joint press release, the content of which
shall be mutually agreed upon by the Company and Parent, and thereafter the
Company and Parent shall consult with each other prior to issuing any press
releases or otherwise making public statements with respect to the transactions
contemplated by this Agreement and the Stock Option Agreement and prior to
making any filings with any Governmental Entity with respect to the transactions
contemplated by this Agreement.
7.9. Benefits.
(a) Stock Options. (i) At the Effective Time, each outstanding
Company Option under the Stock Plans, whether vested or unvested, shall be
deemed to constitute an option to acquire (a "New Parent Option"), on the same
terms and conditions as were applicable under such Company Option, the number of
shares of Common Stock of Parent (rounded to the nearest whole number) equal to
the product of (A) the number of Shares issuable upon exercise of such Company
Option and (B) the Price Per Share divided by the average of the closing sales
prices of Common Stock of Parent on the New York Stock Exchange for the ten (10)
consecutive days immediately prior to and including the day preceding the
Effective Time, at an exercise price per share (rounded to the nearest whole
cent) equal to (x) the aggregate exercise price for the Shares otherwise
purchasable pursuant to such Company Option divided by (y) the aggregate number
of shares of Common Stock of Parent purchasable pursuant to the New Parent
Option (as calculated immediately above); provided, however, that in the case of
any Company Option to which Section 422 of the Code applies, the option price,
the number of shares purchasable pursuant to such option and the terms and
conditions of exercise of such option shall be determined in accordance with the
foregoing, subject to such adjustments as are necessary in order to satisfy the
requirements of Section 424(a) of the Code. At or prior to the Effective Time,
the Company shall take all necessary actions to permit the assumption of the
unexercised Company Options by Parent pursuant to this Section and shall take
all action necessary to cause the funds held in the Company's Employee Stock
Purchase Plan to be used to purchase outstanding Shares through open market
transactions so that such Shares will be converted into the right to receive
cash in the Merger; provided that thereafter the Company shall terminate the
Company's Employee Stock Purchase Plan.
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(ii) Effective at the Effective Time, Parent shall assume, as
a New Parent Option, each outstanding Company Option in accordance with this
Section and with the terms of the Stock Plan under which it was issued and the
stock option agreement by which it is evidenced. Not later than thirty calendar
days after the Closing Date, Parent shall file a registration statement under
the Securities Act of 1933 on Form S-8, or other appropriate form, covering
shares of Parent Common Stock subject to such New Parent Options.
(b) Employee Benefits. Parent agrees that during the period
commencing at the Effective Time and ending on the first anniversary thereof,
the Employees will continue to be provided with benefits under employee benefit
plans (other than stock options or other plans involving the issuance of
securities of the Company or Parent) which in the aggregate are substantially
comparable to those currently provided by the Company to such Employees. Parent
will cause each employee benefit plan of Parent in which Employees are eligible
to participate to take into account for purposes of eligibility and vesting
thereunder the service of such Employees with the Company as if such service
were with Parent, to the same extent that such service was credited under a
comparable plan of the Company and such service period would have been credited
to an employee of the Parent participating in the relevant plan. For the first
plan year ending after the Effective Time, any pre-existing condition exclusion
under any Purchase Benefit Plan providing medical or dental benefits shall be no
more restrictive for any Employee who, immediately prior to commencing
participation in such Purchaser Benefit Plan, was participating in a Company
Benefit Plan providing medical or dental benefits and had satisfied any
pre-existing condition provision under such Company Benefit Plan. Any expenses
that were taken into account under a Company Benefit Plan providing medical or
dental benefits in which the Employee participated immediately prior to
commencing participation in a Purchaser Benefit Plan providing medical or dental
benefits shall be taken into account to the same extent under such Purchaser
Benefit Plan, in accordance with the terms of such Purchaser Benefit Plan, for
purposes of satisfying applicable deductible, coinsurance and maximum
out-of-pocket provisions and life-time benefit limits. Parent will, and will
cause the Surviving Corporation to, honor in accordance with their terms (i) all
employee benefit obligations to Employees accrued as of the Effective Time and
(ii) to the extent set forth on Schedule 6.1(h)(i), all employee severance plans
in existence on the date hereof and all employment or severance agreements
entered into prior to the date hereof.
7.10. Expenses. The Surviving Corporation shall pay all
charges and expenses, including those of the Exchange Agent, in connection with
the transactions contemplated in Article V, and Parent shall reimburse the
Surviving Corporation for such charges and expenses. Except as otherwise
provided in Section 9.5(b), whether or not the Merger is consummated, all costs
and expenses incurred in connection with this Agreement, the Stock Option
Agreement, the Shareholders Agreement, the Offer and the Merger and the other
transactions contemplated by this Agreement, the Stock Option
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Agreement and the Shareholders Agreement shall be paid by the party incurring
such expense.
7.11. Indemnification; Directors' and Officers' Insurance. (a)
From and after the earliest date on which Merger Sub owns at least a majority of
the outstanding Shares on a fully diluted basis, Parent agrees that it will
indemnify, defend and hold harmless each individual and every person who is or
was a director or officer of the Company or any of its Subsidiaries prior to the
Effective Time (the "Indemnified Parties"), against any costs or expenses
(including reasonable attorneys' fees), judgments, fines, losses, claims,
damages, liabilities and amounts paid in settlement (collectively, "Costs")
incurred in connection with any claim, action, suit, proceeding, inquiry or
investigation, whether civil, criminal, administrative or investigative, arising
out of matters existing or occurring at or prior to the Effective Time
(including transactions contemplated by this Agreement), whether asserted or
claimed prior to, at or after the Effective Time (and Parent shall also advance
expenses as incurred to the fullest extent permitted under applicable law,
provided the Person to whom expenses are advanced provides an undertaking to
repay such advances if it is ultimately determined that such Person is not
entitled to indemnification).
(b) From and after the earliest date on which Merger Sub owns
at least a majority of the outstanding Shares on a fully diluted basis, Parent
will cause the Surviving Corporation to fulfill and honor in all respects the
obligations of the Company pursuant to each indemnification agreement listed in
Schedule 7.11(b) and any indemnification provision or any exculpation provision
set forth in the Company's certificate of incorporation or bylaws in effect on
the date hereof. The certificate of incorporation and bylaws of the Surviving
Corporation shall contain the provisions with respect to indemnification and
exculpation from liability set forth in the Company's certificate of
incorporation and bylaws on the date of this Agreement, and during the period
commencing on the earliest date in which Merger Sub purchases Shares pursuant to
the Offer and ending on the sixth anniversary of the Effective Time, such
provisions shall not be amended, repealed or otherwise modified in any manner
that would adversely affect the rights thereunder of any of the Indemnified
Parties.
(c) Any Indemnified Party wishing to claim indemnification
under paragraph (a) of this Section 7.11, upon learning of any such claim,
action, suit, proceeding, inquiry or investigation, shall promptly notify Parent
thereof. In the event of any such claim, action, suit, proceeding, inquiry or
investigation (whether arising before or after the Effective Time), (i) Parent
or the Surviving Corporation shall have the right to assume the defense thereof
and Parent shall be liable to such Indemnified Parties for the legal expenses of
one counsel or any other expenses subsequently incurred by such Indemnified
Parties in connection with the defense thereof unless there is a conflict of
interest between the Indemnified Parties and Parent, in which event Parent shall
be liable to the Indemnified Parties for the fees and expenses of each
Indemnified Parties' counsel,
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(ii) the Indemnified Parties will cooperate in the defense of any such matter
and (iii) Parent shall not be liable for any settlement effected without its
prior written consent and no Indemnified Party shall be liable for any
settlement effected without its prior written consent unless such settlement
includes a complete unconditional release of all claims against all Indemnified
Parties; and provided, further, that Parent shall not have any obligation
hereunder to any Indemnified Party if and when a court of competent jurisdiction
shall ultimately determine, and such determination shall have become final, that
the indemnification of such Indemnified Party in the manner contemplated hereby
is prohibited by applicable law. Parent and the Surviving Corporation jointly
and severally agree to pay all expenses, including attorneys' fees, that may be
incurred by the Indemnified Parties in enforcing the indemnity and other
obligations provided for in this Section 7.11.
(d) Notwithstanding any contrary provision of this Agreement,
prior to the Effective Time, the Company may purchase insurance coverage
extending for a period of six years after the Effective Time the level and scope
of the Company's directors' and officers' liability insurance coverage in effect
as of the date hereof; provided that the aggregate annual premium payable for
such insurance shall not exceed 175% of the last annual premium paid for such
coverage prior to the date hereof. Through the sixth anniversary of the
Effective Time, Parent shall maintain in effect, for the benefit of the
Indemnified Parties, such insurance coverage, and subject to the limitations in
the preceding sentence, shall pay the annual premium for such insurance
coverage. In the event the annual premium payable for such insurance coverage
exceeds 175% of the last annual premium paid by the Company for such coverage,
Parent shall be obligated to obtain and maintain in effect a policy with the
greatest amount of coverage available for a cost not exceeding 175% of such
amount.
(e) If the Surviving Corporation or any of its successors or
assigns (i) shall consolidate with or merge into any other corporation or entity
and shall not be the continuing or surviving corporation or entity of such
consolidation or merger or (ii) shall transfer all or substantially all of its
properties and assets to any individual, corporation or other entity, then and
in each such case, proper provisions shall be made so that the successors and
assigns of the Surviving Corporation shall assume all of the obligations set
forth in this Section.
(f) The provisions of this Section shall survive the earliest
date on which Merger Sub owns at least a majority of the outstanding Shares on a
fully diluted basis and the consummation of the Merger and the Effective Time,
are intended to be for the benefit of, and shall be enforceable by, each of the
Indemnified Parties as intended third party beneficiaries and their heirs and
estates and shall be binding on all successors and assigns of Parent and the
Surviving Corporation.
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7.12. Other Actions by the Company and Parent.
(a) Rights. Prior to the consummation of the Offer, the
Company Board shall take all necessary action to ensure that the representation
and warranty in Section 6.1(s) is accurate.
(b) Antitakeover Statutes. If any Antitakeover Statute is or
may become applicable to the Offer or the Merger or the other transactions
contemplated by this Agreement, the Stock Option Agreement, or the Shareholders
Agreement, each of Parent and the Company and its board of directors shall grant
such approvals and take such lawful actions as are necessary so that such
transactions may be consummated as promptly as practicable on the terms
contemplated by this Agreement, the Stock Option Agreement or the Shareholders
Agreement or by the Offer or the Merger and otherwise act to eliminate or
minimize the effects of such statute or regulation on such transactions.
7.13. Convertible Preferred Stock. Prior to the Effective
Time, the Company and Parent shall take all action necessary to provide that on
and after the Effective Time, the Convertible Preferred Stock will be
convertible only into the Merger Consideration.
ARTICLE VIII
Conditions
8.1. Conditions to Each Party's Obligation to Effect the
Merger. The respective obligation of each party to effect the Merger is subject
to the satisfaction or waiver at or prior to the Closing of each of the
following conditions:
(a) Stockholder Approval. If the approval of this Agreement
and the Merger by the holders of Shares is required by applicable law, this
Agreement shall have been duly adopted by holders of Shares constituting the
Company Requisite Vote.
(b) Regulatory Consents. Any waiting period applicable to the
consummation of the Merger under the HSR Act shall have expired or been
terminated.
(c) Litigation. (i) No court or Governmental Entity of
competent jurisdiction shall have enacted, issued, enforced or entered any
statute, rule, regulation, judgment, decree, injunction or other order (whether
temporary, preliminary or permanent) that is in effect and restrains, enjoins or
otherwise prohibits consummation of the Offer or Merger (collectively, an
"Order"); provided however, that prior to invoking this provision, each party
shall use its commercially reasonable best efforts to have any such Order lifted
or withdrawn, and (ii) no Governmental Entity shall have instituted any
proceeding seeking any such Order.
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(d) Completion of the Offer. Merger Sub shall have (i)
commenced the Offer pursuant to Section 1.1 hereof and (ii) purchased, pursuant
to the terms and conditions of such Offer, all shares of Company Common Stock
duly tendered and not withdrawn; provided, however, that neither Parent nor
Merger Sub shall be entitled to rely on the condition in clause (ii) above if
either of them shall have failed to purchase shares of Company Common Stock
pursuant to the Offer in breach of their obligations under this Agreement.
ARTICLE IX
Termination
9.1. Termination by Mutual Consent. This Agreement may be
terminated and the Merger may be abandoned at any time prior to the Effective
Time, whether before or after the approval by stockholders of the Company
referred to in Section 8.1(a), by mutual written consent of the Company, Parent
and Merger Sub, by action of their respective boards of directors.
9.2. Termination by Either Parent or the Company. This
Agreement may be terminated and the Merger may be abandoned at any time prior to
the Effective Time by action of Parent or the board of directors of the Company
if (i) the Merger shall not have been consummated by February 1, 2000, whether
such date is before or after the date of approval by the stockholders of the
Company referred to in Section 8.1(a); provided, however, that if a request for
additional information is received from the United States Federal Trade
Commission or the Antitrust Division of the United States Department of Justice
pursuant to the HSR Act or additional information is requested by a governmental
authority (a "Foreign Authority") pursuant to the antitrust, competition,
foreign investment, or similar laws or any foreign countries or supranational
commissions or boards that require pre-merger notifications or filings with
respect to the Merger (collectively, "Foreign Merger Laws"), then such date
shall be extended to the 30th day following certification by Parent and/or the
Company, as applicable, that Parent and/or the Company, as applicable, have
substantially complied with such request, but in any event not later than March
1, 2000, (ii) the Company Stockholders Meeting shall have been convened, held
and completed and the approval referred to in Section 8.1(a) shall not have been
obtained thereat or at any adjournment or postponement thereof, provided
however, that Parent shall not be permitted to terminate the Agreement pursuant
to this clause (ii) if Parent or Merger Sub shall not have voted all Shares then
owned beneficially or of record by them in favor of approval and adoption of
this Agreement, the Merger and the transactions contemplated hereby as required
by Section 7.3(a), (iii) any Order permanently restraining, enjoining or
otherwise prohibiting the Offer or the Merger shall become final and
non-appealable (whether before or after the approval referred to in
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Section 8.1(a)) or (iv) if the Offer terminates or expires on account of the
failure of any condition specified in Exhibit A without Merger Sub having
purchased any Shares thereunder; provided that the right to terminate this
Agreement pursuant to clause (i) above shall not be available to any party that
has breached in any material respect its obligations under this Agreement in any
manner that shall have been the proximate cause of, or resulted in, the failure
to consummate the Merger by the date referred to in clause (i) of this Section
9.2 and, provided, further, that the right to terminate this Agreement pursuant
to clause (iii) of this Section 9.2 shall not be available to any party that has
breached its covenant in Section 7.4 to use commercially reasonable best efforts
to prevent such Order from being issued and to use commercially reasonable best
efforts to cause such Order to be vacated, withdrawn or lifted.
9.3. Termination by the Company. This Agreement may be
terminated and the Merger may be abandoned at any time prior to the Effective
Time, whether before or after the approval by stockholders of the Company
referred to in Section 8.1(a), by action of the board of directors of the
Company:
(a) If (i) the Company is not in material breach of any of its
covenants or agreements in this Agreement, (ii) the board of directors of the
Company authorizes the Company, prior to Parent beneficially owning a majority
of the outstanding shares of Common Stock, and subject to complying with the
terms of this Agreement, to enter into a binding written agreement concerning a
Superior Proposal and the Company notifies Parent in writing that it intends to
enter into such an agreement, attaching the most current version of such
agreement to such notice, and (iii) Parent does not make, within three business
days of receipt of the Company's written notification of its intention to enter
into such an agreement, a written offer that is at least as favorable, from a
financial point of view, to the stockholders of the Company as the Superior
Proposal. The Company agrees (x) that it will not enter into a binding agreement
referred to in clause (ii) of the previous sentence until at least the first
calendar day following the third business day after it has provided the written
notice to Parent required thereby, (y) to notify Parent promptly if its
intention to enter into a written agreement referred to in such notice shall
change at any time after giving such notification and (z) that it will not
terminate this Agreement or enter into a binding agreement referred to in clause
(ii) of the previous sentence if Parent has, within the period referred to in
clause (x) of this sentence, made a written offer that is at least as favorable
to the Company's stockholders from a financial point of view as the Superior
Proposal; or
(b) If, prior to consummation of the Offer and prior to Parent
beneficially owning a majority of the outstanding shares of Common Stock, there
has been a material breach by Parent or Merger Sub of any representation,
warranty, covenant or agreement of Parent or Merger Sub contained in this
Agreement which has had, or is reasonably likely to have, the effect of
materially impairing the ability of Parent or Merger Sub to consummate the Offer
or the Merger (a "Terminating Parent Breach");
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provided, however, that, if such Terminating Parent Breach is curable by Parent
through the exercise of reasonable best efforts and such cure is reasonably
likely to be completed prior to the applicable date specified in Section 9.2(i),
then for so long as Parent continues to exercise reasonable best efforts to cure
such Terminating Parent Breach, the Company may not terminate this Agreement
under this Section 9.3(b); or
(c) If Merger Sub shall have failed to commence the Offer
within five Business Days after the date of this Agreement.
9.4. Termination by Parent. This Agreement may be terminated
and the Merger may be abandoned at any time prior to the Parent and Merger Sub,
collectively beneficially owning a majority of the outstanding shares on a fully
diluted basis (so long as the Company has complied with its obligations under
Section 1.4 of this Agreement) by action of the Parent:
(a) If the board of directors of the Company shall have failed
to recommend, or shall have withdrawn or adversely modified its approval or
recommendation of, the Offer or the Merger or failed to reconfirm its
recommendation of the Offer or the Merger within five calendar days after a
written request by Parent to do so, or shall have resolved to do any of the
foregoing; or
(b) There has been a material breach by the Company of any
representation, warranty, covenant or agreement of the Company contained in this
Agreement which would give rise to the failure of a condition set forth in
paragraph (c) of Exhibit A (a "Terminating Company Breach"); provided, however,
that, if such Terminating Company Breach is curable by the Company through the
exercise of reasonable best efforts and such cure is reasonably likely to be
completed prior to the applicable date specified in Section 9.2(i), then for so
long as the Company continues to exercise reasonable best efforts, Parent may
not terminate this Agreement under this Section 9.4(b).
9.5. Effect of Termination and Abandonment. (a) In the event
of termination of this Agreement and the abandonment of the Merger pursuant to
this Article IX, this Agreement (other than as set forth in Section 10.1) shall
become void and of no effect with no liability of any party hereto (or any of
its directors, officers, employees, agents, legal and financial advisors or
other representatives); provided, however, that except as otherwise provided
herein, no such termination shall relieve any party hereto of any liability or
damages resulting from any willful breach of this Agreement.
(b) In the event that (i)(A) a bona fide Acquisition Proposal
shall have been made to the Company or any of its stockholders or any Person
shall have announced an intention (whether or not conditional) to make an
Acquisition Proposal with respect to the Company, and on or following the date
of this Agreement but prior to the date that the
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Offer is consummated and Parent owns a majority of the outstanding shares of
Common Stock, such Acquisition Proposal, announcement or intention is or becomes
publicly known, and (B) on or following the date of this Agreement and prior to
the time such Acquisition Proposal, announcement or intention is or becomes
publicly known, the occurrence of an event which would have a material adverse
effect on the ability of Parent and Merger Sub to consummate the Merger shall
not have become publicly known, and (C) on or following the date on which such
Acquisition Proposal, announcement or intention is or becomes publicly known,
this Agreement is terminated by either Parent or the Company pursuant to Section
9.2(i) and if terminated by Parent or Merger Sub, Parent or Merger Sub shall not
collectively beneficially own a majority of the outstanding Shares on a fully
diluted basis, or (ii) this Agreement is terminated (x) by the Company pursuant
to Section 9.3(a) or (y) by Parent pursuant to Section 9.4(a), or (z) pursuant
to Section 9.2(iv) as a result of the failure of the Company to satisfy any one
of the conditions set forth in paragraphs (e) or (f) of Annex A, then, subject
to Section 9.5(c), the Company (p) shall promptly, but in no event later than
two Business Days after the date of such termination if terminated by Parent or
Merger Sub and simultaneously with such termination if terminated by Company
(except as otherwise provided in the proviso to this sentence), pay Parent a
termination fee of $2 million in cash payable by wire transfer of same day
funds, and (q) shall promptly, but in no event later than two Business Days
after being notified of such by Parent, pay all of the charges and expenses
incurred by Parent or Merger Sub in connection with this Agreement, the Stock
Option Agreement and the Shareholders Agreement and the transactions
contemplated by this Agreement and the Stock Option Agreement and the
Shareholders Agreement, including, without limitation, fees and expenses of
accountants, attorneys and financial advisors, up to a maximum of $500,000, in
the aggregate; provided, however, that no termination fee shall be payable to
Parent by reason of Section 9.5(b)(i) unless and until (I) any person or entity
(other than Parent) (an "Acquiring Party") has within 9 months of such
termination entered into a definitive agreement to be acquired, by purchase,
merger, consolidation, sale, assignment, lease, transfer or otherwise, in one
transaction or any related series of transactions, a majority of the voting
power of the outstanding securities of the Company or (II) a definitive
agreement has been entered into with respect to a merger, consolidation or
similar business combination between the Company and an Acquiring Party or an
affiliate thereof as a result of which the stockholders of the Company
immediately prior to the transaction do not own at least 50% of the surviving
entity. The Company acknowledges that the agreements contained in this Section
9.5(b) are an integral part of the transactions contemplated by this Agreement,
and that, without these agreements, Parent and Merger Sub would not enter into
this Agreement; accordingly, if the Company fails to promptly pay the amount due
pursuant to this Section 9.5(b), and, in order to obtain such payment, Parent or
Merger Sub commences a suit which results in a binding nonappealable judgment
rendered by a court of competent jurisdiction against the Company for the fee
set forth in this paragraph (b) the Company shall pay to Parent or Merger Sub
its costs and expenses (including
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attorneys' fees) in connection with such suit, together with interest on the
amount of the fee at the prime rate of Citibank, N.A. in effect on the date such
payment was required to be made.
(c) Parent agrees that the payment provided for in Section
9.5(b) shall be the sole and exclusive remedy of Parent upon termination of this
Agreement pursuant to Sections 9.3(a) or 9.4(a) and such remedy shall be limited
to the aggregate of the sums stipulated in such Section 9.5(b); provided,
however, that nothing herein shall relieve any party from liability for the
willful breach of any of its representations, warranties, covenants or
agreements set forth in this Agreement. In no event shall the Company be
required to pay to Parent more than one termination fee pursuant to Section
9.5(b)(p). Notwithstanding any other provision of this Agreement or the Stock
Option Agreement, any termination fee required to be paid to Parent pursuant to
Section 9.5(b)(p) shall be reduced (but not below zero) to the extent necessary
so that the sum of (1) the portion of any termination fee actually paid to
Parent pursuant to Section 9.5(b)(p), (2) the aggregate of all Cancellation
Amounts (as defined in the Stock Option Agreement) paid to Parent pursuant to
the Stock Option Agreement and (3) the proceeds actually received by Parent as
the result of selling Shares issued to Parent pursuant to the Stock Option
Agreement to a third party which acquires more than 50% of the Company's
outstanding voting securities (other than the Company or any of its affiliates)
shall not exceed $4.4 million. In no event shall (i) the sum of the portion of
any termination fee actually paid to Parent pursuant to Section 9.5(b)(p), and
the cash proceeds actually received by Parent as the result of selling Shares
issued to Parent pursuant to the Stock Option Agreement to a third party which
acquires more than 50% of the Company's outstanding voting securities (other
than the Company or any of its affiliates) exceed $4.4 million, or (ii) the sum
of the portion of any termination fees actually paid to Parent pursuant to
Section 9.5(b)(p), the aggregate Cancellation Amounts paid to parent pursuant to
the Stock Option Agreement and the cash proceeds actually received by parent as
the result of selling Shares issued to Parent pursuant to the Stock Option
Agreement to a third party which acquires more than 50% of the Company's
outstanding voting securities (other than the Company or any of its affiliates)
exceed $4.4 million.
ARTICLE X
Miscellaneous and General
10.1. Survival. This Article X and the agreements of the
Company, Parent and Merger Sub contained in Articles I, II, III, IV and V and
Sections 7.9 (Benefits), 7.10 (Expenses), and 7.11 (Indemnification; Directors'
and Officers' Insurance) shall survive the consummation of the Offer and the
Merger. This Article X and the agreements of the Company, Parent and Merger Sub
contained in Section 7.10 (Expenses), and Section 9.5 (Effect of Termination and
Abandonment) shall survive the termination of this Agreement. All other
agreements and covenants in this Agreement and all representations
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and warranties contained herein shall not survive the consummation of the Merger
or the termination of this Agreement other than the representations and
warranties set forth in Section 6.1(s) which shall survive termination of this
Agreement.
10.2. Modification or Amendment. Subject to the provisions of
applicable law, at any time prior to the Effective Time, the parties hereto may
modify or amend this Agreement, by written agreement executed and delivered by
duly authorized officers of the respective parties.
10.3. Waiver of Conditions. The conditions to each of the
parties' obligations to consummate the Merger are for the sole benefit of such
party and may be waived by such party in whole or in part to the extent
permitted by applicable law.
10.4. Counterparts. This Agreement may be executed in any
number of counterparts, each such counterpart being deemed to be an original
instrument, and all such counterparts shall together constitute the same
agreement.
10.5. GOVERNING LAW AND VENUE; WAIVER OF JURY TRIAL. (a) THIS
AGREEMENT SHALL BE DEEMED TO BE MADE IN AND IN ALL RESPECTS SHALL BE
INTERPRETED, CONSTRUED AND GOVERNED BY AND IN ACCORDANCE WITH THE LAWS OF THE
STATE OF DELAWARE WITHOUT REGARD TO THE CONFLICT OF LAW PRINCIPLES THEREOF. THE
PARTIES HEREBY IRREVOCABLY SUBMIT TO THE JURISDICTION OF THE COURTS OF THE STATE
OF DELAWARE AND THE FEDERAL COURTS OF THE UNITED STATES OF AMERICA LOCATED IN
THE COUNTY OF NEW CASTLE, DELAWARE SOLELY IN RESPECT OF THE INTERPRETATION AND
ENFORCEMENT OF THE PROVISIONS OF THIS AGREEMENT, THE STOCK OPTION AGREEMENT AND
THE SHAREHOLDERS AGREEMENT AND OF THE DOCUMENTS REFERRED TO IN THIS AGREEMENT,
THE STOCK OPTION AGREEMENT AND THE SHAREHOLDERS AGREEMENT, AND IN RESPECT OF THE
TRANSACTIONS CONTEMPLATED HEREBY AND THEREBY, AND HEREBY WAIVE, AND AGREE NOT TO
ASSERT, AS A DEFENSE IN ANY ACTION, SUIT OR PROCEEDING FOR THE INTERPRETATION OR
ENFORCEMENT HEREOF OR OF ANY SUCH DOCUMENT, THAT IT IS NOT SUBJECT THERETO OR
THAT SUCH ACTION, SUIT OR PROCEEDING MAY NOT BE BROUGHT OR IS NOT MAINTAINABLE
IN SAID COURTS OR THAT THE VENUE THEREOF MAY NOT BE APPROPRIATE OR THAT THIS
AGREEMENT, THE STOCK OPTION AGREEMENT OR THE SHAREHOLDERS AGREEMENT OR ANY SUCH
DOCUMENT MAY NOT BE ENFORCED IN OR BY SUCH COURTS, AND THE PARTIES HERETO
IRREVOCABLY AGREE THAT ALL CLAIMS WITH RESPECT TO SUCH ACTION OR PROCEEDING
SHALL BE HEARD AND DETERMINED IN SUCH A DELAWARE STATE OR FEDERAL COURT. THE
PARTIES HEREBY CONSENT TO AND GRANT ANY SUCH COURT
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JURISDICTION OVER THE PERSON OF SUCH PARTIES AND OVER THE SUBJECT MATTER OF SUCH
DISPUTE AND AGREE THAT MAILING OF PROCESS OR OTHER PAPERS IN CONNECTION WITH ANY
SUCH ACTION OR PROCEEDING IN THE MANNER PROVIDED IN SECTION 10.6 OR IN SUCH
OTHER MANNER AS MAY BE PERMITTED BY LAW, SHALL BE VALID AND SUFFICIENT SERVICE
THEREOF.
(b) EACH PARTY ACKNOWLEDGES AND AGREES THAT ANY
CONTROVERSY WHICH MAY ARISE UNDER THIS AGREEMENT, THE STOCK OPTION AGREEMENT OR
THE SHAREHOLDERS AGREEMENT IS LIKELY TO INVOLVE COMPLICATED AND DIFFICULT
ISSUES, AND THEREFORE EACH SUCH PARTY HEREBY IRREVOCABLY AND UNCONDITIONALLY
WAIVES ANY RIGHT SUCH PARTY MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY
LITIGATION DIRECTLY OR INDIRECTLY ARISING OUT OF OR RELATING TO THIS AGREEMENT,
THE STOCK OPTION AGREEMENT OR THE SHAREHOLDERS AGREEMENT, OR THE TRANSACTIONS
CONTEMPLATED HEREBY OR THEREBY. EACH PARTY CERTIFIES AND ACKNOWLEDGES THAT (I)
NO REPRESENTATIVE, AGENT OR ATTORNEY OF ANY OTHER PARTY HAS REPRESENTED,
EXPRESSLY OR OTHERWISE, THAT SUCH OTHER PARTY WOULD NOT, IN THE EVENT OF
LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVER, (II) EACH SUCH PARTY
UNDERSTANDS AND HAS CONSIDERED THE IMPLICATIONS OF THIS WAIVER, (III) EACH SUCH
PARTY MAKES THIS WAIVER VOLUNTARILY, AND (IV) EACH SUCH PARTY HAS BEEN INDUCED
TO ENTER INTO THIS AGREEMENT OR THE STOCK OPTION AGREEMENT BY, AMONG OTHER
THINGS, THE MUTUAL WAIVERS AND CERTIFICATIONS IN THIS SECTION 10.5.
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10.6. Notices. Any notice, request, instruction or other
document to be given hereunder by any party to the others shall be in writing
and delivered personally or sent by registered or certified mail, postage
prepaid, or by facsimile:
if to Parent or Merger Sub
Celia Colbert
Merck & Co., Inc.
One Merck Drive
P.O. Box 100 WS3AB-05
Whitehouse Station, N.J. 08889-0100
Fax: (908) 735-1246
with copies to:
Gary P. Cooperstein, Esq.
Fried, Frank, Harris, Shriver & Jacobson
One New York Plaza
New York, NY 10004
Fax: (212) 859-4000
if to the Company
Stephen F. Keane
SIBIA Neurosciences, Inc.
505 Coast Blvd. South
Suite 300
La Jolla, CA 92037
fax: (619) 459-1609
with copies to:
Frederick T. Muto, Esq.
Cooley Godward LLP
4365 Executive Drive
Suite 1100
San Diego, California 92121
fax: (858) 453-3555
or to such other persons or addresses as may be designated in writing by the
party to receive such notice as provided above.
10.7. Entire Agreement. This Agreement (including any exhibits
hereto), the Stock Option Agreement, the Company Confidentiality Agreement and
the Parent Confidentiality Agreement constitute the entire agreement, and
supersede all other prior
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agreements, understandings, representations and warranties both written and
oral, among the parties, with respect to the subject matter hereof.
10.8. No Third Party Beneficiaries. Except as provided in
Section 7.11 (Indemnification; Directors' and Officers' Insurance), this
Agreement is not intended to confer upon any Person other than the parties
hereto any rights or remedies hereunder.
10.9. Obligations of Parent and of the Company. Whenever this
Agreement requires a Subsidiary of Parent to take any action, such requirement
shall be deemed to include an undertaking on the part of Parent to cause such
Subsidiary to take such action. Whenever this Agreement requires a Subsidiary of
the Company to take any action, such requirement shall be deemed to include an
undertaking on the part of the Company to cause such Subsidiary to take such
action and, after the Effective Time, on the part of the Surviving Corporation
to cause such Subsidiary to take such action.
10.10. Severability. The provisions of this Agreement shall be
deemed severable and the invalidity or unenforceability of any provision shall
not affect the validity or enforceability of the other provisions hereof. If any
provision of this Agreement, or the application thereof to any Person or any
circumstance, is invalid or unenforceable, (a) a suitable and equitable
provision shall be substituted therefor in order to carry out, so far as may be
valid and enforceable, the intent and purpose of such invalid or unenforceable
provision and (b) the remainder of this Agreement and the application of such
provision to other Persons or circumstances shall not be affected by such
invalidity or unenforceability, nor shall such invalidity or unenforceability
affect the validity or enforceability of such provision, or the application
thereof, in any other jurisdiction.
10.11. Specific Performance. The parties hereto each
acknowledge that, in view of the uniqueness of the subject matter hereof, the
parties hereto would not have an adequate remedy at law for money damages if
this Agreement were not performed in accordance with its terms, and therefore
agree that the parties hereto shall be entitled to specific enforcement of the
terms hereof in addition to any other remedy to which the parties hereto may be
entitled at law or in equity.
10.12. Interpretation. The table of contents and headings
herein are for convenience of reference only, do not constitute part of this
Agreement and shall not be deemed to limit or otherwise affect any of the
provisions hereof. Where a reference in this Agreement is made to a Section,
Schedule or Exhibit, such reference shall be to a Section of or Schedule or
Exhibit to this Agreement unless otherwise indicated. Whenever the words
"include," "includes" or "including" are used in this Agreement, they shall be
deemed to be followed by the words "without limitation."
10.13. Assignment. This Agreement shall not be assignable by
operation of law or otherwise; provided, however, that Parent may designate, by
written notice to the
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Company, another wholly owned direct subsidiary of Parent to be a Constituent
Corporation in lieu of Merger Sub, in the event of which, all references herein
to Merger Sub shall be deemed references to such other subsidiary. Any purported
assignment made in contravention of this Agreement shall be null and void.
10.14. Captions. The Article, Section and Paragraph captions
herein are for convenience of reference only and do not constitute part of this
Agreement and shall not be deemed to limit or otherwise affect any of the
provisions hereof.
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IN WITNESS WHEREOF, this Agreement has been duly executed and
delivered by duly authorized officers of the parties hereto as of the date
hereof.
SIBIA NEUROSCIENCES, INC.
By: /s/ William T. Comer
-----------------------
Name: William T. Comer
Title: President, Chief
Executive Officer
MERCK & CO., INC.
By: /s/ Judy C. Lewent
----------------------
Name: Judy C. Lewent
Title: Senior Vice President
and Chief Financial
Officer
MC SUBSIDIARY CORP.
By: /s/ Judy C. Lewent
----------------------
Name: Judy C. Lewent
Title: President
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<PAGE> 106
ANNEX A
CONDITIONS TO THE OFFER
Notwithstanding any other provision of the Offer, and subject to the
terms and conditions of the Agreement, Merger Sub shall not be obligated to
accept for payment any shares of Company Common Stock until all Required
Regulatory Approvals shall have been obtained, made or satisfied including until
the expiration or termination of any waiting periods applicable under the
Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR Act")
and Merger Sub shall not be required to accept for payment or, subject to any
applicable rules and regulations of the SEC (including Rule 14e-l(c) under the
Exchange Act) pay for, and may delay the acceptance for payment of or payment
for, any shares of Company Common Stock tendered in the Offer and (subject to
the terms and conditions of the Agreement, including Section 1.1(b)) may amend,
extend or terminate the Offer if, (i) immediately prior to the Schedule
Expiration Date (as extended in accordance with clauses (x), (y) or (z) of
Section 1.1(b) of the Agreement) the Minimum Condition shall not have been
satisfied or (ii) prior to the expiration of the Offer any of the following
shall exist and be continuing:
(a) there shall be threatened or pending any action,
litigation or proceeding (hereinafter, an "Action") brought by any U.S.
Governmental Entity: (i) challenging the acquisition by Parent or Merger Sub of
shares of Company Common Stock or seeking to restrain or prohibit the
consummation of the Offer or the Merger; (ii) seeking to prohibit or impose any
material limitation on Parent's, Merger Sub's or any of their respective
affiliates' ownership or operation of all or any material portion of the
business or assets of the Company and its Subsidiaries taken as a whole or
Parent and its Subsidiaries taken as a whole that, in each case referred to in
this clause (ii) individually or in the aggregate, is reasonably likely to have
a Material Adverse Effect on the Company or Parent; or (iii) seeking to impose
material limitations on the ability of Parent or Merger Sub effectively to
acquire or hold, or to exercise full rights of ownership of, the shares of
Company Common Stock including the right to vote the shares of Company Common
Stock purchased by them on an equal basis with all other shares of Company
Common Stock on all matters properly presented to the shareholders of the
Company; or
(b) any U.S. statute, rule, regulation, order or injunction
shall be enacted, promulgated, entered, enforced or deemed to or become
applicable to the Offer or the Merger (and in each case, remain in effect), or
any other action shall have been taken, by any court of competent jurisdiction
or other U.S. Governmental Entity, that has any of the consequences referred to
in clauses (i) through (iii) of paragraph (a) above; or
(c) (i) The representations and warranties of the Company set
forth in this Agreement shall be true and correct as of the date of the
Agreement and as of the consummation of the Offer (except for those
representations and warranties made as of a
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specific date, which shall be true and correct as of such date), and considered
without regard to any qualification by, or references to, "material," "in all
material respects" or "Company Material Adverse Effect," except for such
failures of such representations and warranties to be true and correct that
individually or in the aggregate, do not have and are not reasonably likely to
have a Company Material Adverse Effect; or (ii) the Company shall have breached
or failed to comply in any material respect with any of its material
obligations, covenants or agreements under the Agreement and any such breach or
failure shall not have been substantially cured by the Company within five
Business Days after Parent provides written notice to the Company of such breach
or failure; or
(d) the Agreement shall have been terminated in accordance
with its terms; or
(e) any corporation, entity, "group" or "person" (as defined
in the Exchange Act), other than Parent, Merger Sub or any of the shareholders
that are party to the Shareholders Agreement (so long as such shareholders do
not become beneficial owners of any additional Shares after the date hereof and
so long as such shareholders do not breach any of the provisions of the
Shareholders Agreement), shall have acquired beneficial ownership of more than
20% of the outstanding Shares; or
(f) the Company's Board shall have modified or amended its
recommendation of the Offer in any manner adverse to Parent or Merger Sub or
shall have withdrawn its recommendation of the Offer or shall have recommended
acceptance of any Acquisition Proposal or shall have failed to reconfirm its
recommendation of the Offer within five calendar days after a written request by
Parent to do so, or shall have resolved to do any of the foregoing; or
(g) there shall exist (i) any general suspension of, or
limitation on prices for, trading in securities on any national securities
exchange or in the over the counter market in the United States (other than
shortening of trading hours or any trading halt resulting from a specified
increase or decrease in a market index), (ii) a declaration of any banking
moratorium by federal or state authorities or any suspension of payments in
respect of banks or any limitation (whether or not mandatory) imposed by federal
or state authorities on the extension of credit by lending institutions in the
United States, or (iii) in the case of any of the foregoing existing at the time
of the commencement of the Offer, a material acceleration or worsening thereof.
The conditions set forth in clauses (a) through (g) are for
the sole benefit of Parent and Merger Sub and may be asserted by Parent and
Merger Sub regardless of the circumstances giving rise to such conditions and
may be waived by Parent and Merger Sub in whole or in part at any time and from
time to time, by express and specific action to that effect, in their reasonable
discretions. The failure by Parent or Merger Sub at any time to exercise any of
the foregoing rights shall not be deemed a waiver of any such right, the waiver
of any such
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right with respect to particular facts and other circumstances shall not be
deemed a waiver with respect to any other facts and circumstances, and each such
right shall be deemed an ongoing right that may be asserted at any time and from
time to time.
The capitalized terms used in this Annex A shall have the
meanings set forth in the Agreement to which it is annexed.
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Annex II
SECTION 262 OF THE GENERAL CORPORATION
LAW OF THE STATE OF DELAWARE
SECTION 262. Appraisal rights
(a) Any stockholder of a corporation of this State who holds shares of
stock on the date of the making of a demand pursuant to subsection (d) of this
section with respect to such shares, who continuously holds such shares through
the effective date of the merger or consolidation, who has otherwise complied
with subsection (d) of this section and who has neither voted in favor of the
merger or consolidation nor consented thereto in writing pursuant to sec. 228 of
this title shall be entitled to an appraisal by the Court of Chancery of the
fair value of the stockholder's shares of stock under the circumstances
described in subsections (b) and (c) of this section. As used in this section,
the word "stockholder" means a holder of record of stock in a stock corporation
and also a member of record of a nonstock corporation; the words "stock" and
"share" mean and include what is ordinarily meant by those words and also
membership or membership interest of a member of a nonstock corporation; and
the words "depository receipt" mean a receipt or other instrument issued by a
depository representing an interest in one or more shares, or fractions
thereof, solely of stock of a corporation, which stock is deposited with the
depository.
(b) Appraisal rights shall be available for the shares of any class or
series of stock of a constituent corporation in a merger or consolidation to be
effected pursuant to sec. 251 (other than a merger effected pursuant to sec.
251(g) of this title), secs. 252, 254, 257, 258, 263 and 264 of this title:
(1) Provided, however, that no appraisal rights under this section shall
be available for the shares of any class or series of stock, which stock, or
depository receipts in respect thereof, at the record date fixed to determine
the stockholders entitled to receive notice of and to vote at the meeting of
stockholders to act upon the agreement of merger or consolidation, were either
(i) listed on a national securities exchange or designated as a national market
system security on an interdealer quotation system by the National Association
of Securities Dealers, Inc. or (ii) held of record by more than 2,000 holders;
and further provided that no appraisal rights shall be available for any shares
of stock of the constituent corporation surviving a merger if the merger did
not require for its approval the vote of the stockholders of the surviving
corporation as provided in subsection (f) of sec. 251 of this title.
(2) Notwithstanding paragraph (1) of this subsection, appraisal rights
under this section shall be available for the shares of any class or series of
stock of a constituent corporation if the holders thereof are required by the
terms of an agreement of merger or consolidation pursuant to secs. 251, 252,
254, 257, 258, 263 and 264 of this title to accept for such stock anything
except:
a. Shares of stock of the corporation surviving or resulting from such
merger or consolidation, or depository receipts in respect thereof;
b. Shares of stock of any other corporation, or depository receipts in
respect thereof, which shares of stock (or depository receipts in respect
thereof) or depository receipts at the effective date of the merger or
consolidation will be either listed on a national securities exchange or
designated as a national market system security on an interdealer quotation
system by the National Association of Securities Dealers, Inc. or held of record
by more than 2,000 holders;
c. Cash in lieu of fractional shares or fractional depository receipts
described in the foregoing subparagraphs a. and b., of this paragraph; or
d. Any combination of the shares of stock, depository receipts and cash in
lieu of fractional shares or fractional depository receipts described in the
foregoing subparagraphs a., b. and c. of this paragraph.
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(3) In the event all of the stock of a subsidiary Delaware corporation
party to a merger effected under sec. 253 of this title is not owned by the
parent corporation immediately prior to the merger, appraisal rights shall be
available for the shares of the subsidiary Delaware corporation.
(c) Any corporation may provide in its certificate of incorporation that
appraisal rights under this section shall be available for the shares of any
class or series of its stock as a result of an amendment to its certificate of
incorporation, any merger or consolidation in which the corporation is a
constituent corporation or the sale of all or substantially all of the assets
of the corporation. If the certificate of incorporation contains such a
provision, the procedures of this section, including those set forth in
subsections (d) and (e) of this section, shall apply as nearly as is
practicable.
(d) Appraisal rights shall be perfected as follows:
(1) If a proposed merger or consolidation for which appraisal rights are
provided under this section is to be submitted for approval at a meeting of
stockholders, the corporation, not less than 20 days prior to the meeting,
shall notify each of its stockholders who was such on the record date for such
meeting with respect to shares for which appraisal rights are available
pursuant to subsection (b) or (c) hereof that appraisal rights are available
for any or all of the shares of the constituent corporations, and shall include
in such notice a copy of this section. Each stockholder electing to demand the
appraisal of such stockholder's shares shall deliver to the corporation, before
the taking of the vote on the merger or consolidation, a written demand for
appraisal of such stockholder's shares. Such demand will be sufficient if it
reasonably informs the corporation of the identity of the stockholder and that
the stockholder intends thereby to demand the appraisal of such stockholder's
shares. A proxy or vote against the merger or consolidation shall not
constitute such a demand. A stockholder electing to take such action must do so
by a separate written demand as herein provided. Within 10 days after the
effective date of such merger or consolidation, the surviving or resulting
corporation shall notify each stockholder of each constituent corporation who
has complied with this subsection and has not voted in favor of or consented to
the merger or consolidation of the date that the merger or consolidation has
become effective; or
(2) If the merger or consolidation was approved pursuant to sec. 228 or
sec. 253 of this title, each constituent corporation, either before the
effective date of the merger or consolidation or within ten days thereafter,
shall notify each of the holders of any class or series of stock of such
constituent corporation who are entitled to appraisal rights of the approval of
the merger or consolidation and that appraisal rights are available for any or
all shares of such class or series of stock of such constituent corporation, and
shall include in such notice a copy of this section; provided that, if the
notice is given on or after the effective date of the merger or consolidation,
such notice shall be given by the surviving or resulting corporation to all such
holders of any class or series of stock of a constituent corporation that are
entitled to appraisal rights. Such notice may, and, if given on or after the
effective date of the merger or consolidation, shall, also notify such
stockholders of the effective date of the merger or consolidation. Any
stockholder entitled to appraisal rights may, within 20 days after the date of
mailing of such notice, demand in writing from the surviving or resulting
corporation the appraisal of such holder's shares. Such demand will be
sufficient if it reasonably informs the corporation of the identity of the
stockholder and that the stockholder intends thereby to demand the appraisal of
such holder's shares. If such notice did not notify stockholders of the
effective date of the merger or consolidation, either (i) each such constituent
corporation shall send a second notice before the effective date of the merger
or consolidation notifying each of the holders of any class or series of stock
of such constituent corporation that are entitled to appraisal rights of the
effective date of the merger or consolidation or (ii) the surviving or resulting
corporation shall send such a second notice to all such holders on or within 10
days after such effective date; provided, however, that if such second notice is
sent more than 20 days following the sending of the first notice, such second
notice need only be sent to each stockholder who is entitled to appraisal rights
and who has demanded appraisal of such holder's shares in accordance with this
subsection. An affidavit of the secretary or assistant secretary or of the
transfer agent of the corporation that is required to give either notice that
such notice has been given shall, in the absence of fraud, be prima facie
evidence of the facts stated therein. For purposes of determining the
stockholders entitled to receive either notice, each constituent corporation may
fix, in advance, a record date that shall be not more than 10 days prior to the
date the notice is given, provided, that if the notice is given on or after the
effective date of the merger or consolidation, the record date shall be such
effective date. If no record date is fixed and the notice is given prior
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to the effective date, the record date shall be the close of business on the
day next preceding the day on which the notice is given.
(e) Within 120 days after the effective date of the merger or
consolidation, the surviving or resulting corporation or any stockholder who
has complied with subsections (a) and (d) hereof and who is otherwise entitled
to appraisal rights, may file a petition in the Court of Chancery demanding a
determination of the value of the stock of all such stockholders.
Notwithstanding the foregoing, at any time within 60 days after the effective
date of the merger or consolidation, any stockholder shall have the right to
withdraw such stockholder's demand for appraisal and to accept the terms
offered upon the merger or consolidation. Within 120 days after the effective
date of the merger or consolidation, any stockholder who has complied with the
requirements of subsections (a) and (d) hereof, upon written request, shall be
entitled to receive from the corporation surviving the merger or resulting from
the consolidation a statement setting forth the aggregate number of shares not
voted in favor of the merger or consolidation and with respect to which demands
for appraisal have been received and the aggregate number of holders of such
shares. Such written statement shall be mailed to the stockholder within 10
days after such stockholder's written request for such a statement is received
by the surviving or resulting corporation or within 10 days after expiration of
the period for delivery of demands for appraisal under subsection (d) hereof,
whichever is later.
(f) Upon the filing of any such petition by a stockholder, service of a
copy thereof shall be made upon the surviving or resulting corporation, which
shall within 20 days after such service file in the office of the Register in
Chancery in which the petition was filed a duly verified list containing the
names and addresses of all stockholders who have demanded payment for their
shares and with whom agreements as to the value of their shares have not been
reached by the surviving or resulting corporation. If the petition shall be
filed by the surviving or resulting corporation, the petition shall be
accompanied by such a duly verified list. The Register in Chancery, if so
ordered by the Court, shall give notice of the time and place fixed for the
hearing of such petition by registered or certified mail to the surviving or
resulting corporation and to the stockholders shown on the list at the
addresses therein stated. Such notice shall also be given by 1 or more
publications at least 1 week before the day of the hearing, in a newspaper of
general circulation published in the City of Wilmington, Delaware or such
publication as the Court deems advisable. The forms of the notices by mail and
by publication shall be approved by the Court, and the costs thereof shall be
borne by the surviving or resulting corporation.
(g) At the hearing on such petition, the Court shall determine the
stockholders who have complied with this section and who have become entitled
to appraisal rights. The Court may require the stockholders who have demanded
an appraisal for their shares and who hold stock represented by certificates to
submit their certificates of stock to the Register in Chancery for notation
thereon of the pendency of the appraisal proceedings; and if any stockholder
fails to comply with such direction, the Court may dismiss the proceedings as
to such stockholder.
(h) After determining the stockholders entitled to an appraisal, the
Court shall appraise the shares, determining their fair value exclusive of any
element of value arising from the accomplishment or expectation of the merger
or consolidation, together with a fair rate of interest, if any, to be paid
upon the amount determined to be the fair value. In determining such fair
value, the Court shall take into account all relevant factors. In determining
the fair rate of interest, the Court may consider all relevant factors,
including the rate of interest which the surviving or resulting corporation
would have had to pay to borrow money during the pendency of the proceeding.
Upon application by the surviving or resulting corporation or by any
stockholder entitled to participate in the appraisal proceeding, the Court may,
in its discretion, permit discovery or other pretrial proceedings and may
proceed to trial upon the appraisal prior to the final determination of the
stockholder entitled to an appraisal. Any stockholder whose name appears on the
list filed by the surviving or resulting corporation pursuant to subsection (f)
of this section and who has submitted such stockholder's certificates of stock
to the Register in Chancery, if such is required, may participate fully in all
proceedings until it is finally determined that such stockholder is not
entitled to appraisal rights under this section.
(i) The Court shall direct the payment of the fair value of the shares,
together with interest, if any, by the surviving or resulting corporation to
the stockholders entitled thereto. Interest may be simple or compound,
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as the Court may direct. Payment shall be so made to each such stockholder, in
the case of holders uncertificated stock forthwith, and the case of holders of
shares represented by certificates upon the surrender to the corporation of the
certificates representing such stock. The Court's decree may be enforced as
other decrees in the Court of Chancery may be enforced, whether such surviving
or resulting corporation be a corporation of this State or of any state.
(j) The costs of the proceeding may be determined by the Court and taxed
upon the parties as the Court deems equitable in the circumstances. Upon
application of a stockholder, the Court may order all or a portion of the
expenses incurred by any stockholder in connection with the appraisal
proceeding, including, without limitation, reasonable attorney's fees and the
fees and expenses of experts, to be charged pro rata against the value of all
the shares entitled to an appraisal.
(k) From and after the effective date of the merger or consolidation, no
stockholder who has demanded appraisal rights as provided in subsection (d) of
this section shall be entitled to vote such stock for any purpose or to receive
payment of dividends or other distributions on the stock (except dividends or
other distributions payable to stockholders of record at a date which is prior
to the effective date of the merger or consolidation); provided, however, that
if no petition for an appraisal shall be filed within the time provided in
subsection (e) of this section, or if such stockholder shall deliver to the
surviving or resulting corporation a written withdrawal of such stockholder's
demand for an appraisal and an acceptance of the merger or consolidation,
either within 60 days after the effective date of the merger or consolidation
as provided in subsection (e) of this section or thereafter with the written
approval of the corporation, then the right of such stockholder to an appraisal
shall cease. Notwithstanding the foregoing, no appraisal proceeding in the
Court of Chancery shall be dismissed as to any stockholder without the approval
of the Court, and such approval may be conditioned upon such terms as the Court
deems just.
(l) The shares of the surviving or resulting corporation to which the
shares of such objecting stockholders would have been converted had they
assented to the merger or consolidation shall have the status of authorized and
unissued shares of the surviving or resulting corporation. (Last amended by Ch.
339, L.'98, eff. 7-1-98.)
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ANNEX III
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> 114
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> 115
ANNEX IV
SUPERIOR COURT OF THE STATE OF CALIFORNIA
COUNTY OF SAN DIEGO
STEVE PELLINGER On Behalf of Himself and ) Case No. GIC 733725
All Others Similarly Situated, )
Plaintiff, ) CLASS ACTION
)
vs. ) CLASS ACTION COMPLAINT FOR
) BREACH OF FIDUCIARY DUTY
)
SIBIA NEUROSCIENCES, INC., WILLIAM ) General - Civil
R. MILLER, WILLIAM T. COMER, GUNNAR )
EKDAHL, JEFFREY F. McKELVY, )
STANLEY T. CROOKE, JAMES D. WATSON )
and DOES 1-25, inclusive, )
)
Defendants. )
- ---------------------------------------- ) DEMAND FOR JURY TRIAL
<PAGE> 116
Plaintiff, by his attorneys, alleges as follows:
INTRODUCTION
1. This is a shareholder class action on behalf of the public stockholders
of Sibia Neurosciences, Inc. ("Sibia" or the "Company") against Sibia and its
Board of Directors arising out of an offer to purchase the outstanding shares of
Sibia in a deal valued at more than $86 million. On August 2, 1999, Merck & Co.
("Merck") offered to purchase the remaining outstanding shares of Sibia for
$8.50 per share. In violation of their fiduciary obligation to Sibia's
shareholders, the Board of Directors of Sibia has used Merck's offer to enact a
penalty fee designed to halt any other offer and deter higher offers from other
potential acquirers and thereby entrench current management.
2. Each of the defendants has directly violated their fiduciary duty of
care owed to the public shareholders of Sibia. Absent judicial intervention,
the defendants will continue to entrench themselves by implementing and abiding
by provisions designed to deter higher offers and further entrench current
management and which will result in irreparable injury to the plaintiff and the
Class. This action seeks to enjoin the unreasonable steps taken by defendants,
including the implementation of defensive measures which were enacted solely to
discourage or otherwise inhibit higher offers from other potential acquirers.
JURISDICTION AND VENUE
3. This Court has jurisdiction over the cause of action asserted herein
pursuant to the California Constitution, Article VI, Section 10, because this
case is a cause not given by statute to other trial courts.
4. This Court has jurisdiction over each of the defendants because they
conduct business in, reside in and/or are citizens of California. Certain of the
defendants are citizens of California, including defendant Sibia which has its
principal place of business in this State. The amount in controversy of
plaintiff's claim exclusive of interest and costs is less than $75,000. Venue is
proper in this Court because defendants' wrongful acts arose in and emanated
from this county.
PARTIES
5. Plaintiff Steve Pellinger ("Pellinger" or "plaintiff") is a resident and
citizen of Utah and at all times relevant hereto has been a stockholder of
Sibia.
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<PAGE> 117
6. Defendant Sibia is a corporation with its principal executive offices
located at 505 Coast Blvd., La Jolla, California. Sibia is a San Diego-based
drug company which is engaged in the discovery of small molecule therapeutics
for the treatment of neurodegenerative, neuropsychiatric and neurological
disorders. Sibia's common shares are publicly traded on the NASDAQ. Sibia has
over 9 million shares outstanding held by thousands of shareholders.
7. Defendant William R. Miller ("Miller") is the Chairman of the Board
of Directors of Sibia.
8. Defendant William T. Comer ("Comer") is President, Chief Executive
Officer and a director of Sibia.
9. Defendant Gunnar Ekdahl ("Ekdahl") has served as a director of Sibia
since 1995.
10. Defendant Jeffrey F. McKelvy ("McKelvy") has served as Sibia's
Executive Vice President and Chief Scientific Officer and a director since
April 1998.
11. Defendant Stanley Crooke ("Crooke") has served as a director of Sibia
since 1992.
12. Defendant James D. Watson ("Watson") has served as a director of
Sibia since 1992.
13. The defendants named in paragraphs 7-12 are sometimes collectively
referred to herein as the "Individual Defendants."
14. The true names and capacities of defendants sued herein under
California Code of Civil Procedure Section 474 as Does 1 through 25, inclusive,
are presently not known to plaintiff, who therefore sues these defendants by
such fictitious names. Plaintiff will seek to amend this Complaint and include
these Doe defendants' true names and capacities when they are ascertained. Each
of the fictitiously named defendants is responsible in some manner for the
conduct alleged herein and for the injuries suffered by the Class.
15. By virtue of their positions as directors and/or officers of Sibia,
the Individual Defendants have, and at all relevant times had, the power to
control and influence, and did control and influence and cause Sibia to engage
in the practices complained of herein.
FIDUCIARY DUTIES OF THE INDIVIDUAL DEFENDANTS
16. By reason of the above Individual Defendants' positions with the
Company as officers and/or directors, said individuals are in a fiduciary
relationship with plaintiff and the other public
-2-
<PAGE> 118
stockholders of Sibia and owe plaintiff and the other members of the Class a
duty of highest good faith, fair dealing, loyalty and full, candid and adequate
disclosure.
17. The claims are brought under state laws which require every corporate
director to act in good faith, in the best interests of a corporation's
shareholders and with such care, including reasonable inquiry, as would be
expected of an ordinarily prudent person. In a situation where the directors of
a publicly traded company undertake a transaction that may result in a change
in corporate control (particularly when it involves a decision to eliminate the
shareholders' equity investment in a company), the applicable state law
requires the directors to take all steps reasonably required to maximize the
value shareholders will receive. To diligently comply with this duty, the
directors of a corporation may not take any action that:
(a) adversely affects the value provided to the corporation's
shareholders;
(b) contractually prohibits them from complying with or carrying out
their fiduciary duties;
(c) discourages or inhibits alternative offers to purchase control
of the corporation or its assets; or
(d) will otherwise adversely affect their duty to search and secure
the best value reasonably available under the circumstances for the
corporation's shareholders.
18. As described herein, the Individual Defendants have breached their
fiduciary duties by, among other things, adopting a penalty fee designed to
halt any other offers and deter higher offers from other potential acquirers so
as to protect the interests of defendants at the expense of Sibia's
shareholders. Defendants cannot possibly fulfill their fiduciary obligations
after implementing provisions which disable them from maximizing shareholder
value. The Individual Defendants have breached their fiduciary obligation to
act reasonably and establish a "level playing field" for all potential bidders
such that Sibia shareholders will benefit from fair competition to acquire the
Company.
CLASS ACTION ALLEGATIONS
19. Plaintiff brings this action pursuant to Section 382 of the
California Code of Civil Procedure on his own behalf and as a class action on
behalf of all holders of Sibia common stock, who are being
- 3 -
<PAGE> 119
and will be harmed by defendants' actions described below (the "Class").
Excluded from the Class are defendants herein and any person, firm, trust,
corporation, or other entity related to or affiliated with any defendants.
20. This action is properly maintainable as a class action.
21. The Class is so numerous that joinder of all members is
impracticable. There are over 9 million shares of Sibia stock issued. The
shares trade on the NASDAQ and thousands of Sibia stockholders of record are
located throughout the United States.
22. Questions of law and fact are common to the Class and predominate
over questions affecting any individual Class members. The common questions
include, inter alia, the following:
(a) whether the defendants breached their fiduciary duties of care,
loyalty and/or candor owed by them to plaintiff and the other members of the
Class in connection with the proposed sale of Sibia;
(b) whether the defendants have breached their fiduciary duty to
secure and obtain the best price reasonable under the circumstances for the
benefit of plaintiff and the other members of the Class in connection with the
proposed sale of Sibia;
(c) whether the defendants have, in bad faith or for improper
motives, erected and/or retained barriers to discourage other offers for the
Company or its assets;
(d) whether plaintiffs and the other members of the Class would be
irreparably damaged were the provisions and conduct detailed herein allowed to
persist;
(e) whether the compensation to be paid to plaintiff and the class
is unfair and inadequate; and
(f) whether the "$2 million dollar plus costs and expenses"
provision is a penalty, payment of which would constitute an unlawful waste
(liquidated damages) of corporate assets which has wrongfully reduced the value
a competing bidder is willing to pay.
23. The defendants have acted or refused to act on grounds generally
applicable to the Class thereby making appropriate final injunctive relief with
respect to the Class as a whole.
24. Plaintiff is committed to prosecuting this action and has retained
competent counsel experienced in litigation of this nature. The claims of
plaintiff are typical of the claims of the other
4
<PAGE> 120
members of the Class and plaintiff has the same interests as the other members
of the Class. Accordingly, plaintiff is an adequate representative of the Class
and will fairly and adequately protect the interests of the Class.
25. Plaintiff anticipates that there will be no difficulty in the
management of this litigation as a class action.
26. For the reasons stated herein, a class action is superior to other
available methods for the fair and efficient adjudication of this controversy.
BACKGROUND TO PROPOSED MERGER
27. Sibia is engaged in the discovery and development of novel small
molecule therapeutics for the treatment of neurodegenerative, neuropsychiatric
and neurological disorders, many of which have large patient populations and
represent critical unmet medical needs. Sibia is a leader in the area of the
proprietary drug discovery platforms that combine key tools necessary for
modern drug discovery, including genomics, high throughput screening, advanced
combinatorial chemistry techniques and pharmacology. In the Fall of 1998,
Sibia's efforts and the public shareholders' investments in Sibia were just
beginning to pay off as its pipeline of drugs began moving into the final
phases of FDA approval.
28. On December 21, 1998, Sibia announced that it had won a patent
infringement case resulting in damages of $18 million against Cadus
Pharmaceuticals Corporation.
29. On March 2, 1999, Ethan Lovell, an analyst with Bear Stearns, issued
a report which conservatively valued Sibia at "$93 million."
30. On May 7, 1999, Sibia announced its first quarter results for the
period ending March 31, 1999, reporting revenues of $2.5 million compared with
revenues of $1.5 million for the same period in 1998. In connection with the
announcement, defendant Comer announced that:
"Sibia has made significant progress over the last few months in
licensing our patented TBA technology and in identifying several new
promising drug leads...... Looking ahead, we are accelerating our drug
discovery efforts and continue to leverage our unique technology
platforms to attract major strategic collaborations with pharmaceutical
and biotechnology companies."
31. Over the next few months, the Company's drugs advanced through the
FDA process and Sibia continued to announce new patents and promising licensing
agreements of its drugs with
-5-
<PAGE> 121
the world's largest drug companies. The following is Sibia's pipeline of drugs,
their indications, their FDA status and their corporate partner.
SIBIA'S PIPELINE
<TABLE>
<CAPTION>
Compound Indication Status Partner
<S> <C> <C> <C>
NAChR Agonists
SIB-1508Y Parkinson's Disease Phase II Meiji/Lilly
SIB-1553A Alzheimer's Disease Phase II Lilly
SIB-3182 Alzheimer's Disease Discovery Lilly
(Other Indications) Pain, schizophrenia, Discovery Lilly
depression
EAAR Ligands
CGP 80887 Epilepsy Preclinical Novartis
CGP 79397 Pain Preclinical Novartis
VGCC Angatonists Pain, stroke, migraine, Discovery
bipolar disorder
Protease Inhibitors
AB Inhibitors Alzheimer's Disease Preclinical Bristol-Myers
Squibb
Apoptosis Modulators Stroke Discovery
</TABLE>
MERGER NEGOTIATIONS
32. In June 1999, Sibia and Merck entered into merger negotiations wherein
the Individual Defendants provided to Merck certain proprietary information
about the Company and the Company's prospects. In fact, it was during these
negotiations that the Individual Defendants, for the first time ever, revealed
that Sibia would report a profit for the year 1999. In addition, the Individual
Defendants provided to Merck Sibia's internal operating projections wherein it
was disclosed that over the next two years Sibia expected to earn $30 million
in net profits. The following are the internal operating projections that were
provided by the Individual Defendants to Merck during merger negotiations:
-6-
<PAGE> 122
SIBIA'S INTERNAL OPERATING PROJECTIONS
<TABLE>
<CAPTION>
1999 2000 2001 2002 2003 2004
- ---------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Revenue $21.4 $29.7 $44.5 $53.5 $79 $83.7
million million million million million million
- ---------------------------------------------------------------------------
Net $1.5 $9.0 $22.7 $23.4 $33.7 $36.4
Income million million million million million million
- ---------------------------------------------------------------------------
</TABLE>
33. While negotiating to the sell the Company, the Company amended its
Change in Control Plan in June 1999 which provides for the payment of benefits
to certain officers and directors including certain Individual Defendants named
herein for (i) cash bonuses of up to 25% of the individual's annual base
salary, (ii) acceleration of vesting of certain stock options granted to
certain participants, and (iii) severance payments of up to two times the
individual's annual base salary. Under the Change of Control Plan as amended in
June 1999, these change of control provisions will be triggered upon the
consummation of the merger with Merck.
THE MERGER AGREEMENT
34. On July 30, 1999, Sibia entered into a merger agreement with Merck
and MC Subsidiary Corp., a wholly owned subsidiary of Merck (collectively
referred to as "Merck"). Under the terms of the merger agreement, Merck will
pay $8.50 for each share of Sibia. The merger is to be consummated through a
Tender Offer which began on August 6, 1999.
35. In the Solicitation and Recommendation Statement filed on April 6,
1999, the Individual Defendants stated that they "unanimously recommends that
the holders of shares accept the offer and tender their shares pursuant to the
offer" and that "the Merger is in the best interests of the Company and its
stockholders."
36. The merger agreement with Merck included several provisions designed
to make it difficult for a competing bid from a third party to succeed. For
example, the merger agreement contains:
- a provision that Sibia pay immediately to Merck a penalty of $2
million plus its costs if Sibia's Board decides to proceed with a superior
offer, despite the fact that $2 million plus costs is in no way a
reflection of "damages" that Merck would suffer if a superior bid was
accepted by the defendants;
-7-
<PAGE> 123
- a "no shop" provision, which states in part "[Sibia] shall not
directly or indirectly, knowingly encourage, solicit, participate in or
initiate discussions or negotiations with, or provide any non-public
information or data . . . to any corporation, partnership, person or other
entity or a group . . . with respect to any inquiries or the making of any
offer or proposal . . . concerning an acquisition transaction"; and
- a provision which requires Sibia to notify Merck concerning any
acquisition proposals, inquiries or offers within 48 hours of receipt. In
addition, Sibia agreed to provide Merck with three business days' advance
notice of its intention to either enter into an agreement with or provide
any information to any entity or person making an inquiry or proposal.
37. In addition, in the Solicitation and Recommendation Statement
transmitted to shareholders, the defendants were required to act with complete
candor and provide the shareholders with all material information which might
affect the shareholders' decision to tender their shares. As of June 1999,
Sibia had cash or its equivalent of approximately $14 million. However, in
addition to the $14 million in cash, Sibia had obtained a judgment of $18
million against Cadus. Sibia had won all pre-trial motions and Cadus had
deposited the $18 million into an escrow account pending final settlement
negotiations. Pursuant to Financial Accounting Standards No. 5, Accounting for
Contingencies, paragraph 17, Sibia was required to adequately disclose any
contingency that "might result in gains." Given the status of the litigation
with Cadus, Sibia having survived all post-trial motions and the $18 million
being placed into an escrow account, coupled with the fact that this $18
million would virtually double the Company's cash position, the $18 million
judgment was a material factor to Sibia's shareholders' deciding whether or not
to tender their shares. As such, this gain contingency should have been
disclosed. The defendants failed to disclose the possibility of the Company
recovering the $18 million judgment or a portion thereof.
38. The Individual Defendants failed to conduct a market check or
otherwise ensure that Sibia shareholders obtained the highest value reasonably
available prior to entering into the merger agreement. Subsequent events have
only confirmed the unreasonableness of the defendants' conduct, in that
despite defendants' efforts to go forward with the merger, to deter other
bidders and consummate the Merck merger agreement, other parties have announced
that they are willing to pay
-8-
<PAGE> 124
Sibia shareholders more than the $86 million which Merck offered to pay. On
August 3, 1999, a pharmaceutical company contacted the defendants and advised
them that they were interested in acquiring the Company and that it was prepared
to make an offer in excess of the $8.50 per share that was offered by Merck. In
addition, on August 4, 1999, a representative of an investment banking firm
contacted Sibia's financial advisor on behalf of a pharmaceutical company and
indicated that the company was evaluating making a better offer for Sibia's
shares. Instead of pursuing a merger with those companies, the defendants voted
on the same day to proceed with the inferior offer and go forward with the
merger. The defendants not only proceeded with the inferior Merck agreement,
they failed to use the leverage provided by the other indications of interest
from the third parties to negotiate a better price from Merck, or eliminate the
no shop clause, the termination fee and the other provisions in the merger
agreement that are calculated to deprive Sibia's shareholders of receiving full
value for their shares.
FIRST CAUSE OF ACTION
Breach Of Fiduciary Duty Of Loyalty
And Due Care Against All Defendants
39. Plaintiff repeats and realleges each allegation set forth herein.
40. The Individual Defendants have thus far failed to announce any active
auction, open bidding, or other procedures best calculated to maximize
shareholder value. Instead of attempting to obtain the highest price reasonably
available for Sibia shareholders, the Individual Defendants have taken actions
and put into place, among other things, a penalty fee that will only serve to
inhibit the maximization of shareholder value.
41. The Individual Defendants were and are under a duty:
(a) to fully inform themselves of the market value of Sibia before
taking, or agreeing to refrain from taking, action;
(b) to act in the interests of the equity owners;
(c) to maximize shareholder value;
(d) to obtain the best financial and other terms when the Company's
independent existence will be materially altered by a transaction; and
- 9 -
<PAGE> 125
(e) to act in accordance with their fundamental duties of due care
and loyalty.
42. By the acts, transactions and courses of conduct alleged herein,
defendants, individually and as part of a common plan and scheme or in breach
of their fiduciary duties to plaintiff and the other members of the Class, are
implementing and abiding by a process that will deprive plaintiff and other
members of the Class of the true value of their investment in Sibia.
43. Sibia shareholders will, if the defendants' actions are allowed to
stand, be deprived of the opportunity for substantial gains the plaintiff and
Class members may realize if an active auction or open bidding process is
allowed to occur.
44. By reason of the foregoing acts, practices and course of conduct, the
defendants have failed to exercise ordinary care and diligence in the exercise
of their fiduciary obligations toward plaintiff and the other Sibia public
stockholders.
45. In light of the foregoing, plaintiff demands that the Individual
Defendants, as their fiduciary obligations require, immediately:
- Undertake an independent evaluation of Sibia's worth as an acquisition
candidate.
- Rescind any and all provisions that inhibit the maximization of
shareholder value, including but not limited to the penalty fee.
- Implement an active auction or open bidding process in order to
maximize shareholder value.
- Retain independent advisors and appoint a truly independent committee
so that the interests of Sibia's public stockholders will be protected
and any subsequent offers will be considered and negotiated in the
interest of Sibia's public stockholders.
46. As a result of the defendants' failure to take such steps to date,
plaintiff and the other members of the Class have been and will be damaged in
that they have been and will be prevented from obtaining a fair price for their
shares.
47. Defendants are not acting in good faith toward plaintiff and the other
members of the Class, and have breached and are continuing to breach their
fiduciary duties to plaintiff and the members of the Class.
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<PAGE> 126
48. As a result of the defendants' unlawful actions, plaintiff and the
other members of the Class will be irreparably harmed in that they will not
receive fair value for Sibia's assets and business and will be prevented from
obtaining the real value of their equity ownership in Sibia. Unless the
defendants' actions are enjoined by the Court, defendants will continue to
breach their fiduciary duties owed to plaintiff and the members of the Class,
and will engage in a process that inhibits the maximization of shareholder
value.
49. Plaintiff and the other members of the Class have no adequate remedy
at law.
SECOND CAUSE OF ACTION
Breach Of Duty Of Candor Against All Defendants
50. Plaintiff repeats and realleges each allegation set forth herein.
51. As fiduciaries of the Sibia shareholders, the Individual Defendants
owe the Sibia shareholders a duty to fully disclose the existence and nature of
all material facts in their possession or control with respect to the Merck
merger and all other alternative transactions.
52. The Individual Defendants breached and are continuing to breach their
duty of candor and full disclosure owed to Sibia shareholders by failing to
disclose material facts and/or misrepresenting facts regarding the existence and
nature of the Merck offer and/or other offers. For example, defendants failed to
disclose the existence of the $18 million judgment and the likelihood of
recovering said judgment and the status of the litigation with Cadus which would
have a material impact valuing said judgment. Plaintiff has no adequate remedy
at law for defendants' misrepresentations and/or omissions. Only through this
Court's exercise of its broad equitable powers can plaintiff and the Class be
fully protected from the immediate and irreparable injury that defendants'
actions threaten to inflict.
PRAYER
WHEREFORE, plaintiff demands judgment and preliminary and permanent relief,
including injunctive relief, in plaintiff's favor and in favor of the Class and
against defendants as follows:
A. Declaring that this action is properly maintainable as a class action;
B. Declaring and decreeing that the Merck Merger Agreement was entered
into in breach of the fiduciary duties of the Individual Defendants and is
therefore unlawful and unenforceable;
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<PAGE> 127
C. Enjoining defendants from proceeding with the Merck Merger Agreement
and Tender Offer;
D. Enjoining defendants from consummating the merger, or a business
combination with a third party, unless and until the Company adopts and
implements a procedure or process, such as an auction, to obtain the highest
possible price for the Company;
E. Directing the Individual Defendants to exercise their fiduciary
duties to obtain a transaction which is in the best interests of shareholders
until the process for the sale or auction of the Company is completed and the
highest possible price is obtained;
F. Rescinding, to the extent already implemented, the Merck Merger
Agreement and/or any of the terms thereof, including any provisions which
provide advantages to Merck and/or are designated to deter other bidders and/or
high bids;
G. Prohibiting payment of the $2 million termination fee plus costs;
H. Awarding plaintiff and the Class appropriate damages;
I. Awarding plaintiff the costs and disbursements of this action,
including reasonable attorneys' and experts' fees; and
J. Granting such other and further relief as this Court may deem just
and proper.
JURY DEMAND
Plaintiff demands a trial by jury.
DATED this 16th day of August, 1999.
MILBERG WEISS BERSHAD
HYNES & LERACH LLP
WILLIAM S. LERACH
DARREN J. ROBBINS
/S/ William S. Lerach
-------------------------------
WILLIAM S. LERACH
600 West Broadway, Suite 1800
San Diego, CA 92101
Telephone: 610/231-1058
SHEPHERD & GELLER, LLC
PAUL J. GELLER
7200 W. Camino Real, Suite 203
Boca Raton, FL 33433
Telephone: 561/750-3000
Attorneys for Plaintiff
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<PAGE> 128
ANNEX V
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-K
------------------------
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
COMMISSION FILE NUMBER 0-28310
SIBIA NEUROSCIENCES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
DELAWARE 95-3616229
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
</TABLE>
505 COAST BOULEVARD SOUTH, SUITE 300, LA JOLLA, CA 92037
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, INCLUDING ZIP CODE)
(619) 452-5892
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, $.001 PAR VALUE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K [X]
On January 29, 1999, the aggregate market value of the voting stock held by
non-affiliates of the Registrant totaled approximately $24,518,214 based on the
closing stock price as reported by The Nasdaq Stock Market. For purposes of
determining this number, shares of Common Stock held by officers and directors
and stockholders whose ownership exceeded ten percent (10%) of the total shares
of Common Stock outstanding at January 29, 1999 were excluded. Exclusion of such
shares should not be construed to indicate that any such person possesses the
power, direct or indirect, to direct or cause the direction of the management or
policies of the Registrant or that such person is controlled or under control
with the Registrant.
The number of shares of Common Stock of the Registrant outstanding as of
January 29, 1999 was 9,517,947.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of Registrant's Definitive Proxy Statement to be filed with the
Securities and Exchange Commission (the "Commission") pursuant to Regulation 14A
in connection with the 1999 Annual Meeting of Stockholders scheduled to be held
May 26, 1999 are incorporated herein by reference into Part III of this Report.
Such Proxy Statement will be filed with the Commission not later than 120 days
after Registrant's year end. Certain Exhibits filed with the Registrant's
Registration Statement on Form S-1 (Registration No. 333-2586), Form 10-K for
the year ended December 31, 1996, Form 8-K filed on March 31, 1997 and Forms
10-Q for the quarters ended June 30, 1997, March 31, 1998 and June 30, 1998 are
incorporated by reference into Parts III and IV of this Report.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 129
SIBIA NEUROSCIENCES, INC.
FORM 10-K
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
PART I.................................................................... 1
ITEM 1. BUSINESS.................................................... 1
ITEM 2. PROPERTIES.................................................. 26
ITEM 3. LEGAL PROCEEDINGS........................................... 26
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS......... 26
PART II................................................................... 27
ITEM 5. MARKET FOR THE REGISTRANTS' COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS......................................... 27
ITEM 6. SELECTED FINANCIAL DATA..................................... 27
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS................................... 28
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK........................................................ 31
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA................. 31
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.................................... 31
PART III.................................................................. 31
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.......... 31
ITEM 11. EXECUTIVE COMPENSATION...................................... 31
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.................................................. 31
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.............. 31
PART IV................................................................... 32
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM
8-K......................................................... 32
SIGNATURES.............................................................. 35
</TABLE>
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PART I
ITEM 1. BUSINESS
Except for historical information contained herein, the discussion in this
Form 10-K contains forward looking statements within the meaning of Section 21E
of the Securities Exchange Act of 1934 as amended ("Exchange Act") that involve
certain risks and uncertainties that could cause the Company's actual results to
differ materially from those anticipated. Factors that could cause or contribute
to such differences include, but are not limited to, uncertainties regarding the
ability to identify new drug leads or move drug leads into pre-clinical
development, the ability of the Company or its corporate partners to develop
safe and efficacious drugs in a timely and efficient manner, the ability to
enter into future collaborative and other agreements that will generate license,
royalty, contract and other revenue and cash flow, uncertainties regarding the
Company's patents and proprietary rights (including the risk that the Company
may be forced to engage in costly litigation to protect such patent rights and
the material adverse consequences to the Company if there were unfavorable
outcome of any such litigation), uncertainties regarding the availability of
additional financing on favorable terms, if at all, uncertainties regarding the
potential impact of Year 2000 issues, as well as other risks and uncertainties
discussed in the description of the Company's business below and the sections
entitled "Risk Factors" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations" as well as those discussed in any document
incorporated herein by reference.
OVERVIEW
SIBIA Neurosciences, Inc. ("SIBIA" or the "Company") is engaged in the
discovery and development of novel small molecule therapeutics for the treatment
of neurodegenerative, neuropsychiatric and neurological disorders, many of which
have large patient populations and represent critical unmet medical needs. SIBIA
is a leader in the development of proprietary drug discovery platforms that
combine key tools necessary for modern drug discovery, including genomics, high
throughput screening, advanced combinatorial chemistry techniques and
pharmacology. These platforms are based on two primary technologies in which the
Company has established a leading scientific and proprietary position: human
receptor/ion channel subtype technology and human protease technology.
The Company's proprietary molecular targets and drug candidates, together
with its drug discovery technologies and research expertise, have enabled the
Company to establish several collaborative research and license agreements,
which include Bristol-Myers Squibb Company ("Bristol-Myers Squibb"), Eli Lilly
and Company ("Lilly"), Meiji Seika Kaisha, Ltd. ("Meiji"), and Novartis AG
("Novartis"), and multiple technology licensing and sublicensing arrangements,
which include Aurora Biosciences Corporation ("Aurora"), Lilly, Merck & Company,
Inc. ("Merck"), Neurocrine Biosciences, Inc. ("Neurocrine"), and The Salk
Institute for Biological Studies ("The Salk Institute"). In March, 1999, the
Company licensed to Bristol-Myers Squibb non-exclusive rights to practice its
patented transcription-based assay technology. SIBIA currently receives
collaborative research funding from only Bristol-Myers Squibb. SIBIA has
recently completed its collaborative research with Lilly and Novartis and is
entitled to receive, from Bristol-Myers Squibb, Lilly, Meiji, and Novartis,
milestone payments at certain stages of the development of product candidates,
if any are identified, and royalties on sales of products that are developed, if
any are developed. SIBIA believes its proprietary drug discovery technology
platform and drug candidates will lead to additional corporate collaborations
and licensing opportunities with pharmaceutical, biotechnology and drug
discovery service companies.
The first compound to enter clinical trials from the Company's drug
discovery program was SIB-1508Y, currently in development for Parkinson's
disease. This compound was selected as a potential drug candidate on the basis
of its nicotinic acetylcholine receptor ("nAChR") subtype selectivity and
behavioral profile. In contrast to current therapies, which treat only motor
dysfunction, SIB-1508Y is being developed for the treatment of motor, affective
and cognitive dysfunctions of Parkinson's disease. SIB-1508Y is currently in
Phase 2 clinical trials that the Company expects to be completed in mid-1999.
The Company has a collaboration with Meiji for the development and
commercialization of SIB-1508Y in Japan and certain other Asian countries and
plans to establish additional corporate collaborations for advanced clinical
trials and commercialization of SIB-1508Y in other areas of the world.
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SIBIA's second compound to enter clinical trials from the Company's drug
discovery program was another nAChR subtype-selective compound, SIB-1553A, as a
development candidate for the treatment of Alzheimer's disease. This compound
was also selected as a potential drug candidate on the basis of its nAChR
subtype selectivity and behavioral profile. The Company's studies indicate that
this compound strongly stimulates acetylcholine release in specific brain
regions associated with memory and learning, the same regions which exhibit
deficits of this neurotransmitter in Alzheimer's disease. SIB-1553A is currently
in a Phase 2 clinical trial that the Company expects to be completed in
mid-1999. The Company does not currently have a collaborative partner for the
development and commercialization of SIB-1553A but plans to establish corporate
collaborations for advanced clinical trials and commercialization of SIB-1553A
throughout the world.
SIBIA has been involved in patent litigation with Cadus Pharmaceutical
Corporation ("Cadus"). On December 18, 1998, a jury returned a verdict in favor
of the Company in this litigation, finding that certain of the Company's patents
are valid and enforceable and awarding the Company damages in the amount of $18
million to compensate the Company for Cadus' past direct and indirect
infringement of those patents. On January 29, 1999, the Court granted the
Company's request for a permanent injunction preventing Cadus, and all persons
acting in concert or otherwise participating with Cadus from practicing the
methods claimed in those patents. See "Item 3, Legal Proceedings."
The Company is applying its drug discovery technologies to discover and
develop potential drug candidates independently and in collaboration with
established pharmaceutical companies. The Company currently expects that late
stage clinical development and commercialization of independently discovered
compounds will be accomplished in conjunction with corporate partners. The
Company believes, assuming successful pre-clinical studies, that additional
compounds discovered with its technologies by the Company and its corporate
partners will enter clinical trials within the next 12 to 18 months. There can
be no assurance, however, that pre-clinical studies relating to any of the
Company's compounds will be successful.
SIBIA'S DRUG DISCOVERY PLATFORMS
SIBIA is pursuing a molecular target-based approach to drug discovery. The
Company believes that its proprietary drug discovery platform technologies will
enable the early identification of compounds that are selective for specific
receptor/ion channel subtypes and proteases, facilitating the discovery and
development of new classes of drugs, such as SIB-1508Y and SIB-1553A, that may
be more effective and have fewer side effects than existing drugs for the
treatment of nervous system disorders. SIBIA's drug discovery platforms are
based on two primary technologies that define the molecular targets on which the
Company has focused, and in which the Company has established a leading
scientific and proprietary position: human receptor/ion channel subtype
technology and human protease technology.
The Role of Calcium in Nervous System Function and Disease
The human nervous system is a complex network of interconnected neurons
that are responsible for coordination of virtually all bodily activities,
including movement, sensory perception, learning, memory and emotions. Neurons
receive, conduct and transmit signals; this communication between neurons and
with other cells is essential to the function of the nervous system. Neuronal
cell death or dysfunction that impairs the ability of neurons to communicate can
result in neurodegenerative disorders (e.g., Alzheimer's and Parkinson's
diseases), neurological disorders (e.g., epilepsy and chronic pain), and
psychiatric disorders (e.g., schizophrenia and depression).
Communication between neurons occurs through complex electrical and
chemical processes. Neurons communicate with each other and with target cells
through the transmission and reception of molecules known as neurotransmitters.
Nerve impulses, in the form of voltage changes, cause the release of
neurotransmitters, activating specific receptors on the surface of an adjacent
neuron or target cell and cause a response in the receiving cell. This
interaction takes place at a synapse, which is the point at which a nerve
impulse is transmitted from one neuron to another. Each different
neurotransmitter interacts with a specific corresponding receptor or family of
receptors and transmits primary messages that control important processes within
those neurons and target cells. These processes include the regulation of
secondary messenger systems that, in turn, modulate a wide array of signal
transduction pathways involved in neuronal communication and survival.
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One of the most important messengers in the nervous system is calcium ions,
which facilitate the communication between neurons. Calcium ions regulate many
essential functions in neurons, such as the release of neurotransmitters,
electrical activity, activation of enzymes and transcription of genes. Calcium
ions perform this function by entering neurons through ion channels
("receptor/ion channels") which open and close (i.e., are gated) either through
neurotransmitter reception (more generally, ligand/receptor interactions) or
voltage changes such as nerve impulses.
Because calcium is central to so many critical neuronal functions, the
Company believes that controlling calcium levels within neurons is a key
strategy for potential therapeutic intervention in a number of nervous system
disorders, including Parkinson's disease, Alzheimer's disease and other
dementias, Attention Deficit Hyperactivity Disorder ("ADHD"), depression,
schizophrenia, neuropathic and chronic pain, epilepsy, stroke, brain injury,
anxiety, bipolar disorder and migraine. Over the past 20 years, drugs blocking
calcium influx through certain receptor/ion channels (e.g., voltage-gated
calcium channels ("VGCCs")) have been successfully developed and commercialized
for the treatment of cardiovascular diseases such as angina and hypertension.
However, these existing calcium channel blockers are either generally
ineffective or have significant side effects when evaluated for nervous system
disorders. The Company believes this is due to their lack of selectivity or
activity on specific neuronal VGCC subtypes and that the Company's drug
discovery technologies will enable it to identify lead compounds that are highly
selective for brain receptor/ion channel subtypes.
Calcium ions enter neurons primarily through: (i) two receptor classes that
function as ligand-gated ion channels -- nAChRs and excitatory amino acid
receptors ("EAARs"); and (ii) VGCCs. These three classes are the major
receptor/ion channel classes involved in regulating neuronal calcium. Each class
is comprised of numerous structurally and pharmacologically distinct subtypes.
In addition, subtypes within these receptor/ion channel classes are anatomically
distinct, located not only in different organs of the body (such as the heart
and brain), but also localized within specific substructures of organs (such as
the hippocampus and cerebellum of the brain). The large number and diversity of
nAChR, EAAR and VGCC subtypes has only recently been identified through modern
gene cloning techniques.
SIBIA was a pioneer in the discovery and functional expression of cloned
genes encoding important human subtypes in these three receptor/ion channel
classes. This has enabled SIBIA to characterize a large number of previously
unrecognized receptor/ion channel subtypes and establish them as targets for
drug discovery. SIBIA has further incorporated these molecular targets into
functional cell-based assays for drug screening.
SIBIA's Human Receptor/Ion Channel Subtype Technology
SIBIA's human receptor/ion channel subtype technology is based on (i) the
identification and cloning of the genes encoding nAChRs, EAARs and VGCCs from
human brain tissue, (ii) the expression of these genes in mammalian cells to
afford fully functional receptor/ion channels of defined subtype and (iii) the
use of these cells in in vitro high throughput functional drug screening assays.
Each cell line or assay contains only a single human receptor/ion channel
subtype representing a pure molecular target for drug screening. In contrast to
traditional binding assays, these proprietary assays can quantify the functional
effect of test compounds and characterize them as agonists, antagonists or
modulators, at any functional site, known or unknown, on a specific receptor/ion
channel subtype, all in a primary screen.
SIBIA has established a leading proprietary position in drug discovery
based on human receptor/ion channel subtypes. Each of the following scientific
and technological developments by SIBIA was critical in building this position
and has represented a significant advance:
- The Company has discovered, isolated and developed an extensive library
of more than 63 complete genes cloned from human brain tissue which code
for multiple, distinct subtypes of nAChRs, EAARs and VGCCs.
- SIBIA has expressed more than 32 functional receptor/ion channel subtypes
in the nAChR, EAAR and VGCC classes in stable cell lines. Each subtype
potentially represents a novel molecular target for developing
therapeutic compounds for nervous system disorders. This was a difficult
and significant technical challenge, since most receptor/ion channel
subtypes are multimeric (i.e., molecular com-
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plexes of two or more proteins) and require the expression of multiple complex
genes to form a functional subtype.
- SIBIA has developed proprietary functional cell-based assays encompassing
these molecular targets and uses these assays with its proprietary high
throughput screening technology, which includes novel assay methods and
instrumentation, to rapidly identify and select compounds for further
development.
Human Protease Technology
Proteases are a class of enzymes which play an important role in the
processing of proteins. The body uses this mechanism to control many critical
pathways or biochemical cascades. In neurons, specific proteases control
pathways critical to neuronal communication and survival. Abnormal neuronal
protease activity can lead to degenerative processes, as occurs during
progressive disorders such as Alzheimer's disease and in phases of acute
neuronal cell death resulting from head trauma and ischemia due to stroke. For
example, these proteases can generate products that are neurotoxic, such as the
amyloid beta protein ("A(BETA)") which forms the senile plaques seen in
Alzheimer's disease patients, or initiate degradative cascades that are involved
in breaking down the neuronal cytoskeleton, leading to nerve cell death. The
Company believes that modulating the activity of selected proteases may control
these degenerative processes and have therapeutic benefit leading to
neuroprotection and reduced neuronal cell loss.
SIBIA believes there are significant new opportunities for protease-based
therapeutics for nervous system disorders, particularly neurodegenerative
conditions. To pursue this class of molecular targets the Company has
established its human protease technology platform, which includes the
identification and characterization of specific proteases and their functional
activity, the development of proprietary assays to measure specific protease
activity and the use of novel combinatorial chemistry techniques to design
proprietary and selective protease inhibitors. The Company has established a
panel of more than 15 protease targets to be able to evaluate the selectivity of
its compounds. These targets have been incorporated into assays that include
isolated enzymes and cell-based approaches. This has facilitated the discovery
of specific small molecule inhibitors that have demonstrated effectiveness in
animal models of human neurodegenerative diseases.
DRUG DISCOVERY TECHNOLOGIES
SIBIA is a leader in the development of proprietary drug discovery
platforms which combine key tools necessary for modern drug discovery, including
genomics, high throughput screening, advanced combinatorial chemistry techniques
and pharmacology.
The Company's proprietary molecular targets and drug candidates, together
with its drug discovery technologies and research expertise, have enabled the
Company to establish several corporate collaborations and resulted in a number
of compounds being evaluated for, or developed in, clinical trials. The Company
believes its technology platform, including its human receptor/ion channel
subtype and human protease technologies, and product candidates will lead to
additional corporate collaborations and licensing opportunities with
pharmaceutical and biotechnology companies.
Molecular Targets
Genomics. For over ten years, SIBIA has been involved in the cloning of
complete genes encoding selected receptor/ion channel subtypes from human brain
tissue. This has been critical for the Company's target based approach to drug
discovery. Receptor/ion channel subunit genes have been cloned through molecular
biological, biochemical, immunological and functional approaches, and by using
molecular hybridization techniques and homology screening, related subunits and
splice variants of those genes have been identified. SIBIA is now incorporating
expression cloning and more sophisticated bioinformatics-based approaches to its
target identification efforts and has developed a collection of more than 63
complete receptor/ion channel genes encompassing all known subtypes of the
targeted nAChR, EAAR and VGCC classes. This has provided SIBIA with a strong
proprietary position with respect to those particular drug targets.
Functional Genomics. In an effort to establish functions for specific
isolated receptor/ion channel subtypes and proteases, SIBIA has pursued various
functional genomic approaches either internally or in conjunction with leading
academic collaborators. These include anatomical (mapping studies in normal and
diseased tissue using clones and antibodies to expressed proteins),
pharmacological (utilizing molecular
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target-specific compounds in cell, tissue or animal models), genetic
(chromosomal mapping, linkage studies, knockouts and transgenic animals) and
expression array (gene chip or gene filter) approaches.
Functional Assay Technology and High Throughput Screening
High throughput screening utilizing functional assays is a key component of
SIBIA's target-based approach to drug discovery. SIBIA utilizes its human
receptor/ion channel subtype technology and human protease technology with high
throughput screening in two modes: first, for the testing of large random
compound libraries to discover novel structures that are selective and potent
substrates for more in-depth research and evaluation; and second, for the rapid
identification, characterization, profiling and optimization of selected
compounds through an interactive process with chemistry and pharmacology for
further in vitro and in vivo study of lead candidates.
SIBIA's proprietary high throughput functional cell-based assays are
applicable to all of SIBIA's drug discovery programs -- nAChRs, EAARs, VGCCs and
proteases. SIBIA's proprietary assays are based on the receptor/ion
channel-induced changes in cellular calcium levels, or protease-mediated changes
in fluorescent substrates. In contrast to traditional binding assays, these
assays also allow for simultaneous analysis of the selectivity, potency,
efficacy and pharmacological nature (e.g., agonist, antagonist or modulator) of
test compounds with respect to specific molecular targets.
Fluorescence-Based Ion Assay. SIBIA's proprietary fluorescence-based ion
assay technology measures changes in intracellular events (e.g., calcium
concentrations) through the use of ion-sensitive and other fluorescent dyes.
SIBIA, in collaboration with a third party, has developed a microtiter
plate-imaging fluorimeter to perform functional high throughput screening. The
equipment is fully automated with robotics and analyzes the fluorescent signals
of all 96 wells in a standard microtiter plate simultaneously, rather than
sequentially in a time-delayed manner. This system can also be adapted to a 384
well plate format. This equipment incorporates a sophisticated computer control
and data capture system which allows SIBIA to perform more than 25,000
functional receptor/ion channel assays per day. SIBIA is in the process of
expanding its capacity in this area and expects to significantly increase high
throughput screening.
Transcription-Based Assay. SIBIA's proprietary transcription-based assay
technology measures the functional activity of test compounds on cell-surface
proteins using a wide array of specifically responsive promoter-reporter gene
constructs and products. SIBIA believes its proprietary transcription-based
assay technology is broadly applicable to virtually any cell-surface protein,
such as receptors and ion channels, that control signal transduction processes
affecting gene transcription. In addition, the Company believes that
transcription-based assays have applications beyond SIBIA's current receptor/ion
channel subtype targets and could support the expansion of SIBIA's drug
discovery efforts to other human molecular targets involved in nervous system
disorders or to other therapeutic categories.
Chemistry
Medicinal Chemistry. SIBIA has established in-house a state-of-the-art
medicinal chemistry capability which incorporates structure-based drug design,
computer assisted molecular modeling, pharmacophore development based on
structure-activity relationships and organic synthesis. These activities are
closely integrated with combinatorial chemistry.
Combinatorial Chemistry. SIBIA has developed a combinatorial chemistry
capability referred to as high throughput organic synthesis ("HTOS"). HTOS is
currently focused on the rapid generation of analogues of "hits" from high
throughput screening. The Company's HTOS laboratory is automated and is able to
produce milligram amounts of up to 1,000 individual compounds per week. Novel
synthetic approaches and strategies have also been developed and are being
utilized in SIBIA's drug discovery programs. SIBIA has integrated its high
throughput screening capabilities with its proprietary HTOS technologies to
rapidly convert hits identified through screening to potential lead compounds.
Pharmacology
Neuropharmacology. SIBIA has established in-house a number of in vitro and
in vivo assays for evaluating properties of specific test compounds such as
second messenger modulation, neurotransmitter release from tissue slices, and in
vivo microdialysis.
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Neurodegeneration. SIBIA has established in-house a number of in vitro and
in vivo assays to measure neuroprotective and neurodegenerative potential of
test compounds in acute neurodegenerative diseases such as stroke and head
trauma and chronic neurodegenerative diseases such as Parkinson's disease and
Alzheimer's disease.
Behavioral Pharmacology. SIBIA has developed in-house a panel of more than
30 different animal models that permit the evaluation and optimization in vivo
of compound activity in a range of potential therapeutic indications.
Developmental Pharmacology. SIBIA has established an in-house group capable
of performing safety, pharmacokinetic and ADME (absorption, distribution,
metabolism and excretion) studies in rodents, which are a precursor to the
development of drug candidate compounds.
DISCOVERY AND DEVELOPMENT PROGRAMS
<TABLE>
<CAPTION>
DEVELOPMENT COMMERCIAL
PROGRAM THERAPEUTIC TARGET STATUS(1) RIGHTS
------- ------------------ ----------- ----------
<S> <C> <C> <C>
HUMAN RECEPTOR/ION CHANNEL SUBTYPE TECHNOLOGY
nAChR Agonists
SIB-1508Y Parkinson's Disease Phase 2 clinical trials Meiji/SIBIA
SIB-1553A Alzheimer's Disease, Phase 2 clinical trial SIBIA
Attention Deficit
and Hyperactivity
Disorder (ADHD),
Schizophrenia
SIB-3182 Alzheimer's Disease, Pre-clinical SIBIA
Attention Deficit
and Hyperactivity
Disorder (ADHD),
Schizophrenia
Other Series Pain, Schizophrenia, Discovery/Leads identified SIBIA
Depression
EAAR Ligands
CGP 79397 Epilepsy Pre-clinical Novartis/SIBIA
CGP 80887 Pain Pre-clinical Novartis/SIBIA
Other Series Pain, Anxiety, Discovery/Leads identified SIBIA
Schizophrenia,
Neurodegenerative
Diseases
VGCC Antagonists
Compound Series Neuropathic and Leads identified SIBIA
Chronic Pain
HUMAN PROTEASE TECHNOLOGY
A(BETA) Inhibitors Alzheimer's Disease Pre-clinical Bristol-Myers Squibb/
SIBIA
Apoptosis Modulators Stroke, Brain Discovery/Leads identified SIBIA
Injury,
Neurodegenerative
Diseases
</TABLE>
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<TABLE>
<CAPTION>
DRUG DISCOVERY TECHNOLOGY LICENSEES
------------------------- ---------
<S> <C>
Transcription-Based Assay Novartis; Aurora; Neurocrine;
Bristol-Myers Squibb
Fluorescence-Based Ion Assay Novartis; Aurora; Lilly
Phage Display Technology Affymax/Glaxo Wellcome
</TABLE>
- ---------------
(1) "Discovery" activities include initial research related to specific
molecular targets and assay development for the identification of new lead
compounds.
"Leads identified" indicates that lead compounds have been discovered that
meet certain criteria of the Company. Lead compounds may undergo structural
modification and more extensive evaluation prior to selection of candidates
for preclinical development.
"Pre-clinical" indicates that SIBIA is conducting pharmacology testing,
toxicology testing, formulation, process development and/or manufacturing
scale-up prior to possible submission of an IND.
"Phase 2 clinical trials" are those in which the drug is administered to
patients to evaluate safety, tolerability and efficacy. This indicates that
SIBIA has completed the initial introduction of the drug into healthy human
subjects (Phase 1), where it has successfully been tested for safety,
tolerability and pharmacokinetics over a range of doses. In some cases,
aspects of the metabolism or the pharmacodynamics of compounds are also
tested in Phase 1.
HUMAN RECEPTOR/ION CHANNEL SUBTYPE TECHNOLOGY
nAChR Program
In the late 1980s, SIBIA began exploring nAChR subtypes as targets for drug
discovery because of the growing awareness of the diversity and importance of
the nAChR system and its endogenous neurotransmitter, acetylcholine, in a
variety of behaviors, particularly cognition; the discovery of a number of
distinct nAChR subtypes located in the brain; and the complex pharmacology of
the exogenous ligand nicotine. The complexity of nicotine's activity was
believed to be due to its non-selective nature (acting at all nAChRs), and SIBIA
sought to separate the potential therapeutic benefits of nicotinic compounds
from less desirable effects with receptor subtype-selective compounds. Until
recently, the pharmaceutical industry has not focused on nAChRs as important
drug targets. Mapping and pharmacological studies have revealed that nAChR
subtypes are widely but discretely distributed in the brain and appear to be
associated with specific neuronal structures and functions. The Company's nAChR
drug discovery program is focused on the identification, optimization and
early-stage development of nAChR subtype-selective compounds as novel drug
candidates.
There is strong evidence that nAChRs are important in a number of nervous
system disorders. In particular, deficits of nAChRs have been demonstrated in
Parkinson's and Alzheimer's patients. Studies by the Company indicate that
nAChRs are involved in modulating the release of dopamine, acetylcholine and
other important neurotransmitters in different brain regions. The Company
believes that it may be able to develop subtype-selective nAChR drugs, such as
SIB-1508Y and SIB-1553A, to ameliorate the disease symptoms that result from
reduced concentrations of dopamine and acetylcholine in Parkinson's and
Alzheimer's patients, respectively. In addition, SIBIA believes that nAChR
compounds with different subtype selectivities may be useful for the treatment
of other nervous system disorders such as schizophrenia, ADHD, depression and
pain.
SIB-1508Y. The first compound discovered by SIBIA to enter clinical trials
was SIB-1508Y, currently in development for Parkinson's disease. In contrast to
current Parkinson's disease therapies which treat only motor dysfunction,
SIB-1508Y is being developed for the treatment of motor, affective and cognitive
dysfunctions of this disease. SIB-1508Y exhibits subtype-selective nAChR agonist
activity and releases dopamine, acetylcholine and norepinephrine from selected
brain regions. SIB-1508Y has been tested in a number of animal models, and
demonstrated activity in rodent and primate models of Parkinson's disease, in
rodent models of depression and in primate models of cognitive function.
Pre-clinical data suggests that SIB-1508Y may be useful both as a stand-alone
therapeutic agent and as an adjunctive therapy with L-dopa. SIB-1508Y is
currently in two Phase 2 clinical trials for Parkinson's disease. The first
trial, ongoing since
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January 1998, is assessing the safety, motor and cognitive effects of SIB-1508Y
in early stage Parkinson's patients requiring but not receiving dopamine
replacement therapy. The second trial, initiated in early 1999, is studying the
compound in later-stage patients in combination with a half dose of their
current dopamine replacement therapy. SIBIA plans to complete both Phase 2
studies in mid-year 1999.
In March 1997, the Company announced a collaboration with Meiji for the
development and commercialization of SIB-1508Y in Japan and certain other Asian
countries. SIBIA has retained worldwide rights to manufacture the clinical
supplies and bulk drug material required for the commercial production of
SIB-1508Y. The Company plans to establish additional corporate collaborations
for advanced clinical trials and commercialization of SIB-1508Y in other areas
of the world.
SIB-1553A. Another compound discovered by SIBIA's proprietary drug
discovery platforms is SIB-1553A, currently in development for Alzheimer's
disease. The Company's studies indicate that this compound strongly stimulates
acetylcholine release in specific brain regions associated with memory and
learning, the same regions which exhibit deficits of this neurotransmitter in
Alzheimer's disease. In the first half of 1997, the Company reported
pre-clinical data demonstrating that in animals, SIB-1553A significantly
stimulates the release of acetylcholine. In addition, SIB-1553A was demonstrated
to improve working (short-term) and reference (long-term) memory deficits due to
injury, drugs or aging in studies in rodents and monkeys. SIB-1553A is currently
in a Phase 2 clinical trial, commenced in early 1999, to study the effect of the
compound on cognitive performance in early to mid-stage Alzheimer's patients.
SIBIA expects to complete this study mid-year 1999.
EAAR Program
The excitatory amino acid system is the major excitatory system in the
brain. EAARs are divided into three categories based on the names of compounds
selective for each category: NMDA-type receptor/ion channels, AMPA-type
receptor/ion channels, kainate-type receptor/ion channels and metabotropic
receptors, a category of G protein-coupled receptors which do not directly flux
calcium but rather function via other cellular second messenger molecules. Each
category is comprised of multiple subtypes that are activated by excitatory
amino acid neurotransmitters such as glutamate and each subtype has unique
anatomical distributions.
The NMDA-, AMPA-, and kainate-type receptor/ion channel categories are
ligand-gated ion channels, and these subtypes directly flux calcium into
neurons. These receptor/ion channel subtypes are important for diverse brain
functions, including memory and learning, and are also implicated in a variety
of central nervous system disorders, including stroke and brain trauma,
epilepsy, pain, schizophrenia, depression and others. Stable cell lines
expressing NMDA-, AMPA-, and kainate-type EAARs have been established and are
being used in SIBIA's functional high throughput screening assays. Potent and
selective compounds are being identified and are being evaluated in various
animal models of nervous system disorders.
Metabotropic receptors also appear to be involved in certain nervous system
disorders. Clones for genes encoding a number of different and novel
metabotropic EAARs have been isolated by SIBIA from human brain tissue and have
been demonstrated to be functional in several types of assays. Stable cell lines
expressing metabotropic EAARs have been established and are being used in
SIBIA's functional high throughput screening assays. Potent and selective
compounds have been identified and are being evaluated in various animal models.
The Company believes drugs acting at different and specific EAAR subtypes
may have application to certain disorders of the central nervous system as
stated above. To date, developing therapeutically useful EAAR drugs has been
difficult. Traditional drug discovery approaches have produced non-selective
EAAR antagonists which generally have intolerable side effects. SIBIA has
discovered a number of novel and distinct human EAAR subtypes, each with
different pharmacological properties. By identifying receptor subtype-selective
EAAR agonists and antagonists, the Company believes it should be possible to
effectively treat certain nervous system disorders without the side effects
caused by non-selectively blocking multiple EAAR subtypes.
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The first EAAR gene was cloned at The Salk Institute, and SIBIA has an
exclusive license to broad patents relating to this research. The Company has
subsequently filed its own patents on additional EAAR subtypes. SIBIA and
Novartis have identified a series of subtype-specific human metabotropic
receptor antagonists. Under the terms of their agreement, SIBIA and Novartis
both worked to design and optimize potential lead compounds which are selective
for EAARs. Such compounds will be further developed by Novartis and SIBIA will
receive milestone payments based on their success. Subsequent to the completion
of the collaborative research with Novartis in October 1998, SIBIA has been
independently pursuing drug discovery on EAAR targets.
VGCC Program
VGCCs are a major receptor/ion channel family involved in regulating
neuronal calcium flux and cell excitability. VGCCs have traditionally been
classified as L-, T-, N- and P-type calcium channels based on their biophysical
and pharmacological properties. SIBIA's pioneering research in the
characterization of VGCCs by molecular structure has led to the identification
of other classes of calcium channels as well as channel subtypes within these
classes, resulting in a new structure-based understanding of VGCCs. The critical
role of VGCC subtypes in the function and potential dysfunction of nerve cells
indicates that they may be important targets for therapeutic intervention in a
number of nervous system disorders.
Calcium entry into neurons through distinct VGCC subtypes is essential for
several fundamental activities of neurons, e.g., regulation of neurotransmitter
release, activation of enzymes and regulation of gene transcription. This gives
rise to several possible therapeutic applications of modulation of VGCC
function. Currently, SIBIA is focusing on small molecule VGCC antagonists for
the treatment of pain. This derives from the observation that a synthetic
version of a VGCC subtype-selective peptide, (OMEGA)-conotoxin MVIIA, is
currently in late stage clinical development by a third party for chronic pain.
This molecule has demonstrated efficacy, but its widespread use may be limited
by its peptidic nature and by the fact that it must be administered into the
spinal fluid by a pump. The Company believes that this validates a particular
VGCC subtype as a molecular target for pain, and that small molecule drugs of
the type SIBIA is identifying will offer significant advantages over peptides or
their derivatives in creating a useful drug for chronic pain, where great unmet
need exists. In addition, recent studies have identified specific mutations in
one of the Company's proprietary human VGCC genes associated with an inherited
form of migraine. The Company believes this provides insight as to a novel
therapeutic approach for the treatment of migraine. The Company further believes
modulation of synaptic activity by controlling neurotransmitter release,
neuronal calcium levels and neuronal excitability with VGCC subtype-selective
drugs may prove to be a more effective approach with broader applicability than
current drug therapy for many nervous system disorders.
The Company believes it was the first to clone and functionally express a
human neuronal N-type VGCC. SIBIA has generated a number of stable mammalian
cell lines which functionally express additional distinct VGCC subtypes and has
developed these cell lines into assays that currently are being employed in
efforts to discover selective drugs using high throughput screening technology.
SIBIA has an extensive patent portfolio in this area. Potent and selective
compounds have been identified by the Company and are being evaluated in various
animal models. SIBIA is currently free to develop compounds and other technology
it discovers in this area on its own or with partners.
HUMAN PROTEASE TECHNOLOGY
APP Modulators
SIBIA's Amyloid Precursor Protein (APP) Modulator program is currently
focused on controlling proteases that generate A(BETA), the neurotoxic
fragment of APP. A(BETA), which is derived from APP, is generally understood to
be a key molecule in the development of Alzheimer's disease. A(BETA) is found at
autopsy in senile plaques and in deposits surrounding the small blood vessels in
brain tissue, both of which are diagnostic for Alzheimer's disease. A number of
studies indicate that mutations in the APP gene are associated with early-onset
familial Alzheimer's disease. The clinical presentation and histopathology of
early-onset Alzheimer's disease are indistinguishable from that seen in the more
prevalent late-onset Alzheimer's disease.
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The Company therefore believes the inhibition of A(BETA) formation may be
broadly applicable to early- and late-onset Alzheimer's disease.
SIBIA has conducted extensive research concerning the role of APP in
Alzheimer's disease. It has developed technology related to the metabolism of
APP in Alzheimer's disease and methods for controlling the formation of A(BETA).
The other important APP metabolic product, secreted APP(s(ALPHA)), has been
shown in in vitro and in vivo studies to have neuroprotective properties and has
been shown by SIBIA to be significantly decreased in the cerebrospinal fluid of
Alzheimer's disease patients. SIBIA is seeking to develop compounds which
selectively modulate the enzymatic processing of APP, such that the formation of
A(BETA) is inhibited and that of APP(s(ALPHA)) is maintained or enhanced. SIBIA
believes such compounds could slow disease progression or possibly modify the
underlying disease process. In the A(BETA) inhibitor program, SIBIA has
developed neuronal-type cell lines able to process human APP and produce
APP(s(ALPHA)), A(BETA) and other processing fragments which can be detected with
the use of various antibodies, and which have been established as functional
assays for compound screening and drug development. SIBIA's biochemical assays
allow quantification of A(BETA) and APP(s(ALPHA)) in cultured cells, tissues and
biological fluids (for example, cerebrospinal fluid) from animals (normal and
transgenic mice) and sporadic and familial Alzheimer's patients. The Company
believes its assays, and the ability to biochemically evaluate the effect of
test compounds on APP processing in biological systems, and potentially in
patients in clinical trials, provide it a significant competitive advantage.
SIBIA, in collaboration with its partner in the APP Modulator program,
Bristol-Myers Squibb, has identified several series of small molecules that
inhibit A(BETA) production in vitro and in vivo. The most advanced compounds
from this collaboration are in pre-clinical development.
Other Protease Targets
SIBIA has built an integrated drug discovery platform able to address a
broad range of human proteases as molecular targets. The Company has developed a
novel cell-based screening assay using protease activity as a "reporter" for
utilizing proprietary technology licensed from Aurora for monitoring the effects
of test compounds. SIBIA is currently utilizing this assay to discover
inhibitors of programmed cell death (apoptosis), which occurs in stroke, head
trauma and neurodegenerative disease.
STRATEGIC ALLIANCES
Strategic alliances with major pharmaceutical and biotechnology companies
are an integral part of SIBIA's business strategy. Currently, SIBIA has a
collaborative research and license agreement with Bristol-Myers Squibb and
development and license agreement with Meiji. Only the collaborative research
agreement with Bristol-Myers Squibb currently provides research funding
payments. SIBIA is entitled to receive, from Bristol-Myers Squibb, Lilly, Meiji,
and Novartis, milestone payments at certain stages of the development of product
candidates, if any are identified, and royalties on sales of products that are
developed, if any are developed.
Bristol-Myers Squibb Company
In August 1995, SIBIA entered into a collaborative research and license
agreement with Bristol-Myers Squibb under which Bristol-Myers Squibb agreed to
fund research for a minimum of four years to discover and develop compounds able
to selectively modulate the processing of APP for the treatment of Alzheimer's
disease and related neurodegenerative disorders. During the joint research
effort, neither SIBIA nor Bristol-Myers Squibb may enter into any other
third-party agreements directed toward the discovery and development of products
for use in the area of APP metabolism. In addition, Bristol-Myers Squibb has the
sole discretion to determine which compounds, if any, it will pursue to develop.
Under the terms of the agreement, all pre-clinical and clinical development of
lead compounds will be undertaken by Bristol-Myers Squibb. SIBIA has a right of
first negotiation to obtain a license to certain compounds discovered during the
research collaboration in the event Bristol-Myers Squibb elects not to pursue
the development of such compounds. Pursuant to the collaborative research and
license agreement, except with regard to SIBIA's assay technology, SIBIA has
granted to Bristol-Myers Squibb an exclusive, worldwide, royalty-bearing license
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to commercialize products arising out of the collaboration. Furthermore, upon
the termination of the research collaboration, SIBIA and Bristol-Myers Squibb
have granted to one another non-exclusive licenses to the other's assay
technology for the discovery and development of new compounds. The collaborative
research funding may not be terminated prior to August 1999 without the parties'
mutual consent.
Coincident with the collaborative research and license agreement,
Bristol-Myers Squibb made an equity investment in the amount of $7,000,000 and
paid a non-refundable license fee of $3,000,000. Bristol-Myers Squibb is also
obligated to make a further equity investment of $6,000,000 upon the initiation
of clinical trials relating to any product developed from the collaboration. In
addition to research funding, SIBIA is entitled to receive certain milestone
payments at certain stages during the development of product candidates, if any
are identified. The agreement also provides that Bristol-Myers Squibb will pay
SIBIA royalties on net sales of products resulting from the joint research, if
any are developed.
Meiji Seika Kaisha, Ltd.
In February 1997, the Company entered into a development and license
agreement with Meiji for the development and commercialization of the Company's
proprietary nAChR agonist, SIB-1508Y, as a treatment for Parkinson's disease and
other nervous system disorders in Japan and other Asian countries. Under the
agreement, the Company received a one-time license fee of $3,000,000 for the
license of certain technology to Meiji. In addition, the Company may receive
development milestone payments and royalties on future product sales, if the
product is successfully commercialized in such countries. SIBIA has retained
rights to develop and commercialize SIB-1508Y outside of Japan and certain other
Asian countries, and has retained rights to manufacture clinical supplies and
commercial material worldwide.
Completed Research Collaborations
In October 1997, the Company and Lilly completed their collaborative
research in the area of VGCCs. The Company and Lilly will independently pursue
discovery and development of drug leads that act on VGCC drug targets identified
during the research collaboration. The Company is free to develop compounds it
discovers in this area on its own or with other partners. Lilly has exercised
its option to license the Company's fluorescence-based ion assay technology.
In October 1992, SIBIA entered into a collaborative research and license
agreement (which included research funding and a $5,000,000 equity investment)
with Novartis to develop and utilize SIBIA's receptor/ion channel technology in
the area of EAARs for the discovery of drugs that interact with these molecular
targets. In March 1996, the initial term of the collaborative research funding
was extended through September 1998, at which time the parties' collaborative
research was concluded. Under the agreement, Novartis was granted exclusive
worldwide rights to manufacture and market products it or SIBIA discovered using
the EAAR technology during the research collaboration, and SIBIA is entitled to
receive milestone payments at certain stages of the development of product
candidates, if any are identified, and royalties on sales of products that are
developed, if any are developed. Novartis also received a non-exclusive license
to the Company's transcription-based assay technology and fluorescence-based ion
assay technology. SIBIA has retained the rights to use the program technology
for its own drug discovery efforts and may screen molecules from other sources
against EAARs and pursue development of these molecules.
Pursuant to the extended agreement, Novartis paid SIBIA $500,000 to fund
certain capital expenditures and agreed to purchase $7,500,000 of the Company's
Common Stock, $5,000,000 of which was purchased in conjunction with the initial
public offering of the Company's Common Stock and the remaining $2,500,000 of
which is required to be purchased upon the achievement of certain research
milestones.
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DRUG DISCOVERY TECHNOLOGY LICENSES
Consistent with the Company's strategy of enhancing and leveraging its
proprietary drug discovery platform technologies, the Company has entered into
the following technology licensing arrangements with third parties:
The Salk Institute for Biological Studies
In 1988, SIBIA entered into a license agreement with The Salk Institute on
a number of nAChR subunit clones on which five U.S. patents have issued. This
agreement was amended in March 1996 such that the license to the issued U.S.
patents and related patent applications became an exclusive worldwide license.
Pursuant to the agreement, as amended, SIBIA is obligated to pay royalties to
The Salk Institute on sales of products resulting from The Salk Institute's
nAChR technology. In addition, the Company is required to make minimum annual
royalty payments to The Salk Institute beginning in 2002. Failure to pay such
royalties will result in the related license becoming non-exclusive.
In 1990, SIBIA entered into a three-year agreement with The Salk Institute
in the area of EAARs. This agreement provided for the support of research at The
Salk Institute by SIBIA and the transfer of research materials and research
results in the EAAR area from The Salk Institute to SIBIA. SIBIA also received
an exclusive worldwide license to certain EAAR-related patents and patent
applications held by The Salk Institute. The agreement was amended in March
1996. Pursuant to the agreement, as amended, SIBIA began making certain annual
minimum royalty payments to The Salk Institute beginning in 1998. Failure to pay
such royalties will result in the related license agreement becoming
non-exclusive.
Aurora Biosciences Corporation
In January 1997, the Company entered into an agreement with Aurora. Under
the agreement, the Company licensed to Aurora non-exclusive rights to practice
its patented transcription-based assay technology, and certain aspects of its
fluorescence-based ion assay technology related to automated drug screening. In
return, in addition to other consideration, the Company received from Aurora
non-exclusive rights to several assay technologies, including novel reporter
molecules, that will facilitate the Company's high throughput screening and drug
discovery efforts directed to certain receptor, ion channel and enzyme targets
associated with nervous system disorders. Both parties have limited sublicensing
rights to each other's patents. In December 1997, Aurora entered into agreements
with Lilly and Merck to sublicense certain of SIBIA's patents when used in
conjunction with Aurora technologies.
Bristol-Myers Squibb
In March 1999, SIBIA entered into a license agreement with Bristol-Myers
Squibb. Under the agreement, the Company licensed to Bristol-Myers Squibb
non-exclusive rights to practice its patented transcription-based assay
technology. SIBIA will receive annual maintenance payments as well as royalties
on the sales of any products identified using the licensed technology.
Neurocrine Biosciences, Inc.
In October 1997, SIBIA entered into an agreement with Neurocrine. Under the
agreement, the Company licensed to Neurocrine non-exclusive rights to practice
its patented transcription-based assay technology for use with a specified
molecular target. In exchange, SIBIA has been granted access to a compound
library developed by Neurocrine's combinatorial chemistry group. SIBIA intends
to use the Neurocrine compound library in its drug discovery and high throughput
screening programs directed to certain receptor/ion channel and enzyme targets
associated with nervous system disorders.
Affymax/Glaxo Wellcome
In 1993, SIBIA entered into a semi-exclusive license with Affymax, which
was subsequently acquired by Glaxo Wellcome, regarding SIBIA patents covering
phage display technology for drug discovery. This
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technology covers the display of random peptide epitopes on the surface of viral
coat proteins, which can then be screened for activity in various types of
assays. SIBIA retains exclusive rights to this technology for vaccine and other
applications.
SELECTED ACADEMIC RESEARCH COLLABORATIONS
The Mayo Clinic, Jacksonville
SIBIA is collaborating with and providing research support to Dr. Steven G.
Younkin, Director of Research at the Mayo Clinic, Jacksonville. Research is
focused on measuring the effects of lead compounds on A(BETA) levels in
biological samples from in vitro and in vivo models of APP processing and
Alzheimer's disease.
The Rockefeller University
SIBIA is collaborating with Dr. Rong Wang, a researcher in the Mass
Spectrometry Laboratory at Rockefeller, on the detection and quantitation of
A(BETA) and related APP fragments in tissue culture, cerebrospinal fluid and
plasma samples.
University of California, Los Angeles, School of Medicine
SIBIA is collaborating with Robert Baloh, M.D., Professor, Department of
Neurology and Joanna Jen, M.D., Ph.D., Clinical Instructor, Department of
Neurology, in the area of genetic disorders involved with calcium channels.
Thomas Jefferson University
SIBIA is collaborating with Jay S. Schneider, Ph.D., Professor, Department
of Pathology, Anatomy and Cell Biology, and Department of Neurology, in the
evaluation of various compounds on cognitive deficits in motor asymptomatic
macaques treated with MPTP.
Medical College of Georgia
SIBIA is collaborating with Jerry J. Buccafusco, Ph.D., Professor,
Director, ARC Animal Behavior Center, in the evaluation of various compounds in
aged rhesus monkeys.
University of Chicago
SIBIA is collaborating with Dr. Richard J. Miller, Professor, Department of
Pharmacology and Physiological Sciences, on the biophysical and pharmacological
characterization of certain VGCC subtypes.
University of California, San Diego, School of Medicine
SIBIA is collaborating with Dr. Tony Yaksh, Professor and Chair, Department
Anesthesiology, to map changes in calcium channels in neuropathic pain states.
Parkinson's Institute
SIBIA is collaborating with J. William Langston, M.D., President, and
Giselle M. Petzinger, M.D., Assistant Research Scientist, in the evaluation of
various compounds in the systemic MPTP parkinsonian monkey model (squirrel
monkeys).
PATENTS AND PROPRIETARY RIGHTS
SIBIA files patent applications to protect molecular targets, technologies,
compounds, processes, assay methods and therapeutic treatment methods that are
important to the development of its business. The
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Company also relies upon trade secrets, know-how, continuing technological
innovations and licensing opportunities to develop and maintain its competitive
position.
SIBIA has established an extensive patent portfolio which it intends to
protect on behalf of its shareholders. The Company has been engaged in
litigation with Cadus Pharmaceutical Corporation ("Cadus") regarding the
Company's U.S. Patent No. 5,401,629 (the "'629 patent"), entitled "Assay Methods
and Compositions Useful for Measuring the Intracellular Transduction of an
Intracellular Signal." See "Item 3. Legal Proceedings."
SIBIA directly holds, or has exclusive licenses to, 48 issued U.S. and 26
foreign patents relating to molecular targets, technologies, compounds and assay
methods for various nervous system diseases and disorders. In addition, SIBIA
has 58 U.S. and 71 foreign applications relating to these enabling technologies,
thirteen of which have been allowed.
SIBIA has eight issued patents and three allowed which include claims to
DNAs encoding key structural components of VGCCs, one of which, the
(ALPHA)(2)(DELTA) component, is thought to be essential for all VGCC subtypes.
Four additional patents cover VGCCs which can be utilized in assays to identify
compounds that modulate VGCC function. SIBIA has been granted a European patent
covering DNA encoding VGCC (ALPHA)(2)(DELTA) subunits, cells expressing the same
and a method to identify compounds that modulate VGCC function and Australian
and British patents covering a number of subtypes and assay methods. Eleven of
the pending U.S. patent applications cover the composition or use of VGCC genes
and the encoded subtypes and assay methods; two of these have been allowed.
SIBIA has been issued five U.S. patents which claim DNAs encoding and
assays for key structural components of nAChRs and has an exclusive license from
the Salk Institute to five issued U.S. patents and three pending applications
(of which 2 stand allowed), all of which claim DNAs encoding various nAChR
subunits and assay methods. SIBIA also has been granted four patents in Great
Britain covering nAChR subtypes and assay methods. Seven of SIBIA's pending U.S.
applications cover the composition or use of human nAChR genes and encoded
subtypes and assay methods; four of these have been allowed.
SIBIA has two issued U.S. patent with claims to DNAs encoding human
metabotropic receptors and cells containing the same and a corresponding patent
has been granted in Australia and Great Britain. SIBIA also has one issued U.S.
patent with claims to NMDA receptors and an exclusive license from the Salk
Institute to four additional issued U.S. patents with broad claims to DNAs
encoding various NMDA- and non-NMDA-type ligand gated EAA receptor/ion channel
subtypes, and corresponding Australian and British patents have issued. SIBIA
has five pending U.S. applications covering human NMDA receptor genes and
encoded subtypes and seven pending U.S. applications covering human metabotropic
glutamate receptor ("mGLuR") genes and assay methods, two of which have been
allowed.
Several of SIBIA's pending U.S. patent applications relate to functional
screening techniques that can be utilized in conjunction with receptor/ion
channel compositions for identifying drugs which have the potential for
treatment of disorders associated with the particular receptor or ion channel.
Two issued U.S. patents cover methods and compositions for identifying
receptor-modulating compounds based on detection of reporter gene transcription.
In addition, one issued U.S. patent, three granted foreign patents, five pending
U.S. patent applications and seven pending foreign applications cover
fluorescence-based automated systems and methods for high throughput functional
screening of receptor-modulating compounds.
SIBIA has also filed a patent application disclosing proprietary methods
for solid phase synthesis of chemical series, termed resin activation/capture or
REACAP, to produce libraries of compounds that would be difficult, or
impossible, to obtain using solution phase syntheses. An additional advantage of
the methods is the production of compounds of increased purity. The libraries
produced by the methods will be useful for screening against SIBIA's molecular
targets.
SIBIA has eleven issued U.S. patents covering the composition, use, or
methods or preparation of compounds which modulate the activity of nAChRs for
the treatment of diseases and disorders involving these receptors, including six
issued U.S. patents covering, inter alia, SIB-1508Y. Additionally, SIBIA has
four pending U.S. applications, fifteen foreign applications and one issued
Australian patent, covering different
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series of nAChR compounds. Two additional applications covering EAA compounds
are jointly assigned to SIBIA and Novartis.
SIBIA has three issued U.S. patents and six U.S. patent applications and
three foreign applications pending covering the composition or use of compounds
that modulate the processing of proteins implicated in Alzheimer's disease and
an issued U.S. patent covering assay methods for the detection of Alzheimer's
disease. Four additional applications covering compounds for treating
Alzheimer's disease are jointly assigned to SIBIA and Bristol-Myers Squibb.
SIBIA has a non-exclusive worldwide license to various patents and patent
applications held by Aurora. The technology covered by these patents and patent
applications include several assay technologies.
The Company intends to file additional applications as appropriate for
patents covering its technologies, compounds and processes. There can be no
assurance that the Company will develop additional technologies, compounds or
processes that are patentable, that patents will issue from any patent
application or that claims allowed will be sufficient to protect the Company's
technologies, compounds or processes. Competitors may have filed applications,
may have been issued patents or may obtain additional patents and proprietary
rights relating to technologies, compounds or processes competitive with those
of the Company. The failure by the Company to adequately protect its
technologies, compounds or processes covered by issued patents or to obtain
patents based on the applications referred to herein or any future applications
could have a material adverse effect on the Company's business.
The patent positions of pharmaceutical and biotechnology firms, including
SIBIA, are uncertain and involve complex legal and factual questions. In
addition, the coverage claimed in a patent application can be significantly
reduced before the patent is issued or upon reexamination. Consequently, the
Company does not know whether any more of its applications will result in the
issuance of patents or, if any patents are issued, whether they will provide
significant proprietary protection or will be circumvented or invalidated. Since
patent applications in the United States are maintained in secrecy until a
patent issues, and since publication of discoveries in the scientific or patent
literature often lag behind actual discoveries, the Company cannot be certain
that it was the first creator of inventions covered by its pending patent
applications or that it was the first to file patent applications for such
inventions.
The success of the Company will also depend in part on SIBIA not infringing
patents issued to competitors and not breaching the technology licenses upon
which any Company compounds or processes are based. It is uncertain whether any
third-party patents will require the Company to alter its technologies,
compounds or processes, obtain licenses or cease certain activities. A number of
pharmaceutical companies, biotechnology companies, universities and research
institutions have filed patent applications or received patents in the field in
which the Company is involved. Some of these applications or patents may be
competitive with the Company's applications or conflict in certain respects with
claims made under the Company's applications. Such conflict could result in a
significant reduction of the coverage of the Company's patents, if issued. In
addition, if patents issued to other companies contain competitive or
conflicting claims and such claims are ultimately determined to be valid, the
Company may be required to obtain licenses to these patents or to develop or
obtain alternative technology. If any licenses are required, there can be no
assurance that the Company will be able to obtain any such license on
commercially favorable or acceptable terms, if at all. The Company's breach of
an existing license or failure to obtain a license to any technology that it may
require to develop and commercialize its compounds would have a material adverse
effect on the Company's business.
Litigation, which could result in substantial costs to the Company, may
also be necessary to enforce any patents issued to the Company or to determine
the scope and validity of third-party proprietary rights. See "Item 3. Legal
Proceedings." Moreover, if competitors of the Company prepare and file patent
applications in the United States that claim technology also claimed by the
Company, the Company may have to participate in interference proceedings
declared by the United States Patent and Trademark Office ("PTO") to determine
priority of invention, which could result in substantial cost to the Company,
even if the eventual outcome is favorable to the Company. Similarly, the Company
may have to participate in opposition proceedings with respect to granted
foreign patents. The Company is aware of a third-party patent application
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that elicited an interference proceeding with one of the Company's patent
applications in the PTO. There can be no assurance that the Company will prevail
in these proceedings. Also, there can be no assurance that the validity of the
Company's patents, if issued, would be upheld by a court of competent
jurisdiction. An adverse outcome in patent prosecution or in litigation with
respect to the validity of any of the Company's patents could subject the
Company to significant liabilities to third parties, require disputed rights to
be licensed from third parties or require the Company to cease using such
technology, any of which could have a material adverse effect on the Company's
business.
In addition, the recombinant Pichia pastoris yeast expression system
developed at SIBIA is protected by several patents that have issued to Phillips
Petroleum. These patents include claims to key Pichia gene regulatory elements,
marker genes and transformation methods that form the basis of the recombinant
expression system. SIBIA retains full rights to the general expression system
protected by these patents but does not have the right to sublicense this
technology. SIBIA has filed numerous applications and has been granted eight
U.S. patents and two foreign patents pertaining to Pichia-based recombinant
systems for the production of certain proteins including human epidermal growth
factor, human IGF-1 and aprotinin. SIBIA also has patents in vaccine-related
technology.
In addition to patents, the Company relies on trade secret laws to protect
its technology, especially where patent protection is not believed to be
appropriate or obtainable. Thus, SIBIA relies on protecting its proprietary
technology and processes in part by confidentiality agreements with its
employees, consultants and certain contractors. There can be no assurance that
these agreements will not be breached, that the Company would have adequate
remedies for any breach, or that the Company's trade secrets will not otherwise
become known or be independently discovered by competitors.
COMPETITION
Competition to develop drugs to treat nervous system disorders is intense
and expected to increase as knowledge and interest in the disorders addressed by
the products the Company is seeking to develop increases. The Company's most
significant competitors are pharmaceutical companies and established
biotechnology companies. Smaller companies may also prove to be significant
competitors, particularly through collaborative arrangements with large
pharmaceutical companies. In addition, the Company faces competition from
academic institutions, governmental agencies and other public and private
research organizations which conduct research, seek patent protection, and
establish collaborative arrangements for product and clinical development and
marketing. Furthermore, these companies and institutions compete with the
Company in recruiting and retaining highly qualified scientific and management
personnel.
Many of the Company's competitors have substantially greater financial,
technical and human resources than the Company and have significant products
approved or in development. In addition, many of these competitors have
significantly greater experience than the Company in undertaking preclinical
testing and clinical trials of new pharmaceutical products and in obtaining FDA
approval for products more rapidly than the Company. The Company has not sought
the approval of the FDA for any product based on any of its compounds under
development. Furthermore, if the Company is permitted to commence commercial
sales of products that it may develop, it will also be competing with respect to
manufacturing efficiency and marketing capabilities, areas in which it has no
experience.
Any product that the Company may succeed in developing, and for which it
gains regulatory approval, must then compete for market acceptance and market
share. For certain of the Company's potential products, an important competitive
factor will be the timing of market introduction. Accordingly, the Company
expects that the relative speed with which companies can develop products,
complete the clinical testing and approval processes and supply commercial
quantities of the product to the market will be important competitive factors.
With respect to clinical testing, competition may delay progress by limiting the
number of clinical investigators and patients available to test the Company's
potential products.
In addition to the above factors, competition is based on product efficacy
and safety, the timing and scope of regulatory approvals, availability of
supply, marketing and sales capability, price, patent position and reimbursement
coverage.
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MANUFACTURING
The Company currently has no manufacturing facilities for clinical or
commercial production of any compounds currently under development or the
manufacture and distribution of products that may be developed. The Company is
currently relying on third-party manufacturers to produce its compounds for pre-
clinical and clinical purposes. Furthermore, the compounds under development by
the Company have never been manufactured on a commercial scale and may not be
able to be manufactured at a cost or in quantities to make commercially viable
products.
The Company intends to establish arrangements with third-party
manufacturers to supply compounds for preclinical and clinical trials and
commercial sales of products that may be developed, as well as for the
packaging, labeling and distribution of such products. If the Company is unable
to contract for a sufficient supply of its compounds on acceptable terms, the
Company's preclinical and clinical testing schedule would be delayed, resulting
in the delay of submission of products for regulatory approval and initiation of
new development programs, which would have a material adverse effect on the
Company's business. If the Company should encounter delays or difficulties in
establishing relationships with manufacturers to produce, package and distribute
products that it may develop, market introduction or penetration of such
products would be adversely affected.
SALES AND MARKETING
The commercialization of products, such as those that may be developed by
the Company, is an expensive and time-consuming process. The Company has no
experience in sales, marketing or distribution. In order to market directly any
products that the Company may develop, the Company must develop a marketing and
sales force with technical expertise and supporting distribution capability.
Alternatively, the Company may seek to obtain the assistance of a pharmaceutical
or biotechnology company with a large distribution system and a large direct
sales force.
GOVERNMENT REGULATION
The manufacturing and marketing of pharmaceutical products in the United
States requires the approval of the FDA under the federal Food, Drug and
Cosmetic Act. Similar approvals by the comparable agencies are required in most
foreign countries. The FDA has established mandatory procedures and safety
standards that apply to the pre-clinical and clinical testing, manufacture and
marketing of pharmaceutical products. Obtaining FDA approval for a new
therapeutic takes several years and involves substantial expenditures.
Pharmaceutical manufacturing facilities are also regulated by state, local and
other authorities.
As an initial step in the FDA regulatory approval process, pre-clinical
studies are typically conducted in animal models to assess a drug's efficacy and
to identify potential safety problems. The results of these studies are
submitted to the FDA as part of an IND, which is filed to comply with FDA
regulations prior to beginning clinical trials.
Clinical trials are typically conducted in three sequential phases, but the
phases may overlap. In Phase 1, the initial introduction of the drug into
healthy human subjects, the drug is tested for safety (adverse effects), dosage
tolerance, metabolism, distribution, excretion and pharmacodynamics (clinical
pharmacology). Phase 2 involves studies in a limited patient population to (i)
assess the potential of the drug for specific, targeted indications; (ii)
evaluate dosage tolerance and optimal dosage; and (iii) identify possible
adverse effects and safety risks. When a compound is found to be effective and
to have an acceptable safety profile in Phase 2 evaluations, Phase 3 trials are
undertaken to further evaluate clinical efficacy and to further test for safety
within an expanded patient population at geographically dispersed clinical study
sites. Data from clinical trials are submitted to the FDA in a New Drug
Application ("NDA") or Product License Application ("PLA"). Preparing an NDA or
PLA involves considerable data collection, verification, analysis and expense.
The testing and approval process requires substantial time and effort and
there can be no assurance that any approval will be granted on a timely basis,
if at all. The time period required for NDA review and approval may be affected
by a number of factors, including the severity of the disease, the availability
of alternative
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treatments and the risks and benefits demonstrated in clinical trials.
Additional animal studies or clinical trials may be requested during the FDA
review period. The FDA may ask one of its advisory committees to aid in its
assessment of the drug. All of these factors may delay marketing approval. The
FDA may also require post-marketing testing to monitor for adverse effects,
which can involve significant expense. FDA approval is limited to specified
indications. Moreover, the product label and promotional labeling and
prescription drug advertising are highly regulated by the FDA under the federal
Food, Drug and Cosmetic Act. In order to permit promotion of the approved
product for indications not included in the scope of the original approval,
further clinical trials and FDA approval may be necessary.
NDA approval requires, among other things, that the prospective
manufacturer's quality control and manufacturing procedures conform to Good
Manufacturing Practices ("GMP") regulations. All manufacturing facilities,
whether foreign or domestic, may be subjected to a pre-NDA approval inspection.
Additionally, domestic manufacturing facilities are subject to biennial FDA
inspections and foreign manufacturing facilities are subject to periodic
inspection by foreign regulatory authorities as well as by the FDA where the FDA
has a reciprocal inspection agreement with the foreign regulatory authorities.
For clinical investigation and marketing outside the United States, the
Company also is subject to foreign regulatory requirements governing clinical
trials and marketing approval for drugs. The requirements governing the conduct
of clinical trials, product licensing, pricing and reimbursement vary widely
from country to country. The Company's approach to the European regulatory
process involves the identification of respected clinical investigators in the
member states of the European Union ("EU") to conduct clinical studies. The
Company intends to design these studies to meet both FDA and EU standards.
Provided regulatory harmonization is finalized in the EU, these studies are
designed to develop a regulatory package sufficient for multi-country approval
in the Company's European target markets without the need to duplicate studies
for individual country approvals. This approach also takes advantage of
regulatory requirements in some countries, such as in the United Kingdom, which
allow Phase 1 studies to commence after appropriate toxicology and preclinical
pharmacology studies but prior to formal regulatory approval.
HUMAN RESOURCES
As of December 31, 1998, the Company had 122 employees, 39 of whom hold
Ph.D. degrees. 109 employees are engaged in, or directly support, research and
development. The Company's employees are not covered by a collective bargaining
agreement and the Company considers its relations with its employees to be
excellent.
RISK FACTORS
Absence of Developed Products; Early Stage of Development. SIBIA is an
early stage biotechnology company. The Company has no products available for
sale and does not expect to have any products resulting from its research
efforts, including its collaborations with others, commercially available for at
least several years, if at all. SIBIA has commenced clinical trials on two of
its compounds (SIB-1508Y and SIB-1553A) currently under research and
development, but no clinical trials have commenced by the Company's
collaborative partners for any compound in connection with their collaborations
with the Company. Even though Phase 2 clinical trials with respect to SIB-1508Y
and SIB-1553A have commenced, both may prove to be ineffective in the treatment
of neural disorders, or have undesirable or unintended side effects or other
characteristics that prevent or limit their commercial use, either of which
could have a material adverse effect on the Company's business. Furthermore,
there can be no assurance that any products will be successfully discovered or
developed by the Company or its collaborative partners, be approved for clinical
trials, prove to be safe and efficacious in clinical trials, meet applicable
regulatory standards, be capable of being produced in commercial quantities at
acceptable costs or be marketed successfully. The failure of the Company or its
collaborative partners to discover or develop commercially viable products or
successfully market such products would have a material adverse effect on the
Company's business.
The Company's area of therapeutic focus, disorders of the nervous system,
is not thoroughly understood and there can be no assurance that the compounds
the Company is seeking to develop will prove to be safe and
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effective in treating nervous system disorders. The development of such
compounds will require the commitment of substantial resources to continue
research and to conduct the pre-clinical development and clinical trials
necessary to bring such compounds to market and to establish production and
marketing capabilities. Drug research, discovery and development by nature are
uncertain. There is a risk of delay or failure at any stage, and the time
required and cost involved in successfully accomplishing the Company's
objectives cannot be predicted. Actual drug research, discovery and development
costs could exceed budgeted amounts, which could have a material adverse effect
on the Company's business.
Dependence on Collaborative Relationships. The Company's strategy for the
development, clinical testing, manufacturing and commercialization of certain of
its compounds includes entering into various collaborations with corporate
partners, licensors, licensees and others.
The Company's collaborators have received from SIBIA certain exclusive
rights to commercialize any products developed under their respective
agreements. These collaborators have generally agreed to fund the research and
development of compounds discovered under their respective agreements, conduct
clinical testing of lead compounds, prepare and file submissions for regulatory
approval, make milestone payments to SIBIA upon the achievement of certain goals
and pay royalties on any resulting products. Under its agreements with these
collaborators, the Company is restricted in its ability to conduct research with
third parties with respect to the technology subject to the respective agreement
until its collaborative research is complete. The amount and timing of resources
dedicated by these collaborators under their respective agreements also is not
within the control of the Company. There can be no assurance that the Company
will ever receive any milestone or royalty payments under these agreements. In
addition, if products that may be developed under such agreements are approved
for marketing, any revenues to the Company from such products will be dependent
on the marketing and sales efforts of these collaborators.
Each of the collaborative parties has the right to terminate its respective
collaboration under certain circumstances, including upon the occurrence of a
material breach and, in certain cases, upon a change in control. There can be no
assurance that the Company's relationships with its collaborative partners will
not be terminated or that the Company will be able to enter into additional
collaborations in the future. In addition, there can be no assurance that
collaborators will not pursue alternative technologies to develop treatments for
the diseases targeted by the respective collaborative programs. If any of the
Company's collaborative partners terminates or breaches its agreement with the
Company or fails to devote adequate resources to or to conduct in a timely
manner its collaborative activities, the research program under the applicable
collaborative agreement or the development and commercialization of drug
candidates subject to such collaboration would be materially adversely affected,
which would have a material adverse effect on the Company's business. In
addition, because the Company's collaborative agreements have accounted for 93%,
95%, 97% of total revenues for the years ended December 31, 1998, 1997 and 1996,
respectively, such a termination or breach could materially adversely affect the
Company's results of operations and financial condition. Also, there can be no
assurance that a research program covered by a particular collaborative
agreement does not or will not conflict with any research programs covered by
the Company's other collaborations. The occurrence of any such conflict could
have a material adverse effect on the Company's business.
A key element of the Company's strategy is to enter into additional
collaborative arrangements with pharmaceutical and biotechnology companies to
develop and commercialize its drug candidates. There can be no assurance that
the Company will be able to negotiate collaborative arrangements in the future
on acceptable terms, if at all, or that such collaborative arrangements will be
successful. Most of the Company's competitors similarly are seeking to develop
or expand their collaborative relationships with pharmaceutical and
biotechnology companies, which could adversely impact the Company's ability to
enter into additional collaborative arrangements. To the extent that the Company
is not able to establish such arrangements or any of its existing arrangements
are terminated, it would require significant capital to undertake development,
regulatory, manufacturing and marketing activities at its own expense and may be
required to curtail significantly or eliminate one or more of its research,
discovery or development programs, either of which could have a material adverse
effect on the Company's business. In addition, the Company may encounter
significant delays in introducing products that it may develop into certain
markets or may find that the
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development, manufacture or sale of such products in such markets is adversely
affected by the absence of such collaborative arrangements.
New and Uncertain Technology. The Company's proprietary nervous system
discovery technologies, which comprise the human receptor/ion channel subtype
technology and human protease technology, are unproven and relatively new
compared to traditional methods of drug discovery. The Company uses its
technologies to isolate and identify molecular targets that it believes play an
important role in nervous system function and nervous system disorders. The
ability of the Company to screen potential compounds, select product candidates
and develop products is dependent in large part upon the number of such targets
available for screening and whether the expected functionality of such targets
plays an important role in nervous system function and nervous system disorders.
There can be no assurance that the use of such technologies will lead to the
discovery or development of commercial pharmaceutical products that are safe and
efficacious in treating any nervous system disorder. Failure to develop any such
product would have a material adverse effect on the Company's business.
History of Operating Losses. The Company is at an early stage of
development with respect to its nervous system technologies and its compounds.
Except for 1995, the Company has incurred net losses every year since it shifted
its area of therapeutic focus to the central nervous system in 1991. As of
December 31, 1998, the Company had an accumulated deficit of approximately $45.1
million. The Company's revenue for the short term will be limited to payments
under its existing or future strategic alliance agreements. There can be no
assurance that the Company will ever achieve or sustain significant revenues or
profitable operations. To achieve significant revenues or profitable operations,
the Company, alone or with its collaborators, must successfully develop,
manufacture and market safe and efficacious products and obtain the regulatory
approvals required for their testing, manufacture and sale. Failure to achieve
significant revenues or profitable operations could impair the Company's ability
to sustain operations. There can be no assurance that the Company will be
successful in entering into additional collaborative arrangements or that any
such arrangements will result in revenues or that the Company will receive
additional revenues under existing collaborative arrangements. The Company has
not yet received any revenues from the achievement of milestones from the
discovery or development of, or royalties from the sale of, commercial drugs by
Lilly, Novartis, Bristol-Myers Squibb or Meiji, and such revenues, if any, are
not expected to represent a material amount of the Company's total revenues for
several years, if at all.
Future Capital Needs; Uncertainty of Additional Funding. The Company will
require substantial additional funds to conduct the research and development and
pre-clinical and clinical testing of its compounds and to manufacture and market
any products that may be developed. Although the Company plans to contract with
third parties to manufacture and market any products that may be developed, to
the extent the Company is unsuccessful and is required to establish its own
manufacturing capacity or marketing program, it will require substantial
additional capital. The Company's future capital needs will be dependent upon
many factors, including progress in its research and development activities, the
magnitude and scope of these activities, progress with pre-clinical and clinical
trials, the cost of preparing, filing, prosecuting, maintaining, defending and
enforcing patent claims and other intellectual property rights, competing
technological and market developments, changes in or terminations of existing
collaborative arrangements, the establishment of additional collaborative
arrangements and the cost of manufacturing scale-up and development of marketing
activities, if undertaken by the Company. The Company expects to expend
substantial funds in connection with research and development and in the
prosecution and enforcement of its intellectual property rights. Payments under
existing collaborative agreements and the Company's current cash reserves will
be insufficient to fund the Company's operations through the completion of any
clinical trials and commercialization of its first product, if developed.
Although the Company will seek to obtain additional funds through public or
private equity or debt financings, collaborative or other arrangements with
corporate partners or from other sources, there can be no assurance that
additional financing will be available or, if available, that it will be
available on acceptable terms. If additional funds are raised by issuing equity
securities, further dilution to then existing stockholders would result. If
adequate funds are not available, the Company may be required to curtail
significantly or eliminate one or more of its research, discovery or development
programs or obtain funds through additional arrangements with corporate partners
or others which may require the
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Company to relinquish rights to certain of its technologies or product
candidates that the Company would not otherwise relinquish, any of which could
have a material adverse effect on the Company's business.
Intense Competition; Rapid Technological Change. The field in which the
Company is involved is characterized by extensive research efforts, rapid
technological change and intense competition from numerous organizations
including pharmaceutical companies, biotechnology companies, drug discovery
service companies, universities and other research organizations. Technologies,
products and therapies currently exist on the market that would compete directly
with those that the Company is seeking to develop and market. In addition, new
developments occur and are expected to continue to occur at a rapid pace.
Competition from pharmaceutical, biotechnology and drug discovery service
companies is intense and is expected to increase. Many of these companies have
significantly greater financial resources and expertise in research and
development, manufacturing, pre-clinical and clinical testing, obtaining
regulatory approvals and marketing than the Company. Smaller companies may also
prove to be significant competitors, particularly through collaborative
arrangements with large pharmaceutical companies. Many of these competitors have
significant nervous system products approved or in development and operate
large, well-funded nervous system research and development programs. Academic
institutions, governmental agencies and other public and private research
organizations also conduct research, and establish collaborative arrangements
for the clinical development of compounds and marketing of products aimed at
treating nervous system disorders. The Company's competitors may succeed in
discovering and developing products more rapidly or products that are more
effective or more affordable than any that may be developed by the Company and
its collaborative partners, and such competitors may also prove to be more
successful than the Company and its collaborative partners in production and
marketing of such products. There can be no assurance that research, discoveries
or commercial developments by others will not render any of the Company's or its
collaborative partners' programs or potential products obsolete or
noncompetitive, any of which would have a material adverse effect on the
Company's business. Moreover, there can be no assurance that the Company's
competitors will not obtain patent protection or other intellectual property
rights that would limit the Company's or its collaborative partners' ability to
use the Company's technology or commercialize products that may be developed.
Uncertainty Regarding Patents and Proprietary Rights. The Company's success
will depend in part on its ability to obtain patents, maintain trade secrets and
operate without infringing on the proprietary rights of others, both in the
United States and other countries. The patent positions of biotechnology and
pharmaceutical companies can be highly uncertain and involve complex legal and
factual questions, and therefore, the breadth of claims allowed in biotechnology
and pharmaceutical patents cannot be predicted. There can be no assurance that
patents issued to or licensed by the Company will not be infringed or will not
be challenged, invalidated or circumvented, or that the rights granted
thereunder will provide proprietary protection to the Company's technology, to
products that the Company may develop, or to other competitive advantages that
the Company may possess.
SIBIA has 58 pending applications for U.S. patents and 71 pending foreign
applications on its technology relating to drug discovery for various nervous
system disorders. To date, the Company has exclusively licensed twelve U.S.
patents from The Salk Institute related to SIBIA's human receptor/ion channel
subtype technology, including continuations-in-part and foreign counterparts of
these patents. The Company intends to file additional applications as
appropriate for patents covering its technologies, compounds and processes.
There can be no assurance that the Company will develop additional technologies,
compounds or processes that are patentable, that patents will issue from any
patent application, that issued patents will prevail in reexamination or that
claims allowed will be sufficient to protect the Company's technologies,
compounds or processes. Competitors may have filed applications, may have been
issued patents or may obtain additional patents and proprietary rights relating
to technologies, compounds or processes competitive with those of the Company.
The failure by the Company to adequately protect its technologies, compounds or
processes covered by issued patents or to obtain patents based on the
applications referred to herein or any future applications could have a material
adverse effect on the Company's business.
The success of the Company will also depend in part on SIBIA not infringing
patents issued to competitors and not breaching the technology licenses upon
which any Company compounds or processes are
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based. It is uncertain whether any third-party patents will require the Company
to alter its technologies, compounds or processes, obtain licenses or cease
certain activities. A number of pharmaceutical companies, biotechnology
companies, universities and research institutions have filed patent applications
or received patents in the field in which the Company is involved. Some of these
applications or patents may be competitive with the Company's applications or
conflict in certain respects with claims made under the Company's applications.
Such conflict could result in a significant reduction of the coverage of the
Company's patents, if issued. In addition, if patents issued to other companies
contain competitive or conflicting claims and such claims are ultimately
determined to be valid, the Company may be required to obtain licenses to these
patents or to develop or obtain alternative technology. If any licenses are
required, there can be no assurance that the Company will be able to obtain any
such license on commercially favorable or acceptable terms, if at all. The
Company's breach of an existing license or failure to obtain a license to any
technology that it may require to develop and commercialize its compounds would
have a material adverse effect on the Company's business.
Litigation, which could result in substantial economic costs to the Company
and diversion of management and other resources, may also be necessary to
enforce any patents issued to the Company or to determine the scope and validity
of third-party proprietary rights. See "Item 3. Legal Proceedings." Moreover, if
competitors of the Company prepare and file patent applications in the United
States that claim technology also claimed by the Company, the Company may have
to participate in interference proceedings declared by the United States Patent
and Trademark Office ("PTO") to determine priority of invention, which could
result in substantial cost to the Company, even if the eventual outcome is
favorable to the Company. Similarly, the Company may have to participate in
opposition proceedings with respect to granted foreign patents. The Company is
aware of third-party patent applications that may elicit an interference
proceeding with two of the Company's patent applications in the PTO. There can
be no assurance that the Company will prevail in these proceedings. Also, there
can be no assurance that the validity of the Company's patents, if issued, would
be upheld by a court of competent jurisdiction. An adverse outcome in patent
prosecution or in litigation with respect to the validity of any of the
Company's patents could subject the Company to significant liabilities to third
parties, require disputed rights to be licensed from third parties or require
the Company to cease using such technology, any of which could have a material
adverse effect on the Company's business.
In addition to patents, the Company relies on trade secret laws to protect
its technology, especially where patent protection is not believed to be
appropriate or obtainable. Thus, SIBIA relies on protecting its proprietary
technology and processes in part by confidentiality agreements with its
employees, consultants and certain contractors. There can be no assurance that
these agreements will not be breached, that the Company would have adequate
remedies for any breach, or that the Company's trade secrets will not otherwise
become known or be independently discovered by competitors. If the Company is
unable to sufficiently protect its trade secrets, such inability could have a
material adverse effect on the Company's business.
No Assurance of Regulatory Approval; Government Regulation. The production
and marketing of products that the Company may develop and its ongoing research
and development activities are subject to extensive regulation by numerous
governmental authorities in the United States and other countries. Prior to
marketing in the United States, any drug developed by the Company must undergo
rigorous pre-clinical and clinical testing and an extensive regulatory approval
process implemented by the FDA under the federal Food, Drug and Cosmetic Act. To
market products abroad, the Company also would be subject to foreign regulatory
requirements, implemented by foreign health authorities, governing clinical
trials and marketing approval for drugs. Satisfaction of such regulatory
requirements, which includes demonstrating to the satisfaction of the FDA that
the product is both safe and effective, typically takes several years or more
depending upon the type, complexity and novelty of the product and requires the
expenditure of substantial resources. Pre-clinical studies must be conducted, as
appropriate, in conformance with the FDA's good laboratory practice regulations.
Clinical trials will be vigorously regulated and must meet requirements for
institutional review board oversight and informed consent as well as FDA review
and oversight and under good clinical practice regulations. The Company has no
experience in developing a product through the clinical trial process, which is
necessary to obtain regulatory approval. The Company intends to establish
collaborative relationships to conduct clinical trials and seek regulatory
approvals to market products that it may develop, although there
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can be no assurance that such approvals will be received on a timely basis, if
at all. Clinical trials require the recruitment of large numbers of test
subjects, particularly for products that are intended to treat nervous system
disorders. There can be no assurance that those conducting clinical trials for
the Company will be able to initiate such trials at preferred clinical test
sites or recruit sufficient test subjects, or that such trials will be started
or completed successfully within any specified time period, if at all, with
respect to any of the products that the Company may develop. Furthermore, the
Company or the FDA may suspend clinical trials at any time if it is determined
that the subjects participating in such trials are being exposed to unacceptable
health risks. There can be no assurance that the Company will not encounter
problems in clinical trials which would cause the Company or the FDA to delay or
suspend clinical trials. Any such delay or suspension could have a material
adverse effect on the Company's business. There can be no assurance that any
compound that may be developed by the Company alone or in conjunction with
others will prove to be safe and efficacious in clinical trials and meet all of
the applicable regulatory requirements needed to receive marketing approval. If
regulatory approval of a product is granted, such approval will be limited to
those disease states and conditions for which the product is useful, as
demonstrated through clinical studies. The failure to obtain marketing approval
for any drug candidate could have a material adverse effect on the Company's
business.
There can be no assurance that delays or rejections will not be encountered
based upon additional government regulation from future legislation or
administrative action or that changes will not be made in FDA policy during the
period of product development and FDA regulatory review of each submitted new
drug application. Similar delays may also be encountered in foreign countries.
Furthermore, product approval may entail ongoing requirements for post-marketing
studies. Even if such regulatory approval is obtained, a marketed product, its
manufacturer and its manufacturing facilities are subject to continual review
and periodic inspections, and the regulatory standards for manufacturing are
currently being applied stringently by the FDA. Later discovery of previously
unknown problems with a product, a manufacturer or its facility may result in
restrictions on such product or manufacturer, including withdrawal of the
product from the market, which would have a material adverse effect on the
Company's business.
Reliance on Third-Party Manufacturers. The Company currently has no
manufacturing facilities for clinical or commercial production of any compounds
currently under development or marketing capability for the distribution of any
products that may be developed. The Company is currently relying on third-party
manufacturers to produce its compounds for pre-clinical and clinical purposes.
The Company's only compounds in human clinical trials, SIB-1508Y and SIB-1553A,
have never been manufactured on a commercial scale and there can be no assurance
that such compounds, or any other compounds the Company or its collaborators may
develop, can be manufactured at a cost or in quantities to make commercially
viable products.
The Company intends to establish additional arrangements with third-party
manufacturers to supply compounds for pre-clinical and clinical trials and
commercial sales of products that may be developed, as well as for the
packaging, labeling and distribution of such products. If the Company is unable
to contract for a sufficient supply of its compounds on acceptable terms, the
Company's pre-clinical and clinical testing schedule would be delayed, resulting
in the delay of submission of compounds for regulatory approval and initiation
of new development programs, which would have a material adverse effect on the
Company's business. If the Company should encounter delays or difficulties in
establishing relationships with manufacturers to produce, package and distribute
products that the Company may develop, market introduction or penetration of
such products would be adversely affected. Moreover, third-party manufacturers
that the Company may use must adhere to good manufacturing practice regulations
enforced by the FDA through its facilities inspection program. If facilities of
third-party manufacturers cannot pass a pre-approval plant inspection, the FDA
approval of products that may be developed by the Company will be adversely
affected.
Year 2000. As many computer systems and other equipment with embedded chips or
processors use only two digits to represent the year, they may be unable to
process accurately certain data before, during or after the year 2000. As a
result, internal systems of the Company and its suppliers and vendors are at
risk for possible miscalculations or systems failures causing disruptions in
their business operations. This is commonly known as the Year 2000 ("Y2K")
issue. The Company's efforts to address the Y2K issue are described in
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more detail in "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations."
Management of Growth; Dependence on Key Personnel; Need to Attract and
Retain Key Employees and Consultants. To expand its research and development
programs and pursue its product development plans, the Company will be required
to hire additional qualified scientific personnel to perform research and
development, as well as personnel with expertise in clinical testing and
government regulation. These requirements are also expected to necessitate the
addition of management personnel and the development of additional expertise by
existing management personnel. The failure to attract such personnel or to
develop or acquire such expertise would have a material adverse effect on the
Company's business. As part of this growth, the Company will be required to
enter into additional collaborative arrangements and successfully manage these,
along with its current, collaborative arrangements. To the extent the Company
does not enter into collaborative agreements with third parties, it will also be
required to hire manufacturing and marketing personnel. If the Company is unable
to manage its growth effectively, the Company's business would be materially
adversely affected.
The Company is highly dependent on the principal members of its scientific
and management staff, and the loss of any of these members might significantly
delay the achievement of the Company's development objectives. The Company does
not maintain "key man" insurance on any of its employees, nor does the Company
intend to secure such insurance. In addition, the Company relies on consultants
and advisors, including its scientific advisors, to assist the Company in
formulating its research and development strategy. Retaining and attracting
qualified personnel, consultants and advisors will be critical to the Company's
success. The Company faces competition for qualified individuals from numerous
pharmaceutical and biotechnology companies, universities and other research
institutions. There can be no assurance that the Company will be able to attract
and retain such individuals on acceptable terms or at all. The failure to
attract or retain such personnel would have a material adverse effect on the
Company's business.
Control by Principal Stockholders; Anti-Takeover Provisions. The Salk
Institute and its affiliates beneficially owned approximately 19.6% of the
outstanding shares of Common Stock of SIBIA as of January 31, 1999. In addition,
as of January 31, 1999, the present directors and executive officers of the
Company beneficially owned approximately 8.2% of the outstanding shares of
Common Stock. Accordingly, together with The Salk Institute, the present
directors and executive officers of the Company have the ability to exercise
substantial influence over the outcome of most stockholders' actions. Moreover,
the Company's Certificate of Incorporation does not provide for cumulative
voting with respect to the election of directors. Consequently, the present
directors and executive officers, together with The Salk Institute, are able to
exercise substantial influence over the election of the members of the Board of
Directors. Such concentration of ownership could have an adverse effect on the
price of SIBIA's Common Stock. In addition, the Company's Certificate of
Incorporation provides that any action required or permitted to be taken by
stockholders of the Company must be effected at a duly called annual or special
meeting of stockholders and may not be effected by any consent in writing.
Special meetings of the stockholders of the Company may be called only by the
Chairman of the Board of Directors, the President of the Company, by the Board
of Directors pursuant to a resolution adopted by a majority of the total number
of authorized directors, or by the holders of 10% of the outstanding voting
stock of the Company. Moreover, the Company's Certificate of Incorporation and
Bylaws provide for a classified Board of Directors and eliminate the ability of
stockholders to remove a director without cause. The Company's Certificate of
Incorporation and Bylaws also require that the holders of at least 66 2/3% of
the voting stock of the Company must approve any amendment to either the
Certificate of Incorporation or Bylaws affecting certain provisions, including
the provisions described above. These provisions may have the effect of making
hostile takeovers of the Company more difficult, but may also render more
difficult the accomplishment of mergers or the assumption of control by a
principal stockholder because they make it more difficult to remove the
Company's management. In addition, the Board of Directors has the authority,
without action by stockholders, to issue additional shares of Common Stock and
to fix the rights and preferences of and issue shares of Preferred Stock, either
of which may have the effect of delaying or preventing a change in control of
the Company.
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Further, the Company has issued rights (the "Rights") to the holders of its
Common Stock to purchase a specified class of Preferred Stock of the Company
pursuant to a Preferred Share Purchase Rights Plan (the "Rights Plan"). Although
the Rights Plan will not prevent a takeover of the Company, it may discourage
abusive and coercive takeover tactics that result in a rapid, forced sale of the
Company at a lower price than might otherwise be obtainable. The existence of a
Rights Plan may confront the Board of Directors with difficult decisions with
respect to redemption or amendment of the outstanding Rights. In addition, once
a hostile bidder crosses a certain threshold, the Rights become non-redeemable
and the Board of Directors' ability to enter into a negotiated acquisition would
be impaired. There can be no assurance that the Rights Plan will maximize
shareholder value. Furthermore, there can be no assurance that the Rights Plan
will not discourage potential bidders from attempting to gain control of the
Company. The foregoing charter provisions as well as other charter provisions,
the rights of first refusal in favor of the Company, the Rights Plan and certain
provisions of Delaware law may discourage certain types of transactions
involving an actual or potential change in control of the Company or its
management (including transactions in which stockholders might otherwise receive
a premium for their shares over then current prices) and may limit the ability
of stockholders to remove current management of the Company or approve
transactions that stockholders may deem to be in their best interests.
In addition, certain of the Company's collaborative partners have the right
to terminate their respective agreements with the Company upon certain changes
in control of the Company, which may discourage acquisitions or other changes in
control (including those in which stockholders of the Company might otherwise
receive a premium for their shares over then current market prices).
Product Liability Exposure and Uninsured Risks. The testing of compounds
and the marketing and sale of commercial pharmaceutical products involves
unavoidable risks. The use of any of the Company's compounds or its
collaborative partners' compounds in clinical trials and the sale of any
products that may be developed may expose the Company to potential liability
resulting from the use of such compounds or products. Such liability might
result from claims made directly by consumers or by regulatory agencies,
pharmaceutical companies or others using or selling such compounds or products.
The Company has obtained insurance coverage for its current clinical trials. The
Company intends to seek additional insurance coverage if and when it develops
products that are ready to be commercialized. There can be no assurance that the
Company will be able to obtain or maintain product liability insurance in the
future on acceptable terms or that, if obtained, the insurance coverage will be
sufficient to cover any potential claims or liabilities. The inability of the
Company to obtain product liability coverage in amounts sufficient to cover any
damages resulting from a product liability claim could have a material adverse
effect on the Company's business.
Hazardous Materials. The Company's research and development involves the
controlled use of hazardous materials, chemicals and various radioactive
compounds. Although the Company believes that its safety procedures for storing,
handling and disposing of such materials comply with the standards prescribed by
state and federal regulations, the risk of accidental contamination or injury
from these materials cannot be completely eliminated. In the event of such an
accident, the Company could be held liable for any resulting damages, which
could have a material adverse effect on the Company's business.
Possible Volatility of Stock Price. The market prices for securities of
biopharmaceutical and biotechnology companies, including that of SIBIA,
historically have been highly volatile, and the market from time to time has
experienced significant price and volume fluctuations that are unrelated to the
operating performance of such companies. Factors that may have a significant
impact on the market price and marketability of the Company's Common Stock
include: announcements of technological innovations or new commercial
therapeutic products by the Company, its collaborative partners or the Company's
present or potential competitors; announcements by the Company or others of
results of preclinical testing and clinical trials; developments or disputes
concerning patent or other proprietary rights; developments in the Company's
relationships with its existing or future collaborative partners; acquisitions;
litigation; adverse legislation; changes in governmental regulation, third party
reimbursement policies, or the status of the Company's regulatory approvals or
applications; changes in earnings; changes in securities analysts'
recommendations; changes in health care policies and practices; economic and
other external factors; and period-to-period fluctuations in financial results
of the Company and general market conditions. Fluctuations in the trading
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<PAGE> 155
price or liquidity of the Company's Common Stock may adversely affect the
Company's ability to raise capital through future equity financing, which could
have a material adverse effect on the Company's business.
ITEM 2. PROPERTIES
The Company's facilities are located in La Jolla, California. The Company
leases approximately 53,526 square feet of space used for laboratory and
administrative purposes of which approximately 10,792 square feet is sublet.
SIBIA believes that its present facility will be adequate to conduct its
research activities through December 2006, when its current lease, including
available option terms, expires. Management believes that it will be able to
secure additional space at commercially reasonable rates during the terms of
such lease, if necessary.
ITEM 3. LEGAL PROCEEDINGS
On July 9, 1996, the Company filed an action for patent infringement
against Cadus Pharmaceutical Corporation ("Cadus") in the United States District
Court for the Southern District of California. The complaint asserted that
Cadus' assay technology infringes the Company's United States Patent No.
5,401,629 (the "'629 Patent"), entitled "Assay Methods and Compositions Useful
for Measuring the Transduction of an Intercellular Signal." The Company sought
damages in an unspecified amount and injunctive relief in the complaint.
Cadus responded by asserting that the '629 Patent and the Company's United
States Patent No. 5,436,128 (the "'128 Patent"), entitled "Assay Methods and
Compositions for Detecting and Evaluating the Intercellular Transduction of an
Extracellular Signal," are invalid, unenforceable and not infringed, and further
asserting claims for intentional interference with prospective economic
advantage and unfair competition. Cadus sought declaratory relief and
compensatory and punitive damages against the Company. On August 3, 1998, the
Court granted summary judgment for the Company on Cadus' counterclaims. Cadus
subsequently dismissed its counterclaim alleging invalidity and unenforceability
of the '128 Patent.
On December 18, 1998, the jury returned a verdict in favor of the Company,
finding that the '629 Patent is valid and enforceable and awarding the Company
damages in the amount of $18 million to compensate the Company for Cadus' past
direct and indirect infringement of the '629 Patent. On January 29, 1999, the
Court granted the Company's request for a permanent injunction preventing Cadus,
and all persons acting in concert or otherwise participating with Cadus from
practicing the methods claimed in the '629 Patent.
On February 26, 1999, the Court denied Cadus' request to decrease the
amount of damages awarded by the jury and to order a new trial.
On March 10, 1999, the Court confirmed the jury's verdict in all respects
and entered judgment in favor of the Company. On March 23, 1999, Cadus posted
security for the judgment in the amount of $18,500,000. On March 25, 1999, Cadus
filed a notice of appeal from the judgment.
The Company has recently been notified that the Patent & Trademark Office
has granted a request for reexamination of the '629 Patent. The Company's
management intends to vigorously defend the '629 Patent in that proceeding.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's Security holders
during the fourth quarter of the year ended December 31, 1998.
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<PAGE> 156
PART II
ITEM 5. MARKET FOR THE REGISTRANTS' COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's Common Stock commenced trading on the Nasdaq National Market
under the symbol "SIBI" on May 9, 1996. The following table sets forth, for the
periods indicated, the high and low sales prices per share of the Common Stock
as reported on the Nasdaq National Market:
<TABLE>
<CAPTION>
HIGH LOW
---- ---
<S> <C> <C>
1998
Fourth Quarter.............................................. $6 3/4 $3
Third Quarter............................................... 5 1/4 2 1/2
Second Quarter.............................................. 7 3/4 4 7/8
First Quarter............................................... 7 1/4 5
1997
Fourth Quarter.............................................. $9 $5 5/8
Third Quarter............................................... 9 1/8 6
Second Quarter.............................................. 9 5 1/4
First Quarter............................................... 9 1/2 7 1/2
</TABLE>
The last reported sale price of the Common Stock on the Nasdaq National
Market on January 29, 1999 was $5.50. As of January 29, 1999, there were
approximately 900 stockholders of record of the Company's Common Stock. To date,
the Company has not paid any dividends on its Common Stock.
ITEM 6. SELECTED FINANCIAL DATA
The following table summarizes certain selected financial data for each of
the five years in the period ended December 31, 1998. The information should be
read in conjunction with the financial statements included elsewhere in this
report.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Total revenue..................... $ 7,043 $ 11,197 $ 8,481 $ 10,448 $ 4,852
Research and development
expenses........................ $ 18,247 $ 15,819 $ 12,268 $ 8,949 $ 8,663
Net income (loss)................. $(15,807) $ (7,593) $ (5,564) $ 2,926 $ (27)
Basic net income (loss) per common
share........................... $ (1.68) $ (0.82) $ (0.73) $ 0.60
Diluted net income (loss) per
common share.................... $ (1.68) $ (0.82) $ (0.73) $ 0.47
Shares used in computing basic net
income (loss) per common
share........................... 9,421 9,248 7,596 4,893
Shares used in computing diluted
net income (loss) per common
share........................... 9,421 9,248 7,596 6,164
BALANCE SHEET DATA:
Cash, cash equivalents and
investment securities........... $ 17,187 $ 33,347 $ 37,464 $ 16,488 $ 5,944
Working capital................... $ 13,662 $ 31,214 $ 35,324 $ 14,338 $ 4,523
Total assets...................... $ 21,199 $ 36,180 $ 39,983 $ 18,251 $ 8,005
Long-term debt, less current
portion......................... $ 1,350 $ 695 $ 519 $ 721 $ 860
Accumulated deficit............... $(45,093) $(29,286) $(21,693) $(16,129) $(19,055)
Total stockholders' equity...... $ 21,199 $ 32,214 $ 36,572 $ 15,107 $ 5,166
</TABLE>
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<PAGE> 157
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
SIBIA, incorporated in Delaware in 1981, was established by The Salk
Institute. Through 1990, SIBIA successfully developed several proprietary
life-sciences technologies in collaboration with corporate partners. In 1987,
SIBIA initiated research in the neuroscience field and in 1991 shifted its focus
completely to the development of novel therapeutics to treat nervous system
disorders.
The Company receives contract revenue and license and royalty revenue.
Contract revenue includes payments for research to support a specified number of
the Company's scientists and payments upon the achievement of specified research
and drug development milestones. Research contracts are generally conducted on a
best efforts basis. Contract revenue is recognized as the research is performed
using the percentage-of-completion method of accounting, primarily based on
contract costs incurred to date compared with total estimated costs at
completion. Revenue related to milestones is recognized upon the achievement of
the related milestone and when collection is probable. License revenue is
recognized when earned as generally evidenced by certain factors including:
receipt of such fees, satisfaction of any performance obligations and the
non-refundable nature of such fees. Royalty revenue is recognized when earned
and collection is probable.
Research and development costs are expensed as incurred and include costs
associated with collaborative agreements. These costs consist of direct and
indirect costs related to specific projects as well as fees paid to other
entities which conduct certain research activities on behalf of the Company.
The Company has no products available for sale and does not expect to have
any products resulting from its research efforts, including its collaborations
with others, commercially available for at least several years, if at all.
Except for 1995, the Company has incurred net losses every year since shifting
its area of therapeutic focus to the central nervous system in 1991. The Company
expects that its revenue and other income for the next several years will
fluctuate significantly on a quarterly and annual basis and will be limited to
payments under its collaborative relationships, license fees, interest income
and other miscellaneous income.
During the years ended December 31, 1998, 1997, and 1996, the Company had
three, four and three collaborative research agreements that accounted for 93%,
95% and 97%, respectively, of total revenue.
As of December 31, 1998, the Company had an accumulated deficit of
approximately $45,093,000. To date, the Company's operations have been funded
primarily through equity financings, research contracts, option and license and
royalty revenues. In addition, SIBIA received funds from the sale of its
interest in a corporate joint venture in 1994 and from the settlement of certain
litigation in 1995, with which it has purchased investment securities and which
it has used to finance its operations.
RESULTS OF OPERATIONS
Years Ended December 31, 1998 and 1997
Total revenue decreased by 37%, to $7,043,000 in 1998 from $11,197,000 in
1997. The decrease was due primarily to one-time license fees of $3,000,000
recognized in 1997 related to the Company's agreement with Meiji for the
development of SIB-1508Y, SIBIA's lead compound for Parkinson's disease, and the
completion of the Company's research programs under its collaborations with Eli
Lilly and Novartis in October 1997 and September 1998, respectively.
Total expenses increased by 22%, to $25,587,000 in 1998 from $20,965,000 in
1997. The increase in total expenses was primarily attributable to increases in
both research and development and general and administrative expenses. Research
and development expenses increased 15%, to $18,247,000 in 1998 from $15,819,000
in 1997. This was primarily the result of expanded programs in drug discovery
including psychiatric disorders, chronic pain, neuroprotection and apoptosis and
for expenses associated with clinical trials. The Company's two compounds under
development are SIB-1508Y, currently in Phase 2 clinical studies for Parkinson's
disease, and SIB-1553A, currently in Phase 2 clinical studies for Alzheimer's
disease. General and administrative expenses increased 43%, to $7,340,000 in
1998 from $5,146,000 in 1997. The
28
<PAGE> 158
increase in general and administrative expenses was primarily due to increased
legal fees related to the Company's ongoing patent litigation with Cadus
Pharmaceutical Corporation. In December 1998, SIBIA was awarded an $18.0 million
jury verdict that has been appealed by Cadus.
Other income increased by 26%, to $2,737,000 in 1998 from $2,175,000 in
1997. The increase in other income was due primarily to the net effect of gains
on the sale of equity securities which were partially offset by decreased
interest income as a result of lower average cash and investment balances
carried in 1998.
Years Ended December 31, 1997 and 1996
Total revenue increased by 32%, to $11,197,000 in 1997 from $8,481,000 in
1996. The increase was due primarily to one-time license fees of $3,000,000
recognized in 1997 related to the Company's agreement with Meiji for the
development of SIB-1508Y, SIBIA's lead compound for Parkinson's disease.
Total expenses increased by 32%, to $20,965,000 in 1997 from $15,829,000 in
1996. The increase in total expenses was primarily attributable to an increase
in research and development expenses of 29%, to $15,819,000 in 1997 from
$12,268,000 in 1996. This was primarily the result of expanded programs in drug
discovery and for expenses associated with clinical trials of SIB-1508Y. General
and administrative expenses increased 45%, to $5,146,000 in 1997 from $3,561,000
in 1996. The increase in general and administrative expenses was primarily due
to increased legal fees related to various patent and litigation matters, the
payment, in 1997, of foreign taxes related to payments received under the Meiji
agreement and costs associated with a proposed secondary offering of the
Company's common stock, which offering was withdrawn by the Company in February
1998 due to market conditions.
Other income increased by 22%, to $2,175,000 in 1997 from $1,784,000 in
1996. The increase in other income was due primarily to an increase in interest
income earned on proceeds from the Company's initial public offering of Common
Stock in May 1996.
LIQUIDITY AND CAPITAL RESOURCES
SIBIA has financed its operations primarily through equity financings,
research contracts (generally conducted on a best efforts basis) and option,
license and royalty revenues. Since 1991, the Company has received approximately
$41,775,000 in net proceeds from the sale of Convertible Preferred Stock and
Common Stock to investors and collaborative partners and approximately
$54,979,000 in contract, license and royalty revenue. The Company is entitled to
receive additional payments under the collaborative agreements in the form of
contract revenue, milestone payments, if milestones are achieved, and royalties,
if products are commercialized. As of December 31, 1998, the Company had an
accumulated deficit of $45,093,000.
The Company believes its proprietary drug discovery platform will lead to
corporate collaboration and licensing opportunities which may generate future
revenues in the form of license fees, milestone payments and/or royalties.
The Company anticipates that the cash, cash equivalents and investment
securities balance of $17,187,000 as of December 31, 1998 will be sufficient to
support continued research and development of its technologies and fund other
general and administrative expenditures through 1999.
The Company leases laboratory and office facilities under an agreement
expiring on December 31, 2001. The average minimum annual payment under the
lease is approximately $1,518,000, before consideration of sublease income. The
Company believes that its present facility will be adequate to conduct its
research activities through December 2001. Management believes that it should be
able to secure additional space at commercially reasonable rates, if necessary.
The Company has an option to extend its lease for an additional five years.
Since 1991, the Company has invested $5,735,000 in property and equipment.
Included within this amount is $4,651,000 of equipment under capital leases and
equipment notes payable. The net present value of obligations under such capital
leases as of December 31, 1998 was $2,075,000.
The Company's future capital needs will be dependent upon many factors,
including progress in its research and development activities, the magnitude and
scope of these activities, progress with pre-clinical and
29
<PAGE> 159
clinical trials, the cost of preparing, filing, prosecuting, maintaining,
defending and enforcing patent claims and other intellectual property rights,
competing technological and market developments, changes in or terminations of
existing collaborative arrangements, the establishment of additional licensing
and/or collaborative arrangements, and the cost of manufacturing scale-up and
development of marketing activities, if undertaken by the Company. The Company
intends to seek additional funding through research and development
relationships with suitable corporate collaborators or through public or private
financing. There can be no assurance that the Company will be successful in its
efforts to collaborate with additional partners or that additional financing
from other sources will be available on favorable terms, if at all.
Payments under existing collaborative agreements and the Company's current
cash reserves will be insufficient to fund the Company's operations through the
completion of any clinical trials and commercialization of its first product, if
developed. Although the Company will seek to obtain additional funds through
public or private equity or debt financings, collaborative or other arrangements
with corporate partners or from other sources, there can be no assurance that
additional financing will be available or, if available, that it will be
available on acceptable terms. If additional funds are raised by issuing equity
securities, further dilution to then existing stockholders would result. If
adequate funds are not available, the Company may be required to curtail
significantly or eliminate one or more of its research, discovery or development
programs or to obtain funds through additional arrangements with corporate
partners or others which may require the Company to relinquish rights to certain
of its technologies or product candidates that the Company would not otherwise
relinquish, which could have a material adverse effect on the Company's
business.
NET OPERATING LOSSES
As of December 31, 1998, the Company had available net operating loss
carryforwards for federal and state income tax purposes of approximately
$44,335,000 and $18,972,000, respectively, which expire beginning in 2006 and
2002, respectively. As of December 31, 1998, the Company had federal and state
tax credits for research activities totaling approximately $2,210,000 and
$814,000, respectively, which are available to offset future income taxes and
expire beginning in 2004 and 2000, respectively. The Company's ability to
utilize net operating loss carryforwards and tax credits is subject to
limitations as set forth in applicable federal and state tax laws. As specified
in the Internal Revenue Code, an ownership change of more than 50% by a
combination of the Company's significant stockholders during any three-year
period would result in certain limitations on the Company's ability to utilize
its net operating loss and tax credit carryforwards.
YEAR 2000
As many computer systems and other equipment with embedded chips or
processors use only two digits to represent the year, they may be unable to
process accurately certain data before, during or after the year 2000. As a
result, internal systems of the Company and its suppliers and vendors are at
risk for possible miscalculations or systems failures causing disruptions in
their business operations. This is commonly known as the Year 2000 ("Y2K")
issue.
The Company has formed a Y2K Compliance Committee ("Y2K Committee"), with
representation from each major functional area within the organization that has
been charged with implementing the Company's Y2K Compliance Program ("Y2K
Program"). The Y2K Program has been designed to identify those issues (both
internal and external) that would cause material interruption to the Company's
"business as usual" and consists of the following phases: (1) identification of
all Y2K issues; (2) assigning priorities to identified items; (3) assessing the
Y2K compliance of items determined to be material to the Company; (4) repairing
or replacing items that are determined to be material to the Company; (5)
testing material items; and (6) designing contingency and business continuation
plans.
Currently, the Company has completed the identification, assignment and
assessment phases for all material Y2K issues. The repair or replacement,
testing and contingency planning phases are currently underway with various
expected completion dates through mid-1999.
No material costs have been incurred to date in the Company's effort to
address its Y2K issues and the Company does not anticipate the amounts to become
material in the future.
30
<PAGE> 160
The failure to correct a material Y2K issue could result in an interruption
in, or a failure of the Company's business as usual. Due to the general
uncertainty inherent in the Y2K issue, resulting in part from the uncertainty of
the Y2K readiness of third-party suppliers and service providers, the Company is
unable to determine at this time whether the consequences of Y2K failures will
have a material impact on the Company's results of operations, liquidity and
financial condition. The Company's Y2K program is expected to significantly
reduce the Company's level of uncertainty about the Y2K issue and, in
particular, about the Y2K readiness of its suppliers and service providers. The
Company believes that with the completion of the Y2K program as scheduled, the
possibility of significant interruptions of normal operations will be greatly
reduced.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's exposure to market-rate risk for changes in interest rates
relates primarily to the Company's investment portfolio. The Company employs
established policies and procedures to manage its exposure to fluctuations in
interest rates. The Company places its investments with high quality issuers
and, by policy, limits the amount of credit exposure to any one issuer and does
not use derivative financial instruments in its investment portfolio. The
Company maintains an investment portfolio of various issuers, types and
maturities, which consist mainly of fixed rate financial instruments. These
securities are classified as available-for-sale and, consequently, are recorded
on the balance sheet at fair value with unrealized gains or losses reported as a
separate component in stockholders' equity. At any time, sharp changes in
interest rates can affect the fair value of the investment portfolio and its
interest earnings. Currently, the Company does not hedge these interest rate
exposures.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and supplementary data of the Company required by
this item are filed as exhibits hereto, are listed under Item 14, and are
incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item is incorporated by reference to the
information under the caption "Election of Directors" contained in the Company's
definitive Proxy Statement to be filed with the Commission pursuant to
Regulation 14A in connection with the Company's 1999 Annual Meeting of
Stockholders to be held on May 26, 1999 (the "Proxy Statement").
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference to the
information under the caption "Compensation of Executive Officers" contained in
the Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference to the
information under the caption "Security Ownership of Certain Beneficial Owners
and Management" contained in the Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference to the
information under the caption "Certain Transactions" contained in the Proxy
Statement.
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<PAGE> 161
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) (1)FINANCIAL STATEMENTS
Index to financial statements appears on page F-1.
(2)FINANCIAL STATEMENT SCHEDULES
None required.
(3)EXHIBITS
See paragraph (c) below.
(b) REPORTS ON FORM 8-K
Not applicable
(c) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
<S> <C>
3.1 Amended and Restated Certificate of Incorporation of the
Registrant.(4)
3.2 Amended and Restated Bylaws of the Registrant.(4)
3.3 Registrant's Certificate of Designation of Series A Junior
Participating Preferred Stock.(2)
4.1 Reference is made to Exhibits 3.1, 3.2 and 3.3.
4.2 Specimen stock certificate.(1)
10.1 Form of Indemnification Agreement entered into between
Registrant and its directors and officers.(1)(5)
10.2 Registrant's 1992 Stock Option and Restricted Stock Plan, as
amended (the "1992 Option Plan").(4)(5)
10.3 Form of Incentive Stock Option Agreement under the 1992
Option Plan.(1)(5)
10.4 Form of Nonstatutory Stock Option Agreement under the 1992
Option Plan.(1)(5)
10.5 Registrant's 1996 Equity Incentive Plan, as amended (the
"1996 Equity Plan").(4)(5)
10.6 Form of Incentive Stock Option Agreement under the 1996
Equity Plan.(1)(5)
10.7 Form of Nonstatutory Stock Option Agreement under the 1996
Equity Plan.(1)(5)
10.8 Registrant's 1996 Non-Employee Directors' Stock Option Plan,
as amended (the "Non-Employee Directors' Option
Plan").(4)(5)
10.9 Form of Nonstatutory Stock Option Agreement under the
Non-Employee Directors' Option Plan.(1)(5)
10.10 Registrant's Employee Stock Purchase Plan.(1)(5)
10.11 Registrant's Management Change of Control Plan, as amended
(the "Change of Control Plan").(5)
10.12 Form of Nonqualified Stock Option Agreement under the Change
of Control Plan.(1)(5)
10.13 Lease Agreement dated April 7, 1989 between Registrant and
Regency Associates Limited, as subsequently amended on March
1, 1993, and July 1, 1995.(1)
10.14 Equipment Lease Line Agreement dated June 30, 1992 between
Registrant and GE Capital, as amended.(1)
</TABLE>
32
<PAGE> 162
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
<S> <C>
10.15 Investment Agreement dated August 10, 1995 between
Registrant and Bristol-Myers Squibb Company.(1)
10.16 Collaborative Research and License Agreement dated August
10, 1995 between Registrant and Bristol-Myers Squibb
Company.(1)
10.17 Stockholders Agreement dated as of October 1, 1991, by and
among Registrant, Phillips Petroleum Company, The Salk
Institute for Biological Studies, Skandigen AB and the
Stockholders of Protease Corporation.(1)
10.18 License Agreement dated March 8, 1988 between Registrant and
The Salk Institute for Biological Studies, as amended by
that certain First Amendment to License Agreement dated
March 10, 1996.(1)
10.19 License Agreement dated December 15, 1990 between Registrant
and The Salk Institute for Biological Studies, as amended by
that certain First Amendment to License Agreement dated
March 10, 1996.(1)
10.20 Stock Purchase and Stockholders Agreement dated April 11,
1988 among Registrant, Phillips Petroleum Company, The Salk
Institute for Biological Studies and Skandigen AB, as
amended by that certain Amendment to Stock Purchase and
Shareholders Agreement dated April 12, 1990.(1)
10.21 Agreement dated December 20, 1991 between Registrant,
Phillips Petroleum Company, The Salk Institute for
Biological Studies and Skandigen AB.(1)
10.22 License Agreement dated December 20, 1991 between Registrant
and Phillips Petroleum Company.(1)
10.23 Amended and Restated Research and Development and License
Agreement dated March 20, 1996 between Registrant and
CIBA-GEIGY Limited.(1)
10.24 Stock Purchase Agreement dated September 15, 1992 between
Registrant and CIBA-GEIGY Limited.(1)
10.25 Subscription Agreement dated April 11, 1994 between
Registrant and CIBA-GEIGY Limited.(1)
10.26 Stock Purchase Agreement dated March 20, 1996 between
Registrant and CIBA-GEIGY Limited.(1)
10.27 Agreement dated May 1, 1992 between Registrant and Eli Lilly
and Company, as amended and extended by that certain
Extension Agreement dated May 1, 1995.(1)
10.28 Stock Purchase Agreement dated May 7, 1992 between
Registrant and Eli Lilly and Company.(1)
10.29 Option and License Agreement dated April 30, 1995 between
Registrant and Eli Lilly and Company.(1)
10.30 License Agreement dated March 5, 1992 between Registrant and
Cephalon, Inc., as amended by that certain Letter dated
March 22, 1995.(1)
10.31 Patent License Agreement dated June 21, 1993 between
Registrant and Affymax Technologies, N.V., as amended by
that certain Letter dated July 15, 1993.(1)
10.32 Agreement dated October 1, 1993 between Registrant and
Hafslund Nycomed Pharma AG.(1)
10.33 Development and License Agreement dated February 28, 1997
between Registrant and Meiji Seika Kaisha, Ltd.(3)
10.34 Further Extension Agreement dated November 1, 1996 between
Registrant and Eli Lilly and Company.(3)
</TABLE>
33
<PAGE> 163
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
<S> <C>
10.35 Third Amendment to Lease dated December 31, 1996 between
Registrant and Regency Properties, L.P.(3)
10.36 Equipment Lease Line Agreement dated March 4, 1997 between
Registrant and G.E. Capital.(3)
10.37 Rights Agreement dated as of March 17, 1997 among Registrant
and ChaseMellon Shareholder Services, L.L.C.(2)
10.38 Specimen Rights Certificate.(2)
10.39 Employment Agreement dated February 23, 1998 between
Registrant and Jeffrey F. McKelvy, Ph.D.(5)(6)
10.40 Employment Agreement dated June 4, 1998 between Registrant
and Michael M. Harpold, Ph.D.(5)(7)
10.41 Employment Agreement dated October 27, 1998 between
Registrant and Stephen F. Keane.(5)
23.1 Consent of PricewaterhouseCoopers LLP.
24.1 Power of Attorney. Reference is made to page 35.
27.1 Financial Data Schedule.
</TABLE>
- ---------------
(1) Filed as an exhibit to Registrant's Registration Statement on Form S-1 (No.
333-2586) or amendments thereto and incorporated herein by reference.
(2) Filed as an exhibit to Registrant's report on Form 8-K filed with the
Commission on March 31, 1997 and incorporated herein by reference.
(3) Filed as an exhibit to Registrant's annual report on Form 10-K for the year
ended December 31, 1996 and incorporated herein by reference.
(4) Filed as an exhibit to Registrant's quarterly report on Form 10-Q for the
quarter ended June 30, 1997 and incorporated herein by reference.
(5) Constitutes a "management contract or compensatory plan or arrangement,"
pursuant to Item 14(a)(3)
(6) Filed as an exhibit to Registrant's quarterly report on Form 10-Q for the
quarter ended March 31, 1998 and incorporated herein by reference.
(7) Filed as an exhibit to Registrant's quarterly report on Form 10-Q for the
quarter ended June 30, 1998 and incorporated herein by reference.
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<PAGE> 164
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
SIBIA NEUROSCIENCES, INC.
By: /s/ THOMAS A. REED
------------------------------------
Thomas A. Reed,
Vice President,
Finance/Administration, & CFO
Date: March 30, 1999
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints William T. Comer and Thomas A. Reed, and
each of them, as his true and lawful attorneys-in-fact and agents, with full
power of substitution and resubstitution, for him and in his name, place and
stead, in any and all capacities, to sign any and all amendments to this Report,
and to file the same, with all exhibits thereto, and other documents in
connection therewith, with the Securities and Exchange Commission, granting unto
said attorneys-in-fact and agents, and each of them, full power and authority to
do and perform each and every act and thing requisite and necessary to be done
in connection therewith, as fully to all intents and purposes as he might or
could do in person, hereby ratifying and confirming that all said
attorneys-in-fact and agents, or any of them or their or his substitute or
resubstitute, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <C> <S>
/s/ WILLIAM T. COMER President, Chief Executive March 30, 1999
- ----------------------------------------------------- Officer
William T. Comer, Ph.D. and Director
(Principal Executive Officer)
/s/ THOMAS A. REED Vice President, March 30, 1999
- ----------------------------------------------------- Finance/Administration and
Thomas A. Reed Chief Financial Officer
(Principal Financial and
Accounting Officer)
/s/ WILLIAM R. MILLER Chairman of the Board March 30, 1999
- -----------------------------------------------------
William R. Miller
/s/ STANLEY T. CROOKE Director March 30, 1999
- -----------------------------------------------------
Stanley T. Crooke, M.D., Ph.D.
/s/ GUNNAR EKDAHL Director March 30, 1999
- -----------------------------------------------------
Gunnar Ekdahl
/s/ JEFFREY F. MCKELVY Director March 30, 1999
- -----------------------------------------------------
Jeffrey F. McKelvy, Ph.D.
/s/ FREDERICK B. RENTSCHLER Director March 30, 1999
- -----------------------------------------------------
Frederick B. Rentschler
/s/ JAMES D. WATSON Director March 30, 1999
- -----------------------------------------------------
James D. Watson, Ph.D.
</TABLE>
35
<PAGE> 165
SIBIA NEUROSCIENCES, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Accountants........................... F-2
Balance Sheet as of December 31, 1998 and 1997.............. F-3
Statement of Operations for the years ended December 31,
1998, 1997 and 1996....................................... F-4
Statement of Stockholders' Equity for the years ended
December 31, 1998, 1997 and 1996.......................... F-5
Statement of Cash Flows for the years ended December 31,
1998, 1997 and 1996....................................... F-6
Notes to Financial Statements............................... F-7
</TABLE>
F-1
<PAGE> 166
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Stockholders of SIBIA Neurosciences, Inc.
In our opinion, the accompanying balance sheet and the related statements
of operations, of stockholders' equity and of cash flows present fairly, in all
material respects, the financial position of SIBIA Neurosciences, Inc. at
December 31, 1998 and 1997, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1998, in conformity
with generally accepted accounting principles. These financial statements are
the responsibility of the Company's management; our responsibility is to express
an opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
/s/ PRICEWATERHOUSECOOPERS LLP
- --------------------------------------
PRICEWATERHOUSECOOPERS LLP
San Diego, California
February 19, 1999
F-2
<PAGE> 167
SIBIA NEUROSCIENCES, INC.
BALANCE SHEET
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1998 1997
------------ ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents................................. $ 4,595,000 $ 4,972,000
Investment securities..................................... 12,592,000 28,375,000
Contracts and accounts receivable......................... 501,000 588,000
Prepaid expenses and other current assets................. 683,000 550,000
------------ ------------
Total current assets.............................. 18,371,000 34,485,000
Property and equipment, net................................. 2,638,000 1,599,000
Other assets................................................ 190,000 96,000
------------ ------------
$ 21,199,000 $ 36,180,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 2,567,000 $ 1,611,000
Accrued liabilities....................................... 2,142,000 1,660,000
------------ ------------
Total current liabilities......................... 4,709,000 3,271,000
Long-term debt, less current portion........................ 1,350,000 695,000
Commitments and contingencies (Note 9)
Stockholders' equity:
Preferred Stock, $.001 par value; 5,000,000 shares
authorized
Common Stock, $.001 par value; 25,000,000 shares
authorized; 9,515,588 and 9,338,744 shares issued and
outstanding at December 31, 1998 and 1997,
respectively........................................... 10,000 9,000
Additional paid-in capital................................ 60,206,000 59,946,000
Deferred compensation..................................... (273,000) (580,000)
Notes receivable from stockholders........................ (83,000) (87,000)
Net unrealized gain on investment securities
available-for-sale..................................... 373,000 2,212,000
Accumulated deficit....................................... (45,093,000) (29,286,000)
------------ ------------
Total stockholders' equity........................ 15,140,000 32,214,000
------------ ------------
$ 21,199,000 $ 36,180,000
============ ============
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE> 168
SIBIA NEUROSCIENCES, INC.
STATEMENT OF OPERATIONS AND COMPREHENSIVE LOSS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------------
1998 1997 1996
------------ ----------- -----------
<S> <C> <C> <C>
Revenue:
Contract......................................... $ 6,613,000 $ 7,537,000 $ 8,215,000
License and royalty.............................. 430,000 3,660,000 266,000
------------ ----------- -----------
Total revenue (Note 1)................... 7,043,000 11,197,000 8,481,000
------------ ----------- -----------
Expenses:
Research and development......................... 18,247,000 15,819,000 12,268,000
General and administrative....................... 7,340,000 5,146,000 3,561,000
------------ ----------- -----------
Total expenses........................... 25,587,000 20,965,000 15,829,000
------------ ----------- -----------
(18,544,000) (9,768,000) (7,348,000)
------------ ----------- -----------
Other income (expense):
Interest income.................................. 1,523,000 2,231,000 1,834,000
Interest expense................................. (91,000) (59,000) (68,000)
Gain on sale of investment (Note 5).............. 1,305,000
Other............................................ 3,000 18,000
------------ ----------- -----------
2,737,000 2,175,000 1,784,000
------------ ----------- -----------
Net loss........................................... (15,807,000) (7,593,000) (5,564,000)
Other comprehensive income -- unrealized holding
gains (losses) arising during period............. (534,000) 2,023,000 110,000
Less: reclassification adjustment for gains
included in net loss............................. 1,305,000
------------ ----------- -----------
Comprehensive loss................................. $(15,036,000) $(5,570,000) $(5,454,000)
============ =========== ===========
Basic and diluted net loss per common share........ $ (1.68) $ (0.82) $ (0.73)
============ =========== ===========
Shares used in computing basic and diluted net loss
per common share................................. 9,421,057 9,247,521 7,596,380
============ =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE> 169
SIBIA NEUROSCIENCES, INC.
STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
SERIES A, B AND C
CONVERTIBLE NOTES
PREFERRED STOCK COMMON STOCK RECEIVABLE
--------------------- --------------------- ADDITIONAL DEFERRED FROM
SHARES SHARES PAID-IN COMPEN- STOCK-
OUTSTANDING AMOUNT OUTSTANDING AMOUNT CAPITAL SATION HOLDERS
----------- ------- ----------- ------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE AS OF DECEMBER 31, 1995........... 476,211 4,899,884 $ 5,000 $31,869,000 $ (635,000) $ (82,000)
Issuance of Common Stock.................. 2,554,545 3,000 25,842,000
Stock option compensation expense......... 1,167,000 (404,000)
Exercise of stock options................. 120,200 288,765 815,000 (593,000)
Stock purchase plan....................... 9,408 54,000
Payments on notes receivable.............. 35,000
Conversion of Preferred Stock............. (596,411) 1,401,566 1,000 (1,000)
Net increase in unrealized gain on
investment securities
available-for-sale......................
Cancellation of partial shares............ (11)
Net loss..................................
-------- ------- --------- ------- ----------- ----------- ---------
BALANCE AS OF DECEMBER 31, 1996........... 9,154,157 9,000 59,746,000 (1,039,000) (640,000)
Stock option compensation expense......... (109,000) 459,000
Exercise of stock options................. 162,766 174,000
Stock purchase plan....................... 21,821 135,000
Payments on notes receivable.............. 553,000
Net increase in unrealized gain on
investment securities
available-for-sale......................
Net loss..................................
-------- ------- --------- ------- ----------- ----------- ---------
BALANCE AS OF DECEMBER 31, 1997........... 9,338,744 9,000 59,946,000 (580,000) (87,000)
Stock option compensation expense......... (60,000) 399,000
Issuance of stock options................. 92,000 (92,000)
Exercise of stock options................. 144,442 1,000 94,000
Stock purchase plan....................... 32,402 134,000
Payments on notes receivable.............. 4,000
Net increase (decrease) in unrealized gain
on investment securities
available-for-sale......................
Net loss..................................
-------- ------- --------- ------- ----------- ----------- ---------
BALANCE AS OF DECEMBER 31, 1998........... 9,515,588 $10,000 $60,206,000 $ (273,000) $ (83,000)
======== ======= ========= ======= =========== =========== =========
<CAPTION>
NET
UNREALIZED
GAIN (LOSS)
ON INVESTMENT
SECURITIES TOTAL
AVAILABLE- ACCUMULATED STOCKHOLDERS'
FOR-SALE DEFICIT EQUITY
------------- ------------ -------------
<S> <C> <C> <C>
BALANCE AS OF DECEMBER 31, 1995........... $ 79,000 $(16,129,000) $ 15,107,000
Issuance of Common Stock.................. 25,845,000
Stock option compensation expense......... 763,000
Exercise of stock options................. 222,000
Stock purchase plan....................... 54,000
Payments on notes receivable.............. 35,000
Conversion of Preferred Stock.............
Net increase in unrealized gain on
investment securities
available-for-sale...................... 110,000 110,000
Cancellation of partial shares............
Net loss.................................. (5,564,000) (5,564,000)
----------- ------------ ------------
BALANCE AS OF DECEMBER 31, 1996........... 189,000 (21,693,000) 36,572,000
Stock option compensation expense......... 350,000
Exercise of stock options................. 174,000
Stock purchase plan....................... 135,000
Payments on notes receivable.............. 553,000
Net increase in unrealized gain on
investment securities
available-for-sale...................... 2,023,000 2,023,000
Net loss.................................. (7,593,000) (7,593,000)
----------- ------------ ------------
BALANCE AS OF DECEMBER 31, 1997........... 2,212,000 (29,286,000) 32,214,000
Stock option compensation expense......... 339,000
Issuance of stock options.................
Exercise of stock options................. 95,000
Stock purchase plan....................... 134,000
Payments on notes receivable.............. 4,000
Net increase (decrease) in unrealized gain
on investment securities
available-for-sale...................... (1,839,000) (1,839,000)
Net loss.................................. (15,807,000) (15,807,000)
----------- ------------ ------------
BALANCE AS OF DECEMBER 31, 1998........... $ 373,000 $(45,093,000) $ 15,140,000
=========== ============ ============
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE> 170
SIBIA NEUROSCIENCES, INC.
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------------
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss....................................... $(15,807,000) $ (7,593,000) $ (5,564,000)
Adjustments to reconcile net loss to net cash
used by operating activities:
Depreciation and amortization............... 858,000 667,000 598,000
Compensation from issuance of common stock
options................................... 339,000 350,000 763,000
Gain on disposal of property................ (3,000) (1,000)
Gain on sale of investment.................. (1,305,000)
Net amortization of premium and discount on
investment securities..................... (32,000) (127,000) (447,000)
Increase (decrease) in cash resulting from
changes in:
Contracts and accounts receivable........... 87,000 (520,000) (33,000)
Prepaid expenses and other assets........... (227,000) 488,000 (813,000)
Accounts payable and accrued liabilities.... 1,242,000 764,000 237,000
Deferred revenue............................ (431,000) 181,000
------------ ------------ ------------
Net cash used by operating
activities........................... (14,845,000) (6,405,000) (5,079,000)
------------ ------------ ------------
Cash flows from investing activities:
Maturities of investment securities
held-to-maturity............................ 13,992,000
Purchase of investment securities
available-for-sale.......................... (7,232,000) (13,383,000) (42,624,000)
Maturities and sales of investment securities
available-for-sale.......................... 22,452,000 23,181,000 7,300,000
Principal payments received on investment
securities available-for-sale............... 61,000 29,000 51,000
Proceeds from disposal of property and
equipment................................... 4,000 5,000
Acquisition of property and equipment.......... (332,000) (172,000) (182,000)
------------ ------------ ------------
Net cash provided (used) by investing
activities........................... 14,949,000 9,659,000 (21,458,000)
------------ ------------ ------------
Cash flows from financing activities:
Payments on notes receivable from
stockholders................................ 4,000 553,000 35,000
Proceeds from issuance of stock................ 229,000 309,000 26,121,000
Principal payments on capital lease
obligations................................. (714,000) (556,000) (481,000)
------------ ------------ ------------
Net cash provided (used) by financing
activities........................... (481,000) 306,000 25,675,000
------------ ------------ ------------
Net increase (decrease) in cash and cash
equivalents.................................... (377,000) 3,560,000 (862,000)
Cash and cash equivalents at beginning of year... 4,972,000 1,412,000 2,274,000
------------ ------------ ------------
Cash and cash equivalents at end of year......... $ 4,595,000 $ 4,972,000 $ 1,412,000
============ ============ ============
Supplemental Information:
Income taxes paid -- Note 6
Interest paid -- Note 9
Equipment under capital leases -- Note 9
</TABLE>
See accompanying notes to financial statements.
F-6
<PAGE> 171
SIBIA NEUROSCIENCES, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company
SIBIA Neurosciences, Inc. (the "Company" or "SIBIA") was founded by The
Salk Institute for Biological Studies ("The Salk Institute") and incorporated in
Delaware in 1981. SIBIA is engaged in the discovery and development of novel
small molecule therapeutics for the treatment of nervous system disorders. The
Company is pursuing a molecular target-based approach to drug discovery, and its
targets have been selected based on their known or postulated roles in molecular
processes critical to normal and pathologic neuronal function. The Company's
focus is on the development of therapeutics for the treatment of
neurodegenerative, neuropsychiatric and neurological disorders, many of which
have large patient populations and represent critical unmet medical needs. The
Company has been funded to date principally through equity financings, research
contracts (generally conducted on a best efforts basis), and option, license and
royalty revenues.
Significant Ownership
The Salk Institute owned 20%, 21% and 22% of the Company's outstanding
Common Stock as of December 31, 1998, 1997, and 1996, respectively. Skandigen AB
owned 10%, 11% and 11% of the Company's outstanding Common Stock as of December
31, 1998, 1997, and 1996, respectively. Novartis AG, formerly CIBA-GEIGY
Limited, owned 11% of the Company's outstanding Common Stock as of December 31,
1998, 1997 and 1996.
Use of Estimates
The preparation of financial statements, in conformity with generally
accepted accounting principles, requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Fair Value of Financial Instruments
It is management's belief that the carrying amounts shown for the Company's
financial instruments, including cash, investment securities, contracts and
accounts receivable, and accounts payable and accrued liabilities, are
reasonable estimates of their fair value (Notes 2 and 3).
Concentration of Risk
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of cash equivalents and
investment securities. No significant losses have been incurred related to these
investments.
During the years ended December 31, 1998, 1997, and 1996, the Company had
three, four and three collaborative research agreements that accounted for 93%,
95% and 97%, respectively, of total revenue (Note 4).
Collaborative Agreements
The Company enters into collaborative agreements from time to time with
third parties. Such agreements may call for an equity investment by the
collaborative partner as well as a commitment for current and future research
funding in exchange for best efforts research to be provided by the Company. The
collaborative agreements may also provide for license fees, milestone payments
and royalties. Such agreements define the
F-7
<PAGE> 172
SIBIA NEUROSCIENCES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
rights of each party related to the results of such research. Amounts related to
research funding and license and royalty rights are recognized in accordance
with the specific terms of each collaborative agreement to the extent the
Company determines that such recognition is consistent with the substance of the
agreement (Note 4).
Revenue Recognition
Contract revenue is recognized as the research is performed using the
percentage-of-completion method of accounting, primarily based on contract costs
incurred to date compared with total estimated costs at completion. Contract
revenue related to milestones is recognized upon the achievement of the related
milestone and when collection is probable. License revenue is recognized when
earned as generally evidenced by certain factors including: receipt of such
fees, satisfaction of any performance obligations and the non-refundable nature
of such fees. Royalty revenue is recognized when earned and collection is
probable.
Total revenue for the years ended December 31, 1998, 1997, and 1996,
includes related party revenue of $2,381,000, $3,496,000 and $6,606,000,
respectively.
Research and Development Costs
Research and development costs are expensed as incurred and include costs
associated with collaborative agreements. These costs consist of direct and
indirect internal costs related to specific projects as well as fees paid to
other entities which conduct certain research activities on behalf of the
Company.
Cash Equivalents
Cash equivalents are liquid investments purchased with an original maturity
of three months or less. As of December 31, 1998, $4,562,000 of the $4,595,000
total cash and cash equivalents was invested in money market funds. As of
December 31, 1997, the cash and cash equivalents balance of $4,972,000 was
primarily made up of $2,317,000 in money market funds and $2,474,000 in
commercial paper.
Investment Securities
Management determines the appropriate classification of its investment
securities at the time of purchase and reevaluates such designation as of each
balance sheet date. The Company has classified its investment securities as
"available-for-sale" or "held-to-maturity." Available-for-sale securities are
recorded at fair value with the corresponding unrealized gain or loss reflected
as a component of stockholders' equity. Held-to-maturity securities are recorded
at amortized cost. Actual gains or losses, if any, on investment securities are
reflected in the statement of operations when the underlying securities are
sold.
Property and Equipment
Property and equipment is recorded at cost and depreciated over estimated
useful lives of 4 to 8 years using the straight-line method. Property and
equipment acquired under capital leases is amortized over the shorter of the
useful life or the related lease terms using the straight-line method.
Long-Lived Assets
The Company assesses potential impairments to its long-lived assets when
there is evidence that events or changes in circumstances have made recovery of
the asset's carrying value unlikely. An impairment loss would be recognized when
the sum of the expected future net cash flows is less than the carrying amount
of the asset. No such impairment losses have been recorded by the Company.
F-8
<PAGE> 173
SIBIA NEUROSCIENCES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Income Taxes
Current income tax expense is the amount of income taxes expected to be
payable for the current year. A deferred income tax asset or liability is
established for the expected future consequences resulting from the differences
in the financial reporting and tax bases of assets and liabilities. The Company
establishes a valuation allowance, if necessary, to reflect the likelihood of
realization of net deferred tax assets. Deferred income tax expense is the
change during the year in the deferred income tax asset or liability.
Net Loss Per Share
The Company applies Statement of Financial Accounting Standards No. 128 and
related Interpretations in computing its net loss per share. Basic net loss per
common share is computed by dividing net loss by the weighted average number of
shares of Common Stock outstanding. Diluted EPS is computed similarly to basic
EPS, except that the weighted average number of shares of Common Stock
outstanding are increased to include the number of additional shares of Common
Stock that would have been outstanding if dilutive potential common shares had
been issued.
Accounting for Stock-Based Compensation
The Company applies Accounting Principles Board Opinion No. 25 and related
Interpretations in accounting for its stock-based compensation. Compensation
expense, as appropriate, has been recorded related to option grants and is being
amortized to operations over the related vesting period. No compensation expense
has been recognized for its stock purchase plan.
Adoption of New Accounting Standard
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income." This
pronouncement, which was adopted by the Company effective January 1, 1998,
requires the presentation of a statement of comprehensive income. Comprehensive
income is defined as the change in equity of a business enterprise during a
period resulting from transactions and other events and circumstances from
nonowner sources. Comprehensive loss for the Company, in addition to net loss,
includes unrealized gains and losses on marketable securities available for
sale, currently recorded in stockholders' equity.
Reclassifications
Certain reclassifications have been made to the 1997 amounts to conform to
the presentation used in 1998.
F-9
<PAGE> 174
SIBIA NEUROSCIENCES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 2. INVESTMENT SECURITIES
The following is a summary of all of the Company's investment securities.
All of the Company's securities are classified as available-for-sale.
Determination of estimated fair value is based on quoted market prices:
<TABLE>
<CAPTION>
DECEMBER 31, 1998
------------------------------------------------------
GROSS GROSS
ESTIMATED UNREALIZED UNREALIZED
COST FAIR VALUE GAINS LOSSES
----------- ----------- ---------- ----------
<S> <C> <C> <C> <C>
U.S. Treasury obligations and obligations
of U.S. government agencies............ $ 5,004,000 $ 5,027,000 $ 23,000 $
=========== =========== ========== =======
U.S. corporate debt securities........... $ 7,002,000 $ 7,007,000 $ 5,000 $
=========== =========== ========== =======
U.S. corporate equity securities......... $ $ 289,000 $ 289,000 $
=========== =========== ========== =======
Mortgage-backed securities............... $ 214,000 $ 269,000 $ 61,000 $ 6,000
=========== =========== ========== =======
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1997
------------------------------------------------------
GROSS GROSS
ESTIMATED UNREALIZED UNREALIZED
COST FAIR VALUE GAINS LOSSES
----------- ----------- ---------- ----------
<S> <C> <C> <C> <C>
U.S. Treasury obligations and obligations
of U.S. government agencies............ $21,859,000 $21,923,000 $ 67,000 $ 3,000
=========== =========== ========== =======
U.S. corporate debt securities........... $ 4,033,000 $ 4,013,000 $ $20,000
=========== =========== ========== =======
U.S. corporate equity securities......... $ 1,000 $ 2,100,000 $2,099,000 $
=========== =========== ========== =======
Mortgage-backed securities............... $ 271,000 $ 339,000 $ 73,000 $ 5,000
=========== =========== ========== =======
</TABLE>
The amortized cost and estimated fair value of the debt securities as of
December 31, 1998 by contractual maturity are shown below. Actual maturities may
differ from the contractual maturities as the issuers of the securities may have
the right to call the obligation.
<TABLE>
<CAPTION>
ESTIMATED
COST FAIR VALUE
----------- -----------
<S> <C> <C>
Due in one year or less................................... $12,006,000 $12,034,000
=========== ===========
Due after ten years....................................... $ 214,000 $ 269,000
=========== ===========
</TABLE>
F-10
<PAGE> 175
SIBIA NEUROSCIENCES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 3. COMPOSITION OF CERTAIN FINANCIAL STATEMENT CAPTIONS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1998 1997
----------- -----------
<S> <C> <C>
PROPERTY AND EQUIPMENT
Lab equipment........................................... $ 6,247,000 $ 4,463,000
Computer equipment...................................... 398,000 354,000
Other................................................... 224,000 171,000
----------- -----------
6,869,000 4,988,000
Accumulated depreciation and amortization............... (4,231,000) (3,389,000)
----------- -----------
$ 2,638,000 $ 1,599,000
=========== ===========
ACCRUED LIABILITIES
Current portion of long-term debt....................... $ 725,000 $ 528,000
Accrued vacation........................................ 397,000 335,000
Accrued bonuses......................................... 657,000 531,000
Other................................................... 363,000 266,000
----------- -----------
$ 2,142,000 $ 1,660,000
=========== ===========
</TABLE>
NOTE 4. SIGNIFICANT COLLABORATIVE AGREEMENTS
Novartis AG (Formerly CIBA-GEIGY Limited)
In October 1992, the Company entered into a collaborative research and
license agreement (which included research funding and a $5,000,000 equity
investment) with Novartis AG ("Novartis") to develop and utilize SIBIA's
receptor/ion channel technology in the area of excitatory amino acid receptors
("EAARs") for the discovery of drugs that interact with these molecular targets.
In March 1996, the Company executed an agreement with Novartis to extend the
term of its collaborative research funding to September 1998. In exchange for
providing a certain level of scientific research under the agreement, the
Company received payments from Novartis; additional payments may be received by
the Company upon the achievement of certain development milestones and the
Company may receive royalties in the event there are sales of products
containing a compound developed under the agreement. Pursuant to the extended
agreement, Novartis paid SIBIA $500,000 to fund certain capital expenditures and
agreed to purchase $7,500,000 of the Company's Common Stock, $5,000,000 of which
was purchased in conjunction with the initial public offering of the Company's
Common Stock and the remaining $2,500,000 of which will be purchased upon the
achievement of certain research milestones. Subsequent to completion of the
collaborative research, SIBIA retained the rights to use the program technology
for its own drug discovery efforts and may screen molecules from other sources
against EAARs and pursue development of these molecules. The Company recognized
contract revenue related to this agreement of $2,381,000, $3,496,000 and
$3,383,000 for the years ended December 31, 1998, 1997 and 1996, respectively.
Bristol-Myers Squibb Company
In August 1995, the Company entered into a collaborative research and
license agreement with Bristol-Myers Squibb Company ("Bristol-Myers Squibb")
relating to the discovery and development of compounds relating to amyloid
precursor protein. In exchange for providing a certain level of scientific
research under the agreement, the Company will receive research funding payments
from Bristol-Myers Squibb for a term of four years; additional payments may be
received by the Company upon the achievement of certain development milestones.
Bristol-Myers Squibb will also pay royalties based on the level of its net sales
of products, if any,
F-11
<PAGE> 176
SIBIA NEUROSCIENCES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
developed under the agreement. The Company recognized contract revenue related
to this agreement of $3,622,000, $3,262,000 and $3,223,000 for the years ended
December 31, 1998, 1997 and 1996, respectively.
Concurrent with the execution of the agreement, Bristol-Myers Squibb paid a
non-refundable $3,000,000 license fee for an exclusive commercialization license
to use certain related existing proprietary technologies and purchased 280,000
shares of the Company's Series C Convertible Preferred Stock. Bristol-Myers
Squibb also agreed to make an additional equity investment of $6,000,000 in
shares of Common Stock upon the initiation of clinical trials relating to any
product developed from the collaboration.
Meiji Seika Kaisha, Ltd
In February 1997, the Company entered into a development and license
agreement with Meiji Seika Kaisha, Ltd ("Meiji") for the development and
commercialization of the Company's proprietary nicotinic acetylcholine receptor
agonist, SIB-1508Y, as a treatment for Parkinson's disease and other nervous
system disorders in Japan and other Asian countries. Under the agreement, the
Company received a one-time license fee of $3,000,000 for the license of certain
technology to Meiji. In addition, the Company recognizes contract revenue and
related development costs related to certain cost sharing provisions of the
agreement and may receive development milestone payments and royalties on future
product sales, if the product is successfully commercialized in such countries.
SIBIA has retained rights to develop and commercialize SIB-1508Y outside of
Japan and certain other Asian countries, and has retained rights to manufacture
clinical supplies and commercial material worldwide. The Company recognized
contract revenue related to this agreement of $611,000 and $114,000 for the
years ended December 31, 1998 and 1997, respectively.
Eli Lilly & Company
In May 1992, the Company entered into a collaborative research and license
agreement with Eli Lilly & Company ("Lilly") providing for the discovery and
development of drugs which specifically interact with human neuronal calcium
channels. As part of the agreement, Lilly purchased 276,470 shares of Common
Stock. The term of the collaborative research was revised, extended and
ultimately completed in October 1997. The Company is entitled to receive
milestone payments and royalties on sales of products identified by Lilly within
a certain period of time and commercialized, and is free to develop compounds
and other technology it discovers in this area on its own or with other
partners. The Company recognized contract revenue related to this agreement of
$665,000 and $1,609,000 for the years ended December 31, 1997, and 1996,
respectively.
Total costs incurred under the Company's various collaborative agreements
for the years ended December 31, 1998, 1997 and 1996, including certain
administrative costs, aggregated $5,777,000, $7,313,000, and $5,671,000,
respectively.
NOTE 5. SIGNIFICANT OPTION AND LICENSE AGREEMENTS
The Salk Institute
In 1988, SIBIA entered into a license agreement with The Salk Institute
covering a number of nAChR subunit clones. This agreement was amended in March
1996 such that the license to the issued U.S. patents and related patent
applications became an exclusive worldwide license. Pursuant to the agreement,
as amended, SIBIA is obligated to pay royalties to The Salk Institute on sales
of products resulting from The Salk Institute's nAChR technology. In addition,
the Company is required to make certain minimum annual royalty payments to The
Salk Institute beginning in 2002. Failure to pay such royalties will result in
the related license becoming non-exclusive.
F-12
<PAGE> 177
SIBIA NEUROSCIENCES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
In 1990, SIBIA entered into a three-year agreement with The Salk Institute
in the area of EAARs. This agreement provided for the support of certain
research in 1992 and 1993 at The Salk Institute by SIBIA and the transfer of
research materials and research results in the EAAR area from The Salk Institute
to SIBIA. SIBIA also received an exclusive worldwide license to certain
EAAR-related patents and patent applications held by The Salk Institute. The
agreement was amended in March 1996. Pursuant to the agreement, as amended,
SIBIA began making certain annual minimum royalty payments to The Salk Institute
beginning in 1998. Failure to pay such royalties will result in the related
license agreement becoming non-exclusive.
Cephalon, Inc.
In October 1991, the Company entered into a development and
option-to-license agreement with Cephalon, Inc. ("Cephalon") for certain
proprietary technology related to the development and production of recombinant
insulin-like growth factor ("IGF-1"), known as Myotrophin, on a commercial basis
for certain applications. The option-to-license was subsequently expanded to
include additional applications. All options-to-license the IGF-1 technology
were exercised and the license agreements, as executed, include a provision for
the payment of licensing fees upon the occurrence of certain development
milestones and royalties on the sales of products using licensed technology. In
1995, the Company received a non-refundable payment of $1,750,000 from Cephalon
to reduce the royalty percentage on sales of an IGF-1 product within the
neurology field.
Aurora Biosciences Corporation
In January 1997, the Company entered into an agreement with Aurora
Biosciences Corporation ("Aurora"). Under the agreement, the Company gave Aurora
non-exclusive rights to practice under its patents for transcription-based
assays and certain other patents related to automated drug screening. In return,
the Company received 160,000 shares of Aurora's Common Stock and non-exclusive
rights to several assay technologies, including novel reporter molecules, that
will facilitate the Company's high throughput screening and drug discovery
efforts directed to certain receptor, ion channel and enzyme targets associated
with nervous system disorders. Both parties received limited sublicensing rights
to each other's patents. In December 1997, Aurora entered into agreements with
Lilly and Merck and Company to sublicense certain of SIBIA's patents when used
in conjunction with Aurora technologies. During 1998, the Company sold 115,000
shares of Aurora Common Stock resulting in a gain of $1,305,000.
NOTE 6. INCOME TAXES
As of December 31, 1998, the Company had net operating loss carryforwards
for federal and state income tax purposes of approximately $44,335,000 and
$18,972,000 respectively, which expire beginning in 2006 and 2002, respectively.
As of December 31, 1998, the Company had federal and state tax credits for
research activities totaling approximately $2,210,000 and $814,000,
respectively, which are available to offset future income taxes and expire
beginning in 2004 and 2000, respectively.
The Company's ability to utilize net operating loss carryforwards and tax
credits is subject to limitations as set forth in applicable federal and state
tax laws. As specified in the Internal Revenue Code, an ownership change of more
than 50% by a combination of the Company's significant stockholders during any
three-year period would result in certain limitations on the Company's ability
to utilize its net operating loss and credit carryforwards.
F-13
<PAGE> 178
SIBIA NEUROSCIENCES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Deferred tax liabilities and assets are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1998 1997
------------ ------------
<S> <C> <C>
Deferred tax liabilities:
Depreciation.......................................... $ (667,000) $ (517,000)
------------ ------------
Deferred tax assets:
Net operating loss carryforwards...................... 16,181,000 10,228,000
Research and development credits...................... 3,025,000 1,774,000
Research and development capitalized for state tax
purposes........................................... 391,000 708,000
Capital lease obligations............................. 637,000 487,000
Other................................................. 530,000 449,000
------------ ------------
Total deferred tax assets..................... 20,764,000 13,646,000
------------ ------------
Net deferred tax assets................................. 20,097,000 13,129,000
Valuation allowance..................................... (20,097,000) (13,129,000)
------------ ------------
Deferred taxes.......................................... $ -- $ --
============ ============
</TABLE>
As of December 31, 1998, the Company has provided a deferred tax asset
valuation allowance for net deferred tax assets which more likely than not will
not be realized based on recent and expected trends in operating results.
The Company paid state franchise taxes of $25,000, $25,000 and $31,000
during 1998, 1997 and 1996, respectively.
NOTE 7. STOCKHOLDERS' EQUITY
Share Purchase Rights Plan
In March 1997, the Board of Directors of the Company designated 150,000
shares of $.001 par value Preferred Stock as Series A Junior Participating
Preferred Stock and adopted a Share Purchase Rights Plan pursuant to which
preferred share purchase rights (the "Rights") were distributed for each share
of Common Stock of the Company held as of the close of business on April 2,
1997. Each Right, under certain circumstances, entitles the holder thereof to
purchase from the Company one one-hundredth of a share of Series A Junior
Participating Preferred Stock (each a "Preferred Share") at an exercise price of
$60.00 per one one-hundredth of a Preferred Share. Each one one-hundredth of a
share of Preferred Share has rights, preferences and privileges equal to the
value of a share of Common Stock. The Rights will expire on March 17, 2007,
unless the Rights are earlier redeemed or exchanged by the Company. The Rights
will cause substantial dilution to a person or group that attempts to acquire
the Company on terms not approved by the Company's Board of Directors.
NOTE 8. EMPLOYEE BENEFIT PLANS
Stock-Based Compensation
The Company has adopted the disclosure-only provision of Statement of
Financial Accounting Standards No. 123 ("SFAS 123"). Accordingly, no
compensation expense has been recognized for the stock option plans. Had
compensation cost for the Company's stock-based compensation awards issued
during 1998, 1997 and 1996 been determined based on the fair value at the grant
dates of awards consistent with the method of
F-14
<PAGE> 179
SIBIA NEUROSCIENCES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Statement of Financial Accounting Standards No. 123, the Company's actual net
loss and net loss per share would have been increased to the pro forma amounts
indicated below:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------
1998 1997 1996
------------ ----------- -----------
<S> <C> <C> <C>
Net loss:
As reported.............................. $(15,807,000) $(7,593,000) $(5,564,000)
Pro forma................................ (16,605,000) (8,215,000) (5,856,000)
Basic and diluted net loss per common
share:
As reported.............................. $ (1.68) $ (0.82) $ (0.73)
Pro forma................................ (1.76) (0.89) (0.77)
</TABLE>
For purposes of determining the pro forma amounts, the fair value of each
option grant is estimated on the date of grant using the Black-Scholes option
pricing model with the following weighted average assumptions used for grants
during the years ended December 31, 1998, 1997 and 1996, respectively: dividend
yield of 0.0% for all years, risk-free interest rates of 4.76%, 5.70% and 6.16%,
expected volatility of 64.0%, 66.0% and 34.2%, and expected lives of 7.50, 7.50
and 5.81 years. The weighted average fair value of options granted during 1998,
1997 and 1996 for which the exercise price equals the market price on the grant
date was $3.34, $4.79 and $5.29, respectively. The weighted average fair value
of options granted during 1996 for which the exercise price was less than the
market price on the grant date was $6.21. The fair value of the employees'
purchase rights is estimated using the Black-Scholes model with the following
weighted average assumptions used for purchase rights granted during the years
ended December 31, 1998, 1997 and 1996, respectively: dividend yield of 0.0% for
all years, risk-free interest rate of 4.64%, 5.43% and 5.41%, expected
volatility of 64.1%, 66.6% and 66.8% and an expected life of 1.21, 1.47 and 1.26
years. The weighted average fair value of those purchase rights granted in 1998,
1997 and 1996 was $1.99, $5.22 and $4.91, respectively.
Stock Option and Equity Incentive Plans
The Company has various stock option plans and an equity incentive plan
whereby 2,694,306 shares of the Company's Common Stock have been reserved for
issuance to its officers, directors, employees and consultants. The plans are
administered by the Board of Directors or its designees and provide generally
that, for incentive stock options, the exercise price shall not be less than the
fair market value of the shares on the date of grant and, for non-qualified
stock options, the price shall not be less than 85% of the fair market value of
the shares on the date of grant as determined by the Board of Directors. The
options expire not later than ten years from the date of grant and are generally
subject to vesting over four years, as determined by the
F-15
<PAGE> 180
SIBIA NEUROSCIENCES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Board of Directors. A summary of the changes in options outstanding under the
plans for the three years ended December 31, 1998 is as follows:
<TABLE>
<CAPTION>
WEIGHTED
OPTIONS AVERAGE
OUTSTANDING EXERCISE PRICE
----------- --------------
<S> <C> <C>
Balance, December 31, 1995.................................. 1,368,979 $1.31
Options granted:
Price equal to the market price of stock on grant
date................................................. 173,975 7.32
Price less than the market price of stock on grant
date................................................. 186,282 2.01
Options exercised......................................... (570,706) 1.43
Options forfeited......................................... (36,910) 3.06
---------
Balance, December 31, 1996.................................. 1,121,620 2.24
Options granted:
Price equal to the market price of stock on grant
date................................................. 257,892 6.82
Options exercised......................................... (151,545) 1.02
Options forfeited......................................... (40,400) 5.20
---------
Balance, December 31, 1997.................................. 1,187,567 3.29
Options granted:
Price equal to the market price of stock on grant
date................................................. 535,788 4.87
Options exercised......................................... (144,442) 1.13
Options forfeited......................................... (102,110) 5.01
---------
Balance, December 31, 1998.................................. 1,476,803 3.96
=========
Exercisable, December 31, 1998.............................. 674,537 3.24
=========
Available for future grant, December 31, 1998............... 869,794
=========
</TABLE>
Included as options outstanding as of December 31, 1998, 1997 and 1996 in
the above table are options to purchase 264,237, 355,374 and 373,062 shares,
respectively, of Common Stock under the Management Change of Control Plan which,
in the event of a change of control, may have options for which vesting may
accelerate as determined by the value of the Company on the date of such a
change of control. Also included as options outstanding as of December 31, 1998,
1997 and 1996 in the above table are options to purchase 826,871, 385,186 and
155,455 shares, respectively, of Common Stock under the 1996 Equity Incentive
Plan. Shares of Common Stock issued under the 1996 Equity Incentive Plan may be
subject to a repurchase feature in favor of the Company in accordance with a
vesting schedule to be determined by the Board of Directors; however; the right
to repurchase at the original purchase price will lapse at a minimum rate of 20%
per year over the five-year period following the date that the award was
granted. The repurchase feature can be exercised by the Company within the
90-day period following the stockholder's termination of employment or the
relationship as a director or consultant.
F-16
<PAGE> 181
SIBIA NEUROSCIENCES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The following table summarizes information concerning currently outstanding
and exercisable stock options:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
REMAINING WEIGHTED WEIGHTED
RANGE OF NUMBER CONTRACTUAL AVERAGE NUMBER AVERAGE
EXERCISE PRICES OUTSTANDING LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE
--------------- ----------- ----------- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$0.85 - 1.23 298,312 5.42 $0.89 216,064 $0.91
1.45 - 2.13 300,620 1.54 1.71 212,185 1.69
3.75 - 5.00 447,732 9.44 4.72 47,985 4.87
5.63 - 8.38 405,588 8.40 6.68 177,002 6.74
9.75 - 9.88 24,551 7.41 9.78 21,301 9.77
--------- -------
1,476,803 6.70 3.96 674,537 3.24
========= =======
</TABLE>
Employee Stock Purchase Plan
In February 1996, the Company adopted the Employee Stock Purchase Plan
under Section 423 of the Internal Revenue Code in which eligible employees may
use funds from accumulated payroll deductions to purchase shares of Common Stock
at the end of each designated purchase period. Employees may contribute up to
15% of base salary toward such purchases, not to exceed $25,000 per calendar
year. The purchase price is 85% of the fair market value of Common Stock
determined at either the beginning or end of each purchase period, whichever is
lower. The Company has reserved 500,000 shares of Common Stock for issuance
under the plan. In 1998, 1997 and 1996 the Company issued 32,402, 21,821 and
9,408 shares of Common Stock, respectively, under the plan.
Retirement Savings Plan
The Company has a savings plan under Section 401(k) of the Internal Revenue
Code which covers all employees who meet minimum age requirements. Employees can
contribute up to 15% of their salaries, but not in excess of the amount
deductible for income tax purposes. 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 are
vested proportionately over five years of service. The plan may be amended or
discontinued at anytime by the Company. During 1998, 1997 and 1996, the Company
contributed $184,000, $161,000, and $121,000, respectively, to the plan.
NOTE 9. COMMITMENTS AND CONTINGENCIES
Leases and Equipment Notes Payable
Certain scientific instrumentation, computer equipment and other equipment
have been acquired under capital lease and equipment note payable agreements.
These agreements mature at various dates through September 2002 and have
interest rates between 4.2% and 9.5%. As of December 31, 1998, $3,302,000
($2,109,000 net of accumulated amortization) of equipment under these agreements
is included in property and equipment. For the years ended December 31, 1998,
1997 and 1996, $721,000, $542,000 and $483,000 in amortization expense,
respectively, was recorded related to property acquired under such agreements.
During 1998, 1997 and 1996, $90,000, $58,000 and $66,000, respectively, was
paid in imputed interest on capital leases.
For the years ended December 31, 1998, 1997 and 1996, the Company had
non-cash financing activities in the form of capital leases and equipment loans
for $1,565,000, $778,000 and $330,000, respectively.
F-17
<PAGE> 182
SIBIA NEUROSCIENCES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Operating Leases
The Company leases its principal facilities under a long-term operating
lease that expires December 31, 2001. The Company has the option to extend the
lease for a period of five years. Rent expense was $991,000, $967,000, and
$705,000 net of sub-lease income of $490,000, $400,000 and $586,000 for 1998,
1997 and 1996, respectively.
Future minimum payments for capital leases, equipment notes and operating
leases as of December 31, 1998 are as follows (operating lease payments are net
of noncancellable sub-lease income of $441,000).
<TABLE>
<CAPTION>
CAPITAL LEASES AND OPERATING
EQUIPMENT NOTES LEASES
------------------ ----------
<S> <C> <C>
1999.................................................... $ 832,000 $1,032,000
2000.................................................... 717,000 1,518,000
2001.................................................... 648,000 1,563,000
2002.................................................... 79,000
---------- ----------
Total minimum lease payments............................ 2,276,000 $4,113,000
==========
Amount representing interest............................ 201,000
----------
Obligations under capital leases........................ 2,075,000
Less portion due within one year........................ 725,000
----------
Long-term capital lease obligations..................... $1,350,000
==========
</TABLE>
Legal Proceedings
On July 9, 1996, the Company filed an action for patent infringement
against Cadus Pharmaceutical Corporation ("Cadus") in the United States District
Court for the Southern District of California. The complaint asserted that
Cadus' assay technology infringes the Company's United States Patent No.
5,401,629 (the "'629 Patent"), entitled "Assay Methods and Compositions Useful
for Measuring the Transduction of an Intercellular Signal." The Company sought
damages in an unspecified amount and injunctive relief in the complaint.
Cadus responded by asserting that the '629 Patent and the Company's United
States Patent No. 5,436,128 (the "'128 Patent"), entitled "Assay Methods and
Compositions for Detecting and Evaluating the Intercellular Transduction of an
Extracellular Signal," are invalid, unenforceable and not infringed, and further
asserting claims for intentional interference with prospective economic
advantage and unfair competition. Cadus sought declaratory relief and
compensatory and punitive damages against the Company. On August 3, 1998, the
Court granted summary judgment for the Company on Cadus' counterclaims. Cadus
subsequently dismissed its counterclaim alleging invalidity and unenforceability
of the '128 Patent.
On December 18, 1998, the jury returned a verdict in favor of the Company,
finding that the '629 Patent is valid and enforceable and awarding the Company
damages in the amount of $18 million to compensate the Company for Cadus' past
direct and indirect infringement of the '629 Patent. On January 29, 1999, the
Court granted the Company's request for a permanent injunction preventing Cadus,
and all persons acting in concert or otherwise participating with Cadus from
practicing the methods claimed in the '629 Patent.
Cadus has requested that the Court grant a new trial and/or reduce the
jury's damage award. The Court has not yet ruled on that request. Cadus has
indicated publicly that it intends to appeal the decision if that request is
denied.
The Company has recently been notified that the Patent & Trademark Office
has granted a request for reexamination of the '629 Patent. The Company's
management intends to vigorously defend the '629 Patent in that proceeding.
F-18
<PAGE> 183
ANNEX VI
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES AND
EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES AND
EXCHANGE ACT OF 1934
Commission File Number: 0-28310
SIBIA Neurosciences, Inc.
------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 95-3616229
------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
505 Coast Boulevard South, Suite 300, La Jolla, CA 92037
------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(858) 452-5892
------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirement for the past 90 days. Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at July 30, 1999
----- ----------------------------
Common Stock, $.001 par value 9,703,769
<PAGE> 184
SIBIA Neurosciences, Inc.
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART I. FINANCIAL INFORMATION
ITEM 1. Condensed Financial Statements
Condensed Balance Sheet as of June 30, 1999 (Unaudited) and
December 31, 1998.......................................................................3
Condensed Statement of Operations and Comprehensive Loss
(Unaudited) for the Three Months and Six Months Ended June
30, 1999 and 1998.......................................................................4
Condensed Statement of Cash Flows (Unaudited) for the Six
Months Ended June 30, 1999 and 1998.....................................................5
Notes to Financial Statements (Unaudited)..................................................6
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of
Operations................................................................................9
ITEM 3. Quantitative and Qualitative Disclosure About Market Risk.................................12
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings.........................................................................13
ITEM 2. Changes in Securities and Use of Proceeds.................................................13
ITEM 3. Defaults Upon Senior Securities...........................................................14
ITEM 4. Submission of Matters to a Vote of Security Holders.......................................15
ITEM 5. Other Information.........................................................................15
ITEM 6. Exhibits and Reports on Form 8-K..........................................................16
SIGNATURE.............................................................................................17
</TABLE>
2
<PAGE> 185
PART I. FINANCIAL INFORMATION
ITEM 1. Condensed Financial Statements
SIBIA NEUROSCIENCES, INC.
CONDENSED BALANCE SHEET
<TABLE>
<CAPTION>
June 30, 1999 December 31, 1998
------------- -----------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents .................................................... $ 15,809,000 $ 4,595,000
Investment securities ........................................................ 2,779,000 12,592,000
Contracts and accounts receivable ............................................ 2,069,000 501,000
Prepaid expenses and other current assets .................................... 282,000 683,000
------------ ------------
Total current assets ................................................. 20,939,000 18,371,000
Property and equipment, net .................................................... 2,757,000 2,638,000
Other assets ................................................................... 12,000 190,000
------------ ------------
$ 23,708,000 $ 21,199,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ............................................................. $ 2,309,000 $ 2,567,000
Accrued liabilities .......................................................... 1,753,000 2,142,000
------------ ------------
Total current liabilities ............................................ 4,062,000 4,709,000
Contract advance ............................................................... 1,375,000
Long-term capital lease obligations ............................................ 1,296,000 1,350,000
Commitments and contingencies (Note 3)
Stockholders' equity:
Preferred Stock, $.001 par value; 5,000,000 shares authorized (Note 6):
Series B Convertible Non-Voting, one share issued and outstanding at
June 30, 1999 (liquidating value $5,000,000) -- --
Common Stock, $.001 par value; 25,000,000 shares authorized; 9,703,469 and
9,515,588 shares issued and outstanding at June 30, 1999 and December 31,
1998, respectively........................................................ 10,000 10,000
Additional paid-in capital ................................................... 65,471,000 60,206,000
Deferred compensation ........................................................ (159,000) (273,000)
Notes receivable from stockholders ........................................... (60,000) (83,000)
Accumulated other comprehensive income ....................................... 145,000 373,000
Accumulated deficit .......................................................... (48,432,000) (45,093,000)
------------ ------------
Total stockholders' equity ........................................... 16,975,000 15,140,000
------------ ------------
$ 23,708,000 $ 21,199,000
============ ============
</TABLE>
See accompanying notes to financial statements.
3
<PAGE> 186
SIBIA NEUROSCIENCES, INC.
CONDENSED STATEMENT OF OPERATIONS AND COMPREHENSIVE LOSS (UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1999 1998 1999 1998
----------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
Revenue:
Contract ......................................................... $ 1,458,000 $ 2,276,000 $ 2,468,000 $ 3,810,000
License and royalty .............................................. 2,763,000 85,000 4,268,000 85,000
----------- ----------- ------------ ------------
Total revenue (Note 4) ........................................ 4,221,000 2,361,000 6,736,000 3,895,000
----------- ----------- ------------ ------------
Operating expenses:
Research and development ......................................... 3,951,000 4,514,000 8,453,000 9,310,000
General and administrative ....................................... 1,045,000 1,586,000 2,220,000 3,077,000
----------- ----------- ------------ ------------
Total operating expenses ...................................... 4,996,000 6,100,000 10,673,000 12,387,000
----------- ----------- ------------ ------------
(775,000) (3,739,000) (3,937,000) (8,492,000)
Other income (expense):
Interest income .................................................. 183,000 412,000 404,000 876,000
Interest expense ................................................. (35,000) (24,000) (68,000) (47,000)
Gain on sale of investment ....................................... 105,000 900,000 239,000 1,160,000
Other ............................................................ 23,000 -- 23,000 --
----------- ----------- ------------ ------------
276,000 1,288,000 598,000 1,989,000
----------- ----------- ------------ ------------
Net loss ........................................................... (499,000) (2,451,000) (3,339,000) (6,503,000)
Other comprehensive income - unrealized holding gains
(losses) arising during period ..................................... 3,000 (351,000) 11,000 (568,000)
Less: reclassification adjustment for
gains included in net loss ......................................... (105,000) (900,000) (239,000) (1,160,000)
----------- ----------- ------------ ------------
Comprehensive loss ................................................. $ (601,000) $(3,702,000) $ (3,567,000) $ (8,231,000)
=========== =========== ============ ============
Basic and diluted net loss per
common share (Note 7) ............................................. $ (0.05) $ (0.26) $ (0.35) $ (0.69)
=========== =========== ============ ============
Shares used in computing basic and diluted net loss per common share 9,661,653 9,391,243 9,592,874 9,378,271
=========== =========== ============ ============
</TABLE>
See accompanying notes to financial statements.
4
<PAGE> 187
SIBIA NEUROSCIENCES, INC.
CONDENSED STATEMENT OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
1999 1998
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net loss .............................................. $ (3,339,000) $ (6,503,000)
Adjustments to reconcile net loss to net cash provided
(used) by operating activities:
Depreciation and amortization ....................... 540,000 443,000
Compensation from issuance of common stock
options............................................. 88,000 152,000
Gain on sale of investment .......................... (239,000) (1,160,000)
Net amortization of premium and discount on
investment securities ............................. 46,000 (44,000)
Increase (decrease) in cash resulting from changes in:
Contract and accounts receivable .................... (1,568,000) 325,000
Prepaid expenses and other assets ................... 579,000 (691,000)
Accounts payable and accrued liabilities ............ (697,000) 958,000
Contract advance and deferred revenue ............... 1,375,000 13,000
------------ ------------
Net cash provided (used) by operating activities (3,215,000) (6,507,000)
------------ ------------
Cash flows from investing activities:
Purchase of investment securities available-for-sale . (2,500,000) (6,232,000)
Maturities and sales of investment securities
available-for-sale .................................. 12,239,000 14,160,000
Principal payments received on investment securities
available-for-sale .................................. 39,000 37,000
Acquisition of property and equipment ................. (256,000) (141,000)
------------ ------------
Net cash provided (used) by investing activities 9,522,000 7,824,000
------------ ------------
Cash flows from financing activities:
Proceeds from issuance of stock ....................... 5,291,000 132,000
Proceeds from payment on notes receivable ............. 23,000 --
Principal payments on capital lease obligations ....... (407,000) (383,000)
------------ ------------
Net cash provided (used) by financing activities 4,907,000 (251,000)
Net increase (decrease) in cash and cash equivalents .... 11,214,000 1,066,000
Cash and cash equivalents at beginning of period ........ 4,595,000 4,972,000
------------ ------------
Cash and cash equivalents at end of period .............. $ 15,809,000 $ 6,038,000
============ ============
Supplemental Information:
Equipment acquired under capital leases ............... $ 403,000 $ 809,000
============ ============
</TABLE>
See accompanying notes to financial statements.
5
<PAGE> 188
SIBIA Neurosciences, Inc.
NOTES TO THE FINANCIAL STATEMENTS
June 30, 1999
(Unaudited)
1. BASIS OF PRESENTATION
The accompanying unaudited financial statements of SIBIA Neurosciences, Inc.
("SIBIA" or the "Company") have been prepared in accordance with generally
accepted accounting principles for interim financial information and with the
rules and regulations of the Securities and Exchange Commission ("SEC").
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Operating results for the three- and six-month periods ended June 30, 1999 are
not necessarily indicative of the results that may be expected for the year
ended December 31, 1999. For further information, refer to the financial
statements and footnotes thereto for the year ended December 31, 1998, included
in the Company's Form 10-K filed with the SEC.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets, liabilities, revenues and expenses and
related disclosures as of the date of the financial statements. Actual results
could differ from such estimates.
2. RELATED PARTY TRANSACTIONS
Total revenue for the three- and six-month periods ended June 30, 1999 included
no amounts from collaborative partners that are related parties. For the
corresponding periods in 1998, total revenue included $813,000 and $1,526,000,
respectively, from a collaborative partner that is a related party.
3. COMMITMENTS AND CONTINGENCIES
The Company is involved in certain litigation with Cadus Pharmaceutical
Corporation and Pfizer, Inc. See further discussion of this matter at Item 1 in
Part II of this Form 10-Q.
4. SIGNIFICANT OPTION AND LICENSE AGREEMENTS
During the first six months of 1999, SIBIA entered into licensing agreements
with Bristol-Myers Squibb, SmithKline Beecham, and American Home Products. The
agreements grant the licensees non-exclusive rights to use the Company's
patented transcription-based assay technology. SIBIA expects to receive annual
maintenance payments as well as royalties on the sales of any products
identified using the licensed technology.
6
<PAGE> 189
5. RESEARCH COLLABORATIONS
In May 1999, SIBIA entered into a collaborative agreement with Eli Lilly and
Company to research and develop compounds effective in treating disorders of the
central nervous system. SIBIA and Lilly will work together to identify and
optimize compounds selective for subtypes of nicotinic acetylcholine receptors
(nAChRs). Under the terms of the agreement, Lilly made a $5 million equity
investment, for one share of the Company's Series B Convertible Non-Voting
Preferred Stock, and will make payments of approximately $5.5 million per year
for research support. The agreement has a minimum initial term of two years,
although it may be terminated earlier in connection with a change in control of
the Company. Eli Lilly was granted exclusive worldwide rights, subject to some
limitations, to manufacture and market products it or SIBIA discovers during the
research collaboration. SIBIA is entitled to receive milestone payments at
certain stages of development of product candidates, if any are identified, and
royalties on sales of products that are developed.
6. SERIES B CONVERTIBLE NON-VOTING PREFERRED STOCK
The Series B Convertible Non-Voting Preferred Stock shall be convertible into
such number of shares of Common Stock as is determined as follows:
(a) At the option of the holder, anytime prior to February 21, 2001, by
dividing $2,000,000 by the average of the closing prices per share of the
Common Stock on the Nasdaq National Market (or any other national
securities exchange on which the Common Stock is then traded) for the 30
consecutive trading days ending on the trading day immediately preceding
the date of such conversion (the "Average Closing Price"), or
(b) Unless converted earlier pursuant to (a) above, the outstanding Series B
Convertible Non-Voting Preferred Stock shall automatically convert on the
date (the "Automatic Conversion Date") that is the earlier of (i) February
21, 2001, or (ii) the date of the closing of a "Change of Control", as
defined in the agreement, in the following manner:
(x) in the event that candidate selection approval is achieved for a
collaboration compound under the collaboration agreement between Eli
Lilly and the Company prior to the Automatic Conversion Date - by
dividing $2,000,000 by the Average Closing Price, or
(y) in the event that candidate selection approval is not achieved for a
collaboration compound under the collaboration agreement between Eli
Lilly and the Company prior to the Automatic Conversion Date - by
dividing $5,000,000 by the Average Closing Price.
7
<PAGE> 190
Notwithstanding the foregoing, (1) in no event will the total number of shares
of Common Stock beneficially owned by the holder of the Series B Convertible
Non-Voting Preferred Stock upon conversion of the Series B Convertible
Non-Voting Preferred Stock exceed 15% of the Common Stock then outstanding, and
(2) the Company will not be obligated to issue upon conversion of the Series B
Convertible Non-Voting Preferred Stock a number of shares of Common Stock
representing more than 19.9% of the Common Stock outstanding on the date that
the first share of Series B Convertible Non-Voting Preferred Stock was issued if
such issuance would constitute a violation of the Company's obligations under
the rules or regulations of the Nasdaq National Market (or any other national
securities exchange on which the Company's Common Stock is then traded).
7. NET LOSS PER COMMON SHARE
For all periods presented, both basic and diluted loss per common share are
computed based on the weighted average number of shares of Common Stock
outstanding during the period. Stock options and conversion of the Series B
Convertible Non-Voting Preferred Stock, could potentially dilute basic earnings
per share in the future but were excluded from the computation of diluted loss
per share as their effect is antidilutive for the periods presented. Common
share equivalents that would have been included in the computation of diluted
loss per common share if they were not antidilutive totaled 494,700, and 596,260
for the three months ended June 30, 1999 and June 30, 1998, respectively, and
423,020, and 576,646 for the six months ended June 30, 1999 and June 30 1998,
respectively.
8. SUBSEQUENT EVENTS
In July 1999, SIBIA entered into an agreement with Pharmacia & Upjohn Company.
Under the agreement, the Company licensed to Pharmacia & Upjohn non-exclusive
rights to use its patented transcription-based assay technology. SIBIA will
receive annual maintenance payments as well as royalties on the sales of any
products identified using the licensed technology.
In August 1999, SIBIA entered into a non-exclusive license agreement for its
transcription-based assay patent portfolio with Glaxo Wellcome. The agreement
grants Glaxo Wellcome and its affiliates a fully paid-up, worldwide license to
certain patents in the Company's transcription-based assay patent portfolio.
Glaxo Wellcome also has the option of obtaining a fully paid-up license to two
additional patents at the conclusion of certain proceedings. Under the terms of
the agreement, SIBIA will receive an up-front payment and additional payments
should Glaxo Wellcome exercise its options.
The initial Phase 2 clinical trials of the Company's compound SIB-1508Y for
Parkinson's disease were completed in July 1999. SIB-1508Y did not demonstrate
statistically significant improvement relative to placebo. However SIB-1508Y did
show improvement relative to baseline status in certain motor and cognitive
measures as well as dose tolerability. The Company believes that further studies
are warranted, and the Company expects that any future clinical studies will be
carried out by a collaborative partner.
The Phase 2 clinical trial of SIB-1553A for Alzheimer's disease is expected to
be completed during the third quarter of 1999.
8
<PAGE> 191
On August 2, 1999, the Company and Merck & Co., Inc. announced that they have
entered into a definitive agreement under which Merck will acquire SIBIA for
$8.50 per share in cash. Merck commenced a tender offer for the outstanding
SIBIA shares on or about August 6, 1999.
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
OVERVIEW
Except for the historical information contained herein, the discussion in this
report contains forward-looking statements that involve risks and uncertainties.
The Company's actual results may differ significantly from those discussed in
this report. Factors that might cause or contribute to such differences include,
without limitation, those discussed in this Item 2 (Management's Discussion and
Analysis of Financial Condition and Results of Operations) as well as those
discussed in the Company's Form 10-K for the year ended December 31, 1998 under
the headings "Risk Factors" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
SIBIA, incorporated in Delaware in 1981, was established by The Salk Institute
for Biological Studies. Through 1990, SIBIA successfully developed several
proprietary life-sciences technologies in collaboration with corporate partners.
In 1987, SIBIA initiated research in the neuroscience field and in 1991 shifted
its focus completely to the development of novel therapeutics to treat nervous
system disorders.
The Company has no products available for sale and does not expect to have any
products resulting from its research efforts, including its collaborations with
others, commercially available for at least several years, if at all. Except for
1995, the Company has incurred net losses every year since shifting its area of
therapeutic focus to the central nervous system in 1991. The Company is
continuing to incur losses and expects to incur increasing operating losses over
the next several years as the Company's research and development efforts expand.
The Company expects that its revenue and other income for the next several years
will fluctuate significantly from quarter to quarter and will be limited to
payments under its collaborative relationships, license fees, interest income
and other miscellaneous income.
RESULTS OF OPERATIONS
Revenue
The Company had total revenue of $4,221,000 and $6,736,000 for the three- and
six-month periods ended June 30, 1999, compared with $2,361,000 and $3,895,000,
respectively, for the same periods in 1998. The increase in the comparable
three-month periods was due primarily to the signing of non-exclusive license
agreements with SmithKline Beecham and American Home Products to use the
Company's patented transcription-based assay technology ("TBA") and the initial
revenues from the collaborative agreement with Eli Lilly and Company. This
increase was partially offset by decreases in revenue from collaborative
research programs with Novartis AG
9
<PAGE> 192
and Bristol-Meyers Squibb and a decrease in revenue generated from various
studies performed for Meiji Seika Kaisha. The net increase in the comparable
six-month periods was also due to the foregoing and the signing of an additional
TBA license agreement with Bristol-Meyers Squibb.
Expenses
Research and development expenses decreased to $3,951,000 for the second quarter
and $8,453,000 for the six-month period ended June 30, 1999 from $4,514,000 and
$9,310,000, respectively, for the same periods in 1998. The decrease in research
and development expenses for the comparable periods was primarily due to reduced
costs associated with the clinical studies for the Company's two lead drug
candidates SIB-1508Y and SIB-1553A.
General and administrative expenses decreased to $1,045,000 for the second
quarter and $2,220,000 for the six-month period ended June 30, 1999 from
$1,586,000 and $3,077,000, respectively, for the same periods in 1998. The
decrease in general and administrative expenses in the comparable three- and
six-month periods was due primarily to reduced expenditures from legal expenses
related to patent litigation.
Other Income
Other income decreased to $276,000 for the three-month period ended June 30,
1999 and $598,000 for the six-month period ended June 30, 1999 from $1,288,000
and $1,989,000, respectively, for the same periods in 1998. The decrease in
other income in the comparable three- and six-month periods was due primarily to
a decrease of interest income as a result of lower average cash and investment
balances carried in 1999 and a decrease of gains from the sale of investment
securities.
Liquidity and Capital Resources
Cash and cash equivalents and investment securities were approximately
$17,187,000 at December 31, 1998 as compared to $18,588,000 at June 30, 1999.
This increase was primarily attributable to increased license revenues and an
equity investment.
To date, the Company has financed its operations primarily through equity
financings, research contracts (generally conducted on a best efforts basis),
and license and royalty revenues. Since 1991, the Company has received
approximately $46,775,000 in net proceeds from the sale of Convertible Preferred
Stock and Common Stock to investors and collaborative partners and approximately
$61,715,000 in contract, license, and royalty revenue. As of June 30, 1999, the
Company had an accumulated deficit of approximately $48,432,000.
The Company is entitled to receive additional payments under its collaborative
agreements in the form of contract revenue, milestone payments, if milestones
are achieved, and royalties, if products are commercialized. The Company
currently receives ongoing collaborative research funding from Eli Lilly. The
collaboration with Eli Lilly has a minimum initial term of two years, although
it may be terminated earlier upon change in control of the Company. Under its
license agreements, the Company is also entitled to receive annual maintenance
payments as well as
10
<PAGE> 193
royalties on the sales of any products identified using the licensed technology.
In August 1999, the Bristol-Meyers Squibb collaborative research funding was
terminated.
The Company leases laboratory and office facilities under an agreement expiring
on December 31, 2001. The average minimum annual payment under the lease is
approximately $1,518,000, before consideration of sublease income. The Company
believes that its present facility will be adequate to conduct its research
activities through December 2001. Management believes that it should be able to
secure additional space at commercially reasonable rates, if necessary. The
Company has an option to extend its lease for an additional five years. Since
1991, the Company has invested $6,392,000 in property and equipment. Included
within this amount is $5,052,000 of equipment under capital leases.
The Company anticipates that the cash, cash equivalents and investment
securities balance of $18,588,000 as of June 30, 1999 will be used to support
continued research and development of its technologies and fund other general
and administrative expenditures and will be sufficient to maintain operations
through mid-2000. However, the Company expects to incur substantial research and
development expenses including continued increases in personnel costs and costs
related to the continued expansion of its drug discovery platforms and
pre-clinical testing and early stage clinical trials. The Company's future
capital needs will be dependent upon many factors, including progress in its
research and development activities, the magnitude and scope of these
activities, progress with pre-clinical and clinical trials, the cost of
preparing, filing, prosecuting, maintaining, defending and enforcing patent
claims and other intellectual property rights, competing technological and
market developments, changes in or terminations of existing collaborative
arrangements, the establishment of additional licensing and/or collaborative
arrangements, and the cost of manufacturing scale-up and development of
marketing activities, if undertaken by the Company.
The Company believes its drug discovery programs and technologies will lead to
corporate collaboration and licensing opportunities which may generate future
revenues in the form of license fees, milestone payments and/or royalties. The
Company may also seek additional funding through public or private financing.
There can be no assurance that the Company will be successful in its efforts to
collaborate with additional partners or that additional financing from other
sources will be available on favorable terms, if at all. If additional funds are
raised by issuing equity securities, further dilution to then existing
stockholders would result. If adequate funds are not available, the Company may
be required to curtail significantly or eliminate one or more of its research,
discovery or development programs.
Year 2000
As many computer systems and other equipment with embedded chips or processors
use only two digits to represent the year, they may be unable to process
accurately certain data before, during, or after the year 2000. As a result,
internal systems of the Company and its suppliers and vendors are at risk for
possible miscalculations or systems failures causing disruptions in their
business operations. This is commonly known as the Year 2000 ("Y2K") issue.
The Company has formed a Y2K Compliance Committee ("Y2K Committee"), with
representation from each major functional area within the organization that has
been charged with implementing the Company's Y2K Compliance Program ("Y2K
Program"). The Y2K
11
<PAGE> 194
Program has been designed to identify those issues (both internal and external
and involving both information technology ("IT") and non-IT systems) that would
cause material interruption to the Company's "business as usual" and consists of
the following phases: (1) identification of all Y2K issues; (2) assigning
priorities to identified items; (3) assessing the Y2K compliance of items
determined to be material to the Company; (4) repairing or replacing items that
are determined to be material to the Company; (5) testing material items; and
(6) designing contingency and business continuation plans.
The Company has completed the identification, assignment, and assessment phases
for all material Y2K issues. The Company has completed the repair and/or the
replacement, including compliance confirmation by third parties, for
approximately 80% of the identified items. The repair or replacement and testing
of the remaining items is currently underway with various expected completion
dates through the fourth quarter of 1999. The Company currently plans to
complete a contingency plan during the fourth quarter for any systems or third
party vendors not expected to be Y2K compliant by December 31, 1999.
No material costs (including, without limitation, costs related to system
replacement) have been incurred to date in the Company's effort to address its
Y2K issues, and the Company does not expect the amounts to become material in
the future. The total Y2K issue cost to the Company is expected to be less than
$50,000. Y2K costs will be funded with cash from the Company's working capital.
The Company estimates that Y2K issues will use less than 5% of its IT budget. No
other material IT projects have been deferred because of efforts put into Y2K
compliance.
The failure to correct a material Y2K issue could result in an interruption in,
or a failure of, the Company's business as usual. Due to the general uncertainty
inherent in the Y2K issue, resulting in part from the uncertainty of the Y2K
readiness of third-party suppliers and service providers, the Company is unable
to determine at this time whether the consequences of Y2K failures will have a
material impact on the Company's results of operations, liquidity and financial
condition. The Company's Y2K Program is expected to significantly reduce the
Company's level of uncertainty about the Y2K issue and, in particular, about the
Y2K readiness of its suppliers and service providers. The Company believes that
with the completion of the Y2K program as scheduled, the possibility of
significant interruptions of normal operations will be greatly reduced.
The most likely worst case Y2K scenario facing the Company involves third-party
vendors of utility services who fail to adequately address their own Y2K issues.
The Company has begun to identify alternative solutions to deal with problems
associated with utility failures, and we hope to have contingency plans
finalized in the fourth quarter of 1999.
The estimated timing of completion of these efforts is a forward-looking
statement that involves risk and uncertainties, including the risk that such
efforts will not adequately address such Y2K problems and that, as a result, the
Company's business will be adversely affected.
ITEM 3. Quantitative and Qualitative Disclosure About Market Risk
Not Applicable.
12
<PAGE> 195
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings:
a. Cadus Pharmaceutical Corporation. On July 9, 1996, the Company filed an
action for patent infringement against Cadus Pharmaceutical Corporation
("Cadus") in the United States District Court for the Southern District of
California. The complaint asserted that Cadus' assay technology infringed the
Company's United States Patent No. 5,401,629 (the `629 Patent"). In the
complaint, the Company sought damages in an unspecified amount and injunctive
relief.
In November 1998, the case proceeded to trial over the Company's claim of
infringement and Cadus' counterclaims of invalidity, unenforceability and
non-infringement of the `629 Patent. On December 18, 1998, the jury returned a
verdict in favor of the Company, finding that the '629 Patent is valid and
enforceable and awarding the Company damages in the amount of $18 million for
Cadus' infringement. On January 29, 1999, the Court granted the Company's
request for a permanent injunction preventing Cadus, and all persons acting in
concert or otherwise participating with Cadus, from practicing the methods
claimed in the '629 Patent. On March 10, 1999, the Court confirmed the jury's
verdict in all respects and entered judgment in favor of the Company. Cadus
filed a notice of appeal from the judgment on March 25, 1999.
The Company has recently been notified that the Patent & Trademark Office has
granted requests for reexamination of the '629 Patent. The Company's management
intends to vigorously defend the '629 Patent in that proceeding.
b. Pfizer, Inc. On May 5, 1999, Pfizer, Inc. ("Pfizer") filed an action for
declaratory relief against the Company in the United States District Court for
the District of Delaware. The complaint purports to seek a judgment regarding
the Company's '629 Patent and United States Patent No. 5,436,128 that Pfizer
does not infringe and the patents are invalid and/or unenforceable. On May 27,
1999, the Company filed a counterclaim against Pfizer alleging that Pfizer
infringes the `629 patent and seeking damages and injunctive relief.
The Company's management does not believe that the Pfizer complaint is
meritorious and intends to prosecute its claim of infringement.
ITEM 2. Changes in Securities and Use of Proceeds:
In May 1999, the Company issued one share of Series B Convertible Non-Voting
Preferred Stock priced at $5,000,000 per share to Eli Lilly and Company. Such
share is convertible into such number of shares of Common Stock as is determined
as follows:
(a) At the option of the holder, anytime prior to February 21, 2001, by
dividing $2,000,000 by the average of the closing prices per share of the
Common Stock on the Nasdaq National Market (or any other national
securities exchange on which the Common Stock is then traded) for the 30
consecutive trading days ending on the trading day immediately preceding
the date of such conversion (the "Average Closing Price"), or
13
<PAGE> 196
(b) Unless converted earlier pursuant to (a) above, the outstanding Series B
Preferred Stock shall automatically convert on the date (the "Automatic
Conversion Date") that is the earlier of (i) February 21, 2001, or (ii) the
date of the closing of a "Change of Control," as defined in the Agreement,
in the following manner:
(x) in the event that candidate selection approval is achieved for a
collaboration compound under the collaboration agreement between Eli
Lilly and the Company prior to the Automatic Conversion Date, by
dividing $2,000,000 by the Average Closing Price, or
(y) in the event that candidate selection approval is not achieved for a
collaboration compound under the collaboration agreement between Eli
Lilly and the Company prior to the Automatic Conversion Date, by
dividing $5,000,000 by the Average Closing Price.
Notwithstanding the foregoing, (1) in no event will the total number of shares
of Common Stock beneficially owned by the holder of the Series B Convertible
Non-Voting Preferred Stock upon conversion of the Series B Convertible
Non-Voting Preferred Stock exceed 15% of the Common Stock then outstanding, and
(2) the Company will not be obligated to issue upon conversion of the Series B
Convertible Non-Voting Preferred Stock a number of shares of Common Stock
representing more than 19.9% of the Common Stock outstanding on the date that
the first share of Series B Convertible Non-Voting Preferred Stock was issued if
such issuance would constitute a violation of the Company's obligations under
the rules or regulations of the Nasdaq National Market (or any other national
securities exchange on which the Company's Common Stock is then traded).
The Company has agreed to file a registration statement covering the re-sale of
the shares of Common Stock underlying the Series B Convertible Non-Voting
Preferred Stock. The Company intends to use the proceeds from the sale of the
Series B Convertible Non-Voting Preferred Stock to fund operations.
The sale and issuance of the Series B Convertible Non-Voting Preferred Stock in
the transaction described in the foregoing paragraph was deemed to be exempt
from registration under the Securities Act of 1933, as amended, by virtue of
Regulation D promulgated under such Act. Eli Lilly represented its intention to
acquire the securities for investment only and not with a view to the
distribution thereof. Appropriate legends are affixed to the stock certificate
issued in the transaction. Eli Lilly represented that it received adequate
information about the Company.
ITEM 3. Defaults Upon Senior Securities:
None.
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<PAGE> 197
ITEM 4. Submission of Matters to a Vote of Security Holders:
(a) The Company held its Annual Meeting of Stockholders on May 26,
1999.
(b) One director was elected to serve for a term of three years
ending at the 2002 annual meeting:
<TABLE>
<CAPTION>
FOR WITHHELD
--- --------
<S> <C> <C>
Dr. James D. Watson 8,050,836 512,981
</TABLE>
In addition to the above director elected at the 1999 annual
meeting, the following directors will continue in office:
Stanley T. Crooke, M.D., Ph.D.
Jeffrey F. McKelvy, Ph.D.
William R. Miller
William T. Comer, Ph.D.
Gunnar Ekdahl
(c) The following items were approved at the Annual Meeting:
(1) The amendment of the Company's 1996 Equity Incentive
Plan, to increase the aggregate number of shares of
common stock authorized for issuance under the Plan
from 1,513,141 shares to 2,513,141. The total votes
for, against, abstained, and broker non-votes were
5,069,098, 1,167,776, 1,951, and 2,324,992,
respectively.
(2) The selection of PricewaterhouseCoopers LLP as the
Company's independent auditors for the fiscal year
ending December 31, 1999. The total votes for, against,
and abstained were 8,542,334, 21,232, and 251,
respectively. There were no broker non-votes.
ITEM 5. Other Information:
Pursuant to the Company's bylaws, stockholders who wish to bring
matters or propose nominees for director at the Company's 2000
annual meeting of stockholders must provide specified information to
the Company not later than the close of business on December 16,
1999 unless such matters are included in the Company's proxy
statement pursuant to Rule 14a-8 under the Securities Exchange Act
of 1934, as amended.
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<PAGE> 198
ITEM 6. Exhibits and Reports on Form 8-K:
(a) Exhibits
4.3 Stock Purchase Agreement dated May 25, 1999
between Registrant and Eli Lilly and Company
("Lilly"). *
10.42 Collaboration Agreement dated May 25, 1999 between
Registrant and Lilly. *
27.1 Financial Data Schedule. (Exhibit 27 is submitted
as an exhibit in the electronic format of this
Quarterly Report on Form 10-Q submitted to the
Securities and Exchange Commission.)
(b) Reports on Form 8-K
None.
* Confidential treatment has been requested with respect
to certain portions of this exhibit. Omitted portions
have been filed separately with the Securities and
Exchange Commission.
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<PAGE> 199
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed in its behalf by the
undersigned thereunto duly authorized.
SIBIA Neurosciences, Inc.
Date: August 16, 1999 By: /s/ THOMAS A. REED
------------------------ ----------------------------
Thomas A. Reed
Vice President, Finance & Administration,
and Chief Financial Officer
(on behalf of the registrant and as the
registrant's principal financial officer)
17
