As filed with the Securities and Exchange Commission on November 5, 1998
Registration No. 333-61317
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------------
AMENDMENT NO. 4
TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
Agouron Pharmaceuticals, Inc.
(Exact name of registrant as specified in its charter)
California 2830 33-0061928
(State or other (Primary Standard Industrial (I.R.S. Employer
jurisdiction of Classification Code Number) Identification No.)
incorporation or
organization)
10350 North Torrey Pines Road, La Jolla, California 92037
(619) 622-8000
(Address, including zip code, and
telephone number, including
area code, of Registrant's
principal executive offices)
Peter Johnson
President and Chief Executive Officer
AGOURON PHARMACEUTICALS, INC.
10350 North Torrey Pines Road, La Jolla, California 92037
(619) 622-8000
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
-----------------------
Copies to:
John M. Dunn, Esq. and Stanton D. Wong, Esq.
PILLSBURY MADISON & SUTRO LLP
101 West Broadway
Suite 1800
San Diego, California 92101
Approximate date of commencement of proposed sale to the public: As soon as
practicable after approval by the shareholders.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
-----------------------
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
[Agouron Pharmaceuticals Letterhead appears here]
November 12, 1998
Dear Shareholder:
You are cordially invited to attend the Annual Meeting of Shareholders
of Agouron Pharmaceuticals, Inc. which will be held on Wednesday,
December 16, 1998, at 10:00 a.m., San Diego time, at the Sheraton
Grande Torrey Pines, 10950 North Torrey Pines Road, La Jolla,
California 92037.
At the Annual Meeting, shareholders will be asked to consider and
approve a proposal (the "Divisional Stock Proposal"), which is being
recommended by your Board of Directors (the "Board"), to increase the
number of shares of authorized Common Stock to 150,000,000 shares, to
create two series of Common Stock that are intended to reflect
separately the performances of Agouron's Oncology Division (the
"Oncology Division") and its other businesses ("Agouron
Pharmaceuticals") and to authorize the issuance of one or more
additional series of Common Stock by the Board from undesignated shares
of Common Stock; 75,000,000 shares will be initially designated as
Agouron Pharmaceuticals Common Stock ("Agouron Pharmaceuticals Stock")
and 25,000,000 will be initially designated as Agouron Oncology
Division Common Stock ("Oncology Division Stock"). Undesignated shares
of Common Stock may be used for new series of Common Stock or to
increase or decrease shares of an existing series of Common Stock. The
Company is currently investigating the availability of names under
which the Oncology Division will operate. The exact name of the
division and of the divisional stock will be determined and announced
prior to the implementation of the Divisional Stock Proposal.
If the Divisional Stock Proposal is approved by the shareholders, the
Board will have the authorization to create a new series of Common
Stock intended to reflect the performance of the Oncology Division (the
"Oncology Division Stock"). Each outstanding share of Agouron's
existing Common Stock (the "Existing Common Stock") will be converted
into one share of a series of Common Stock intended to reflect the
performance of the Agouron Pharmaceuticals Division ("the Agouron
Pharmaceuticals Stock"), and 0.5 shares of Oncology Division Stock,
intended to reflect the performance of the Oncology Division. The
transactions contemplated by the Divisional Stock Proposal are intended
to be tax free for both the Company and its shareholders except with
respect to cash received in lieu of fractional shares.
The Divisional Stock Proposal is designed to separate the business,
cash flows and reported operating results of the Oncology Division from
the rest of the Company's business, enable better capital allocation
decisions, charge the managers of each Division with the responsibility
of maximizing the returns from their businesses, and provide the
opportunity to structure more focused incentives to management teams
and employees. In addition, this new equity structure should increase
the Company's flexibility in raising capital and responding to
acquisitions and other strategic opportunities by enabling the Company
to issue Agouron Pharmaceuticals Stock or Oncology Division Stock as
appropriate under the particular circumstances.
By providing investors with separate classes of Common Stock intended
to reflect the respective performances of Agouron Pharmaceuticals and
the Oncology Division, we believe the Divisional Stock Proposal should
allow investors and analysts to gain a better understanding of each
business and enable investors to invest in either or both securities
depending upon their individual
<PAGE>
investment objectives. The Board believes that the Divisional Stock
Proposal should result in greater market recognition of the value of
each of these businesses, while at the same time enabling the Company
to preserve the operational and financial benefits it currently enjoys
as a single company.
The Divisional Stock Proposal will not result in a distribution or
spin-off to shareholders of any assets or liabilities of Agouron
Pharmaceuticals, Inc. or its subsidiaries. Holders of Agouron
Pharmaceuticals Stock and the Oncology Division Stock will be common
shareholders of the Company and, as such, will be subject to all risks
associated with an investment in Agouron Pharmaceuticals, Inc. and all
of its businesses, assets and liabilities. Following implementation of
the Divisional Stock Proposal, there can be no assurance as to whether
or to what extent the market values of the Agouron Pharmaceuticals
Stock and the Oncology Division Stock will reflect the separate
performance of Agouron Pharmaceuticals and the Oncology Division, or
that the combined market values of the Agouron Pharmaceuticals Stock
and the Oncology Division Stock will equal or exceed the market value
of the Existing Common Stock. In addition, implementation of the
Divisional Stock Proposal will, to an extent, make the capital
structure of the Company more complex and may give rise to occasions
when the interests of the holders of Agouron Pharmaceuticals Stock and
the holders of the Oncology Division Stock may diverge or conflict.
At the Annual Meeting, shareholders will also be asked to consider and
approve proposals to increase the number of shares available for
issuance under the Company's 1996 Stock Option Plan and to increase the
number of shares available for purchase under the Company's Employee
Stock Purchase Plan. Additionally, the shareholders will be asked to
elect nine directors, all of whom shall serve until the 1999 Annual
Meeting of Shareholders and until the election and qualification of
their successors, and to ratify the selection of independent
accountants.
The Board has carefully considered the Divisional Stock Proposal and
each of the other proposals set forth in the Notice of Annual Meeting
and believes that the approval of each of the proposals by the
shareholders is in the best interests of the Company and the
shareholders. Accordingly, the Board unanimously recommends that the
shareholders approve the Divisional Stock Proposal and each of the
other proposals set forth in the Notice of Annual Meeting of
Shareholders which are described in more detail in the attached Proxy
Statement/Prospectus. The Board also recommends that shareholders vote
for the nine nominees for director listed in the attached Proxy
Statement/Prospectus.
To expedite the admissions process for the Annual Meeting, please
indicate if you will be attending by marking the appropriate box on the
enclosed proxy card and returning it to our transfer agent, ChaseMellon
Shareholder Services.
Regardless of whether you plan to be present at the Annual Meeting,
your shares should be represented and voted. Therefore, please
complete, sign and return the enclosed Proxy Card in the envelope
provided at your earliest convenience, whether or not you plan to
attend.
Sincerely,
/s/ Peter Johnson
Peter Johnson
President and Chief Executive Officer
<PAGE>
AGOURON PHARMACEUTICALS, INC.
10350 North Torrey Pines Road
La Jolla, California 92037-1020
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD ON DECEMBER 16, 1998
The Annual Meeting of Shareholders (the "Meeting") of Agouron
Pharmaceuticals, Inc., a California corporation (the "Company") will be held at
the Sheraton Grande Torrey Pines, 10950 North Torrey Pines Road, La Jolla,
California 92037, on Wednesday, December 16, 1998, at 10:00 a.m., San Diego
time, for the following purposes:
1. To elect nine directors of the Company, all of whom shall serve
until the 1999 Annual Meeting of Shareholders (and until the
election and qualification of their successors).
2. To consider and vote upon a proposal (the "Divisional Stock
Proposal") to amend and restate the Company's Articles of
Incorporation to (i) increase the number of shares of authorized
Common Stock to 150,000,000 shares, of which 75,000,000 shares
would initially be esignated as Agouron Pharmaceuticals Stock
and 25,000,000 shares would initially be designated as
Oncology Division Common Stock, (ii) provide authorization to
the Board to designate and issue any undesignated shares in one
or more additional series of Common Stock, to determine the number
of shares, rights, preferences, privileges and restrictions of
any such series, and to increase or decrease the number of shares
of any existing series, and (iii) convert each share of the
Company's existing Common Stock into one share of Agouron
Pharmaceuticals Stock and 0.5 shares of Oncology Division Stock,
all as described in the attached Proxy Statement/Prospectus.
3. To consider and vote upon a proposal to amend the Company's 1996
Stock Option Plan to increase the number of shares available for
issuance under such plan by 1,000,000 shares.
4. To consider and vote upon a proposal to amend the Company's
Employee Stock Purchase Plan to increase the number of shares
available for purchase under such plan by 200,000 shares.
5. To ratify the selection of independent accountants.
6. To consider and act upon such other business as may properly be
presented to the Meeting or any adjournments or postponements
thereof.
Only shareholders of record as of the close of business on October 19, 1998
will be entitled to notice of and to vote at the Meeting or any adjournments or
postponements thereof. A list of shareholders entitled to vote at the Meeting
will be available for inspection at the offices of the Company for 10 days
before the Meeting.
All shareholders are cordially invited to attend the Meeting in person.
Regardless of whether you plan to attend the Meeting, please complete, sign and
date the enclosed Proxy and return it promptly in the accompanying envelope,
postage for which has been provided if mailed in the United States. The prompt
return of Proxies will ensure a quorum and save the Company the expense of
further solicitation. Any shareholder returning the enclosed Proxy may revoke it
prior to its exercise by voting in person at the Meeting or by filing with the
Secretary of the Company a written revocation or a duly executed Proxy bearing a
later date.
By Order of the Board of Directors
/s/ Gary E. Friedman, Secretary
La Jolla, California
November 12, 1998
<PAGE>
TABLE OF CONTENTS
Page
Proxy Statement/Prospectus.....................................................1
Available Information..........................................................2
Incorporation of Certain Documents by Reference................................2
Safe Harbor Cautionary Statement...............................................3
Questions and Answers..........................................................4
Proxy Statement Summary........................................................8
The Annual Meeting....................................................8
The Company..........................................................10
The Divisional Stock Proposal........................................11
Comparison of Existing Common Stock with Agouron Pharmaceuticals
Stock and Oncology Division Stock..........................14
Agouron Pharmaceuticals, Inc. Selected Consolidated Financial Data...19
Agouron Pharmaceuticals Selected Financial Data......................20
Agouron Oncology Division Selected Financial Data....................21
Price Range of Common Stock and Dividend Policy......................22
Risk Factors..................................................................23
General.......................................................................37
Proposal 1 - Election of Directors............................................39
Proposal 2 - The Divisional Stock Proposal....................................42
General..............................................................42
Background of and Reasons for the Divisional Stock Proposal..........43
Vote Required........................................................46
Recommendation of the Board..........................................46
Management and Allocation Policies...................................46
Description of Capital Stock.........................................52
Oncology Division Designated Shares..................................56
Increase in Authorized Common Stock..................................57
Determinations by the Board..........................................57
Dividend Policy......................................................58
Nasdaq National Market Listing.......................................58
Exchange Procedures..................................................58
Stock Transfer Agent and Registrar...................................58
Financial Advisor....................................................58
No Dissenters' Rights................................................58
Material Federal Income Tax Considerations...........................59
Amendment of Stock Plans.............................................61
Restatement of Rights Agreement......................................62
Anti-Takeover Considerations.........................................64
<PAGE>
TABLE OF CONTENTS (cont'd)
Proposal 3 - Amendment of the 1996 Stock Option Plan..........................66
Proposal 4 - Amendment of the Employee Stock Purchase Plan....................71
Proposal 5 - Ratification of Selection of Independent Accountants.............73
Security Ownership of Certain Beneficial Owners and Management................74
Executive Compensation........................................................75
Certain Transactions..........................................................81
Submission of Shareholder Proposals...........................................81
Legal Matters.................................................................81
Experts.......................................................................81
Other Matters.................................................................81
Annex I - Index of Defined Terms
Annex II - Proposed Restated Articles of Incorporation
Annex III - Agouron Pharmaceuticals, Inc.
Management's Discussion and Analysis
Consolidated Financial Statements
Annex IV - Agouron Pharmaceuticals
Description of Business
Management's Discussion and Analysis
Combined Financial Statements of Agouron Pharmaceuticals
Annex V - Agouron Oncology Division
Description of Business
Management's Discussion and Analysis
Combined Financial Statements of Agouron Oncology Division
Annex VI - - Amended and Restated Agouron Stock Option Plan
Annex VII - Amended and Restated Employee Stock Purchase Plan
<PAGE>
PROXY STATEMENT/PROSPECTUS
ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD ON DECEMBER 16, 1998
This Proxy Statement/Prospectus ("Proxy Statement") is furnished in
connection with the solicitation of Proxies by and on behalf of the Board of
Directors (the "Board") of Agouron Pharmaceuticals, Inc., a California
corporation ("Agouron" or the "Company"), for use at the Company's Annual
Meeting of Shareholders for the fiscal year ended June 30, 1998 (the "Meeting")
to be held at the Sheraton Grande Torrey Pines, 10950 North Torrey Pines Road,
La Jolla, California 92037, on Wednesday, December 16, 1998 at 10:00 a.m., San
Diego time, and at any adjournments or postponements thereof. At the Meeting,
shareholders will be asked (i) to elect nine directors of the Company to hold
office until the 1999 Annual Meeting of Shareholders and until their successors
are elected and qualified, (ii) to increase the number of shares of authorized
Common Stock to 150,000,000 shares, of which 75,000,000 shares would initially
be designated as Agouron Pharmaceuticals Common Stock ("Agouron Pharmaceuticals
Stock") and 25,000,000 shares would initially be designated as Agouron Oncology
Division Common Stock ("Oncology Division Stock"), to provide authorization to
the Board to designate and issue any undesignated shares in one or more
additional series of Common Stock, determine the number of shares, rights,
preferences, privileges and restrictions of any such series, and increase or
decrease the number of shares of any existing series, and to convert each share
of the Company's existing Common Stock ("Existing Common Stock") into one share
of Agouron Pharmaceuticals Stock and 0.5 shares of Oncology Division Stock (the
"Divisional Stock Proposal"), (iii) to increase the number of shares available
for issuance under the Company's 1996 Stock Option Plan by 1,000,000 shares,
(iv) to increase the number of shares available for purchase under the Company's
Employee Stock Purchase Plan by 200,000 shares, (v) to ratify the selection of
the Company's independent accountants, and (vi) to transact such other business
as may properly be presented to the Meeting or any adjournments or postponements
thereof. This Proxy Statement also constitutes the Prospectus of the Company
with respect to the shares of Agouron Pharmaceuticals Stock and Oncology
Division Stock to be issued pursuant to the Divisional Stock Proposal. It is
anticipated that this Proxy Statement and the accompanying Proxy will be mailed
to the Company's shareholders on or about November 12, 1998. An Index of Defined
Terms showing the pages on which certain terms used in this Proxy Statement are
defined is included as Annex I.
See "Risk Factors" beginning on page 23 for certain information that should
be considered in connection with an evaluation of the Divisional Stock Proposal.
The Existing Common Stock is traded on the Nasdaq National Market under
the symbol AGPH. There has been no prior market for the Agouron Pharmaceuticals
Stock or the Oncology Division Stock. Application will be made to The Nasdaq
Stock Market, Inc. to redesignate the Existing Common Stock as Agouron
Pharmaceuticals Stock, to be quoted on the Nasdaq National Market under the
symbol AGPH, and for the quotation of the Oncology Division Stock on the Nasdaq
National Market under a separate symbol to be determined.
Shareholders should note that if the Divisional Stock Proposal is
approved, holders will not have to send in their certificates representing
shares of Existing Common Stock to be exchanged for certificates representing
shares of Agouron Pharmaceuticals Stock. DO NOT MAIL YOUR EXISTING COMMON STOCK
CERTIFICATES TO EITHER THE COMPANY OR ITS TRANSFER AGENT IN CONNECTION WITH
THESE TRANSACTIONS.
The Board has carefully considered the Divisional Stock Proposal and each
of the other proposals set forth in the Notice of Annual Meeting of Shareholders
and believes that the approval of these proposals by the shareholders is in the
best interests of the Company and the shareholders. Accordingly, the Board
unanimously recommends that the shareholders approve the Divisional Stock
Proposal and each of the other proposals which are described in more detail in
this Proxy Statement.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROXY STATEMENT. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
Dated: November 12, 1998
<PAGE>
AVAILABLE INFORMATION
The Company 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 Securities and Exchange Commission (the "Commission"). Such reports, proxy
statements, and other information filed by the Company can be inspected and
copied at the public reference facilities maintained by the Commission at 450
Fifth Street, N.W., Room 1024, Washington, D.C. 20549, and at the Commission's
Regional Offices at Seven World Trade Center, 13th Floor, New York, New York
10048, and Citicorp Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661. Copies of such material can be obtained from the Public
Reference Section of the Commission at 450 Fifth Street, N.W., Room 1024,
Washington, D.C. 20549, at prescribed rates or by accessing the Commission's
World Wide Web site at http://www.sec.gov.
The Company has filed a registration statement on Form S-4 (referred to
herein, together with all amendments and exhibits, as the "Registration
Statement") with the Commission under the Securities Act of 1933, as amended
(the "Securities Act"), covering the shares of Agouron Pharmaceuticals Stock and
Oncology Division Stock issuable in connection with the Divisional Stock
Proposal. This Proxy Statement, which also constitutes the Prospectus of the
Company filed as part of the Registration Statement, does not contain all of the
information set forth in the Registration Statement and the exhibits thereto,
certain parts of which are omitted in accordance with the rules and regulations
of the Commission. For further information, reference is hereby made to the
Registration Statement, which is available for inspection and copying as set
forth above. Statements contained in this Proxy Statement as to the contents of
any contract or other document which is filed as an exhibit to the Registration
Statement are necessarily summaries thereof, and each such statement is
qualified in its entirety by reference to the full text of such contract or
document.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents which have been filed by the Company with the
Commission (File No 0-15609) are incorporated herein by reference: Annual Report
on Form 10-K for the fiscal year ended June 30, 1998 and Quarterly Report on
Form 10-Q for the quarter ended September 30, 1998. All documents filed by the
Company pursuant to Section 13(a), 13(c), 14 or 15(d) of the Exchange Act
subsequent to the date of this Proxy Statement and prior to the date of the
Meeting shall be deemed to be incorporated by reference into this Proxy
Statement and to be a part hereof from the date any such document is filed. Any
statement contained in a document incorporated or deemed to be incorporated by
reference herein shall be deemed to be modified or superseded for purposes of
this Proxy Statement to the extent that a statement contained herein (or in any
other subsequently filed document which also is or is deemed to be incorporated
by reference herein) modifies or supersedes such statement. Any such statement
so modified or superseded shall not be deemed, except as so modified or
superseded, to constitute a part of this Proxy Statement.
This Proxy Statement incorporates documents by reference that are not
presented herein or delivered herewith. A copy of such documents (excluding
exhibits unless such exhibits are specifically incorporated by reference into
the information incorporated herein) will be provided without charge to each
person, including any beneficial owner, to whom a Proxy Statement is delivered,
upon oral or written request of any such person. Requests should be directed to
Agouron Corporate Communications, 10350 North Torrey Pines Road, La Jolla,
California 92037; telephone (619) 622-3000. In order to ensure timely delivery
of the documents, any request should be made by November 23, 1998.
<PAGE>
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
SAFE HARBOR CAUTIONARY STATEMENT
This Proxy Statement contains forward-looking statements. Such
statements, including but not limited to those regarding anticipated expenses of
the Oncology Division, sales and revenues attributable to Agouron
Pharmaceuticals, timing and initiation of clinical trials, development and
marketing of future products, the anticipated benefits of the Divisional Stock
Proposal and other projections, estimates and statements of belief or
expectancy, are subject to certain risks and uncertainties which could cause
actual results to differ materially from those projected. See "Important Factors
Regarding Forward-Looking Statements" attached as Exhibit 99 to the Company's
Annual Report on Form 10-K for the fiscal year ended June 30, 1998 and "Risk
Factors." Important factors which may affect these projections or expectations
include, but are not limited to: the impact of competitive products, regulatory
approvals, changes in the overall economy, availability of future financing, the
potential divergence of interests of holders of Agouron Pharmaceuticals Stock
and Oncology Division Stock, potential changes in policies without shareholder
approval, and other unanticipated events. Readers are cautioned not to place
undue reliance on these forward-looking statements, which speak only as of the
date hereof. The Company undertakes no obligation to publicly release the result
of any revisions to these forward-looking statements which may be made to
reflect events or circumstances after the date hereof or to reflect the
occurrence of unanticipated events.
<PAGE>
QUESTIONS AND ANSWERS
RELATING TO THE DIVISIONAL STOCK PROPOSAL AND RELATED TRANSACTIONS
Q: WHY AM I RECEIVING THIS PROXY STATEMENT?
A: In addition to the standard Annual Meeting business of electing
directors and ratifying accountants, the oard is distributing this
Proxy Statement to shareholders of the Company in connection with a
proposal that would, among other things, create two new series of
Common Stock intended to separately reflect the performance of (i) the
Company's Oncology Division and (ii) the Company's antiviral
business and all of the other businesses of the Company that are not
attributed to the Oncology Division. The Divisional Stock Proposal
also authorizes the Board to establish additional series of Common
Stock. The Board is also distributing this Proxy Statement in
connection with proposals to amend the Company's stock option
and stock purchase plans.
The Board of Directors is seeking your proxy to vote in favor of the
Divisional Stock Proposal and the other proposals listed in this Proxy
Statement at its annual meeting of shareholders (the "Meeting").
Q. WHAT IS A DIVISIONAL STOCK?
A. Divisional stock, which is also referred to as "tracking stock" or
"letter stock," represents shares of common stock of a corporation, in
this case the Company, which are intended to "track" the performance of
a group of assets or a division of the Company. The Restated Articles
of Incorporation of the Company would, among other things, authorize
two new series of divisional stock, to be designated as Agouron
Pharmaceuticals Stock and Oncology Division Stock.
- The Oncology Division Stock, when issued, is intended to
reflect the separate performance of the Oncology Division of
the Company, which is engaged in research and development of
pharmaceuticals for the treatment of cancer.
- The Agouron Pharmaceuticals Stock, when issued, is intended
to reflect the separate performance of the Company's
anti-viral business and all of the other remaining businesses
of the Company that are not attributed to the Oncology
Division.
Although the two series of Divisional Stock are intended to track the
performance of the Company's different operating divisions, these
divisions are not separate legal entities. As a consequence, assets
allocated to each division remain assets of the Company as a whole and
will be available to satisfy liabilities of the Company, including
obligations arising from lawsuits and indebtedness related to the other
division's business.
Q. WHEN AND WHERE WILL THE ANNUAL MEETING BE HELD?
A. The Meeting will be held on Wednesday, December 16, 1998, at 10:00
a.m., San Diego time, at the Sheraton Grande Torrey Pines, 10950 North
Torrey Pines Road, La Jolla, California 92037.
Q. WHAT DO I NEED TO DO NOW?
A. Just mail in your completed and signed proxy card in the enclosed
return envelope as soon as possible so that your shares may be
represented at the Meeting.
<PAGE>
Q. WHAT DOES THE BOARD OF DIRECTORS RECOMMEND?
A. The Board of Directors has unanimously approved each proposal, believes
that the adoption of each proposal is in the best interests of the
Company and its shareholders and unanimously recommends that you vote
"FOR" the election of the nine nominees for director listed in the
Proxy Statement and "FOR" each of proposals 2 through 5.
Q. WHAT VOTE IS REQUIRED TO APPROVE THE DIVISIONAL STOCK PROPOSAL AND
THE OTHER PROPOSALS?
A. The approval of the Divisional Stock Proposal requires the affirmative
vote of the holders of a majority of the outstanding shares of the
Existing Common Stock. The approval of each of the other proposals
requires the affirmative vote of the holders of a majority of the
shares represented in person or by proxy and voting at the meeting,
provided that those affirmatively voted shares also constitute at least
a majority of the required quorum.
Q. WILL THE DIVISIONAL STOCK PROPOSAL RESULT IN A CHANGE IN
CONTROL OF AGOURON?
A. There will be no change in control of the Company if the Divisional
Stock Proposal is approved.
Q. WILL THE DIVISIONAL STOCK PROPOSAL RESULT IN A SPIN-OFF?
A. No. The Divisional Stock Proposal will not result in a distribution or
spin-off of any assets or liabilities of the Company or its
subsidiaries. Holders of Agouron Pharmaceuticals Stock and Oncology
Division Stock will continue to be common shareholders of the Company
and, as such, will be subject to all risks associated with an
investment in the Company and all of its businesses, assets and
liabilities.
Q. WHY DID THE COMPANY DECIDE TO DISTRIBUTE A DIVISIONAL STOCK AS OPPOSED
TO SPINNING OFF THE ONCOLOGY
ASSETS?
A. While both alternatives would separate the two operating divisions and
allow for separate market valuations of each division, the Board
believed that a spin-off of a separate company owning the oncology
assets could create significant tax, credit and control issues. By
issuing a divisional stock, the Company will retain ownership of its
technologies, which the Board considers to be a long-term strategic
benefit to all of the Company's shareholders. In addition, as part of
one company, each division will be in a position to benefit from cost
savings and synergies with the other compared to the costs each
division would incur if it operated separately.
Q. SHOULD I SEND IN MY STOCK CERTIFICATES?
A. No. If the Divisional Stock Proposal is approved, then upon amendment
and restatement of the Company's Articles of Incorporation, each of
your shares of Existing Common Stock will be automatically converted
into one share of Agouron Pharmaceuticals Stock and 0.5 shares of
Oncology Division Stock.
In connection with this conversion, the stock certificate representing
your shares of Existing Common Stock will represent ownership of the
same number of shares of Agouron Pharmaceuticals Stock. The Company
will send to you your certificates for Oncology Division Stock.
<PAGE>
Q. WHAT DO I NEED TO DO TO RECEIVE MY CERTIFICATES FOR THE ONCOLOGY
DIVISION STOCK?
A. You do not need to do anything to receive your certificates for the
Oncology Division Stock. If all of the events take place as planned,
certificates representing whole shares of Oncology Division Stock (and
cash in lieu of fractional shares) will be mailed to all shareholders
after the Effective Date as directed by the Board.
Q. WHEN WILL ALL OF THIS TAKE PLACE?
A. If the Divisional Stock Proposal is approved, the Company intends to
file its Restated Articles of Incorporation with the Secretary of State
of California shortly after the Meeting. If all of these events occur
as planned, this event (the "Effective Date") would take place in
December. However, the Board of Directors could choose to effect the
Divisional Stock Proposal at a later time, or not to effect the
Divisional Stock Proposal, depending on the circumstances at the time.
Q. WHAT ARE THE TAX CONSEQUENCES TO ME?
A. The implementation of the Divisional Stock Proposal is intended to be
tax-free to shareholders for federal income tax purposes (except with
respect to any cash received in lieu of fractional shares) based upon
the facts and law at the time of this Proxy Statement. For federal
income tax purposes, cash received for fractional shares will likely
result in recognition of gain or loss. You should consult a tax
advisor.
Q. WHAT WILL MY EXISTING COMMON STOCK REPRESENT IF EVERYTHING TAKES PLACE
AS PROPOSED?
A. Upon the completion of all the events as planned, the equity interest
in the Company represented by all the Existing Common Stock will equal
the equity interest of the total of the Agouron Pharmaceuticals Stock
and the Oncology Division Stock. Each share of Existing Common Stock
will be converted into one share of Agouron Pharmaceuticals Stock and
0.5 shares of Oncology Division Stock.
Q. WILL THE AGOURON PHARMACEUTICALS STOCK AND THE ONCOLOGY DIVISION STOCK
BE LISTED ON THE NASDAQ NATIONAL MARKET?
A. The Company will file an application to list the Agouron
Pharmaceuticals Stock and the Oncology Division Stock on the Nasdaq
National Market. The Agouron Pharmaceuticals Stock will be traded under
the symbol AGPH and the Oncology Division Stock will be traded under a
separate symbol to be determined.
Q. WHAT VOTING RIGHTS WILL I HAVE?
A. After the Effective Date, each share of Agouron Pharmaceuticals
Stock will be entitled to one vote and each share of Oncology Division
Stock will have a number of votes (including a fraction of one vote)
equal to the ratio of the weighted average market capitalization of
the Oncology Division Stock and the Agouron Pharmaceuticals Stock to
be initially determined on the earlier of the 90th day following
commencement of trading of the Oncology Division Stock or the record
date established for the first meeting of shareholders following
implementation of the Divisional Stock Proposal. The initial vote so
established shall remain unchanged until June 30, 2000.
On July 1, 2000, and on July 1 every two (2) years thereafter,
the number of votes to which holders of Oncology Division Stock are
entitled will be adjusted to reflect the relative market value of such
series as compared to the market value of Agouron Pharmaceuticals
Stock. This periodic adjustment of the relative voting rights of each
series will be done so a holder's voting rights will more closely
reflect the market value of the holder's equity investment in the
Company.
The Agouron Pharmaceuticals Stock and the Oncology Division Stock will
vote together as a single class except in certain limited
circumstances, under which the holders of Agouron Pharmaceuticals Stock
or Oncology Division Stock will have rights to vote as a separate
class.
<PAGE>
Q. DOES THE COMPANY INTEND TO PAY DIVIDENDS?
A. The Company has never paid cash dividends on shares of its Common
Stock. The Board currently intends to retain future earnings, if any,
for the development of the businesses of Agouron Pharmaceuticals and
the Oncology Division and does not anticipate paying dividends on the
Agouron Pharmaceuticals Stock or the Oncology Division Stock in the
foreseeable future.
Q. WHAT DO I DO IF I HAVE ADDITIONAL QUESTIONS?
A. If you have any questions prior to the Meeting, please call
Agouron Investor Relations at 619-622-3000.
<PAGE>
PROXY STATEMENT SUMMARY
The following is a summary of certain information contained elsewhere
in this Proxy Statement and the Annexes hereto. Reference is made to, and this
Summary is qualified in its entirety by, the more detailed information contained
or incorporated by reference in this Proxy 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 Proxy Statement. See
Annex I, "Index of Defined Terms." Shareholders are urged to read carefully this
Proxy Statement and the Annexes hereto in their entirety. Agouron
Pharmaceuticals and the Oncology Division (and any additional divisions created
by the issuance of additional series by the Board) are sometimes referred to
herein collectively as the "Divisions" and individually as a "Division."
THE ANNUAL MEETING
DATE, TIME AND PLACE OF MEETING The Annual Meeting will be
held on December 16, 1998,
at 10:00 a.m., San Diego
time, at the
Sheraton Grande Torrey
Pines, 10950 North Torrey
Pines Road, La Jolla,
California 92037.
RECORD DATE October 19, 1998
PROPOSALS TO BE CONSIDERED The following proposals (the "Proposals") will be
considered AT THE MEETING and voted upon at the Annual Meeting:
PROPOSAL 1 - Election of
Directors. To elect nine
directors of the Company,
all of whom shall serve
until the 1999 Annual
Meeting of Shareholders and
until the election and
qualification of their
successors.
PROPOSAL 2 - The Divisional
Stock Proposal. To consider
and vote upon the amendment
and restatement of the
Company's Articles of
Incorporation to (i)
increase the number of
shares of authorized Common
Stock to 150,000,000
shares, of which 75,000,000
shares would initially be
designated as Agouron
Pharmaceuticals Stock and
25,000,000 shares would
initially be designated as
Oncology Division Common
Stock, (ii) provide
authorization to the Board
to designate and issue any
undesignated shares in one
or more additional series
of Common Stock, to
determine the number of
shares, rights,
preferences, privileges and
restrictions of any such
series, and to increase or
decrease the number of
shares of any existing
series, including Agouron
Pharmaceuticals Stock and
Oncology Division Stock,
and (iii) convert each
share of the Company's
Existing Common Stock into
one share of Agouron
Pharmaceuticals Stock and
0.5 shares of Oncology
Division Stock, all as
described in this Proxy
Statement.
PROPOSAL 3 - Amendment to
the Company's 1996 Stock
Option Plan. To consider
and vote upon an amendment
to the Company's 1996 Stock
Option Plan to increase by
1,000,000 shares the number
of shares available for
issuance under such plan.
<PAGE>
PROPOSAL 4 - Amendment to
the Company's Employee
Stock Purchase Plan. To
consider and vote upon an
amendment to increase by
200,000 shares the number
of shares available for
purchase under such plan.
PROPOSAL 5 - Selection of
Independent Accountants. To
ratify the selection of
PricewaterhouseCoopers LLP
as the Company's
independent accountants for
the fiscal year ending June
30, 1999.
IF THE DIVISIONAL STOCK PROPOSAL IS NOT APPROVED BY THE SHAREHOLDERS, THE
AGOURON PHARMACEUTICALS STOCK AND THE ONCOLOGY DIVISION STOCK WILL NOT BE
CREATED AND THE EXISTING COMMON STOCK WILL NOT BE RECLASSIFIED AND CONVERTED
INTO AGOURON PHARMACEUTICALS STOCK AND ONCOLOGY DIVISION STOCK.
VOTE REQUIRED Holders of Existing Common
Stock are entitled to one
vote per share on all
matters brought before the
Meeting and to cumulate
votes for the election of
the nine directors.
Therefore, in voting for
directors, each outstanding
share of Existing Common
Stock is entitled to nine
votes which may be cast for
one candidate or
distributed in any manner
among the nominees for
director. However, the
right to cumulate votes in
favor of one or more
candidates may not be
exercised until the
candidate or candidates
have been nominated and
the shareholder has given
notice at the Meeting of
the intention to cumulate
votes. If any one
shareholder gives notice,
all shareholders may
cumulate votes for
candidates for nomination.
Assuming that a quorum
is present at the Meeting,
the nine persons receiving
the highest number of votes
will be elected to the
Board. The required quorum
for the Meeting shall
consist of a majority
of the outstanding shares
of Existing Common Stock
which are entitled to vote
in person or by proxy at
the Meeting.
Proposal 2. The affirmative
vote by the holders of a
majority of the outstanding
shares of the Existing
Common Stock.
Proposals 3, 4 and 5. The
affirmative vote by the
holders of a majority of
the shares of the Existing
Common Stock represented
and voting at the Meeting
(which shares constitute at
least a majority of the
required quorum for the
Meeting).
RECOMMENDATION OF THE BOARD The Board has carefully
considered each Proposal
and believes that the
approval of each of these
Proposals by the
shareholders is in the
best interest of the
Company and the
shareholders. Accordingly,
the Board unanimously
recommends that the
shareholders vote "FOR"
each of the Proposals and
"FOR" the election of the
nine nominees for director
listed herein.
<PAGE>
THE COMPANY
The principal executive offices of the Company are located at 10350
North Torrey Pines Road, La Jolla, California 92037 and its telephone number is
(619) 622-3000.
Agouron Pharmaceuticals
Agouron Pharmaceuticals encompasses all of the activities of the
Company except for those activities related to the research, development and
commercialization of oncology products being pursued by the Oncology Division.
Agouron Pharmaceuticals, through its own sales and marketing
organization, is currently marketing in the United States the first drug
developed by the Company, VIRACEPT (nelfinavir mesylate), for treatment of HIV
infection. In addition, Agouron Pharmaceuticals is expected to initiate a phase
II/III pivotal clinical trial of REMUNE, an immune-based therapeutic agent for
treatment of HIV infection and AIDS being co-developed by Agouron
Pharmaceuticals and The Immune Response Corporation. Further, Agouron
Pharmaceuticals has a number of programs in progress for discovery or
development of other new drugs in the fields of viral disease, inflammatory
disease and other serious diseases. Agouron Pharmaceuticals utilizes the
proprietary core drug discovery technology of Alanex Corporation, a wholly-owned
subsidiary of the Company, to accelerate the steps necessary to discover small
molecule drug candidates. Such steps include the initial identification of
compounds that exhibit activity against selected biological targets to the
progression of these compounds to drug candidates for human clinical trials.
Agouron Pharmaceuticals' long-term goal is increasing profitability
from the sale of drugs generated from its own drug discovery and development
efforts, and from development and commercialization of drugs licensed by Agouron
Pharmaceuticals. To augment its technical capabilities, to enhance the
likelihood of successful commercialization of its products and to offset some of
its operating costs, Agouron Pharmaceuticals has entered into collaborative
research and development arrangements with other companies. Agouron
Pharmaceuticals has generally retained significant commercial rights in drugs
developed in its collaborative research and development programs funded in whole
or in part by other companies. Agouron Pharmaceuticals anticipates that its
successfully developed products will be commercialized both through its own
direct sales and marketing activities in certain pharmaceutical markets and
through manufacturing and marketing relationships with other pharmaceutical
companies.
Agouron Oncology Division
The Oncology Division will be organized as a distinct operating
division of the Company and will continue its commitment to the discovery,
development and marketing of small-molecule drugs engineered to inactivate
proteins which play key roles in cancer. Approximately 25% of the Company's
total anticipated research and development expenditures during the Company's
1999 fiscal year are expected to be incurred by the Oncology Division in
connection with four clinical development programs and four preclinical research
programs. Included are AG3340, an inhibitor of matrix metalloprotease ("MMP")
currently in pivotal phase II/III clinical trials for treatment of lung and
prostate cancer, programs that pursue other inhibitors of MMPs and inhibitors or
antagonists of the following: glycinamide ribonucleotide formyltransferase
("GART"); cyclin dependent kinases ("cdk"); gonadotropin releasing hormone
("GnRH"); poly (ADP ribose) polymerase ("PARP"); and a receptor for vascular
endothelial growth factor ("VEGF"). The Oncology Division is presently pursing
these programs on an independent basis. See Annex V - "Agouron Oncology
Division" for a more complete description of the programs initially allocated to
the Oncology Division. The Company is currently investigating the availability
of names under which the Oncology Division will operate. The exact name of the
Division and of the Divisional Stock will be determined and announced prior to
the implementation of the Divisional Stock Proposal.
<PAGE>
THE DIVISIONAL STOCK PROPOSAL
GENERAL
If the Divisional Stock Proposal is approved by the shareholders and
implemented by the Board of Directors, the Company's existing Articles of
Incorporation will be amended to increase the number of shares of Common Stock
to 150,000,000 and to designate two new series of Common Stock - 75,000,000
shares of Agouron Pharmaceuticals Common Stock ("Agouron Pharmaceuticals Stock")
and 25,000,000 shares of Agouron Oncology Division Common Stock ("Oncology
Division Stock") and convert each share of the Company's Existing Common Stock
into one share of Agouron Pharmaceuticals Stock and 0.5 shares of Oncology
Division Stock. The amendment would also authorize the Board to establish from
time to time one or more additional series with the number of shares, rights,
preferences, privileges and restrictions as determined by the Board.
Undesignated shares of Common Stock could also be used to increase the
authorized shares of any existing series of Common Stock. The rights,
preferences, privileges and restrictions of the Agouron Pharmaceuticals Stock
and the Oncology Division Stock are described in more detail elsewhere in this
Proxy Statement. See "Proposal 2--The Divisional Stock Proposal--Description of
Capital Stock" and the proposed Restated Articles of Incorporation included as
Annex II.
The ratio of 0.5 shares of Oncology Division Stock for each share of
Existing Common Stock was determined by the Board in consultation with
PaineWebber Incorporated ("PaineWebber"), the Company's financial advisor in
connection with the Divisional Stock Proposal. Such ratio is the quotient of the
total number of Oncology Division Shares divided by the number of shares of
Existing Common Stock outstanding. The number of Oncology Division Shares is the
quotient of the initial estimated fair market value of the Oncology Division
divided by the desired initial trading range of the Oncology Division stock. The
initial estimated fair market value of the Oncology Division was determined by
the Board in consultation with PaineWebber and was based on an analysis of
comparable company valuations, prevailing market conditions, financial and
operating information of the Oncology Division and independent financial
projections and discounted cash flow analyses of the programs and products
associated with Oncology Division.
The Divisional Stock Proposal is designed to separate the Company's
research and development activities in oncology from the balance of the
Company's business by establishing two separate operating divisions, Agouron
Pharmaceuticals and the Oncology Division. The Oncology Division Stock is
intended to reflect the value and track the performance of the Oncology
Division, whereas the Agouron Pharmaceuticals Stock is intended to reflect the
value and track the performance of the Company's anti-viral and other
businesses. See Annex IV - "Agouron Pharmaceuticals" and Annex V - "Agouron
Oncology Division" for a more complete description of each Division.
The Company has established policies designed to separate the business
and operations of Agouron Pharmaceuticals and the Oncology Division, to operate
each on a stand-alone basis, to allocate debt, corporate overhead, interest,
taxes and other charges between the two Divisions on an objective basis and to
ensure that terms of inter-division transactions approximate the terms that
could be obtained from unaffiliated third parties. In addition, these policies
set forth certain allocations in connection with the commercialization of the
Oncology Division's potential products. See "Proposal 2 - The Divisional Stock
Proposal - Management and Allocation Policies."
RISK FACTORS
When evaluating the Divisional Stock Proposal, shareholders should be
aware of certain risk factors relating thereto. Such risk factors include: (i)
the risks associated with an investment in the Company and all of its
businesses, assets and liabilities; (ii) limited separate shareholder rights
with respect to the two series of Common Stock; (iii) limited separate voting
rights with respect to the two series; (iv) the lack of legal precedent with
respect to the fiduciary duties of the board of directors of a company with two
series of common stock, the rights of which are defined by reference to
specified businesses of the company; (v) the ability of the Board to change
certain management and allocation policies without shareholder approval; (vi)
the potential diverging interests of each series of Common Stock; (vii) the
ability of the Board to transfer funds, services and assets between the
Divisions; (viii) the Company's ability to issue authorized but unissued shares
of Agouron Pharmaceuticals Stock, Oncology Division Stock or other classes of
stock without shareholder approval; (ix) no assurances as to the market price of
the Agouron Pharmaceuticals Stock or the Oncology Division Stock following
effectiveness of the Divisional Stock
<PAGE>
Proposal; (x) the risk that liquidating distributions to a Division's Common
Stock may not correspond to the value of that Division's assets at the time of a
dissolution of the Company; (xi) the utilization of tax benefits by the
Divisions; (xii) limitations on potential unsolicited acquisitions of either
Division; and (xiii) certain anti-takeover considerations.
Shareholders should also be aware of certain risks with respect to each
Division's operations, which include (i) the early stage of product development,
the uncertainty of product development and market acceptance and technological
uncertainty; (ii) uncertainty associated with clinical testing; (iii) a limited
history of profitability and uncertainty of continued profitability of Agouron
Pharmaceuticals; (iv) a history of operating losses and lack of revenues of the
Oncology Division; (v) additional financing requirements and access to capital;
(vi) dependence on others; (vii) limited manufacturing capability; (viii)
limited sales and marketing capabilities; (ix) patents and proprietary
technology; (x) technological change and intense competition; (xi) government
regulation; (xii) uncertainty of third-party reimbursement and product pricing;
(xiii) product liability and limited insurance coverage; (xiv) use of hazardous
materials; (xv) attraction and retention of personnel; and (xvi) volatility of
stock prices. For additional information with respect to the foregoing
considerations, see "Risk Factors."
REASONS FOR THE DIVISIONAL STOCK PROPOSAL
The Divisional Stock Proposal was adopted by the Board following its
review of various alternatives to enhance shareholder value over the long term.
Creating separate series of Common Stock intended to reflect separately the
performance of Agouron Pharmaceuticals and the Oncology Division could enable
investors to gain a better understanding of the businesses of Agouron
Pharmaceuticals and the Oncology Division, while preserving for the Company the
financial, strategic and operational benefits it currently enjoys as a single
company. The Board also believes that the separate reporting of each Division's
results would create a framework for increased and more focused equity research
coverage by the investment community and would separate the Oncology Division's
current operating losses from the results of operations of Agouron
Pharmaceuticals. The Divisional Stock Proposal is intended to increase the
Company's ability to focus the management of the respective Divisions on
maximizing the returns from such businesses and provide the opportunity to
structure incentives for employees of each Division that are tied directly to
the operating results and share price performance of that Division. The
Divisional Stock Proposal is also intended to provide the Company greater
flexibility with regard to raising capital and the choice of stock consideration
for acquisitions and investments, including strategic partnering transactions.
In particular, development, clinical testing and commercialization of the
Oncology Division's products will require substantial funds. A separate equity
security for the Oncology Division is expected to allow the Oncology Division to
raise capital without diluting the interests of holders of Agouron
Pharmaceuticals Stock. See "Proposal 2 - The Divisional Stock Proposal
Background of and Reasons for the Divisional Stock Proposal."
INCREASE IN AUTHORIZED STOCK
The Divisional Stock Proposal increases the number of shares of Common
Stock the Company is authorized to issue from 75,000,000 to 150,000,000 in the
aggregate. If the Divisional Stock Proposal is approved, 75,000,000 shares will
be initially designated Agouron Pharmaceuticals Stock, 25,000,000 shares will be
initially designated Oncology Division Stock and 50,000,000 shares will
initially be undesignated shares of Common Stock. The Board would be authorized
to designate and issue shares in one or more additional series of Common Stock
or to increase the number of designated shares of Agouron Pharmaceuticals Stock
or Oncology Division Stock. The authorized but unissued shares of Agouron
Pharmaceuticals Stock and the Oncology Division Stock would be available for
issuance from time to time by the Company at the discretion of the Board for any
proper corporate purpose. The issuance of such additional shares would not be
subject to approval by the shareholders of the Company unless deemed advisable
by the Board or required by applicable law, regulation or stock market listing
requirements. See "Proposal 2 - The Divisional Stock Proposal - Description of
Capital Stock."
The Board believes that an increase in the number of authorized shares
of the Common Stock at this time is in the best interest of the Company in order
to have available the number of shares needed to implement aspects of the
Divisional Stock Proposal and provide for share dividends, stock splits or
acquisitions and other strategic opportunities if such transactions are
determined to be in the best interest of the Company. Other than the issuance of
shares to the holders of Existing Common Stock pursuant to the Divisional Stock
Proposal and the issuance of
<PAGE>
shares pursuant to the Company's employee stock option and purchase plans, as
amended in connection with the Divisional Stock Proposal, the Company has no
present intention or agreement with respect to issuance of any of the shares of
Agouron Pharmaceuticals Stock, the Oncology Division Stock or any of the
undesignated shares of Common Stock. However, the Board may in the future
consider the creation of additional series of Common Stock that track the
performance of other lines of the Company's business.
SUMMARY OF MATERIAL FEDERAL INCOME TAX CONSIDERATIONS
The Company has received an opinion from its tax counsel, as more
specifically set forth in "Proposal 2--The Divisional Stock Proposal -- Material
Federal Income Tax Considerations," that for United States federal income tax
purposes (i) the Agouron Pharmaceuticals Stock and the Oncology Division Stock
will be treated for federal income tax purposes as common stock of the Company
and (ii) except with respect to cash paid in lieu of fractional shares, holders
of the Agouron Pharmaceuticals Stock and the Oncology Division Stock will not
recognize income, gain or loss in and as a result of the reclassification and
conversion of the Existing Common Stock. However, there are no court decisions
or other authorities bearing directly on transactions similar to the Divisional
Stock Proposal. Further, the Internal Revenue Service ("IRS") has announced that
it will not issue advance rulings on the federal income tax consequences of
transactions similar to the Divisional Stock Proposal. It is possible,
therefore, that the IRS could assert that the Oncology Division Stock or the
Agouron Pharmaceuticals Stock or both represent property other than stock of the
Company. Any such determination could have a material adverse effect on the
Company and result in adverse tax consequences for shareholders of the Company.
See "Proposal 2 - The Divisional Stock Proposal -- Material Federal Income Tax
Considerations." Shareholders are urged to consult their own tax advisors as to
the particular tax consequences to them of the reclassification contemplated by
the Divisional Stock Proposal under federal, state, local or foreign law.
DISSENTERS' RIGHTS
Under the California Corporations Code, holders of the Existing Common
Stock have no dissenters' rights in connection with the Divisional Stock
Proposal.
FRACTIONAL SHARES
Fractional shares of Oncology Division Stock will not be issued. If the
number of shares of Oncology Division Stock to be issued to any holder of
Existing Common Stock includes a fraction of a whole share, the Company will pay
to such holder, within 60 trading days after the Effective Date, the cash value
of such fractional share based on the average of the daily average of the high
and low sale prices of the Oncology Division Stock reported on the Nasdaq
National Market during the first ten trading days following the Effective Date.
<PAGE>
COMPARISON OF EXISTING COMMON STOCK WITH AGOURON PHARMACEUTICALS STOCK
AND ONCOLOGY DIVISION STOCK
The following is a comparison of the Existing Common Stock and the
proposed Agouron Pharmaceuticals Stock and Oncology Division Stock. This summary
is qualified in its entirety by the more detailed information contained in this
Proxy Statement and the Annexes hereto. See "Risk Factors," "Proposal 2--The
Divisional Stock Proposal-- Description of Capital Stock" and the Restated
Articles of Incorporation (the "Restated Articles") included in Annex II to this
Proxy Statement.
<TABLE>
<CAPTION>
THE DIVISIONAL STOCK PROPOSAL
<S> <C> <C>
EXISTING COMMON STOCK AGOURON PHARMACEUTICALS STOCK ONCOLOGY DIVISION STOCK
SHAREHOLDERS OF ONE COMPANY:
Holders of Existing Common Holders of Agouron Pharmaceuticals Holders of Oncology Division
Stock are subject to the Stock will continue to be subject Stock will continue to be
risks associated with an to the risks associated with an subject to the risks associated
investment in the Company investment in the Company and all with an investment in the Company
and all of its businesses, of its businesses, assets and and all of its businesses, assets
assets and liabilities. liabilities. Financial affects and liabilities. Financial affects
arising from the Oncology Division arising from Agouron Pharmaceuticals
that affect the Company's results that affect the Company's results
of operations or financial of operations or financial
condition could, if significant, condition could, if significant,
affect the results of operations affect the results of operations
or financial condition of Agouron or financial condition of the
Pharmaceuticals or the market Oncology Division of the market
price of the Agouron Pharmaceuticals price of the Oncology Division
Stock. Stock.
Any net losses of either Division, Any net losses of either Division,
and dividends or distributions on, and dividends or distributions on,
or repurchases of, either series of or repurchases of, either series of
Common Stock or any Preferred Stock, Common Stock or any Preferred Stock,
will reduce the assets of the will reduce the assets of the
Company legally available for Company legally available for
payment of future dividends on the payment of future dividends on the
other series of Common Stock. other series of Common Stock.
NUMBER OF SHARES OUTSTANDING:
(BASED UPON NUMBER OF SHARES OF EXISTING COMMON STOCK
OUTSTANDING AS OF OCTOBER 19, 1998)
31,282,508 31,282,508 15,641,254
INCLUSION IN NASDAQ NATIONAL MARKET:
Nasdaq National Market Application will be made to The Nasdaq Application will be made to The Nasdaq
under the symbol AGPH. Stock Market, Inc. for the redesignation Stock Market, Inc. for the listing of
of Existing Common Stock as Agouron Oncology Division Stock under a separate
Stock, which will trade Pharmaceuticals symbol to be determined.
under the symbol AGPH.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
THE DIVISIONAL STOCK PROPOSAL
<S> <C> <C>
EXISTING COMMON STOCK AGOURON PHARMACEUTICALS STOCK ONCOLOGY DIVISION STOCK
DIVIDENDS:
The Company has never The Company intends to retain earnings The Company intends to retain earnings
paid any cash dividends to finance future growth and, therefore, to finance future growth and, therefore,
on shares ot its capital does not anticipate paying any cash does not anticipate paying any cash
stock. dividends on the Agouron Pharmaceuticals dividends on the Oncology Division
Stock in the foreseeable future. Stock in the foreseeable future.
Dividends on the Existing Dividends on the Agouron Pharmaceuticals Dividends on the Oncology Division Stock
Common Stock are limited Stock will be paid at the discretion of will be paid at the discretion of the
to assets of the Company the Board based primarily upon the Board based primarily upon the financial
legally available for the financial condition, results of condition, results of operations and
payment of dividends under operations and business requirements of business requirements of the Oncology
the California Agouron Pharmaceuticals and the Company Division and the Company as a whole.
Corporations Code and are as a whole. Dividends will be payable Dividends will be payable out of the
payable at the discretion out of the lesser of (i) the assets of lesser of (i) the assets of the Company
of the Board based the Company legally available for the legally available for the payment of
primarily upon the payment of dividends and (ii) the Agouron dividends and (ii) the Oncology Division
financial condition, Pharmaceuticals Available Dividend Available Dividend Amount. See "Proposal
results of operations and Amount. See "Proposal 2 - The Divisional 2 - The Divisional Stock Proposal -
business requirements of Stock Proposal - Description of Capital Description of Capital Stock - Dividend
the Company. Stock - Dividend Rights." Rights."
The Board, subject to the limitations set The Board, subject to the limitations set
forth above, may, in its sole discretion, forth above, may, in its sole discretion,
declare and pay dividends exclusively on declare and pay dividends exclusively on
the Agouron Pharmaceuticals Stock, the Oncology Division Stock, exclusively
exclusively on the Oncology Division on the Agouron Pharmaceuticals Stock, or
Stock, or on any combination thereof, in on any combination thereof, in equal or
equal or unequal amounts, notwithstanding unequal amounts, notwithstanding the
the amount of dividends previously amount of dividends previously declared on
declared on either series, the respective either series, the respective voting or
voting or liquidation rights of either liquidation rights of either series or any
series or any other factor. other factor.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
THE DIVISIONAL STOCK PROPOSAL
<S> <C> <C>
EXISTING COMMON STOCK AGOURON PHARMACEUTICALS STOCK ONCOLOGY DIVISION STOCK
VOTING RIGHTS:
One vote per share. One vote per share. Each share of Oncology Division Stock will
have a number of votes (including a
fraction of one vote) equal to the ratio
of the weighted average market
capitalization of the Oncology Division
Stock and the Agouron Pharmaceuticals
Stock to be initially determined on the
earlier of the 90th day following
commencement of trading of the Oncology
Division Stock or the record date
established for the first meeting or
consent of shareholders following
implementation of the Divisional Stock
Proposal. The initial vote so established
shall remain unchanged until June 30,
2000. On July 1, 2000, and on each July 1
thereafter, the number of votes to which
each share of Oncology Division Stock is
entitled will be adjusted to reflect the
ratio of the weighted average market
capitalization of the Oncology Division
Stock and the Agouron Pharmaceuticals
Stock on such date. The market
capitalization of each series of stock
will be determined by multiplying the
number of outstanding shares of each
series by the Fair Market Value of one
share of such series. Fair Market Value
means the average of the daily average of
high and low per share sales prices as
reported by the Nasdaq National Market
(or the appropriate exchange or stock
market on which such shares are traded)
for the 20 consecutive trading days
commencing on the 30th trading day prior
to such date. In the event such selling
prices are unavailable, Fair Market Value
will be determined by the Board.
Except as otherwise described herein Except as otherwise described herein, or as
or as provided under the California provided under the California Corporations
Corporations Code, the holders of Code, the holders of Oncology Division
Agouron Pharmaceuticals Stock and the Stock and the holders of Agouron
holders of Oncology Division Stock will Pharmaceuticals Stock will vote together as
vote together as a single voting class. a single voting class.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
THE DIVISIONAL STOCK PROPOSAL
<S> <C> <C>
EXISTING COMMON STOCK AGOURON PHARMACEUTICALS STOCK ONCOLOGY DIVISION STOCK
CONVERSION AT OPTION OF COMPANY:
None. None. The Company may, at any time, convert each
share of Oncology Division Stock into any
combination of cash and/or a number of
shares of Agouron Pharmaceuticals Stock
having a Fair Market Value equal to 125%
of the Fair Market Value of one share of
Oncology Division Stock.
The ratio of the Fair Market Value of one
share of Oncology Division Stock to one
share of Agouron Pharmaceuticals Stock could
be affected by many factors, including the
results of operations and financial condition
of the Company and each Division, trading
volume, share issuances and repurchases and
general economic and market conditions.
The respective Fair Market Values of the
Oncology Division Stock and the Agouron
Pharmaceuticals Stock could also be affected
by decisions of management regarding the
reallocation of assets, expenses and liabilities,
the allocation of corporate opportunities by the
Board, as well as decisions regarding how the
Company's liabilities will be met, how
financing resources between two divisions
will be allocated or what amount of dividends,
if any, may be declared on either series of
Common Stock. See "Risk Factors--Risks
Related to the Divisional Stock Proposal--
Decisions That Affect Fair Market Values
Can Affect Shareholder Rights."
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
THE DIVISIONAL STOCK PROPOSAL
<S> <C> <C>
EXISTING COMMON STOCK AGOURON PHARMACEUTICALS STOCK ONCOLOGY DIVISION STOCK
RIGHTS ON DISPOSITION OF ASSETS OF A DIVISION:
None. None. If the Company disposes of all or
substantially all of the properties and
assets allocated to the Oncology Division
(i.e., 80% or more on a fair value
basis), the Company is required to
exchange each outstanding share of the
Oncology Division Stock for any
combination of cash and/or Agouron
Pharmaceuticals Stock having a Fair
Market Value equal to 125% of the Fair
Market Value of one share of Oncology
Division Stock.
The proceeds from any disposition of
properties and assets that do not comprise
all or substantially all of the properties
and asets allocated to the Oncology
Division will be assets of the Oncology
Division and will be used for its benefit,
subject to the policies described under
"Proposal 2 - The Divisional Stock
Proposal - Management and Allocation
LIQUIDATION:
Holders of Existing Common Holders of Agouron Pharmaceuticals Stock Holders of Oncology Division Stock will
Stock are entitled to will be entitled to a portion of the be entitled to a portion of the assets
receive the net assets of assets remaining for distribution to remaining for distribution to holders of
the Company, if any, holders of Common Stock in proportion to Common Stock in proportion to the
remaining for distribution the aggregate Liquidation Units of Agouron aggregate Liquidation Units of Oncology
to holders of Existing Pharmaceuticals Stock. Each share of Division Stock. Each share of Oncology
Common Stock. Agouron Pharmaceuticals Stock will have Division Stock will have 25 Liquidation
100 Liquidation Units. Units. The number of Liquidation Units
to which the Oncology Division Stock is
entitled is subject to adjustment if
shares of either series are subdivided,
combined or distributed as a dividend to
the shareholders of such series.
</TABLE>
<PAGE>
AGOURON PHARMACEUTICALS, INC.
SELECTED CONSOLIDATED FINANCIAL DATA
The following table summarizes certain selected consolidated financial data
of the Company for each of the five years in the period ended June 30, 1998 and
for the three month periods ended September 30, 1997 and 1998. The information
presented should be read in conjunction with the consolidated financial
statements included in Annex III to this Proxy Statement.
<TABLE>
<CAPTION>
(In thousands, except
per share amounts)
Three months ended
Year Ended June 30, September 30,
1994 1995 1996 1997 1998 1997 1998
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Income (Loss) Data:
Total revenues $ 16,301 $ 26,722 $ 55,955 $132,063 $466,505 $ 91,857 $ 144,937
Product sales 0 0 0 56,969 409,298 79,502 133,870
Research & development
expenses(1) 23,957 36,317 71,010 108,137 150,657 26,932 37,364
Net income (loss) (1) and (2) (9,462) (12,939) (19,523) (42,806) 13,154 3,630 6,890
Net income (loss) per share $ (.66) $ (.89) $ (.99) $ (1.59) $ .40 $ .11 $ .21
Shares used in computing net income
(loss) per share 14,482 14,592 19,688 26,946 33,214 33,158 33,179
June 30, September 30,
1994 1995 1996 1997 1998 1998
Balance Sheet Data:
Working capital $ 21,039 $ 8,837 $ 70,381 $115,786 $127,728 $ 138,533
Total assets 37,178 27,097 102,577 266,914 363,337 338,784
Long-term liabilities 2,285 1,884 1,734 7,217 6,915 7,180
Stockholders' equity(3) 24,852 12,591 75,583 191,282 236,169 245,372
</TABLE>
(1) In 1998, includes in-licensing expenses of $26,000,000 ($15,600,000 net
of tax) for commercial rights to three development stage anti-HIV
products.
(2) In 1997, includes the write-off of $57,500,000 of in-process technology
associated with the acquisition of Alanex Corporation, partially offset
by the realization of $43,800,000 of deferred tax assets associated
with the Company's expectation of future taxable income.
(3) The Company has never declared or paid cash dividends on its common
stock.
<PAGE>
AGOURON PHARMACEUTICALS SELECTED FINANCIAL DATA
The following table summarizes certain selected financial data of Agouron
Pharmaceuticals for each of the five years in the period ended June 30, 1998 and
for the three month periods ended September 30, 1997 and 1998. The information
presented should be read in conjunction with the financial statements and notes
thereto and related Management's Discussion and Analysis of Financial Condition
and Results of Operations of Agouron Pharmaceuticals, a division of Agouron
Pharmaceuticals, Inc., included in Annex IV to this Proxy Statement.
<TABLE>
<CAPTION>
(In thousands, except
per share amounts)
Three months ended
Year Ended June 30, September 30,
1994 1995 1996 1997 1998 1997 1998
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Income (Loss) Data:
Total revenues $ 12,100 $ 23,679 $ 37,942 $116,793 $451,077 $ 88,759 $ 144,937
Product sales 0 0 0 56,969 409,298 79,502 133,870
Research & development
expenses(1) 10,681 24,394 53,763 81,293 113,132 19,595 25,437
Net income (loss) (1) and (2) 1,241 (2,664) (18,349) (34,234) 29,364 6,642 13,792
Tax benefit allocated from Oncology
Division 0 0 0 4,290 8,023 2,007 5,685
Net income (loss) attributable to
Agouron Pharmaceuticals stock 1,241 (2,664) (18,349) (29,944) 37,387 8,649 19,477
June 30, September 30,
1994 1995 1996 1997 1998 1998
Balance Sheet Data:
Working capital $ 21,543 10,640 71,607 114,368 125,933 138,702
Total assets 37,178 27,097 102,577 262,246 360,654 337,146
Long-term liabilities 2,285 1,884 1,734 7,217 6,915 7,180
Division equity(3) 25,356 14,394 76,809 189,864 234,374 245,541
</TABLE>
(1) In 1998, includes in-licensing expenses of $26,000,000 ($15,600,000 net
of tax) for commercial rights to three development stage anti-HIV
products.
(2) In 1997, includes the write-off of $57,500,000 of in-process technology
associated with the acquisition of Alanex Corporation, partially offset
by the realization of $43,800,000 of deferred tax assets associated
with Agouron Pharmaceuticals' expectation of future taxable income.
(3) Agouron Pharmaceuticals has never declared or paid cash dividends on
its equivalent common stock.
<PAGE>
AGOURON ONCOLOGY DIVISION SELECTED FINANCIAL DATA
The following table summarizes certain selected financial data of the
Oncology Division for each of the five years in the period ended June 30, 1998
and for the three month periods ended September 30, 1997 and 1998. The
information presented should be read in conjunction with the combined financial
statements and notes thereto and related Management's Discussion and Analysis of
Financial Condition and Results of Operations of Agouron Oncology Division, a
division of Agouron Pharmaceuticals, Inc., included in Annex V to this Proxy
Statement.
<TABLE>
<CAPTION>
(In thousands, except per share amounts)
Three months ended
Year Ended June 30, September 30,
1994 1995 1996 1997 1998 1997 1998
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenues:
Contract and license $ 4,201 $ 3,043 $ 18,013 $ 15,270 $ 15,428 $ 3,098 $ 0
Operating expenses:
Research and development 13,276 11,923 17,247 26,844 37,525 7,337 11,927
General and administrative 1,628 1,394 1,940 1,288 2,136 780 660
Net loss $ (10,703) $ (10,274) $ (1,174) $(12,862) $(24,233) $ (5,019) $ (12,587)
</TABLE>
<TABLE>
<CAPTION>
June 30, September 30,
1994 1995 1996 1997 1998 1998
<S> <C> <C> <C> <C> <C> <C>
Balance Sheet Data:
Working capital $ (504) $ (1,803) $ (1,226) $ 1,418 $ 1,795 $ (169)
Total assets 0 0 0 4,668 2,683 1,638
Division equity(1) (504) (1,803) (1,226) 1,418 1,795 (169)
(1) Agouron Oncology Division has never declared or paid cash dividends on
its equivalent common stock.
</TABLE>
<PAGE>
PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY
The Existing Common Stock trades on the Nasdaq National Market under
the symbol AGPH. The following table sets forth the high and low sales prices
for the Existing Common Stock, as reported by Nasdaq, for the fiscal periods
indicated. All prices have been adjusted to reflect a 2-for-1 stock split
effected in the form of a 100% stock dividend in August 1997.
High Low
Fiscal 1997
Quarter ended September 30 $ 23.125 $ 14.500
Quarter ended December 31 35.750 21.125
Quarter ended March 31 50.500 33.500
Quarter ended June 30 45.500 29.187
Fiscal 1998
Quarter ended September 30 $ 56.500 $ 39.250
Quarter ended December 31 56.500 26.750
Quarter ended March 31 40.000 29.250
Quarter ended June 30 40.250 28.750
Fiscal 1999
Quarter ended September 30 $ 36.125 $ 19.250
On July 20, 1998, the trading day prior to the Company's announcement of
its proposal to create a separate operating division, the last reported sale
price for Existing Common Stock on the Nasdaq National Market was $29.50 per
share. On August 11, 1998, the trading day prior to the Company's announcement
of the Divisional Stock Proposal, the last reported sale price for Existing
Common Stock on the Nasdaq National Market was $22.78 per share. On October 19,
1998, the last reported sale price for the Existing Common Stock on the Nasdaq
National Market was $36.875 per share. As of October 19, 1998, there were
approximately 30,000 shareholders of the Existing Common Stock.
The Company has never declared or paid dividends on its capital stock
and does not anticipate paying any dividends in the foreseeable future. The
Company currently intends to retain its earnings, if any, for the development of
its businesses.
<PAGE>
RISK FACTORS
You should consider the following factors, in addition to the other
information contained elsewhere in this Proxy Statement and the Exhibits and
Annexes hereto, in connection with the Divisional Stock Proposal. For
definitions of certain defined terms, see "Annex I - Index of Defined Terms."
RISKS RELATED TO THE DIVISIONAL STOCK PROPOSAL
SHAREHOLDERS OF ONE COMPANY; Financial Effects of One Division Could
Adversely Affect the Other Divisions. Agouron Pharmaceuticals and the Oncology
Division are not separate legal entities. Holders of Agouron Pharmaceuticals
Stock and Oncology Division Stock will be shareholders of a single company and
will not have any interest in the assets of their respective Division.
Notwithstanding the attribution of assets and liabilities (including contingent
liabilities) and stockholders' equity among the Divisions for the purpose of
preparing their respective financial statements, the change in the capital
structure of the Company contemplated by the Divisional Stock Proposal will not
affect legal title to such assets or responsibility for such liabilities of the
Company or any of its subsidiaries. The assets of each Division are subject to
the obligations and liabilities incurred by either Division, whether such
obligations or liabilities arise from lawsuits, contract or other indebtedness
allocated to such Division. In the event one Division is unable to satisfy its
obligations or liabilities out of assets or other resources allocated to it, the
Company may be required to satisfy the obligations or liabilities using assets
or resources allocated to the other Division. As such, the holders of Agouron
Pharmaceuticals Stock and Oncology Division Stock can be affected by decisions
of the Board and the Company's management regarding the assets and liabilities
of both Divisions. The Board or management may, subject to the Management and
Allocation Policies described under "Proposal 2--The Divisional Stock
Proposal--Management and Allocation Policies" and the Board's fiduciary duties
to the Company and its shareholders, allocate assets and divert earnings between
Divisions without shareholder approval.
Financial effects arising from a Division that affect the consolidated
results of operations or financial position of the Company could affect the
results of operations or financial position of the other Division(s) and the
market price of the series of Common Stock related to the other Division(s).
Moreover, any net losses of Agouron Pharmaceuticals or the Oncology Division and
any distributions on, or repurchases of, any shares of capital stock will reduce
the funds of the Company legally available for the payment of dividends on all
classes and series of common stock of the Company. Accordingly, Agouron
Pharmaceuticals and the Oncology Division financial information should be read
in conjunction with the Company's consolidated financial information.
The Company will continue to prepare consolidated financial statements
and also provide such consolidated financial statements to the shareholders of
each of Agouron Pharmaceuticals and the Oncology Division. If the Divisional
Stock Proposal is approved, the Company will provide to shareholders of each of
Agouron Pharmaceuticals and the Oncology Division separate financial statements,
management's discussion and analysis of financial condition and results of
operations, descriptions of businesses and other relevant information for the
respective Division, together with the Company's consolidated financial
statements. Upon request, the Company will provide to any shareholder of a
Division a copy of the separate financial statements related to the other
Divisions.
LIMITED SEPARATE SHAREHOLDER RIGHTs. Under the Divisional Stock
Proposal, holders of the Agouron Pharmaceuticals Stock would not have any legal
rights specifically related to the assets attributed to the Oncology Division,
and the shareholders of the Oncology Division would not have any legal rights
specifically related to the assets attributed to Agouron Pharmaceuticals, except
(i) as set forth in the provisions relating to dividend and liquidation rights
and requirements for a mandatory exchange of the Oncology Division Stock upon
the disposition of all or substantially all of the properties and assets
allocated to the Oncology Division, as described under "Proposal 2 -- The
Divisional Stock Proposal--Description of Capital Stock--General Redemption and
Conversion Provisions" and (ii) separate voting rights in limited circumstances
as required by the California Corporations Code, as discussed below under
"--Limited Separate Voting Rights; Variable Voting Rights." Separate meetings
for the holders of Agouron Pharmaceuticals Stock and Oncology Division Stock
will not be held.
<PAGE>
Holders of Agouron Pharmaceuticals Stock and Oncology Division Stock
will be common shareholders of the Company, and will continue to be subject to
all the risks associated with an investment in the Company and all of its
businesses and liabilities. The Company and its subsidiaries will continue to be
responsible for each of their respective liabilities.
LIMITED SEPARATE VOTING RIGHTS; Variable Voting Rights. Under the
Divisional Stock Proposal, holders of both the Agouron Pharmaceuticals Stock and
of the Oncology Division Stock will vote together as a single voting group,
except in certain limited circumstances provided under the California
Corporations Code. Accordingly, except in limited circumstances, holders of
shares of one series of Common Stock could not bring a proposal to a vote of the
holders of that series of Common Stock only, but would be required to bring any
proposal to a vote of all common shareholders. If a separate vote on a matter by
the holders of either the Agouron Pharmaceuticals Stock or the Oncology Division
Stock is not required under the California Corporations Code, and if the Board
does not require a separate vote, either class of Common Stock that is entitled
to more than the number of votes required to approve such matter will be in a
position to control the outcome of such vote even if the matter involves a
divergence or conflict of the interests of the holders of the Agouron
Pharmaceuticals Stock and the Oncology Division Stock. See "--Potential
Divergence of Interests; No Specific Procedures for Resolution" and "--
Allocation of Proceeds of Mergers or Consolidations."
Conversely, if a separate vote on a matter by the holders of either the
Agouron Pharmaceuticals Stock or the Oncology Division Stock is required under
the California Corporations Code, by stock market rules or by the Board, such
holders of either Agouron Pharmaceuticals Stock or Oncology Division Stock could
prevent approval of such matter, even if the holders of a majority of the total
number of votes cast or entitled to be cast with respect to both the Agouron
Pharmaceuticals Stock and the Oncology Division Stock voting together as a group
were to vote in favor of it.
Each outstanding share of Agouron Pharmaceuticals Stock will have one
vote. Each outstanding share of Oncology Division Stock will have a number of
votes (including a fraction of one vote) equal to the ratio of the weighted
average market capitalization of the Oncology Division Stock and the Agouron
Pharmaceuticals Stock to be initially determined on the earlier of the 90th day
following commencement of trading of the Oncology Division Stock or the record
date established for the first meeting or consent of shareholders following
implementation of the Divisional Stock Proposal. The initial vote so established
shall remain unchanged until June 30, 2000. On July 1, 2000 and on each July 1
every two years thereafter, the number of votes to which each share of Oncology
Division Stock is entitled will be adjusted to reflect the ratio of the weighted
average market capitalization of the Oncology Division Stock and the Agouron
Pharmaceuticals Stock as of such date. The relative market capitalization of
each series of Oncology Division Stock and Agouron Pharmaceuticals Stock shall
be determined by multiplying the number of outstanding shares of each series by
the Fair Market Value of one share of such series. The formula is intended to
equate the proportionate per share voting rights of each series of Common Stock
to their respective market capitalization from time to time. Accordingly, the
relative voting power per share of Agouron Pharmaceuticals Stock and Oncology
Division Stock will fluctuate based on the respective Fair Market Values of the
two series of Common Stock. Fair Market Value could be affected by many factors,
including the results of operations of the Company and each of the Divisions,
trading volume, share issuances and repurchases, general economic and market
conditions, and decisions regarding allocations between the Divisions. Changes
in the aggregate votes or relative voting power of Agouron Pharmaceuticals Stock
or the Oncology Division Stock could result from the market's reaction to a
decision by the Company's management or Board that is perceived to affect
differently one series of Common Stock in comparison to the other or the
issuance or repurchase of shares of Common Stock of either series. Upon the
approval by shareholders and the filing of the Restated Articles with the
California Secretary of State, holders of Agouron Pharmaceuticals Stock are
anticipated to have a greater total voting power than holders of Oncology
Division Stock. As a result, on matters submitted to a vote of the common
shareholders as a group, the preferences of the holders of Agouron
Pharmaceuticals Stock are likely to dominate and determine the outcome of such
vote unless and until the relative number of shares outstanding and/or the
market value of each series of the Company's Common Stock materially changes.
See "--Decisions That Affect Fair Market Values Can Affect Shareholder Rights"
and "Proposal 2 -- The Divisional Stock Proposal--Description of Capital
Stock--Voting Rights."
<PAGE>
FIDUCIARY DUTIES OF THE BOARD; No Definitive Precedent Under California
Law. Under the California Corporations Code, each member of the Board must
discharge his or her duties in a manner he or she believes in good faith to be
in the best interests of the corporation and its shareholders with the care,
including reasonable inquiry, an ordinarily prudent person in a like position
would exercise under similar circumstances. Although the Company is not aware of
any precedent concerning the manner in which principles of California law would
be applied in the context of the capital structure contemplated by the
Divisional Stock Proposal, California courts generally apply the statutory
standard described above to determine if a board of directors has satisfied its
fiduciary duties. Courts interpreting California law have held that directors
satisfy their fiduciary duties if they make a good faith business determination
in an informed and deliberate manner with a careful consideration of the action
to be taken. If the Board acts in accordance with the standards described above
with respect to any matter having a disparate impact upon the holders of Agouron
Pharmaceuticals Stock or the holders of Oncology Division Stock, it should have
a defense to any challenge made by or on behalf of either group of holders.
Nevertheless, a California court hearing a case involving such a challenge may
decide to apply principles of California law other than those discussed above,
or, because such a case could be a case of first impression, may fashion new
principles of California law to decide such a case. There may arise
circumstances involving a divergence or conflict of the interests of the holders
of Agouron Pharmaceuticals Stock and holders of Oncology Division Stock in which
the Board is held to have properly discharged its duty to act in accordance with
its good faith business judgment of the best interests of the Company but in
which holders of Agouron Pharmaceuticals Stock or Oncology Division Stock
consider themselves to be disadvantaged relative to the other series. In such a
case, such holders might not have any remedy under California law with respect
to the circumstances giving rise to the divergence or conflict of interests.
Disproportionate ownership interests of members of the Board in Agouron
Pharmaceuticals Stock or Oncology Division Stock or disparity in the respective
market values of the Agouron Pharmaceuticals Stock and the Oncology Division
Stock held by such directors could create potential conflicts of interest when
directors are faced with decisions that could have different implications for
the different series. See "--Potential Divergence of Interests; No Specific
Procedures for Resolution" and "Proposal 2--The Divisional Stock
Proposal--Management and Allocation Policies--Fiduciary and Management
Responsibilities."
MANAGEMENT AND ALLOCATION POLICIES SUBJECT TO CHANGE. The Board has
adopted certain management and allocation policies described herein with respect
to cash management, the allocation of corporate expenses, rights to
commercialize products, inter-Division transactions and other matters, any and
all of which could be modified or rescinded by the Board, in its sole
discretion, without the approval of shareholders, although there is no present
intention to do so. The Board could also adopt additional policies depending
upon the circumstances. The Board could decide to modify or rescind such
policies, or to adopt additional polices, and any such decision could have
disparate effects upon holders of shares of any series of Common Stock. Any
determination of the Board to modify or rescind such policies, or to adopt
additional policies, including any such decision that would have disparate
impacts upon holders of Agouron Pharmaceuticals Stock and holders of Oncology
Division Stock, would be made in accordance with the Board's good faith business
judgment of the best interests of the Company, taking into consideration the
interests of all common shareholders. See "Proposal 2 -- The Divisional Stock
Proposal--Management and Allocation Policies."
POTENTIAL DIVERGENCE OF INTERESTS; No Specific Procedures for
Resolution. Occasions may arise when the interest of the holders of Agouron
Pharmaceuticals Stock and the holders of Oncology Division Stock may diverge or
appear to diverge. Examples include, among others, determinations by the Board
to: (i) allocate resources and financial support to or pursue business
opportunities or operational strategies through one Division instead of one or
more of the other Divisions; (ii) exchange each outstanding share of Oncology
Division Stock for cash or shares of Agouron Pharmaceuticals Stock, (iii)
approve the disposition of all or substantially all of the properties and assets
of the Oncology Division, (iv) allocate consideration to be received by holders
of Common Stock in connection with a merger or consolidation involving the
Company among holders of different series of Common Stock, (v) if and to the
extent there are Designated Shares (as defined below), allocate the proceeds of
future issuances of the Oncology Division Stock either to the Agouron
Pharmaceuticals shareholders or to the equity of the Oncology Division, (vi)
<PAGE>
pay or omit dividends on any series of Common Stock or (vii) approve
transactions involving the transfer of funds or assets from one Division to the
other or make other operational or financial decisions with respect to one
Division that could be considered to be detrimental to the other Division.
Other than as described under "Proposal 2 -- The Divisional Stock
Proposal -- Management and Allocation Policies," no specific procedures have
been adopted for consideration of matters involving a divergence of interests
among the holders of the Company's Common Stock. The policies that have been
adopted could be modified or rescinded by the Board, in its sole discretion,
without the approval of shareholders, although there is no present intention to
do so. The Board could also adopt additional policies. The Board intends to
exercise its judgment from time to time, depending on the circumstances, as to
how best to obtain information regarding the divergence (or potential
divergence) of interests, under what circumstances to seek the assistance of
outside advisors, whether a committee of the Board should be appointed to
address the matter, and how to assess which available alternative is in the best
interests of the Company and all of its shareholders. The Board believes the
advantages of retaining flexibility in determining how best to fulfill its
responsibilities in such circumstances as they may arise outweigh any perceived
advantages from attempting to adopt specific procedures in advance to cover all
conceivable circumstances. Each of the foregoing potential diverging or
conflicting interests is discussed below:
OPERATIONAL AND FINANCIAL DECISIONS. The Board could, in its sole
discretion, from time to time, make operational and financial decisions or
implement policies that affect disproportionately the businesses of Agouron
Pharmaceuticals and the Oncology Division, such as transfers of services, funds
or assets between Divisions and other inter-Division transactions, the
allocation of financing opportunities in the public markets and the allocation
of business opportunities, resources and personnel that may be suitable for both
Divisions. Any such decision may favor one Division at the expense of the other.
For example, the decision to obtain funds for one Division may adversely affect
the ability of the other Division to obtain funds sufficient to implement its
growth strategies. All such decisions will be made by the Board in its good
faith business judgment or in accordance with procedures and policies adopted by
the Board from time to time, including the policies described under "Proposal
2--The Divisional Stock Proposal--Management and Allocation Policies," in a
manner designed to be consistent with the best interests of the Company, taking
into consideration the interests of all common shareholders. For further
discussion of potential divergence of interests, see "--Fiduciary Duties of the
Board; No Definitive Precedent Under California Law," "--Transfers of Funds
Between Divisions; Equity Contributions," and "Proposal 2--The Divisional Stock
Proposal--Management and Allocation Policies."
OPTIONAL EXCHANGE OF ONCOLOGY DIVISION STOCK. The Board could, in its
sole discretion and without shareholder approval, determine to exchange shares
of Oncology Division Stock for cash or shares of Agouron Pharmaceuticals Stock
(or any combination thereof) at a 25% premium over the Fair Market Value of the
Oncology Division Stock at any time. Any such determination could be made at a
time when either or both of the Oncology Division Stock and the Agouron
Pharmaceuticals Stock may be considered to be overvalued or undervalued. In
addition, any such conversion at any premium would dilute the interests in the
Company of the holders of the Agouron Pharmaceuticals Stock and would preclude
holders of the Oncology Division Stock from retaining their investment in a
security that is intended to reflect separately the performance of that
Division. If such exchange is perceived as dilutive to the Agouron
Pharmaceuticals Stock, the market price of such stock may be adversely affected.
The Company cannot predict the impact on the market prices of the Agouron
Pharmaceuticals Stock or the Oncology Division Stock of its ability to effect
any such exchange or the effect, if any, that the exercise by the Company of
this exchange right would have on the market price of the Agouron
Pharmaceuticals Stock or the Oncology Division Stock prevailing at such time. In
determining whether to convert the Oncology Division Stock into the Agouron
Pharmaceuticals Stock, the Board will act in accordance with its good faith
business judgment that any such conversion is in the best interests of the
Company as a whole, but not necessarily in the best interests of either Division
individually. See "Proposal 2--The Divisional Stock Proposal--Description of
Capital Stock--General Redemption and Conversion Provisions."
FAIR VALUE UPON DISPOSITION OF DIVISION ASSETS. As long as the assets
attributed to a Division continue to represent less than substantially all of
the properties and assets of the Company, the Board may approve sales and other
dispositions of any amount of the properties and assets of such Division without
shareholder approval. The proceeds from any such sale would be assets attributed
to such Division and used for its benefit, subject to the management and
allocation policies described under "Proposal 2--The Divisional Stock
Proposal--Management
<PAGE>
and Allocation Policies." The Restated Articles contain provisions that,
following a disposition of all or substantially all of the assets of the
Oncology Division, the shares of Oncology Division Stock are subject to
mandatory exchange by the Company for cash or shares of Agouron Pharmaceuticals
Stock (or any combination thereof) at a 25% premium over the Fair Market Value
of the Oncology Division Stock as determined by the trading prices during a
specified period prior to consummation of the disposition. Consequently, holders
of Oncology Division Stock may receive a greater or lesser premium for their
shares than any premium that might be paid by a third-party buyer of all or
substantially all of the assets of the Oncology Division. In addition, any such
exchange could be made at a time when the Oncology Division Stock or the Agouron
Pharmaceuticals Stock may be considered to be overvalued or undervalued. See
"--Optional Exchange of Oncology Division Stock." The decision to sell the
assets of the Oncology Division may have the effect of precluding holders of the
Oncology Division Stock from realizing their anticipated return on their
investment in the Oncology Division Stock. Moreover, if the proceeds from such a
sale resulted in a price greater than the 25% premium, the Company's obligation
to the holders of the Oncology Division Stock would be limited to payment of the
25% premium as set forth in the Restated Articles. The terms of the Oncology
Division Stock and the Agouron Pharmaceuticals Stock do not require the Board to
select the option that would result in the distribution with the highest value
to the holders of the Oncology Division Stock or with the smallest effect on the
Agouron Pharmaceuticals Stock. The Board would select an option based upon its
good faith business judgment that such option is in the best interests of the
Company, taking into consideration the interests of all common shareholders. See
"--Fiduciary Duties of the Board; No Definitive Precedent under California Law."
ALLOCATION OF PROCEEDS UPON ISSUANCE OF ONCOLOGY DIVISION STOCK. If and
to the extent there are Oncology Division Designated Shares at the time of any
sale of shares of Oncology Division Stock, the Board would determine the
allocation of the proceeds of such sale between the Agouron Pharmaceuticals
shareholders and the Oncology Division. In such case, the Board could (assuming
there are sufficient Oncology Division Designated Shares) allocate up to 100% of
the net proceeds of the sale of Oncology Division Stock to the Agouron
Pharmaceuticals shareholders or allocate some or all such proceeds to the
Oncology Division, and such allocated amount of net proceeds would be reflected
entirely on the financial statements of the Division to which such proceeds were
allocated. Any such allocation of net proceeds to the Agouron Pharmaceuticals
shareholders would reduce the number of Oncology Division Designated Shares.
NO ASSURANCE OF PAYMENT OF DIVIDENDS. The Company has not paid
dividends in the past and does not anticipate paying any dividends in the
foreseeable future. Any dividends on the Agouron Pharmaceuticals Stock or the
Oncology Division Stock that may be declared by the Board will be payable out of
the lesser of: (i) the funds of the Company legally available for such purpose,
which are determined on the basis of the entire Company, and (ii) the Available
Dividend Amount with respect to the relevant Division, which in general is equal
to the amount legally available for such purpose determined in accordance with
California law applied as if such Division were a separate corporation. Such
dividends are further subject to the prior payment of dividends on outstanding
shares of any class or series of capital stock of the Company with preferential
dividend provisions. Any net losses of the Company (without regard to whether
such losses arose from any specific Dividends), and any dividends or
distributions on, or repurchases of, the Agouron Pharmaceuticals Stock or the
Oncology Division Stock, and dividends on, and certain repurchases of, preferred
stock, will reduce the funds of the Company legally available for payment of
dividends on both the Agouron Pharmaceuticals Stock and the Oncology Division
Stock. Subject to limitations of the California Corporations Code and the
Restated Articles, the Board may declare and pay dividends on Agouron
Pharmaceuticals Stock and Oncology Division Stock in equal or unequal amounts,
or may decide not to declare and pay such dividends, notwithstanding the
relationship between the Available Dividend Amounts for the respective
Divisions, the respective amounts of prior dividends paid on, or liquidation
rights of, the Agouron Pharmaceuticals Stock or the Oncology Division Stock or
any other factor. See "Proposal 2--The Divisional Stock Proposal --Description
of Capital Stock --Dividend Rights" and "--Dividend Policy."
ALLOCATION OF PROCEEDS OF MERGERS OR CONSOLIDATIONS. The Restated
Articles do not contain any provisions governing how consideration to be
received by the Company's shareholders in connection with a merger or
consolidation involving the Company (in which the Common Stock is to be
converted into other securities, cash or other property) is to be allocated
among holders of the Oncology Division Stock and the Agouron Pharmaceuticals
Stock. In any such merger or consolidation, the allocation of consideration
would be determined by the Board.
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TRANSFER OF FUNDS AMONG DIVISIONS; EQUITY CONTRIBUTIONS. If the
Divisional Stock Proposal is approved by shareholders, all debt incurred or
stock issued by the Company and its subsidiaries following the issuance by the
Company of the Agouron Pharmaceuticals Stock and the Oncology Division Stock
would be (unless the Board otherwise provides) specifically attributed to and
reflected in the financial statements of the Division that includes the entity
which incurred the debt or issued the stock or, in the case of debt or stock
that is not specifically attributed to one of the Divisions, Agouron
Pharmaceuticals. The Board could, however, determine from time to time that debt
incurred or stock issued by entities included in a Division should be
specifically attributed to and reflected in the financial statements of the
other Division(s) to the extent that the debt is incurred or the preferred stock
is issued for the benefit of such other Division(s).
To the extent cash needs of one Division exceed cash provided by such
Division, one of the other Divisions may transfer funds to such other Division.
The Company has provided and will continue to provide centralized cash
management functions under which cash receipts of certain entities included in
the Divisions are remitted to Agouron Pharmaceuticals and certain cash
disbursements of the other Divisions will be funded by Agouron Pharmaceuticals
on a daily basis. Such transfers of funds between the Divisions will be
reflected as borrowings or as the creation of, or at the option of the Board an
increase or reduction in the number of Designated Shares of the relevant
Division. In addition, the Board has approved an allocation of up to $25 million
in cash from Agouron Pharmaceuticals to the Oncology Division (the "Equity
Line"). Amounts drawn on the Equity Line will be exchanged automatically for
Oncology Division Designated Shares based on the Fair Market Value of the
Oncology Division Stock on the date of exchange or at such time as the maximum
amount of the Equity Line is drawn or the Board otherwise determines. See
"Proposal 2--The Divisional Stock Proposal--Management and Allocation Policies."
There are no specific criteria for determining when a transfer will be
reflected as a borrowing or as the creation of, or an increase or reduction in
the number of, Oncology Division Designated Shares. The Board expects to make
such determinations, either in specific instances or by setting generally
applicable policies from time to time, after consideration of such factors as it
deems relevant, including, without limitation, the needs of the Company, the
financing needs and objectives of the Divisions, the investment objectives of
the Divisions, the availability, cost and time associated with alternative
financing sources, prevailing interest rates and general economic conditions.
Loans from one Division to another Division will bear interest at such
rates and have such repayment schedules and other terms as are established from
time to time by, or pursuant to procedures established by, the Board. The Board
expects to make such determinations, either in specific instances or by setting
generally applicable policies from time to time, after consideration of such
factors as it deems relevant, including, without limitation, the needs of the
Company, the use of proceeds by and creditworthiness of the recipient Division,
the capital expenditure plans and investment opportunities available to each
Division and the availability, cost and time associated with alternative
financing sources. There can be no assurance that interest rates and other terms
established by the Board for any inter-Division loan will approximate those that
could have been obtained by the borrowing Division had it been a stand-alone
corporation.
Although the creation of or any increase in the number of Oncology
Division Designated Shares resulting from an equity contribution by Agouron
Pharmaceuticals to the Oncology Division or an exchange of amounts outstanding
under the Equity Line (or any decrease in such number of Oncology Division
Designated Shares) would be determined by reference to the Fair Market Value of
the Oncology Division Stock as of the date of such event, an increase (or
decrease) could occur at a time when the Oncology Division's stock could be
considered undervalued or overvalued. In addition, the creation of or an
increase in the number of Oncology Division Designated Shares may result in
dilution in net tangible book value per share to the existing holders of the
Oncology Division Stock.
ABSENCE OF APPROVAL RIGHTS WITH RESPECT TO FUTURE ISSUANCES OF
AUTHORIZED SHARES. The approval of the shareholders of the Company will not be
sought by the Company for the issuance of authorized but unissued shares of
Agouron Pharmaceuticals Stock, Oncology Division Stock or additional series
established by the Board or securities of the Company that are convertible into
or exchangeable for such shares, unless deemed advisable by the Board or
required by applicable law, regulation or stock market requirements. In
addition, the Board may, without soliciting the vote of shareholders, designate
and issue shares of a new series of Common Stock intended to reflect the
performance of new or additional divisions as otherwise described herein.
<PAGE>
DECISIONS THAT AFFECT FAIR MARKET VALUES CAN AFFECT SHAREHOLDER RIGHTS.
The relative voting power per share of the Agouron Pharmaceuticals Stock and the
Oncology Division Stock and the number of shares of Agouron Pharmaceuticals
Stock issuable upon the optional conversion of or mandatory exchange for the
Oncology Division Stock will differ depending upon the relative Fair Market
Values of the Agouron Pharmaceuticals Stock and the Oncology Division Stock. In
addition, the number of Oncology Division Designated Shares will increase upon
advances under the Equity Line provided by Agouron Pharmaceuticals to the
Oncology Division. The amount of increase will depend on the Fair Market Value
of the Oncology Division Stock at the time of such advances. The Fair Market
Values of the Oncology Division Stock and the Agouron Pharmaceuticals Stock
could be affected by many factors, including decisions of management and the
Board regarding the reallocation of assets, expenses and liabilities, the
allocation of corporate opportunities between Divisions, the allocation of
financing resources, the amount of dividends, if any, that may be declared on
either series of Common Stock, the allocation of responsibility for the
Company's liabilities, and other inter-Division transactions. See "Proposal
2--The Divisional Stock Proposal--Management and Allocation Policies."
NO ASSURANCES AS TO MARKET PRICE OR LIQUIDITY. Because there has been
no prior market for the Agouron Pharmaceuticals Stock and the Oncology Division
Stock, there can be no assurance as to their market prices or liquidity
following issuance thereof. There can be no assurance that the combined market
values of the Agouron Pharmaceuticals Stock and the Oncology Division Stock held
by a shareholder immediately following the effectiveness of the Divisional Stock
Proposal will equal or exceed the market value of the Existing Common Stock held
by such shareholder prior to the announcement or effectiveness of the Company's
Divisional Stock Proposal, and the combined market value could be less than such
market value of the Existing Common Stock. Until an orderly market develops for
the Agouron Pharmaceuticals Stock and the Oncology Division Stock, their
respective trading prices may fluctuate significantly. If an active trading
market does develop, there can be no assurance that it will be maintained. The
prices at which the shares of Agouron Pharmaceuticals Stock or Oncology Division
Stock will trade will be determined in the trading markets and may be influenced
by many factors, including the consolidated results of the Company, as well as
the respective performance of Agouron Pharmaceuticals and the Oncology Division,
investors' expectations for the Company and each Division, trading volume, the
number of market makers supporting each Divisional Stock, the amount and level
or analyst coverage of each Division and general economic and market conditions.
There is no assurance that investors will assign value to the Agouron
Pharmaceuticals Stock or the Oncology Division Stock based on the reported
financial results and fundamental operating prospects of the related Division.
Financial results of the Divisions that impact the Company's consolidated
results of operations or financial condition could affect the market prices of
the Agouron Pharmaceuticals Stock and the Oncology Division Stock. In addition,
the Company cannot predict the impact on the market values of the Agouron
Pharmaceuticals Stock or the Oncology Division Stock of certain terms of the
securities, such as the ability of the Company to convert shares of the Oncology
Division Stock, the discretion of the Board to make various determinations, or
the impact on the market value of each series of Common Stock of its voting
power. See also "--Risks Related to Agouron Pharmaceuticals and the Oncology
Division - Volatility of Stock Price and Liquidity."
NO ADJUSTMENT TO LIQUIDATING DISTRIBUTIONS. In the event of a voluntary
or involuntary dissolution, liquidation or winding up of the affairs of the
Company (other than pursuant to a merger, business combination or sale of
substantially all assets), holders of outstanding shares of each series of
Common Stock would receive the assets, if any, remaining for distribution to
common shareholders on a per share basis in proportion to the respective per
share liquidation units of such series. The Restated Articles provide that each
share of Agouron Pharmaceuticals Stock has 100 liquidation units and each share
of Oncology Division Stock has 25 liquidation units. Because the liquidation
units will not be adjusted to reflect changes in the relative market value or
performance of each of the Divisions, the per share liquidating distribution to
a holder of Agouron Pharmaceuticals Stock or Oncology Division Stock is not
likely to correspond to the value of the assets of Agouron Pharmaceuticals or
the Oncology Division, respectively, at the time of a dissolution, liquidation
or winding up of the Company. See "Proposal 2--The Divisional Stock
Proposal--Description of Capital Stock--Liquidation Rights."
USE OF TAX BENEFITS BY OTHER DIVISION. The Company's management and
allocation policies provide that, to the extent any Division is unable to
utilize its operating losses or other projected tax benefits to reduce its
current or deferred income tax expense, such losses or benefits will be
reallocated to the other Division on a quarterly basis
<PAGE>
for financial reporting purposes. Accordingly, although the actual payment of
taxes is a corporate liability of the Company as a whole, separate financial
statements will be prepared for each Division and any losses that cannot be
utilized by a Division will be allocated to the profitable Division rather than
carried forward to reduce the future tax liability of the Division generating
such losses. Since Agouron Pharmaceuticals is currently profitable and the
Oncology Division is expected to incur losses for at least the next several
years, this could result in the Oncology Division being charged a greater
portion of the total corporate tax liability and reporting lower earnings after
taxes in the future than would have been the case if such Division had retained
its losses or other benefits in the form of a net operating loss carry forward.
See "Proposal 2--The Divisional Stock Proposal--Management and Allocation
Policies."
LIMITATIONS ON POTENTIAL UNSOLICITED ACQUISITIONS. If Agouron
Pharmaceuticals or the Oncology Division were stand-alone corporations, any
person interested in acquiring either of such corporations without negotiation
with management could seek control of the outstanding stock of such corporation
by means of a tender offer or proxy contest. Although the Divisional Stock
Proposal would create two series of Common Stock that are intended to reflect
the separate performance of the Divisions, a person interested in acquiring only
one Division without negotiation with the Company's management would still be
required to seek control of the voting power represented by all of the
outstanding capital stock of the Company entitled to vote on such acquisition,
including the series of Common Stock related to the other Division. See
"--Limited Separate Shareholder Rights," "--Limited Separate Voting Rights;
Variable Voting Rights," and "Proposal 2--The Divisional Stock
Proposal--Description of Capital Stock--Voting Rights."
ANTI-TAKEOVER CONSIDERATIONS. The Company has adopted a Shareholder
Rights Plan pursuant to which each share of Common Stock (including, after
implementation of the Divisional Stock Proposal, if approved, shares of Agouron
Pharmaceuticals Stock and Oncology Division Stock) is accompanied by a preferred
stock purchase right. These rights will cause a substantial dilution to a person
or group that attempts to acquire the Company on terms not approved by the Board
and may have the effect of deterring hostile takeover attempts. In addition, the
existence of two series of Common Stock could present complexities and could in
certain circumstances pose obstacles, financial and otherwise, to an acquiring
person. For example, the Company could, in the sole discretion of the Board and
without shareholder approval, exercise its rights to exchange the shares of
Oncology Division Stock for shares of Agouron Pharmaceuticals Stock at a 25%
premium over the Fair Market Value of the Oncology Division Stock, which could
result in additional dilution to persons seeking control of the Company. The
Shareholder Rights Plan and the existence of the two series of Common Stock
could, under certain circumstances, prevent shareholders from profiting from an
increase in the market value of their shares as a result of a change in control
of the Company by delaying or preventing such change in control. Although the
Board has no present intention of doing so, it could issue shares of Preferred
Stock or of a new or existing series of Common Stock that could be used to
create voting or other impediments or to discourage persons seeking to gain
control of the Company and could also be privately placed with purchasers
favorable to the Board in opposing such action.
RISKS RELATED TO AGOURON PHARMACEUTICALS AND THE ONCOLOGY DIVISION
EARLY STAGE OF PRODUCT DEVELOPMENT; UNCERTAINTY OF PRODUCT DEVELOPMENT
AND MARKET ACCEPTANCE; TECHNOLOGICAL UNCERTAINTY. The Company has completed the
development and commercialization of only one Agouron Pharmaceuticals product
and no Oncology Division products and does not expect to have any additional
products commercially available until calendar 2000, if at all. While the
Company has received regulatory approval to begin human clinical testing for
certain of its compounds (see Annex IV and Annex V), these and other compounds
currently being developed by the Company will require further research and
development, including extensive additional preclinical and human clinical
testing, prior to submission of any regulatory application for commercial sale
of such compounds. There can be no assurance that further research and
development will be successful or will result in drugs that will qualify for
approval by regulatory authorities for commercial sale or be accepted and
successful in the marketplace. In addition, clinical testing of a pharmaceutical
product is itself subject to approvals by various governmental regulatory
authorities. No assurance can be given that the Company will be permitted by
regulatory authorities to conduct planned additional clinical testing of the
Company's compounds in any particular country of the world, including the United
States, or that, if permitted, such additional clinical testing will prove that
such drugs are safe and efficacious to the extent necessary to permit the
Company to obtain marketing approvals for them from regulatory authorities. The
Company may encounter problems or delays relating to research
<PAGE>
and development, regulatory approval and manufacturing and the failure to
address such problems or delays could have a material adverse effect on the
Company's business and prospects. Even if FDA and foreign regulatory approvals
for the marketing of any products being developed by the Company are obtained,
there can be no assurance that such products will be accepted and successful in
the marketplace.
While the Company believes it has demonstrated the utility of certain
of its potential products in preclinical testing and in phase I and phase II
human clinical trials, extensive further clinical testing of these potential
products is required before the Company can seek marketing approval from
regulatory authorities. Furthermore, results obtained in preclinical studies or
in phase I and phase II human clinical trials are not necessarily indicative of
results that will be obtained in subsequent or more extensive preclinical or
clinical testing.
UNCERTAINTY ASSOCIATED WITH CLINICAL TESTING. Before seeking regulatory
approvals for the commercial sale of any of its products, the Company must
undertake extensive preclinical and clinical testing to demonstrate their safety
and efficacy in humans. Historical results of clinical testing of VIRACEPT and
the Company's other clinical programs are not necessarily predictive of future
results. There can be no assurance that clinical studies of products under
development will demonstrate the safety and efficacy of such products. The
failure to adequately demonstrate the safety and efficacy of a therapeutic
product could delay or prevent regulatory approval of the product. There can be
no assurance that unacceptable toxicities or side effects will not occur at any
time in the course of human clinical trials or commercial use of the Company's
drugs. The appearance of any such unacceptable toxicities or side effects could
interrupt, limit, delay or abort the development of any of the Company's drugs
or, if previously approved, necessitate their withdrawal from the market.
Furthermore, there can be no assurance that disease resistance will not limit
the efficacy of VIRACEPT or other of the Company's drugs, if any. Even after
being approved by FDA or foreign regulatory authorities, products may later
exhibit adverse effects that prevent their widespread use or necessitate their
withdrawal from the market. Additionally, the Company has made and may in the
future make changes to the formulation of its drugs and/or the processes for
manufacturing its drugs. Any such changes in formulation or manufacturing
processes could result in delays in conducting further preclinical and clinical
testing. There can be no assurance that any products under development by the
Company will be safe when administered to patients. Delays in planned patient
enrollment in the Company's current clinical trials or future clinical trials
may result in increased costs, program delays or both. There can be no assurance
that if clinical trials are completed the Company will be able to submit a New
Drug Application and/or Product License Application as scheduled or that any
such application will be reviewed and approved by FDA in a timely manner, or at
all. Even after being approved by FDA or foreign regulatory authorities,
products may later exhibit adverse effects that prevent their widespread use or
necessitate their withdrawal from the market. There can be no assurance that any
products under development by the Company will be safe when administered to
humans.
HISTORY OF OPERATING LOSSES AND UNCERTAINTY OF CONTINUED PROFITABILITY
OF AGOURON PHARMACEUTICALS; DEPENDENCE ON VIRACEPT. Agouron Pharmaceuticals has
had product sales only since fiscal 1997 and reported net income only for fiscal
1998. Continued profitability of Agouron Pharmaceuticals will be dependent in
the foreseeable future upon the sales of VIRACEPT. There can be no assurance
that commercial sales of VIRACEPT alone will be able to maintain Agouron
Pharmaceuticals' substantial rate of growth in revenues or to either generate or
maintain profitable operating results on a consistent basis. Any disruption in
the supply or manufacturing process for VIRACEPT may have a material adverse
effect on revenues. Operating results will also be impacted by the timing and
amount of Agouron Pharmaceuticals' research, development and clinical trial
programs, the level of its selling and marketing efforts, the efficiency and
cost of its manufacturing activities, the nature of its business development
activities and on the timing and receipt of fees from existing and future
collaborative relationships.
HISTORY OF OPERATING LOSSES; LACK OF REVENUES OF THE ONCOLOGY DIVISION.
The Oncology Division has recorded operating losses since inception. The
Oncology Division has no product sales and its only source of revenues in the
past has been from payments by collaborative partners. The collaborative
agreements with Hoffmann-LaRoche Inc, and F. Hoffmann-La Roche Ltd that
accounted for substantially all of the Oncology Division's contract and license
revenues for fiscal 1996, 1997 and 1998 have been terminated, and the Company
anticipates no contract and license revenues for the Oncology Division for
fiscal 1999. Because all of the Oncology Division's potential therapeutic
products will require substantial additional research, development and
preclinical and clinical testing prior to commercialization, it may be several
years, if ever, before the Oncology Division
<PAGE>
recognizes revenue from sales and royalties on these potential
products. Accordingly, the Oncology Division is expected to experience
significant operating losses for at least the next several years. The Oncology
Division may never achieve a profitable level of operations and that
profitability, if achieved, may not be sustained on an ongoing basis. For the
immediate future, the Oncology Division intends to rely entirely on the funding
capabilities of Agouron Pharmaceuticals. There can be no assurance that Agouron
Pharmaceuticals will be capable of continuing to fund (or that the Board will
elect to fund) the Oncology Division as currently anticipated.
ADDITIONAL FINANCING REQUIREMENTS AND ACCESS TO CAPITAL. The Company
has expended approximately $487,000,000 on research and development activities
since its inception. Both Agouron Pharmaceuticals and the Oncology Division
intend in the future to expend substantial additional funds to continue research
and development activities, conduct preclinical studies and tests, conduct human
clinical trials, establish manufacturing, sales and marketing capabilities and
market any approved products. Additional funds may be required in connection
with collaborative arrangements with others and for working capital and other
general corporate needs.
The Company believes that its current capital resources and existing
contractual commitments will enable Agouron Pharmaceuticals and the Oncology
Division to maintain their current and planned operations through at least
fiscal 1999. No assurance can be given that there will be no change in the
operations of Agouron Pharmaceuticals or the Oncology Division that would
consume available resources more rapidly than anticipated. Additional funding
may be required by either or both Agouron Pharmaceuticals or the Oncology
Division before the commercialization of any additional products. The future
capital requirements of both Agouron Pharmaceuticals and the Oncology Division
will depend on many factors, including the product contribution to Agouron
Pharmaceuticals from commercial sale of VIRACEPT, the progress of research and
development, the scope and results of preclinical studies and clinical trials,
the cost, timing and outcome of regulatory reviews, the rate of technological
advances, the market acceptance of any approved Company products, administrative
and legal expenses and competitive factors. To the extent the capital resources
of Agouron Pharmaceuticals are insufficient to meet current or planned operating
requirements of both Agouron Pharmaceuticals and the Oncology Division, Agouron
Pharmaceuticals or the Oncology Division may seek to obtain additional funds
through equity or debt financing, collaborative or other arrangements with
corporate partners, licensees and others, and from other sources, which may have
the effect of diluting the holdings of existing shareholders. No assurance can
be given that additional financing will be available when needed or on terms
acceptable to Agouron Pharmaceuticals or the Oncology Division. If adequate
funds are not available, Agouron Pharmaceuticals or the Oncology Division may be
required to delay or eliminate expenditures for certain programs, cancel
licenses from third parties or to license third parties to commercialize
products or technologies that either Agouron Pharmaceuticals or the Oncology
Division would otherwise seek to develop and commercialize itself, any of which
could have a material adverse effect on Agouron Pharmaceuticals, the Oncology
Division or the Company.
DEPENDENCE ON OTHERS. The Company's strategy for development and
commercialization of certain of its products entails entering into various
arrangements with corporate partners, licensees and others, and upon the
subsequent success of these partners, licensors, licensees and others in
performing preclinical and clinical testing, obtaining regulatory approvals,
manufacturing and marketing. These arrangements may require the Company to
transfer certain material rights to such corporate partners, licensees and
others. In the event the Company determines to license or sublicense certain of
its commercial rights, there can be no assurance such arrangements will not
result in reduced product revenue to the Company. While the Company believes its
partners, licensees and others will have an economic motivation to succeed in
performing their contractual responsibilities, the amount and timing of
resources to be devoted to these activities will be controlled by others.
Consequently, there can be no assurance that any revenues or profits will be
derived from such arrangements, that any of the Company's current strategic
arrangements will be continued or not terminated early or that the Company will
be able to enter into future collaborations.
MANUFACTURING CAPABILITIES. The Company is dependent on a number of
contract manufacturers for the commercial manufacture of VIRACEPT under current
Good Manufacturing Practices ("GMP"). Failure to meet GMP standards would have
an adverse impact on the Company's business. No assurance can be given that such
manufacturers can be retained or that such manufacturers will continue to timely
deliver sufficient product quantities at acceptable costs. Although the Company
is producing clinical quantities of certain chemical compounds in certain of its
laboratory facilities that have undergone GMP inspections and been approved by
the State of California, and
<PAGE>
has business relationships with its collaborators and with manufacturers to
supply significant portions of its clinical trial material requirements, the
current facilities and existing manufacturing relationships of the Company may
not be adequate to meet anticipated commercial production needs. Therefore, the
Company will be dependent upon its collaborators and licensees or upon contract
manufacturers for the commercial manufacture of products it may develop. The
Company has limited experience in such commercial manufacturing and related
matters and no assurance can be given that the Company will be able to continue
to arrange for contract manufacturing or that adequate supplies of raw materials
will be available. In the event the Company is unable to obtain contract
manufacturing on acceptable terms, its ability to commercialize or timely
deliver its products at acceptable cost may be adversely affected.
SALES AND MARKETING CAPABILITIES. While the Company has established its
capabilities in the sales, marketing and distribution of pharmaceutical products
in the United States and Canada, there can be no assurance that such
capabilities will be sufficient or successfully maintained in the United States
or other markets outside of the United States and Canada. Further, there can be
no assurance that any products, if approved, will gain market acceptance. The
Company's results of operations and cash flows for at least the next several
years will be highly dependent upon the timing and extent of VIRACEPT sales.
PATENTS AND PROPRIETARY TECHNOLOGY. The Company has been granted
certain patents relating to its inventions in the United States and certain
other countries. The Company also has various pending patent applications
claiming inventions in various fields. The Company expects to continue to
attempt to secure patent protection for its potential products, and that any
such patents will be owned by the Company and licensed or be made available to
the applicable Division. The Company believes that its current and future patent
portfolio is important to its future operations.
Patent protection is recognized as being important to the
pharmaceutical industry in general, e.g., as providing a period of exclusivity
against generic competition, which serves as a return for the great expenditure
of resources incurred in discovering and developing a drug and for advancing the
state of the art. The commercial success of the products of both Agouron
Pharmaceuticals and the Oncology Division may depend, in part, on the Company's
ability to enforce its patents against infringing competitors. Although the
Company's issued patents, pending patent applications, and future patents may be
of importance to the Divisions, there can be no assurance that additional
patents will be granted or that any patents now or hereafter granted will be of
commercial benefit.
The granting of a patent is not conclusive as to the validity or
enforceability of the claims therein, which define the scope of the Company's
exclusive rights. The validity and enforceability of a United States patent, as
well as of a patent from certain other countries, may be challenged by a third
party in a litigation or proceeding before a court or patent office. If the
validity or enforceability of a patent claim is successfully challenged in such
a litigation or proceeding, then third parties may be free to use a claimed
invention, in some cases without payment to the Company. Moreover, there can be
no assurance that patent claims covering a Division's products will not be
infringed or that infringement will be avoided by successfully designing around
a claimed invention.
There also can be no assurance that the technology or products of the
Divisions, whether patented or not, will not infringe third parties' patents.
The Company is aware of certain patent applications or patents of third parties,
and there may be other patents or patent applications, covering subject matter
related to Agouron Pharmaceuticals or the Oncology Division's technology and
potential products. Research, development or commercialization of the Company's
products may require that the Company obtain licenses under such patent
applications, if granted, or patents of third parties. However, there can be no
assurance that the Company will be able to obtain such licenses on commercially
reasonable terms or at all. If a third party obtains a patent covering a product
of a Division, the Company could be required to defend against an infringement
action, which could be costly and time-consuming. Furthermore, any fees or
royalties required to be paid under a patent license, settlement agreement, or
litigation judgment could be significant.
The Company seeks to protect certain unpatented proprietary technology
and know-how through the maintenance of trade secrets or confidential
information. Certain technology and know-how of importance to the Company's
drug-discovery and manufacturing operations depend on the skills, knowledge, and
experience of its scientific and technical personnel, for which patent
protection may not be available. To help protect its rights, the
<PAGE>
Company generally requires all employees, relevant consultants and advisors, and
collaborators to enter into confidentiality agreements. There can be no
assurance, however, that these agreements will provide adequate protection for
the Company's trade secrets, know-how, or other proprietary information in the
event of its unauthorized use or disclosure. Competitors may independently
develop substantially equivalent technology, undermining the value of the
Company's trade secrets. Third parties may even obtain patents covering the
Company's proprietary technology or know-how, which may adversely affect a
Division's ability to use such technology or know-how.
The costs of obtaining and enforcing patents and of protecting
proprietary technology may involve a substantial commitment of either or both
Division's resources. Any such commitment may divert resources from other
operations of the impacted Division.
TECHNOLOGICAL CHANGE AND INTENSE COMPETITION. The pharmaceutical and
biotechnology industries are subject to intense competition and rapid
technological change. The Company believes that industry-wide interest in the
application of protein structure-based drug design and related technology will
continue and may accelerate as the technology becomes more widely understood.
Competitors of the Company in the United States and abroad are numerous and
include, among others, pharmaceutical, biotechnology and chemical companies,
universities and other research organizations. For example, HIV protease
inhibitors developed by Abbott Laboratories, Inc., Merck & Co., Inc. and Roche
are currently being marketed. There can be no assurance that these and other
competitors will not have products or succeed in developing technologies and
products that are more effective than any which have been or are being developed
by the Company or which would render the Company's technology and products
obsolete and noncompetitive.
Many of the Company's competitors have substantially greater financial
and technical resources and production and marketing capabilities and experience
than the Company. In addition, many of the Company's competitors have
significantly greater experience than the Company in conducting preclinical
testing and human clinical trials of new pharmaceutical products and in
obtaining FDA and other regulatory approvals of products. Accordingly, certain
of the Company's competitors may succeed in obtaining regulatory approval for
products more rapidly or effectively than the Company. The Company also competes
with respect to manufacturing efficiency and sales and marketing capabilities,
areas in which the Company has limited experience.
GOVERNMENT REGULATION. Preclinical studies, clinical trials and the
production and marketing of the Company's products and its ongoing research and
development activities are subject to regulation by numerous governmental
authorities in the United States and other countries. Rigorous preclinical and
clinical testing and obtaining regulatory approvals can take many years and
require the expenditure of substantial resources. Failures or delays by the
Company or its collaborators, licensors or licensees in obtaining regulatory
approvals would adversely affect the marketing of products developed by the
Company and the Company's ability to receive product revenues or royalties.
Further, there can be no assurance that the Company or its collaborators,
licensors or licensees will be able to obtain necessary regulatory approvals.
There can be no assurance that clinical data will be accepted by regulatory
agencies or that any approvals will be granted on a timely basis, if at all. Any
significant delays or requests to provide additional data in the approval
process could have a material adverse effect on the Company.
If regulatory approval of a drug is obtained, such approval may involve
limitations and restrictions on the drug's use. In addition, any marketed drug
and its manufacturer are subject to continual governmental review and any
subsequent discovery of previously unrecognized problems could result in
restrictions on the product or manufacturer, including, without limitation,
withdrawal of the product from the market. Failure of the Company to comply with
applicable regulatory requirements can, among other things, result in fines,
suspension of regulatory approvals, product recalls, seizure of products,
operating restrictions or criminal prosecution.
Additionally, the Company is or may become subject to various federal,
state and local laws, regulations and recommendations relating to safe working
conditions, laboratory and manufacturing practices, the experimental use of
animals and the use and disposal of hazardous or potentially hazardous
substances, including radioactive compounds and infectious disease agents, used
in connection with Agouron's research and development work. The Company is
unable to predict the extent of restrictions that might arise from any
governmental or administrative action.
<PAGE>
VOLATILITY OF STOCK PRICE AND LIQUIDITY. The market price of the
Existing Common Stock, like that of the common stock of other biopharmaceutical
companies, has in recent years fluctuated significantly, and it is likely that
should the Divisional Stock Proposal be approved and implemented the market
prices of Agouron Pharmaceuticals Stock and Oncology Division Stock will
fluctuate significantly in the future. Factors such as announcements of
technological innovations or new commercial products by a Division or its
competitors, progress with clinical trials, governmental regulation, changes in
reimbursement policies, developments in patent or other proprietary rights of a
Division or its competitors, including litigation, developments in a Division's
relationships with current or future collaborators and licensees, if any, public
concern as to the safety and efficacy of drugs developed by a Division and its
competitors, changes in estimates of a Division's performance by securities
analysts, changes in the Company's policies regarding the allocation of business
opportunities and other matters among the Divisions and general market
conditions may have a significant effect on the market price of the Agouron
Pharmaceuticals Stock and Oncology Division Stock. Fluctuations in financial
performance of the respective Divisions from period to period also may have a
significant impact on the market price of the Agouron Pharmaceuticals Stock and
Oncology Division Stock. Additionally, because there has been no prior market
for the Agouron Pharmaceuticals Stock or the Oncology Division Stock, there can
be no assurance that an orderly and liquid market will exist or evolve for such
securities following the implementation of the Divisional Stock Proposal. In
addition to many of the factors noted above, such market will be impacted by the
number of market makers, if any, supporting the Divisional Stock and the level
of analyst coverage, if any, experienced by each Division.
UNCERTAINTY OF THIRD-PARTY REIMBURSEMENT AND PRODUCT PRICING. The
Company's ability to commercialize products successfully will depend in part on
the availability of reimbursement of the costs of such products and related
treatments at acceptable levels from government authorities, private health
insurers and other organizations, such as health maintenance organizations
("HMOs"). There can be no assurance that reimbursement in the United States or
foreign countries will be available for any products the Company may develop or,
if available, will not be decreased in the future, or that reimbursement amounts
will not reduce the demand for, or the price of, the Company's products, thereby
adversely affecting the Company's business
Third-party payors are increasingly challenging the prices charged for
medical products and services. Also, the trend toward managed health care in the
United States and the concurrent growth of organizations, such as HMOs, which
can control or significantly influence the purchase of health care services and
products, as well as legislative proposals to reform health care or reduce
government insurance programs, may result in lower prices for pharmaceutical
products. The cost containment measures that health care providers are
instituting and the effect of any health care reform could materially adversely
affect the Company's ability to sell its products if successfully developed and
approved. Moreover, the Company is unable to predict what additional legislation
or regulation, if any, relating to the health care industry or third-party
coverage and reimbursement may be enacted in the future or what effect such
legislation or regulation would have on the Company's business.
PRODUCT LIABILITY; LIMITED INSURANCE COVERAGE. The testing, marketing
and sale of human health care products entail an inherent risk of allegations of
product liability and there can be no assurance that product liability claims
will not be asserted against the Company, its collaborators or its licensees.
The Company currently has only limited amounts of product liability insurance
for clinical trials and for commercial sales. There can be no assurance that the
Company will be able to maintain product liability insurance on acceptable terms
or that such insurance will provide adequate coverage against any potential
claims. Furthermore, there can be no assurance that any collaborators and
licensees of Agouron will agree to indemnify the Company, be sufficiently
insured or have a sufficient net worth to protect the Company from any product
liability claims.
USE OF HAZARDOUS MATERIALS. The Company's research and development
activities involve the controlled use of hazardous materials, chemicals, viruses
and various radioactive compounds. Although the Company believes that its safety
procedures for 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 damages
that result and any liability could have a material adverse effect on the
Company.
<PAGE>
ATTRACTION AND RETENTION OF PERSONNEL. The future success of the
Company will depend in large part on its ability to continue to attract and
retain highly qualified scientific, technical, sales and marketing and
managerial personnel. Competition for such personnel is intense and there can be
no assurance that the Company will be able to attract and retain the personnel
necessary for the development of its business. In addition, much of the know-how
developed by the Company resides in its scientific and technical personnel and
such know-how is not readily transferable to other scientific and technical
personnel. The loss of or failure to recruit scientific, technical, sales,
marketing, manufacturing and managerial personnel could have a material adverse
effect on the Company.
<PAGE>
GENERAL
This Proxy Statement and the enclosed form of Proxy are furnished in
connection with the solicitation of Proxies by and on behalf of the Board for
use at the Meeting to be held at the Sheraton Grande Torrey Pines, 10950 North
Torrey Pines Road, La Jolla, California 92037, on Wednesday, December 16, 1998
at 10:00 a.m., San Diego time, and at any adjournments or postponements thereof.
Any shareholder returning the enclosed Proxy may revoke it prior to its
exercise by voting in person at the Meeting or by filing with the Secretary of
the Company a written revocation or a duly executed Proxy bearing a later date.
All shares represented by valid Proxies will be voted in accordance
with the directions specified thereon and otherwise in accordance with the
judgment of the proxyholders. Any duly executed Proxy on which no direction is
specified will be voted FOR the election of the nominees named herein to the
Board and FOR Proposals 2, 3, 4 and 5 described in the Notice of Meeting and
this Proxy Statement.
Only shareholders of record as of the close of business on October 19,
1998 (the "Record Date") will be entitled to vote at the Meeting. As of October
19, 1998, there were outstanding 31,282,508 shares of Existing Common Stock.
Holders of Existing Common Stock are entitled to one vote per share on
all matters brought before the Meeting and to cumulate votes for the election of
the nine directors. Therefore, in voting for directors, each outstanding share
of Existing Common Stock is entitled to nine votes which may be cast for one
candidate or distributed in any manner among the nominees for director. However,
the right to cumulate votes in favor of one or more candidates may not be
exercised until the candidate or candidates have been nominated and the
shareholder has given notice at the Meeting of the intention to cumulate votes.
If any one shareholder gives such notice, all shareholders may cumulate their
votes for candidates in nomination.
The persons authorized to vote shares represented by executed Proxies
for Existing Common Stock in the enclosed form (if authority to vote for the
election of directors is not withheld) will have full discretion and authority
to vote cumulatively and to allocate votes among any or all of the nominees as
they may determine or, if authority to vote for a specified candidate or
candidates had been withheld, among those candidates for whom authority to vote
has not been withheld.
The required quorum for the Meeting shall consist of a majority of the
outstanding shares of Existing Common Stock which are entitled to vote in person
or by proxy at the Meeting. Assuming that a quorum is present at the Meeting,
the nine persons receiving the highest number of votes will be elected to the
Board. The approval of Proposal 2 will require the affirmative vote of a
majority of the outstanding shares of Existing Common Stock. Each of Proposals
3, 4 and 5 requires the affirmative vote of a majority of the shares present in
person or represented by proxy at the Meeting, provided that those affirmatively
voted shares also constitute at least a majority of the required quorum.
Abstentions have the same effect as negative votes with respect to
Proposal 2. Abstentions will generally not be counted for purposes of
determining whether approval of Proposals 3, 4 or 5 has been obtained (although
they may, depending upon the number of shares voted, have the same effect as
negative votes with respect to those proposals due to the requirement that the
shares voting affirmatively constitute a majority of the required quorum). If a
broker which is the record holder of certain shares indicates on a proxy that it
does not have discretionary authority to vote on a particular matter as to such
shares, or if shares are not voted in other circumstances in which proxy
authority is defective or has been withheld with respect to a particular matter,
these non-voted shares will be counted for quorum purposes but are not deemed to
be present or represented for purposes of determining whether shareholder
approval of that matter has been obtained (however, they will have the same
effect as negative votes with respect to Proposal 2 and may, depending upon the
number of shares voted, have the same effect as negative votes with respect to
Proposals 3, 4 and 5).
<PAGE>
The expense of printing and mailing Proxy material will be borne by the
Company. In addition to the solicitation of Proxies by mail, solicitation may be
made by certain directors, officers or other employees of the Company by
telephone, telegraph, facsimile or in person. No additional compensation will be
paid to such persons for such solicitation. However, the Company will request
brokers, nominees, fiduciaries, custodians and others to forward Proxy materials
to the beneficial owners of the Company's shares and the Company will reimburse
such brokers or other persons for their reasonable out-of-pocket expenses
incurred in connection with forwarding such materials. The Company has retained
D.F. King & Co., Inc. to perform various proxy advisory, distribution and
solicitation services at a cost of approximately $7,500 plus reimbursement of
out-of-pocket expenses.
<PAGE>
PROPOSAL 1 - ELECTION OF DIRECTORS
Under the bylaws of the Company, the number of directors is to be not
less than six nor more than eleven, with the actual number to be fixed from time
to time by resolution of the Board. The Board has fixed at nine the number of
directors to be elected at the 1998 Annual Meeting of Shareholders.
Nine directors are to be elected at the Meeting, each to serve until
the next Annual Meeting of Shareholders and until their respective successors
are elected or appointed. Unless authority to vote for all directors is
withheld, it is intended that the shares represented by the enclosed Proxy will
be voted for the election of the nominees named. In the event any of them shall
become unable or unwilling to accept nomination or election, the shares
represented by the enclosed Proxy will be voted for the election of such other
person as the Board may recommend in his or her place. The Board has no reason
to believe that any such nominee will be unable or unwilling to serve.
The nine nominees for election as directors, all of whom are members of the
present Board, are Peter Johnson, Gary E. Friedman, John N. Abelson, Patricia M.
Cloherty, A.E. Cohen, Michael E. Herman, Irving S. Johnson, Antonie T. Knoppers
and Melvin I. Simon. Their terms will last until the 1999 Annual Meeting of
Shareholders. Certain information concerning the nominees for directors is set
forth below.
THE BOARD RECOMMENDS THAT YOU VOTE FOR THE NOMINEES FOR DIRECTORS, AS SET
FORTH IN ITEM 1 ON THE PROXY CARD.
NOMINEES FOR ELECTION AS DIRECTORS
NAME AGE POSITION
Peter Johnson 53 President, Chief Executive
Officer and Director
Gary E. Friedman 51 Corporate Vice President,
General Counsel,
Secretary and Director
John N. Abelson, Ph.D.(1) 59 Director
Patricia M. Cloherty(2) 56 Director
A.E. Cohen(1) 62 Director
Michael E. Herman(1) 57 Director
Irving S. Johnson, Ph.D. 73 Director
Antonie T. Knoppers, M.D., Ph.D.(2) 83 Director
Melvin I. Simon, Ph.D.(2) 61 Director
(1) Member of Directors Compensation Committee
(2) Member of Audit Committee
PETER JOHNSON, a founder of the Company, has served as a director and as
president and chief executive officer of the Company since its inception in
1984. Through 1989, Mr. Johnson held various positions with The Agouron
Institute, including executive director. Mr. Johnson received a M.A. from the
University of California, San Diego.
GARY E. FRIEDMAN, a founder of the Company, has served as a director since
its inception, as the secretary of the Company since May 1986 and as vice
president and general counsel since December 1991. In June 1997, Mr. Friedman
was promoted to corporate vice president. Previously, from 1982 until December
1991, Mr. Friedman was a principal of the law firm of Friedman, Jay & Cramer, a
Professional Corporation. Mr. Friedman is a California Certified Specialist in
Taxation. Mr. Friedman received a J.D. and a M.B.A. from the University of
California, Berkeley and a L.L.M. in taxation from the University of San Diego.
JOHN N. ABELSON, a founder of the Company, has served as a director since
its inception. Dr. Abelson, a molecular biologist, is a member of the National
Academy of Sciences. Since 1982, Dr. Abelson has been a member
<PAGE>
of the faculty of the Division of Biology at the California Institute of
Technology where, from October 1989 until June 1995, he served as chairman.
Previously, Dr. Abelson was a member of the faculty in the Department of
Chemistry at the University of California, San Diego. Dr. Abelson received a
Ph.D. in biophysics from The Johns Hopkins University and was a postdoctoral
fellow at the Laboratory of Molecular Biology in Cambridge, England.
Dr. Abelson also serves as a director of The Agouron Institute.
PATRICIA M. CLOHERTY joined the Board in December 1988. Since 1970, Ms.
Cloherty has been associated with Patricof & Co. Ventures, Inc. (formerly Alan
Patricof Associates, Inc.), a New York venture capital firm ("Patricof"), and
has been a general partner of its funds since 1973. From 1993 until 1997 she was
president of Patricof. From 1997 to the present, Ms. Cloherty has been executive
co-chairman as well as a general partner of Patricof. Ms. Cloherty also served
as deputy administrator for the U.S. Small Business Administration in 1977 and
1978. Ms. Cloherty also serves on the board of directors of several private
companies.
A. E. COHEN joined the Board in March 1992. Mr. Cohen is an independent
management consultant. From 1957 until his retirement in January 1992, Mr. Cohen
held various positions at Merck & Co., Inc., including senior vice president and
president of the Merck Sharp & Dohme International Division. Currently, Mr.
Cohen is the chairman of the board of Neurobiological Technologies, Inc. and
Vasomedical, Inc., and is a member of the board of directors of Akzo Nobel N.v.,
Teva Pharmaceutical Industries Ltd., Smith Barney (Mutual Funds), and
Pharmaceutical Product Development, Inc., all of which are public companies. Mr.
Cohen also serves as trustee to The Population Council and is a consultant to
Chugai Pharmaceutical Co. Ltd., Tokyo ("Chugai"), and serves as chairman of the
board of Chugai's U.S. subsidiary companies. Mr. Cohen also is a member of the
board of directors of Lung Check, Inc.
MICHAEL E. HERMAN joined the Board in October 1992. Mr. Herman is a private
investor, as well as president and chief operating officer of the Kansas City
Royals Baseball Team. From October 1974 until his retirement in 1990, Mr. Herman
held various positions at Marion Laboratories, Inc. (now Hoechst Marion
Roussel), including executive vice president and chief financial officer.
Currently, Mr. Herman serves as chairman of the finance committee of the Ewing
Marion Kauffman Foundation, a private foundation located in Kansas City where,
from 1985 through 1990, he was the president and chief operating officer. Mr.
Herman is also a member of the board of directors of Cerner Corporation, a
public company, and serves on the board of directors of several private
companies.
IRVING S. JOHNSON joined the Board in May 1989. Dr. Johnson is an
independent consultant in biomedical research working with numerous private
companies. From 1953 until his retirement in November 1988, Dr. Johnson held
various positions at Eli Lilly and Company, including vice president of research
from 1973 until 1988. Dr. Johnson also served on several committees of the
National Academy of Sciences, the Office of Technology Assessment and the
National Institutes of Health. Currently, he is a member of the board of
directors of Allelix Biopharmaceuticals Inc. and Ligand Pharmaceuticals
Incorporated, and is on the scientific advisory board of ELAN Corporation, all
of which are public companies. Dr. Johnson received a Ph.D. in developmental
biology from the University of Kansas.
ANTONIE T. KNOPPERS joined the Board in July 1991. Dr. Knoppers is an
independent management consultant. From 1952 until his retirement in 1975, Dr.
Knoppers held various positions at Merck & Co., Inc., including vice chairman of
the board and president and chief operating officer. Dr. Knoppers is a member of
the board of directors of Centocor, Inc., a public biotechnology company. In
addition, he is a former chairman of the U.S. Council of the International
Chamber of Commerce and a member of the advisory board of PaineWebber
Development Corporation, an affiliate of PaineWebber Incorporated. Dr. Knoppers
received a M.D. from the University of Amsterdam and a Ph.D. from the University
of Leiden, The Netherlands.
MELVIN I. SIMON, a founder of the Company, has served as a director since
its inception. Dr. Simon, a molecular geneticist, is a member of the National
Academy of Sciences. Currently, Dr. Simon is chairman of the Division of Biology
at the California Institute of Technology where he has been a member of the
faculty since 1982. Previously, Dr. Simon was a member of the faculty in the
Department of Biology at the University of California, San Diego. Dr. Simon
received a Ph.D. in biochemistry from Brandeis University. Dr. Simon also serves
as a director of The Agouron Institute.
<PAGE>
COMMITTEES AND MEETINGS OF THE BOARD
The Company has a Directors Compensation Committee and an Audit Committee.
The Company does not have a Nominating Committee. During the fiscal year ended
June 30, 1998, the Board held six meetings.
During the fiscal year ended June 30, 1998, members of the Audit Committee
consisted of Ms. Cloherty, Chairperson, Dr. Knoppers and Dr. Simon. The Audit
Committee oversees the Company's accounting and financial reporting policies,
makes recommendations to the Board regarding the appointment of independent
accountants, reviews with the independent accountants the accounting principles
and practices followed by the Company and the adequacy thereof, approves the
Company's annual audit and financial results and any material change in
accounting principles, policies and procedures and makes recommendations to the
Board with regard to any of the preceding. The Audit Committee held two meetings
in the fiscal year ended June 30, 1998.
During the fiscal year ended June 30, 1998, members of the Directors
Compensation Committee consisted of Mr. Herman, Chairman, Dr. Abelson, and Mr.
Cohen. The Directors Compensation Committee recommends to the Board the
Company's overall compensation and the individual compensation elements for the
Company's executive officers and directors. The Directors Compensation Committee
does not approve grants of stock options to executive officers and directors
under the Company's stock option plans. The Directors Compensation Committee
held two meetings in the fiscal year ended June 30, 1998. During fiscal 1998,
the full Board was responsible for approving grants of options to executive
officers and directors.
No incumbent director attended fewer than 75% of the aggregate of the Board
and Committee meetings in which such director was entitled to participate.
<PAGE>
PROPOSAL 2 - THE DIVISIONAL STOCK PROPOSAL
GENERAL
The shareholders of the Company are being asked to consider and approve
the Divisional Stock Proposal which, if approved, will amend and restate the
Company's Articles of Incorporation to increase the number of shares of
authorized Common Stock to 150,000,000 shares, of which 75,000,000 shares would
initially be designated as Agouron Pharmaceuticals Stock and 25,000,000 shares
would initially be designated as Oncology Division Common Stock, to provide
authorization to the Board to designate and issue any undesignated shares in one
or more additional series of Common Stock and to determine the number of shares,
rights, preferences, privileges and restrictions of any such series, to increase
or decrease the number of shares of any existing series including the Agouron
Pharmaceuticals Stock and the Oncology Division Stock, and to convert each share
of the Company's existing Common Stock into one share of Agouron Pharmaceuticals
Stock and 0.5 shares of Oncology Division Stock.
The reclassification and conversion of the Existing Common Stock into
Agouron Pharmaceuticals Stock and Oncology Division Stock (the
"Reclassification") are intended for United States federal income tax purposes
to be tax free to both the Company and its shareholders except with respect to
cash paid in lieu of fractional shares.
See "--Certain Federal Income Tax Considerations."
The ratio of 0.5 shares of Oncology Division Stock for each share of
Existing Common Stock was determined by the Board in consultation with
PaineWebber, the Company's financial advisor in connection with the Divisional
Stock Proposal. Such ratio is the quotient of the total number of Oncology
Division Shares divided by the number of shares of Existing Common Stock
outstanding. The number of Oncology Division Shares is the quotient of the
initial estimated fair market value of the Oncology Division divided by the
desired initial trading range of approximately $8 to $11 of the Oncology
Division stock. See "Risk Factors - No Assurance as to Market Price or
Liquidity." The initial estimated fair market value of the Oncology Division of
approximately $150,000,000 was determined by the Board in consultation with
PaineWebber and was based on an analysis of comparable company valuations,
prevailing market conditions, financial and operating information of the
Oncology Division and independent financial projections and discounted cash flow
analyses of the programs and products associated with Oncology Division.
IF THE DIVISIONAL STOCK PROPOSAL IS NOT APPROVED BY THE SHAREHOLDERS,
THE ONCOLOGY DIVISION STOCK WILL NOT BE CREATED, AND THE EXISTING COMMON STOCK
WILL NOT BE RECLASSIFIED AND CONVERTED INTO AGOURON PHARMACEUTICALS STOCK AND
ONCOLOGY DIVISION STOCK.
If the Divisional Stock Proposal is approved by the shareholders at the
Annual Meeting, the Company anticipates that the Restated Articles (see Annex
II) will be filed with the California Secretary of State shortly thereafter.
However, the Board could choose to effect the Divisional Stock Proposal at any
time thereafter, or not to effect the Divisional Stock Proposal depending on the
circumstances at the time. The Restated Articles will become effective upon
filing with the California Secretary of State (the "Effective Date").
Certificates formerly representing shares of Existing Common Stock that are held
by shareholders will be deemed to represent an equal number of shares of Agouron
Pharmaceuticals Stock. New certificates representing shares of Agouron
Pharmaceuticals Stock will be issued in replacement of certificates formerly
representing shares of Existing Common Stock as such certificates are received
and canceled by the transfer agent. Shareholders should not mail in their stock
certificates evidencing Existing Common Stock to either the Company or its
transfer agent in connection with the Divisional Stock Proposal. Certificates
representing Oncology Division Stock will be distributed as promptly as
practicable after the Effective Date. At any time prior to filing the Restated
Articles with the California Secretary of State, including after adoption by the
shareholders of the Company, the Board may abandon the Divisional Stock
Proposal, or any part thereof, without further action by the shareholders.
Approval of the Divisional Stock Proposal is an approval of the amendments of
the Company's Articles of Incorporation as set forth in the Restated Articles.
The names of the Oncology Division and of the Oncology Division Stock are
subject to change but will be determined prior to filing the Restated Articles.
By approving the Divisional Stock Proposal, the shareholders will also be
granting authority to the Company to change the name of the Oncology Division
and the Oncology Division Stock as set forth in the Restated Articles and to
make such other changes as may be required by the California Secretary of State
in order to conform the Restated Articles to the California Corporations Code.
<PAGE>
Fractional shares of Oncology Division Stock will not be issued in
connection with the Reclassification. If more than one share of Existing Common
Stock is held by the same holder of record, the Company will aggregate the
number of shares of Oncology Division Stock issuable to such holder upon such
distribution (including any fractions of shares). If the number of shares of
Oncology Division Stock calculated to be issued to any holder of record of
Existing Common Stock includes a fraction of a whole share, the Company will pay
to such record holder the cash value of such fractional share within 60 trading
days of the Effective Date, based upon the average of the daily average of high
and low prices of the Oncology Division Stock on the Nasdaq National Market for
each of the first ten trading days following the Effective Date. Shareholders
who own their stock beneficially through brokers or other nominees listed as
holders of record will have their fractional shares handled according to the
practices of such broker or nominee, which may result in such shareholders
receiving a price that is higher or lower than the price paid by the Company to
holders of record. If the necessary trading of Oncology Division Stock does not
occur within 20 trading days after the Effective Date, the Board will determine
the cash value of a share of Oncology Division Stock and the amount to be paid
in lieu of fractional shares.
The authorized but unissued shares of the two new series of the
Company's Common Stock and the undesignated shares of Common Stock will be
available for issuance from time to time by the Company at the discretion of the
Board for any proper corporate purpose, which could include raising capital,
payment of stock dividends, providing compensation or benefits to employees or
acquiring companies or businesses. Such Common Stock would provide the Board
with a means to complete acquisitions or to further divide the Company into
additional divisions, through the creation of separate series of Common Stock.
In addition, the Board could use undesignated shares of Common Stock to increase
or decrease the number of shares of an existing series of Common Stock,
including Agouron Pharmaceuticals Stock and Oncology Division Stock, but not
below the number of outstanding shares of that series. The issuance of such
additional shares or series would not be subject to approval by the shareholders
of the Company unless deemed advisable by the Board or required by applicable
law, regulation or the listing requirements of the stock market or stock
exchange upon which the Company's shares are listed.
BACKGROUND OF AND REASONS FOR THE DIVISIONAL STOCK PROPOSAL
The Divisional Stock Proposal has been approved by the Board with the
goal of creating flexibility for the future growth of the Company, and to
advance the Company's financial and strategic objectives, all in an effort to
enhance the overall return to the holders of Existing Common Stock.
If Agouron shareholders approve the Divisional Stock Proposal and it is
implemented by the Board, the resulting amendments to the Company's Articles of
Incorporation will create two series of Common Stock of the Company, namely the
Agouron Pharmaceuticals Stock and the Oncology Division Stock, each having the
rights and privileges described elsewhere in this Proxy Statement. The
Divisional Stock Proposal will also authorize the Board to issue shares in one
or more additional or existing series of Common Stock with each new series
having the rights, preferences, privileges and restrictions determined by the
Board before the issuances of any shares of such series. See "- Description of
Capital Stock" and Annex II.
The Oncology Division Stock is intended to reflect the value and track
the performance of the Oncology Division. Through the Oncology Division, the
Company seeks to create a focused, integrated oncology business which will
develop and commercialize novel products for the diagnosis, treatment and
prevention of cancer. The Oncology Division will, on its own and in combination
with partners and with Agouron Pharmaceuticals (when appropriate), develop,
manufacture and market those oncology related products.
The Board reviewed in detail the financial performance of the Company
since the FDA approved the sale of VIRACEPT in March 1997. Since that date,
revenues from VIRACEPT sales have grown steadily, allowing the Company to
continue its vigorous investment in research and development ("R&D") for new
products. Such R&D expenditures in non-VIRACEPT related programs, however, have
impacted and are expected to continue to impact the overall financial
performance of the Company and overall shareholder return. One of the desired
consequences of the Divisional Stock Proposal is that the Board believes that
the market will evaluate the Company's profitable VIRACEPT driven non-oncology
division and its potential for future growth separately from the Oncology
Division which will continue as a research and development business for the near
future.
<PAGE>
Approximately 25% of the Company's total anticipated R&D expenditures
during the Company's 1999 fiscal year are expected to be incurred in oncology
related programs. Currently the Company has four clinical development programs
and four preclinical research and development programs in the oncology field.
The Board believes that tracking the oncology operations separately from the
rest of the Company will help the Company realize what it believes to be the
unappreciated value of the Company's R&D pipeline of products for oncology while
at the same time reducing the impact of those R&D expenditures on the financial
results of the Company's VIRACEPT-driven non-oncology business.
In addition to its review of the financial performance of the Company,
the Board considered the Company's present organizational structure, which does
not completely recognize and resolve the inherent conflict between a profitable
business and a business division still in the development stage. For these and
other reasons, management engaged PaineWebber to discuss with the Company
various alternatives designed to achieve greater overall value in these
respective businesses. PaineWebber advised that the separation of the
development stage oncology division from the VIRACEPT driven non-oncology
business, and the creation of two classes or series of Common Stock to track
those divisions, should result in the market separately evaluating the
performances of Agouron Pharmaceuticals and the Oncology Division.
At meetings held on February 12, 1998 and August 6, 1998, the Board
considered a variety of structural proposals to increase the overall value of
the Existing Common Stock to the Company's shareholders. The Board evaluated
alternatives available to the Company in view of its strategic objectives,
capital requirements, past financial results and other factors. They had
extensive discussions with senior financial and legal officers of the Company as
well as representatives of PaineWebber. Among the alternatives which the Board
considered were (i) the preservation of the Company's current equity and
operating structure; (ii) the separation of various of the Company's businesses
through a distribution (for example, in a spin-off) of certain programs to the
Company's shareholders or the creation of special purpose financing entities;
(iii) the license to third parties of certain of the Company's technology; and
(iv) the creating of two classes or series of Common Stock to reflect separately
the results of the Company's profitable anti-viral related business and its
development stage oncology division.
The Board determined that the license to third parties of the oncology
assets or other technology would not realize the full value of those development
stage programs. The Board also determined that a spin-off to shareholders of a
separate company owning the Company's other technologies could create
significant tax, credit and control issues. Following deliberation over and
consideration of the advantages and disadvantages of the various alternatives,
the Board concluded that the Divisional Stock Proposal was the best alternative
for the Company and its shareholders.
The Board's adoption of the Divisional Stock Proposal is part of its
ongoing effort to increase the long-term value of the Company.
In reaching its conclusion, the Board identified the following as the
advantages of the Divisional Stock Proposal:
o The creation of two series of Common Stock intended to reflect
separately the performance of Agouron Pharmaceuticals
and the Oncology Division offers the opportunity to
increase shareholder value by more specifically tracking the
financial performance of each Division. Separate equity
securities could enable investors to gain a better
understanding of the businesses of Agouron Pharmaceuticals
and the Oncology Division and allow shareholders to
invest in either or both securities depending on their
investment objectives. The separate reporting of each
Division's results would create a framework for increased
and more focused equity research coverage by the investment
community and would separate the Oncology Division
operating results from the results of operations of Agouron
Pharmaceuticals.
o The Divisional Stock Proposal will provide financial and
strategic flexibility for Agouron Pharmaceuticals and the
Oncology Division to raise capital and to engage in
acquisitions, strategic investments, and other transactions
affecting either Agouron Pharmaceuticals or the Oncology
<PAGE>
Division as a result of the availability of two different
equity securities for issuance. In particular, development,
clinical testing and commercialization of the Oncology
Division's products will require substantial funds. A separate
equity security for the Oncology Division is expected to allow
the Company to raise capital through offerings of Oncology
Division Stock without diluting the interests of holders of
Agouron Pharmaceuticals Stock. In addition, by issuing a
separate security intended to reflect the performance of the
development stage Oncology Division, the Company can seek to
raise funds with investors who have different investment
objectives than those who may seek to invest in the Company as
a whole or in Agouron Pharmaceuticals.
o Creating separate series of Common Stock, each of which is
designed to reflect the operating results of a distinct
division, increases the Company's ability to focus the
management of the respective Divisions on maximizing the
returns from such businesses and provides the opportunity to
structure incentives for employees that are tied directly to
the business results and share price performance of that
Division.
o The Divisional Stock Proposal will retain for the Company the
advantages of doing business as a single company.
Specifically, the Company will retain ownership of all of its
technologies, which the Board considers to be a
significant long-term strategic benefit given what it
believes to be the potential of the products under
development. Further, as part of one company, each Division
will be in a position to benefit from cost savings and
synergies with the other compared to the costs each Division
would incur if it operated separately. These include
management and administrative synergies, a potentially lower
overall borrowing cost as a resultof the credit rating of the
combined Company and potential federal, state and local
tax benefits that may be greater for the combined Company than
for the two Divisions operating separately.
o The ability of the Board to create one or more additional
series of Common Stock or to increase or decrease the number
of shares in existing series without the need to obtain
shareholder approval at the time of creation of each
additional series would provide the Board with a means to act
quickly and definitively in future acquisitions or to further
divide the Common Stock of the Company into additional series.
o Implementation of the Divisional Stock Proposal is intended
to be tax free for United States federal income tax purposes
to the Company and its shareholders except with respect to
cash paid in lieu of fractional shares.
See "- Certain Federal Income Tax Considerations."
o By permitting the Board to redeem the Oncology Division Stock
under certain conditions, the proposal allows the Board to
retain the flexibility to consider possible future
restructuring options.
The Board also considered the following potential disadvantages of the
Divisional Stock Proposal:
o The Divisional Stock Proposal requires a complex capital
structure which may not be well-understood by investors and
thus could inhibit the efficient valuation of either or both
series of Common Stock.
o There is limited experience with the use of divisional stock
in companies having a business unit with an established
history of earnings and another business unit in the
development stage.
o There are potential diverging or conflicting interests of
the two Divisions and issues that could arise in resolving any
conflicts. See "- Management and Allocation Policies" and
"Risk Factors - Potential Divergence of Interests;
No Specific Procedures for Resolution."
o Investors in the Oncology Division Stock or Agouron
Pharmaceuticals Stock will be exposed to the risks of the
Company's consolidated businesses and liabilities such
as tort or product liability claims and shareholder lawsuits
because both Divisions remain legally a part of the
Company. See
<PAGE>
"Risk Factors--Risks Related to the Divisional Stock
Proposal - Shareholders of One Company;
Financial Effects of One Division Could Adversely
Affect the Other Division" and "- Management
and Allocation Policies."
o The market values of Agouron Pharmaceuticals Stock and
Oncology Division Stock may be affected by investors'
reactions to decisions by the Board or the Company's
management regarding the allocation of assets, expenses,
liabilities and corporate opportunities between the divisions.
o Divisional Stock will create a possible inability to use the
pooling method of accounting in connection with future
acquisitions using Agouron Pharmaceuticals Stock or Oncology
Division Stock, and the possible inability or increased
difficulty of receiving a ruling from the Internal Revenue
Service in connection with a proposed acquisition to be
effected using either Oncology Division Stock or Agouron
Pharmaceuticals Stock.
o The costs associated with implementing the Divisional Stock
Proposal and the ongoing cost of operating separate Divisions
will exceed the costs associated with operating the Company as
it currently exists.
The Board determined that on balance the potential advantages of the
Divisional Stock Proposal outweigh the potential disadvantages and concluded
that the Divisional Stock Proposal is in the best interests of the Company and
its shareholders.
VOTE REQUIRED
The Divisional Stock Proposal requires the affirmative vote of the
holders of a majority of the outstanding shares of Existing Common Stock.
RECOMMENDATION OF THE BOARD
THE BOARD HAS CAREFULLY CONSIDERED THE DIVISIONAL STOCK PROPOSAL AND
BELIEVES THAT ITS APPROVAL BY THE SHAREHOLDERS IS IN THE BEST INTERESTS OF THE
COMPANY AND THE SHAREHOLDERS. ACCORDINGLY, THE BOARD UNANIMOUSLY RECOMMENDS THAT
THE SHAREHOLDERS APPROVE THE DIVISIONAL STOCK PROPOSAL.
MANAGEMENT AND ALLOCATION POLICIES
Because Agouron Pharmaceuticals and the Oncology Division will each be
a part of a single company, the Board and management have carefully considered a
number of issues with respect to intracompany business transactions, the
financing of Agouron Pharmaceuticals and the Oncology Division, and the
allocation of debt, corporate overhead, interest, taxes and other charges
between the two Divisions. The Board and management have established policies to
accomplish the fundamental objective of the Divisional Stock Proposal, which is
to separate the business and operations of the Oncology Division from those of
Agouron Pharmaceuticals, to operate the Oncology Division on a stand-alone
basis, and to allocate costs and charges between the two Divisions on an
objective basis.
POLICIES SUBJECT TO CHANGE WITHOUT SHAREHOLDER APPROVAL. The principal
terms of the foregoing policies, as they are expected to be in effect at the
Effective Date, are summarized below. Shareholder approval of these policies is
not being sought by this Proxy Statement, and the description of the policies is
provided for the information of shareholders. Except as otherwise provided in
the policies, the Board may further modify or rescind the policies in its sole
discretion without approval of the shareholders, subject only to the Board's
fiduciary duty to the Company's shareholders. The Board has no present plans to
change any of such policies. The Board may also adopt additional policies
depending upon the circumstances. Any determination of the Board to modify or
rescind the policies, or to adopt additional policies, including any such
decision that would have disparate impacts upon holders of the Common Stock
representing the two Divisions, would be governed by the principles of
California law discussed under "Risk Factors - Risks Related to the Divisional
Stock Proposal Management and Allocation
<PAGE>
Policies Subject to Change." However, the Board will make any such decision in
accordance with its good faith business judgment of the best interests of the
Company. In addition, generally accepted accounting principles require that any
change in policy be preferable (in accordance with such principles) to the
previous policy.
FINANCIAL STATEMENTS, ALLOCATION MATTERS. The Company will prepare
financial statements in accordance with generally accepted accounting principles
for Agouron Pharmaceuticals and the Oncology Division, and these financial
statements, taken together, will comprise all of the accounts included in the
corresponding consolidated financial statements of the Company. The financial
statements of each of Agouron Pharmaceuticals and the Oncology Division will
reflect the financial condition, results of operations and cash flows of the
businesses included therein. The financial statements of Agouron Pharmaceuticals
will also include any accounts or assets of the Company not specifically
allocated to the Oncology Division.
Division financial statements may include allocated portions of the
Company's debt, interest, corporate overhead and taxes. Notwithstanding such
allocations, for the purpose of preparing each Division's financial statements,
holders of Agouron Pharmaceuticals Stock and Oncology Division Stock will
continue to be subject to all of the risks associated with an investment in the
Company and all of its businesses, assets and liabilities. See Annex IV -
"Agouron Pharmaceuticals - Combined Financial Statements," Annex V - "Oncology
Division -- Combined Financial Statements" and "Risk Factors - Risks Related to
the Divisional Stock Proposal -- Shareholders of One Company; Financial Effects
on One Division Could Affect the Other Divisions."
DEBT FINANCING. Each Division's debt will increase or decrease by the
amount of any net cash generated by, or required to fund, the Division's
operating activities, dividend payments, share repurchases and other financing
activities. Interest will be charged to each Division based on the amount of
such Division's debt. Changes in the cost of the Company's debt will be
reflected in adjustments in the weighted average interest cost of such debt.
FUNDING FOR THE ONCOLOGY DIVISION. The development of the Oncology
Division's products will require substantial funds. See "Risk Factors - Risks
Related to Agouron Pharmaceuticals and the Oncology Division Additional
Financing Requirements and Access to Capital." Agouron Pharmaceuticals intends
to fund the operations of the Oncology Division as necessary. Agouron
Pharmaceuticals may raise funds for the Oncology Division through a public
offering of shares of the Oncology Division Stock as market conditions permit.
The Board has approved the allocation of up to $25 million in cash from Agouron
Pharmaceuticals to the Oncology Division (the "Equity Line"). Amounts drawn on
the Equity Line are expected to be exchanged for Oncology Division Designated
Shares when the maximum amount of the Equity Line is reached or as the Board
otherwise determines. Such stock will be distributed to Agouron Pharmaceuticals
shareholders on at least an annual basis.
The Equity Line will be reviewed annually for extension or termination
on or before June 30 of each calendar year. If terminated, all amounts drawn
under the Equity Line as of such termination date will be repaid in cash or, at
the option of the Board, will be exchanged for Oncology Division Designated
Shares in the manner described below. Upon exchange for Oncology Division
Designated Shares, the Equity Line will be re-established.
The number of Oncology Division Designated Shares to be exchanged for
amounts drawn under the Equity Line will be determined by dividing the amount of
the accumulated Equity Line advances on the date of exchange by the Fair Market
Value of the Oncology Division Common Stock. The Fair Market Value of the
Oncology Division Stock will equal the average of the daily average of high and
low prices of the Oncology Division Stock of the 20 trading days commencing on
the 30th trading day immediately prior to the exchange date.
Any amounts advanced under the Equity Line (or general inter-division
advances as described under "-- Other Interdivision Transactions") may be repaid
in total or in part at any time prior to their exchange for Oncology Division
Designated Shares.
REVENUE ALLOCATION. Other than revenues received in connection with
transactions subject to the policies described under "-- Interdivision Asset
Transfers" and "Other Interdivision Transactions," revenues from the sale of a
Division's products and services shall be credited to that Division.
<PAGE>
EXPENSE ALLOCATION. Other than expenses incurred in connection with
transactions subject to the policy regarding Interdivision Transactions, all
direct expenses shall be charged to the Division for the benefit of which they
are incurred. Indirect costs will be allocated to each Division in a reasonable
and consistent manner based on utilization by the Division of the services to
which such costs relate.
CORPORATE OVERHEAD. A portion of the Company's shared general and
administrative expenses (such as executive management, human resources, legal,
accounting and auditing, tax, treasury, strategic planning, information systems
support, and environmental services) will be allocated to Agouron
Pharmaceuticals and the Oncology Division based upon specific identification of
such services used by such Division. Where determinations based on use alone are
impracticable, other methods and criteria will be used that management believes
are equitable and provide a reasonable estimate of the cost attributable to the
Divisions.
TAX ALLOCATIONS. Income taxes shall be allocated to each Division based
upon the financial statement income, taxable income, credits and other amounts
properly allocable to such Division under generally accepted accounting
principles as if each Division were a separate taxpayer; provided, however, that
as of the end of any fiscal quarter of the Company, any tax benefit attributable
to any Division that cannot be utilized by such Division to offset or reduce its
current or deferred income tax expense may be allocated to the Divisions in
proportion to their taxable income without any compensating payment or
allocation. The federal income taxes of the Company and the subsidiaries which
own assets allocated between the Divisions are determined on a consolidated
basis. Consolidated federal income tax provisions and related tax payments or
refunds will be allocated between the Divisions based principally on the taxable
income and tax credits directly attributable to each Division. Such allocations
will reflect each Division's contribution (positive or negative) to the
Company's consolidated federal taxable income and the consolidated federal tax
liability and tax credit position. Had the Divisions filed separate tax returns,
the provision for income taxes and net income for each Division (prior to tax
allocations from other divisions) would not have differed from the amounts
reported in the Divisions' statements of income for the years ended June 30,
1996, 1997 and 1998. However, the amounts of current and deferred taxes and
taxes payable or refundable allocated to each Division in these historical
financial statements may differ from those that would have been allocated to
each Division had they filed separate income tax returns.
Depending on the tax laws of the respective jurisdictions, state and
local income taxes are calculated on either a consolidated or combined basis or
on a separate corporation basis. State income tax provisions and related tax
payments or refunds determined on a consolidated or combined basis will be
allocated between the Divisions based on their respective contributions to such
consolidated or combined state taxable incomes. State and local income tax
provisions and related tax payments which are determined on a separate
corporation basis will be allocated between the Divisions in a manner designed
to reflect the respective contributions of the Divisions to the Company's
separate state or local taxable income.
ACQUISITION OF PROGRAMS, PRODUCTS OR ASSETS. Upon the acquisition by
the Company from a third party of any programs, products or assets (whether by
acquisition of assets or stock, merger, consolidation or otherwise), the
aggregate cost of the acquisition and the programs, products or assets acquired
shall be allocated among the Divisions of the Company. In the case of material
acquisitions, such allocation shall be made in a manner determined by the Board
to be fair and reasonable to each Division and to holders of the Common Stock
representing each Division, taking into account such matters as the Board and
its financial advisors, if any, deem relevant. Any such determination by the
Board will be final and binding on all holders of Common Stock.
DISPOSITION OF PROGRAMS, PRODUCTS OR ASSETS. Upon any sale, transfer,
assignment or other disposition by the Company of any product, program or asset
not consisting of all or substantially all of the assets of a Division, all
proceeds from such disposition shall be allocated to the Division to which the
program, product or asset had been allocated. If the program, product or asset
was allocated to more than one Division, the proceeds of the disposition shall
be allocated among such Divisions based on their respective interests in such
program, product or asset. Such allocation shall be made in a manner determined
by the Board to be fair and reasonable to such Division and to holders of the
Common Stock representing such Division, taking into account such matters as the
Board and its financial advisors, if any, deem relevant. Any such determination
by the Board will be final and binding on all holders of Common Stock.
<PAGE>
INTERDIVISION ASSET TRANSFERS. The Board may at any time and from time
to time reallocate any program, product or other asset from one Division to any
other Division. All such reallocations shall be done at fair market value as
determined by the Board. Such determination shall take into account, in the case
of a program under development, the commercial potential and the phase of the
clinical development of such program, the expenses associated with realizing any
income from such program (and the likelihood and timing of any such realization)
and other matters that the Board and its financial advisors, if any, deem
relevant. The consideration for such reallocation may be paid by one Division to
another in cash or other consideration with a value equal to the fair market
value of the assets being reallocated or, in the case of a reallocation of
assets from Agouron Pharmaceuticals to the Oncology Division, the Board may
elect to account for such reallocation as an increase in the Oncology Division
Designated Shares.
Notwithstanding the foregoing, no Key Oncology Division Program, as
defined below, will be transferred out of the Oncology Division. A "Key Oncology
Division Program" is any of the following: (i) AG3340; or (ii) any additional
oncology program or product being developed from time to time in the Oncology
Division which (a) constituted 20% or more of the research and development
budget of the Oncology Division in any one of the three most recently completed
fiscal years, or (b) has had a cumulative investment of $8 million or more in
research and development expenses by the Oncology Division.
COMMERCIALIZATION OF ONCOLOGY PRODUCTS. The Board has determined
certain allocations of rights concerning development-stage oncology products for
which development and registration will be completed by the Oncology Division.
Agouron Pharmaceuticals shall have the worldwide right to commercialize oncology
indications of AG3340, AG3433 (or a substituted product), AG2034 and AG2037 if
successfully developed and registered by the Oncology Division. The Oncology
Division shall have the exclusive, worldwide, royalty-free right to develop and
commercialize for oncology indications any other products discovered, acquired
and/or developed by the Oncology Division or Agouron Pharmaceuticals. Agouron
Pharmaceuticals shall have the exclusive, worldwide, royalty-free right to
develop and commercialize for non-oncology indications any product discovered,
acquired and/or developed by the Oncology Division.
The Oncology Division may elect to co-promote AG3340, AG3433 (or a
substituted product), AG2034 and/or AG2037 in the United States and Canada
through a specialty oncology sales and marketing organization by agreeing to
provide up to fifty percent of the total sales and marketing effort with respect
to the applicable product in the United States and Canada. If the Oncology
Division elects to co-promote a product, it shall be entitled to share in that
percentage of profits from the sale of such product in the United States and
Canada which corresponds to the percentage of the total sales and marketing
efforts for such product contributed by the Oncology Division. Profits in the
United States and Canada shall be computed by deducting from net sales of a
product amounts representing the applicable cost of goods sold, and other
allowable expenses. Notwithstanding the Oncology Division's election to
co-promote a product and to share in profits from such product and in order to
provide the Oncology Division with an adequate minimum return for its
development and registration efforts for a product, the Oncology Division shall
be entitled to receive the greater of: (i) the Oncology Division's share of
profits from the net sales of such product in the United States and Canada plus
royalties based upon Agouron Pharmaceuticals' net sales of such product outside
of the United States and Canada according to the schedule below or (ii)
royalties based upon Agouron Pharmaceuticals' worldwide net sales of such
product according to the schedule below:
AG3340: 16% of first $150 million of net sales; 18% of net sales above
$150 million
AG3433 (OR A SUBSTITUTED PRODUCT): 18% of first $150 million of
net sales;
20% of net sales above $150 million
AG2034: 17% of first $150 million of net sales;
19% of net sales above $150 million
AG2037: 18% of first $150 million of net sales;
20% of net sales above $150 million
Agouron Pharmaceuticals and the Oncology Division shall also share
equitably in any license fees and/or royalties received from any third party
licensees of AG3340, AG3433 (or a substituted product), AG2034 or AG2037.
If Agouron Pharmaceuticals is obligated to pay royalties or other
payments to a third party to settle any infringement claim or action arising out
of the development and commercialization of a product, then fifty percent of
<PAGE>
the royalties and other payments paid by Agouron Pharmaceuticals to
such third parties to settle such infringement claim or action shall be
creditable against royalty or other payment obligations payable to the Oncology
Division on such product; provided, however, that in no case shall the royalties
and other payments due to the Oncology Division in a quarterly period be reduced
by more than fifty percent of the amounts otherwise due in such quarterly
period. Any remaining creditable amount may be used in subsequent quarterly
periods to offset royalties and other payments due the Oncology Division.
Additionally, the royalty rates that would otherwise apply for a quarterly
period in a country shall be reduced by fifty percent in such country if no
valid Agouron patent claims exist, or if the parties mutually agree that it is
not commercially reasonable to pursue third-party infringers; royalty rates that
would otherwise apply for a quarterly period may also be adjusted in certain
other circumstances as determined by the Board.
OTHER INTERDIVISION TRANSACTIONS. This policy shall cover Interdivision
transactions other than asset transfers, which shall be subject to the policy
regarding Interdivision Asset Transfers. From time to time, a Division may
engage in transactions directly with the other Divisions or jointly with the
other Divisions and one or more third parties. Such transactions may include
agreements by one Division to provide products and services for use by the other
Division and joint ventures or other collaborative arrangements involving more
than one Division to develop new products and services jointly and with third
parties. Such transactions shall be subject to the following conditions:
(i) Research and/or development performed by one Division for the
benefit of another Division will be charged to the Division for
which work is performed on a cost basis. Such costs shall be
allocated in the manner described above under "Expense
Allocation", and the Division performing the research will not
recognize revenue as a result of performing such research.
(ii) Corporate and general and administrative services will be provided
by each Division to the other Division(s) requesting such services
on a cost basis and such costs shall be allocated in the manner
described above under "Expense Allocation."
(iii)Other than research, corporate and general and administrative
services, Interdivision transactions shall be on terms and
conditions that would be obtainable in transactions negotiated at
arm's length with unaffiliated third parties.
(iv) Any Interdivision transaction (a) to be performed on terms and
conditions that deviate from the policies set forth in
subparagraphs (i), (ii) or (iii) above and (b) that is material to
the other participating Divisions will require approval by the
Board, which approval shall include a determination by the Board
that the transaction is fair and reasonable to such participating
Division and to holders of the Common Stock representing such
Division.
(v) If a Division (the "Purchasing Division") requires any product
or service from which another Division (the "Selling Division")
derives revenues from sales to third parties (a "Commercial
Product or Service"), the Purchasing Division may solicit
from the Selling Division a bid to provide such Commercial
Product or Service in addition to any bids solicited by the
Purchasing Division from third parties. Unless the Board
determines that the bid of the Selling Division is fair and
reasonable to the Selling and Purchasing Divisions and to
holders of Common Stock representing the Selling and Purchasing
Divisions and that the Purchasing Division must accept the
Selling Division's bid, the Purchasing Division may accept
any bid deemed to offer the most favorable terms and conditions
for providing the Commercial Product or Service sought by the
Purchasing Division.
(vi) Loans may be made from time to time between the Divisions. Any
such loan of $1 million or less will mature within 18 months and
interest will accrue at the best borrowing rate available to the
Company for a loan of like type and duration. Amounts borrowed in
excess of $1 million will require approval of the Board, which
approval shall include a determination by the Board that the
material terms of such loan, including the interest rate and
maturity date, are fair and reasonable to each participating
Division and to holders of the Common Stock representing each such
Division. Any such loans made by
<PAGE>
(vii)Agouron Pharmaceuticals to the Oncology Division may be in
addition to or in lieu of amounts available under the Equity Line.
ACCESS TO TECHNOLOGY AND KNOW-HOW. Each Division will have free access
to all technology and know-how of the Company that may be useful in such
Division's business, subject to any obligations or limitations applicable to the
Company.
DISPOSITION OF ONCOLOGY DIVISION DESIGNATED SHARES. The Oncology Division
Designated Shares may be(a) issued upon the exercise or conversion of
outstanding stock options, warrants or convertible securities allocated to
Agouron Pharmaceuticals, (b) subject to the restrictions set forth below under
"Issuance and Sale of Additional Shares of Common Stock," sold for any valid
business purpose or (c) distributed as a dividend to the holders of shares of
the Agouron Pharmaceuticals Stock, all as determined from time to time by the
Board. See "--Oncology Division Designated Shares."
On at least an annual basis, Oncology Division Designated Shares will
be distributed to the Agouron Pharmaceuticals shareholders of record at times
generally occurring no later than when the number of Oncology Division
Designated Shares exceeds 15% of the total outstanding shares of Oncology
Division Stock.
ISSUANCE AND SALE OF ADDITIONAL SHARES OF COMMON STOCK. When additional
shares of Common Stock are issued and sold by the Company, the Company will
identify the number of such shares issued and sold for the account of the
Division to which they relate, the proceeds of which will be allocated to and
reflected in the financial statements of such Division. Notwithstanding the
foregoing, it is the Board's current policy that the Company will not sell any
Oncology Division Designated Shares.
OPEN MARKET PURCHASES OF SHARES OF COMMON STOCK. Agouron
Pharmaceuticals may make open market purchases of any series of its Common Stock
in accordance with applicable securities law requirements; provided, however, it
is the Board's current policy that in no event shall any such purchases be made
if as an immediate result thereof the number of Oncology Division Designated
Shares will exceed 60% of the number of shares of the Oncology Division
outstanding plus such number of Oncology Division Designated Shares.
Notwithstanding the foregoing, within 90 days of any open market purchase of the
Common Stock representing the Oncology Division, Agouron Pharmaceuticals may not
exercise the right provided under the Restated Articles to exchange shares
representing such Division for cash and/or shares of the Agouron Pharmaceuticals
Stock.
CAPITAL SPENDING. It is anticipated that the Oncology Division will be
in the development stage for at least several years and therefore will not have
annual cash flows sufficient to finance its normal annual capital spending
program. Any decision by the Board to fund capital expenditures or capital
investments in excess of the cash flows of the respective Divisions would be
made by the Board in the exercise of its good faith business judgment based on
all relevant circumstances, including the financing and investing needs and
objectives of each Division, the availability and cost of alternative financing,
the existence of alternative investment opportunities for Agouron
Pharmaceuticals and the Oncology Division, and the Board's analysis of the
desirability of making such investment or acquisition.
FIDUCIARY AND MANAGEMENT RESPONSIBILITIES. Because Agouron
Pharmaceuticals and the Oncology Division will continue to be part of a single
company, the Board and management will have the same fiduciary duties to holders
of the Agouron Pharmaceuticals Stock and the Oncology Division Stock that they
currently have to the holders of the Existing Common Stock. Under California
law, a director or a member of management will be deemed to have satisfied his
or her fiduciary duties to the Company and its shareholders if he or she acts in
a manner which he or she believes in good faith to be in the best interests of
the Company and with the care, including reasonable inquiry, that an ordinarily
prudent person in a like position would exercise under similar circumstances.
The Board and the Chief Executive Officer of the Company, in establishing
policies with regard to intracompany matters such as allocations of assets,
liabilities, debt, corporate overhead, taxes, interest and other matters, will
consider various factors and information which could benefit or cause detriment
to the shareholders of the respective Divisions and will make determinations
designed to be in the best interests of the Company.
<PAGE>
Because the Divisional Stock Proposal will result in no change in the
corporate structure of the Company, Peter Johnson, the Company's President and
Chief Executive Officer, will have the same duties and responsibilities for the
management of the Company's assets and businesses which comprise Agouron
Pharmaceuticals and the Oncology Division following the Effective Date as he did
prior thereto. The Company's senior staff officers will continue to be
responsible for the same designated functions in both Agouron Pharmaceuticals
and the Oncology Division as they were prior to the Effective Date. The costs
attributable to their functions will be allocated as discussed above under
"Corporate Overhead."
While it is the intent of directors to remain impartial notwithstanding
their equity ownership interests in Agouron Pharmaceuticals and the Oncology
Division, because of the anticipated differences in trading values between the
two securities, the actual value of the shares of Agouron Pharmaceuticals Stock
and Oncology Division Stock held by directors initially will vary significantly.
See "Risk Factors - Risks Related to the Divisional Stock Proposal - Fiduciary
Duties of the Board; No Definitive Precedent Under California Law."
BOARD REVIEW OF CORPORATE OPPORTUNITIES AND OTHER MATTERS. The Board
will also review any matter which involves the allocation of a corporate
opportunity of the Company to either Agouron Pharmaceuticals or the Oncology
Division. In accordance with California law, the Board will make its
determination with regard to the allocation of any such opportunity in
accordance with their good faith business judgment of the best interests of the
Company. Among the factors that the Board may consider in making such allocation
is whether a particular corporate opportunity is principally related to the
business of Agouron Pharmaceuticals or the Oncology Division, whether one
Division, because of its managerial or operational expertise, would be better
positioned to undertake the corporate opportunity, existing contractual
agreements and restrictions, and other matters. The Board will also review
allocations between the Divisions of significant tax benefits or charges, the
write-off of significant assets, the allocation of significant liabilities, and
any actions which would significantly affect the Divisions' access to the
Company's credit.
COMPETITION BETWEEN DIVISIONS. Agouron Pharmaceuticals and the Oncology
Division will not compete in each other's principal business. It is currently
contemplated that certain products developed by the Oncology Division will be
marketed by Agouron Pharmaceuticals and co-marketed by the Oncology Division.
The Oncology Division will receive a royalty on the net sales of such product in
certain countries and profits from the sale of such products in the U.S. and
Canada will be shared in proportion to each Divisions co-promotion efforts.
Other products, at the sole discretion of the Oncology Division, may be marketed
exclusively by the Oncology Division or in collaboration with Agouron
Pharmaceuticals or a non-affiliated third party collaborator. See
"--Commercialization of Products" and "--Revenue Allocation." Alternatively,
certain products may be marketed by collaborators of the Company.
DESCRIPTION OF CAPITAL STOCK
The following description is qualified in its entirety by reference to
Annex II to this Proxy Statement, which contains the full text of the Restated
Articles.
GENERAL
The Company's Articles currently provide that the Company is authorized
to issue two classes of shares, designated common and preferred, respectively.
75,000,000 shares of Common Stock are authorized for issuance, and 2,000,000
shares of Preferred Stock are currently authorized for issuance, of which 2,000
shares have been designated Series B Participating Preferred Stock. As of
October 19, 1998, 31,282,508 shares of Existing Common Stock were issued and
outstanding and no shares of Preferred Stock were issued and outstanding.
If the Divisional Stock Proposal is approved by the Company's
shareholders and implemented by the Board, the authorized Common Stock will
consist of 150,000,000 shares of which 75,000,000 will initially be designated
Agouron Pharmaceuticals Stock, 25,000,000 will initially be designated Oncology
Division Stock and 50,000,000 will initially be undesignated Common Stock. In
the aggregate, the number of authorized shares of Common Stock would increase
from 75,000,000 to 150,000,000. The Agouron Pharmaceuticals Stock and the
Oncology Division
<PAGE>
Stock will have the voting powers, qualifications and rights described below.
The number of shares, rights, preferences, privileges and restrictions of any
future designated series of Common Stock will be determined by the Board at the
time of such series' designation. The Board will also be able to increase or
decrease (but not below the number of shares then outstanding) the number of
shares of an existing series of Common Stock without the approval of
shareholders.
In connection with the Divisional Stock Proposal, the Articles will be
amended to designate a new Series C Participating Preferred Stock as "Series C
Participating Preferred Stock," no par value, consisting of 100,000 shares (the
"Series C Participating Preferred Stock"), to increase the number of already
designated Series B Participating Preferred Stock from 2,000 shares to 200,000
shares, and to amend certain provisions of the already designated Series B
Participating Preferred Stock. The Series C Participating Preferred Stock will
have substantially the same rights, preferences, privileges and restrictions as
the Series B Participating Preferred Stock. These amendments relating to the
Participating Preferred Stock will be necessary as a result of the Divisional
Stock Proposal and its effect on the Company's Rights Agreement. See "Proposal 2
- - The Divisional Stock Proposal - Restated Rights Agreement."
VOTING RIGHTS
Currently, holders of Existing Common Stock have one vote per share on
all matters submitted to shareholders. In addition, holders of any series of
Preferred Stock would have the right to vote as a separate voting group under
the California Corporations Code in certain circumstances. The Restated Articles
will provide that the holders of all series of Common Stock and any series of
Preferred Stock outstanding at the time of such vote and entitled to vote
together with the holders of Common Stock will vote together as a single voting
group on all matters as to which common shareholders generally are entitled to
vote other than a matter with respect to which the Common Stock or a series
thereof or any series of Preferred Stock would be entitled to vote as a separate
voting group. On all matters as to which all series of Common Stock will vote
together as a single voting group: (i) each outstanding share of Agouron
Pharmaceuticals Stock will have one vote, and (ii) each share of Oncology
Division Stock will have a number of votes (including a fraction of one vote)
equal to the ratio of the weighted average market capitalization of the Oncology
Division Stock and the Agouron Pharmaceuticals Stock to be initially determined
on the earlier of the 90th day following commencement of trading of the Oncology
Division Stock or the record date established for the first meeting or consent
of shareholders following implementation of the Divisional Stock Proposal. The
initial vote so established shall remain unchanged until June 30, 2000. On July
1, 2000, and on each July 1 thereafter, the number of votes to which each share
of Oncology Division Stock is entitled will be adjusted to reflect the ratio of
the weighted average market capitalization of the Oncology Division Stock and
the Agouron Pharmaceuticals Stock on such date, so that the resulting voting
percentage of each Division will be proportionate to its market value. If no
shares of Agouron Pharmaceuticals Stock are outstanding on such date, then all
other series of the Company's Common Stock outstanding on such date will have a
number of votes such that each share of the series of Common Stock that has the
highest market capitalization on such date (the "Base Series") will have one
vote, and each share of each other series of outstanding Common Stock will have
the number of votes determined according to the immediately preceding sentence,
treating, for such purposes the Base Series as the Agouron Pharmaceuticals Stock
in such sentence. See "Restated Articles" (Annex II).
The voting rights of the Oncology Division Stock will be appropriately
adjusted so as to avoid dilution in the aggregate voting rights of any series of
Common Stock in the event the outstanding shares of any series are subdivided
(by stock split, reclassification or otherwise) or combined (by reverse stock
split, reclassification or otherwise), or in the event of the issuance of shares
of any series as a dividend or a distribution to holders of shares of such
series. If shares of only one series of Common Stock are outstanding, or if
shares of any series of Common Stock are entitled to vote separately as a class,
each share of that series would have one vote.
If the Divisional Stock Proposal is approved by the shareholders and
implemented thereafter, the Company will set forth the number of outstanding
shares of each series of Common Stock in its Annual and Quarterly Reports filed
pursuant to the Exchange Act, and will disclose in any proxy statement for a
shareholder meeting the number of outstanding shares and per share voting rights
of each such series of Common Stock.
<PAGE>
The relative voting rights of each series of Common Stock will be
adjusted from time to time as described above so that a holder's voting rights
will more closely reflect the market value of such holder's equity investment in
the Company. Adjustments in the relative voting rights of each series of Common
Stock could (i) influence an investor interested in acquiring and maintaining a
fixed percentage of the voting power of the Company to acquire such percentage
of all series of Common Stock, and would (ii) limit the ability of investors in
one series to acquire for the same consideration relatively more or fewer votes
per share than investors in the other series. To the extent the relative market
values of each series of Common Stock change between any adjustments, an
investor in one series of Common Stock may acquire relatively more or less
voting power for the same consideration when compared with investors in another
series of Common Stock.
Following implementation of the Divisional Stock Proposal, under the
current California Corporations Code, the holders of Agouron Pharmaceuticals
Stock and Oncology Division Stock will vote together as a single class, except
as to certain amendments to the Restated Articles that adversely affect a
particular series in a different manner than other shares of the same class, in
which case a separate vote by the holders of the particular class affected would
also be required. Accordingly, if a separate vote on a matter by the holders of
either Agouron Pharmaceuticals Stock or Oncology Division Stock is not required
under the California Corporations Code or by stock market rules, and if the
Board does not require a separate vote, the series, if any, that is entitled to
more than the number of votes required to approve such matter will be in a
position to control the outcome of such vote even if the matter involves a
divergence or conflict of the interests of the holders of the Agouron
Pharmaceuticals Stock and the Oncology Division Stock. Under the California
Corporations Code, approval of actions requiring a separate class or series vote
will require the approval of the holders of a majority of the outstanding shares
of each such class or series, voting separately. Most other matters (other than
the election of directors whereby directors who receive the highest number of
votes are elected) will be approved if the affirmative votes constitute a
majority of the votes cast by the holders of the Agouron Pharmaceuticals Stock
and the Oncology Division Stock, voting together as a single class, provided
that the affirmatively voted shares also constitute at least a majority of the
required quorum. Because the holders of Agouron Pharmaceuticals Stock will
initially have more than the number of votes required to approve any such
matters requiring only the approval of a majority of the votes cast, such
holders would be in a position to control the outcome of the vote on such a
matter. See "Risk Factors - Risks Related to the Divisional Stock
Proposal--Limited Separate Voting Rights; Variable Voting Rights" and
"--Decisions That Affect Fair Market Values Can Affect Shareholder Rights."
LIQUIDATION RIGHTS
In the event of a voluntary or involuntary dissolution, liquidation or
winding up of the affairs of the Company, after the Company has satisfied or
made provision for its debts and obligations and for payment to the holders of
shares of any series or class of capital stock having preferential rights to
receive distributions of the net assets of the Company, the holders of the
Common Stock are entitled to receive the net assets, if any, remaining for
distribution to common shareholders on a per share basis in proportion to the
respective per share liquidation units of such class. Shareholders will have no
direct claim against any particular assets of the Company or any of its
subsidiaries. Each share of Agouron Pharmaceuticals Stock has 100 liquidation
units and each share of Oncology Division Stock will have 25 liquidation units.
The liquidation units of the Oncology Division Stock will be appropriately
adjusted so as to avoid dilution in the aggregate liquidation rights of any
series in the event the outstanding shares of any series are subdivided (by
stock split, reclassification or otherwise) or combined (by reverse stock split,
reclassification or otherwise), or in the event of the issuance of shares of any
series as a dividend or a distribution to holders of shares of that series, but
will not otherwise be adjusted. A merger or business combination involving the
Company or a sale of all or substantially all of the assets of the Company will
not be treated as a liquidation.
DIVIDEND RIGHTS
The Company has never paid any cash dividends on shares of its capital
stock. The Company currently intends to retain its earnings to finance future
growth and, therefore, does not anticipate paying any cash dividend on any class
of Common Stock in the foreseeable future.
<PAGE>
Dividends or other distributions on the Agouron Pharmaceuticals Stock
and the Oncology Division Stock will be subject to the same limitations as
dividends or other distributions on the Existing Common Stock. Under the
California Corporations Code, no dividends or other distributions may be made to
shareholders, unless made from retained earnings or, if after giving effect to
such dividends or other distributions, the Company's assets would be at least
equal to 1 1/4 times its liabilities; and, subject to certain exceptions, the
current assets of the Company would be at least equal to its current
liabilities.
Dividends or other distributions on the Agouron Pharmaceuticals Stock
and the Oncology Division Stock will be further limited by the Restated Articles
to an amount not in excess of Agouron Pharmaceuticals Available Dividend Amount
and the Oncology Division Available Dividend Amount, respectively.
The "Agouron Pharmaceuticals Available Dividend Amount" or the
"Oncology Division Available Dividend Amount," on any date, means any amount in
excess of the amount legally available for payment of dividends determined in
accordance with California law applied if such Division were a separate
corporation (such amount with respect to a Division is referred to as an
"Available Dividend Amount").
In addition, the amount legally available for payment of dividends will
be determined on the basis of the entire Company, and not just the respective
Divisions. Consequently, dividend or other distribution payments on the Agouron
Pharmaceuticals Stock and the Oncology Division Stock could be precluded because
of the available limits under the California Corporations Code, even though
there may exist an Available Dividend Amount with respect to the relevant
Division. There can be no assurance that an Available Dividend Amount will exist
with respect to either Division. See "Risk Factors - Risks Related to the
Divisional Stock Proposal - Potential Divergence of Interests; No Specific
Procedures for Resolution - No Assurance of Payment of Dividends."
Subject to the prior payment of distributions on any outstanding shares
of Preferred Stock and the foregoing limitations, the Board will be able, in its
sole discretion, to declare and pay dividends or other distributions exclusively
on the Agouron Pharmaceuticals Stock, exclusively on the Oncology Division Stock
or on both, in equal or unequal amounts, notwithstanding the amount of dividends
or other distributions previously declared on each series, the respective voting
or liquidation rights of each series or any other factor.
GENERAL REDEMPTION AND CONVERSION PROVISIONS
The Company's Articles currently do not provide, and the Divisional
Stock Proposal does not provide, for either mandatory or optional conversion or
redemption of the Agouron Pharmaceuticals Stock. If the Divisional Stock
Proposal is approved the Restated Articles will provide that the Oncology
Division Stock may be exchanged for any combination of cash and/or Agouron
Pharmaceuticals Stock upon the terms described below. The Company cannot predict
the impact on the market prices for each series of Common Stock of its ability
to effect such exchanges.
OPTIONAL REDEMPTION AND/OR CONVERSION. The Board may at any time
determine to exchange all or part of the outstanding shares of Oncology Division
Stock for any combination of cash and/or Agouron Pharmaceuticals Stock having a
Fair Market Value equal to 125% of the Fair Market Value of the Oncology
Division Stock, such Fair Market Value being determined by the trading prices
during a specified period prior to the first public announcement by the Company
of such exchange.
The foregoing provision allows the Company the flexibility to redeem
all outstanding shares of the Oncology Division Stock and leave outstanding
classes of Common Stock that would, collectively, represent the residual equity
interest in the Company. The optional exchange could be exercised at any future
time if the Board determined that, under the facts and circumstances then
existing, a particular series of Common Stock was no longer in the best
interests of all of the Company's shareholders. Such exchange may be completed,
however, at a time that is disadvantageous to the holders of the Oncology
Division Stock.
The right of the Board to exchange all outstanding shares of Oncology
Division Stock for any combination of cash and/or Agouron Pharmaceuticals Stock
having a Fair Market Value equal to 125% of the Fair Market Value of the
Oncology Division Stock does not preclude the Board from making an offer to
exchange such shares on terms
<PAGE>
other than those provided in the Restated Articles. Although any alternative
offer would be subject to acceptance by holders of the shares to be exchanged,
such offer could be made on terms less favorable than those provided in the
Restated Articles. See "Risk Factors - Risks Related to the Divisional Stock
Proposal Potential Divergence of Interests; No Specific Procedures for
Resolution - Optional Exchange of Oncology Division Stock."
In the event Agouron Pharmaceuticals Stock is not publicly traded at
the time of a conversion of the Oncology Division Stock, the Board may convert
the Oncology Division Stock into fully paid and nonassessable shares of such
other publicly traded class or series of common stock as has the largest market
capitalization at the time of the conversion.
MANDATORY CONVERSION AND/OR REDEMPTION. In the event of the
disposition, in one transaction or a series of related transactions, by the
Company of all or substantially all of the properties and assets allocated to
the Oncology Division (other than in connection with the sale by the Company of
all or substantially all of the Company's properties and assets) to any person,
entity or group, other than (i) a wholly owned subsidiary of the Company or (ii)
any entity formed at the direction of the Company in connection with obtaining
financing for the programs or products of the Oncology Division, as the case may
be, the Company on or prior to the first business day following the 90th day
following consummation of such disposition will be required to exchange each
outstanding share of the Oncology Division Stock for any combination of cash
and/or Agouron Pharmaceuticals Stock having a Fair Market Value equal to 125% of
the Fair Market Value of the Oncology Division Stock as determined by the
trading prices during a specified period prior to the consummation of such
disposition. Consequently, holders of Oncology Division Stock may receive a
greater or lesser premium for their shares than any premium paid by a third
party buyer of the assets of the Oncology Division. In addition, any such
exchange for shares of Agouron Pharmaceuticals Stock could be made at a time
when the Oncology Division Stock may be considered to be undervalued and the
Agouron Pharmaceuticals Stock may be considered to be overvalued. See "Risk
Factors - Risks Related to the Divisional Stock Proposal - Potential Divergence
of Interests; No Specific Procedures for Resolution - Disposition of Division
Assets."
The Fair Market Values of the Agouron Pharmaceuticals Stock and
Oncology Division Stock could be affected by many factors, including the results
of operations and financial condition of the Company and each Division, trading
volume, share issuances and repurchases, general economic and market conditions,
and decisions regarding allocations between the Divisions. See "Risk
Factors--Risks Related to the Divisional Stock Proposal--Decisions That Affect
Fair Market Values Can Affect Shareholder Rights."
ONCOLOGY DIVISION DESIGNATED SHARES
Oncology Division Designated Shares are authorized shares of Oncology
Division Stock that are not issued and outstanding, but which the Board,
pursuant to the Company's management and allocation policies, may from time to
time issue, or otherwise distribute without allocating the proceeds or other
benefits of such issuance, sale or distribution to the Oncology Division. The
shares of Oncology Division Stock that are issuable with respect to the Oncology
Division Designated Shares are not outstanding shares of Oncology Division
Stock, are not eligible to receive dividends and cannot be voted by the Company.
The number of Oncology Division Designated Shares will initially be
zero but from time to time will be:
(a) increased by a number equal to the quotient obtained by dividing
(i) the aggregate amount of all advances made under the Equity Line by (ii) the
Fair Market Value of the Oncology Division Stock on the date of each exchange;
(b) decreased (but to not less than zero) by the number of any shares
of Oncology Division Stock issued by the Company as a dividend or distribution
or by reclassification, exchange or otherwise to holders of Agouron
Pharmaceuticals Stock;
(c) adjusted as appropriate to reflect subdivisions (by stock split or
otherwise) and combinations (by reverse stock split or otherwise) of the
Oncology Division Stock and dividends or distributions of shares of
<PAGE>
Oncology Division Stock to holders of Oncology Division Stock and other
reclassifications of Oncology Division Stock.
INCREASE IN AUTHORIZED COMMON STOCK
The Articles currently authorize the issuance of 75,000,000 shares of
Existing Common Stock. In connection with the Divisional Stock Proposal, the
Articles will be amended to increase the number of shares of Common Stock
authorized for issuance will increase to 150,000,000 and to designate Agouron
Pharmaceuticals Stock initially consisting of 75,000,000 authorized shares and
Oncology Division Stock initially consisting of 25,000,000 authorized shares.
50,000,000 authorized shares will initially be undesignated shares of Common
Stock. In addition, the Board from time to time can issue one or more additional
series or additional shares of Agouron Pharmaceuticals Stock or Oncology
Division Stock. Additionally, the Board would be authorized to determine the
number of shares of each new series and all rights and privileges of each new
series, including dividend rights, conversion or redemption provisions, rights
upon liquidation or merger, and voting rights and to increase or decrease the
number of shares in any existing series. Under the existing Articles, the
issuance of a new class or series of common stock, such as the Oncology Division
Stock, would require shareholder approval. The increase in authorized shares
provides the Board with a means to act quickly and definitively to complete
strategic transactions such as acquisitions or to further divide the business of
the Company into additional divisions without the need to obtain shareholder
approval unless deemed advisable by the Board or required by applicable law,
regulation or stock market requirements.
The increase in authorized shares of Common Stock will be used in part
to implement the various aspects of the Divisional Stock Proposal. Further, as
described under "- Description of Capital Stock--General Redemption and
Conversion Provisions," the Board has the right to convert the Oncology Division
Stock into Agouron Pharmaceuticals Stock at a 25% premium to the Fair Market
Value of the Oncology Division Stock at any time, or in connection with a
disposition of all or substantially all properties and assets of the Oncology
Division. The Board may also pay a share dividend in one series of Common Stock
on such series of Common Stock, or declare a stock split. The number of shares
issuable in a conversion will, therefore, vary based on the relative market
values of the two series of Common Stock and the number of outstanding shares of
the Oncology Division Stock to be converted. The Board believes that an increase
in the number of authorized shares of Common Stock at this time is in the best
interests of the Company in order to have available the number of shares needed
for a future conversion, share dividend, stock split or a corporate opportunity
if such a transaction is determined to be in the best interests of the Company.
If the Divisional Stock Proposal is implemented, and based on the
number of outstanding shares of the Existing Common Stock as of October 19,
1998: (i) the number of issued and outstanding shares of Agouron Pharmaceuticals
Stock, Oncology Division Stock and the undesignated Common Stock will be
31,282,508, 15,641,254 and zero, respectively; (ii) the number of unissued and
reserved shares of Agouron Pharmaceuticals Stock and Oncology Division Stock
under the Company's Stock Plans will be 11,574,100 and 5,787,050 respectively;
and (iii) the number of unissued and unreserved shares of Agouron
Pharmaceuticals Stock, Oncology Division Stock and the undesignated Common Stock
will be 32,143,392, 3,571,696 and 50,000,000 shares, respectively.
Other than the Reclassification of the Existing Common Stock pursuant
to the Divisional Stock Proposal and the issuance of shares of Common Stock
pursuant to the Company's employee benefit plans, the Company has no present
intention or agreement with respect to the issuance for any purpose of any of
the shares of Common Stock that will be authorized for issuance if the
Divisional Stock Proposal is approved by the shareholders. The Board, however,
has considered and may in the future consider the creation of additional series
of stock that would track the performance of the other lines of the Company's
business.
DETERMINATIONS BY THE BOARD
If the Divisional Stock Proposal is approved by the shareholders and
implemented by the Board, any determinations made in good faith by the Board
under any provision described under "- Description of Capital
<PAGE>
Stock," and any determinations with respect to any Division or the rights of
holders of shares of any series of Common Stock, will be final and binding on
all shareholders of the Company.
DIVIDEND POLICY
Agouron has never paid any cash dividends on shares of its capital
stock. Agouron currently intends to retain its earnings to finance future growth
and, therefore, does not anticipate paying any cash dividend on any series of
Common Stock in the foreseeable future.
The Board does not currently intend to change the above-described
dividend policy but reserves the right to do so at any time, or from time to
time, based on its review of the financial performance of the respective
Division and of the Company as a whole. Future dividends on the Agouron
Pharmaceuticals Stock and Oncology Division Stock will be payable when, as and
if declared by the Board out of all funds of the Company legally available
therefor. See "- Description of Capital Stock - Dividends."
NASDAQ NATIONAL MARKET LISTING
The Existing Common Stock is traded on the Nasdaq National Market under
the symbol AGPH. There has been no prior market for the Agouron Pharmaceuticals
Stock or the Oncology Division Stock. Application will be made to The Nasdaq
Stock Market, Inc. to redesignate the Existing Common Stock as Agouron
Pharmaceuticals Stock, to be quoted on the Nasdaq National Market under the
symbol AGPH, and for the quotation of the Oncology Division Stock on the Nasdaq
National Market under a separate symbol to be determined. The Company is unable
to predict to what extent a public market will develop for shares of Oncology
Division Stock or the prices at which the shares of Agouron Pharmaceuticals
Stock or Oncology Division Stock will trade in such market or otherwise.
EXCHANGE PROCEDURES
Upon the implementation of the Divisional Stock Proposal, the Existing
Common Stock share certificates (the "Existing Certificates") will be deemed to
represent shares of Agouron Pharmaceuticals Stock. Following the Effective Date,
at such time as is reasonably determined by the Board, holders of Existing
Common Stock as of the Effective Date will be mailed certificates representing
shares of Oncology Division Stock. Shareholders should not mail their Existing
Certificates to either the Company or its transfer agent in connection with the
Divisional Stock Proposal. New certificates representing shares of Agouron
Pharmaceuticals Stock will be issued in replacement of Existing Certificates as
such certificates are received and canceled by the transfer agent.
STOCK TRANSFER AGENT AND REGISTRAR
ChaseMellon Shareholder Services, L.L.C. ("ChaseMellon") is the
transfer agent and registrar for the Existing Common Stock. If the Divisional
Stock Proposal is approved by the shareholders and implemented by the Board,
ChaseMellon will be selected as the transfer agent and registrar for the Agouron
Pharmaceuticals Stock and the Oncology Division Stock.
FINANCIAL ADVISOR
PaineWebber is acting as financial advisor providing general financial
advisory services to the Company in connection with the Divisional Stock
Proposal. The Company has agreed to pay PaineWebber a fee of $750,000 for its
services including the providing of consultation to the Board on the initial
estimated fair market value of the Oncology Division. The Company also has
agreed to reimburse PaineWebber for certain of its reasonable out-of-pocket
expenses and has agreed to indemnify PaineWebber against certain liabilities,
including liabilities under the Securities Act.
NO DISSENTERS' RIGHTS
Under the California Corporations Code, holders of Existing Common
Stock do not have dissenters' rights with regard to the Divisional Stock
Proposal.
<PAGE>
MATERIAL FEDERAL INCOME TAX CONSIDERATIONS
The following discussion summarizes the material United States federal
income tax consequences of the Divisional Stock Proposal. The discussion is
based on the Internal Revenue Code of 1986, as amended (the "Code"), Treasury
Department regulations, published positions of the IRS, and court decisions, all
of which are subject to change. In particular, Congress could enact legislation
affecting the treatment of stock with characteristics similar to the Agouron
Pharmaceuticals Stock and Oncology Division Stock or the Treasury Department
could issue regulations, including regulations issued pursuant to its broad
authority under Section 337(d) of the Code, which could change current law or
adversely effect existing interpretations of current law. Any such change, which
may or may not be retroactive, could alter the tax consequences to the Company
or the shareholders of the Company discussed herein.
TAX IMPLICATIONS TO SHAREHOLDERS OF THE RECLASSIFICATION
This discussion is based on certain assumptions regarding the factual
circumstances that will exist at the time of the Reclassification, including
certain representations made to or to be made by the Company. This discussion
addresses only those shareholders who hold their Existing Common Stock as a
capital asset within the meaning of Section 1221 of the Code, and is included
for general information only. It does not discuss all aspects of United States
federal income taxation that may be relevant to a particular shareholder in
light of such shareholder's personal tax circumstances and may not apply to
certain types of shareholders who may be subject to special treatment under the
federal income tax laws, such as insurance companies, corporations subject to
the alternative minimum tax, banks, dealers in securities or tax-exempt
organizations, persons that hold Existing Common Stock as part of a straddle,
hedging or conversion transaction, persons whose functional currency is not the
U.S. dollar, shareholders who for United States federal income tax purposes are
foreign corporations, foreign partnerships, nonresident alien individuals,
foreign estates or foreign trusts or to shareholders who acquired their stocks
pursuant to the exercise of employee stock options or otherwise as compensation.
In addition, this discussion does not address the effect of any applicable
state, local or foreign laws or any federal tax laws other than those pertaining
to the income tax. EACH SHAREHOLDER OF THE COMPANY SHOULD CONSULT SUCH
SHAREHOLDER'S OWN TAX ADVISOR AS TO THE APPLICATION OF THE FEDERAL INCOME TAX
LAWS TO SUCH SHAREHOLDER'S PARTICULAR SITUATION, AS WELL AS TO THE APPLICABILITY
AND EFFECT OF ANY STATE, LOCAL, OR FOREIGN TAX LAWS TO WHICH SUCH SHAREHOLDER
MAY BE SUBJECT.
In the opinion of Pillsbury Madison & Sutro LLP, tax counsel to the
Company, for United States federal income tax purposes: (i) the Reclassification
will constitute a recapitalization within the meaning of Section 368(a)(1)(E) of
the Code, (ii) the Agouron Pharmaceuticals Stock and the Oncology Division Stock
will be treated for federal income tax purposes as Common Stock of the Company,
(iii) except with respect to cash paid in lieu of fractional shares, if any, the
holders of the Divisional Stock will not recognize income, gain or loss in and
as a result of the Reclassification, (iv) the Divisional Stock received in the
Reclassification will not constitute Section 306 stock within the meaning of
Section 306(c) of the Code, (v) the Divisional Stock received in the
Reclassification will not constitute nonqualified preferred stock within the
meaning of Section 351(g) of the Code and (vi) the amendment and restatement of
the Rights Agreement will not result in income, gain or loss to the
shareholders. As a result of such treatment, holders of Existing Common Stock
will take a tax basis in the Agouron Pharmaceuticals Stock and Oncology Division
Stock equal to their tax basis prior to the Reclassification in the Existing
Common Stock (reduced by the amount allocable to any fractional share interest
for which cash is received), with such tax basis being allocated among the
Agouron Pharmaceuticals Stock and Oncology Division Stock in proportion to their
relative fair market values at the time of the Reclassification. Cash received
in lieu of fractional shares will result in the recognition of gain or loss
equal to the difference, if any, between the shareholder's basis in the
fractional shares and the amount of cash received. For U.S. federal income tax
purposes, a shareholder's holding period for shares of Agouron Pharmaceuticals
Stock and Oncology Division Stock received in the Reclassification will include
such shareholder's holding period for the shares of Existing Common Stock
surrendered therefor.
The IRS announced in 1987 that it was studying and would not issue
advance rulings on the classification of stock that has certain voting and
liquidation rights in an issuing corporation but the dividend rights of which
are determined by reference to the earnings of a segregated portion of the
issuing corporation's assets. Although in 1995 the IRS withdrew such stock from
its list of matters under consideration, the IRS has reiterated that it will not
issue
<PAGE>
advance rulings regarding such stock. There are no court decisions or other
authorities that bear directly on transactions similar to the Reclassification.
It is possible, therefore, that the IRS could assert that the Oncology Division
Stock or the Agouron Pharmaceuticals Stock or both represent property other than
stock of Agouron ("Other Property"). If such stocks were treated as Other
Property, the Company would recognize a significant taxable gain on the
Reclassification in an amount equal to the excess of the fair market value of
such Other Property over its federal income tax basis to the Company or its
subsidiaries allocable to such Other Property. In addition, the Company could
lose the ability to file its federal income tax returns on a consolidated basis.
As a result, the tax losses expected to be incurred by the Oncology Division
could not offset the taxable income expected to be earned by Agouron
Pharmaceuticals and any amounts paid or deemed paid to the Company by the
Oncology Division or Agouron Pharmaceuticals could be taxable to the Company.
Furthermore, the receipt of Oncology Division Stock or the Agouron
Pharmaceuticals Stock by a shareholder of the Company might be treated as a
fully taxable dividend to such shareholder in an amount equal to the fair market
value of such stock (subject, in the case of shareholders of the Company that
are corporations, to any applicable dividends received deduction) or might be
treated as a distribution in complete liquidation of the Company, in which case
shareholders of the Company would have gain or loss with respect to the shares
held in the Company immediately before the Reclassification. As indicated above,
however, the Company has received an opinion from tax counsel that the Agouron
Pharmaceuticals Stock and the Oncology Division Stock will be treated for
federal income tax purposes as common stock of the Company.
It is also possible that the IRS could assert, in the alternative, that
the Oncology Division Stock or the Agouron Pharmaceuticals Stock or both
represent preferred stock (rather than Common Stock) of the Company for federal
income tax purposes. In order to support such an assertion the IRS would
generally have to conclude that such stock is limited and preferred as to
dividends and does not participate significantly in corporate growth. As a
result of such a conclusion, the IRS could further assert that the Oncology
Division Stock or the Agouron Pharmaceuticals Stock or both should be
characterized as "nonqualified preferred stock" or Section 306 stock.
Nonqualified preferred stock that is received by a shareholder in connection
with transactions intended to qualify as tax-free reorganizations, such as the
Reclassification, will be treated as taxable Other Property rather than as
tax-free stock consideration and accordingly, gain, but not loss, would be
recognized by the shareholder. If the Divisional Stocks were instead, or in
addition, treated as Section 306 stock, a shareholder could recognize ordinary
income on the taxable sale or exchange of such stock and dividend income on the
redemption of such stock. As mentioned above, the Company has received an
opinion from tax counsel that the Agouron Pharmaceuticals Stock and the Oncology
Division Stock will not constitute nonqualified preferred stock or Section 306
stock.
Certain non-corporate holders of Oncology Division Stock or Agouron
Pharmaceuticals Stock might be subject to backup withholding at a rate of 31% on
the payment of dividends on such stock. Backup withholding will apply only if
the shareholder (i) fails to furnish his, her or its Taxpayer Identification
Number ("TIN"), (ii) furnishes an incorrect TIN, (iii) is notified by the IRS
that he, she or it has failed properly to report payments of interest or
dividends, or (iv) under certain circumstances, fails to certify, under
penalties of perjury, that he, she or it has furnished a correct TIN and has not
been notified by the IRS that he, she or it is subject to backup withholding for
failure to report payments of interest or dividends. Shareholders should consult
their tax advisors regarding their qualifications for a tax exemption from
backup withholding and the procedure for obtaining such an exemption if
applicable. The amount of any backup withholding from a payment to a holder of
Oncology Division Stock or Agouron Pharmaceuticals Stock will be allowed as a
credit against such shareholder's federal income tax liability and may entitle
such shareholder to a refund, provided that the required information is
furnished to the IRS.
Shareholders should consult their own tax advisors as to the particular
federal income tax consequences to them of the Reclassification, as to the
foreign, state, local and other tax consequences thereof, and as to the federal,
state, local and foreign tax consequences of the holding of Oncology Division
Stock and Agouron Pharmaceuticals Stock.
TAX IMPLICATIONS OF POSSIBLE DISTRIBUTION OF ONCOLOGY DIVISION DESIGNATED SHARES
In the future, the Company may distribute Oncology Division Designated
Shares to holders of Agouron Pharmaceuticals Stock (a "Distribution").
<PAGE>
As set forth above, it is possible that the IRS may claim that the
Oncology Division Stock represents property other than stock of the Company (or
alternatively that the Oncology Division Stock should be characterized as
preferred stock of the Company rather than common stock of the Company.) In
either case, holders of Agouron Pharmaceuticals Stock could be subject to
taxation with respect to a Distribution. However, as indicated above, the
Company has received an opinion from its tax counsel that the Oncology Division
Stock will be treated as common stock of the Company for United States federal
income tax purposes.
If, in accordance with the opinion of tax counsel, the Oncology
Division Stock is characterized as common stock of the Company, the tax
consequences of a Distribution will depend upon the facts existing at the time
of such Distribution. In general, a Distribution characterized as common stock
of the Company will only be subject to taxation if the Distribution, when viewed
in connection with certain other distributions made by the Company with respect
to other classes of its stock (including the outstanding Oncology Division
Stock) is determined to have the effect of (i) the receipt of property (other
than stock of the Company) by other stockholders and (ii) an increase in the
proportionate interest in the assets or earnings and profits of the Company by
holders of Agouron Pharmaceuticals Stock (a "disproportionate distribution").
Under current Treasury regulations, the receipt of cash or other property that
occurs more than 36 months following, or that is made more than 36 months
before, a distribution (or series of distributions) of stock will be presumed
not to be a disproportionate distribution unless the receipt of cash or other
property and the stock distribution are made pursuant to a plan. However, unless
more than 36 months have elapsed between a distribution of cash or other
property and a Distribution, the distribution of cash or other property may
cause a Distribution to be a disproportionate distribution that is subject to
taxation.
EACH SHAREHOLDER OF THE COMPANY SHOULD CONSULT SUCH SHAREHOLDER'S OWN TAX
ADVISOR AS TO THE TAX CONSEQUENCES OF A DISTRIBUTION OF ONCOLOGY DIVISION
DESIGNATED SHARES.
UNITED STATES TAX CONSEQUENCES TO NON-U.S. SHAREHOLDERS
Each Non-U.S. Holder should consult a tax advisor with respect to the
United States federal tax consequences of acquiring, holding and disposing of
Oncology Division Stock, as well as any tax consequences that may arise under
the laws of any foreign, state, local or other taxing jurisdiction.
AMENDMENT OF STOCK PLANS
If the Divisional Stock Proposal is approved and implemented, the Board
or its delegates, pursuant to applicable provisions of the Company's existing
stock option plans and Employee Stock Purchase Plan (collectively the "Stock
Plans"), will determine appropriate adjustments to outstanding options granted
under the provisions of such Stock Plans to take into account the implementation
of the Divisional Stock Proposal. Under these adjustments each outstanding
option to purchase Existing Common Stock will automatically be converted into an
option to purchase the number of shares of Agouron Pharmaceuticals Stock equal
to the number of shares of Existing Common Stock previously covered by the
outstanding option plus an option to purchase the number of shares of Oncology
Division Stock equal to one-half of the number of shares of Existing Common
Stock previously covered by the outstanding option. The aggregate exercise price
of the outstanding option to purchase Existing Common Stock will be allocated
between the option covering Agouron Pharmaceuticals Stock and the option
covering Oncology Division Stock in a ratio to be determined by the Board or its
delegates.
In the event the Divisional Stock Proposal is approved and implemented,
the Stock Plans will be amended as of the Effective Date to clarify that grants
made after the Effective Date may be made with respect to either Agouron
Pharmaceuticals Stock or Oncology Division Stock or both (and/or any other
series of outstanding Common Stock of the Company), in the same manner and to
the same extent as permitted with respect to the Existing Common Stock. Although
the Stock Plan language authorizing adjustments to shares reserved and
outstanding awards and stock purchase rights implicitly permits the use of more
than one series of Common Stock for awards and stock purchase rights under the
Stock Plans, the Board believes that it is desirable to amend the Stock Plans to
explicitly provide that shares of any series of Common Stock are available for
awards. For the text of the
<PAGE>
1996 Stock Option Plan and the Employee Stock Purchase Plan as proposed to be
amended, see Annexes VI and VII, respectively.
In determining whether awards of options or stock purchase rights to
purchase Agouron Pharmaceuticals Stock or Oncology Division Stock or a
combination thereof are to be made to specific employees, the Board or its
delegates may consider, among other things, the Division to which the employee
in question provides services. The Company also anticipates, however, that the
Board or its delegates will consider that employees should be rewarded based on
the success of the Company as a whole and that a policy of granting awards
solely in respect of the Common Stock relating to the Division for which the
employee provides services may be counterproductive to the overall success of
the Company. In addition, because of the complementary nature of much of the
businesses of Agouron Pharmaceuticals and the Oncology Division, the Company
anticipates that services performed in respect of one Division may have at least
an indirect effect upon the operations of the other Division. Therefore, the
Company anticipates that the Board or its delegates could decide that in order
to provide the maximum incentive to employees regarding the overall success of
the Company, it may be appropriate to grant awards consisting of securities in
respect of both Divisions to employees performing services for one Division. If
the Board or its delegates elects to grant awards to individual employees
consisting of stock options or rights to purchase both Agouron Pharmaceuticals
Stock and Oncology Division Stock, the allocation between the two will be at the
discretion of the Board or its delegates.
RESTATEMENT OF RIGHTS AGREEMENT
Pursuant to the Rights Agreement (the "Rights Agreement") between the
Company and ChaseMellon Shareholder Services, L.L.C., as Rights Agent (the
"Rights Agent"), the Company issued a dividend on November 7, 1996 of one
preferred stock purchase right on each share of Common Stock (a "Common Stock
Right"). If the shareholders approve the Divisional Stock Proposal and it is
implemented by the Board, the Rights Agreement will be amended and restated to
reflect the change in the capital structure of the Company and the Board will
declare a distribution to the holders of Oncology Division Stock of a preferred
stock purchase right (an "Oncology Stock Right") for each outstanding share of
Oncology Division Stock. The Rights Agreement, as amended and restated (the
"Restated Rights Agreement"), will provide (i) for the redesignation of each
Common Stock Right as an Agouron Pharmaceuticals Stock Purchase Right (an
"Agouron Stock Right"), (ii) for a two-for-one split of the Agouron Stock Rights
(reflecting the two-for-one split of the Common Stock in August 1997), so that
each share of Agouron Pharmaceuticals Stock will have one Agouron Stock Right
associated therewith, (iii) that each Agouron Stock Right, when it becomes
exercisable, will entitle the registered holder to purchase from the Company one
one-ten thousandth of a share of Series B Participating Preferred Stock, no par
value (the "Series B Shares"), at a purchase price of $0.001, subject to
adjustment, and (iv) that each Oncology Stock Right, when it becomes
exercisable, will entitle the registered holder to purchase from the Company one
one-ten thousandth of a share of Series C Participating Preferred Stock, no par
value (the "Series C Shares"), at a purchase price of $0.001, subject to
adjustment. The Agouron Stock Rights and the Oncology Stock Rights are sometimes
hereinafter referred to together as the "Rights."
The Restated Rights Agreement will provide that, initially, the Agouron
Stock Rights and the Oncology Stock Rights will be evidenced by the certificates
representing shares of Agouron Pharmaceuticals Stock and Oncology Division
Stock, respectively, and no separate Rights certificates will be distributed.
Agouron Pharmaceuticals Stock and Oncology Division Stock are sometimes
hereinafter referred to together as the "Voting Stock." The Rights will separate
from the Voting Stock (referred to as a "Distribution Date") upon the earliest
of (i) a public announcement that a person or group of affiliated or associated
persons (collectively, a "Person") has acquired beneficial ownership of
securities having 15% or more of the total voting power of all outstanding
Common Stock (i.e., 15% or more of the total voting power of the Voting Stock)
(such a person being hereinafter referred to as an "Acquiring Person") or (ii)
ten days (unless such date is extended by the Board) following the commencement
of (or a public announcement of an intention to make) a tender offer or exchange
offer which would result in any Person becoming an Acquiring Person. Until the
Distribution Date, the Agouron Stock Rights will be transferred with and only
with Agouron Pharmaceuticals Stock, and the Oncology Stock Rights will be
transferred with and only with Oncology Division Stock. For purposes of the
Restated Rights Agreement, the total voting power of the Voting Stock will be
determined based upon the voting rights of holders of outstanding shares of
Agouron Pharmaceuticals
<PAGE>
Stock and Oncology Division Stock in effect at the time of any such
determination. See "- Description of Capital Stock - Voting Rights."
The Rights will not be exercisable until the Distribution Date. The
Rights will expire on the earliest of (i) November 21, 2006, (ii) consummation
of a merger transaction with a Person who acquired Voting Stock pursuant to a
Permitted Offer (as defined below) and is offering in the merger the same price
per share and form of consideration paid in the Permitted Offer, or (iii)
redemption or exchange of the Rights by the Company as described below.
In the event that, after the first date of public announcement by the
Company or an Acquiring Person that an Acquiring Person has become such, the
Company is involved in a merger or other business combination transaction
(whether or not the Company is the surviving corporation) or 50% or more of the
Company's assets or earning power are sold (in one transaction or a series of
transactions), proper provision will be made so that each holder of a Right
(other than an Acquiring Person) will thereafter have the right to receive, upon
the exercise thereof at the then current exercise price of the Right, that
number of shares of Agouron Pharmaceuticals Stock, in the case of an Agouron
Stock Right, and Oncology Division Stock, in the case of an Oncology Stock
Right, in the event that the Company is the surviving corporation of a merger or
consolidation, or that number of shares of the common stock of the acquiring
company (or, in the event there is more than one acquiring company, the
acquiring company receiving the greatest portion of the assets or earning power
transferred), which at the time of such transaction would have a market value of
two times the exercise price of the Right (such right being hereinafter referred
to as the "Merger Right"). In the event that a Person becomes an Acquiring
Person (unless pursuant to a tender offer or exchange offer for all outstanding
shares of Voting Stock at a price and on terms determined prior to the date of
the first acceptance of payment for any of such shares by at least a majority of
the members of the Board who are not officers of the Company and are not
Acquiring Persons or affiliates or associates thereof to be in the best
interests of the Company and its shareholders (a "Permitted Offer")), then
proper provision will be made so that each holder of an Agouron Stock Right or
an Oncology Stock Right will, for a 60-day period (subject to extension under
certain circumstances) thereafter, have the right to receive upon exercise that
number of shares of Agouron Pharmaceuticals Stock or Oncology Division Stock, as
the case may be, having a market value of two times the exercise price of the
Right (such right being hereinafter referred to as the "Subscription Right"),
although the Company may take action (if deemed appropriate by the Board) to
provide substitute consideration for Voting Stock (including cash (which may
entail a reduction in the exercise price of the Rights), securities of the
Company (including a Voting Stock equivalent such as fractional Series B Shares
or Series C Shares) or other assets (or any combination thereof) (collectively
hereinafter referred to as "Substitute Consideration")), and the Company shall
take such action if insufficient shares of Voting Stock are available to permit
the exercise of the Rights. The holder of a Right will continue to have the
Merger Right whether or not such holder exercises the Subscription Right.
Notwithstanding the foregoing, upon the occurrence of any of the events giving
rise to the exercisability of the Merger Right or the Subscription Right, any
Rights that are or were at any time after the Distribution Date owned by an
Acquiring Person will immediately become null and void.
At any time prior to the earliest to occur of a Person becoming an
Acquiring Person or the expiration of the Rights, the Company may redeem the
Rights in whole, but not in part, at a price of $0.001 and $0.001 per Agouron
Stock Right and Oncology Stock Right, respectively (in each case hereinafter
referred to as the "Redemption Price"), which redemption shall be effective upon
action of the Board. Additionally, the Company may thereafter redeem the then
outstanding Rights in whole, but not in part, at the Redemption Price (a) if
such redemption is incidental to a merger or other business combination
transaction or series of transactions involving the Company but not involving an
Acquiring Person or certain related persons or (b) following an event giving
rise to, and the expiration of the exercise period for, the Subscription Right
if and for as long as no Person is then an Acquiring Person (e.g., the Person
initially triggering the Subscription Right has reduced its beneficial ownership
of the Company's securities so that such Person is no longer an Acquiring
Person). The redemption of the Rights described in the preceding sentence will
be effective only as of such time when the Subscription Right is not
exercisable, and in certain events only after 10 business days' prior notice.
Upon the effective date of the redemption of the Rights, the right to exercise
the Rights will terminate and the only right of the holders of the Rights will
be to receive the Redemption Price.
<PAGE>
The Restated Rights Agreement will provide that, subject to applicable
law, the Board may, at any time after a Person becomes an Acquiring Person (but
not after the acquisition by such Person of beneficial ownership of securities
having 50% or more of the total voting power of all outstanding Common Stock),
exchange all or part of the then outstanding and exercisable Agouron Stock
Rights and Oncology Stock Rights (except for Rights which have become void) for
shares of Agouron Pharmaceuticals Stock or Oncology Division Stock, as the case
may be, equivalent to one share of Agouron Pharmaceuticals Stock per Agouron
Stock Right and one share of Oncology Division Stock per Oncology Stock Right
(subject to adjustment) or, alternatively, for Substitute Consideration.
Prior to the Distribution Date, the terms of the Restated Rights
Agreement may be amended by the Board without the consent of the holders of the
Rights. After the Distribution Date, the terms of the Restated Rights Agreement
may be amended by the Board in any manner which the Company may deem necessary
or desirable and which will not adversely affect the interests of the Rights
holders.
Until a Right is exercised, the holder thereof, as such, will have no
rights as a shareholder of the Company, including, without limitation, the right
to vote or to receive dividends.
In addition to the amendment to the Articles in connection with the
Divisional Stock Proposal, the Articles will be further amended to provide for
the potential effects of the Restated Rights Agreement in conformity with the
California Corporations Code. Specifically, inasmuch as the Rights may provide
for different or disparate treatment among holders of the Rights in accordance
with criteria selected by the Board in connection with the creation of the
Rights (which criteria is set forth in the Restated Rights Agreement), the
Articles, as amended, will include specific provisions permitting such potential
treatment.
A copy of the form of the Restated Rights Agreement (which includes, as
Exhibit B, the form of Rights Certificate for Agouron Stock Rights and Oncology
Stock Rights) is being filed with the Commission as an exhibit to the
Registration Statement to which this Proxy Statement relates and is incorporated
herein by reference. An initial version of the Rights Agreement and an amended
version of the Rights Agreement were included, respectively, as Exhibits to the
Company's Registration Statement on Form 8-A and the Company's amended Form
8-A/A (filed with the Commission on November 8, 1996 and December 20, 1996,
respectively), and are incorporated herein by reference. A copy of the Rights
Agreement is available free of charge from the Rights Agent and, following an
implementation of the Divisional Stock Proposal, a copy of the Restated Rights
Agreement would be so available. The foregoing description of the Rights is a
summary only and is qualified in its entirety by reference to the Restated
Rights Agreement and the Rights Agreement.
ANTI-TAKEOVER CONSIDERATIONS
The following information is provided with respect to certain matters
that could be viewed as having the effect of discouraging an attempt to obtain
control of the Company.
The Articles provide that the Board has the authority, without further
action by the shareholders, to issue from time to time the Preferred Stock in
one or more series and to fix the number of shares, designations, rights,
preferences, privileges and restrictions thereof. The rights, preferences,
privileges and restrictions of different series of Preferred Stock may differ
with respect to dividend rates, amounts payable on liquidation, voting rights,
conversion rights, redemption provisions, sinking fund provisions, and other
matters.
If the Divisional Stock Proposal is approved and implemented, the
Restated Articles will provide that the Board has the authority, without further
action by the shareholders, to issue from time to time shares of a new series of
Common Stock and to fix the number of shares, designations, rights, preferences,
privileges and restrictions thereof or to increase or decrease the number of
shares of any existing series. The rights, preferences, privileges and
restrictions of different series of Common Stock may differ with respect to
dividend rates, amounts payable on liquidation, voting rights, conversion
rights, redemption provisions, and other matters.
Although the Board has no present intention of doing so, it could
issue shares of Preferred Stock or of a new or existing series of Common Stock
that could, depending on the terms of such stock, make more difficult or
<PAGE>
discourage an attempt to obtain control of the Company by means of a merger,
tender offer, proxy contest or other means. Such shares could be used to create
voting or other impediments or to discourage persons seeking to gain control of
the Company and could also be privately placed with purchasers favorable to the
Board in opposing such action. In addition, the Board could authorize holders of
a series of Common Stock or Preferred Stock to vote either separately as a
class, or with the holders of the Company's currently outstanding Common Stock,
on any merger, sale or exchange of assets by the Company or any other
extraordinary corporate transaction. The mere existence of the additional
authorized shares could have the effect of discouraging unsolicited takeover
attempts. The issuance of new shares also could have a dilutive effect on the
voting power of existing holders of Common Stock and on earnings per share and
could be used to dilute the stock ownership of a person or entity seeking to
obtain control of the Company should the Board consider the action of such
entity or person not to be in the best interests of the shareholders and the
Company. To the extent that potential takeovers are thereby discouraged,
shareholders may not have the opportunity to dispose of all or a part of their
stock at a price that may be higher than that prevailing in the market.
<PAGE>
PROPOSAL 3 - AMENDMENT OF THE
1996 STOCK OPTION PLAN
DESCRIPTION OF THE 1996 STOCK OPTION PLAN
THE ESSENTIAL FEATURES OF THE RESTATED 1996 STOCK OPTION PLAN (THE "STOCK
OPTION PLAN") ARE OUTLINED BELOW. FOR A COMPLETE UNDERSTANDING OF THE TERMS OF
THE STOCK OPTION PLAN, AS IT IS PROPOSED TO BE AMENDED, SEE ANNEX VI, WHICH
REFLECTS AMENDMENTS THAT WILL BE MADE IF THE DIVISIONAL STOCK PROPOSAL AND THIS
PROPOSAL 3 ARE APPROVED BY THE SHAREHOLDERS. IF THE DIVISIONAL STOCK PROPOSAL IS
NOT APPROVED BY THE SHAREHOLDERS BUT PROPOSAL 3 IS APPROVED, THEN THE 1996 STOCK
OPTION PLAN WILL BE AMENDED TO INCREASE THE NUMBER OF SHARES OF EXISTING COMMON
STOCK RESERVED FOR ISSUANCE THEREUNDER BY 1,000,000 SHARES BUT NOT TO REFLECT
THE DIVISIONAL STOCK PROPOSAL REVISIONS.
The purpose of the Stock Option Plan is to encourage officers,
directors, employees and consultants of the Company to acquire or increase their
proprietary interest in the success of the Company and to continue their
affiliation with the Company. Eligible employees may be granted either
"incentive stock options" or "non-statutory stock options" to purchase Common
Stock under the Stock Option Plan. Subject to certain conditions, officers,
directors and consultants who are not employees may be granted "non-statutory
stock options" under the Stock Option Plan. An incentive stock option is an
option which qualifies for certain favorable income tax treatment under the
Internal Revenue Code. A non-statutory stock option is an option which is not an
incentive stock option for federal income tax purposes.
As of October 19, 1998, under the Stock Option Plan, there were
outstanding options to purchase 2,786,091 shares of Existing Common Stock under
the Stock Option Plan (of which options to purchase 707,527 shares were
exercisable). The Company has five additional stock option plans: (1) the 1985
Stock Option Plan (the "1985 Plan") under which as of October 19, 1998 there
were outstanding options to purchase 83,375 shares of Existing Common Stock (of
which options to purchase 79,542 shares were exercisable); (2) the 1990 Stock
Option Plan (the "1990 Plan") under which as of October 19, 1998 there were
outstanding options to purchase 4,743,406 shares of Existing Common Stock (of
which options to purchase 3,450,318 shares were exercisable); (3) the 1998 Stock
Option Plan (the "1998 Plan") under which as of October 19, 1998 there were
outstanding options to purchase 1,320,378 shares of Existing Common Stock (of
which no options were exercisable) and (4) the two Alanex Plans under which as
of October 19, 1998, there were outstanding options to purchase 173,533 shares
of Existing Common Stock (of which options to purchase 97,350 shares were
exercisable). At October 19, 1998, stock options to purchase an aggregate of
2,187,284 shares remained available for issuance under the Stock Option Plan,
including 1,000,000 shares approved by the Board on August 6, 1998, stock
options to purchase an aggregate of 8,050 shares remained available for issuance
under the 1985 Plan, stock options to purchase an aggregate of 92,361 shares
remained available for issuance under the 1990 Plan, and stock options to
purchase an aggregate of 179,622 shares remained available for issuance under
the 1998 Plan. No stock options remain available for issuance under the Alanex
Plans.
The Board believes that the Company's stock option programs have
created significant incentives for its employees, officers, directors and
consultants. The Board considers it important for the future success of the
Company to continue to grant stock options on a basis comparable with those
granted by other companies with which it competes in attracting, retaining and
motivating qualified personnel. On August 6, 1998, the Board adopted an
amendment to the Stock Option Plan, to increase by 1,000,000 shares the
aggregate number of shares of Common Stock available for issuance under the
Stock Option Plan. The Board has also approved, in connection with and subject
to approval and implementation of the Divisional Stock Proposal, an amendment to
the Stock Option Plan to conform the Plan to the changes in the Company's
capital structure being made by the Divisional Stock Proposal. See "Proposal
2--The Divisional Stock Proposal--Amendment of Stock Plans."
The total number of shares available under the Stock Option Plan, the
number of shares subject to outstanding options and the exercise price per share
of outstanding options will be subject to adjustment upon the occurrence of
stock dividends, recapitalizations, consolidations, stock splits, combinations
or exchanges of shares of stock or other increases or decreases in the number of
shares of the Company's Common Stock effected without receipt of consideration
by the Company, in order to preclude the dilution or enlargement of benefits
under the Stock
<PAGE>
Option Plan. The Board may also make such equitable adjustments to the Stock
Option Plan and outstanding options as it deems appropriate in order to preclude
the dilution or enlargement of benefits under the Stock Option Plan upon
exchange of all of the outstanding Common Stock of the Company for a different
class or series of capital stock or the separation of assets of the Company,
including a spin-off or other distribution of stock or property by the Company.
If any option under the Stock Option Plan terminates or expires, the shares
allocable to the unexercised portion of the option will again be available for
purposes of the Stock Option Plan. In certain circumstances, where an optionee
uses stock to exercise an option, only the net shares issued to the optionee are
counted against the number of shares issued under the Stock Option Plan. Certain
stock issuances which are later forfeited by the optionee do not count as grants
under the Stock Option Plan.
A dissolution or liquidation of the Company, a merger or consolidation
in which the Company is not the surviving corporation, a reverse merger in which
the Company is the surviving corporation but the Company's Common Stock
outstanding immediately preceding the merger is converted by virtue of the
merger into other property, or other capital reorganization in which more than
fifty percent (50%) of the Company's Common Stock is exchanged, shall cause each
outstanding option to terminate, provided that each optionee shall have the
right immediately prior to the occurrence of such event to exercise his or her
option in whole or in part; however, the exercise date of outstanding options
shall not be accelerated by such event if and to the extent: (i) the option in
connection with such event is either to be assumed by the successor corporation
or parent thereof or to be replaced with a comparable option to purchase shares
of the capital stock of the successor corporation or parent thereof; or (ii) the
option is to be replaced by a comparable cash incentive program of the successor
corporation based on the value of the option on the date of such event.
Notwithstanding the preceding, if within one year from the date of such event,
an employee's employment is involuntarily terminated, then the employee's
outstanding stock options, if any, shall become immediately exercisable.
ADMINISTRATION OF THE STOCK OPTION PLAN
The Stock Option Plan is administered by the Board, except that the
Board may delegate all or any part of its authority to administer the Stock
Option Plan with respect to any group or groups of persons eligible to receive
options to such persons or committee as the Board may determine. The Board has
currently delegated to a committee, composed of certain of the Company's
executive officers, the authority to administer the Stock Option Plan with
respect to persons who are neither officers nor directors of the Company.
Further references herein to the administration of the Stock Option Plan by the
Board refer to the Board or its delegates, unless the context otherwise
indicates. Whether or not the Board has delegated administrative authority, the
Board has final power to determine all questions of policy or expediency that
may arise in the administration of the Stock Option Plan.
The Board has the power to make all determinations necessary or
advisable for the administration of the Stock Option Plan. The Board also has
the final power to construe and interpret the Plans and the options granted
under it. The Board determines, within the limits of the Stock Option Plan, the
persons to whom and the time or times at which options shall be granted, the
type of options to be granted (whether incentive stock options or non-statutory
stock options), the number of shares to be subject to each option, the duration
of each option, the option price and the time or times within which, during the
term of option, all or any portion of an option becomes exercisable ("vests").
If the Divisional Stock Proposal is approved and implemented, the Board or its
delegates shall be entitled to determine as of the grant date, the series of
Common Stock from which shares will be issued on exercise of a specific option.
The Company's current form of stock option agreement provides that an option
vests over a two, three or four year period. In the event that an employee
terminates his or her employment with the Company, unless the Board otherwise
elects, the then nonvested portion of his or her option is forfeited. Subject to
the terms and conditions of the Stock Option Plan, the Board may modify an
outstanding option (including lowering the option price or changing incentive
stock options into non-statutory stock options), change the vesting schedule,
extend or renew outstanding options granted under the Stock Option Plan or
accept the surrender of outstanding options (to the extent not previously
exercised) and authorize the granting of new options in substitution therefor.
The Board may permit an option to be exercised before it is vested, subject to
repurchase rights which terminate on a vesting schedule identical to the vesting
schedule of the option. The Board may also establish other limitations or
restrictions upon exercise of options.
<PAGE>
GRANT AND EXERCISE OF INCENTIVE STOCK OPTIONS AND NON-STATUTORY STOCK OPTIONS
All employees of the Company are eligible to receive incentive stock
options and non-statutory stock options under the Stock Option Plan. Subject to
certain conditions, officers, directors and consultants of the Company who are
not employees are eligible to receive non-statutory stock options but not
incentive stock options. To the extent required by Section 162(m) to qualify
future compensation as "performance based," options to purchase more than
750,000 shares may not be granted in a fiscal year to any individual participant
in the Stock Option Plan.
Incentive stock options under the Stock Option Plan may be granted by
the Board at any time prior to August 6, 2008. Options shall be evidenced by
agreements in such form as the Board shall from time to time determine,
consistent with the terms of the Stock Option Plan. The price per share under
each incentive stock option must be at least 100% of the fair market value of
the Common Stock on the date the option is granted. The Board can set any price
it wishes for shares granted under non-statutory stock options. The price for
shares may be paid in any combination of cash, by cashier's or certified check,
personal check acceptable to the Company, shares of the Company's Common Stock
(including previously owned Common Stock or Common Stock issuable in connection
with the exercise) or "built-in gain" in any options which are terminated as
part of such exercise. The Board may take such steps it deems necessary to
facilitate the payment of the option price. However, payment of the option price
must be in such form as the Board determines and the Board may require
satisfaction of any rules or conditions it deems necessary in connection with
the payment of the option price or on account of any assistance given an
optionee to facilitate such payment. The aggregate fair market value (determined
as of the time the option is granted) of stock with respect to which incentive
stock options are exercisable for the first time by an employee during a
calendar year can not exceed $100,000.
Except as otherwise provided in the option agreement between the Company
and the optionee, each option expires on the date set forth in such agreement.
The term of each incentive stock option cannot be more than ten years from the
date on which the option is granted.
To the extent required by Internal Revenue Code Section 422, options
granted under the Stock Option Plan may not be transferred other than by will or
the laws of descent and distribution and may be exercised during the holder's
lifetime only by the holder. However, non-statutory stock options can be
transferred to a trust for the benefit of the optionee, or members of his
family.
AMENDMENT AND TERMINATION
The Board may at any time revise, amend, suspend or terminate the Stock
Option Plan. No amendment shall, without the approval of the shareholders,
change the number of shares for which incentive stock options may be granted
under the Stock Option Plan, reduce the price per share at which incentive stock
options may be offered under the Stock Option Plan below 100% of the fair market
value on the date of grant, or modify the eligibility requirements for the class
of employees eligible to receive incentive stock options.
TAX WITHHOLDING
Optionees are required to pay the Company cash for the amount of the
tax liability incurred by the optionee in connection with the exercise of his or
her option. However, the Board may in its sole discretion permit an optionee to
reimburse the Company for such tax liability by the actual or imputed delivery
to the Company of shares of its Common Stock.
FEDERAL INCOME TAX CONSEQUENCES
The principal tax consequences of the grant and exercise of incentive
stock options and non-statutory stock options under current provisions of the
federal income tax laws may be summarized as follows:
<PAGE>
INCENTIVE STOCK OPTIONS. The grant of an incentive stock option does
not produce taxable income for the employee or a tax deduction for the Company.
Upon exercise of an incentive stock option, the excess of the fair market value
of the shares acquired over the amount paid by the employee for the shares will
be an item of tax preference to the employee, which may be subject to the
alternative minimum tax for the taxable year of exercise. If no disposition of
the stock is made within two years from the date of grant of the incentive stock
option nor within one year after the transfer of the shares to the employee, the
employee will not realize ordinary income as a result of the exercise and
subsequent sale of the incentive stock option. Any gain or loss realized on the
ultimate sale of the shares must be reported by the employee as long-term
capital gain or loss. The Company is not entitled to any deduction as a result
of the exercise of the incentive stock option.
If the employee disposes of the shares within the two-year or one-year
periods referred to above, the excess of the fair market value of the shares at
the time of exercise (or the proceeds of disposition, if less) over the amount
paid by the employee for the shares will at that time be taxable to the employee
as ordinary income. The same amount will be deductible by the Company, subject
to the general rules relating to the reasonableness of compensation. The excess
(if any) of the proceeds of disposition over the fair market value of the shares
on the date of exercise must be reported by the employee as a long-term capital
gain if the shares have been held for more than one year, or as a short-term
capital gain if the shares have been held for one year or less. If no gain is
realized, there will be no ordinary income and any loss will be long-term or
short-term capital loss.
NON-STATUTORY STOCK OPTIONS. The grant of a non-statutory stock option
under the Stock Option Plan does not produce taxable income for the optionee or
a tax deduction for the Company. Except as described below, upon exercise of a
non-statutory stock option, the excess of the fair market value of the shares
acquired over the amount paid by the optionee will be taxable to the optionee as
ordinary income.
The Company will be entitled to a deduction for income tax purposes in
an amount equal to the ordinary income taxable to the optionee in the year in
which such ordinary income is recognized. Any additional profit or loss realized
by an optionee on disposition of the shares will not result in any additional
tax deduction to the Company.
Similar rules apply if the Company permits the exercise of an
"unvested" option with the issued stock being subject to certain repurchase
rights or other substantial risks of forfeiture.
USING STOCK TO EXERCISE OPTIONS. Special rules apply if an optionee uses
already owned stock of the Company to pay all or part of the exercise price of
an incentive or non-statutory stock option. The use of already owned stock to
pay all or part of the exercise price of a non-statutory stock option permits an
optionee to defer the date when the gain on the surrendered shares which are
used to pay the exercise price of the option is recognized for tax purposes.
That is, using already owned shares to exercise a non-statutory stock option
permits an optionee to finance the exercise of the option without paying current
tax on the unrealized appreciation in value of the surrendered shares. An option
exercise using already owned stock is treated as a "tax-free exchange" with
respect to that number of shares received on the option exercise which equals
the number of shares surrendered. The optionee's basis in these shares is the
same as his or her basis in the shares surrendered , and the capital gain
holding period on such shares runs without interruption from the date when the
surrendered shares were acquired. Any additional shares received by the optionee
on the exercise will trigger ordinary income taxation equal to the fair market
value of the additional shares over the consideration paid by the optionee in
connection with the exercise. The optionee's basis in the additional shares is
equal to their fair market value on the date the shares were received, and the
capital gain holding period on such shares commences on that date. Similarly,
the use of previously owned stock to pay the exercise price of an incentive
stock option permits an employee to defer tax recognition of gain on the
surrendered shares. However, if an employee pays all or part of the exercise
price of an incentive stock option by surrendering stock previously acquired in
the exercise of any other incentive stock option and such previously acquired
stock has not been held for the statutory holding period, then the surrender of
such stock to exercise the incentive stock option will be treated as a
disqualifying disposition of the prior incentive stock option with the tax
consequences described above. Furthermore, complex tax rules apply concerning
the use of shares to exercise an incentive stock option, especially with regard
to an employee's basis in the shares received on the exercise.
<PAGE>
ACCOUNTING TREATMENT
Under the present financial accounting rules, neither the grant nor the
exercise of options issued to employees at fair market value will result in any
charge to the Company's earnings. However, the Company will be required to
calculate the "fair value" of all option grants at the time of grant and
disclose such value on a pro-forma basis. The grant of options with exercise
prices less than the fair market value of the shares at the time of grant will
result in a compensation expense equal to the discount from market at the time
of grant. The Company will have to report such expense pro rata as the shares
underlying the option become exercisable. Accordingly, the grant of discounted
options under the Stock Option Plan would result in a charge to reported
earnings. In all events, the number of dilutive options outstanding under the
Stock Option Plan will be a factor in determining the Company's reported
earnings per share.
REQUIRED VOTE
Approval by the holders of a majority of the shares of the Existing
Common Stock represented and voting at the Meeting on this matter (which shares
constitute at least a majority of the required quorum for the Meeting) is
required for the adoption of this proposal.
THE BOARD RECOMMENDS THAT YOU VOTE FOR THE APPROVAL OF THIS PROPOSAL, WHICH
IS SET FORTH AS ITEM 3 ON THE PROXY CARD.
<PAGE>
PROPOSAL 4 - AMENDMENT OF THE
AGOURON PHARMACEUTICALS, INC. EMPLOYEE STOCK PURCHASE PLAN
DESCRIPTION OF THE EMPLOYEE STOCK PURCHASE PLAN
THE ESSENTIAL FEATURES OF THE RESTATED EMPLOYEE STOCK PURCHASE PLAN
(THE "ESPP") ARE OUTLINED BELOW. FOR A COMPLETE UNDERSTANDING OF THE TERMS OF
THE ESPP AS IT IS PROPOSED TO BE AMENDED, SEE ANNEX VII, WHICH REFLECTS
AMENDMENTS THAT WILL BE MADE IF THE DIVISIONAL STOCK PROPOSAL AND THIS PROPOSAL
4 ARE APPROVED BY THE SHAREHOLDERS. IF THE DIVISIONAL STOCK PROPOSAL IS NOT
APPROVED BY THE SHAREHOLDERS BUT PROPOSAL 4 IS APPROVED, THEN THE ESPP WILL BE
AMENDED TO INCREASE THE NUMBER OF SHARES OF EXISTING COMMON STOCK AVAILABLE FOR
PURCHASE THEREUNDER BY 200,000 SHARES BUT NOT TO REFLECT THE DIVISIONAL STOCK
PROPOSAL REVISIONS.
As of October 19, 1998, a total of 131,156 shares of Common Stock
remain available for purchase under the ESPP. Any full-time employee is eligible
to participate in the ESPP after he or she has been continuously employed by the
Company for three consecutive months. Eligible employees may elect to contribute
up to 15% of their total compensation during each offering period, subject to
certain statutory limits. Additionally, each employee is only entitled to
purchase up to a maximum of 3,000 shares of Common Stock during any one year. On
the last day of the offering period or such other date(s) during the offering
period which the Board has chosen prior to the commencement of the offering
period (Purchase Date) the Company will apply the amount contributed by the
participant to purchase whole shares of Common Stock. Shares of Common Stock are
purchased for eighty-five percent (85%) of the lower of the fair market value
per share of Common Stock on (i) the first day of the offering period or (ii)
the Purchase Date. All expenses incurred in connection with the implementation
and administration of the ESPP are paid by the Company. The ESPP is administered
by the Board; provided, however, that the Board may delegate all or any part of
its authority to administer the ESPP. Termination of employment for any reason
shall be treated as an automatic withdrawal by the participant from the ESPP.
The Board has the right to amend, suspend or terminate the ESPP at any
time and without notice; provided, no participant's existing rights are
adversely affected thereby and except that any amendment to increase the
aggregate number of shares available under the ESPP shall be subject to approval
by a vote of the shareholders of the Company.
On August 6, 1998, the Board adopted an amendment to the ESPP subject
to the approval of the Company's shareholders to increase by 200,000 shares the
aggregate number of shares available for purchase under the ESPP. The Board has
also approved, in connection with and subject to approval and implementation of
the Divisional Stock Proposal, the amendment and restatement of the ESPP to
conform the ESPP to the changes in the Company's capital structure being made by
the Divisional Stock Proposal. See "Proposal 2--The Divisional Stock
Proposal--Amendment of Stock Plans."
CERTAIN FEDERAL INCOME TAX INFORMATION
The ESPP, and the right of participants to make purchases thereunder,
is intended to qualify under the provisions of Sections 421 and 423 of the
Internal Revenue Code. Under these provisions, no income will be taxable to a
participant at the time of grant of the option or purchase of shares. Upon
disposition of the shares, the participant will generally be subject to tax. If
the shares have been held by the participant for more than two years after the
first day of the offering period and more than one year after the purchase date
of the shares, the lesser of (a) the excess of the fair market value of the
shares at the time of such disposition over the purchase price of the shares
subject to option, or (b) the excess of the fair market value of the shares on
the first day of the offering period over the deemed purchase price of the
shares subject to option, will be treated as ordinary income, and any further
gain upon such disposition will be treated as capital gain. If the shares are
disposed of before the expiration of the holding periods described above, the
excess of the fair market value of the shares on the date of purchase over the
purchase price will be treated as ordinary income, and any further gain or loss
on such disposition will be capital gain or loss. Different rules may apply with
respect to optionee's subject to Section 16(b) of the Exchange Act. The Company
is not entitled to a deduction for amounts taxable to a participant, except to
the extent of ordinary income reported by participants upon disposition of
shares prior to the expiration of the holding periods described above.
<PAGE>
The foregoing is only a summary of the United States federal income tax
consequences of the ESPP to participants and the Company and does not purport to
be complete. Reference should be made to the applicable provisions of the
Internal Revenue Code. In addition, the foregoing summary does not discuss the
income tax consequences of a participant's death or the income tax laws of any
municipality, state or foreign country in which the participant may reside.
REQUIRED VOTE
Approval by the holders of a majority of the shares of the Existing
Common Stock represented and voting at the Meeting on this matter (which shares
constitute at least a majority of the required quorum for the Meeting) is
required for the adoption of this proposal.
THE BOARD RECOMMENDS THAT YOU VOTE FOR THE APPROVAL OF THIS PROPOSAL, WHICH
IS SET FORTH AS ITEM 4 ON THE PROXY CARD.
<PAGE>
PROPOSAL 5
RATIFICATION OF SELECTION OF INDEPENDENT ACCOUNTANTS
The Board has selected the firm of PricewaterhouseCoopers LLP as
independent accountants for the Company for the fiscal year ending June 30,
1999, it being intended that such selection would be proposed for ratification
by the affirmative vote of a majority of the shares of the Existing Common Stock
represented and voting at the Meeting on this matter (which shares constitute at
least a majority of the required quorum for the Meeting). One or more members of
PricewaterhouseCoopers LLP are expected to be present at the Meeting and will be
available to respond to questions and make a statement if they desire to do so.
THE BOARD RECOMMENDS THAT YOU VOTE FOR THE RATIFICATION OF THE
SELECTION OF PRICEWATERHOUSECOOPERS LLP, WHICH IS SET FORTH AS ITEM 5 ON THE
PROXY CARD.
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information as of October 19, 1998
relating to the beneficial ownership of the Existing Common Stock by (i) each
person known by the Company to beneficially own more than 5% of the outstanding
shares of the Company's Common Stock, (ii) each director, (iii) each of the
executive officers named in the Summary Compensation Table below, and (iv) all
executive officers and directors as a group.
<TABLE>
<CAPTION>
Beneficial Ownership(1)
Number of Percentage of
Beneficial Owner Shares(9) Total
<S> <C> <C>
Wellington Management Co. 5,196,000 16.61%
75 State Street, Boston, MA 02109
T. Rowe Price 2,420,000 7.74%
100 E. Pratt St., Baltimore, MD 21202
Peter Johnson(2) 706,533 2.22%
Gary E. Friedman(2) Family Trust(8) 294,123 *
John N. Abelson(2)(3)(6) 102,943 *
Patricia M. Cloherty(2) 27,659 *
A. E. Cohen(2) 73,333 *
Michael E. Herman(2)(4) 83,333 *
Irving S. Johnson(2) 41,933 *
Antonie T. Knoppers(2) 51,533 *
Melvin I. Simon(2)(3) and Linda F. Simon Living Trust(5) 122,843 *
Marvin R. Brown 194,995 *
Barry D. Quart 152,481 *
R. Kent Snyder(7) 175,035 *
All executive officers and directors as a group (19 persons) 2,706,671 8.14%
</TABLE>
* less than 1%.
(1) Unless otherwise indicated, the persons named in the above table exercise
sole voting and investment powers with respect to all shares beneficially
owned by them, subject to applicable community property laws. The number of
shares beneficially owned includes the following number of shares issuable
upon exercise of stock options exercisable within 60 days of October 19,
1998: Mr. Johnson, 596,923 shares; Mr. Friedman, 241,599 shares; Dr.
Abelson, 33,333 shares; Ms. Cloherty, 13,333 shares; Mr. Cohen, 43,333
shares; Mr. Herman, 39,333 shares; Dr. Johnson, 15,833 shares; Dr.
Knoppers, 43,333 shares; Dr. Simon, 33,333 shares; Dr. Brown, 23,077
shares; Dr. Quart, 117,266 shares; Mr. Snyder, 168,932 shares; and all
executive officers and directors as a group, 1,952,280 shares.
(2) Director.
(3) Does not include 1,106,000 shares held by The Agouron Institute, of which
Drs. Abelson and Simon are directors. As directors, they share voting and
investment powers as to the shares held by The Agouron Institute.
(4) Includes 20,000 shares held by the Herman Family Trading Company, a family
partnership of which Mr. Herman is the general partner, 10,000 shares held
by Vail Fishing Partners in which Mr. Herman has a 50% general partner
interest and 2,000 shares held by Mrs. Herman, of which Mr. Herman
disclaims any beneficial ownership.
(5) Shared voting and investment power.
(6) Includes 2,350 shares held by Dr. Abelson as custodian for his minor
children, of which Dr. Abelson disclaims any beneficial ownership.
(7) Includes 800 shares held by immediate family members, of which Mr. Snyder
disclaims any beneficial ownership.
(8) Includes 5,408 shares held by wife as custodian for minor children of which
Mr. Friedman disclaims any beneficial ownership.
(9) Adjusted to reflect the two-for-one stock split in the form of a stock
dividend in August 1997.
<PAGE>
EXECUTIVE COMPENSATION
COMPENSATION OF DIRECTORS
Non-employee members of the Board receive cash compensation in the
amount of $250 per Board meeting for their services as Board members, and are
eligible for reimbursement of their expenses incurred to attend each such
meeting in accordance with Company policy. In addition to meeting fees, certain
non-employee directors received consulting fees during fiscal 1998. For
scientific consultation, Dr. Abelson received $30,040; Dr. Knoppers, $6,000; Dr.
Johnson, $18,750 and Dr. Simon, $26,900. For special consultation concerning
corporate development issues, Mr. Cohen received $18,250 and Mr. Herman received
$750.
COMPENSATION OF EXECUTIVE OFFICERS
The following table sets forth the aggregate compensation paid or
accrued by the Company to the Chief Executive Officer and to the four other most
highly compensated executive officers whose annual compensation exceeded
$100,000 for the fiscal year ended June 30, 1998 (collectively the "named
executive officers") for service during the fiscal years ended June 30, 1998,
1997 and 1996:
Summary Compensation Table
<TABLE>
<CAPTION>
Long-Term
Compensation
Name Annual Compensation Awards(2)
Principal Stock All Other
Position Year Salary(1) Bonus Options Compensation(3)
<S> <C> <C> <C> <C> <C>
Peter Johnson 1998 $ 395,000 $ 230,000 40,000 $ 2,998
President and Chief 1997 330,000 165,000 100,000 2,250
Executive Officer 1996 285,000 100,000 180,000 1,647
Marvin R. Brown(4) 1998 230,000 65,000 10,000 2,400
Vice President, 1997 23,523 0 0 0
President of Alanex 1996 -- -- -- --
Gary E. Friedman 1998 212,500 100,000 17,000 11,232
Corporate Vice President, 1997 195,000 70,000 26,000 2,250
General Counsel 1996 175,500 50,000 50,000 1,589
Barry D. Quart(5) 1998 230,000 125,000 21,000 2,713
Senior Vice President, 1997 180,000 115,500(5) 44,000 2,953
Regulatory Affairs 1996 165,000 70,500(5) 72,000 16,587
R. Kent Snyder(5) 1998 230,000 150,000 21,000 3,050
Senior Vice President, 1997 200,000 102,000(5) 44,000 2,250
Commercial Affairs 1996 178,500 62,200(5) 64,000 1,777
</TABLE>
(1) Includes amounts deferred out of compensation under the Company's 401(k)
Plan otherwise payable in cash during each fiscal year.
(2) The Company has made no restricted stock awards, has not granted any stock
appreciation rights and has no other long-term incentive plans.
(3) (a) During 1998, the Company made matching contributions to the
Company's 401(k) Plan in the following amounts: Mr. Johnson, $2,998;
Dr. Brown, $2,400; Mr. Friedman, $3,063; Dr. Quart, $2,713; and Mr.
Snyder $3,050.
(b) During 1997, the Company made matching contributions to the
Company's 401(k) Plan in the following amounts: Mr. Johnson, $2,250;
Mr. Friedman $2,250; Dr. Quart, $2,953; and Mr. Snyder, $2,250.
(c) During 1996, the Company made matching contributions to the Company's
401(k) Plan in the following amounts: Mr. Johnson, $1,647; Mr.
Friedman, $1,589; Dr. Quart, $1,959; and Mr. Snyder, $1,777.
(d) During 1996, the Company reimbursed Dr. Quart for relocation costs in
the amount of $14,628.
(e) During 1998, Mr. Friedman sold accrued but unused vacation back to the
Company in the amount of $8,169.
(4) Dr. Brown joined the Company in May 1997 with the acquisition of Alanex
Corporation.
(5) For Dr. Quart and Mr. Snyder, a portion of the bonus amount was
subsequently used to partially repay their outstanding relocation loans.
These loans were paid in full on June 30, 1997.
<PAGE>
The following table sets forth certain information with respect to
individual grants of stock options made during the fiscal year ended June 30,
1998, to each of the named executive officers:
Option Grants in Fiscal 1998
<TABLE>
<CAPTION>
Potential Realizable Value at
Assumed Annual Rates of
Stock Price Appreciation
Individual Grants for Option Term(2)_
% of Total
Options
Granted to
Employees
Options in Fiscal Exercise Expiration
Name Granted(1) Year Price Date 5% 10%
<S> <C> <C> <C> <C> <C> <C>
Peter Johnson 30,145# 2.70% $30.4375 6/29/08 $577,035 $1,462,320
9,855* 0.88 30.4375 6/29/08 188,644 478,061
Marvin R. Brown 145# 0.01 30.4375 6/29/08 2,776 7,034
9,855* 0.88 30.4375 6/29/08 188,644 478,061
Gary E. Friedman 7,145# 0.64 30.4375 6/29/08 136,769 346,601
9,855* 0.88 30.4375 6/29/08 188,644 478,061
Barry D. Quart 11,145# 1.00 30.4375 6/29/08 213,337 540,639
9,855* 0.88 30.4375 6/29/08 188,644 478,061
R. Kent Snyder 11,145# 1.00 30.4375 6/29/08 213,337 540,639
9,855* 0.88 30.4375 6/29/08 188,644 478,061
</TABLE>
(1) During fiscal 1998, the Agouron Stock Option Plan ("Plan") for executive
officers and directors was administered by the Board. The Board, based upon
the recommendation of the Directors Compensation Committee, determines the
number of shares to be granted and the term of such grants to each
executive officer and director. The options granted in fiscal 1998 were
either incentive stock options(*) or non-statutory stock options(#), have
exercise prices equal to the fair market values on the date of grant, vest
over a period of three years and have a term of ten years. Upon certain
corporate events as defined in the Plan which result in a change of
control, the exercise date of all outstanding options for all employees,
including executive officers, may be accelerated. The Plan also permits the
Company to assist an employee in using a so-called "cashless" exercise
procedure to pay the option exercise price.
(2) Potential realizable value is based on an assumption that the stock price
of the Common Stock appreciates at the annual rate shown (compounded
annually) from the date of grant until the end of the ten year option term.
These numbers are calculated based on the requirements promulgated by the
Securities and Exchange Commission and do not reflect the Company's
estimate of future stock price growth. Any such growth would benefit all
shareholders.
<PAGE>
The following table sets forth certain information with respect to each
exercise of stock options during the fiscal year ended June 30, 1998, by each of
the named executive officers and the number and value of unexercised options
held by such named executive officers as of June 30, 1998:
Option Exercises in Fiscal 1998
And Value of Options at June 30, 1998
<TABLE>
<CAPTION>
Number of Unexercised Value of Unexercised
Options at In-the-Money Options at
Shares June 30, 1998(2) June 30, 1998(1)
Acquired on Value
Name Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
<S> <C> <C> <C> <C> <C> <C>
Peter Johnson 125,000 $5,692,095 596,923 205,767 $ 11,290,804 $ 1,312,900
Marvin R. Brown 2,500 85,744 17,845 17,325 538,428 221,014
Gary E. Friedman 1,000 24,188 241,599 61,001 4,988,364 348,337
Barry D. Quart 32,000 1,233,037 133,266 89,334 1,982,900 513,000
R. Kent Snyder 12,500 406,045 168,932 81,668 2,983,727 392,673
</TABLE>
(1) Value calculated as market value of Company stock on June 30, 1998,
minus exercise price multiplied by the number of shares
(2) Adjusted to reflect
the two-for-one stock split in the form of a stock dividend in August 1997.
<PAGE>
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION(1)
OVERVIEW AND PHILOSOPHY
The Directors Compensation Committee (the "Committee") is composed
entirely of outside directors and is responsible for developing and making
recommendations to the Board with respect to the Company's executive
compensation policies and practices, including the establishment of the annual
total compensation for the chief executive officer (the "CEO") and all executive
officers. The Committee has available to it an outside compensation consultant
and access to independent compensation data. The Board is responsible for
approving and implementing the compensation recommendations of the Committee.
The recommendations made by the Committee to the Board have generally been
approved without any significant modification.
The objectives of the Company's executive compensation program are to
attract, retain and motivate highly qualified executive personnel. These
objectives are satisfied through the use of three principal compensation
elements: base salary, cash bonus payments and stock options.
BASE SALARY
Base salary levels for the Company's executive officers are based on
the concept of pay for performance and are competitively set relative to the
compensation of other executives in the biotechnology industry. Extensive salary
survey data is available on the industry (notably, the annual "Biotechnology
Compensation and Benefits Survey" conducted by Radford Associates and Alexander
& Alexander Consulting Group) and is utilized by the Committee in establishing
annual base salaries. In determining base salaries, the Committee also considers
corporate performance and progress in the immediately preceding fiscal year,
individual experience and performance, specific issues which are relevant to the
Company and general economic conditions. The base salary of the CEO and all
other executive officers is reviewed annually. During fiscal year 1998, the base
salaries paid to the executive officers other than the CEO approximated the 75th
percentile of the above-noted industry survey data.
BONUS PAYMENTS
Annual cash bonus payments are discretionary. Bonus payments, if any,
to executive officers, including the CEO, are based on two principal factors:
corporate performance as compared to the Company's annual goals and objectives
and individual performance relative to corporate performance and individual
goals and objectives.
Bonus payments in 1998 were generally in recognition of the
satisfaction of several significant corporate objectives during the year,
including the establishment of the Company's first product, VIRACEPT(R)
(nelfinavir mesylate) as the market leader among all HIV protease inhibitors,
the in-licensing of three development stage compounds to supplement the
Company's internal R&D pipeline, the continued preclinical and clinical
development of the Company's cancer and anti-viral agents and the satisfaction
of all significant financial targets for fiscal 1998.
Bonus payment recommendations for executive officers other than the CEO
are initiated by the CEO and submitted to the Committee for review and
subsequent submission to the Board. Bonus payment recommendations for the CEO
are initiated by the Committee and submitted to the Board.
Total base salary and any bonus payments are compared to "total
compensation" of peers as reported by the previously noted industry survey. Such
total compensation for the executive officers of the Company is at or above the
averages of such data, which reflects the Committee's belief that the relative
levels of corporate performance during the period were also above average.
(1) The material in this report is not soliciting material, is not deemed filed
with the SEC, and is not incorporated by reference in any filing of the
Company under the Securities Act of 1933 (the "Securities Act"), as
amended, or the Securities Exchange Act of 1934 (the "Exchange Act"), as
amended, whether made before or after the date of this Proxy Statement and
irrespective of any general incorporation language in such filing.
<PAGE>
STOCK OPTIONS
To conserve its cash resources, the Company places special emphasis on
equity-based incentives to attract, retain and motivate executive officers as
well as other employees. Under the Company's stock option plans, grants are
generally priced at the fair market value on the date of grant, vest over a
period of three or four years and have a term of ten years. Grants are made to
all employees on their date of hire based on salary level and position. All
employees, including executive officers, are eligible for subsequent,
discretionary grants which are generally based on either individual or corporate
performance. It is the Committee's intent that the interests of the Company's
shareholders and the executive officers be closely aligned through the use of
stock options. Option grants recommended by the Committee are submitted to the
Board for approval. Based on recent peer-company proxy data compiled by the
Company, the level of option grants to each executive officer in 1998 remains
competitive, and the resultant total option position as a percent of total
shares outstanding represents approximately the 70th to 90th percentile of such
positions.
CHIEF EXECUTIVE OFFICER COMPENSATION
During 1998, Mr. Johnson's base salary of $395,000 was based on
individual and corporate performance, and approximated the average of the
updated industry data for base salaries of CEOs.
During 1998, Mr. Johnson was awarded a bonus of $230,000 in recognition
of the satisfaction of several significant corporate objectives, including the
establishment of VIRACEPT(R) as the number one HIV protease inhibitor in the
United States with product sales in the United States of $358 million for fiscal
1998. The Committee believes that Mr. Johnson has made a significant
contribution during 1998 in enhancing shareholder value and establishing a sound
base for the continued enhancement of shareholder value through his managerial
and entrepreneurial efforts.
The stock options awarded to Mr. Johnson during fiscal 1998 are
competitive and consistent with the purpose of the stock option plans. The
resultant total option position as a percent of total shares outstanding
represents approximately the 75th percentile for peer CEO positions.
EXECUTIVE COMPENSATION DEDUCTION LIMITATIONS
In 1993, Section 162(m) of the Internal Revenue Code ("Section 162(m)")
was enacted which disallows the deductibility by the Company of any compensation
over $1 million per year paid to each of the chief executive officer and the
four other most highly compensated executive officers, unless certain
performance-based compensation criteria are satisfied. While it is the
Committee's firm belief and intent that compensation from base salary and cash
bonus payments will not approach the annual Section 162(m) limitation in the
foreseeable future, additional "compensation" from the exercise of option grants
pursuant to the Company's stock option plans could result in the annual
limitation being exceeded. Accordingly, the Company's 1990 and 1996 Stock Option
Plans contain certain provisions which exempt compensation resulting from such
option exercises from the $1 million limitation. The Committee will continue to
monitor all forms of compensation to its executive officers to ensure that the
Company may maximize the tax benefits of such compensation.
Directors Compensation Committee
Michael E. Herman, Chairman
John N. Abelson, Ph.D.
A. E. Cohen
<PAGE>
DIRECTORS COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Directors Compensation Committee is composed exclusively of three
outside directors: Mr. Herman, Mr. Cohen and Dr. Abelson. The Company is not
aware of any Committee interlocks.
PERFORMANCE MEASUREMENT COMPARISON(1)
The chart set forth below shows the value of an investment of $100 on
June 30, 1993 in the Existing Common Stock, The Nasdaq Stock Market Index (U.S.
Companies) ("Nasdaq Market (US)") and the Nasdaq Pharmaceuticals Index ("Nasdaq
Pharmaceuticals"). The total returns assume the reinvestment of dividends,
although cash dividends have not been declared on the Existing Common Stock. The
Existing Common Stock is traded on The Nasdaq Stock Market and is a component of
both the Nasdaq Market (US) and the Nasdaq Pharmaceuticals Index. The
comparisons in the chart are required by the Securities and Exchange Commission
and are not intended to forecast or be an indicator of possible future
performance of the Company's Common Stock.
(OBJECT OMITTED)
6/30/93 6/30/94 6/30/95 6/30/96 6/30/97 6/30/98
Agouron Common Stock $100.00 $112.50 $236.26 $390.00 $808.76 $606.20
Nasdaq Market (US) 100.00 100.96 134.77 173.03 210.38 277.69
Masdaq Pharmaceuticals 100.00 83.65 111.03 163.50 166.34 170.68
(1) This section is not "soliciting material," is not deemed filed with the
Securities and Exchange Commission and is not to be incorporated by
reference in any filing of the Company under the Securities Act or the
Exchange Act.
<PAGE>
CERTAIN TRANSACTIONS
All transactions with affiliates have been and will continue to be on
terms no less favorable to the Company than could be obtained from unaffiliated
parties. Furthermore, all transactions with affiliates and any loans to Company
officers, affiliates or shareholders must be approved by a majority of the
disinterested directors.
As permitted by California law, the Articles of Incorporation and
bylaws of the Company currently provide for the limitation of director liability
for monetary damages for breach of duty to the Company and for indemnification
of agents (including officers and directors) to the fullest extent permitted
under the California General Corporation Law. The Company has entered into
Indemnification Agreements with all of its directors and officers. Additionally,
the Company has in effect a directors and officers liability insurance policy
which insures directors and officers of the Company against loss arising from
claims made against them due to wrongful acts while acting in their individual
and collective capacities as directors and officers.
SUBMISSION OF SHAREHOLDER PROPOSALS
To be considered for inclusion in the Company's proxy statement and
form of proxy for its 1999 Annual Meeting of Shareholders, a shareholder
proposal must be received at the principal executive offices of the Company not
later than August 18, 1999. If a shareholder wishes to have a proposal
considered at the 1999 Annual Meeting but does not seek to have the proposal
included in the Company's proxy statement and form of proxy for that meeting,
and if the shareholder does not notify the Company of the proposal by November
1, 1999, then the persons appointed as proxies by management may use their
discretionary voting authority to vote on the proposal when the proposal is
considered at the 1999 Annual Meeting, even though there is no discussion of the
proposal in the proxy statement for that meeting. It is recommended that
shareholders submitting proposals or notices of proposal direct them to the
Secretary of the Company and utilize Certified Mail-Return Receipt Requested.
LEGAL MATTERS
Certain legal matters with respect to the validity of the Agouron
Pharmaceuticals Stock and the Oncology Division Stock and with respect to the
matters set forth under "Proposal 2--The Divisional Stock Proposal--Certain
Federal Income Tax Considerations" will be passed upon for the Company by
Pillsbury Madison & Sutro LLP, San Diego, California.
EXPERTS
The financial statements as of June 30, 1997 and 1998 and for each of
the three years in the period ended June 30, 1998 included in this Proxy
Statement/Prospectus and the financial statements incorporated in this Proxy
Statement/Prospectus by reference to the Annual Report on Form 10-K for the year
ended June 30, 1998 have been so included and incorporated in reliance on the
report of PricewaterhouseCoopers LLP, independent accountants, given on the
authority of said firm as experts in auditing and accounting.
OTHER MATTERS
The Company's Annual Report to Shareholders for the fiscal year ended
June 30, 1998 accompanies this Proxy Statement.
Section 16(a) of the Exchange Act requires the Company's executive
officers and directors, and persons who own more than 10% of a registered class
of the Company's equity securities, to file reports of ownership and changes in
ownership with the Commission and The Nasdaq Stock Market. Executive officers,
directors and greater than 10% shareholders are required by Commission
regulation to furnish the Company with copies of all Section 16(a) forms they
file. Based solely on review of the copies of such forms furnished to the
Company, or written representations that no Forms 5 were required, the Company
believes that, during the applicable reporting period ending June 30, 1998, all
Section 16(a) filing requirements applicable to its executive officers,
directors and greater than 10% beneficial owners were satisfied.
<PAGE>
The Company's Board does not know of any other matters to be presented
at the Meeting. However, if any other business is properly presented at the
Meeting for action, the persons named in the enclosed form of Proxy will vote
such Proxy according to their best judgment on such matters.
BY ORDER OF THE BOARD OF DIRECTORS
Gary E. Friedman, Secretary
November 12, 1998
<PAGE>
ANNEX INDEX
Annex I - Index of Defined Terms
Annex II - Proposed Restated Articles of Incorporation
Annex III - Agouron Pharmaceuticals, Inc
Management's Discussion and Analysis of Financial Condition
Consolidated Financial Statements
Annex IV - Agouron Pharmaceuticals
Description of Business
Management's Discussion and Analysis of Financial Condition
Combined Financial Statements
Annex V - Agouron Oncology Division
Description of Business
Management's Discussion and Analysis of Financial Condition
Combined Financial Statements
Annex VI - Amended and Restated Agouron Stock Option Plan
Annex VII - Amended and Restated Employee Stock Purchase Plan
<PAGE>
ANNEX I
Index of Defined Terms
1985 Plan.....................................................................66
1990 Plan.....................................................................66
1998 Plan.....................................................................66
Acquiring Person..............................................................62
Agouron........................................................................1
Agouron Pharmaceuticals Stock..................................................1
Agouron Pharmaceuticals Available Dividend Amount.............................55
Agouron Stock Right...........................................................62
Articles of Incorporation......................................................5
Available Dividend Amount.....................................................27
Board..........................................................................1
California Corporations Code..................................................13
ChaseMellon...................................................................58
Code..........................................................................59
Commercial Product or Service.................................................50
Commission.....................................................................2
Common Stock...................................................................1
Common Stock Right............................................................62
Company........................................................................1
Convertible Securities..................................................Annex II
Designated Shares.............................................................25
Distribution Date.............................................................62
Division.......................................................................8
Divisional Stock...............................................................4
Divisional Stock Proposal......................................................1
Divisional Stocks..............................................................2
Effective Date.................................................................6
Equity Line...................................................................28
ESPP..........................................................................71
Exchange Act...................................................................2
Existing Certificates.........................................................58
Existing Common Stock..........................................................1
Fair Market Value.............................................................16
FDA...........................................................................31
GART..........................................................................10
GMP...........................................................................32
GnRH..........................................................................10
HMOs..........................................................................35
Interdivision Transactions....................................................50
IRS...........................................................................13
Meeting........................................................................1
Merger Right..................................................................63
MMPs..........................................................................10
Nasdaq Market (US)............................................................80
Nasdaq National Market.........................................................1
Nasdaq Pharmaceuticals........................................................80
Oncology Division Stock........................................................1
<PAGE>
Oncology Stock Right..........................................................62
Other Property................................................................60
PaineWebber...................................................................11
PARP..........................................................................10
Permitted Offer...............................................................63
Plan..........................................................................76
Preferred Stock...............................................................14
PricewaterhouseCoopers LLP.....................................................9
Proxy Statement................................................................1
Purchase Date.................................................................71
Purchasing Division...........................................................50
Reclassification..............................................................42
Record Date....................................................................8
Redemption Price..............................................................63
Registration Statement.........................................................2
Restated Articles ............................................................14
Restated Rights Agreement.....................................................62
Rights........................................................................62
Rights Agent..................................................................62
Rights Agreement..............................................................62
Securities Act.................................................................2
Selling Division..............................................................50
Series B Shares...............................................................62
Series C Shares...............................................................62
Series B Participating Preferred Stock..................................Annex II
Series C Participating Preferred Stock..................................Annex II
Shareholder Rights Plan.......................................................30
Stock Option Plan.............................................................66
Stock Plans...................................................................61
Subscription Right............................................................63
TIN...........................................................................60
VEGF..........................................................................10
Voting Stock..................................................................62
<PAGE>
ANNEX II
RESTATED
ARTICLES OF INCORPORATION
OF
AGOURON PHARMACEUTICALS, INC.
Peter Johnson and Gary E. Friedman certify that:
1. They are the President and Secretary, respectively, of
AGOURON PHARMACEUTICALS, INC. a California corporation ("Corporation").
2. The articles of incorporation of the Corporation are amended and
restated to read as follows:
ARTICLE I
The name of the Corporation is Agouron Pharmaceuticals, Inc.
ARTICLE II
The purpose of the Corporation is to engage in any lawful act or
activity for which a Corporation may be organized under the General Corporation
Law of California other than the banking business, the trust company business or
the practice of a profession permitted to be incorporated by the California
Corporations Code.
ARTICLE III
A. CLASSES OF STOCK. The Corporation is authorized to issue two classes
of shares to be designated Common Stock ("Common Stock") and Preferred Stock
("Preferred Stock"), respectively. The total number of shares of capital stock
that the Corporation is authorized to issue is one hundred fifty-two million
(152,000,000). The total number of shares of Common Stock the Corporation shall
have authority to issue is one hundred fifty million (150,000,000). The total
number of shares of Preferred Stock the Corporation shall have authority to
issue is two million (2,000,000). Certain capitalized terms used in this Article
III shall have the meanings set forth in Section E.6.
B. DESIGNATIONS AND AMOUNTS.
1. COMMON STOCK. Seventy-five million (75,000,000) shares of the Common
Stock are designated "Agouron Pharmaceuticals Common Stock" ("Agouron
Pharmaceuticals Stock") and twenty-five million (25,000,000) shares of the
Common Stock are designated "Agouron Oncology Division Common Stock" ("Oncology
Division Stock")*. The Board of Directors of the Corporation (the "Board of
Directors") is expressly authorized to divide undesignated shares of the Common
Stock into any number of series, and to fix the designation and number of shares
of each such series. The Board of Directors may determine and alter the rights,
preferences, privileges and restrictions granted to and imposed upon any wholly
unissued series of Common Stock as shall be stated and expressed in the
resolution or resolutions adopted by the Board of Directors providing for the
issue of such shares and as may be permitted by the General Corporation Law of
California. The Board of Directors (within the limits
- --------------
* The designated name "Agouron Oncology Division Stock" is subject to change.
The exact name of the series of Common Stock will be determined by the Company
prior to the Effective Date.
<PAGE>
and restrictions stated herein or within any resolution adopted by it originally
fixing the number of shares of any series) may increase or decrease the number
of shares of any series (including the Agouron Pharmaceuticals Stock and the
Oncology Division Stock); provided, that no decrease shall reduce the number of
shares of such series to a number less than that of the shares then outstanding
plus the number of shares issuable upon exercise of outstanding rights, options
or warrants or upon conversion of outstanding securities issued by the
Corporation.
Upon the effectiveness of these Restated Articles of Incorporation (the
"Effective Date"), and without any further action on the part of the Corporation
or its shareholders, each share of the Corporation's outstanding Common Stock
shall automatically be reclassified as one share of Agouron Pharmaceuticals
Stock and 0.5 share of Oncology Division Stock, each being a share of a series
of a single class of Common Stock. For purposes of this Article III, (i) the
Agouron Pharmaceuticals Stock, when issued, shall be fully paid and
nonassessable and shall be considered issued in respect of Agouron
Pharmaceuticals (defined below), and (ii)the Oncology Division Stock, when
issued, shall be fully paid and nonassessable and shall be considered issued in
respect of the Oncology Division (defined below).
2. PREFERRED STOCK. Two Hundred Thousand (200,000) shares of the
Preferred Stock are designated "Series B Participating Preferred Stock" and Two
Hundred Thousand (200,000) shares of the Preferred Stock are designated "Series
C Participating Preferred Stock." The Board of Directors is expressly authorized
to divide undesignated shares of the Preferred Stock into any number of series,
and to fix the designation and number of shares of each such series. The Board
of Directors may determine and alter the rights, preferences, privileges and
restrictions granted to and imposed upon any wholly unissued series of Preferred
Stock as shall be stated and expressed in the resolution or resolutions adopted
by the Board of Directors providing for the issue of such shares and as may be
permitted by the General Corporation Law of California. The Board of Directors
(within the limits and restrictions stated herein or within any resolution
adopted by it originally fixing the number of shares of any series) may increase
or decrease the number of shares of any series (including the Series B
Participating Preferred Stock and the Series C Participating Preferred Stock);
provided, that no decrease shall reduce the number of shares of such series to a
number less than that of the shares then outstanding plus the number of shares
issuable upon exercise of outstanding rights, options or warrants or upon
conversion of outstanding securities issued by the Corporation.
C. AGOURON PHARMACEUTICALS STOCK. The rights, preferences, privileges,
restrictions and other matters relating to the Agouron Pharmaceuticals Stock are
as follows:
1. DIVIDENDS AND DISTRIBUTIONS. Subject to the express terms of any
outstanding series of Preferred Stock, dividends may be declared and paid upon
Agouron Pharmaceuticals Stock, in such amounts and at such times as the Board of
Directors may determine, only out of the lesser of (a) funds of the Corporation
legally available therefor and (b) the Agouron Pharmaceuticals Available
Dividend Amount (as defined below).
2. VOTING RIGHTS. The holders of Agouron Pharmaceuticals Stock, voting
together with the holders of shares of all other series of Common Stock as a
single class of stock, shall have the right to vote for the election of
directors and on all other matters requiring action by the shareholders or
submitted to the shareholders for action, except as otherwise set forth in the
terms of any outstanding series of Preferred Stock or as may be determined by
the Board of Directors in establishing any series of Common or Preferred Stock
or as may otherwise be required by law. Each share of Agouron Pharmaceuticals
Stock shall entitle the holder thereof to one vote.
3. LIQUIDATION, DISSOLUTION OR WINDING UP. Upon any voluntary or
involuntary liquidation, dissolution or winding up of the Corporation, the
rights of the holders of Agouron Pharmaceuticals Stock shall be as follows:
(a) After the Corporation has satisfied or made provision for
its debts and obligations and for the payment to the holders of shares of any
class or series of capital stock having preferential rights to receive
distributions of the net assets of the Corporation (including any accumulated
and unpaid dividends), the holders of Agouron Pharmaceuticals Stock shall be
entitled to receive the net assets of the Corporation remaining for
distribution, on a per share basis in proportion to the respective liquidation
units per share of all series of Common Stock. Each share of Agouron
Pharmaceuticals Stock shall have one hundred (100) liquidation units.
<PAGE>
(b) For the purposes of Section C.3.(a), any merger or
business combination involving the Corporation or any sale of all or
substantially all of the assets of the Corporation shall not be treated as a
liquidation.
D. ONCOLOGY DIVISION STOCK. The rights, preferences, privileges,
restrictions and other matters relating to the Oncology Division Stock are as
follows:
1. DIVIDENDS AND DISTRIBUTIONS. Subject to the express terms of any
outstanding series of Preferred Stock, dividends may be declared and paid upon
the Oncology Division Stock, in such amounts and at such times as the Board of
Directors may determine, only out of the lesser of (a) funds of the Corporation
legally available therefor and (b) the Oncology Division Available Dividend
Amount (as defined below).
2. VOTING RIGHTS. The holders of Oncology Division Stock, voting
together with the holders of shares of all other series of Common Stock as a
single class of stock, shall have the right to vote for the election of
directors and on all other matters requiring action by the shareholders or
submitted to the shareholders for action, except as otherwise set forth in the
terms of any outstanding series of Preferred Stock or as may be determined by
the Board of Directors in establishing any series of Common or Preferred Stock
or as may otherwise be required by law. Each share of Oncology Division Stock
shall subject to Section E.3. below entitle the holder thereof to a number of
votes (including a fraction of one vote) equal to the quotient (expressed as a
decimal and rounded to the nearest three decimal places) obtained by dividing
(i) the number of Total Oncology Division Votes (defined below) by (ii) the
number of outstanding shares of Oncology Division Stock on the date which shall
be the earlier of (x) the 90th day following the first day the Oncology Division
Stock commences trading on a national securities exchange or the Nasdaq Stock
Market or (y) the record date for determining shareholders entitled to notice of
or to vote at the first meeting of shareholders (or to give consent to corporate
action) following the Effective Date. The number of votes so determined to which
the holder of each share of Oncology Division Stock shall be entitled shall
remain fixed through June 30, 2000. On July 1, 2000 and on each July 1 every two
years thereafter, the number of votes to which the holder of each share of
Oncology Division Stock shall be entitled shall be adjusted and fixed for the
immediately succeeding two-year period to equal the quotient (expressed as a
decimal and rounded to the nearest three decimal places) obtained by dividing
(i) the number of Total Oncology Division Votes by (ii) the number of
outstanding shares of Oncology Division Stock on each such date. If no shares of
Agouron Pharmaceuticals Stock are outstanding on such date, then all other
series of voting Common Stock outstanding on such date shall have a number of
votes such that each share of the series of outstanding Common Stock that has
the largest Market Capitalization (defined below) on such date (the "Base
Series") shall have one vote and each share of each other series of outstanding
Common Stock shall have the number of votes determined according to the
immediately preceding sentence, treating, for such purpose, the Base Series as
the Agouron Pharmaceuticals Stock in such sentence. Moreover, if shares of
Oncology Division Stock are entitled to vote separately as a class as to any
matter, each share of Oncology Division Stock shall have one vote as to such
matter.
3. LIQUIDATION, DISSOLUTION OR WINDING UP. Upon any voluntary or
involuntary liquidation, dissolution or winding up of the Corporation, the
rights of the holders of Oncology Division Stock shall be as follows:
(a) After the Corporation has satisfied or made provision for
its debts and obligations and for the payment to the holders of shares of any
class or series of capital stock having preferential rights to receive
distributions of the net assets of the Corporation (including any accumulated
and unpaid dividends), the holders of Oncology Division Stock shall be entitled
to receive the net assets of the Corporation remaining for distribution, on a
per share basis in proportion to the respective liquidation units per share of
all series of Common Stock. Each share of Oncology Division Stock shall, subject
to Section E.3. below, have 25 liquidation units.
(b) For purposes of paragraph (a) of this Section D.3., any
merger or business combination involving the Corporation or any sale of all or
substantially all of the assets of the Corporation shall not be treated as a
liquidation.
4. CONVERSION OR REDEMPTION OF ONCOLOGY DIVISION STOCK. Shares of
Oncology Division Stock are subject to conversion and/or redemption upon the
terms and conditions set forth below:
<PAGE>
(a) OPTIONAL CONVERSION AND/OR REDEMPTION OF ONCOLOGY DIVISION
STOCK. The Board of Directors may at any time declare that each of the
outstanding shares of Oncology Division Stock shall, on an "Exchange Date" set
forth in a notice to holders of Oncology Division Stock pursuant to Section
E.1.(a), (i) be converted to a number of fully paid and nonassessable shares of
Agouron Pharmaceuticals Stock (calculated to the nearest five decimal places)
equal to (1) 125% of the Fair Market Value (defined below) of one share of the
Oncology Division Stock (the "Exchange Amount") as of the date of the first
public announcement by the Corporation of such conversion (the "Announcement
Date") divided by (2) the Fair Market Value of one share of Agouron
Pharmaceuticals Stock as of such Announcement Date or (ii) be redeemed for cash
equal to the Exchange Amount, provided that there are funds of the Corporation
legally available therefor, or (iii) be converted into and redeemed for any
combination of Agouron Pharmaceuticals Stock and cash equal to the Exchange
Amount as determined by the Board of Directors.
(b) MANDATORY CONVERSION AND/OR REDEMPTION OF ONCOLOGY
DIVISION STOCK. In the event of the Disposition (defined below), in one
transaction or a series of related transactions, by the Corporation of all or
substantially all of the properties and assets allocated to the Oncology
Division (other than in connection with the Disposition by the Corporation of
all or substantially all of its properties and assets in one transaction or a
series of related transactions) to any person, entity or group (other than (x)
any entity in which the Corporation, directly or indirectly, owns all of the
equity interest or (y) any entity formed at the direction of the Corporation in
connection with obtaining financing for the programs or products of the Oncology
Division), the Corporation shall, on or prior to the first Business Day after
the 90th day following the consummation of such Disposition, for each
outstanding share of Oncology Division Stock (i) convert such share to a number
of fully paid and nonassessable shares of Agouron Pharmaceuticals Stock
(calculated to the nearest five decimal places) equal to (1) the Exchange Amount
as of the consummation date of such Disposition (the "Consummation Date")
divided by (2) the Fair Market Value of one share of Agouron Pharmaceuticals
Stock as of such Consummation Date, or (ii) redeem such share for cash equal to
the Exchange Amount, provided that there are funds of the Corporation legally
available therefor, or (iii) convert such share into and redeem such share for
any combination of Agouron Pharmaceuticals Stock and cash equal to the Exchange
Amount as determined by the Board of Directors. For purposes of this paragraph
(b):
(1) "substantially all of the properties and
assets allocated to the Oncology Division" shall mean a portion of the
properties and assets allocated to the Oncology Division that represents at
least 80% of the then-current fair value (as determined by the Board of
Directors) of the properties and assets allocated to the Oncology Division; and
(2) in the case of a Disposition of properties
and assets in a series of related transactions, such Disposition shall not be
deemed to have been consummated until the consummation of the last of such
transactions.
(c) Notwithstanding the foregoing provisions of paragraph (a)
of this Section D.4., the Corporation shall convert Oncology Division Stock to
Agouron Pharmaceuticals Stock as provided in paragraph (a) only if (i) the
Corporation is a Listed Corporation both at the time of the original issuance of
Oncology Division Stock and at the time of the conversion and (ii) Agouron
Pharmaceuticals Stock is then Publicly Traded. If Agouron Pharmaceuticals Stock
is not Publicly Traded and shares of another class or series of Common Stock
(other than Oncology Division Stock) are then Publicly Traded, the Board of
Directors may convert Oncology Division Stock into fully paid and nonassessable
shares of such other class or series of Common Stock as has the largest Market
Capitalization as of the close of business on the trading day immediately
preceding the date of the notice to holders of Oncology Division Stock required
by Section E.1.(a).
E. GENERAL PROVISIONS REGARDING THE COMMON STOCK.
1. GENERAL CONVERSION PROVISIONS. In the event of any conversion of any
series of Common Stock (the "Exchange Stock") for shares of Agouron
Pharmaceuticals Stock pursuant to the provisions of these Articles of
Incorporation (or for shares of another class or series of Common Stock pursuant
to the last sentence of Section D.4.(c) in which event all reference to Agouron
Pharmaceutical Stock in this Section E.1. shall be deemed to refer to such other
class or series of Common Stock), the following provisions shall apply:
<PAGE>
(a) The Corporation shall cause to be given to each record
holder of shares of the Exchange Stock a notice stating (i) that shares of
Exchange Stock shall be converted to shares of Agouron Pharmaceuticals Stock, or
redeemed for cash, or a combination thereof, as the case may be, (ii) the date
on which the exchange shall become effective (the "Exchange Date"), (iii) the
number of shares of Agouron Pharmaceuticals Stock, the amount of cash or the
combination thereof to be received by such holder with respect to each share of
the Exchange Stock held by such holder, including details as to the calculation
thereof and (iv) the place or places where certificates for shares of Exchange
Stock, properly endorsed or assigned for transfer, are to be surrendered for
delivery of certificates for shares of Agouron Pharmaceuticals Stock or cash or
a combination thereof (unless the Corporation shall waive such requirement).
Such notice shall be sent by first-class mail, postage prepaid, not less than 30
nor more than 60 days prior to the Exchange Date to each holder of shares of
Exchange Stock at such holder's address as the same appears on the stock
transfer books of the Corporation. Neither the failure to mail such notice to
any particular holder of shares of Exchange Stock nor any defect therein shall
affect the sufficiency thereof with respect to any other holder of shares of
Exchange Stock.
(b) The Corporation shall not be required to issue or deliver
fractional shares of Agouron Pharmaceuticals Stock to any holder of shares of
Exchange Stock upon any such conversion. If more than one share of Exchange
Stock shall be held by the same holder of record, the Corporation shall
aggregate the number of shares of Agouron Pharmaceuticals Stock that shall be
issuable to such holder upon any such conversion. If the total number of shares
of Agouron Pharmaceuticals Stock to be so issued to any holder of record of
shares of Exchange Stock includes a fraction, the Corporation shall, if such
fraction is not issued or delivered to such holder, either arrange for the
disposition of such fraction by or on behalf of such holder or pay to such
holder the cash value of such fraction, based upon the Fair Market Value of the
Agouron Pharmaceuticals Stock on the Exchange Date.
(c) No adjustments in respect of dividends shall be made upon
the conversion of any shares of Exchange Stock; provided, however, that if the
Exchange Date shall be subsequent to the record date for determining holders of
Exchange Stock entitled to the payment of a dividend or other distribution
thereon or with respect thereto, the holders of shares of Exchange Stock at the
close of business on such record date shall be entitled to receive the dividend
or other distribution payable on or with respect to such shares on the date set
for payment of such dividend or other distribution, notwithstanding the exchange
of such shares.
(d) Before any holder of shares of Exchange Stock shall be
entitled to receive certificates representing shares of Agouron Pharmaceuticals
Stock or cash or a combination thereof to be received by such holder with
respect to the conversion of such shares of Exchange Stock, such holder shall
surrender at such place as the Corporation shall specify certificates for such
shares of Exchange Stock, properly endorsed or assigned for transfer (unless the
Corporation shall waive such requirement). The Corporation will as soon as
practicable after such surrender of certificates representing such shares of
Exchange Stock deliver to the person for whose account such shares of Exchange
Stock were so surrendered, or to the nominee or nominees of such person,
certificates representing the number of shares of Agouron Pharmaceuticals Stock
or cash or a combination thereof to which such person shall be entitled as
aforesaid, together with any fractional share payment contemplated by Section
E.1.(b).
(e) From and after the Exchange Date, all rights of a holder
of shares of Exchange Stock shall cease except for the right, upon surrender of
the certificates representing such shares of Exchange Stock, to receive
certificates representing shares of Agouron Pharmaceuticals Stock or cash or a
combination thereof, together with any fractional share payment contemplated by
Section E.1.(b) and rights to dividends as provided in Section E.1.(c). No
holder of a certificate that immediately prior to the Exchange Date represented
shares of Exchange Stock shall be entitled to receive any dividend or other
distribution with respect to the Agouron Pharmaceuticals Stock to be issued in
exchange until surrender of such holder's certificate for a certificate or
certificates representing shares of Agouron Pharmaceuticals Stock (unless the
Corporation shall waive such requirement). Upon such surrender, there shall be
paid to the holder the amount of any dividends or other distributions (without
interest) which had become payable with respect to a record date after the
Exchange Date, but that were not paid by reason of the foregoing, with respect
to the number of shares of Agouron Pharmaceuticals Stock represented by the
certificate or certificates issued upon such surrender. From and after the
Exchange Date, the Corporation shall, however, be entitled to treat the
certificates for Exchange Stock that have not yet been surrendered for exchange
as evidencing the ownership of the
<PAGE>
number of shares of Agouron Pharmaceuticals Stock for which the shares of
Exchange Stock represented by such certificates shall have been converted,
notwithstanding the failure to surrender such certificates.
(f) The Corporation will pay any and all documentary, stamp or
similar issue or transfer taxes that may be payable in respect of the issue or
delivery of any shares of Agouron Pharmaceuticals Stock in exchange for shares
of Exchange Stock pursuant hereto. The Corporation shall not, however, be
required to pay any tax that may be payable in respect of any transfer involved
in the issue and delivery of any shares of Agouron Pharmaceuticals Stock issued
in exchange in a name other than that in which the shares of Exchange Stock so
exchanged were registered and no such issue or delivery shall be made unless and
until the person requesting such issue has paid to the Corporation the amount of
any such tax, or has established to the satisfaction of the Corporation that
such tax has been paid or that no such tax is due.
(g) After the Exchange Date, any share of Exchange Stock
issued upon conversion or exercise of any Convertible Security (defined below)
shall, immediately upon issuance pursuant to such conversion or exercise and
without any notice or any other action on the part of the Corporation or its
Board of Directors or the holder of such share of Exchange Stock, be exchanged
for the number of shares of Agouron Pharmaceuticals Stock or cash or combination
thereof (together with any payments in lieu of fractional shares or dividends,
if any) that a holder of such Convertible Security would have been entitled to
receive pursuant to the terms of such Convertible Security had such terms
provided that the conversion privilege in effect immediately prior to any
conversion by the Corporation of any shares of Exchange Stock for shares of any
other capital stock of the Corporation would be adjusted so that the holder of
any such Convertible Security thereafter surrendered for conversion would be
entitled to receive the number of shares of capital stock of the Corporation he
or she would have owned immediately following such action had such Convertible
Security been converted immediately prior to such exchange; provided, however
the foregoing provisions shall not apply to the extent that equivalent
adjustments are otherwise made pursuant to the provisions of such Convertible
Security.
2. DISCRIMINATION BETWEEN SERIES OF COMMON STOCK. Subject to the
provisions of each series of Common Stock regarding the payment of dividends on
such series of Common Stock, the Board of Directors may, in its sole discretion,
declare and pay dividends exclusively on any series of Common Stock, or all
series, in equal or unequal amounts, notwithstanding the amounts available for
the payment of dividends on any series, the respective voting and liquidation
rights of each series, the amounts of prior dividends declared on each series or
any other factor.
3. ADJUSTMENTS RELATIVE TO VOTING RIGHTS AND LIQUIDATION.
Notwithstanding any other provision herein to the contrary, if at any time the
Corporation shall in any manner subdivide (by stock split, reclassification or
otherwise) or combine (by reverse stock split, reclassification or otherwise)
the outstanding shares of any series of Common Stock, or pay a dividend or make
a distribution in shares of any series of Common Stock to holders of such
series, the per share voting rights and the liquidation units of each series of
Common Stock other than the Agouron Pharmaceuticals Stock shall be appropriately
adjusted so as to avoid dilution in the aggregate voting and liquidation rights
of any series; provided, however, that the issuance by the Corporation of shares
of any series of Common Stock (whether by a dividend or otherwise) to the
holders of any other series of Common Stock shall not require adjustment
pursuant to this paragraph.
4. RANK. All series of Common Stock shall rank junior with respect to
the payment of dividends and the distribution of assets to all series of the
Preferred Stock that specifically provide that they shall rank prior to the
Common Stock. Nothing herein shall preclude the Board of Directors from creating
any series of Preferred Stock ranking on a parity with or prior to the Common
Stock as to any rights or preferences (including without limitation, the payment
of dividends or the distribution of assets).
5. FRACTIONAL SHARES. Any series of Common Stock may be issued in
fractions of a share which shall entitle the holder, in proportion to such
holder's fractional shares, to exercise voting rights, receive dividends,
participate in distributions and to have the benefit of all other rights of
holders of such series of Common Stock.
<PAGE>
6. DEFINITIONS. As used in these Articles of Incorporation, the
following terms shall have the following meanings (with terms defined in the
singular having comparable meaning when used in the plural and vice versa),
unless another definition is provided or the context otherwise requires:
(a) "Agouron Pharmaceuticals" shall mean, at any time, the
Corporation's interest in (i) all of the businesses, products or development or
research programs in which the Corporation or any of its subsidiaries (or any of
their predecessors or successors) is or has been engaged, directly or
indirectly, other than those allocated to any business unit of the Corporation
represented by a series of Common Stock other than the Agouron Pharmaceuticals
Stock; and (ii) all assets and liabilities of the Corporation to the extent
allocated to any such businesses, products or development or research programs
in accordance with generally accepted accounting principles consistently applied
for all of the Corporation's business units. From and after the date on which
all of the outstanding shares of any series of Common Stock are exchanged for
shares of Agouron Pharmaceuticals Stock, cash or a combination thereof, all of
the businesses, products, development or research programs, assets and
liabilities of the business unit represented by such series of Common Stock
shall be included in Agouron Pharmaceuticals. Agouron Pharmaceuticals shall be
represented by the Agouron Pharmaceuticals Stock.
(b) "Agouron Pharmaceuticals Available Dividend Amount," on
any date, shall mean the amount legally available for the payment of dividends
determined in accordance with the California General Corporation Law applied as
if Agouron Pharmaceuticals were a separate corporation.
(c) "Business Day" shall mean each weekday other than a
national holiday observed by any national securities exchange or The Nasdaq
Stock Market.
(d) "Convertible Securities" shall mean any securities
(including employee stock options) of the Corporation that are convertible into
or evidence the right to purchase any shares of any series of Common Stock.
(e) "Disposition" shall mean the sale, transfer, assignment or
other disposition (whether by merger, consolidation, sale or contribution of
assets or stock or otherwise) of any properties or assets, other than by pledge,
hypothecation or grant of any security interest in such properties or assets.
(f) "Fair Market Value" as to shares of any series of stock
shall as of any date mean the average Market Value of one share for the 20
consecutive trading days commencing on the 30th trading day prior to such date.
The "Market Value" for any trading day shall mean the average of the high and
low selling prices per share on such day (or if there was no trading of such
shares on that day, on the next preceding day on which there was such trading)
(i) as reported by The Nasdaq Stock Market or a similar source selected from
time to time by the Corporation for the purpose or (ii) if the shares of such
series of stock become listed or admitted to trading on a national securities
exchange, as reported on the prevailing composite tape reporting transactions on
such national securities exchange or, if such composite tape shall not be in use
or shall not report transactions in such shares, the reported sales prices
regular way on the principal national securities exchange on which such shares
are listed or admitted to trading (which shall be the national securities
exchange on which the greatest number of shares of such series of stock has been
traded during such consecutive trading days). In the event such Market Values
are unavailable, Fair Market Value shall be determined by the Board of
Directors.
(g) "Listed Corporation" shall mean (i) a corporation with
outstanding shares listed on the New York Stock Exchange or the American Stock
Exchange, (ii) a corporation with outstanding securities designated as qualified
for trading as a national market system security on the National Association of
Securities Dealers Automatic Quotation System (or any successor national market
system) if the corporation has at least 800 holders of its equity securities as
of the record date of the corporation's most recent annual meeting of
shareholders or (iii) a corporation meeting the definition of "Listed
Corporation" under Section 301.5 of the California Corporations Code (as such
Section 301.5 may be amended from time to time).
(h) "Market Capitalization" shall mean, with respect to any
series of Common Stock as of any date of determination, the product of (i) the
Fair Market Value of one share of such series as of such date and (ii) the
number of shares of such series issued and outstanding as of such date.
<PAGE>
(i) "Oncology Division"* shall mean, at any time, the
Corporation's interest in (i) the following businesses, products, or development
or research programs: (A) the clinical program developing anti-angiogenic agent
AG3340, (B) the clinical program developing anti-angiogenic agent AG3433, (C)
the clinical program developing anti-angiogenic agent AG2034, (D) the clinical
program developing anti-angiogenic agent AG2037, (E) the research program
developing cdk Inhibitor, (F) the research program developing GnRH Antagonist,
(G) the research program developing PARP, and (H) the research program
developing VEGF Inhibitor; (ii) all assets and liabilities of the Corporation to
the extent allocated to any such businesses, products or development or research
programs in accordance with generally accepted accounting principles
consistently applied for all of the Corporation's business units; and (iii) such
businesses, products, or development or research programs developed in, or
acquired by the Corporation for, the Oncology Division after the Effective Date,
in each case as determined by the Board of Directors; PROVIDED, HOWEVER, that,
from and after any Disposition or transfer to Agouron Pharmaceuticals of any
business, product, development or research program, assets or properties, the
Oncology Division shall no longer include the business, product, development
program, research program, assets or properties so disposed of or transferred.
The Oncology Division shall be represented by the Oncology Division Stock.
(j) "Oncology Division Available Dividend Amount," on any
date, shall mean the amount legally available for the payment of dividends
determined in accordance with the California General Corporation Law applied as
if the Oncology Division were a separate corporation.
(k) "Publicly Traded" shall mean any security listed or
qualified for trading on a stock exchange or market system described in the
foregoing definition of Listed Corporation.
(l) "Total Oncology Division Votes" on any date shall mean the
number of votes equal to the product of (i) the number of Total Votes minus the
number of shares of outstanding Agouron Pharmaceuticals Stock, times (ii) the
quotient obtained by dividing (A) the Market Capitalization of Oncology Division
Stock, by (B) the sum of the Market Capitalization of all series of Common Stock
other than Agouron Pharmaceuticals Stock.
(m) "Total Votes" on any date shall mean the number of votes
obtained by dividing (i) the number of outstanding shares of Agouron
Pharmaceuticals Stock, by (ii) the quotient obtained by dividing (A) the Market
Capitalization of Agouron Pharmaceuticals Stock, by (B) the sum of the Market
Capitalization of all series of Common Stock.
7. DETERMINATIONS BY THE BOARD OF DIRECTORS. Any determinations with
respect to any division of the Corporation for purposes of this Article III or
the rights of holders of any series of Common Stock made by the Board of
Directors of the Corporation in good faith pursuant to or in furtherance of any
provision of these Articles of Incorporation relating to the Common Stock shall
be final and binding on all stockholders of the Corporation.
F. SERIES B PARTICIPATING PREFERRED STOCK. The rights, preferences,
privileges, restrictions and other matters relating to the Series B
Participating Preferred Stock are as follows:
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* The designated name "Agouron Oncology Division Stock" is subject to change.
The exact name of the series of Common Stock will be determined by the Company
prior to the Effective Date.
<PAGE>
1. DIVIDENDS AND DISTRIBUTIONS.
(a) Subject to the prior and superior rights of the holders of
any shares of any series of Preferred Stock ranking prior and superior to the
shares of Series B Participating Preferred Stock with respect to dividends, the
holders of shares of Series B Participating Preferred Stock in preference to the
holders of shares of Common Stock and any other junior stock, shall be entitled
to receive, when, as and if declared by the Board of Directors out of funds
legally available for the purpose, quarterly dividends payable in cash on the
first day of March, June, September and December in each year (each such date
being referred to herein as a "Quarterly Dividend Payment Date"), commencing on
the first Quarterly Dividend Payment Date after the first issuance of a share or
fraction of a share of Series B Participating Preferred Stock in an amount per
share (rounded to the nearest cent) equal to the greater of (i) $100 per share
of Series B Participating Preferred Stock, or (ii) subject to the provision for
adjustment hereinafter set forth, 10,000 times the aggregate per share amount of
all cash dividends, and 10,000 times the aggregate per share amount (payable in
kind) of all non-cash dividends or other distributions other than a dividend
payable in shares of Agouron Pharmaceuticals Stock or a subdivision of the
outstanding shares of Agouron Pharmaceuticals Stock (by reclassification or
otherwise), declared on the Agouron Pharmaceuticals Stock since the immediately
preceding Quarterly Dividend Payment Date, or, with respect to the first
Quarterly Dividend Payment Date, since the first issuance of any share or
fraction of a share of Series B Participating Preferred Stock. In the event the
Corporation shall at any time after the Effective Date (A) declare any dividend
on Agouron Pharmaceuticals Stock payable in shares of Agouron Pharmaceuticals
Stock, (B) subdivide the outstanding Agouron Pharmaceuticals Stock or (C)
combine the outstanding Agouron Pharmaceuticals Stock into a smaller number of
shares, by reclassification or otherwise, then in each such case the amount to
which holders of shares of Series B Participating Preferred Stock were entitled
immediately prior to such event under clause (ii) of the preceding sentence
shall be adjusted by multiplying such amount by a fraction the numerator of
which is the number of shares of Agouron Pharmaceuticals Stock outstanding
immediately after such event and the denominator of which is the number of
shares of Agouron Pharmaceuticals Stock that were outstanding immediately prior
to such event.
(b) The Corporation shall declare a dividend or distribution
on the Series B Participating Preferred Stock as provided in paragraph (a) above
immediately after it declares a dividend or distribution on the Agouron
Pharmaceuticals Stock (other than a dividend payable in shares of Agouron
Pharmaceuticals Stock); provided that, in the event no dividend or distribution
shall have been declared on the Agouron Pharmaceuticals Stock during the period
between any Quarterly Dividend Payment Date and the next subsequent Quarterly
Dividend Payment Date, a dividend of $100 per share on the Series B
Participating Preferred Stock shall nevertheless be payable on such subsequent
Quarterly Dividend Payment Date.
(c) Dividends shall begin to accrue and be cumulative on
outstanding shares of Series B Participating Preferred Stock from the Quarterly
Dividend Payment Date next preceding the date of issue of a share or fraction of
a share of Series B Participating Preferred Stock unless the date of issue of
such shares is prior to the record date for the first Quarterly Dividend Payment
Date, in which case dividends on such shares shall begin to accrue from the date
of such issue, or unless the date of issue is a Quarterly Dividend Payment Date
or is a date after the record date for the determination of holders of shares of
Series B Participating Preferred Stock entitled to receive a quarterly dividend
and before such Quarterly Dividend Payment Date, in either of which events such
dividends shall begin to accrue and be cumulative from such Quarterly Dividend
Payment Date. Accrued but unpaid dividends shall not bear interest. Dividends
paid on the shares of Series B Participating Preferred Stock in an amount less
than the total amount of such dividends at the time accrued and payable on such
shares shall be allocated pro rata on a share-by-share basis among all such
shares at the time outstanding. The Board of Directors may fix a record date for
the determination of holders of shares of Series B Participating Preferred Stock
entitled to receive payment of a dividend or distribution declared thereon,
which record date shall be no more than thirty (30) days prior to the date fixed
for the payment thereof.
<PAGE>
2. VOTING RIGHTS. The holders of shares of Series B Participating
Preferred Stock shall have the following voting rights:
(a) Subject to the provision for adjustment hereinafter set
forth, each share of Series B Participating Preferred Stock shall entitle the
holder thereof to 10,000 votes on all matters submitted to a vote of the
shareholders of the Corporation. In the event the Corporation shall at any time
after the Effective Date (i) declare any dividend on Agouron Pharmaceuticals
Stock payable in shares of Agouron Pharmaceuticals Stock, (ii) subdivide the
outstanding Agouron Pharmaceuticals Stock into a greater number of shares or
(iii) combine the outstanding Agouron Pharmaceuticals Stock into a smaller
number of shares, by reclassification or otherwise, then in each such case the
number of votes per share to which holders of shares of Series B Participating
Preferred Stock were entitled immediately prior to such event shall be adjusted
by multiplying such number by a fraction the numerator of which is the number of
shares of Agouron Pharmaceuticals Stock outstanding immediately after such event
and the denominator of which is the number of shares of Agouron Pharmaceuticals
Stock outstanding immediately prior to such event.
(b) Except as otherwise provided herein or by law, the holders
of shares of Series B Participating Preferred Stock, the Series C Participating
Preferred Stock and all series of Common Stock shall vote together as one class
on all matters submitted to a vote of shareholders of the Corporation.
(c) Except as set forth herein or as otherwise required by
law, holders of Series B Participating Preferred Stock shall have no special
voting rights and their consent shall not be required (except to the extent they
are entitled to vote with holders of Common Stock as set forth herein) for
taking any corporate action.
3. CERTAIN RESTRICTIONS.
(a) Whenever quarterly dividends or other dividends or
distributions payable on the Series B Participating Preferred Stock as provided
in Section F.1. are in arrears, thereafter and until all accrued and unpaid
dividends and distributions, whether or not declared, on shares of Series B
Participating Preferred Stock outstanding shall have been paid in full, the
Corporation shall not:
(i) declare or pay dividends on, make any other distributions
on, or redeem or purchase or otherwise acquire for consideration any
shares of stock ranking junior (either as to dividends or upon
liquidation, dissolution or winding up) to the Series B Participating
Preferred Stock;
(ii) declare or pay dividends on or make any other
distributions on any shares of stock ranking on a parity (either as to
dividends or upon liquidation, dissolution or winding up) with the
Series B Participating Preferred Stock except dividends paid ratably on
the Series B Participating Preferred Stock and all such parity stock on
which dividends are payable or in arrears in proportion to the total
amounts to which the holders of all such shares are then entitled;
(iii) redeem or purchase or otherwise acquire for
consideration shares of any stock ranking on a parity (either as to
dividends or upon liquidation, dissolution or winding up) with the
Series B Participating Preferred Stock provided that the Corporation
may at any time redeem, purchase or otherwise acquire shares of any
such parity stock in exchange for shares of any stock of the
Corporation ranking junior (either as to dividends or upon dissolution,
liquidation or winding up) to the Series B Participating Preferred
Stock; or
(iv) purchase or otherwise acquire for consideration any
shares of Series B Participating Preferred Stock or any shares of stock
ranking on a parity with the Series B Participating Preferred Stock
except in accordance with a purchase offer made in writing or by
publication (as determined by the Board of Directors) to all holders of
such shares upon such terms as the Board of Directors, after
consideration of the respective annual dividend rates and other
relative rights and preferences of the respective series and classes,
shall determine in good faith will result in fair and equitable
treatment among the respective series or classes.
<PAGE>
(b) The Corporation shall not permit any subsidiary of the
Corporation to purchase or otherwise acquire for consideration any shares of
stock of the Corporation unless the Corporation could, under paragraph (a) of
this Section F.3., purchase or otherwise acquire such shares at such time and in
such manner.
4. REACQUIRED SHARES. Any shares of Series B Participating Preferred
Stock purchased or otherwise acquired by the Corporation in any manner
whatsoever shall be retired and canceled promptly after the acquisition thereof.
All such shares shall upon their cancellation become authorized but unissued
shares of Preferred Stock and may be reissued as part of a new series of
Preferred Stock to be created by resolution or resolutions of the Board of
Directors, subject to the conditions and restrictions on issuance set forth
herein.
5. LIQUIDATION, DISSOLUTION OR WINDING UP.
(a) Upon any liquidation (voluntary or otherwise), dissolution
or winding up of the Corporation, no distribution shall be made to the holders
of shares of stock ranking junior (either as to dividends or upon liquidation,
dissolution or winding up) to Series B Participating Preferred Stock unless,
prior thereto, the holders of shares of Series B Participating Preferred Stock
shall have received per share, the greater of $10,000 or 10,000 (as
appropriately adjusted as set forth in paragraph (c) below to reflect such
events as stock splits, stock dividends and recapitalization with respect to the
Agouron Pharmaceuticals Stock (the "Series B Adjustment Number")) times the
payment to be made per share of Agouron Pharmaceuticals Stock, plus an amount
equal to accrued and unpaid dividends and distributions thereon, whether or not
declared, to the date of such payment (the "Series B Liquidation Preference").
(b) In the event there are not sufficient assets available to
permit payment in full of the Series B Liquidation Preference and the
liquidation preferences of all other series of Preferred Stock, if any, which
rank on a parity with the Series B Participating Preferred Stock then such
remaining assets shall be distributed ratably to the holders of such parity
shares in proportion to their respective liquidation preferences.
(c) In the event the Corporation shall at any time after the
Effective Date (i) declare any dividend on Agouron Pharmaceuticals Stock payable
in shares of Agouron Pharmaceuticals Stock, (ii) subdivide the outstanding
Agouron Pharmaceuticals Stock, or (iii) combine the outstanding Agouron
Pharmaceuticals Stock into a smaller number of shares, by reclassification or
otherwise, then in each such case the Series B Adjustment Number in effect
immediately prior to such event shall be adjusted by multiplying such Series B
Adjustment Number by a fraction the numerator of which is the number of shares
of Agouron Pharmaceuticals Stock outstanding immediately after such event and
the denominator of which is the number of shares of Agouron Pharmaceuticals
Stock that were outstanding immediately prior to such event.
6. CONSOLIDATION, MERGER, ETC. In case the Corporation shall enter into
any consolidation, merger, combination or other transaction in which the shares
of Agouron Pharmaceuticals Stock are exchanged for or changed into other stock
or securities, cash and/or any other property, then in any such case the shares
of Series B Participating Preferred Stock shall at the same time be similarly
exchanged or changed in an amount per share (subject to the provision for
adjustment hereinafter set forth) equal to 10,000 times the aggregate amount of
stock, securities, cash and/or any other property (payable in kind), as the case
may be, into which or for which each share of Agouron Pharmaceuticals Stock is
changed or exchanged. In the event the Corporation shall at any time after the
Effective Date (a) declare any dividend on Agouron Pharmaceuticals Stock payable
in shares of Agouron Pharmaceuticals Stock, (b) subdivide the outstanding
Agouron Pharmaceuticals Stock or (c) combine the outstanding Agouron
Pharmaceuticals Stock into a smaller number of shares, then in each such case
the amount set forth in the preceding sentence with respect to the exchange or
change of shares of Series B Participating Preferred Stock shall be adjusted by
multiplying such amount by a fraction the numerator of which is the number of
shares of Agouron Pharmaceuticals Stock outstanding immediately after such event
and the denominator of which is the number of shares of Agouron Pharmaceuticals
Stock that are outstanding immediately prior to such event.
7. REDEMPTION. The shares of Series B Participating Preferred Stock
shall not be redeemable.
<PAGE>
8. RANKING. The Series B Participating Preferred Stock shall rank on a
parity with the Series C Participating Preferred Stock and junior to all other
series of the Corporation's Preferred Stock as to the payment of dividends and
the distribution of assets, unless the terms of any such series shall provide
otherwise.
9. AMENDMENT. The Articles of Incorporation and the Bylaws of the
Corporation shall not be further amended in any manner which would materially
alter or change the powers, preferences or special rights of the Series B
Participating Preferred Stock so as to affect them adversely without the
affirmative vote of the holders of at least sixty-six and two-thirds percent
(66-2/3%) of the outstanding shares of Series B Participating Preferred Stock
voting separately as a class.
10. FRACTIONAL SHARES. Series B Participating Preferred Stock may be
issued in fractions of a share which shall entitle the holder, in proportion to
such holder's fractional shares, to exercise voting rights, receive dividends,
participate in distributions and to have the benefit of all other rights of
holders of Series B Participating Preferred Stock.
G. SERIES C PARTICIPATING PREFERRED STOCK. The rights, preferences,
privileges, restrictions and other matters relating to the Series C
Participating Preferred Stock are as follows:
1. DIVIDENDS AND DISTRIBUTIONS.
(a) Subject to the prior and superior rights of the holders of
any shares of any series of Preferred Stock ranking prior and superior to the
shares of Series C Participating Preferred Stock with respect to dividends, the
holders of shares of Series C Participating Preferred Stock in preference to the
holders of shares of Common Stock and any other junior stock, shall be entitled
to receive, when, as and if declared by the Board of Directors out of funds
legally available for the purpose, quarterly dividends payable in cash on the
first day of March, June, September and December in each year (each such date
being referred to herein as a "Quarterly Dividend Payment Date"), commencing on
the first Quarterly Dividend Payment Date after the first issuance of a share or
fraction of a share of Series C Participating Preferred Stock in an amount per
share (rounded to the nearest cent) equal to the greater of (i) $100 per share
of Series C Participating Preferred Stock, or (ii) subject to the provision for
adjustment hereinafter set forth, 10,000 times the aggregate per share amount of
all cash dividends, and 10,000 times the aggregate per share amount (payable in
kind) of all non-cash dividends or other distributions other than a dividend
payable in shares of Oncology Division Stock or a subdivision of the outstanding
shares of Oncology Division Stock (by reclassification or otherwise), declared
on the Oncology Division Stock, since the immediately preceding Quarterly
Dividend Payment Date, or, with respect to the first Quarterly Dividend Payment
Date since the first issuance of any share or fraction of a share of Series C
Participating Preferred Stock. In the event the Corporation shall at any time
after the Effective Date (A) declare any dividend on Oncology Division Stock
payable in shares of Oncology Division Stock, (B) subdivide the outstanding
Oncology Division Stock or (C) combine the outstanding Oncology Division Stock
into a smaller number of shares, by reclassification or otherwise, then in each
such case the amount to which holders of shares of Series C Participating
Preferred Stock were entitled immediately prior to such event under clause (ii)
of the preceding sentence shall be adjusted by multiplying such amount by a
fraction the numerator of which is the number of shares of Oncology Division
Stock outstanding immediately after such event and the denominator of which is
the number of shares of Oncology Division Stock that were outstanding
immediately prior to such event.
(b) The Corporation shall declare a dividend or distribution
on the Series C Participating Preferred Stock as provided in paragraph (a) above
immediately after it declares a dividend or distribution on the Oncology
Division Stock (other than a dividend payable in shares of Oncology Division
Stock); provided that, in the event no dividend or distribution shall have been
declared on the Oncology Division Stock during the period between any Quarterly
Dividend Payment Date and the next subsequent Quarterly Dividend Payment Date, a
dividend of $100 per share on the Series C Participating Preferred Stock shall
nevertheless be payable on such subsequent Quarterly Dividend Payment Date.
<PAGE>
(c) Dividends shall begin to accrue and be cumulative on
outstanding shares of Series C Participating Preferred Stock from the Quarterly
Dividend Payment Date next preceding the date of issue of a share or fraction of
a share of Series C Participating Preferred Stock unless the date of issue of
such shares is prior to the record date for the first Quarterly Dividend Payment
Date, in which case dividends on such shares shall begin to accrue from the date
of such issue, or unless the date of issue is a Quarterly Dividend Payment Date
or is a date after the record date for the determination of holders of shares of
Series C Participating Preferred Stock entitled to receive a quarterly dividend
and before such Quarterly Dividend Payment Date, in either of which events such
dividends shall begin to accrue and be cumulative from such Quarterly Dividend
Payment Date. Accrued but unpaid dividends shall not bear interest. Dividends
paid on the shares of Series C Participating Preferred Stock in an amount less
than the total amount of such dividends at the time accrued and payable on such
shares shall be allocated pro rata on a share-by-share basis among all such
shares at the time outstanding. The Board of Directors may fix a record date for
the determination of holders of shares of Series C Participating Preferred Stock
entitled to receive payment of a dividend or distribution declared thereon,
which record date shall be no more than thirty (30) days prior to the date fixed
for the payment thereof.
2. VOTING RIGHTS. The holders of shares of Series C Participating
Preferred Stock shall have the following voting rights:
(a) Subject to the provision for adjustment hereinafter set
forth, each share of Series C Participating Preferred Stock shall entitle the
holder thereof to 10,000 votes on all matters submitted to a vote of the
shareholders of the Corporation. In the event the Corporation shall at any time
after the Effective Date (i) declare any dividend on Oncology Division Stock
payable in shares of Oncology Division Stock, (ii) subdivide the outstanding
Oncology Division Stock into a greater number of shares or (iii) combine the
outstanding Oncology Division Stock into a smaller number of shares, by
reclassification or otherwise, then in each such case the number of votes per
share to which holders of shares of Series C Participating Preferred Stock were
entitled immediately prior to such event shall be adjusted by multiplying such
number by a fraction the numerator of which is the number of shares of Oncology
Division Stock outstanding immediately after such event and the denominator of
which is the number of shares of Oncology Division Stock outstanding immediately
prior to such event.
(b) Except as otherwise provided herein or by law, the holders
of shares of Series C Participating Preferred Stock, the Series B Participating
Preferred Stock and all series of Common Stock shall vote together as one class
on all matters submitted to a vote of shareholders of the Corporation.
(c) Except as set forth herein or as otherwise required by
law, holders of Series C Participating Preferred Stock shall have no special
voting rights and their consent shall not be required (except to the extent they
are entitled to vote with holders of Common Stock as set forth herein) for
taking any corporate action.
3. CERTAIN RESTRICTIONS.
(a) Whenever quarterly dividends or other dividends or
distributions payable on the Series C Participating Preferred Stock as provided
in Section G.1. are in arrears, thereafter and until all accrued and unpaid
dividends and distributions, whether or not declared, on shares of Series C
Participating Preferred Stock outstanding shall have been paid in full, the
Corporation shall not:
(i) declare or pay dividends on, make any other distributions
on, or redeem or purchase or otherwise acquire for consideration any
shares of stock ranking junior (either as to dividends or upon
liquidation, dissolution or winding up) to the Series C Participating
Preferred Stock;
(ii) declare or pay dividends on or make any other
distributions on any shares of stock ranking on a parity (either as to
dividends or upon liquidation, dissolution or winding up) with the
Series C Participating Preferred Stock, except dividends paid ratably
on the Series C Participating Preferred Stock and all such parity stock
on which dividends are payable or in arrears in proportion to the total
amounts to which the holders of all such shares are then entitled;
<PAGE>
(iii) redeem or purchase or otherwise acquire for
consideration shares of any stock ranking on a parity (either as to
dividends or upon liquidation, dissolution or winding up) with the
Series C Participating Preferred Stock, provided that the Corporation
may at any time redeem, purchase or otherwise acquire shares of any
such parity stock in exchange for shares of any stock of the
Corporation ranking junior (either as to dividends or upon dissolution,
liquidation or winding up) to the Series C Participating Preferred
Stock; or
(iv) purchase or otherwise acquire for consideration any
shares of Series C Participating Preferred Stock or any shares of stock
ranking on a parity with the Series C Participating Preferred Stock,
except in accordance with a purchase offer made in writing or by
publication (as determined by the Board of Directors) to all holders of
such shares upon such terms as the Board of Directors, after
consideration of the respective annual dividend rates and other
relative rights and preferences of the respective series and classes,
shall determine in good faith will result in fair and equitable
treatment among the respective series or classes.
(b) The Corporation shall not permit any subsidiary of the
Corporation to purchase or otherwise acquire for consideration any shares of
stock of the Corporation unless the Corporation could, under paragraph (a) of
this Section G.3., purchase or otherwise acquire such shares at such time and in
such manner.
4. REACQUIRED SHARES. Any shares of Series C Participating Preferred
Stock purchased or otherwise acquired by the Corporation in any manner
whatsoever shall be retired and canceled promptly after the acquisition thereof.
All such shares shall upon their cancellation become authorized but unissued
shares of Preferred Stock and may be reissued as part of a new series of
Preferred Stock to be created by resolution or resolutions of the Board of
Directors, subject to the conditions and restrictions on issuance set forth
herein.
5. LIQUIDATION, DISSOLUTION OR WINDING UP.
(a) Upon any liquidation (voluntary or otherwise), dissolution
or winding up of the Corporation, no distribution shall be made to the holders
of shares of stock ranking junior (either as to dividends or upon liquidation,
dissolution or winding up) to Series C Participating Preferred Stock unless,
prior thereto, the holders of shares of Series C Participating Preferred Stock
shall have received per share, the greater of $10,000 or 10,000 (as
appropriately adjusted as set forth in paragraph (c) below to reflect such
events as stock splits, stock dividends and recapitalization with respect to the
Oncology Division Stock (the "Series C Adjustment Amount")) times the payment to
be made per share of Oncology Division Stock, plus an amount equal to accrued
and unpaid dividends and distributions thereon, whether or not declared, to the
date of such payment (the "Series C Liquidation Preference").
(b) In the event there are not sufficient assets available to
permit payment in full of the Series C Liquidation Preference and the
liquidation preferences of all other series of Preferred Stock, if any, which
rank on a parity with the Series C Participating Preferred Stock then such
remaining assets shall be distributed ratably to the holders of such parity
shares in proportion to their respective liquidation preferences.
(c) In the event the Corporation shall at any time after the
Effective Date (i) declare any dividend on Oncology Division Stock payable in
shares of Oncology Division Stock, (ii) subdivide the outstanding Oncology
Division Stock, or (iii) combine the outstanding Oncology Division Stock into a
smaller number of shares, by reclassification or otherwise, then in each such
case the Series C Adjustment Number in effect immediately prior to such event
shall be adjusted by multiplying such Series C Adjustment Number by a fraction
the numerator of which is the number of shares of Oncology Division Stock
outstanding immediately after such event and the denominator of which is the
number of shares of Oncology Division Stock that were outstanding immediately
prior to such event.
6. CONSOLIDATION, MERGER, ETC. In case the Corporation shall enter into
any consolidation, merger, combination or other transaction in which the shares
of Oncology Division Stock are exchanged for or changed into other stock or
securities, cash and/or any other property, then in any such case the shares of
Series C Participating Preferred Stock shall at the same time be similarly
exchanged or changed in an amount per share (subject to the
<PAGE>
provision for adjustment hereinafter set forth) equal to 10,000 times the
aggregate amount of stock, securities, cash and/or any other property (payable
in kind), as the case may be, into which or for which each share of Oncology
Division Stock is changed or exchanged. In the event the Corporation shall at
any time after the Effective Date (a) declare any dividend on Oncology Division
Stock payable in shares of Oncology Division Stock, (b) subdivide the
outstanding Oncology Division Stock or (c) combine the outstanding Oncology
Division Stock into a smaller number of shares, then in each such case the
amount set forth in the preceding sentence with respect to the exchange or
change of shares of Series C Participating Preferred Stock shall be adjusted by
multiplying such amount by a fraction the numerator of which is the number of
shares of Oncology Division Stock outstanding immediately after such event and
the denominator of which is the number of shares of Oncology Division Stock.
7. REDEMPTION. The shares of Series C Participating Preferred Stock
shall not be redeemable.
8. RANKING. The Series C Participating Preferred Stock shall rank on a
parity with the Series B Participating Preferred Stock and junior to all other
series of the Corporation's Preferred Stock as to the payment of dividends and
the distribution of assets, unless the terms of any such series shall provide
otherwise.
9. AMENDMENT. The Articles of Incorporation and the Bylaws of the
Corporation shall not be further amended in any manner which would materially
alter or change the powers, preferences or special rights of the Series C
Participating Preferred Stock so as to affect them adversely without the
affirmative vote of the holders of at least sixty-six and two-thirds percent
(66-2/3%) of the outstanding shares of Series C Participating Preferred Stock
voting separately as a class.
10. FRACTIONAL SHARES. Series C Participating Preferred Stock may be
issued in fractions of a share which shall entitle the holder, in proportion to
such holder's fractional shares, to exercise voting rights, receive dividends,
participate in distributions and to have the benefit of all other rights of
holders of Series C Participating Preferred Stock.
ARTICLE IV
Without limiting its rights under the California Corporations Code, the
Board of Directors is hereby authorized to create and issue, by dividend or
otherwise and whether or not in connection with the issuance and sale of any of
its stock or other securities or property, rights entitling the holders thereof
to purchase from the Corporation shares of stock or other securities of the
Corporation or any other corporation ("Rights") which Rights may be attached to
and trade with the shares of Common Stock or any series of Common Stock. The
Rights may provide for different or discriminatory treatment among the holders
of the Rights in accordance with criteria selected by the Board of Directors in
connection with the creation of the Rights, which criteria may include the
number of shares of Common Stock or any series of Common Stock held by a holder
of Rights, the percentage of the outstanding shares of Common Stock or any
series of Common Stock held by a holder of Rights or the voting power based upon
ownership of Common Stock or any series of Common Stock held by a holder of
Rights.
ARTICLE V
The liability of directors of the Corporation for monetary damages
shall be eliminated to the fullest extent permissible under California law.
ARTICLE VI
The Corporation is authorized to provide indemnification of agents (as
defined in Section 317 of the California Corporations Code) for breach of duty
to the Corporation and its shareholders through bylaw provisions or through
agreements with agents, or both, in excess of the indemnification otherwise
permitted by Section 317 of the California Corporations Code, subject to limits
on such excess indemnification set forth in Section 204 of the California
Corporations Code, to the fullest extent permissible under California law.
3. The foregoing amendment and restatement of Articles of Incorporation
has been duly approved by the Board of Directors.
<PAGE>
4. The amendments as included in the Restated Articles of Incorporation
were duly approved by the required vote of shareholders in accordance with
Section 902 of the California Corporations Code. The Corporation has only one
class of shares outstanding and the total number of outstanding shares of the
Corporation is _____________ shares of Common Stock. The number of shares voting
in favor of the amendments equaled or exceeded the vote required. The percentage
vote required was more than 50% of the outstanding shares of Common Stock.
We further declare under penalty of perjury under the laws of the State
of California that the matters set forth in this Certificate are true and
correct of our own knowledge and this declaration was executed on _____________,
1998, at San Diego, California.
Dated: ___________ __, 1998. ________________________________
Peter E. Johnson, President
Agouron Pharmaceuticals, Inc.
________________________________
Gary E. Friedman, Secretary
Agouron Pharmaceuticals, Inc.
<PAGE>
ANNEX III
AGOURON PHARMACEUTICALS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
This discussion contains forward-looking statements. Such statements are
subject to certain risks and uncertainties which could cause actual results to
differ materially from those projected. See "Risk Factors Risks related to
Agouron Pharmaceuticals Division and Oncology Division" in the Proxy
Statement/Prospectus to which this Annex III is attached. Readers are cautioned
not to place undue reliance on these forward-looking statements, which speak
only as of the date hereof. The Company undertakes no obligation to publicly
release the result of any revisions to these forward-looking statements which
may be made to reflect events or circumstances after the date hereof or to
reflect the occurrence of unanticipated events.
Agouron Pharmaceuticals, Inc (the "Company") is committed to the discovery,
development, manufacturing and marketing of human pharmaceuticals targeting
cancer, AIDS, and other serious diseases. Operations to date have been
principally funded from the Company's equity-derived working capital, various
collaborative arrangements and, most recently, from the gross margin
contribution of its first product, VIRACEPT(R) (nelfinavir mesylate). The net
income reported in fiscal year 1998 and the first quarter of fiscal 1999 is
principally due to the commercialization of VIRACEPT while the Company's prior
net operating losses reflect primarily the result of its independent research
and substantial investment in the clinical and commercial development of
VIRACEPT and certain anti-cancer compounds.
In March 1997, the Company received clearance from the United States Food
and Drug Administration ("FDA") to market VIRACEPT in the United States. Due
principally to the increasing product contribution from VIRACEPT sales, license
fees and royalties, the Company realized a net income of $13,154,000 for the
fiscal year ended June 30, 1998 and $3,630,000 and $6,890,000 for the three
month periods ended September 30, 1997 and 1998.
RESULTS OF OPERATIONS
YEARS ENDED JUNE 30, 1996, 1997 AND 1998
PRODUCT SALES
Product sales for the fiscal years ended June 30, 1997 and 1998 were
approximately $57,000,000 and $409,300,000 which included sales in the United
States of $55,559,000 and $358,321,000, respectively. The Company anticipates
that VIRACEPT sales in the United States will approximate $430,000,000 to
$440,000,000 for fiscal 1999.
CONTRACT REVENUES
Collaborative research and development agreements with Japan Tobacco Inc.
("JT") and Hoffman-La Roche Inc. and F. Hoffman-La Roche Ltd (collectively
"HLR") accounted for substantially all of the Company's contract revenues for
1996, 1997 and 1998. The increase in contract revenues from 1996 to 1997 of
approximately 59% was due principally to increased program activity and spending
on the JT collaborations. Total contract revenues for 1998 decreased
approximately 40% from 1997 due principally to decreased VIRACEPT program
spending by Agouron, which was partially funded by JT. Additionally, the
amortization to revenue over a 24-month period of JT's $24,000,000 milestone
payment, which was received in August 1995, was completed in June 1997.
In December 1997, the Company agreed to end its collaboration with HLR in
the field of cancer. As a result of the termination agreement, Agouron has
regained all rights to its anti-cancer drugs previously within the scope of the
HLR collaboration.
<PAGE>
The Company anticipates that contract revenues for fiscal 1999 will
approximate $30,000,000 to $35,000,000.
LICENSE FEES AND ROYALTIES
The Company's license fees in 1996 were earned from HLR; license fees and
royalties for 1997 and 1998 were principally derived from F. Hoffmann-La Roche
Ltd ("Roche"). The 33% decrease from 1996 to 1997 is principally due to
$9,000,000 for initial European marketing rights for VIRACEPT in 1997 versus
$15,000,000 for initial world-wide development rights for two anti-cancer drugs
in 1996. Total revenues for 1998 increased approximately 83% from 1997 due to
European marketing approval for VIRACEPT.
In January and March 1998, VIRACEPT was approved for marketing in Europe
and Japan, respectively. Upon such approvals, the Company realized as revenue
license fees totaling $12,000,000. In July 1997, the Company and JT granted
Roche certain exclusive rights to VIRACEPT in several Asian countries. For such
rights, the Company received a license fee of $2,000,000.
Royalty revenues of approximately $3,852,000 have been recognized in 1998
based on estimated and actual Roche sales of VIRACEPT in its licensed territory.
The Company anticipates that license fees and royalties for fiscal 1999 will
range from $30,000,000 to $35,000,000.
COST OF PRODUCT SALES
The aggregate cost of product sales as a percentage of product sales was
approximately 43% and 42% for 1997 and 1998, respectively. Gross margins on
United States commercial sales were approximately 57% and 65% during 1997 and
1998, respectively. The Company anticipates that gross margins on United States
commercial sales will improve as product sales volumes increase and certain
manufacturing process and scale efficiencies are realized, and will approximate
71% in 1999. Aggregate gross margins will also be impacted by the size of the
Company's patient assistance program (which provides free goods to indigent
individuals), the Company's manufacturing supply arrangement with Roche (whereby
Roche has the right to either purchase product at Agouron's cost plus
contractually determined mark-ups or manufacture drug product for its own use,
subject to contractually determined fees to be paid to Agouron) and the level of
sales subject to Medicaid and other discounts or rebates in the United States.
RESEARCH AND DEVELOPMENT
Research and development ("R&D") spending increased by approximately 52%
from 1996 to 1997 due generally to increasing average R&D staff levels
(approximately 39%) and staff-related expenditures (including occupancy),
increased expenditures in support of human clinical trials, an expanded access
program associated with VIRACEPT and the increased expenditures for clinical
trial activities associated with AG3340 and other anti-cancer compounds. R&D
spending increased by approximately 39% from 1997 to 1998 due to license fees
for three development stage HIV products, increasing average R&D staff levels
(approximately 28%) and staff-related spending (including occupancy and the
addition of Alanex since late 1997) and increased expenditures for human
clinical trial activities associated with the clinical development of certain of
the Company's anti-cancer compounds. The Company anticipates that total R&D
expenses in fiscal 1999, excluding the impact of any license fees or milestone
expenses in either 1998 or 1999, will exceed fiscal 1998 expenses by
approximately 40%.
<PAGE>
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative ("SG&A") expenses represented
approximately 10% of total operating expenses (excluding the cost of product
sales, royalties and write-off of in-process technology purchased) in 1996, 23%
in 1997 and 28% in 1998. Spending increases from 1996 to 1997 were due chiefly
to increasing staff levels (approximately 214%) and staff-related expenditures,
certain premarketing and advertising and promotion costs associated with the
launch of VIRACEPT in March 1997 and other costs associated with a growing sales
and marketing infrastructure. SG&A increased by approximately 76% from 1997 to
1998 due principally to a full year of expenses associated with the sales force
and other marketing personnel. The Company anticipates that total SG&A expenses
will increase by approximately 40% in fiscal 1999 due to increasing sales and
marketing activities and the support of VIRACEPT phase IV marketing studies.
ROYALTIES
The Company's obligation to share VIRACEPT profits with JT is reflected in
royalty expense for 1998 and represents approximately 19% of United States
product sales. Royalties in fiscal 1997 were not significant. It is anticipated
that royalty expense for fiscal 1999 will approximate 24% to 25% of United
States product sales.
WRITEOFF OF IN-PROCESS TECHNOLOGY PURCHASED
In fiscal 1997, the Company acquired Alanex Corporation ("Alanex"), a
research company engaged in the discovery of drug leads through the high-speed
screening of diverse chemical libraries designed by computational methods and
generated by combinatorial chemistry. Alanex was acquired in a purchase
transaction through the issuance of approximately 2,000,000 shares of Agouron
common stock valued at approximately $61,000,000. Transaction costs were
approximately $1,300,000. In fiscal 1997, the Company recorded a write-off of
$57,500,000 (or 92% of the purchase price, including transaction costs),
representing the values determined by management to be attributable to the
in-process technology purchased. Of the amount written off, approximately 95%
was attributed to and supported by a discounted cash flow analysis of three drug
discovery programs which anticipated revenues beginning in 2003. Approximately
40% of the value was attributed to a compound with obesity and cardiovascular
indications, 30% for compounds with depression and anxiety indications and 25%
for a program to treat endometriosis and sex-hormone dependent tumors. The
Company believes that the allocations and aggregate values attributable to these
programs are reasonable and appropriate based on the commercial potential,
beginning in 2003, of these three drug discovery programs, which remain the
subject of research or development efforts. The Company recorded $4,800,000 of
the purchase price as an asset, attributed to Alanex's technology and chemical
compound library, which is being amortized over the expected benefit periods. At
September 30, 1998, the asset balance was approximately $3,350,000.
INTEREST AND OTHER INCOME
Interest income increased by approximately 23% from 1996 to 1997 due
principally to a higher average investment portfolio balance resulting from the
July 1996 public offering, receipt of $15,000,000 and $9,000,000, respectively,
in license fees from HLR (June 1996) and Roche (January 1997), significantly
increased contract funding from JT and HLR and the exercise of employee stock
options. Interest income increased by 1% from 1997 to 1998. The Company
anticipates that, absent additional revenue sources or a significant change in
interest rates, fiscal 1999 interest income will be less than that of fiscal
1998.
<PAGE>
INTEREST EXPENSE
Interest expense decreased from 1996 to 1997 by approximately 38% due to a
decreasing level of debt and capital lease obligations from year to year.
Interest expense increased from 1997 to 1998 due to borrowings under a line of
credit which was used to partially fund quarterly royalties paid to JT
throughout the year.
INCOME TAX PROVISION (BENEFIT)
The income tax provision in 1998 has been computed using an effective,
combined federal and state rate of 40%. The cash obligation of such 1998
provision has been mostly offset by the utilization of its deferred tax assets.
Based on its 1998 pre-tax profit and its estimates for future taxable income,
the Company believes it is more likely than not that its deferred tax assets
(comprised mostly of net operating loss carryforwards, deductions generated by
the exercise of stock options, and research credits) will be realized and has,
therefore, recorded the full tax benefit of its deferred tax assets. The
Company's accumulated net deferred tax assets totaled approximately $55,900,000
and $64,100,000 at June 30, 1997 and 1998. The Company anticipates that its
effective income tax rate for fiscal 1999 will range from 10% to 15%. Such
decrease from fiscal 1998 is attributed to greater expected availability of R&D
tax credits due to the anticipated increase in R&D spending and the anticipated
reduction in R&D contract revenues.
THREE MONTHS ENDED SEPTEMBER 30, 1997 AND 1998
PRODUCT SALES
Product sales for the three-month periods ended September 30, 1997 and 1998
were approximately $79,502,000 and $133,870,000, which included sales in North
America of $75,374,000 and $107,187,000, respectively.
CONTRACT REVENUES
Collaborative research and development agreements with JT and HLR accounted
for substantially all of the Company's contract revenues for the three-month
periods ended September 30, 1997 and 1998. Total contract revenues for the
three-month periods decreased approximately 40% due principally to termination
of the HLR collaboration in fiscal 1998.
LICENSE FEES AND ROYALTIES
Royalty revenues of approximately $352,000 and $4,925,000 have been
recognized in the three-month periods ended September 30, 1997 and 1998 based on
estimated and actual Roche sales of VIRACEPT in its licensed territory.
COST OF PRODUCT SALES
The aggregate cost of product sales as a percentage of product sales was
approximately 43% for the three-month periods ended September 30, 1997 and 1998.
Gross margins on United States commercial sales were approximately 60% and 70%
for the three month periods ended September 30, 1997 and 1998.
RESEARCH AND DEVELOPMENT
R&D spending increased 39% from the three months ended September 30, 1997
to the three months ended September 30, 1998 due generally to costs associated
with increasing average staff levels and staff related spending, and increasing
expenses associated with the clinical development of certain of the Company's
anti-cancer compounds.
<PAGE>
SELLING, GENERAL AND ADMINISTRATIVE
SG&A costs have increased by 37% from the three months ended September 30,
1997 to the three months ended September 30, 1998 due principally to increasing
sales and marketing activities and the support of VIRACEPT phase IV marketing
studies.
ROYALTIES
The Company's obligation to share VIRACEPT profits with JT is reflected in
royalty expense for the three month periods ended September 30, 1997 and 1998
and represents approximately 18% and 24% of United States product sales.
INTEREST AND OTHER INCOME
Interest income decreased by 19% from the three months ended September 30,
1997 to the three months ended September 30, 1998 due principally to a lower
average investment portfolio balance resulting from increased research and
development spending.
INTEREST EXPENSE
Interest expense increased from the three months ended September 30, 1997
to the three months ended September 30, 1998 due to borrowings under a line of
credit which was used to support increased spending levels.
INCOME TAX PROVISION
The income tax provision for the first quarter of fiscal 1999 has been
computed using an effective, combined federal and state rate of 15%. The cash
obligation of such provision has been mostly offset by the utilization of
deductions generated by the exercise of stock options and/or the utilization of
deferred tax benefits (comprised mostly of net operating loss carryforwards and
research tax credits).
YEAR 2000
The Year 2000 issue results from computer programs and systems that were
created to accept only two digit dates. Such systems may not be able to
distinguish 20th century dates from 21st century dates. This could result in
miscalculations and system failures that could inhibit the Company's ability to
engage in normal business activities.
The Company has established a Year 2000 project team that is currently
reviewing information technology ("IT") systems and non-IT systems that could be
affected by this issue. Additionally, the Company has made initial contact with
all of its significant external business partners to determine the extent to
which the Company is vulnerable to their failures and to ascertain Year 2000
compliance and risk. The Company estimates that the inventory and assessment of
IT systems, non-IT systems, and material third parties will be completed by the
end of calendar 1998. The Company expects to complete remediation efforts by the
end of fiscal 1999, and to complete the validation phase by the end of calendar
1999. At this time the Company has not initiated the formulation of contingency
plans. The determination of the necessity for contingency plans will be made by
the end of fiscal 1999.
While the total cost to obtain Year 2000 compliance is not known at this
time, the Company believes such cost will not have a material effect on the
Company's business, financial position, or results of operation. However, even
though the Company expects to have obtained Year 2000 compliance prior to the
Year 2000, the inability of the Company or its business partners to remedy Year
2000 issues could have a significant impact on the Company's business, financial
position, or results of operation.
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Prior to fiscal 1998, the Company has relied principally on equity
financing and corporate collaborations to fund its operations and capital
expenditures. Beginning in fiscal 1998, the gross margins from commercial sales
of VIRACEPT contributed significantly to the Company's overall working capital
requirements. Commercial sales of VIRACEPT resulted in gross margins of
approximately $32,370,000 and $236,654,000 for the years ended June 30, 1997 and
1998, and $45,429,000 and $76,825,000 for the three month periods ended
September 30, 1997 and 1998.
At June 30, 1998, the Company had net working capital of approximately
$127,728,000, an increase of $11,942,000 over June 30, 1997 levels due
principally to the Company's pre-tax profit of $21,924,000. Individual working
capital components significantly impacted by the commercialization of VIRACEPT
include trade accounts receivable (an increase of $18,416,000), inventories (an
increase of $44,906,000), accounts payable (an increase of $15,560,000) and
accrued liabilities (an increase of $26,467,000, primarily due to accrued
royalties payable to JT). It is anticipated that these working capital
components and cash and short-term investments will continue to be significantly
impacted by VIRACEPT sales. At June 30, 1998, the Company had cash, cash
equivalents and short-term investments of approximately $87,123,000.
At September 30, 1998, the Company had net working capital of approximately
$138,533,000, an increase of $10,805,000 over June 30, 1998 levels due
principally to the Company's pre-tax profit of $8,106,000. Individual working
capital components significantly impacted by the commercialization of VIRACEPT
include trade accounts receivable (a decrease of $1,829,000), inventories (an
increase of $2,932,000), accounts payable (a decrease of $18,539,000) and
accrued liabilities (an increase of $1,391,000, primarily due to accrued
royalties payable to JT). It is anticipated that these working capital
components and cash and short-term investments will continue to be significantly
impacted by VIRACEPT sales. At September 30, 1998, the Company had cash, cash
equivalents and short-term investments of approximately $61,940,000. The Company
believes that its current capital resources, existing contractual commitments
and anticipated VIRACEPT product sales are sufficient to maintain its current
operations through fiscal 1999. This belief is based on current research and
clinical development plans, anticipated working capital requirements associated
with the expanding commercialization of VIRACEPT, the current regulatory
environment, historical industry experience in the development of therapeutic
drugs and general economic conditions.
The Company believes that additional financing may be required to meet the
planned operating needs after fiscal 1999 if significant and increasing positive
cash flows are not generated from commercial activities. Such needs would
include the expenditure of substantial funds to continue and expand research and
development activities, conduct existing and planned preclinical studies and
human clinical trials and to support the increasing working capital requirements
of a growing commercial infrastructure including manufacturing, sales and
marketing capabilities. As a result, the Company anticipates pursuing various
financing alternatives such as collaborative arrangements and additional public
offerings or private placements of securities. If such alternatives are not
available, the Company may be required to defer or restrict certain commercial
activities, delay or eliminate expenditures for certain of its potential
products under development, cancel licenses from third parties or to license
third parties to commercialize products or technologies that the Company would
otherwise seek to develop or commercialize itself.
During fiscal 1996, capital expenditures totaled $3,710,000 compared with
$14,727,000 and $33,086,000 during 1997 and 1998, of which $457,000, $2,355,000
and $1,579,000 were financed through capital lease obligations. During the first
quarter of fiscal 1998 and 1999, capital expenditures totaled $3,942,000 and
$2,928,000, of which $96,000 and $1,292,000 were financed through capital lease
obligations. Capital expenditures during 1999 are expected to be approximately
$18,000,000 to support continued product commercialization, development and
research activities. The Company may utilize lease or debt financing for certain
expenditures if available on acceptable terms.
<PAGE>
AGOURON PHARMACEUTICALS, INC.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
Report of Independent Accountants
Consolidated Balance Sheet as of June 30, 1997, June 30, 1998 and September 30,
1998
Consolidated Statement of Income (Loss) for the years ended June 30, 1996, 1997
and 1998 and for the three month periods ended September 30, 1997 and
1998
Consolidated Statement of Stockholders' Equity and Comprehensive Income (Loss)
for the years ended June 30, 1996, 1997 and 1998 and for the three
month periods ended September 30, 1997 and 1998
Consolidated Statement of Cash Flows for the years ended
June 30, 1996, 1997 and 1998 and for the three month periods ended
September 30, 1997 and 1998
Notes to Consolidated Financial Statements
NOTE: All schedules are omitted because they are not applicable, or not
required, or because the required information is included in the
consolidated financial statements or notes thereto.
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of Agouron Pharmaceuticals, Inc.
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of income (loss), of stockholders' equity and
comprehensive income (loss) and of cash flows present fairly, in all material
respects, the financial position of Agouron Pharmaceuticals, Inc. and its
subsidiaries at June 30, 1997 and 1998, and the results of their operations and
their cash flows for each of the three years in the period ended June 30, 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 an
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.
PricewaterhouseCoopers, LLP
San Diego, California
July 16, 1998
<PAGE>
AGOURON PHARMACEUTICALS, INC.
CONSOLIDATED BALANCE SHEET
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
JUNE 30, September 30,
1997 1998 1998
(unaudited)
ASSETS
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents $ 52,484 $ 19,098 $ 16,713
Short-term investments 38,833 68,025 45,227
Accounts receivable, net 31,375 51,341 51,755
Inventories 58,800 103,706 106,638
Current deferred tax assets 500 564 564
Other current assets 2,209 5,247 3,868
------------- ------------- -------------
Total current assets 184,201 247,981 224,765
Property and equipment, net 22,613 47,212 45,670
Deferred tax assets 56,000 64,644 64,999
Purchased intangibles 4,100 3,500 3,350
------------- ------------- -------------
$ 266,914 $ 363,337 $ 338,784
============ ============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 28,833 $ 44,393 $ 25,854
Accrued liabilities 8,889 35,356 36,747
Deferred revenue and advances 27,567 23,563 21,191
Current deferred tax liabilities 600 1,139 1,621
Loan payable and current portion of long-term debt 2,526 15,802 819
------------- ------------- -------------
Total current liabilities 68,415 120,253 86,232
------------- ------------- -------------
Long-term liabilities:
Long-term debt, less current portion 5,940 5,892 6,242
Accrued rent 1,277 1,023 938
------------- ------------- -------------
Total long-term liabilities 7,217 6,915 7,180
------------- ------------- -------------
Stockholders' equity:
Common stock, no par value, 75,000,000 shares
authorized, 29,429,920, 31,053,380, and
31,246,645 shares issued and outstanding 317,133 348,482 350,947
Accumulated other comprehensive income 0 384 232
Accumulated deficit (125,851) (112,697) (105,807)
------------- ------------- -------------
Total stockholders' equity 191,282 236,169 245,372
------------- ------------- -------------
Commitments
$ 266,914 $ 363,337 $ 338,784
============= ============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
AGOURON PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENT OF INCOME (LOSS)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Three Months Ended
YEARS ENDED JUNE 30, SEPTEMBER 30,
1996 1997 1998 1997 1998
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C>
Revenues:
Product sales $ 0 $ 56,969 $ 409,298 $ 79,502 $ 133,870
Contracts 40,955 65,094 38,855 10,003 6,017
License fees and royalties 15,000 10,000 18,352 2,352 5,050
----------- ----------- ----------- ----------- -----------
55,955 132,063 466,505 91,857 144,937
----------- ----------- ----------- ----------- -----------
Operating expenses:
Cost of product sales 0 24,599 172,644 34,073 57,045
Research and development 71,010 108,137 150,657 26,932 37,364
Selling, general and administrative 8,082 32,941 58,012 12,546 17,142
Royalties 0 0 68,423 13,376 25,893
Write-off of in-process technology
purchased 0 57,500 0 0 0
----------- ----------- ----------- ----------- -----------
79,092 223,177 449,736 86,927 137,444
----------- ----------- ----------- ----------- -----------
Operating income (loss) (23,137) (91,114) 16,769 4,930 7,493
----------- ----------- ----------- ----------- -----------
Other income (expenses):
Interest and other income 4,776 5,873 5,907 1,281 1,036
Interest expense (228) (142) (752) (161) (423)
----------- ----------- ----------- ----------- -----------
4,548 5,731 5,155 1,120 613
----------- ----------- ----------- ----------- -----------
Income (loss) before income taxes (18,589) (85,383) 21,924 6,050 8,106
Income tax provision (benefit) 934 (42,577) 8,770 2,420 1,216
----------- ----------- ----------- ----------- -----------
Net income (loss) $ (19,523) $ (42,806) $ 13,154 $ 3,630 $ 6,890
=========== ============ =========== =========== ===========
Earnings per share:
Basic $ (.99) $ (1.59) $ .43 $ .12 $ .22
=========== =========== ============ =========== ===========
Diluted $ (.99) $ (1.59) $ .40 $ .11 $ .21
=========== =========== ============ =========== ===========
Shares used in calculation of:
Basic 19,688 26,946 30,571 29,964 31,127
Diluted 19,688 26,946 33,214 33,158 33,179
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
AGOURON PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
AND COMPREHENSIVE INCOME (LOSS)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Accumulated
Other
COMMON STOCK Comprehensive Accumulated
SHARES AMOUNT INCOME (LOSS) DEFICIT TOTAL
STOCKHOLDERS' EQUITY:
<S> <C> <C> <C> <C> <C>
Balance at June 30, 1995 14,718,564 $ 76,113 $ 0 $ (63,522) $ 12,591
Stock issuances:
Public sale 6,000,000 78,579 -- 78,579
Exercise of stock options 586,412 2,990 -- 2,990
Exercise of stock warrants 90,000 283 -- 283
Employee stock purchase plan 68,398 663 -- 663
Net loss -- -- (19,523) (19,523)
----------- ----------- ----------- ----------- -----------
Balance at June 30, 1996 21,463,374 158,628 0 (83,045) 75,583
Stock issuances:
Public sale 5,470,000 77,245 -- 77,245
Acquisition of Alanex 1,444,236 61,051 -- 61,051
Exercise of stock options 980,472 6,720 -- 6,720
Employee stock purchase plan 71,838 1,389 -- 1,389
Tax benefit of stock options exercised -- 12,100 -- 12,100
Net loss -- -- (42,806) (42,806)
----------- ----------- ----------- ----------- -----------
Balance at June 30, 1997 29,429,920 317,133 0 (125,851) 191,282
Stock issuances:
Exercise of stock options 1,344,104 11,031 -- 11,031
Exercise of stock warrants 169,522 680 -- 680
Employee stock purchase plan 109,834 2,742 -- 2,742
Tax benefit of stock options exercised -- 16,896 -- 16,896
Unrealized gains (losses) on securities 384 384
Net income -- -- 13,154 13,154
----------- ----------- ----------- ----------- -----------
Balance at June 30, 1998 31,053,380 348,482 384 (112,697) 236,169
Stock issuances:
Exercise of stock options
(unaudited) 193,265 1,805 -- 1,805
Tax benefit of stock options
exercised (unaudited) 660 660
Unrealized gains (losses) on securities (unaudited) (152) (152)
Net income (unaudited) -- -- 6,890 6,890
----------- ----------- ----------- ----------- -----------
Balance at September 30, 1998
(unaudited) 31,246,645 $ 350,947 $ 232 $ (105,807) $ 245,372
============ =========== =========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
Other
Comprehensive Net Comprehensive
INCOME (LOSS) INCOME (LOSS) INCOME (LOSS)
COMPREHENSIVE INCOME (LOSS):
<S> <C> <C> <C>
Year ended June 30,
1996 $ -- $ (19,523) $ (19,523)
1997 -- (42,806) (42,806)
1998 384 13,154 13,538
Three months ended September 30 (unaudited),
1997 -- 3,630 3,630
1998 (152) 6,890 6,738
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
AGOURON PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
Three Months Ended
YEARS ENDED JUNE 30, SEPTEMBER 30,
1996 1997 1998 1997 1998
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Cash received from product sales,
contracts, license fees
and royalties $ 61,376 $ 116,692 $ 442,484 $ 81,701 $ 142,151
Cash paid to suppliers, employees and
service providers (73,738) (195,890) (446,863) (77,401) (152,857)
Interest received 4,776 5,873 5,958 1,281 991
Interest paid (228) (142) (752) (161) (423)
----------- ----------- ----------- ----------- -----------
Net cash provided (used) by
operating activities (7,814) (73,467) 827 5,420 (10,138)
----------- ----------- ----------- ----------- -----------
Cash flows from investing activities:
Proceeds from maturities/sales of short-term
investments 59,686 127,501 147,292 21,818 29,529
Purchases of short-term investments (118,224) (91,227) (176,100) (51,972) (6,883)
Purchase of property and equipment (3,252) (12,372) (31,507) (3,846) (1,636)
Cost to acquire Alanex, net of cash
acquired 0 608 0 0 0
----------- ----------- ----------- ----------- -----------
Net cash provided (used) by
investing activities (61,790) 24,510 (60,315) (34,000) 21,010
----------- ----------- ----------- ----------- -----------
Cash flows from financing activities:
Net proceeds from issuance of
common stock 82,515 85,354 14,453 6,211 1,376
Proceeds from credit line 0 0 53,600 0 8,000
Principal payments on credit line, long-term
debt, and capital leases (818) (364) (41,951) (237) (22,633)
----------- ----------- ----------- ----------- -----------
Net cash provided
(used) by financing activitie 81,697 84,990 26,102 5,974 (13,257)
----------- ----------- ----------- ----------- -----------
Net increase (decrease) in cash
and cash equivalents 12,093 36,033 (33,386) (22,606) (2,385)
Cash and cash equivalents at
beginning of year 4,358 16,451 52,484 52,484 19,098
----------- ----------- ----------- ----------- -----------
Cash and cash equivalents at end of year $ 16,451 $ 52,484 $ 19,098 $ 29,878 $ 16,713
=========== =========== =========== =========== ===========
Reconciliation of net income
(loss) to net cash provided
(used) by operating activities:
Net income (loss) $ (19,523) $ (42,806) $ 13,154 $ 3,630 $ 6,890
Depreciation and amortization 2,411 3,910 9,087 1,893 3,328
Write-off of in-process technology
purchased 0 57,500 0 0 0
Provision (benefit) for deferred income taxes 0 (43,800) 8,727 2,420 1,216
Net (increase) decrease in inventories 0 (58,547) (44,906) 889 (2,932)
Net (increase) decrease in accounts receivable
and other current assets (1,198) (28,209) (23,004) (11,151) 965
Net increase (decrease) in accounts payable,
accrued liabilities, deferred revenue and
advances, and other liabilities 10,496 38,485 37,769 7,739 (19,605)
----------- ----------- ----------- ----------- -----------
Net cash provided (used) by
operating activities $ (7,814) $ (73,467) $ 827 $ 5,420 $ (10,138)
=========== =========== =========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
AGOURON PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES
THE COMPANY
Agouron Pharmaceuticals, Inc. ("Agouron" or the "Company") was organized
and incorporated in California in June 1984. Agouron is an integrated
pharmaceutical company committed to the discovery, development, manufacturing
and marketing of innovative therapeutic products engineered to inactivate
proteins which play key roles in cancer, AIDS and other serious diseases. The
Company, through its own sales and marketing organization, is currently
marketing in the United States its first drug, VIRACEPT(R) (nelfinavir mesylate)
for treatment of HIV infection. The Company is also conducting pivotal phase
II/III clinical trials for AG3340 for treatment of lung and prostate cancer. In
addition, Agouron is expected to initiate a phase II/III pivotal clinical trial
of REMUNE(TM) (AG1661), an immune-based therapeutic agent for treatment of HIV
infection and AIDS being co-developed by Agouron and The Immune Response
Corporation ("IRC"). Further, the Company has a number of programs in progress
for discovery or development of other new drugs in the fields of cancer, viral
disease and other serious diseases. The Company is also using the proprietary
core drug discovery technology of Alanex Corporation ("Alanex"), a wholly-owned
subsidiary of the Company, to accelerate the steps necessary to discover
small-molecule drug candidates, from the initial identification of compounds
that exhibit activity against selected biological targets to the progression of
these compounds to drug candidates for human clinical trials.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated.
UNAUDITED INTERIM FINANCIAL INFORMATION
The consolidated balance sheet as of September 30, 1998 and the
consolidated statements of income, of stockholders' equity and comprehensive
income and of cash flows for the three month periods ended September 30, 1997
and 1998 have been prepared by the Company and have not been audited. Such
financial statements, in the opinion of management, include all adjustments
necessary for their fair presentation in conformity with generally accepted
accounting principles. Certain information and footnote disclosures have been
condensed or omitted pursuant to the Securities and Exchange Commission rules
and regulations. Interim results are not necessarily indicative of results for
the full year.
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, liabilities, revenues
and expenses and related disclosures as of the date of the financial statements.
Actual results could differ from such estimates.
CASH AND CASH EQUIVALENTS
The Company considers cash equivalents to be only those investments which
are highly liquid, readily convertible to cash and which mature within 90 days
from date of purchase.
<PAGE>
SHORT-TERM INVESTMENTS
Short-term investments consist principally of government or government
agency securities, corporate notes and bonds, commercial paper and certificates
of deposit with original maturities of three to thirty-six months, and corporate
equity securities. The Company has classified its short-term investments as
available-for-sale. Included in short-term investments at June 30, 1997 and June
30, 1998 is $588,000 and $1,262,000 of accrued interest receivable.
INVENTORIES
Inventories are stated at the lower of cost or market. Cost is determined
using the first-in, first-out method. Inventories consist of the following
components at September 30, 1998 (unaudited):
Raw materials and work in process $ 98,520
Finished goods 8,118
-----------
$ 106,638
CONCENTRATION OF CREDIT AND MARKET RISK
The Company invests its excess cash principally in marketable securities
from a diversified portfolio of institutions with strong credit ratings and, by
policy, limits the amount of credit exposure at any one institution. These
investments are generally not collateralized and primarily mature within one
year. The Company has not realized any material losses from such investments in
1996, 1997 or 1998.
FINANCIAL INSTRUMENTS AND RISK MANAGEMENT
The Company has contract manufacturing operations in Europe and Asia.
Accordingly, the Company from time-to-time enters into forward contracts to
manage its exposure to fluctuations in foreign currency exchange rates. At June
30, 1998, the Company had several forward contracts with maturities of less than
six months to purchase Japanese Yen for approximately $9,426,000. These
contracts are designated and effective as hedges and, accordingly, gains and
losses are recognized in the same period the offsetting gains and losses of
hedged transactions are realized and recognized.
PROPERTY AND EQUIPMENT
Property and equipment is recorded at cost. Depreciation is computed using
principally the straight-line method over estimated useful lives of three to
five years. Leasehold improvements are amortized over the life of the lease.
PURCHASED INTANGIBLES
In conjunction with the 1997 acquisition of Alanex, the Company has
recorded purchased intangibles (primarily drug discovery technology and chemical
compound libraries) which are being amortized on a straight-line basis over
their estimated useful lives of seven years.
DEFERRED REVENUE AND ADVANCES
At June 30, 1998, approximately $22,414,000 of cash received from JT has
been classified as deferred contract revenue and advances. Approximately
$21,452,000 of the cash received from JT represents JT's advance of the
Company's VIRACEPT development funding obligation which was completed in March
1998. Such amounts are to be repaid by the Company out of future profits, if
any, generated by sales of VIRACEPT in the United States. The balance of the
payments from JT are non-refundable and are being recognized as contract revenue
on a prospective basis generally as collaborative program expenses are incurred.
<PAGE>
PRODUCT SALES
The Company ships VIRACEPT to wholesalers throughout the United States and
recognizes sales revenue upon shipment. Sales are reported net of discounts,
rebates, chargebacks and product returns.
Also included in product sales are sales to Roche (at cost plus
contractually determined mark-ups) of clinical and commercial drug supplies to
be used by Roche in its licensed territory. Such Roche sales were approximately
$1,441,000 and $50,979,000 for 1997 and 1998, and $4,128,000 and $26,683,000 for
the three month periods ended September 30, 1997 and 1998. The Company receives
a royalty on Roche's subsequent commercial sales of such drug supplies.
CONTRACT REVENUES
Contract revenues are earned and recognized generally as contract research
costs are incurred according to the provisions of each underlying agreement.
Amounts received in advance of performance are recorded as deferred revenue.
Contract milestone payments are recognized as revenues upon the completion of
the milestone event or requirement.
LICENSE FEES AND ROYALTIES
License fees are recognized as revenue 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 revenues are recognized based on estimated and actual sales of
licensed products in licensed territories.
RESEARCH AND DEVELOPMENT COSTS
Research and development costs are expensed in the period incurred.
INCOME TAX PROVISION (BENEFIT)
The Company records a provision (benefit) for income taxes using the
liability method. Current income tax expense (benefit) generally is the amount
of income taxes expected to be payable for the current year. Deferred taxes are
recorded by applying applicable tax rates to cumulative temporary differences
based on when and how they are expected to affect the tax return.
EARNINGS (LOSS) PER SHARE
The Company computes earnings per share in accordance with Statement of
Financial Accounting Standards No. 128 "Earnings Per Share". Basic earnings
(loss) per share is based upon the weighted average number of common shares
outstanding during a period. Diluted earnings (loss) per share is based upon the
weighted average number of common shares outstanding and dilutive common stock
equivalents during a period. Common stock equivalents are options under the
Company's stock option plans which are included in the earnings per share
computation under the treasury stock method and common shares expected to be
issued under the Company's employee stock purchase plan.
For 1996 and 1997, common stock equivalents of approximately 2,014,000 and
3,168,000 shares were not used to calculate diluted earnings (loss) per share
because of their anti-dilutive effect. Common stock equivalents of approximately
2,643,000 shares for 1998 were used to calculate diluted earnings per share.
There are no reconciling items in calculating the numerator for basic and
diluted earnings (loss) per share for any of the periods presented.
Common stock equivalents of approximately 3,194,000 and 2,052,000 shares
for the three month periods ended September 30, 1997 and 1998 were used to
calculate diluted earnings per share.
<PAGE>
STOCK-BASED COMPENSATION PLANS
The Company measures compensation expense for its stock-based compensation
plans using the intrinsic method and provides pro-forma disclosures of net
income and earnings (loss) per share as if the fair value-based method had been
applied in measuring compensation expense.
STATEMENT OF CASH FLOWS
For purposes of cash equivalents the Statement of Cash Flows, are highly
liquid investments purchased with an original maturity of ninety days or less.
Non-cash financing and investing activities are comprised primarily of capital
lease obligations of $457,000, $2,355,000 and $1,579,000 for 1996, 1997, 1998
and the acquisition of Alanex in 1997.
NEW ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 131 ("FAS 131"), "Disclosures
about Segments of an Enterprise and Related Information," which requires
additional disclosures to be adopted on June 30, 1999. FAS 131 requires that the
Company report financial and descriptive information about its reportable
operating segments. The Company is evaluating the impact on its disclosures, if
any.
As of July 1, 1998, the Company adopted Statement of Financial Accounting
Standards No. 130 ("FAS 130"), "Reporting Comprehensive Income," which
establishes new rules for the reporting and display of comprehensive income and
its components. FAS 130 requires unrealized gains and losses on the Company's
available-for-sale securities to be included in other comprehensive income. The
Company presents such information in its statement of stockholders' equity and
comprehensive income (loss).
<PAGE>
NOTE 2 - SHORT-TERM INVESTMENTS
The cost of the Company's investment portfolio by type of security and
contractual maturity in the balance sheet is as follows:
<TABLE>
<CAPTION>
JUNE 30,
1997 1998
(Dollars in thousands)
<S> <C> <C>
Type of security:
Corporate debt $ 24,401 $ 46,023
U.S. Treasury and agencies 11,994 10,766
Other interest-bearing 2,438 9,462
Corporate equity 0 1,774
--------------- ---------------
$ 38,833 $ 68,025
=============== ===============
Contractual maturity:
Maturing in less than twelve months $ 35,827 $ 41,389
Maturing between twelve and
thirty-two months 3,006 26,636
--------------- ---------------
$ 38,833 $ 68,025
=============== ===============
</TABLE>
The cost of securities sold, if any, is based upon the specific
identification method. The net unrealized holding gain on available-for-sale
securities included as a separate component of stockholders' equity at June 30,
1998 totaled $384,000. There were no material unrealized gains or losses nor any
material differences between the estimated fair values and costs of securities
in the investment portfolio at June 30, 1998. Realized gains on the disposal of
available-for-sale securities during 1996 totaled $22,000. During 1997 such
gains and losses totaled $12,000 and $4,000, respectively. During 1998, such
gains and losses totaled $20,000 and $2,000, respectively.
<PAGE>
NOTE 3 - COMPOSITION OF CERTAIN FINANCIAL STATEMENT CAPTIONS
<TABLE>
<CAPTION>
JUNE 30,
1997 1998
(Dollars in thousands)
<S> <C> <C>
Accounts receivable, net:
Trade $ 26,055 $ 44,471
Contract 4,668 2,451
Royalties 0 2,339
Employee 269 252
Other 383 1,828
------------- -------------
$ 31,375 $ 51,341
============= =============
Inventories:
Raw materials and work in process $ 57,883 $ 95,517
Finished goods 917 8,189
------------- -------------
$ 58,800 $ 103,706
============= =============
Property and equipment, net:
Scientific instrumentation $ 16,614 $ 26,869
Leasehold improvements 10,804 25,135
Computer equipment 8,892 15,619
Furniture and fixtures 2,464 3,910
------------- -------------
38,774 71,533
Less accumulated depreciation and amortization (16,161) (24,321)
------------- -------------
$ 22,613 $ 47,212
============= =============
Accrued liabilities:
Royalties $ 0 $ 21,410
License fees 0 6,000
Vacation 1,932 2,955
Clinical studies 3,578 2,731
Other 3,379 2,260
------------- -------------
$ 8,889 $ 35,356
============= =============
</TABLE>
<PAGE>
NOTE 4 - SIGNIFICANT CONTRACT ARRANGEMENTS
JAPAN TOBACCO INC.
In February 1994, the Company entered into a strategic alliance with JT in
the field of anti-viral drugs for the treatment of infections caused by
hepatitis C and the herpes family of viruses. In December 1994, the Company
added its anti-HIV drug, VIRACEPT, to the JT collaboration with the execution of
a world-wide development and licensing agreement. Agouron and JT share equally
the costs of further development of VIRACEPT.
Currently, Agouron has exclusive commercial rights to VIRACEPT (with the
right to sublicense) in North America and JT has exclusive commercial rights to
VIRACEPT (with the right to sublicense) in parts of Japan. The Company and JT
share profits and/or royalties equally from the world-wide commercialization of
VIRACEPT.
Under the combined terms of the JT agreements, the Company has incurred
costs of $46,969,000, $71,825,000 and $51,898,000 and recognized corresponding
contract revenues of $37,197,000, $48,886,000 and $17,359,000 for the years
ended June 30, 1996, 1997 and 1998.
ROCHE
The Company and JT have granted Roche certain exclusive royalty bearing
marketing rights to VIRACEPT outside of North America and parts of Japan. For
such rights, the Company has received (and recognized as revenue) initial
license fees and additional product approval license fees. The Company also
receives royalties based either on Roche's sales of VIRACEPT or, in certain
circumstances, Invirase(R) and Fortavase(R) (saquinavir), Roche's HIV protease
inhibitors. VIRACEPT license fees and royalties from Roche totaled $9,000,000
and $17,852,000 for the years ended June 30, 1997 and 1998.
HLR
In June 1996, Agouron granted HLR world-wide development rights in two
anti-cancer drugs and agreed to collaborate with HLR on an additional
early-stage anti-cancer drug discovery program. In return for such rights, HLR
paid $15,000,000 in initial license fees and agreed to bear 80% of certain
future development costs and to provide annual research support to the Company
of $3,000,000. In December 1997, Agouron and HLR agreed to end this anti-cancer
research and development collaboration. The Company has regained all commercial
rights to the anti-cancer drugs previously within the scope of the
collaboration.
Under the terms of the anti-cancer agreements with HLR which have been
terminated, the Company incurred costs of $17,854,000 and $23,486,000 and
recognized corresponding contract revenues of $14,270,000 and $15,428,000 for
the years ended June 30, 1997 and 1998.
THE IMMUNE RESPONSE CORPORATION
In June 1998, the Company entered into a binding letter of intent with IRC
to collaborate on final development and commercialization of REMUNE, an
immune-based therapeutic agent discovered by IRC and currently the subject of
several clinical studies including a large phase III clinical trial. The two
companies intend to enter promptly into a definitive agreement and will endeavor
to complete development and registration of REMUNE in 1999. IRC will manufacture
commercial supplies of REMUNE, and Agouron will have exclusive rights to market
REMUNE in North America, Europe and certain other countries. The two companies
will share equally all profits from the commercialization of REMUNE in the
licensed territory. Agouron paid an initial $10,000,000 license fee to IRC in
June 1998 and also purchased 118,256 newly issued common shares of IRC for
$2,000,000. The Company's development funding obligation commences October 15,
1998 and, assuming ongoing successful development, registration and approval of
REMUNE, the Company may pay to IRC up to $53,000,000 in additional development
and milestone payments and $12,000,000 in purchases of additional IRC common
stock.
<PAGE>
SHIONOGI & CO., LTD.
In June 1998, the Company entered into a binding letter of intent with
Shionogi & Co., Ltd. ("Shionogi") to develop and commercialize AG1549, a
second-generation non-nucleoside reverse transcriptase inhibitor ("NNRTI") for
the treatment of HIV infection. Discovered by Shionogi, AG1549 is currently the
subject of several clinical trials evaluating its dose and its concomitant use
with other antiretroviral treatments.
Agouron has exclusive world-wide rights to the development and
commercialization of AG1549 except in Japan, South Korea and Taiwan. Agouron
paid an initial $10,000,000 license fee in June 1998. Agouron may pay, assuming
ongoing successful development, registration and approval of AG1549, additional
license fees of up to $30,000,000. In addition, Agouron will pay Shionogi
royalties based on sales, if any, of AG1549.
JAPAN ENERGY CORPORATION
In June 1998, the Company entered into an agreement with Japan Energy
Corporation ("JE") to develop and commercialize AG1776, a novel protease
inhibitor for the treatment of HIV infection. Agouron has exclusive world-wide
rights to the development and commercialization of AG1776 except in Japan, South
Korea, North Korea and Taiwan; JE will manufacture bulk compound for use in
final drug product. Agouron incurred an initial $6,000,000 license fee in June
1998. Agouron may pay, assuming ongoing successful development, registration and
approval of AG1776, additional license fees of up to $20,000,000. In addition,
Agouron will pay JE royalties based on sales, if any, of AG1776.
<PAGE>
NOTE 5 - LONG-TERM DEBT
Long-term debt and capital lease obligations are as follows:
<TABLE>
<CAPTION>
JUNE 30,
1997 1998
(Dollars in thousands)
<S> <C> <C>
Notespayable, secured with personal property and a
certificate of deposit;
interest at CD rate plus 1.5%,
paid off in June 1998. $ 142 $ 0
Capital leases with interest rates between 5.86% and 16.5%,
maturing at various dates through June 2003. 2,462 3,214
Line of credit, $20,000,000 secured; interest at bank reference
rate or LIBOR plus 1.5%, expiring September 30, 1999. 0 15,000
Unsecured, non-interest bearing, term obligation;
face value of $4,500,000; iscounted to an 8.95%
effective rate, includes imputed interest of
$548,000 ue June 28, 2001. 3,194 3,480
Term obligation for tenant improvements, interest
at 11% per annum, payable in monthly installments,
paid off in October 1997. 2,668 0
------------- -------------
Total long-term debt and capital lease obligations 8,466 21,694
Current portion (2,526) (15,802)
------------- -------------
$ 5,940 $ 5,892
============= =============
</TABLE>
Maturities of long-term debt, excluding capital leases, are as follows:
1999 - $15,000,000; 2000 - $0; and 2001 - $4,500,000, less imputed interest of
$1,020,000.
<PAGE>
NOTE 6 - INCOME TAXES
(Dollars in thousands)
The components of the provision (benefit) for income taxes are as follows:
YEARS ENDED JUNE 30,
1996 1997 1998
Current:
Federal $ 0 $ 0 $ 0
State 1 1 43
Foreign 933 1,222 0
----------- ----------- -----------
934 1,223 43
----------- ----------- -----------
Deferred:
Federal 0 (37,800) 8,495
State 0 (6,000) 232
Foreign 0 0 0
----------- ----------- -----------
0 (43,800) 8,727
----------- ----------- -----------
$ 934 $ (42,577) $ 8,770
=========== =========== ===========
The income tax reconciliation from income (loss) before income taxes
computed at the federal statutory rate (34%) to the Company's actual income tax
provision is as follows:
YEARS ENDED JUNE 30,
1996 1997 1998
Tax at U.S. federal statutory rate $ (6,320) $ (29,030) $ 7,454
State taxes, net of federal benefit 1 1 181
Foreign taxes 933 1,222 0
Purchase accounting book/ tax basis
differences 0 19,781 0
Change in valuation allowance 6,245 (42,449) 0
Other 75 415 1,135
Adjustments to carryover amounts 0 7,483 0
----------- ----------- -----------
$ 934 $ (42,577) $ 8,770
=========== =========== ===========
The Company's deferred tax assets and liabilities are as follows:
JUNE 30,
1997 1998
Book and tax depreciation/amortization
differences $ 831 $ 5,891
Accrued liabilities 1,363 1,951
Net operating loss carryforwards 49,348 51,281
Tax credits 5,676 6,956
Other (1,318) (2,010)
----------- -----------
55,900 64,069
Valuation allowance 0 0
----------- -----------
Deferred taxes, net $ 55,900 $ 64,069
=========== ===========
The Company has not recorded current provisions for United States federal
income taxes due to net operating losses for tax reporting purposes. At June 30,
1998, the Company had net operating loss carryforwards for federal tax reporting
purposes of approximately $150,000,000 expiring from 2000 to 2013. The net
operating loss includes the tax benefit related to the exercise of stock
options, which benefit was recorded to common stock. The Company also has
federal research and development credit carryforwards of approximately
$4,800,000 at June 30, 1998. The future utilization of net operating loss
carryforwards for federal income tax purposes may be impacted by the issuance of
additional equity securities.
<PAGE>
Due to California's partial conformity with federal provisions regarding
net operating loss and research and development credit carryforwards, and as a
result of the Company's use of certain state tax planning strategies, for state
tax reporting purposes at June 30, 1998, the Company has no net operating loss
carryforwards and has research and development credit carryforwards of
approximately $2,200,000. Such credits do not expire.
Based on its 1998 operating results and its estimates of future taxable
income, the Company believes that it is more likely than not that its deferred
tax assets (comprised mostly of net operating loss carryforwards and research
credits) will be realized and has therefore recorded the full tax benefit of its
deferred tax assets as of June 30, 1998.
Foreign tax expense represents certain withholding taxes associated with
collaboration payments from JT.
<PAGE>
NOTE 7 - STOCKHOLDERS' EQUITY
STOCK OPTIONS
The Company's stock option plans, as amended, 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 at the date of grant and, for certain non-qualified stock options, the
price shall not be less than 85% of the fair market value of the shares at the
date of grant and others may be at any price determined by the Board of
Directors. The options expire not later than ten years from the date of the
grant and generally become exercisable ratably over a three or four year period
beginning one year from the grant date. In February 1998, the Board of Directors
adopted the most recent plan and reserved 1,000,000 shares for issuance
thereunder. At June 30, 1998, the Company had 1,898,556 shares of common stock
available for future grant under its stock option plans. The following table
summarizes stock option activity for fiscal 1996 through fiscal 1998:
<TABLE>
<CAPTION>
SHARES PRICES
<S> <C> <C> <C> <C>
Outstanding June 30, 1995 5,171,384 $ .24- $12.25
Options granted 2,324,950 11.78- 23.00
Options exercised (586,412) 2.70- 9.19
Options canceled (81,208) 3.94- 19.57
---------
Outstanding June 30, 1996 6,828,714 2.70- 23.00
Alanex options assumed 378,084 .27- 3.98
Options granted 2,798,500 15.19- 47.13
Options exercised (980,472) .27- 22.19
Options canceled (205,536) 4.32- 36.35
---------
Outstanding June 30, 1997 8,819,290 .27- 47.13
Options granted 1,115,394 28.00- 55.13
Options exercised (1,344,104) .27- 34.82
Options canceled (169,312) .27- 55.13
---------
Outstanding June 30, 1998 8,421,268 .27- $ 55.13
=========
</TABLE>
The following table summarizes information concerning outstanding and
exercisable options as of June 30, 1998:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
Number Weighted Weighted Number Weighted
Outstanding Average Average Exercisable Average
Ranges of Exercise as of Remaining Exercise as of Exercise
Prices JUNE 30, 1998 LIFE (YEARS) PRICE JUNE 30, 1998 PRICE
------------- -------------- --------------- ------------- ----------
<S> <C> <C> <C> <C> <C> <C>
Less than $20.00 3,601,287 6.14 $ 8.70 2,810,426 $ 7.47
$20.00 to $40.00 3,276,381 8.25 27.18 1,149,617 23.74
Greater than $40.00 1,543,600 8.99 42.56 370,058 41.26
------------- -------------- -------------- ------------- -------------
8,421,268 7.48 $ 22.10 4,330,101 $ 14.68
============= ============== ============== ============= =============
</TABLE>
<PAGE>
The Company applies APB Opinion No. 25 and related Interpretations in
accounting for its plans. Accordingly, no compensation expense has been
recognized for its stock option plans. Had compensation expense for the
Company's stock option plans been determined based upon the fair value method
prescribed under FAS 123, the Company's reported results would have been
impacted as follows:
YEARS ENDED JUNE 30,
1996 1997 1998
Net income (loss)
As reported $ (19,523) $ (42,806) $ 13,154
Compensation expense:
Stock options (1,133) (9,496) (19,891)
Employee stock purchase plan (204) (394) (1,441)
----------- ----------- -----------
Pro-forma $ (20,860) $ (52,696) $ (8,178)
=========== =========== ============
Pro-forma earnings (loss) per share:
Basic $ (1.06)$ (1.96)$ (.27)
Diluted $ (1.06)$ (1.96)$ (.27)
The weighted-average 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 fiscal years 1996, 1997 and 1998,
respectively: expected volatility of 50% each period; risk-free interest rate of
6.1% for 1996, 6.1% for 1997, and 5.7% for 1998; an average expected life of 4
years for 1996, 4 years for 1997 and 3 years for 1998; and no dividends. The
weighted average fair value of stock option grants was $8.97 per share in 1996,
$15.25 per share in 1997, $16.57 per share in 1998.
In connection with its 1997 acquisition of Alanex, the Company assumed all
of the issued and outstanding options of Alanex which resulted in options to
purchase an aggregate of 378,084 shares of the Company's common stock at
exercise prices ranging from $.27 to $3.98 per share.
EMPLOYEE STOCK PURCHASE PLAN
The Company has a stock purchase plan in which eligible employees may
purchase shares of the Company's common stock through payroll deductions. A
total of 500,000 shares of common stock have been reserved for issuance under
the plan, of which 131,156 shares remain available for purchase at June 30,
1998. Funds deducted from participating employees' salaries are used to purchase
common stock at prices equal to 85% of the fair market value of the common stock
on either the first or last day of a purchase period. During 1996, 12,262 shares
were issued at a price of $4.94 per share, 46,480 shares were issued at a price
of $9.99 per share and 9,656 shares were issued at a price of $14.29 per share.
During 1997, 9,730 shares were issued at a price of $14.29 per share, 47,036
shares were issued at a price of $17.37 per share and 15,072 shares were issued
at a price of $28.69 per share. During 1998, 109,834 shares were issued at a
price of $24.97 per share.
Under FAS 123, pro-forma compensation expense equal to the fair value of
the purchase rights granted under the employee stock purchase plan was estimated
using the Black-Scholes model with the following assumptions for 1996, 1997 and
1998: an expected life of one year; expected volatility of 50 percent; a
risk-free interest rate of 5.6 percent; and no dividends. The weighted-average
fair value of purchase rights granted was $3.47 per share in 1996, $5.96 per
share in 1997 and $13.12 per share in 1998.
WARRANTS
In connection with its 1997 acquisition of Alanex, the Company assumed an
issued and outstanding warrant to purchase Alanex common stock. Accordingly, at
June 30, 1997, a warrant to purchase an aggregate of 169,522 shares of the
Company's common stock at an exercise price of $4.01 per share was outstanding.
In July 1997, the warrant was exercised in its entirety generating net proceeds
to the Company of approximately $679,800.
<PAGE>
STOCKHOLDER RIGHTS PLAN
In November 1996, the Company's Board of Directors declared a dividend of
one preferred stock purchase right ("Right") for each outstanding share of the
Company's common stock held on the date (this dividend now amounts to one half
of a Right per share of common stock now outstanding as a result of the
two-for-one split of common stock in August 1997). The Rights will expire 10
years after issuance, and will be exercisable only if a person or group becomes
the beneficial owner of 15% or more of the common stock (such person or group, a
"15% holder") or commences a tender or exchange offer which would result in the
offeror beneficially owning 15% or more of the common stock. Each Right will
entitle stockholders to buy one one-ten thousandth of a share of Series B
Participating Preferred Stock of the Company at an exercise price of $500.00 per
share subject to certain anti-dilution adjustments.
If a person or group accumulates 15% or more of the common stock, each
Right (other than Rights held by a 15% holder and certain related parties, which
will be voided) will be adjusted so that upon exercise the holder will have the
right to receive that number of shares of common stock (or in certain
circumstances, a combination of securities and/or assets) having a value of
twice the exercise price of the Right. In addition, if following the public
announcement of the existence of a 15% holder, the Company is involved in a
merger or business combination or a sale of 50% or more of the Company's assets
or earning power, each Right (other than Rights held by a 15% holder and certain
related parties, which will be voided) will represent the right to purchase, at
the exercise price, common stock of the acquiring entity having a value of twice
the exercise price at the time. The Board of Directors will also have the right,
following the public announcement of the existence of a 15% holder, to cause
Rights (other than Rights held by the 15% holder and certain related parties,
which will be voided) to be exchanged for one share of common stock (presently
at an exchange ratio of two shares of common stock for each Right).
<PAGE>
NOTE 8 - COMMITMENTS
Certain scientific instrumentation, computers and other equipment are
subject to leases which are classified as capital leases. At June 30, 1997 and
June 30, 1998, $2,895,000 ($2,629,000, net) and $4,331,000 ($3,408,000, net) of
such leased equipment are included in property and equipment.
Rental expenses (principally for leased facilities under long-term
operating lease commitments) were $2,548,000, $3,509,000 and $5,031,000 for
1996, 1997 and 1998. Future minimum payments for capital and operating leases at
June 30, 1998 are as follows:
<TABLE>
<CAPTION>
CAPITAL LEASES OPERATING LEASES
(Dollars in thousands)
<S> <C> <C> <C>
1999 $ 819 $ 7,472
2000 812 5,507
2001 818 5,314
2002 578 3,943
2003 243 2,630
Thereafter 0 2,047
------------ --------------
Total minimum lease payments 3,270 $ 26,913
==============
Less amount representing interest (56)
-------------
Obligations under capital leases $ 3,214
============
</TABLE>
The Company is involved in certain legal proceedings generally incidental
to its normal business activities. While the outcome of any such proceedings
cannot be accurately predicted, the Company does not believe the ultimate
resolution of any such existing matters should have a material adverse effect on
its financial position or results of operations.
<PAGE>
NOTE 9 - ALANEX ACQUISITION
In April 1997, the Company executed a merger agreement with Alanex, which
now operates as a wholly-owned subsidiary of Agouron. For all outstanding shares
of Alanex common stock and related options and warrants, approximately 2,000,000
shares of Agouron common stock were issued, subject to certain restrictions.
Such shares had an aggregate fair market value on the measurement date of
approximately $61,000,000 and transaction costs were approximately $1,300,000.
Of the total purchase price (including transaction costs), $57,500,000 was
allocated (as more fully described below) to certain intangible assets and
expensed as in-process technology and approximately $4,800,000 was allocated to
certain tangible and intangible assets and capitalized.
The identifiable intangibles of Alanex include several drug research and
discovery programs, a proprietary drug discovery technology, a chemical compound
library and an assembled work force. These intangibles were valued using either
a replacement cost approach (work force, library and proprietary technology) or
an income approach (research programs). Values assigned to the chemical compound
library and proprietary drug discovery technology have been capitalized, as such
intangibles are of a general nature and may have a number of alternative future
uses. Values assigned to the drug discovery programs have been expensed, as such
programs are pursuing specific drug targets or chemical compounds, the
technological feasibility of which having not been demonstrated, and there may
be no alternative future uses for such targets or chemical compounds if the
programs are ultimately less than successful.
The Company's statement of income (loss) includes the results of operations
related to the acquisition since April 1997. The following are unaudited
pro-forma results of operations as if the transaction had been consummated on
July 1, 1995:
(In thousands except for per share amounts.)
<TABLE>
<CAPTION>
Year ended June 30, 1996 1997
(unaudited) (unaudited)
<S> <C> <C> <C>
Revenues $ 62,392 $ 138,872
============= =============
Net income (loss) $ (19,421) $ 14,276
============= =============
Earnings (loss) per share $ (.92) $ .51
============= =============
</TABLE>
<PAGE>
NOTE 10 - QUARTERLY FINANCIAL DATA (UNAUDITED)
(In thousands, except for
per share amounts)
<TABLE>
<CAPTION>
QUARTER ENDED
SEPTEMBER 30 DECEMBER 31 MARCH 31 JUNE 30
------------- ------------- ------------- ----------
<S> <C> <C> <C> <C>
1997
Product sales $ 0 $ 0 $ 13,401 $ 43,568
Gross margin from product sales 0 0 7,378 24,992
Net loss (14,447) (12,556) (4,999) (10,804)
Earnings (loss) per share:
Basic (.57) (.46) (.18) (.38)(1)
Diluted (.57) (.46) (.18) (.38)(1)
1998
Product sales $ 79,502 $ 91,800 $ 111,950 $ 126,046
Gross margin from product sales 45,429 53,858 62,730 74,637
Net income (loss) 3,630 4,922 13,525 (8,923)
Earnings (loss) per share:
Basic .12 . 16 . 44 (.29)(2)
Diluted .11 . 15 . 41 (.29)(2)
1999
Product sales $ 133,870
Gross margin from product sales 76,825
Net income 6,890
Earnings per share:
Basic .22
Diluted .21
</TABLE>
(1) During the fourth quarter of 1997, the Company recorded a write-off of
$57,500,000 ($2.03 per share) of in-process technology associated with the
acquisition of Alanex, partially offset by the realization of $43,800,000
($1.54 per share) of deferred tax assets associated with the Company's
expectation of future taxable income.
(2) During the fourth quarter of 1998, the Company incurred in-licensing
costs of $26,000,000 (tax-effected $.50 per share) for commercial rights
to three development stage anti-HIV products.
<PAGE>
ANNEX IV
AGOURON PHARMACEUTICALS
DESCRIPTION OF BUSINESS
GENERAL
Agouron Pharmaceuticals ("Agouron Pharmaceuticals") is a division of
Agouron Pharmaceuticals, Inc. ("Agouron" or the "Company"). Agouron
Pharmaceuticals encompasses all of the activities of Agouron except for those
activities related to the research, development and commercialization of
oncology products. Such products are being pursued by the Oncology Division.
Agouron Pharmaceuticals, through its own sales and marketing organization,
is currently marketing in the United States the first drug developed by Agouron,
VIRACEPT(R) (nelfinavir mesylate) for treatment of HIV infection. In addition,
Agouron Pharmaceuticals is expected to initiate a phase II/III pivotal clinical
trial of REMUNE(TM) (AG1661), an immune-based therapeutic agent for treatment of
HIV infection and AIDS being co-developed by Agouron Pharmaceuticals and The
Immune Response Corporation ("IRC"). Further, Agouron Pharmaceuticals has a
number of programs in progress for discovery or development of other new drugs
in the fields of viral disease, inflammatory disease and other serious diseases.
Agouron Pharmaceuticals utilizes the proprietary core drug discovery technology
of Alanex Corporation ("Alanex"), a wholly-owned subsidiary of Agouron, to
accelerate the steps necessary to discover small molecule drug candidates. Such
steps include the initial identification of compounds that exhibit activity
against selected biological targets to the progression of these compounds to
drug candidates for human clinical trials.
Agouron Pharmaceuticals' long-term goal is increasing profitability from
the sale of drugs generated from its own drug discovery and development efforts,
and from development and commercialization of drugs originated outside of
Agouron Pharmaceuticals. To augment its technical capabilities, to enhance the
likelihood of successful commercialization of its products and to offset some of
its operating costs, Agouron Pharmaceuticals has entered into collaborative
research and development arrangements with other companies. Agouron
Pharmaceuticals has generally retained significant commercial rights in drugs
developed in its collaborative research and development programs funded in whole
or in part by other companies. Agouron Pharmaceuticals anticipates that its
successfully developed products will be commercialized both through its own
direct sales and marketing activities in certain pharmaceutical markets and
through manufacturing and marketing relationships with other pharmaceutical
companies.
NARRATIVE DESCRIPTION OF BUSINESS
Agouron Pharmaceuticals is developing innovative drugs for treatment of HIV
infection and other serious diseases and has expended approximately $327,000,000
on research and development since its inception, excluding a $57,500,000
write-off for in-process technology purchased in 1997 in the acquisition of
Alanex.
VIRACEPT
In March 1997, Agouron received clearance from the Food and Drug
Administration ("FDA") to market its first drug, VIRACEPT, a potent HIV protease
inhibitor that substantially decreases viral load and increases CD4+T cell
counts when used in combination antiretroviral drug therapy. An orally
administered product, VIRACEPT is available in adult and pediatric formulations.
VIRACEPT sales in North America totaled $358,321,000 in fiscal 1998 and
$107,187,000 in the first quarter of fiscal 1999. Agouron Pharmaceuticals
estimated that approximately 90,000 patients in the United States (approximately
150,000 in the world) were taking VIRACEPT at the end of September 1998. It is
anticipated that continued VIRACEPT sales will make a substantial contribution
toward profitable financial results in the future.
<PAGE>
Agouron Pharmaceuticals developed VIRACEPT in collaboration with the
pharmaceutical division of JT. Agouron Pharmaceuticals and Japan Tobacco Inc.
("JT"). Agouron Pharmaceuticals and JT granted exclusive commercial rights in
Europe, Asia and certain other countries in the world to Hoffmann-La Roche Inc.
and F. Hoffmann-La Roche Ltd ("Roche"). Agouron Pharmaceuticals and JT share
profits and/or royalties equally from the worldwide commercialization of
VIRACEPT.
In January and March 1998, VIRACEPT was approved for marketing in Europe
and Japan, respectively. VIRACEPT license fees and royalties from Roche totaled
$17,852,000 in 1998 and $5,050,000 in the first quarter of fiscal 1999.
RESEARCH AND DEVELOPMENT PROGRAMS
Agouron Pharmaceuticals' research and development programs focus on the
areas of AIDS and other serious diseases. Agouron Pharmaceuticals' drug
discovery programs apply Agouron's core technologies of three-dimensional
structure based drug design and high-throughput screening of chemical libraries
generated by computation-directed combinatorial chemistry.
The following table outlines the status of various programs in Agouron
Pharmaceuticals' research and development portfolio. Agouron Pharmaceuticals is
pursuing some of these programs independently, while others are being undertaken
in collaboration with other companies.
RESEARCH
AND
DEVELOPMENT
PROGRAM INDICATION STAGE
VIRAL DISEASE
VIRACEPT(1) HIV Infection Approved
REMUNE(2) HIV Infection Phase II/III
S-1153(3) HIV Infection Phase I
JE-2147(4) HIV Infection Preclinical
AG7088 Common Cold Preclinical
Hepatitis C agents(5) Viral Diseases Research
HIV Integrase Inhibitors HIV Infection Research
OPHTHALMOLOGY
AG3340 Macular Degeneration Phase II
Other MMP Inhibitors Macular Degeneration Preclinical
VEGF Inhibitors Macular Degeneration Research
(1) In collaboration with Japan Tobacco, Inc.
(2) In collaboration with The Immune Response Corporation.
(3) In collaboration with Shionogi & Co., Ltd.
(4) In collaboration with Japan Energy Corporation.
(5) In collaboration with Japan Tobacco Inc.
VIRAL DISEASE
OVERVIEW
The development of new drugs for the treatment of certain viral diseases is
an important scientific and commercial focus of Agouron Pharmaceuticals. Agouron
Pharmaceuticals is presently conducting programs aimed at discovery and/or
development of several classes of anti-viral drugs that block viral proteases,
enzymes required by
<PAGE>
several families of pathogenic viruses to carry out replication and infection.
Agouron Pharmaceuticals' anti-viral drug programs include HIV protease
inhibitors (VIRACEPT and JE-2147), an immune-based therapeutic (REMUNE), a
non-nucleoside reverse transcriptase inhibitor (S-1153), rhinovirus 3C protease
inhibitors, and hepatitis C protease enzymes. Agouron Pharmaceuticals is
developing certain of its anti-viral drugs either through collaboration(s) with
JT, Roche, IRC, Shionogi & Co., Ltd. and Japan Energy Corporation.
HIV PROTEASE INHIBITOR: VIRACEPT
HIV protease is an enzyme that performs an essential role in the infectious
cycle of HIV, and clinical research has demonstrated that inhibition of the
protease enzyme renders HIV unable to form new infectious virus. Today, five
FDA-approved HIV protease inhibitors (including VIRACEPT) are making a
significant contribution in the management of HIV disease.
VIRACEPT was cleared by the FDA for marketing in the United States in March
1997 pursuant to the FDA's guidelines for accelerated approval. VIRACEPT
development activities now include certain additional phase II/III studies to
facilitate the full approval of the drug and certain phase IV studies designed
to expand the utilization of the product.
IMMUNE-BASED THERAPEUTIC AGENT: REMUNE (AG1661)
An important recent goal in treatment of HIV infection is to combine such
highly active drugs as HIV protease inhibitors, capable of halting replication
of HIV, with agents capable of directly enhancing recovery of the immune system.
REMUNE is an immune-based therapeutic agent, derived from HIV itself, which has
been shown to stimulate the immune system to respond specifically to HIV
infection and to produce the increases in substances such as chemokines that may
provide protection to uninfected cells. Discovered by IRC, REMUNE is
administered as an intramuscular injection every three months, and has been
well-tolerated in clinical trials to date.
In May 1997, enrollment was completed at 74 centers in the United States
for a pivotal phase III, clinical end-point trial in which approximately 2,500
patients were randomized to receive conventional anti-retroviral drug therapy
with or without REMUNE. This study is expected to be completed in March 1999.
More than 250 patients have been enrolled in two other clinical studies which
are evaluating the effect of REMUNE in combination with anti-retroviral drugs on
virologic and immunologic markers in adults. A smaller study of REMUNE for
treatment of HIV infection in children is in progress at the National Institutes
of Health.
In June 1998, Agouron and IRC began a collaboration on the final
development and commercialization of REMUNE. Agouron has exclusive rights to
market REMUNE in North America, Europe and certain other countries, while IRC
will manufacture commercial supplies of REMUNE. Agouron and IRC will share
equally all profits from the commercialization of REMUNE and the licensed
territory.
NON-NUCLEOSIDE REVERSE TRANSCRIPTASE INHIBITOR (NNRTI): AG1549 (S-1153)
AG1549 is a second-generation NNRTI for the treatment of HIV infection.
Discovered by Shionogi & Co., Ltd. ("Shionogi"), AG1549 is currently the subject
of several clinical trials evaluating its dose and its concomitant use with
other antiretroviral treatments. AG1549 is of high clinical interest because it
is ten times more potent IN VITRO than currently approved NNRTIs and because
AG1549 is fully active IN VITRO against HIV containing the most common genetic
mutation (at position 103) associated with resistance to other NNRTIs.
Agouron Pharmaceuticals has exclusive rights to the development and
commercialization of AG1549, except in Japan, South Korea and Taiwan, subject to
the payment of royalties to Shionogi.
<PAGE>
HIV PROTEASE INHIBITOR: AG1776 (JE-2147)
AG1776 is a protease inhibitor for the treatment of HIV infection.
Preclinical data indicate that AG1776, discovered by Japan Energy Corporation
("JE"), works synergistically IN VITRO with other protease inhibitors. The
compound has also exhibited activity against HIV mutations commonly associated
with resistance to other protease inhibitors.
Agouron Pharmaceuticals has exclusive world-wide rights to the development
and commercialization of AG1776 except in Japan, South Korea, North Korea and
Taiwan, subject to the payment of royalties to JE; JE will manufacture bulk
compound for use in final drug product.
RHINOVIRUS 3C PROTEASE INHIBITOR: AG7088
Rhinoviruses are believed to be the single most frequent cause of the
common cold. While rhinovirus infections are a periodic annoyance to most
individuals, they may produce more severe and prolonged symptoms in people with
chronic obstructive pulmonary disease, such as asthma and emphysema. All known
strains of rhinoviruses depend on a critical enzyme, the 3C protease, at several
stages of their life cycle for production of new infectious viruses. Agouron-has
designed potent, selective rhinovirus 3C protease inhibitors, including AG7088,
that are currently being evaluated in preclinical pharmacological studies.
Agouron Pharmaceuticals retains all commercial rights in compounds resulting
from this program.
HIV INTEGRASE INHIBITORS
The drugs currently approved in the United States for treatment of HIV
infection consist of reverse transcriptase inhibitors and protease inhibitors
(including VIRACEPT). Another mechanism of action is inhibition of HIV-1
integrase, a key enzyme in catalyzing the integration of HIV into human cells.
Agouron scientists believe that blocking HIV integrase is a viable
therapeutic strategy that will abort completion of the viral life cycle,
preventing infection of new, uninfected target cells. Scientists also believe
that HIV integrase is an attractive target, because it is extremely unlikely
that an HIV integrase-specific inhibitor will nonspecifically inhibit other
eukaryotic enzymes. This fact may possibly reduce the incidence of side effects
of an integrase inhibitor used to treat HIV infection. Agouron Pharmaceuticals
retains all commercial rights in compounds resulting from this program.
ANTI HEPATITIS C DRUGS
The hepatitis C virus ("HCV") is a virus that causes illnesses ranging from
a mild flu-like disease to progressive liver disease, cirrhosis and primary
liver cancer. The ability to treat infection by HCV represents a significant
unmet clinical need, particularly in Asian countries. HCV depends upon several
key protease enzyme for the production of new infectious virus.
Agouron Pharmaceuticals scientists have initiated programs to design new
classes of anti-viral drugs that block such enzymes and disrupt the HIV life
cycle. Agouron Pharmaceuticals is pursuing this research program in
collaboration with JT.
OPHTHALMOLOGY
OVERVIEW
A hallmark of many serious retinal disorders, such as age-related macular
degeneration, macular edema, retinopathy of prematurity, and proliferative
diabetic retinopathy, is an extensive proliferation of new blood vessels in the
retina and underlying choroid. This process, known as angiogenesis or
neovascularization, often leads to retinal hemorrhage that results in the loss
of ganglion cells, degeneration of the central optic nerve, and eventually loss
of central and/or peripheral vision. The most common neovascular retinal
disorder, namely age-related macular degeneration, has recently become a leading
cause of blindness in the elderly population in the industrialized world.
<PAGE>
In common with other tissues, the growth of new blood vessels is mediated
by many factors including various members of the family of MMPs, VEGF and
Fibroblast Growth Factors ("FGF") and their respective receptors and some
members of the integrin family of receptors involved in cell-cell and
cell-matrix interactions. In ocular tissues, the production of these factors,
receptors and MMPs is increased by local hypoxia, the most notable condition
believed to stimulate retinal and subretinal neovascularization. Most
significantly, in the ocular tissue of patients with any of the above mentioned
diseases, elevated levels of growth factors, integrins and MMPs (in particular
MMP-2 and MT-MMP-1) were consistently identified.
Key mediators of angiogenesis have been associated with ophthalmic
disorders. VEGF and basic FGF are strongly implicated as causative angiogenic
agents in a variety of studies. In ocular tissues, the production of these
growth factors is increased by hypoxia, the most notable condition believed to
stimulate retinal angiogenesis. Most significantly, in patients undergoing
surgery, high levels of VEGF in ocular fluid were found associated with macular
degeneration, active diabetic retinopathy, central vein occlusion and other
disorders.
Current studies in the area of ophthalmology involve an assessment of the
impact that inhibitors of MMPs might have on therapeutic practice and in meeting
medical needs in these areas. Agouron Pharmaceuticals is in animal models
conducting a series of proof-of-principle pre-clinical studies of ocular
diseases with the MMP inhibitor AG3340 in preparation for the commencement of
human clinical studies. Agouron Pharmaceuticals has recently demonstrated
significant accumulation of AG3340 in the vitreous humor of rats and monkeys
following oral dosing.
Likewise, it is anticipated that when suitable inhibitors of VEGF become
available, they will be tested in the existing ocular angiogenesis models prior
to selection of a lead compound for clinical development. Agouron
Pharmaceuticals retains all commercial rights in compounds resulting from this
program.
BUSINESS RELATIONSHIPS/RESEARCH AND DEVELOPMENT AGREEMENTS
Agouron Pharmaceuticals has funded its research and development primarily
from working capital generated from both private and public sales of Agouron
Pharmaceuticals equity, collaborative arrangements and the financial
contribution resulting from product sales. Agouron Pharmaceuticals has an
ongoing program of business development which may, from time to time, lead to
the establishment of corporate collaborations in addition to those noted below.
JAPAN TOBACCO INC.
In February 1994, Agouron Pharmaceuticals entered into a strategic alliance
with JT in the field of anti-viral drugs for the treatment of infections caused
by hepatitis C and the herpes family of viruses. In December 1994, the Company
added its anti-drug, VIRACEPT, to the JT collaboration with the execution of a
world-wide development and licensing agreement. Agouron Pharmaceuticals and JT
share equally the costs of further development of VIRACEPT.
Currently, Agouron Pharmaceuticals has exclusive commercial rights to
VIRACEPT (with the right to sublicense) in North America and JT has exclusive
commercial rights to VIRACEPT (with the right to sublicense) in certain parts of
Japan. Agouron Pharmaceuticals and JT share profits and/or royalties equally
from the world-wide commercialization of VIRACEPT.
ROCHE
Agouron Pharmaceuticals and JT have granted Roche certain exclusive royalty
bearing marketing rights to VIRACEPT outside of North America and parts of
Japan. Further, Agouron Pharmaceuticals receives royalties based either on
Roche's sales of VIRACEPT or, in certain circumstances, Invirase(R) and
Fortavase(R) (saquinavir), Roche's HIV protease inhibitors. Roche has the right
to manufacture VIRACEPT for its own use and is expected to commence such
manufacturing in calendar 1999.
<PAGE>
IMMUNE RESPONSE
In June 1998, Agouron Pharmaceuticals entered into a binding letter of
intent with IRC to collaborate on final development and commercialization of
REMUNE, an immune-based therapeutic agent discovered by IRC and currently the
subject of several clinical studies including a large phase III clinical trial.
The two companies intend to enter promptly into a definitive agreement and will
endeavor to complete development and registration of REMUNE in 1999. IRC will
manufacture commercial supplies of REMUNE, and Agouron Pharmaceuticals will have
exclusive rights to market REMUNE in North America, Europe and certain other
countries. The two companies will share equally all profits from
commercialization of REMUNE and the licensed territory. Agouron Pharmaceuticals
paid an initial $10,000,000 license fee to IRC in June 1998 and also purchased
118,256 newly issued common shares of IRC for $2,000,000. Agouron
Pharmaceuticals may pay, assuming ongoing successful development, registration
and approval of REMUNE, to IRC up to $53,000,000 in additional development and
milestone payments and $12,000,000 in purchases of IRC common stock.
SHIONOGI & CO., LTD.
In June 1998, Agouron Pharmaceuticals entered into a binding letter of
intent with Shionogi to develop and commercialize AG1549, a second-generation
NNRTI for the treatment of HIV infection. Discovered by Shionogi, AG1549 is
currently the subject of several clinical trials evaluating its dose and its
concomitant use with other antiretroviral treatments. AG1549 is of high clinical
interest because it is ten times more potent IN VITRO than such other NNRTIs as
nevirapine (Viramune(R)) and delavirdine (Rescriptor(R)) and because AG1549 is
fully active IN VITRO against HIV containing the most common genetic mutation
(at position 103) associated with resistance to other NNRTIs, including
efavirenz (Sustiva(TM)).
Agouron Pharmaceuticals has exclusive rights to the development and
commercialization of AG1549 except in Japan, South Korea and Taiwan. Agouron
Pharmaceuticals paid an initial $10,000,00 license fee to Shionogi in June 1998.
Agouron Pharmaceuticals may pay, assuming ongoing successful development,
registration and approval of AG1549, additional license fees of up to
$30,000,000. In addition, Agouron Pharmaceuticals will pay Shionogi royalties
based on sales, if any, of AG1549.
JAPAN ENERGY CORPORATION
In June 1998, Agouron Pharmaceuticals entered into a license agreement with
JE to develop and commercialize AG1776, a novel protease inhibitor for the
treatment of HIV infection. Preclinical data indicate that AG1776, discovered by
JE, works synergistically IN VITRO with other protease inhibitors. The compound
has also exhibited activity against mutations commonly associated with
resistance to other protease inhibitors.
Agouron Pharmaceuticals has exclusive world-wide rights to the development
and commercialization of AG1776 except in Japan, South Korea, North Korea and
Taiwan; JE will manufacture bulk compound for use in final drug product Agouron
Pharmaceuticals incurred an initial $6,000,000 license fee in June 1998. Agouron
Pharmaceuticals may incur, assuming ongoing successful development, registration
and approval of AG1776, additional license fees of up to $20,000,000. In
addition, Agouron Pharmaceuticals will pay JE royalties based on sales, if any,
of AG1776.
MANUFACTURING
Agouron Pharmaceuticals utilizes worldwide contract manufacturing to
produce VIRACEPT. Agouron Pharmaceuticals procures and transfers raw materials
to contracted bulk drug producers, sends the converted bulk drug to finishing
facilities and moves finished goods into a distribution center. Product supply
and associated raw materials have been available in sufficient quantities to
meet business needs. In order to accommodate anticipated sales volume growth,
capacity expansion efforts are being pursued. Agouron Pharmaceuticals will be
dependent upon its contract manufacturers to comply with good manufacturing
practices and to meet its production requirements. There can be no assurance
that Agouron Pharmaceuticals' contract manufacturers will timely deliver
<PAGE>
sufficient quantities of Agouron Pharmaceuticals' products or that Agouron
Pharmaceuticals would be able to find substitute manufacturers, if necessary.
MARKETING
Agouron Pharmaceuticals distributes VIRACEPT in the United States through
wholesalers. Sales volumes in the United States are influenced by underlying
demand and wholesale inventory management practices.
VIRACEPT is covered by Medicaid programs in all states and is covered by
virtually all state AIDS Drug Assistance Programs ("ADAPs"). Currently, VIRACEPT
is paid for predominately by Medicaid, private insurance and ADAPs. The Company
offers a patient assistance program based upon medical need for patients who
have no other means of coverage.
Outside of the United States and Canada, VIRACEPT is marketed on behalf of
Agouron Pharmaceuticals and JT by Roche. Agouron Pharmaceuticals receives a
royalty on Roche's worldwide sales of VIRACEPT.
Agouron Pharmaceuticals' sales and marketing efforts utilize a field sales
organization which focuses primarily on office- and hospital-based physicians,
including key medical thought leaders. Additionally, Agouron Pharmaceuticals has
obtained market access and availability for its products in part by establishing
relationships within key market segments, including health maintenance
organizations, third-party payers and governmental agencies.
HUMAN RESOURCES
As of October 19, 1998, the Company had approximately 1,000 employees. Of
these it is anticipated that approximately 800 full time staff equivalents will
be directly engaged in the conduct of the Agouron Pharmaceuticals business.
<PAGE>
AGOURON PHARMACEUTICALS, A DIVISION OF AGOURON PHARMACEUTICALS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
This discussion contains forward-looking statements. Such statements are
subject to certain risks and uncertainties which could cause actual results to
differ materially from those projected. See "Risk Factors -- Risks related to
Agouron Pharmaceuticals Division and Oncology Division" in the Proxy
Statement/Prospectus to which this Annex IV is attached. Readers are cautioned
not to place undue reliance on these forward-looking statements which speak only
as of the date hereof. The Company undertakes no obligation to publicly release
the result of any revisions to these forward-looking statements which may be
made to reflect events or circumstances after the date hereof or to reflect the
occurrence of unanticipated events.
Agouron Pharmaceuticals ("Agouron Pharmaceuticals" or "AP"), a division of
Agouron Pharmaceuticals, Inc. (the "Company") is committed to the discovery,
development, manufacturing and marketing of human pharmaceuticals targeting AIDS
and other serious diseases. Operations to date have been principally funded from
the Company's equity-derived working capital, various collaborative arrangements
and, most recently, from the gross margin contribution of Agouron
Pharmaceuticals' first product, VIRACEPT(R) (nelfinavir mesylate). The net
income reported in fiscal 1998 and in the first quarter of fiscal 1999 is
principally due to the commercialization of VIRACEPT while Agouron
Pharmaceuticals' prior net operating losses reflect primarily the result of its
independent research and substantial investment in the clinical and commercial
development of VIRACEPT.
In March 1997, Agouron Pharmaceuticals received clearance from the United
States Food and Drug Administration ("FDA") to market VIRACEPT in the United
States. Due principally to the increasing product contribution from VIRACEPT
sales, license fees and royalties, Agouron Pharmaceuticals realized a net income
of $37,387,000 for the fiscal year ended June 30, 1998, and $8,649,000 and
$19,477,000 for the three month periods ended September 30, 1997 and 1998.
RESULTS OF OPERATIONS
YEARS ENDED JUNE 30, 1996, 1997 AND 1998
PRODUCT SALES
Product sales for the fiscal years ended June 30, 1997 and 1998 were
approximately $57,000,000 and $409,300,000 which included sales in the United
States of $55,559,000 and $358,321,000, respectively. Agouron Pharmaceuticals
anticipates that VIRACEPT sales in the United States will approximate
$430,000,000 to $440,000,000 for fiscal 1999.
CONTRACT REVENUES
Collaborative research and development agreements with Japan Tobacco Inc.
("JT") accounted for substantially all of Agouron Pharmaceuticals' contract
revenues for 1996, 1997 and 1998. Total contract revenues for 1997 increased by
approximately 31% due principally to increased program activity and spending on
the JT collaborations. The decrease in contract revenues from 1997 to 1998 of
approximately 53% was due principally to decreased VIRACEPT program spending by
Agouron Pharmaceuticals, which was partially funded by JT. Additionally, the
amortization to revenue over a 24 month period of JT's $24,000,000 milestone
payment, which was received in August 1995, was completed in June 1997. Agouron
Pharmaceuticals anticipates that contract revenues for fiscal 1999 will
approximate $30,000,000 to $35,000,000.
<PAGE>
LICENSE FEES AND ROYALTIES
Agouron Pharmaceuticals license fees and royalties for 1997 and 1998 were
principally derived from F. Hoffmann-La Roche Ltd ("Roche"). The increase from
1996 to 1997 is principally due to the receipt $9,000,000 in 1997 for initial
European marketing rights for VIRACEPT. Total revenues for 1998 increased
approximately 84% from 1997 due to European marketing approval for VIRACEPT.
In January and March 1998, VIRACEPT was approved for marketing in Europe
and Japan, respectively. Upon such approvals, Agouron Pharmaceuticals realized
as revenue license fees totaling $12,000,000. In July 1997, Agouron
Pharmaceuticals and JT granted Roche certain exclusive rights to VIRACEPT in
several Asian countries. For such rights, Agouron Pharmaceuticals received a
license fee of $2,000,000.
Royalty revenues of approximately $3,852,000 have been recognized in 1998
based on estimated and actual Roche sales of VIRACEPT in its licensed territory.
Agouron Pharmaceuticals anticipates that license fees and royalties for fiscal
1999 will range from $30,000,000 to $35,000,000.
COST OF PRODUCT SALES
The aggregate cost of product sales as a percentage of product sales was
approximately 43% and 42% for 1997 and 1998, respectively. Gross margins on
United States commercial sales were approximately 57% and 65% during 1997 and
1998, respectively. Agouron Pharmaceuticals anticipates that gross margins on
United States commercial sales will improve as product sales volumes increase
and certain manufacturing process and scale efficiencies are realized, and will
approximate 71% in 1999. Aggregate gross margins will also be impacted by the
size of Agouron Pharmaceuticals' patient assistance program (which provides free
goods to indigent individuals), Agouron Pharmaceuticals' manufacturing supply
agreement with Roche (whereby Roche has the right to either purchase product at
Agouron Pharmaceuticals' cost plus contractually determined mark-ups or
manufacture drug product for its own use, subject to contractually determined
fees to be paid to Agouron Pharmaceuticals) and the level of sales subject to
Medicaid and other discounts or rebates in the United States.
RESEARCH AND DEVELOPMENT
Research and development ("R&D") spending increased by approximately 51%
from 1996 to 1997 due principally to increased expenditures in support of human
clinical trials and an expanded access program associated with VIRACEPT. R&D
spending increased by approximately 39% from 1997 to 1998 due to license fees
for three development stage HIV products and the addition of Alanex since late
1997. Agouron Pharmaceuticals anticipates that total R&D expenses in fiscal
1999, excluding the impact of any license fees or milestone expenses in either
1998 or 1999, will exceed fiscal 1998 expenses by approximately 40%.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative ("SG&A") expenses represented
approximately 10% of total operating expenses (excluding the cost of product
sales, royalties and write-off of in-process technology purchased) in 1996, 28%
in 1997 and 33% in 1998. Spending increases from 1996 to 1997 were due chiefly
to increasing staff levels (approximately 214%) and staff-related expenditures,
certain premarketing and advertising and promotion costs associated with the
launch of VIRACEPT in March 1997 and other costs associated with a growing sales
and marketing infrastructure. SG&A increased by approximately 77% from 1997 to
1998 due principally to a full year of expenses associated with the sales force
and other marketing personnel. Agouron Pharmaceuticals anticipates that total
SG&A expenses will increase by approximately 40% in fiscal 1999 due to
increasing sales and marketing activities and the support of VIRACEPT phase IV
marketing studies.
<PAGE>
ROYALTIES
Agouron Pharmaceuticals' obligation to share VIRACEPT profits with JT is
reflected in royalty expense for 1998 and represents approximately 19% of United
States product sales. Royalties in fiscal 1997 were not significant. It is
anticipated that royalty expense for fiscal 1999 will approximate 24% to 25% of
United States product sales.
WRITE-OFF OF IN-PROCESS TECHNOLOGY PURCHASED
In fiscal 1997, the Company acquired Alanex Corporation ("Alanex"), a
research company engaged in the discovery of drug leads through the high-speed
screening of diverse chemical libraries designed by computational methods and
generated by combinatorial chemistry. Alanex was acquired in a purchase
transaction through the issuance of approximately 2,000,000 shares of Agouron
common stock valued at approximately $61,000,000. Transaction costs were
approximately $1,300,000. In fiscal 1997, the Company recorded a write-off of
$57,500,000 (or 92% of the purchase price, including transaction costs),
representing the values determined by management to be attributable to the
in-process technology purchased. Of the amount written off, approximately 95%
was attributed to and supported by a discounted cash flow analysis of three drug
discovery programs which anticipated revenues beginning in 2003. Approximately
40% of the value was attributed to a compound with obesity and cardiovascular
indications, 30% for compounds with depression and anxiety indications and 25%
for a program to treat endometriosis and sex-hormone dependent tumors. The
Company believes that the allocations and aggregate values attributable to these
programs are reasonable and appropriate based on the commercial potential,
beginning in 2003, of these three drug discovery programs, which remain the
subject of research or development efforts. The Company recorded $4,800,000 of
the purchase price as an asset, attributed to Alanex's technology and chemical
compound library, which is being amortized over the expected benefit periods. At
September 30, 1998, the asset balance was approximately $3,350,000.
INTEREST AND OTHER INCOME
Interest income increased by approximately 23% from 1996 to 1997 due
principally to a higher average investment portfolio balance resulting from the
July 1996 public offering, receipt of $9,000,000 in license fees from Roche
(January 1997), significantly increased contract funding from JT and the
exercise of employee stock options. Interest income increased by 1% from 1997 to
1998. Agouron Pharmaceuticals anticipates that, absent additional revenue
sources or a significant change in interest rates, fiscal 1999 interest income
will be less than that of fiscal 1998.
INTEREST EXPENSE
Interest expense decreased in 1997 from 1996 by approximately 38% due to a
decreasing level of debt and capital lease obligations from year to year.
Interest expense increased in 1998 from 1997 due to borrowings under a line of
credit which was used to partially fund quarterly royalties paid to JT
throughout the year.
INCOME TAX PROVISION, NET OF TAX BENEFITS
The income tax provision in 1998 has been computed using an effective,
combined federal and state rate of 36%. The cash obligation of such 1998
provision has been mostly offset by the utilization of deferred tax assets.
Based on its 1998 pre-tax profit and its estimates for future taxable income,
Agouron Pharmaceuticals believes it is more likely than not that its deferred
tax assets (comprised mostly of net operating loss carryforwards, deductions
generated by the exercise of stock options, and research credits) will be
realized and has, therefore, recorded the full tax benefit of its deferred tax
assets. Agouron Pharmaceuticals' accumulated net deferred tax assets totaled
approximately $55,900,000 and $64,100,000 at June 30, 1997 and 1998. Agouron
Pharmaceuticals anticipates that its effective income tax rate for fiscal 1999
will be less than 10%. Such decrease from fiscal 1998 is attributed to greater
expected availability of R&D tax credits due to the anticipated increase in R&D
spending plus the anticipated reduction in R&D contract revenues and the
utilization of tax losses from Oncology Division ("Oncology Division" or "OD"),
a division of the Company.
<PAGE>
THREE MONTHS ENDED SEPTEMBER 30, 1997 AND 1998
PRODUCT SALES
Product sales for the three-month periods ended September 30, 1997 and 1998
were approximately $79,502,000 and $133,870,000, which included sales in North
America of $75,374,000 and $107,187,000, respectively.
CONTRACT REVENUES
Collaborative research and development agreements with JT accounted for
substantially all of the Company's contract revenues for the three-month periods
ended September 30, 1997 and 1998. Total contract revenues for the three-month
periods decreased approximately 13% due principally to decreased JT development
contract revenues.
LICENSE FEES AND ROYALTIES
Royalty revenues of approximately $352,000 and $4,925,000 have been
recognized in the three-month periods ended September 30, 1997 and 1998 based on
estimated and actual Roche sales of VIRACEPT in its licensed territory.
COST OF PRODUCT SALES
The aggregate cost of product sales as a percentage of product sales was
approximately 43% for the three-month periods ended September 30, 1997 and 1998.
Gross margins on United States commercial sales were approximately 60% and 70%
for the three month periods ended September 30, 1997 and 1998.
RESEARCH AND DEVELOPMENT
R&D spending increased 30% from the three months ended September 30, 1997
to the three months ended September 30, 1998 due generally to costs associated
with increasing average staff levels and staff related spending.
SELLING, GENERAL AND ADMINISTRATIVE
SG&A costs have increased by 40% from the three months ended September 30,
1997 to the three months ended September 30, 1998 due principally to increasing
sales and marketing activities and the support of VIRACEPT phase IV marketing
studies.
ROYALTIES
Agouron Pharmaceuticals' obligation to share VIRACEPT profits with JT is
reflected in royalty expense for the three-month periods ended September 30,
1997 and 1998 and represents 18% and 24% of United States product sales.
INTEREST AND OTHER INCOME
Interest income decreased by 19% from the three months ended September 30,
1997 to the three months ended September 30, 1998 due principally to a lower
average investment portfolio balance resulting from increased research and
development spending.
INTEREST EXPENSE
Interest expense increased from the three months ended September 30, 1997
to the three months ended September 30, 1998 due to borrowings under a line of
credit which was used to support increased spending levels.
<PAGE>
INCOME TAX PROVISION, NET OF TAX BENEFITS
The income tax provision for the first quarter of fiscal 1998 was computed
using an effective, combined federal and state rate of 22%. The income tax
provision for the first quarter of fiscal 1999 has been computed using an
effective, combined federal and state rate of 6%. The decrease is attributed to
greater utilization of tax losses from Oncology Division.
YEAR 2000
The Year 2000 issue results from computer programs and systems that were
created to accept only two digit dates. Such systems may not be able to
distinguish 20th century dates from 21st century dates. This could result in
miscalculations and system failures that could inhibit the Company's ability to
engage in normal business activities.
The Company has established a Year 2000 project team that is currently
reviewing information technology ("IT") systems and non-IT systems that could be
affected by this issue. Additionally, the Company has made initial contact with
all of its significant external business partners to determine the extent to
which the Company is vulnerable to their failures and to ascertain Year 2000
compliance and risk. The Company estimates that the inventory and assessment of
IT systems, non-IT systems, and material third parties will be completed by the
end of calendar 1998. The Company expects to complete remediation efforts by the
end of fiscal 1999, and to complete the validation phase by the end of calendar
1999. At this time the Company has not initiated the formulation of contingency
plans. The determination of the necessity for contingency plans will be made by
the end of fiscal 1999.
While the total cost to obtain Year 2000 compliance is not known at this
time, the Company believes such cost will not have a material effect on the
Company's business, financial position, or results of operation. However, even
though the Company expects to have obtained Year 2000 compliance prior to the
Year 2000, the inability of the Company or its business partners to remedy Year
2000 issues could have a significant impact on the Company's business, financial
position, or results of operation.
LIQUIDITY AND CAPITAL RESOURCES
Prior to fiscal 1998, Agouron Pharmaceuticals has relied principally on the
Company's equity financings and corporate collaborations to fund its operations
and capital expenditures. Beginning in fiscal 1998, the gross margin from
commercial sales of VIRACEPT contributed significantly to Agouron
Pharmaceuticals' overall working capital requirements. Commercial sales of
VIRACEPT resulted in gross margins of $32,370,000 and $236,654,000 for the years
ended June 30, 1997 and 1998, and approximately $45,429,000 and $76,825,000 for
the three month periods ended September 30, 1997 and 1998.
At June 30, 1998, Agouron Pharmaceuticals had net working capital of
approximately $125,933,000, an increase of $11,565,000 over June 30, 1997 levels
due principally to Agouron Pharmaceuticals' pre-tax profit of $46,157,000,
partially offset by $24,610,000 of funding for Oncology Division. Individual
working capital components significantly impacted by the commercialization of
VIRACEPT include trade accounts receivable (an increase of $18,416,000),
inventories (an increase of $44,906,000), accounts payable (an increase of
$15,560,000) and accrued liabilities (an increase of $25,829,000, primarily due
to accrued royalties payable to JT). It is anticipated that these working
capital components and cash and short-term investments will continue to be
significantly impacted as VIRACEPT sales increase. At June 30, 1998, Agouron
Pharmaceuticals had cash, cash equivalents and short-term investments of
approximately $87,123,000.
At September 30, 1998, Agouron Pharmaceuticals had net working capital of
approximately $138,702,000, an increase of $12,769,000 over June 30, 1998 levels
due principally to Agouron Pharmaceuticals' pre-tax profit of $20,693,000,
partially offset by $10,623,000 of funding for Oncology Division. Individual
working capital components significantly impacted by the commercialization of
VIRACEPT include trade accounts receivable (a decrease of $1,829,000),
inventories (an increase of $2,932,000), accounts payable (a decrease of
$18,539,000) and accrued liabilities (an increase of $472,000, primarily due to
accrued royalties payable to JT). It is anticipated that these working capital
components and cash and short-term investments will continue to be significantly
impacted as
<PAGE>
VIRACEPT sales increase. At September 30, 1998, Agouron Pharmaceuticals had
cash, cash equivalents and short-term investments of approximately $61,940,000.
Agouron Pharmaceuticals believes that its current capital resources, existing
contractual commitments and anticipated VIRACEPT product sales contribution are
sufficient to maintain its current operations and to provide for the operating
requirements of Oncology Division through fiscal 1999. This belief is based on
current research and clinical development plans of Agouron Pharmaceuticals and
Oncology Division, anticipated working capital requirements associated with the
expanding commercialization of VIRACEPT, the current regulatory environment,
historical industry experience in the development of therapeutic drugs and
general economic conditions. The equity of Agouron Pharmaceuticals is a series
of the Common Stock of the Company and is therefore subject to the liabilities
and operations of the other division(s) of the Company.
<PAGE>
AGOURON PHARMACEUTICALS, A DIVISION OF AGOURON PHARMACEUTICALS, INC.
INDEX TO FINANCIAL STATEMENTS
Report of Independent Accountants
Combined Balance Sheet as of June 30, 1997, June 30, 1998 and September 30, 1998
Combined Statement of Income (Loss) for the years ended June 30, 1996, 1997,
1998 and for the three month periods ended September 30, 1997 and
1998
Combined Statement of Division Equity and Comprehensive Income (Loss) for the
years ended June 30, 1996, 1997 and 1998 and for the three month
periods ended September 30, 1997 and 1998
Combined Statement of Cash Flows for the years ended
June 30, 1996, 1997, 1998 and for the three month periods ended
September 30, 1997 and 1998
Notes to Combined Financial Statements
NOTE: All schedules are omitted because they are not applicable, or not
required, or because the required information is included in the combined
financial statements or notes thereto.
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of Agouron Pharmaceuticals, Inc.
In our opinion, the accompanying combined balance sheet and the related combined
statements of income (loss), of division equity and comprehensive income (loss)
and of cash flows present fairly, in all material respects, the financial
position of Agouron Pharmaceuticals (a division of Agouron Pharmaceuticals,
Inc.) at June 30, 1997 and 1998, and the results of its operations and its cash
flows for each of the three years in the period ended June 30, 1998, in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of the management of Agouron Pharmaceuticals,
Inc.; 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.
As described above and more fully described in Note 1 to these financial
statements, Agouron Pharmaceuticals is a division of Agouron Pharmaceuticals,
Inc.; accordingly, the combined financial statements of Agouron Pharmaceuticals
should be read in conjunction with the audited consolidated financial statements
of Agouron Pharmaceuticals, Inc.
PricewaterhouseCoopers LLP
San Diego, California
August 10, 1998
<PAGE>
AGOURON PHARMACEUTICALS, A DIVISION OF AGOURON PHARMACEUTICALS, INC.
COMBINED BALANCE SHEET
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
JUNE 30, September 30,
1997 1998 1998
(unaudited)
ASSETS
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents $ 52,484 $ 19,098 $ 16,713
Short-term investments 38,833 68,025 45,227
Accounts receivable, net 26,707 49,703 50,117
Inventories 58,800 103,706 106,638
Current deferred tax assets 500 564 564
Other current assets 2,209 4,202 3,868
------------- ------------- -------------
Total current assets 179,533 245,298 223,127
Property and equipment, net 22,613 47,212 45,670
Deferred tax assets 56,000 64,644 64,999
Purchased intangibles 4,100 3,500 3,350
------------- ------------- -------------
$ 262,246 $ 360,654 $ 337,146
============= ============= =============
LIABILITIES AND DIVISION EQUITY
Current liabilities:
Accounts payable $ 28,833 $ 44,393 $ 25,854
Accrued liabilities 8,639 34,468 34,940
Deferred revenue and advances 24,567 23,563 21,191
Current deferred tax liabilities 600 1,139 1,621
Loan payable and current portion of long-term debt 2,526 15,802 819
------------- ------------- -------------
Total current liabilities 65,165 119,365 84,425
------------- ------------- -------------
Long-term liabilities:
Long-term debt, less current portion 5,940 5,892 6,242
Accrued rent 1,277 1,023 938
------------- ------------- -------------
Total long-term liabilities 7,217 6,915 7,180
------------- ------------- -------------
Division equity 189,864 234,374 245,541
------------- ------------- -------------
Commitments
$ 262,246 $ 360,654 $ 337,146
============= ============= =============
</TABLE>
See accompanying notes to combined financial statements.
<PAGE>
AGOURON PHARMACEUTICALS, A DIVISION OF AGOURON PHARMACEUTICALS, INC.
COMBINED STATEMENT OF INCOME (LOSS)
(IN THOUSANDS)
<TABLE>
<CAPTION>
Three Months Ended
YEARS ENDED JUNE 30, SEPTEMBER 30,
1996 1997 1998 1997 1998
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C>
Revenues:
Product sales $ 0 $ 56,969 $ 409,298 $ 79,502 $ 133,870
Contracts 37,942 49,824 23,427 6,905 6,017
License fees and royalties 0 10,000 18,352 2,352 5,050
----------- ----------- ----------- ----------- -----------
37,942 116,793 451,077 88,759 144,937
----------- ----------- ----------- ----------- -----------
Operating expenses:
Cost of product sales 0 24,599 172,644 34,073 57,045
Research and development 53,763 81,293 113,132 19,595 25,437
Selling, general and administrative 6,142 31,653 55,876 11,766 16,482
Royalties 0 0 68,423 13,376 25,893
Write-off of in-process technology purchased 0 57,500 0 0 0
----------- ----------- ----------- ----------- -----------
59,905 195,045 410,075 78,810 124,857
----------- ----------- ----------- ----------- -----------
Operating income (loss) (21,963) (78,252) 41,002 9,949 20,080
----------- ----------- ----------- ----------- -----------
Other income (expenses):
Interest and other income 4,776 5,873 5,907 1,281 1,036
Interest expense (228) (142) (752) (161) (423)
----------- ----------- ----------- ----------- -----------
4,548 5,731 5,155 1,120 613
----------- ----------- ----------- ----------- -----------
Income (loss) before income taxes (17,415) (72,521) 46,157 11,069 20,693
Income tax provision (benefit) 934 (38,287) 16,793 4,427 6,901
----------- ----------- ----------- ----------- -----------
Net income (loss) (18,349) (34,234) 29,364 6,642 13,792
Tax benefit allocated from Oncology Division 0 4,290 8,023 2,007 5,685
----------- ----------- ----------- ----------- -----------
Net income (loss) attributable to
AP stock $ (18,349) $ (29,944) $ 37,387 $ 8,649 $ 19,477
=========== =========== =========== =========== ===========
</TABLE>
See accompanying notes to combined financial statements.
<PAGE>
AGOURON PHARMACEUTICALS, A DIVISION OF AGOURON PHARMACEUTICALS, INC.
COMBINED STATEMENT OF DIVISION EQUITY AND COMPREHENSIVE INCOME (LOSS)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Accumulated
Other
Comprehensive Accumulated
OTHER INCOME (LOSS) DEFICIT TOTAL
DIVISION EQUITY:
<S> <C> <C> <C> <C>
Balance at June 30, 1995 $ 16,203 $ -- $ (1,809) $ 14,394
Equity contribution from
Agouron Pharmaceuticals, Inc. 82,515 -- -- 82,515
Equity contribution to Oncology
Division (1,751) -- -- (1,751)
Net Loss 0 0 (18,349) (18,349)
----------- ---------------- ------------- -----------
Balance at June 30, 1996 96,967 -- (20,158) 76,809
Equity contribution from
Agouron Pharmaceuticals, Inc. 146,405 -- -- 146,405
Tax benefit of stock options exercised 12,100 -- --
12,100
Equity contribution to Oncology
Division (15,506) -- -- (15,506)
Net loss -- -- (34,234) (34,234)
Tax benefit allocated from Oncology
Division 0 0 4,290 4,290
----------- ---------------- ------------- -----------
Balance at June 30, 1997 239,966 -- (50,102) 189,864
Equity contribution from
Agouron Pharmaceuticals, Inc. 14,453 -- -- 14,453
Tax benefit of stock options exercised 16,896 -- -- 16,896
Unrealized gains (losses) on securities -- 384 -- 384
Equity contribution to Oncology Division (24,610) -- -- (24,610)
Net income -- 29,364 29,364
Tax benefit allocated from Oncology
Division 8,023 8,023
----------- ---------------- ------------- -----------
Balance at June 30, 1998 246,705 384 (12,715) 234,374
Equity contribution from
Agouron Pharmaceuticals, Inc. (unaudited) 1,805 -- -- 1,805
Tax benefit of stock options exercised (unaudited) 660 -- -- 660
Unrealized gains (losses) on securities (unaudited) -- (152) -- (152)
Equity contribution to Oncology Division
(unaudited) (10,623) -- -- (10,623)
Net income (unaudited) -- 13,792 13,792
Tax benefit allocated from Oncology
Division (unaudited) 0 5,685 5,685
----------- ---------------- ------------- -----------
Balance at September 30, 1998 (unaudited) $ 238,547 $ 232 $ 6,762 $ 245,541
=========== ================ ============= ===========
</TABLE>
<TABLE>
<CAPTION>
Other
Comprehensive Net Comprehensive
INCOME (LOSS) INCOME (LOSS) INCOME (LOSS)
COMPREHENSIVE INCOME (LOSS)
ATTRIBUTABLE TO AP STOCK:
<S> <C> <C> <C>
Year ended June 30,
1996 $ -- $ (18,349) $ (18,349)
1997 -- (29,944) (29,944)
1998 384 37,387 37,771
Three months ended September 30 (unaudited),
1997 -- 8,649 8,649
1998 (152) 19,477 19,325
</TABLE>
See accompanying notes to combined financial statements.
<PAGE>
AGOURON PHARMACEUTICALS, A DIVISION OF AGOURON PHARMACEUTICALS, INC.
COMBINED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
Three Months Ended
YEARS ENDED JUNE 30, SEPTEMBER 30,
1996 1997 1998 1997 1998
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Cash received from product sales,
contracts, license fees and
royalties $ 43,911 $ 103,090 $ 427,026 $ 74,536 $ 142,151
Cash paid to suppliers, employees and
service providers (54,522) (166,782) (406,795) (69,284) (142,234)
Interest received 4,776 5,873 5,958 1,281 991
Interest paid (228) (142) (752) (161) (423)
----------- ----------- ----------- ----------- -----------
Net cash provided (used) by
operating activities (6,063) (57,961) 25,437 6,372 485
----------- ----------- ----------- ----------- -----------
Cash flows from investing activities:
Proceeds from maturities/sales of short-term
investments 59,686 127,501 147,292 21,818 29,529
Purchases of short-term investments (118,224) (91,227) (176,100) (51,972) (6,883)
Purchase of property and equipment (3,252) (12,372) (31,507) (3,846) (1,636)
Cost to acquire Alanex,
net of cash acquired 0 608 0 0 0
----------- ----------- ----------- ----------- -----------
Net cash provided (used) by
investing activities (61,790) 24,510 (60,315) (34,000) 21,010
----------- ----------- ----------- ----------- -----------
Cash flows from financing activities:
Net proceeds from issuance of
common stock 82,515 85,354 14,453 6,211 1,376
Proceeds from credit line 0 0 53,600 0 8,000
Principal payments on credit line, long-term
debt, and capital leases (818) (364) (41,951) (237) (22,633)
Equity contribution to Oncology Division (1,751) (15,506) (24,610) (952) (10,623)
Net cash provided (used) by
financing activitie 79,946 69,484 1,492 (5,022) (23,880)
Net increase (decrease) in cash
and cash equivalents 12,093 36,033 (33,386) (22,606) (2,385)
Cash and cash equivalents at
beginning of year 4,358 16,451 52,484 52,484 19,098
=========== =========== =========== =========== ===========
Cash and cash equivalents at end of year $ 16,451 $ 52,484 $ 19,098 $ 29,878 $ 16,713
=========== =========== =========== =========== ===========
Reconciliation of net income
(loss) to net cash provided
(used) by operating activities:
Net income (loss) attributable to
AP stock $ (18,349) $ (28,944) $ 37,387 $ 8,649 $ 19,477
Depreciation and amortization 2,411 3,910 9,087 1,893 3,328
Write-off of in-process technology purchased 0 57,500 0 0 0
Provision (benefit) for deferred income taxes 0 (40,510) 16,750 4,427 6,743
Tax benefit allocated from Oncology Division 0 (4,290) (8,023) (2,007) (5,685)
Net (increase) decrease in inventories 0 (58,547) (44,906) 889 (2,932)
Net (increase) decrease in accounts receivable
and other current assets (1,198) (23,541) (24,989) (15,039) (80)
Net increase (decrease) in accounts payable,
accrued liabilities, deferred revenue and
advances, and other liabilities 11,073 36,461 40,131 7,560 (20,366)
----------- ----------- ----------- ----------- -----------
Net cash provided (used) by
operating activities $ (6,063) $ (57,961) $ 25,437 $ 6,372 $ 485
========== =========== =========== =========== ===========
</TABLE>
See accompanying notes to combined financial statements.
<PAGE>
AGOURON PHARMACEUTICALS, A DIVISION OF AGOURON PHARMACEUTICALS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
NOTE 1 - THE DIVISION AND ITS SIGNIFICANT ACCOUNTING POLICIES
THE DIVISION
Agouron Pharmaceuticals ("Agouron Pharmaceuticals" or "AP") is a division
of Agouron Pharmaceuticals, Inc. (the "Company") which was organized and
incorporated in California in June 1984. Agouron Pharmaceuticals is an
integrated pharmaceutical company committed to the discovery, development,
manufacturing and marketing of innovative therapeutic products engineered to
inactivate proteins which play key roles in AIDS and other serious diseases.
Agouron Pharmaceuticals, through its own sales and marketing organization, is
currently marketing in the United States its first drug, VIRACEPT(R) (nelfinavir
mesylate) for treatment of HIV infection. In addition, Agouron Pharmaceuticals
is expected to initiate a phase II/III pivotal clinical trial of REMUNE(TM)
(AG1661), aN immune-based therapeutic agent for treatment of HIV infection and
AIDS being co-developed by Agouron Pharmaceuticals and The Immune Response
Corporation ("IRC"). Further, Agouron Pharmaceuticals has a number of programs
in progress for discovery or development of other new drugs in the fields of
viral disease and other serious diseases. Agouron Pharmaceuticals is also using
the proprietary core drug discovery technology of Alanex Corporation ("Alanex"),
a wholly-owned subsidiary of the Company, to accelerate the steps necessary to
discover small molecule drug candidates, from the initial identification of
compounds that exhibit activity against selected biological targets to the
progression of these compounds to drug candidates for human clinical trials.
FINANCIAL STATEMENTS AND ALLOCATION MATTERS
As a matter of policy, the Company manages the financial activities of its
divisions on a centralized basis. These financial activities include the
investment of surplus cash, the issuance, repayment and repurchase of short-term
and long-term debt and the issuance and repurchase of common stock. During the
three years ended June 30, 1998, the Company attributed all of its short-term
and long-term debt to AP based upon the specific purpose for which the debt was
incurred and the cash flow requirements of AP. Accordingly, all of the Company's
interest expense has been allocated to AP. The Company believes this method of
allocation to be equitable and reasonable.
Agouron Pharmaceuticals' financial statements have been prepared in
accordance with generally accepted accounting principles and, taken together
with the Company's other division, comprise all of the accounts included in the
corresponding consolidated financial statements of the Company. The financial
statements of each division reflect the financial condition, results of
operations and cash flows of the businesses included therein. The combined
financial statements of Agouron Pharmaceuticals also include any accounts or
assets of the Company not specifically allocated to Oncology Division ("Oncology
Division" or "OD"), a division of the Company. The equity of Agouron
Pharmaceuticals is a series of the Common Stock of the Company and is therefore
subject to the liabilities and operations of the other division(s) of the
Company.
PRINCIPLES OF COMBINATION
The combined financial statements of AP include the accounts of the Company
and its wholly-owned subsidiaries except for its programs in the area of
oncology, which are reflected separately in Oncology Division's financial
statements. All significant intercompany accounts and transactions have been
eliminated.
<PAGE>
UNAUDITED INTERIM FINANCIAL INFORMATION
The consolidated balance sheet as of September 30, 1998 and the
consolidated statements of income, of division equity and comprehensive income
and of cash flows for the three month periods ended September 30, 1997 and 1998
have been prepared by the Company and have not been audited. Such financial
statements, in the opinion of management, include all adjustments necessary for
their fair presentation in conformity with generally accepted accounting
principles. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to the Securities and
Exchange Commission rules and regulations. Interim results are not necessarily
indicative of results for the full year.
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, liabilities, revenues
and expenses and related disclosures as of the date of the financial statements.
Actual results could differ from such estimates.
CASH AND CASH EQUIVALENTS
Agouron Pharmaceuticals considers cash equivalents to be only those
investments which are highly liquid, readily convertible to cash and which
mature within 90 days from date of purchase.
SHORT-TERM INVESTMENTS
Short-term investments consist principally of government or government
agency securities, corporate notes and bonds, commercial paper and certificates
of deposit with original maturities of three to thirty-six months, and corporate
equity securities. Agouron Pharmaceuticals has classified its short-term
investments as available-for-sale. Included in short-term investments at June
30, 1997 and June 30, 1998 is $588,000, and $1,262,000 of accrued interest
receivable.
INVENTORIES
Inventories are stated at the lower of cost or market. Cost is determined
using the first-in, first-out method. Inventories consist of the following
components at September 30, 1998 (unaudited):
Raw materials and work in progress $ 98,520
Finished goods 8,118
-----------
$ 106,638
===========
CONCENTRATION OF CREDIT AND MARKET RISK
Agouron Pharmaceuticals invests its excess cash principally in marketable
securities from a diversified portfolio of institutions with strong credit
ratings and, by policy, limits the amount of credit exposure at any one
institution. These investments are generally not collateralized and primarily
mature within one year. Agouron Pharmaceuticals has not realized any material
losses from such investments in 1996, 1997 or 1998.
<PAGE>
FINANCIAL INSTRUMENTS AND RISK MANAGEMENT
Agouron Pharmaceuticals has contract manufacturing operations in Europe and
Asia. Accordingly, Agouron Pharmaceuticals from time-to-time enters into forward
contracts to manage its exposure to fluctuations in foreign currency exchange
rates. At June 30, 1998, Agouron Pharmaceuticals had several forward contracts
with maturities of less than six months to purchase Japanese Yen for
approximately $9,426,000. These contracts are designated and effective as hedges
and, accordingly, gains and losses are recognized in the same period the
offsetting gains and losses of hedged transactions are realized and recognized.
PROPERTY AND EQUIPMENT
Property and equipment is recorded at cost. Depreciation is computed using
principally the straight-line method over estimated useful lives of three to
five years. Leasehold improvements are amortized over the life of the lease.
PURCHASED INTANGIBLES
In conjunction with the Company's 1997 acquisition of Alanex, Agouron
Pharmaceuticals has recorded purchased intangibles (primarily drug discovery
technology and chemical compound libraries) which are being amortized on a
straight-line basis over their estimated useful lives of seven years.
DEFERRED REVENUE AND ADVANCES
At June 30, 1998, approximately $22,414,000 of cash received from JT has
been classified as deferred contract revenue and advances. Approximately
$21,452,000 of the cash received from JT represents JT's advance of Agouron
Pharmaceuticals' VIRACEPT development funding obligation which was completed in
March 1998. Such amounts are to be repaid by Agouron Pharmaceuticals out of
future profits, if any, generated by sales of VIRACEPT in the United States. The
balance of the payments from JT are non-refundable and are being recognized as
contract revenue on a prospective basis generally as collaborative program
expenses are incurred.
PRODUCT SALES
Agouron Pharmaceuticals ships VIRACEPT to wholesalers throughout the United
States and recognizes sales revenue upon shipment. Sales are reported net of
discounts, rebates, chargebacks and product returns.
Also included in product sales are sales to Roche (at cost plus
contractually determined mark-ups) of clinical and commercial drug supplies to
be used by Roche in its licensed territory. Such Roche sales were approximately
$1,441,000 and $50,979,000 for 1997 and 1998, and $4,128,000 and $26,683,000 for
the three month periods ended September 30, 1997 and 1998. Agouron
Pharmaceuticals receives a royalty on Roche's subsequent commercial sales of
such drug supplies.
CONTRACT REVENUES
Contract revenues are earned and recognized generally as contract research
costs are incurred according to the provisions of each underlying agreement.
Amounts received in advance of performance are recorded as deferred revenue.
Contract milestone payments are recognized as revenues upon the completion of
the milestone event or requirement.
<PAGE>
LICENSE FEES AND ROYALTIES
License fees are recognized as revenue 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 revenues are recognized based on estimated and actual sales of
licensed products in licensed territories.
RESEARCH AND DEVELOPMENT COSTS
Research and development costs are expensed in the period incurred.
INCOME TAX PROVISION (BENEFIT)
Agouron Pharmaceuticals records a provision (benefit) for income taxes
using the liability method. Current income tax expense (benefit) generally is
the amount of income taxes expected to be payable for the current year. Deferred
taxes are recorded by applying applicable tax rates to cumulative temporary
differences based on when and how they are expected to affect the tax return.
Agouron Pharmaceuticals is included in the consolidated U.S. federal income tax
return filed by the Company. Division management and allocation policies provide
that, as of the end of any fiscal quarter, any projected annual tax benefit
attributable to any division that cannot be utilized by such division to offset
or reduce its current or deferred income tax expense will be allocated to the
other division(s) without any compensating payment or allocation. Accordingly,
all losses of Oncology Division have been utilized by Agouron Pharmaceuticals
and no provision has been recorded by Oncology Division for any fiscal period.
As it is anticipated that all deferred tax assets of the Company at present will
be realized by Agouron Pharmaceuticals, all deferred tax assets of the Company
are currently recorded on the books of Agouron Pharmaceuticals. The
realizability of deferred tax assets is determined at the level of the Company.
STATEMENT OF CASH FLOWS
For purposes of the Statement of Cash Flows, cash equivalents are highly
liquid investments purchased with an original maturity of ninety days or less.
Non-cash financing and investing activities are comprised primarily of capital
lease obligations of $457,000, $2,355,000 and $1,579,000 for 1996, 1997, 1998
and the Company's acquisition of Alanex in 1997.
<PAGE>
NOTE 2 - SHORT-TERM INVESTMENTS
The cost of Agouron Pharmaceuticals' investment portfolio by type of
security and contractual maturity in the balance sheet is as follows:
<TABLE>
<CAPTION>
JUNE 30,
1997 1998
(Dollars in thousands)
<S> <C> <C> <C>
Type of security:
Corporate debt $ 24,401 $ 46,023
U.S. Treasury and agencies 11,994 10,766
Other interest-bearing 2,438 9,462
Corporate equity 0 1,774
--------------- ---------------
$ 38,833 $ 68,025
=============== ===============
Contractual maturity:
Maturing in less than twelve months $ 35,827 $ 41,389
Maturing between twelve and
thirty-two months 3,006 26,636
--------------- ---------------
$ 38,833 $ 68,025
=============== ===============
</TABLE>
The cost of securities sold, if any, is based upon the specific
identification method. The net unrealized holding gain on available-for-sale
securities included as a separate component of stockholders' equity at June 30,
1998 totaled $384,000. There were no material unrealized gains or losses nor any
material differences between the estimated fair values and costs of securities
in the investment portfolio at June 30, 1998. Realized gains on the disposal of
available-for-sale securities during 1996 totaled $22,000. During 1997 such
gains and losses totaled $12,000 and $4,000, respectively. During 1998, such
gains and losses totaled $20,000 and $2,000, respectively.
<PAGE>
NOTE 3 - COMPOSITION OF CERTAIN FINANCIAL STATEMENT CAPTIONS
<TABLE>
<CAPTION>
JUNE 30,
1997 1998
(Dollars in thousands)
<S> <C> <C>
Accounts receivable, net:
Trade $ 26,055 $ 44,471
Contract 0 813
Royalties 0 2,339
Employee 269 252
Other 383 1,828
------------- -------------
$ 26,707 $ 49,703
============= =============
Inventories:
Raw materials and work in process $ 57,883 $ 95,517
Finished goods 917 8,189
------------- -------------
$ 58,800 $ 103,706
============= =============
Property and equipment, net:
Scientific instrumentation $ 16,614 $ 26,869
Leasehold improvements 10,804 25,135
Computer equipment 8,892 15,619
Furniture and fixtures 2,464 3,910
------------- -------------
38,774 71,533
Less accumulated depreciation and amortization (16,161) (24,321)
------------- -------------
$ 22,613 $ 47,212
============= =============
Accrued liabilities:
Royalties $ 0 $ 21,410
License fees 0 6,000
Vacation 1,932 2,955
Clinical studies 3,328 1,843
Other 3,379 2,260
------------- -------------
$ 8,639 $ 34,468
============= =============
</TABLE>
<PAGE>
NOTE 4 - SIGNIFICANT CONTRACT ARRANGEMENTS
JAPAN TOBACCO INC.
In February 1994, Agouron Pharmaceuticals entered into a strategic alliance
with JT in the field of anti-viral drugs for the treatment of infections caused
by hepatitis C and the herpes family of viruses. In December 1994, Agouron
Pharmaceuticals added its anti-HIV drug, VIRACEPT, to the JT collaboration with
the execution of a world-wide development and licensing agreement. Agouron
Pharmaceuticals and JT share equally the costs of further development of
VIRACEPT.
Currently, Agouron Pharmaceuticals has exclusive commercial rights to
VIRACEPT (with the right to sublicense) in North America and JT has exclusive
commercial rights to VIRACEPT (with the right to sublicense) in parts of Japan.
Agouron Pharmaceuticals and JT share profits and/or royalties equally from the
world-wide commercialization of VIRACEPT.
Under the combined terms of the JT agreements, Agouron Pharmaceuticals has
incurred costs of $46,969,000, $71,825,000 and $51,898,000 and recognized
corresponding contract revenues of $37,197,000, $48,886,000 and $17,359,000 for
the years ended June 30, 1996, 1997 and 1998.
ROCHE
Agouron Pharmaceuticals and JT have granted Roche certain exclusive royalty
bearing marketing rights to VIRACEPT outside of North America and parts of
Japan. For such rights, Agouron Pharmaceuticals has received (and recognized as
revenue) initial license fees and additional product approval license fees.
Agouron Pharmaceuticals also receives royalties based either on Roche's sales of
VIRACEPT or, in certain circumstances, Invirase(R) and Fortavase(R)
(saquinavir), Roche's HIV protease inhibitors. VIRACEPT license fees and
royalties frOM Roche totaled $9,000,000 and $17,852,000 for the years ended June
30, 1997 and 1998.
THE IMMUNE RESPONSE CORPORATION
In June 1998, Agouron Pharmaceuticals entered into a binding letter of
intent with The Immune Response Corporation ("IRC") to collaborate on final
development and commercialization of REMUNE, an immune-based therapeutic agent
discovered by IRC and currently the subject of several clinical studies
including a large phase III clinical trial. The two companies intend to enter
promptly into a definitive agreement and will endeavor to complete development
and registration of REMUNE in 1999. IRC will manufacture commercial supplies of
REMUNE, and Agouron Pharmaceuticals will have exclusive rights to market REMUNE
in North America, Europe and certain other countries. The two companies will
share equally all profits from the commercialization of REMUNE in the licensed
territory. Agouron Pharmaceuticals paid an initial $10,000,000 license fee to
IRC in June 1998 and also purchased 118,256 newly issued common shares of IRC
for $2,000,000. Agouron Pharmaceuticals' development funding obligation
commences October 15, 1998 and, assuming ongoing successful development,
registration and approval of REMUNE, Agouron Pharmaceuticals may pay to IRC up
to $53,000,000 in additional development and milestone payments and $12,000,000
in purchases of additional IRC common stock.
SHIONOGI & CO., LTD.
In June 1998, Agouron Pharmaceuticals entered into a binding letter of
intent with Shionogi & Co., Ltd. ("Shionogi") to develop and commercialize
AG1549, a second-generation non-nucleoside reverse transcriptase inhibitor
("NNRTI") for the treatment of HIV infection. Discovered by Shionogi, AG1549 is
currently the subject of several clinical trials evaluating its dose and its
concomitant use with other antiretroviral treatments.
<PAGE>
Agouron Pharmaceuticals has exclusive world-wide rights to the development
and commercialization of AG1549 except in Japan, South Korea and Taiwan. Agouron
Pharmaceuticals paid an initial $10,000,000 license fee in June 1998. Agouron
Pharmaceuticals may pay, assuming ongoing successful development, registration
and approval of AG1549, additional license fees of up to $30,000,000. In
addition, Agouron Pharmaceuticals will pay Shionogi royalties based on sales, if
any, of AG1549.
JAPAN ENERGY CORPORATION
In June 1998, Agouron Pharmaceuticals entered into an agreement with Japan
Energy Corporation ("JE") to develop and commercialize AG1776, a novel protease
inhibitor for the treatment of HIV infection. Agouron Pharmaceuticals has
exclusive world-wide rights to the development and commercialization of AG1776
except in Japan, South Korea, North Korea and Taiwan; JE will manufacture bulk
compound for use in final drug product. Agouron Pharmaceuticals incurred an
initial $6,000,000 license fee in June 1998. Agouron Pharmaceuticals may pay,
assuming ongoing successful development, registration and approval of AG1776,
additional license fees of up to $20,000,000. In addition, Agouron
Pharmaceuticals will pay JE royalties based on sales, if any, of AG1776.
<PAGE>
NOTE 5 - LONG-TERM DEBT
<TABLE>
<CAPTION>
JUNE 30,
1997 1998
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Notespayable, secured with personal
property and a certificate of deposit;
interest at CD rate plus 1.5%,
paid off in June 1998. $ 142 $ 0
Capital leases with interest rates between 5.86% and 16.5%,
maturing at various dates through June 2003. 2,462 3,214
Line of credit, $20,000,000 secured; interest at bank reference
rate or LIBOR plus 1.5%, expiring September 30, 1999. 0 15,000
Unsecured, non-interest bearing, term obligation;
face value of $4,500,000; discounted to an 8.95%
effective rate, includes imputed interest of
$548,000 due June 28, 2001. 3,194 3,480
Term obligation for tenant improvements, interest
at 11% per annum, payable in monthly installments,
paid off in October 1997. 2,668 0
------------- -------------
Total long-term debt and capital lease obligations 8,466 21,694
Current portion (2,526) (15,802)
------------- -------------
$ 5,940 $ 5,892
============= =============
</TABLE>
Maturities of long-term debt, excluding capital leases, are as follows:
1999 - $15,000,000; 2000- $0; and 2001 - $4,500,000, less imputed interest of
$1,020,000.
<PAGE>
NOTE 6 - INCOME TAXES
(Dollars in thousands)
The components of the provision (benefit) for income taxes are as follows:
YEARS ENDED JUNE 30,
1996 1997 1998
Current:
Federal $ 0 $ 0 $ 0
State 1 1 43
Foreign 933 1,222 0
----------- ----------- -----------
934 1,223 43
----------- ----------- -----------
Deferred:
Federal 0 (33,510) 16,518
State 0 (6,000) 232
Foreign 0 0 0
----------- ----------- -----------
0 (39,510) 16,750
----------- ----------- -----------
$ 934 $ (38,287) $ 16,793
=========== ===========- ===========
The income tax reconciliation from income (loss) before income taxes
computed at the federal statutory rate (34%) to Agouron Pharmaceuticals' actual
income tax provision is as follows:
YEARS ENDED JUNE 30,
1996 1997 1998
Tax at U.S. federal statutory rate $ (5,921) $ (24,657) $ 15,693
State taxes, net of federal benefit 1 1 181
Foreign taxes 933 1,222 0
Purchase accounting book/tax basis differences 0 19,781 0
Other 5,864 (42,449) 0
Other 57 332 919
Adjustments to carryover amounts 0 7,483 0
----------- ----------- -----------
Subtotal 934 (38,287) 16,793
Tax benefits to/from other division 0 (4,290) (8,023)
----------- ----------- -----------
$ 934 $ (42,577) $ 8,770
=========== ========== ===========
Agouron Pharmaceuticals' deferred tax assets and liabilities are as
follows:
JUNE 30,
1997 1998
Book and tax depreciation/amortization
differences $ 710 $ 5,743
Accrued liabilities 1,097 1,607
Net operating loss carryforwards 26,081 17,494
Tax credits 4,113 3,859
Allocated tax benefits to/from other divisions 25,798 39,062
Other (1,899) (3,696)
----------- -----------
55,900 64,069
Valuation allowance 0 0
----------- -----------
Deferred taxes, net $ 55,900 $ 64,069
=========== ===========
Agouron Pharmaceuticals has not recorded current provisions for United
States federal income taxes due to net operating losses for tax reporting
purposes. At June 30, 1998, Agouron Pharmaceuticals had allocated net operating
loss carryforwards for federal tax reporting purposes of approximately
$150,000,000 expiring from 2000 to 2013. The net operating loss includes the tax
benefit related to the exercise of stock options, which benefit was recorded to
common stock. Agouron Pharmaceuticals also has federal research and development
credit carryforwards of approximately $4,800,000 at June 30, 1998. The future
utilization of net operating loss carryforwards for federal income tax purposes
may be impacted by the issuance of additional equity securities.
<PAGE>
Due to California's partial conformity with federal provisions regarding
net operating loss and research and development credit carryforwards, and as a
result of Agouron Pharmaceuticals' use of certain state tax planning strategies,
for state tax reporting purposes at June 30, 1998, Agouron Pharmaceuticals has
no net operating loss carryforwards and has research and development credit
carryforwards of approximately $2,200,000. Such credits do not expire.
Based on its 1998 operating results and its estimates of future taxable
income, Agouron Pharmaceuticals believes that it is more likely than not that
its deferred tax assets (comprised mostly of net operating loss carryforwards
and research credits) will be realized and has therefore recorded the full tax
benefit of its deferred tax assets as of June 30, 1998.
Foreign tax expense represents certain withholding taxes associated with
collaboration payments from JT.
<PAGE>
NOTE 7 - DIVISION EQUITY
AP Stock
AP Stock will represent a separate series of the Company Common Stock if
the Company's Divisional Stock Proposal is approved and such series is
designated by the Board. Additional AP Stock may be issued from time to time
upon exercise of stock options or at the discretion of the Company's Board.
ONCOLOGY EQUITY LINE
The Company Board has approved a $25,000,000 cash equity line from Agouron
Pharmaceuticals to Oncology Division. The amounts drawn under the equity line
are expected to be exchanged into shares of Oncology Division Stock when the
maximum amount of the equity line is reached or as the Company's Board otherwise
determines. Such stock will be distributed to holders of AP Stock on at least an
annual basis. On a periodic basis, the Company will review the equity line for
modification, extension or termination. If the line is terminated, the
outstanding amount will be repaid in cash or, at the option of the Company's
Board, be exchanged for Oncology Division Stock. All cash allocated from Agouron
Pharmaceuticals to Oncology Division has been recorded as an equity
contribution.
<PAGE>
NOTE 8 - COMMITMENTS
Certain scientific instrumentation, computers and other equipment are
subject to leases which are classified as capital leases. At June 30, 1997 and
June 30, 1998, $2,895,000 ($2,629,000, net) and $4,331,000 ($3,408,000, net) of
such leased equipment are included in property and equipment.
Rental expenses (principally for leased facilities under long-term
operating lease commitments) were $2,548,000, $3,509,000 and $5,031,000 for
1996, 1997 and 1998. Future minimum payments for capital and operating leases at
June 30, 1998 are as follows:
<TABLE>
<CAPTION>
CAPITAL LEASES OPERATING LEASES
(Dollars in thousands)
<S> <C> <C>
1999 $ 819 $ 7,472
2000 812 5,507
2001 818 5,314
2002 578 3,943
2003 243 2,630
Thereafter 0 2,047
------------ --------------
Total minimum lease payments 3,270 $ 26,913
==============
Less amount representing interest (56)
-------------
Obligations under capital leases $ 3,214
============
</TABLE>
FUNDING FOR THE ONCOLOGY DIVISION
The development of Oncology Division products will require substantial
funds. Agouron Pharmaceuticals intends to fund the operations of Oncology
Division for the foreseeable future. The Company's Board has approved the
allocation of up to $25,000,000 in cash from Agouron Pharmaceuticals to Oncology
Division under an equity line which is expected to be exchanged for OD shares.
OTHER
The Company is involved in certain legal proceedings generally incidental
to its normal business activities. While the outcome of any such proceedings
cannot be accurately predicted, the Company does not believe the ultimate
resolution of any such existing matters should have a material adverse effect on
its financial position or results of operations.
<PAGE>
NOTE 9 - ALANEX ACQUISITION
In April 1997, the Company executed a merger agreement with Alanex, which
now operates as a wholly-owned subsidiary of the Company. For all outstanding
shares of Alanex common stock and related options and warrants, approximately
2,000,000 shares of the Company's common stock were issued, subject to certain
restrictions. Such shares had an aggregate fair market value on the measurement
date of approximately $61,000,000 and transaction costs were approximately
$1,300,000. Of the total purchase price (including transaction costs),
$57,500,000 was allocated (as more fully described below) to certain intangible
assets and expensed as in-process technology and approximately $4,800,000 was
allocated to certain tangible and intangible assets and capitalized.
The identifiable intangibles of Alanex include several drug research and
discovery programs, a proprietary drug discovery technology, a chemical compound
library and an assembled work force. These intangibles were valued using either
a replacement cost approach (work force, library and proprietary technology) or
an income approach (research programs). Values assigned to the chemical compound
library and proprietary drug discovery technology have been capitalized, as such
intangibles are of a general nature and may have a number of alternative future
uses. Values assigned to the drug discovery programs have been expensed, as such
programs are pursuing specific drug targets or chemical compounds, the
technological feasibility of which having not been demonstrated, and there may
be no alternative future uses for such targets or chemical compounds if the
programs are ultimately less than successful.
Agouron Pharmaceuticals' statement of income (loss) includes the results of
operations related to the acquisition since April 1997. The following are
unaudited pro-forma results of operations as if the transaction had been
consummated on July 1, 1995:
(In thousands)
Year ended June 30, 1996 1997
(unaudited) (unaudited)
Revenues $ 44,379 $ 123,602
============= =============
Net income (loss) attributable
to AP stock $ 18,247) $ 27,138
============= =============
<PAGE>
NOTE 10 - QUARTERLY FINANCIAL DATA (UNAUDITED)
(In thousands)
<TABLE>
<CAPTION>
QUARTER ENDED
SEPTEMBER 30 DECEMBER 31 MARCH 31 JUNE 30
------------- ------------- ------------- ----------
<S> <C> <C> <C> <C>
1997
Product sales $ 0 $ 0 $ 13,401 $ 43,568
Gross margin from product sales 0 0 7,378 24,992
Net loss attributable to AP stock (12,021) (9,883) (987) (7,053) (1)
1998
Product sales $ 79,502 $ 91,800 $ 111,950 $ 126,046
Gross margin from product sales 45,429 53,858 62,730 74,637
Net income attributable to AP stock 8,649 7,758 19,758 1,222 (2)
1999
Product sales $ 133,870
Gross margin from product sales 76,825
Net income attributable to AP stock 19,477
</TABLE>
(1) During the fourth quarter of 1997, Agouron Pharmaceuticals recorded a
write-off of $57,500,000 of in-process technology associated with the
acquisition of Alanex, partially offset by the realization of $43,800,000
of deferred tax assets associated with Agouron Pharmaceuticals' expectation
of future taxable income.
(2) During the fourth quarter of 1998, Agouron Pharmaceuticals incurred
in-licensing costs of $26,000,000 (tax-effected $15,600,000) for commercial
rights to three development stage anti-HIV products.
<PAGE>
NOTE 11 - RELATED PARTY TRANSACTIONS
OVERVIEW
The Company allocates corporate general and administrative and research and
development expenses and income taxes in accordance with certain policies
adopted by the Company's Board of Directors. Such policies may be further
modified or rescinded by action of the Company Board of Directors who may adopt
additional policies, without approval of Agouron Pharmaceuticals' stockholders,
subject only to their fiduciary duty to such stockholders.
SHARED SERVICES
Agouron Pharmaceuticals operates as a division of the Company with access
to the Company's personnel, financial resources, facilities and extensive
capabilities in research and development, manufacturing, clinical development
and administration, the costs of which are allocated to each division in a
reasonable and consistent manner based on utilization by the division of the
services to which such costs relate. Management believes that such allocation is
a reasonable estimate of such expenses.
ACCESS TO TECHNOLOGY AND KNOW-HOW
Agouron Pharmaceuticals has free access to all technology and know-how of
the Company that may be useful, subject to any obligations or limitations
applicable to the Company. The costs of developing this technology remain in the
business unit responsible for its development.
<PAGE>
ANNEX V
AGOURON ONCOLOGY DIVISION
DESCRIPTION OF BUSINESS
GENERAL
Since the incorporation of the Company in June 1984, the oncology
department within Agouron, now formed as the Oncology Division, has committed
itself to the discovery, development, manufacturing and marketing of
small-molecule drugs engineered to inactivate proteins which play key roles in
cancer. Oncology Division is currently conducting pivotal phase II/III clinical
trials for AG3340 for treatment of lung and prostate cancer. Further, Oncology
Division has a number of programs in progress for discovery or development of
other new drugs in the field of cancer.
RESEARCH AND DEVELOPMENT PROGRAMS
Oncology Division's research and development programs focusing on the area
of cancer applies the Company's core technologies of three-dimensional structure
based drug design and high-throughput screening of chemical libraries generated
by computation-directed combinatorial chemistry.
The following table outlines the status of various programs in the
Company's Oncology Division research and development portfolio. Oncology
Division is pursuing some of these programs independently, while others are
being undertaken in collaboration with other companies.
RESEARCH
AND
DEVELOPMENT
PROGRAM INDICATION STAGE
CANCER
AG3340 Solid Tumors Phase II/III
AG3433 Solid Tumors Preclinical
AG2034 Solid Tumors Phase I
AG2037 Solid Tumors Preclinical
cdk Inhibitors Solid Tumors Research
PARP Inhibitors(1) Solid Tumors Research
VEGF Inhibitors Solid Tumors Research
GnRH Antagonist Hormone-Dependent
Solid Tumors Research
(1) In collaboration with Cancer Research Campaign Technology, Ltd.
<PAGE>
OVERVIEW
The development of new drugs for treatment of cancer is a key scientific
and commercial focus of the Company. Cancer is the second leading cause of death
in the United States and most developed nations. While much progress has been
made in the treatment of certain forms of cancer, most existing anti-cancer
drugs display limited efficacy and significant toxicities that restrict their
clinical usefulness. As a result, there remains a critical need for anti-cancer
drugs which are less toxic and more efficacious either as tumoricidal
(tumor-killing) or tumoristatic (tumor-controlling) agents.
The Company's Oncology Division drug discovery and development programs
pursue inhibitors of the following enzymes: matrix metalloproteases ("MMPs");
glycinamide ribonucleotide formyltransferase ("GART"); cyclin dependent kinases
("cdk"); gonadotropin releasing hormone ("GnRH"); poly (ADP ribose) polymerase
("PARP"); and a receptor for vascular endothelial growth factor ("VEGF").
MMP INHIBITORS: AG3340 AND AG3433
AG3340 is an orally delivered antiangiogenesis drug designed to inhibit the
growth, invasion and metastasis of solid tumors by inactivating certain members
of a family of enzymes known as MMPs. AG3340 selectively inhibits those MMPs
believed to be involved in tumor progression. A primary goal of clinical studies
of AG3340 is to determine whether this distinctive selectivity results in a
favorable clinical profile of safety and efficacy.
In fiscal 1998, Oncology Division completed two phase I studies of AG3340.
In one phase I study, AG3340 was administered orally twice daily (BID) in
patients with advanced cancer, including lung, prostate, kidney, and colorectal
cancers as well as sarcoma and melanoma.
A separate phase I study found that AG3340 in combination with chemotherapy
was generally well tolerated among patients with advanced prostate cancer whose
disease was resistant to hormonal therapies.
In preclinical studies, AG3340 has been shown to inhibit angiogenesis.
AG3340 was also found to be a potent inhibitor of the growth of
chemotherapy-resistant human non-small cell lung cancer tumors in mice. Here,
administration of AG3340 resulted in a dose-dependent decrease in tumor growth
by up to 65% as compared to controls.
In May 1998, Oncology Division initiated phase II/III clinical trials in
patients with advanced lung or prostate cancer. The Oncology Division is also
conducting preclinical research on a stable of third-generation MMP inhibitors,
including AG3433, which has even greater selectivity than for those MMPs related
to cancer. Oncology Division presently retains rights to AG3340 and AG3433 in
the field of cancer.
GART INHIBITORS: AG2034 AND AG2037
AG2034 is a potent, selective inhibitor of GART believed to be a key enzyme
in the biochemical pathway through which tumor cells synthesize purines,
essential components of DNA. With the exception of liver cells, all normal human
tissues obtain purines through an alternative pathway (the purine salvage
pathway). Oncology Division believes that inhibitors of GART will show a high
degree of selectivity for tumor cells and less significant bone marrow toxicity
than other chemotherapeutic agents. Oncology Division is completing dose-ranging
phase I clinical trials that will establish an appropriate dose for AG2034.
AG2037 is a potent, selective inhibitor of GART believed to be a key enzyme
in the biochemical pathway through which tumor cells synthesize purines,
essential components of DNA. With the exception of liver cells, all normal human
tissues obtain purines through an alternative pathway (the purine salvage
pathway). The Company believes that inhibitors of GART will show a high degree
of selectivity for tumor cells and less significant bone marrow toxicity than
other chemotherapeutic agents.
AG2037 was designed to have markedly reduced binding to the membrane folate
binding protein ("mFBP") because tight binding to this receptor is one likely
source of the toxicity observed with lometrexol, the first molecule
<PAGE>
in this class to be tested clinically by Eli Lilly and Company (assays of mFBP
binding have been routine for compounds generated in this program). AG2037 shows
potent inhibition of GART as a monoglutamate and can be polyglutamylated.
Because of its potent weaker binding to mFBP, AG2037 access is restricted to
only those cells with reduced folate carrier. Preclinical studies have shown
that GART inhibitors are potentially scitotoxic (kill cells) to at least certain
cancer cell types with mutan p53 genes, a common genetic abnormality in human
cancer. Oncology Division retains all commercial rights to any compounds
resulting from its GART inhibitor programs.
CDK INHIBITORS
Cdks are enzymes that play key roles in regulating the cell cycle. Certain
members of this family of enzymes, such as cdk4 and cdk2, have been implicated
as drivers of cells from a normally quiescent phase to the highly proliferative
phase characteristic of malignancies - particularly in familial melanomas,
esophageal carcinomas and pancreatic cancers. Agouron is engaged in a drug
discovery program aimed at the design of selective small-molecule drugs with the
potential to inhibit the activity of such cdks and therefore block the
transition of cancer cells into their proliferative phase. Oncology Division
retains all commercial rights to compounds resulting from this program.
PARP INHIBITORS
PARP is an enzyme which is activated by DNA-strand breaks and is important
in the immediate cellular response to DNA damage. The activity of PARP is
involved in recruiting repair enzymes to the site of DNA damage so that cell
division can proceed faithfully. Inhibition of PARP has profound effects on the
survival of cells following exposure to DNA-damaging agents; thus, PARP
inhibitors may be useful in conjunction with chemo- and radio- therapy to treat
tumors. PARP inhibitors discovered at Oncology Division have been confirmed as
chemopotentiating agents in cells and preliminary testing in tumors in animals
is underway. Oncology Division has exclusive commercial rights in compounds
resulting from this program, which are being pursued in collaboration with
Cancer Research Campaign Technology, Ltd.
VEGF INHIBITORS
The process known as angiogenesis (the formation of new blood vessels) is a
key factor in the maintenance and progression of several disease states,
including the metastasis of malignant tumors. The ability of cancer cells to
carry out angiogenesis depends in part upon the activity of a protein known as
VEGF, which, by binding to a receptor (known as kdr) on the cell surface,
triggers the development of growth factor of endothelial cells. Oncology
Division is engaged in a program to design drugs that block the kdr receptor for
VEGF and, therefore, compromise the ability of tumors to carry out a key process
in angiogenesis. Oncology Division retains all commercial rights to compounds
resulting from this program.
GNRH ANTAGONIST PROGRAM
GnRH is a decapeptide that is synthesized in the brain and controls the
pituitary and gonadal hormones that regulate fertility. (In women, this peptide
is required for successful ovulation and, in men, it is necessary for
spermatogenesis.) Oncology Division, through the Company's Alanex subsidiary, is
currently pursuing a program to discover certain orally active small-molecule
drugs to treat two areas of human disease that depend on GnRH action:
endometriosis and sex-hormone dependent tumors. Oncology Division retains all
commercial rights to compounds resulting from this program.
<PAGE>
BUSINESS RELATIONSHIPS/RESEARCH AND DEVELOPMENT AGREEMENTS
Oncology Division has funded its research and development primarily from
working capital generated from both private and public sales of Agouron equity,
collaborative arrangements and the financial contribution resulting from product
sales. Oncology Division has an ongoing program of business development which
may, from time to time, lead to the establishment of the Oncology Division
related corporate collaborations in addition to those noted below.
HLR
In June 1996, Oncology Division granted Hoffman-La Roche Inc. and F.
Hoffman-La Roche Ltd (collectively "HLR") development rights in two anti-cancer
drugs and agreed to collaborate with HLR on an additional early-stage
anti-cancer drug discovery program. In return for such rights, HLR paid
$15,000,000 in initial license fees and agreed to bear 80% of certain future
development costs and to provide annual research support to the Company of
$3,000,000. In December 1997, Oncology Division and HLR agreed to end this
anti-cancer research and development collaboration. Oncology Division has
regained all rights to the anti-cancer drugs previously within the scope of the
collaboration.
HUMAN RESOURCES
As of October 19, 1998, the Company had approximately 1,000 employees. It
is anticipated that approximately 200 full time staff equivalents will be
directly engaged in the conduct of the Oncology Division business.
<PAGE>
AGOURON ONCOLOGY DIVISION, A DIVISION OF AGOURON PHARMACEUTICALS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
This discussion contains forward-looking statements. Such statements are
subject to certain risks and uncertainties which could cause actual results to
differ materially from those projected. See "Risk Factors -- Risks related to
Agouron Pharmaceuticals Division and Oncology Division" in the Proxy
Statement/Prospectus to which this Annex IV is attached. Readers are cautioned
not to place undue reliance on these forward-looking statements which speak only
as of the date hereof. The Company undertakes no obligation to publicly release
the result of any revisions to these forward-looking statements which may be
made to reflect events or circumstances after the date hereof or to reflect the
occurrence of unanticipated events.
Oncology Division ("Oncology Division" or "OD"), a division of Agouron
Pharmaceuticals, Inc. (the "Company") is committed to the discovery and
development of human pharmaceuticals targeting cancer. Operations to date have
been principally funded from the Company's working capital and OD's various
collaborative arrangements. Net losses for the fiscal years ended June 30, 1996,
1997 and 1998 were $1,174,000, $12,862,000 and $24,233,000, and for the three
month periods ended September 30, 1997 and 1998 were $5,019,000 and $12,587,000.
It is anticipated that net operating losses will continue and will possibly
increase through at least the next two years.
RESULTS OF OPERATIONS
YEARS ENDED JUNE 30, 1996, 1997 AND 1998
CONTRACT AND LICENSE REVENUES
Collaborative research and development agreements with Hoffman-LaRoche Inc.
and F. Hoffman-La Roche Ltd (collectively "HLR") accounted for substantially all
of Oncology Division's contract and license revenues for 1996, 1997 and 1998.
Total contracts and license revenues decreased from 1996 to 1997 approximately
15% due principally to the receipt of $15,000,000 in 1996 for initial world-wide
development rights for two anti-cancer drugs. Total contract and license
revenues increased approximately 1% from 1997 to 1998.
In December 1997, the Company agreed to end its collaboration with HLR in
the field of cancer. As a result of termination, Oncology Division has regained
all rights to its anti-cancer drugs within the scope of the HLR collaboration.
Oncology Division anticipates no contract revenues for fiscal 1999.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development ("R&D") spending increased by approximately 56%
from 1996 to 1997 and 40% from 1997 to 1998 due generally to increasing average
R&D staff levels and staff-related expenditures and increased expenditures for
human clinical trial development activities for certain anti-cancer compounds.
Oncology Division anticipates that total R&D expenses in fiscal 1999 will exceed
fiscal 1998 expenses by approximately 30%.
<PAGE>
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative ("G&A") expenses represented approximately 10%
of total operating expenses in 1996, 5% in 1997 and 5% in 1998. Spending
decreases from 1996 to 1997 were due chiefly to concentrated Company efforts to
complete development of a major non-oncology program. G&A increased by
approximately 66% from 1997 to 1998 due principally to increasing development
efforts. Oncology Division anticipates that total G&A expenses in fiscal 1999
will exceed fiscal 1998 expenses by approximately 30%.
THREE MONTHS ENDED SEPTEMBER 30, 1997 AND 1998
CONTRACT AND LICENSE REVENUES
Collaborative research and development agreements with Hoffman-La Roche
Inc. and F. Hoffman-La Roche Ltd (collectively "HLR") accounted for
substantially all of Oncology Division's contract revenues for the three-month
period ended September 30, 1997. There were no contract revenues for the
three-month period ended September 30, 1998 due principally to the termination
of the HLR collaboration in fiscal 1998.
RESEARCH AND DEVELOPMENT EXPENSES
R&D spending increased 63% from the quarter ended September 30, 1997 to the
quarter ended September 30, 1998 due generally to increasing average R&D staff
levels and staff-related expenditures and increased expenditures for human
clinical trial development activities for certain anti-cancer compounds.
GENERAL AND ADMINISTRATIVE EXPENSES
G&A expenses have decreased by 15% from the quarter ended September 30,
1997 to the quarter ended September 30, 1998 due principally to a relatively
higher level of spending for the Company's non-oncology programs.
YEAR 2000
The Year 2000 issue results from computer programs and systems that were
created to accept only two digit dates. Such systems may not be able to
distinguish 20th century dates from 21st century dates. This could result in
miscalculations and system failures that could inhibit the Company's ability to
engage in normal business activities.
The Company has established a Year 2000 project team that is currently
reviewing information technology ("IT") systems and non-IT systems that could be
affected by this issue. Additionally, the Company has made initial contact with
all of its significant external business partners to determine the extent to
which the Company is vulnerable to their failures and to ascertain Year 2000
compliance and risk. The Company estimates that the inventory and assessment of
IT systems, non-IT systems, and material third parties will be completed by the
end of calendar 1998. The Company expects to complete remediation efforts by the
end of fiscal 1999, and to complete the validation phase by the end of calendar
1999. At this time the Company has not initiated the formulation of contingency
plans. The determination of the necessity for contingency plans will be made by
the end of fiscal 1999.
While the total cost to obtain Year 2000 compliance is not known at this
time, the Company believes such cost will not have a material effect on the
Company's business, financial position, or results of operation. However, even
though the Company expects to have obtained Year 2000 compliance prior to the
Year 2000, the inability of the Company or its business partners to remedy Year
2000 issues could have a significant impact on the Company's business, financial
position, or results of operation.
LIQUIDITY AND CAPITAL RESOURCES
Historically, Oncology Division has relied principally on the Company to
fund its operations and capital expenditures. At June 30, 1998, Oncology
Division had net working capital of approximately $1,795,000, an increase of
$377,000 over June 30, 1997 levels. At September 30, 1998, Oncology Division had
negative working
<PAGE>
capital of approximately $169,000, a decrease of $1,964,000 over June 30, 1998
levels. The development of the Oncology Division products will require
substantial funds. Agouron Pharmaceuticals ("Agouron Pharmaceuticals" or "AP"),
a division of the Company, intends to fund the operations of Oncology Division
for the foreseeable future. The Company's Board has approved the allocation of
up to $25,000,000 in cash from Agouron Pharmaceuticals to Oncology Division
under an equity line which is expected to be exchanged for Oncology Division
Stock.
The Company believes that its current capital resources, existing
contractual commitments and anticipated product sales contribution from Agouron
Pharmaceuticals are sufficient to maintain its current operations and to provide
for the operating requirements of Oncology Division through fiscal 1999. This
belief is based on current research and clinical development plans of Oncology
Division and Agouron Pharmaceuticals, anticipated working capital requirements
associated with expanding product commercialization, the current regulatory
environment, historical industry experience in the development of therapeutic
drugs and general economic conditions. The equity of Oncology Division is a
series of the Common Stock of the Company and is therefore subject to the
liabilities and operations of the other division(s) of the Company.
<PAGE>
AGOURON ONCOLOGY DIVISION, A DIVISION OF AGOURON PHARMACEUTICALS, INC.
INDEX TO FINANCIAL STATEMENTS
Report of Independent Accountants
Combined Balance Sheet as of June 30, 1997, June 30, 1998 and September 30, 1998
Combined Statement of Operations for the years ended
June 30, 1996, 1997 and 1998 and for the three month periods ended
September 30, 1997 and 1998
Combined Statement of Division Equity and Comprehensive Income (Loss) for the
years ended June 30, 1996, 1997 and 1998 and for the three month
periods ended September 30, 1997 and 1998
Combined Statement of Cash Flows for the years ended
June 30, 1996, 1997 and 1998 and for the three month periods ended
September 30, 1997 and 1998
Notes to Combined Financial Statements
NOTE: All schedules are omitted because they are not applicable, or not
required, or because the required information is included in the combined
financial statements or notes thereto.
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of Agouron Pharmaceuticals, Inc.
In our opinion, the accompanying combined balance sheet and the related combined
statements of operations, of division equity and comprehensive income (loss) and
of cash flows present fairly, in all material respects, the financial position
of Agouron Oncology Division (a division of Agouron Pharmaceuticals, Inc.) at
June 30, 1997 and 1998, and the results of its operations and its cash flows for
each of the three years in the period ended June 30, 1998, in conformity with
generally accepted accounting principles. These financial statements are the
responsibility of the management of Agouron Pharmaceuticals, Inc.; 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.
As described above and more fully described in Note 1 to these financial
statements, Agouron Oncology Division is a division of Agouron Pharmaceuticals,
Inc.; accordingly, the combined financial statements of Agouron Oncology
Division should be read in conjunction with the audited consolidated financial
statements of Agouron Pharmaceuticals, Inc.
PricewaterhouseCoopers LLP
San Diego, California
August 10, 1998
<PAGE>
AGOURON ONCOLOGY DIVISION, A DIVISION OF AGOURON PHARMACEUTICALS, INC.
COMBINED BALANCE SHEET
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
JUNE 30, September 30,
1997 1998 1998
(unaudited)
ASSETS
<S> <C> <C> <C>
Current assets:
Accounts receivable $ 4,668 $ 1,638 $ 1,638
Other current assets 0 1,045 0
------------- ------------- -------------
$ 4,668 $ 2,683 $ 1,638
============= ============= =============
LIABILITIES AND DIVISION EQUITY
Current liabilities:
Accrued liabilities $ 250 $ 888 $ 1,807
Deferred revenue 3,000 0 0
------------- ------------- -------------
Total current liabilities 3,250 888 1,807
------------- ------------- -------------
Division equity 1,418 1,795 (169)
------------- ------------- --------------
Commitments
$ 4,668 $ 2,683 $ 1,638
============= ============= =============
</TABLE>
See accompanying notes to combined financial statements.
<PAGE>
AGOURON ONCOLOGY DIVISION, A DIVISION OF AGOURON PHARMACEUTICALS, INC.
COMBINED STATEMENT OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
Three Months Ended
YEARS ENDED JUNE 30, SEPTEMBER 30,
1996 1997 1998 1997 1998
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C>
Revenues:
Contract & license $ 18,013 $ 15,270 $ 15,428 $ 3,098 $ 0
Operating expenses:
Research and development 17,247 26,844 37,525 7,337 11,927
General and administrative 1,940 1,288 2,136 780 660
----------- ----------- ----------- ----------- -----------
19,187 28,132 39,661 8,117 12,587
----------- ----------- ----------- ----------- -----------
Net loss $ (1,174) $ (12,862) $ (24,233) $ (5,019) $ (12,587)
=========== =========== =========== =========== ===========
</TABLE>
See accompanying notes to combined financial statements.
<PAGE>
AGOURON ONCOLOGY DIVISION, A DIVISION OF AGOURON PHARMACEUTICALS, INC.
COMBINED STATEMENTS OF DIVISION EQUITY AND COMPREHENSIVE INCOME (LOSS)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Accumulated
OTHER DEFICIT TOTAL
DIVISION EQUITY:
<S> <C> <C> <C>
Balance at June 30, 1995 $ 59,910 $ (61,713) $ (1,803)
Equity contribution from Agouron Pharmaceuticals 1,751 1,751
Net loss -- (1,174) (1,174)
----------- ----------- ------------
Balance at June 30, 1996 61,661 (62,887) (1,226)
Equity contribution from Agouron Pharmaceuticals 15,506 15,506
Net loss -- (12,862) (12,862)
----------- ----------- -----------
Balance at June 30, 1997 77,167 (75,749) 1,418
Equity contribution from Agouron Pharmaceuticals 24,610 24,610
Net loss -- (24,233) (24,233)
----------- ----------- -----------
Balance at June 30, 1998 101,777 (99,982) 1,795
Equity contribution from Agouron Pharmaceuticals (unaudited) 10,623 10,623
Net loss (unaudited) (12,587) (12,587)
----------- ----------- -----------
Balance at September 30, 1998 (unaudited) $ 112,400 $ (112,569) $ (169)
=========== =========== ============
</TABLE>
<TABLE>
<CAPTION>
Other
Comprehensive Net Comprehensive
LOSS LOSS LOSS
COMPREHENSIVE INCOME (LOSS):
<S> <C> <C> <C>
Year ended June 30,
1996 $ -- $ (1,174) $ (1,174)
1997 -- (12,862) (12,862)
1998 -- (24,233) (24,233)
Three months ended September 30 (unaudited),
1997 -- (5,019) (5,019)
1998 -- (12,587) (12,587)
</TABLE>
See accompanying notes to combined financial statements.
<PAGE>
AGOURON ONCOLOGY DIVISION, A DIVISION OF AGOURON PHARMACEUTICALS, INC.
COMBINED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
Three Months Ended
YEARS ENDED JUNE 30, SEPTEMBER 30,
1996 1997 1998 1997 1998
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Cash received from contracts and licenses $ 17,465 $ 13,602 $ 15,458 $ 7,165 $ 0
Cash paid to suppliers and service providers (19,216) (29,108) (40,068) (8,117) (10,623)
--------- ---------- --------- -------- --------
Net cash provided (used) by operating
activities (1,751) (15,506) (24,610) (952) (10,623)
--------- ---------- --------- -------- --------
Cash flows from investing activities:
Net cash provided (used) by investing
activities 0 0 0 0 0
--------- ---------- --------- -------- --------
Cash flows from financing activities:
Equity contribution from Agouron
Pharmaceuticals 1,751 15,506 24,610 952 10,623
--------- ---------- --------- -------- --------
Net cash provided (used) by financing
activities 1,751 15,506 24,610 952 10,623
--------- ---------- --------- -------- --------
Net increase (decrease) in cash and cash
equivalents 0 0 0 0 0
Cash and cash equivalents at beginning of year 0 0 0 0 0
--------- ---------- --------- -------- --------
Cash and cash equivalents at end of year $ 0 $ 0 $ 0 $ 0 $ 0
=========== =========== =========== =========== ===========
Reconciliation of net loss to net cash
provided (used) by operating activities:
Net loss $ (1,174) $ (12,862) $ (24,233) $ (5,019) $ (12,587)
Net (increase) decrease in accounts
receivable and other current assets 0 (4,668) 1,985 3,888 1,045
Net increase (decrease) in accrued liabilities
and deferred revenue (577) 2,024 (2,362) 179 919
----------- ----------- ----------- ----------- -----------
Net cash provided (used) by
operating activities $ (1,751) $ (15,506) $ (24,610) $ (952) $ (10,623)
=========== =========== =========== =========== ===========
</TABLE>
See accompanying notes to combined financial statements.
<PAGE>
AGOURON ONCOLOGY DIVISION, A DIVISION OF AGOURON PHARMACEUTICALS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
NOTE 1 - THE DIVISION AND ITS SIGNIFICANT ACCOUNTING POLICIES
THE DIVISION
Agouron Oncology Division ("Oncology Division" or "OD") is a division of
Agouron Pharmaceuticals, Inc. (the "Company") which was organized and
incorporated in California in June 1984. Oncology Division is engaged in the
discovery and development of innovative therapeutic products engineered to
inactivate proteins which play key roles in cancer.
FINANCIAL STATEMENTS AND ALLOCATION MATTERS
As a matter of policy, the Company manages the financial activities of its
divisions on a centralized basis. These financial activities include the
investment of surplus cash, the issuance, repayment and repurchase of short-term
and long-term debt and the issuance and repurchase of common stock. During the
three years ended June 30, 1998, the Company attributed none of its short-term
and long-term debt to OD based upon the specific purpose for which the debt was
incurred and the cash flow requirements of OD. Accordingly, none of the
Company's interest expense has been allocated to OD. The Company believes this
method of allocation to be equitable and reasonable.
Oncology's Division's financial statements have been prepared in accordance
with generally accepted accounting principles and, taken together with the
Company's other division, comprise all of the accounts included in the
corresponding consolidated financial statements of the Company. The financial
statements of each division reflect the financial condition, results of
operations and cash flows of the businesses included therein. The equity of
Oncology Division is a series of the Common Stock of the Company and is
therefore subject to the liabilities and operations of the other division(s) of
the Company.
PRINCIPLES OF COMBINATION
The combined financial statements of Oncology Division include the accounts
for all of the Company's programs in the area of oncology.
UNAUDITED INTERIM FINANCIAL INFORMATION
The consolidated balance sheet as of September 30, 1998 and the
consolidated statements of operations, of division equity and comprehensive
income (loss) and of cash flows for the three month periods ended September 30,
1997 and 1998 have been prepared by the Company and have not been audited. Such
financial statements, in the opinion of management, include all adjustments
necessary for their fair presentation in conformity with generally accepted
accounting principles. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to the Securities
and Exchange Commission rules and regulations. Interim results are not
necessarily indicative of results for the full year.
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, liabilities, revenues
and expenses and related disclosures as of the date of the financial statements.
Actual results could differ from such estimates.
<PAGE>
CONTRACT AND LICENSE REVENUES
Contract revenues are earned and recognized generally as contract research
costs are incurred according to the provisions of each underlying agreement.
Amounts received in advance of performance are recorded as deferred revenue.
Contract milestone payments are recognized as revenues upon the completion of
the milestone event or requirement.
License fees are recognized as revenue 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.
RESEARCH AND DEVELOPMENT COSTS
Research and development costs are expensed in the period incurred.
INCOME TAX PROVISION (BENEFIT)
Oncology Division records a provision (benefit) for income taxes using the
liability method. Current income tax expense (benefit) generally is the amount
of income taxes expected to be payable for the current year. Deferred taxes are
recorded by applying applicable tax rates to cumulative temporary differences
based on when and how they are expected to affect the tax return. Oncology
Division is included in the consolidated U.S. federal income tax return filed by
the Company. Division management and allocation policies provide that, as of the
end of any fiscal quarter, any projected annual tax benefit attributable to any
division that cannot be utilized by such division to offset or reduce its
current or deferred income tax expense will be allocated to the other
division(s) without any compensating payment or allocation. Accordingly, all
losses of Oncology Division have been utilized by Agouron Pharmaceuticals and no
provision has been recorded by Oncology Division for any fiscal period. As it is
anticipated that all deferred tax assets of the Company at present will be
realized by Agouron Pharmaceuticals, all deferred tax assets of the Company are
currently recorded on the books of Agouron Pharmaceuticals and none on the books
of Oncology Division. The realizability of deferred tax assets is determined at
the level of the Company.
COMMITMENTS
The Company is involved in certain legal proceedings generally incidental
to its normal business activities. While the outcome of any such proceedings
cannot be accurately predicted, the Company does not believe the ultimate
resolution of any such existing matters should have a material adverse effect on
its financial position or results of operations.
NOTE 2 - SIGNIFICANT CONTRACT ARRANGEMENTS
HLR
In June 1996, Oncology Division granted Hoffman-La Roche Inc. and F.
Hoffman-La Roche Ltd (collectively "HLR") development rights in two anti-cancer
drugs and agreed to collaborate with HLR on an additional early-stage
anti-cancer drug discovery program. In return for such rights, HLR paid
$15,000,000 in initial license fees and agreed to bear 80% of certain future
development costs and to provide annual research support to Oncology Division of
$3,000,000. In December 1997, Oncology Division and HLR agreed to end this
anti-cancer research and development collaboration. Oncology Division has
regained all commercial rights to the anti-cancer drugs previously within the
scope of the collaboration.
Under the terms of the anti-cancer agreements with HLR which have been
terminated, Oncology Division incurred costs of $17,854,000 and $23,486,000
recognized corresponding contract revenues of $14,270,000 and $15,428,000 for
the years ended June 30, 1997 and 1998.
<PAGE>
NOTE 3 - RELATED PARTY TRANSACTIONS
OVERVIEW
The Company allocates corporate general and administrative and research and
development expenses and income taxes in accordance with certain policies
adopted by the Company's Board of Directors. Such policies may be further
modified or rescinded by action of the Company's Board of Directors who may
adopt additional policies, without approval of Oncology Division's stockholders,
subject only to their fiduciary duty to such stockholders.
SHARED SERVICES
Oncology Division operates as a division of the Company with access to the
Company's personnel, financial resources, facilities and extensive capabilities
in research and development, manufacturing, clinical development and
administration, the costs of which are allocated to each division in a
reasonable and consistent manner based on utilization by the division of the
services to which such costs relate. Management believes that such allocation is
a reasonable estimate of such expenses.
ACCESS TO TECHNOLOGY AND KNOW-HOW
Oncology Division has free access to all technology and know-how of the
Company that may be useful, subject to any obligations or limitations applicable
to the Company. The costs of developing this technology remain in the business
unit responsible for its development.
<PAGE>
NOTE 4 - DIVISION EQUITY
OD STOCK
OD Stock will represent a separate series of the Company's Common Stock if
the Company's Divisional Stock Proposal is approved and such series is
designated by the Board. Additional OD Stock may be issued from time to time
upon exercise of stock options or at the discretion of the Company's Board.
EXCHANGE OF OD STOCK
If OD Stock is issued, Agouron Pharmaceuticals will have the right, and
under certain circumstances, the obligation, to exchange each outstanding share
of OD Stock for cash or shares of AP Stock at a 25% premium over fair market
value of OD Stock on the date of exchange.
ONCOLOGY EQUITY LINE
The Company Board has approved a $25,000,000 cash equity line from Agouron
Pharmaceuticals to Oncology Division. The amounts drawn under the equity line
bear interest at competitive rates and are expected to be exchanged into shares
of Oncology Division Stock when the maximum amount of the equity line is reached
or as the Company's Board otherwise determines. On a periodic basis, the Company
will review the equity line for modification, extension or termination. If the
line is terminated, the outstanding amount will be repaid in cash or, at the
option of the Company's Board, be exchanged for Oncology Division Stock.
<PAGE>
ANNEX VI
AGOURON STOCK OPTION PLAN
(Adopted by the Board of Directors August 7, 1996)
(Approved by the Shareholders November 7, 1996)
(Amended by the Board of Directors August 6, 1998)
1. PURPOSE.
This Agouron Stock Option Plan is intended to encourage Stock ownership
in Agouron Pharmaceuticals, Inc. by the officers, directors, employees and
consultants of the Company and its Affiliates in order to promote their interest
in the success of the Company and to encourage their continued affiliation. All
options granted under this Agouron Stock Option Plan are intended to be either
(a) Incentive Stock Options or (b) Non-Statutory Stock Options.
2. DEFINITIONS.
As used herein, the following definitions shall apply:
"Act" shall mean the Securities Exchange Act of 1934, as amended from
time to time.
"Affiliate" shall mean any corporation defined as a "parent
corporation" or a "subsidiary corporation" by Code Section 424(e) and (f),
respectively.
"Agreement" shall mean either an Incentive Stock Option Agreement or a
Non-Statutory Stock Option Agreement, embodying the terms of the agreement
between the Company and the Optionee with respect to Optionee's Option.
"Board" shall mean the Board of Directors of the Company.
"Code" shall mean the Internal Revenue Code of 1986, as amended from
time to time.
"Company" shall mean Agouron Pharmaceuticals, Inc., a California
corporation.
"Consultant" shall mean any person who is placed on the Company's
Consultants List by the Board and who agrees in writing to be included thereon.
"Disability" or "Disabled" shall mean the condition of being "disabled"
within the meaning of Section 422(c)(6) of the Code or any successor provision.
"Director" shall mean an individual member of the Board.
"Employee" shall mean any employee of the Company or its Affiliates,
including those employees who are officers of the Company or its Affiliates.
"ERISA" shall mean the Employee Retirement Income Security Act or the
rules thereunder, as amended from time to time.
"Fair Market Value" of Stock on a given date shall mean an amount per
share as determined by the Board (or its delegates), by applying any reasonable
valuation method determined without regard to any restriction, other than a
restriction that by its terms will never lapse. Notwithstanding the preceding,
if the Stock is traded upon an established stock exchange, then the "Fair Market
Value" of Stock on a given date per share shall be deemed to be the average of
the highest and lowest selling price per share of the Stock on the principal
stock exchange on which the Stock is then trading or, if there was no trading of
the Stock on that day, on the next preceding day on which
<PAGE>
there was such trading; if the Stock is not traded upon an established stock
exchange but is quoted on a quotation system, the "Fair Market Value" of Stock
on a given date shall be deemed to be the mean between the closing
representative "bid" and "ask" prices per share of the Stock on such date as
reported by such quotation system or, if there was no trading of the Stock on
that day, on the next preceding day on which there was such trading.
"Incentive Stock Option" shall mean an option granted pursuant to the
Plan which is designated by the Board (or its delegates) as an "Incentive Stock
Option" and which qualifies as an incentive stock option under Section 422 of
the Code or any successor provision.
"Non-Statutory Stock Option" shall mean a stock option granted pursuant
to the Plan which is not an Incentive Stock Option.
"Option" shall refer to either or both an Incentive Stock Option or
Non-Statutory Stock Option, as the context shall indicate.
"Optionee" shall mean the recipient of an Incentive Stock Option or a
Non-Statutory Stock Option.
"Option Price" shall mean the price per share of Stock to be paid by
the Optionee upon exercise of the Option.
"Option Stock" shall mean the total number of shares of Stock the
Optionee shall be entitled to purchase pursuant to the Agreement.
"Plan" shall mean this Agouron Stock Option Plan as amended from time
to time. This Plan was previously referred to as the Agouron Pharmaceuticals,
Inc. 1996 Stock Option Plan.
"Reporting Person" shall mean an Optionee who is required to file
statements relating to his or her beneficial ownership of Stock with the SEC
pursuant to Section 16(a) of the Act.
"Rule 16b-3" shall mean Rule 16b-3 (as amended from time to time),
promulgated by the SEC under the Act, and any successor thereto.
"SEC" shall mean the Securities and Exchange Commission.
"Stock" shall mean the no par Common Stock of the Company, or any
series thereof authorized by the Board.
3. ADMINISTRATION.
The Plan shall be administered by the Board; provided, however, that
the Board may delegate all or any part of its authority to administer the Plan
in its entirety or, with respect to any group or groups of persons eligible to
receive Options hereunder, to such persons or committee as the Board shall in
its sole discretion determine. The Board and its delegates may adopt, amend and
rescind such rules and regulations for carrying out the Plan and implementing
agreements and take such act as it deems proper. The interpretation,
construction and application by the Board (or any individuals who are delegated
authority by the Board to administer the Plan or any of the provisions of the
Plan) or any Option granted thereunder shall be final and binding on the
Company, all Optionees, their legal representatives, and any person who may
acquire an Option directly from an Optionee by permitted transfer, bequest or
inheritance. Reference to administrative acts by the Board in the Plan shall
also refer to acts by its delegates, unless the context otherwise indicates.
Whether or not the Board has delegated administrative authority, the Board shall
have the final power to determine all questions of policy or expediency that may
arise in administration of the Plan.
<PAGE>
4. ELIGIBILITY.
Only Employees are eligible to receive Incentive Stock Options under
the Plan. Employees, officers, Directors and Consultants of the Company or its
Affiliates are eligible to receive Non-Statutory Stock Options under the Plan.
No person shall be eligible to receive an Option for a larger number of
shares than is recommended for him or her by the Board (or its delegates). Any
Optionee may hold more than one Option (whether Incentive Stock Options,
Non-Statutory Stock Options, or both), but only on the terms and conditions and
subject to the restrictions set forth herein.
Incentive Stock Options granted to an Employee who owns stock at the
time the Incentive Stock Option is granted, representing more than ten percent
(10%) of the total combined voting power of all classes of stock of the Company
and its Affiliates, shall be granted at an Option Price at least one hundred ten
percent (110%) of the Fair Market Value of the Stock at the time the Incentive
Stock Option is granted. In determining ownership of stock by an Employee, the
attribution standards set forth in Code Section 424(d) shall be applicable.
5. STOCK SUBJECT TO THE PLAN.
Options granted under the Plan shall be for shares of any series of the
Company's authorized but unissued or re-acquired Stock. The aggregate number of
shares of Stock that may be subject to Options pursuant to the Plan shall not
exceed three million (3,000,000) shares. The number of shares available shall be
adjusted as provided in Paragraph 6(j) below. Stock issued under other stock
option plans of the Company shall not be counted against the maximum number of
shares that can be issued under the Plan.
In the event that any outstanding Option expires or is terminated for
any reason, the shares of Stock allocable to the unexercised portion of such
Option may again be subject to an Option under the Plan.
If an Optionee pays all or part of any Option Price with shares of
Stock, the number of shares deemed to be issued to the Optionee (and counted
against the maximum number of shares that can be issued under the Plan) shall be
the number of shares transferred to the Optionee by the Company, less the number
of shares transferred by the Optionee to the Company as payment. Stock issued on
the exercise of an Option that is forfeited in accordance with the conditions
contained in the grant by the Optionee after issuance shall be deemed to have
never been issued under the Plan and, accordingly, shall not be counted against
the maximum number of shares that can be issued under the Plan. Notwithstanding
the terms of the previous two sentences, the maximum number of shares for which
Incentive Stock Options may be issued under the Plan shall be three million
(3,000,000) shares, subject to adjustment as provided under Paragraph 6(j),
regardless of the fact that under the terms of the preceding sentences, a lesser
number of shares is deemed to be issued pursuant to the exercise of Incentive
Stock Options.
6. TERMS AND CONDITIONS OF OPTIONS.
The Board (or its delegates) shall authorize the granting of all
Options under the Plan with such Options to be evidenced by Incentive Stock
Option Agreements or Non-Statutory Stock Option Agreements, as the case may be.
Each Agreement shall be in such form as the Board may approve from time to time.
Each Agreement shall comply with and be subject to the following terms and
conditions:
(A) TYPE OF OPTION; SERIES AND NUMBER OF SHARES. Each particular Option
Agreement shall state the type of Options to be granted (whether
Incentive Stock Options or Non-Statutory Stock Options), the series of
Stock and the number of shares of Stock to which the Option pertains.
Under no circumstances shall the aggregate Fair Market Value of the
Stock (determined as of the time the Option is granted) with respect to
which incentive stock options are exercisable for the first time by any
Employee during any calendar year (under all incentive stock option
plans of the Company and its Affiliates) exceed $100,000.
<PAGE>
(B) OPTION PRICE. Each particular Option Agreement shall state the
Option Price. The Option Price for an Incentive Stock Option shall not
be less than one hundred percent (100%) of the Fair Market Value per
share of Stock on the date the Incentive Stock Option is granted. The
Option Price for a Non-Statutory Stock Option shall be the price per
share of Stock set by the Board (or its delegates).
(C) CERTIFICATE LEGENDS. Certificates for shares of Stock issued and
delivered to Reporting Persons on the date of exercise may be legended,
as the Board deems appropriate, if required by the provisions of any
applicable rule or regulation.
(D) MEDIUM AND TIME OF PAYMENT. The aggregate Option Price shall be
payable upon the exercise of the Option and shall be paid in any
combination of:
(i) United States cash currency;
(ii) a cashier's or certified check to the order of the
Company;
(iii) a personal check acceptable to the Company;
(iv) to the extent permitted by the Board, shares of Stock of
the Company (including previously owned Stock or Stock
issuable in connection with the Option exercise), properly
endorsed to the Company, whose Fair Market Value on the date
of exercise equals the aggregate Option Price of the Option
being exercised; or
(v) to the extent permitted by the Board, the Optionee's
entering into an agreement with the Company, whereby a portion
of the Optionee's Options are terminated and where the
"built-in gain" on any Options that are terminated as part of
such agreement equals the aggregate Option Price of the Option
being exercised. "Built-in gain" means the excess of the
aggregate Fair Market Value of any Stock otherwise issuable on
exercise of a terminated Option, over the aggregate Option
Price otherwise due the Company on such exercise.
The Board (or its delegates) may permit deemed or constructive transfer
of shares in lieu of actual transfer and physical delivery of
certificates. Except to the extent prohibited by applicable law, the
Board (or its delegates) may take any necessary or appropriate steps in
order to facilitate the payment of any such Option Price. Without
limiting the foregoing, the Board (or its delegates) may cause the
Company to loan the Option Price to the Optionee or to guarantee that
any Stock to be issued will be delivered to a broker or lender in order
to allow the Optionee to borrow the Option Price. The Board (or its
delegates), in its sole and exclusive discretion, may require
satisfaction of any rules or conditions in connection with payment of
the Option Price at any particular time, in any particular form, or
with the Company's assistance. If Stock used to pay any Option Price is
subject to any prior restrictions imposed in connection with any plan
of the Company (including this Plan), an equal number of the shares of
Stock acquired on exercise shall be made subject to such prior
restrictions in addition to any further restrictions imposed on such
Stock by the terms of the Optionee's Agreement or by the Plan.
(E) DURATION OF OPTIONS. Each particular Option Agreement shall state
the term of the Option; provided, however, that all Incentive Stock
Options granted under this Plan shall expire and not be exercisable
after the expiration of ten years from the date granted; provided,
further, that any Incentive Stock Option granted to an Employee who
owns stock at the time the Incentive Stock Option is granted
representing more than ten percent (10%) of the total combined voting
power of all classes of stock of the Company and its Affiliates shall
expire and not be exercisable after the expiration of five years from
the date granted. Non-Statutory Stock Options shall expire and not be
exercisable after the date set by the Board (or its delegates) in the
particular Option Agreement, or on any later date subsequently approved
by the Board (or its delegates).
<PAGE>
(F) EXERCISE OF OPTIONS.
(i) Each particular Option Agreement shall state when the
Optionee's right to purchase Stock pursuant to the terms of an
Option is exercisable in whole or in part. Subject to the
earlier termination of the right to exercise the Options as
provided under this Plan, Options shall be exercisable in
whole or in part as the Board, (or its delegates) in its sole
and exclusive discretion, may provide in the particular Option
Agreement, as amended. The Board (or its delegates) may at any
time increase the percentage an Option is otherwise
exercisable under the terms of a particular Option Agreement.
The Board, (or its delegates) in its sole and exclusive
discretion, may permit the issuance of Stock underlying an
Option prior to the date the Option is otherwise exercisable,
provided such Stock is subject to repurchase rights that
expire pro rata as the Option would otherwise have become
exercisable.
(ii) If the Optionee does not exercise in any one year period
the full number of shares to which he or she is then entitled
to exercise, the Optionee may exercise those shares in any
subsequent year during the term of the Option.
(G) TRANSFER OF OPTIONS. An attempted non-permitted transfer of an
Option shall be void.
(H) DEATH OF OPTIONEE. If the Optionee who is an Employee, officer or
Director of the Company or its Affiliates dies while in the employ or
service of the Company or its Affiliates or within a period of three
months after termination of such employment or term of corporate office
and before he or she has fully exercised an Option, the Option may be
exercised, regardless of the expiration date stated in the particular
Option Agreement (to the extent that the Option was exercisable on the
date of death and had not previously been exercised), for one year
after the date of the Optionee's death. Such exercise may be made by a
personal representative of the Optionee or by any person or persons who
shall have acquired the Option directly from the Optionee by bequest or
inheritance. Notwithstanding the foregoing, an Incentive Stock Option
may not be exercised after ten years following the date of grant.
(I) TERMINATION OF EMPLOYMENT OR SERVICE OTHER THAN DEATH. Subject to
the provisions of Paragraph 6(h) above, in the event that an Optionee
who is an Employee, officer or Director of the Company or its
Affiliates shall cease to be employed by or perform services for the
Company or its Affiliates prior to an Option's expiration date, the
exercise of Option shall be subject to such limitations on the periods
of time during which the Option may be exercised as may be specified in
the particular Option Agreement, as amended, between the Optionee and
the Company. Notwithstanding the foregoing (and subject to the
provisions of Paragraph 6(h) above), an Optionee who is Disabled on the
date of termination of employment or term of corporate office may
exercise his or her Option, to the extent that the Option was
exercisable on the date of such termination and had not previously been
exercised, for one year from the date of such termination; provided,
however, that an Option may not be exercised after the expiration date
set forth in the particular Option Agreement, as amended. Whether an
authorized leave of absence or absence for military or governmental
service shall constitute termination of employment for purposes of the
Plan shall be determined by the Board (or its delegates) in their sole
and exclusive discretion. No provision of the Plan shall be construed
so as to grant any individual the right to remain in the employ or
service of the Company or its Affiliates for any period of specific
duration.
(J) RECAPITALIZATION/CORPORATE TRANSACTIONS.
(i) The number of shares issuable under the Plan and the
number and amount of the Option Stock and the Option Price of
outstanding Options shall be proportionately adjusted for any
increase or decrease in the number of issued shares of Stock
resulting from a subdivision or consolidation of shares of any
class or series, or for the payment of a Stock dividend, or
any other increase or decrease in the number of such shares of
Stock affected without receipt of consideration by the Company
in order to preclude the dilution or enlargement of benefits
under the Plan.
<PAGE>
(ii) The Board, in its sole and exclusive discretion, may make
such equitable adjustments to the Plan and outstanding
Options, as it deems appropriate in order to preclude the
dilution or enlargement of benefits under the Plan upon
exchange of all of the outstanding Stock of the Company for a
different class or series of capital stock or the separation
of assets of the Company, including a spin-off or other
distribution of Stock or property by the Company.
(iii) If the Company shall be the surviving corporation in any
merger or consolidation, each outstanding Option shall pertain
to and apply to the securities to which a holder of the number
of shares of Option Stock would have been entitled. A
dissolution or liquidation of the Company, a merger (other
than a merger the principal purpose of which is to change the
state of the Company's incorporation) or consolidation in
which the Company is not the surviving corporation, a reverse
merger in which the Company is the surviving corporation but
the Company's Common Stock outstanding immediately preceding
the merger is converted by virtue of the merger into other
property, or other capital reorganization in which more than
fifty percent (50%) of the Company's Common Stock is exchanged
shall cause each outstanding Option to terminate; provided,
however, that immediately prior to such event each Optionee
shall have the right to exercise his or her Option in whole or
in part, unless the Option in connection with such event is
either to be assumed by the successor corporation or parent
thereof, or to be replaced with a comparable option to
purchase shares of the capital stock of the successor
corporation or parent thereof, or the Option is to be replaced
by a comparable cash incentive program of the successor
corporation based on the value of the Option on the date of
such event. Notwithstanding the preceding, if, within one year
from the date of such event, an Employee's employment is
involuntarily terminated, then the Employee's outstanding
Options, if any, shall become immediately exercisable as of
the date of termination of employment.
(iv) All adjustments required by the preceding paragraphs
shall be made by the Board, whose determination in that
respect shall be final, binding and conclusive, provided, that
adjustments shall not be made in a manner that causes an
Incentive Stock Option to fail to continue to qualify as an
"incentive stock option" within the meaning of Code Section
422.
(v) Except as expressly provided in this Paragraph 6(j), an
Optionee shall have no rights by reason of any subdivision or
consolidation of shares of stock of any class or series, or
the payment of any stock dividend, or any other increase in
the number of shares of stock of any class or series by reason
of any dissolution, liquidation, merger, consolidation,
reorganization, or separation of assets, and any issue by the
Company of shares of stock of any class or series, or
securities convertible into shares of stock of any class or
series, shall not affect, and no adjustment by reason thereof
shall be made with respect to, the number or amount of the
Option Stock or the Option Price of outstanding Options.
(vi) The grant or existence of an Option shall not affect in
any way the right or power of the Company to make adjustments,
reclassifications, reorganizations or changes in its capital
or business structure, or to merge, consolidate, dissolve,
liquidate or sell, or transfer all or any part of its business
or assets.
(K) RIGHTS AS A SHAREHOLDER. An Optionee shall not have rights as a
shareholder with respect to any shares covered by an Option until the
Option is exercised and Optionee has become a record holder of the
shares of Stock underlying the Option. No adjustment shall be made for
dividends (ordinary or extraordinary, whether in cash, securities or
other property) or distributions or other rights for which the record
date is prior to the date the Optionee has become a record holder of
the shares of Stock underlying the Option, except as provided in
Paragraph 6(j) above.
<PAGE>
(L) MODIFICATION, EXTENSION AND RENEWAL OF OPTIONS. Subject to the
terms and conditions of the Plan, the Board (or its delegates) may
modify (including lowering the Option Price or changing Incentive Stock
Options into Non-Statutory Stock Options), extend or renew outstanding
Options granted under the Plan, or accept the surrender of outstanding
Options under the Plan and/or other stock option plans of the Company
(to the extent not previously exercised) and authorize the granting of
new Options in substitution therefor. Notwithstanding the foregoing, no
modification of an Option shall, without the consent of the Optionee or
as otherwise provided for in the Plan, adversely affect any rights or
obligations under any Option previously granted under the Plan.
(M) INVESTMENT PURPOSE. Each Option under the Plan shall be granted on
the condition that the purchase of Stock thereunder shall be for
investment purposes for the Optionee's own account and not with a view
to resale or distribution. In the event the Stock subject to such
Option is registered under the Securities Act of 1933, as amended, or
in the event a resale of such Stock without such registration would
otherwise be permissible, such condition shall be inoperative if, in
the opinion of counsel for the Company, such condition is not required
under the Securities Act of 1933, or any other applicable law,
regulation or rule of any governmental agency.
(N) TRANSFER AND EXERCISE OF OPTIONS. The Board (or its delegates) may
adopt, amend and rescind such rules and regulations as the Board (or
its delegates) may deem appropriate concerning the transferability or
assignability of a particular Option; provided, however, to the extent
required by Code Section 422, each Incentive Stock Option shall state
that it is not transferable or assignable by Optionee otherwise than by
will or the laws of descent and distribution, and that during an
Optionee's lifetime, such Incentive Stock Option shall be exercisable
only by the Optionee.
(O) OTHER PROVISIONS. Each Option Agreement may contain such other
provisions, including without limitation, restrictions upon the
exercise or transferability of the Option, as the Board (or its
delegates) may deem advisable. Any Incentive Stock Option Agreement
shall contain such limitations and restrictions upon the exercise of
the Incentive Stock Option as shall be necessary in order that such
Incentive Stock Option shall be an "incentive stock option" as defined
in Code Section 422, or to conform to any change in the law.
(P) WITHHOLDING TAXES. When the Company becomes required to collect
federal and state income and employment taxes in connection with the
exercise of an Option ("withholding taxes"), the Optionee shall
promptly pay to the Company the amount of such taxes in cash, unless
the Board (or its delegates) permits or requires payment in another
form. Subject to such conditions as it may require, the Board, in its
sole discretion, may allow an Optionee to reimburse the Company for
payment of withholding taxes with shares of Stock. If an Optionee is a
Reporting Person at the time of exercise and is given an election to
pay any withholding taxes with Stock, the Board shall have sole
discretion to approve or disapprove such election.
(Q) LIMITATION ON GRANTS. The following limitation will apply to grants
of Options under the Plan: no Employee will be granted Options under
the Plan to receive more than seven hundred fifty thousand (750,000)
shares of Stock in any one fiscal year. The limitation set forth in
this Paragraph 6(q) is intended to satisfy the requirements applicable
to Options intended to qualify as "performance-based compensation"
within the meaning of Section 162(m) of the Code. In the event that
such limitation is not required to qualify Options as performance-based
compensation, this limitation shall not apply under the Plan.
7. TERM OF PLAN.
Incentive Stock Options may be granted pursuant to the Plan from time
to time within a period of ten years from August 6, 1998, or the date the Plan
is approved by the shareholders of the Company, whichever is earlier.
<PAGE>
8. AMENDMENT OF PLAN.
With respect to any shares at the time not subject to Options, the
Board may from time to time, insofar as permitted by law, suspend or discontinue
the Plan or revise or amend the Plan in any respect whatsoever, except that,
without approval of the shareholders, no such revision or amendment shall change
the number of shares for which Options may be granted under the Plan, change the
designation of the class of persons eligible to receive Options under the Plan,
materially increase the benefits accruing to Optionees under the Plan, or
decrease the price at which Incentive Stock Options may be granted. Furthermore,
without the approval of the shareholders, the Plan may not, be amended in any
manner that will cause Incentive Stock Options issued under it to fail to meet
the requirements of "incentive stock options" as defined in Code Section 422.
The Board may amend the Plan from time to time to the extent necessary to comply
with any applicable law, rule or other regulatory requirement.
9. APPLICATION OF FUNDS.
The proceeds received by the Company from the sale of Stock pursuant to
the exercise of an Option will be used for general corporate purposes.
10. NO OBLIGATION TO EXERCISE OPTION.
The granting of an Option shall impose no obligation upon the Optionee
to exercise such Option.
11. INDEMNIFICATION.
In addition to such other rights of indemnification as they may have as
Directors, Employees or agents of the Company, the Directors (or any individuals
who are delegated authority by the Board (or its delegates) to administer the
Plan) shall be indemnified by the Company against: (i) their reasonable
expenses, including attorneys' fees actually and necessarily incurred in
connection with the defense of any action, suit or proceeding, or in connection
with any appeal therein, to which they or any of them may be a party by reason
of any action taken or failure to act under or in connection with the Plan or
any Option granted thereunder; and (ii) against all amounts paid by them in
settlement thereof (provided such settlement is approved by independent legal
counsel selected by the Company), or paid by them in satisfaction of a judgment
in any such action, suit or proceeding, except in actions to matters as to which
it shall be adjudged in such action, suit or proceeding that such Director or
individual is liable for negligence or misconduct in the performance of his
duties; this indemnification is expressly conditioned upon the indemnified
party, within ninety (90) days after institution of any such action, suit or
proceeding, offering the Company in writing the opportunity, at its own expense,
to handle and defend the same.
12. APPROVAL OF SHAREHOLDERS.
The portions of the Plan dealing with Incentive Stock Options shall not
take effect unless approved by the shareholders of the Company's preferred (if
any) and Common Stock, which approval must occur within a period commencing
twelve (12) months before and ending twelve (12) months after the date the Plan
is adopted by the Board. Nothing in the Plan shall be construed to limit the
authority of the Company to exercise its corporate rights and powers, including
the right of the Company to grant non-statutory options for proper corporate
purposes.
AGOURON PHARMACEUTICALS, INC.
By: ______________________________
Peter Johnson, President & CEO
<PAGE>
ANNEX VII
AGOURON PHARMACEUTICALS, INC.
EMPLOYEE STOCK PURCHASE PLAN
(Last amended as of August 6, 1998)
1. PURPOSE OF THE PLAN
The purpose of the Plan is to provide Eligible Employees with an
opportunity to increase their proprietary interest in the success of the Company
by purchasing Stock from the Company on favorable terms and to pay for such
purchases through payroll deductions. The Plan is intended to qualify under
Section 423 of the Internal Revenue Code of 1986, as amended. The provisions of
the Plan, accordingly, shall be construed so as to extend and limit
participation in a manner consistent with the requirements of Section 423.
2. DEFINITIONS
As used herein the following definitions shall apply:
(a) "Affiliate" shall mean any corporation defined as a "parent
corporation" or a "subsidiary corporation" by Code Section 425(e) and (f),
respectively.
(b) "Board of Directors" or "Board" means the Board of Directors of the
Company, as constituted from time to time.
(c) "Code" shall mean the Internal Revenue Code of 1986, as amended.
(d) "Company" means Agouron Pharmaceuticals, Inc., a California
corporation.
(e) "Compensation" means the base compensation paid in cash to a
Participant by a Participating Company, including salaries and wages, but
excluding bonuses, incentive compensation, commissions, overtime pay, moving or
relocation allowances, car allowances, imputed income attributable to cars,
taxable fringe benefits and similar items, all as determined by the Board.
(f) "Eligible Employee" means any employee of a Participating Company
whose customary employment is for more than five months per calendar year and
for more than 20 hours per week.
(g) "Fair Market Value" of Stock on a given date shall mean an amount
per share as determined by the Board (or its delegates), by applying any
reasonable valuation method determined without regard to any restriction, other
than a restriction that by its terms will never lapse. Notwithstanding the
preceding, if the Stock is traded upon an established stock exchange, then the
"Fair Market Value" of Stock on a given date per share shall be deemed to be the
average of the highest and lowest selling price per share of the Stock on the
principal stock exchange on which the Stock is then trading or, if there was no
trading of the Stock on that day, on the next preceding day on which there was
such trading; if the Stock is not traded upon an established stock exchange but
is quoted on a quotation system, the "Fair Market Value" of Stock on a given
date shall be deemed to be the mean between the closing representative "bid" and
"ask" prices per share of the Stock on such date as reported by such quotation
system or, if there was no trading of the Stock on that day, on the next
preceding day on which there was such trading.
(h) "Participant" means an Eligible Employee who elects to participate
in the Plan, as provided in Section 4(b).
(i) "Participating Company" means the Company and any Affiliates.
(j) "Participation Period" means a period during which contributions
may be made toward the purchase of Stock under the Plan, as determined pursuant
to Section 4(a).
<PAGE>
(k) "Plan" means this Agouron Pharmaceuticals, Inc. Employee Stock
Purchase Plan, as amended from time to time.
(l) "Plan Account" means the account established for each Participant
pursuant to Section 8(a).
(m) "Purchase Price" means the price at which Participants may purchase
Stock under the Plan, as determined pursuant to Section 8(b).
(n) "Rule 16b-3" shall mean Rule 16b-3 (as amended from time to time)
promulgated by the SEC under the Securities Exchange Act of 1934 and any
successor thereto.
(o) "SEC" means the Securities and Exchange Commission.
(p) "Stock" means the Common Stock of the Company, or any series
thereof authorized by the Board.
3. ADMINISTRATION OF THE PLAN
(a) The Plan shall be administered by the Board; provided, however,
that the Board may delegate all or any part of its authority to administer the
Plan, in its entirety or with respect to any group or groups of persons eligible
to participate hereunder, to such persons or committee as the Board shall in its
sole discretion determine. The Board and its delegates may adopt, amend and
rescind such forms, rules and regulations for carrying out the Plan and
implementing agreements and take such acts as it deems proper. The
interpretation, construction and application by the Board or any individuals who
are delegated authority by the Board to administer the Plan or any of the
provisions of the Plan, shall be final and binding on the Company, and all
persons and their legal representatives who have rights hereunder. Reference to
administrative acts by the Board in this Agreement shall also refer to acts by
its delegates unless the context otherwise indicates. Whether or not the Board
has delegated administrative activity, the Board has the final power to
determine all questions of policy or expediency that may arise in administration
of the Plan.
4. ENROLLMENT AND PARTICIPATION
(a) PARTICIPATION PERIODS. While the Plan is in effect, there shall be
two twelve-month Participation Periods in each calendar year, one commencing on
January 1 and terminating on the following December 31 and one commencing on
July 1 and terminating on the following June 30; provided, however, that the
Board shall have the right to alter the duration of the Participation Periods
(including the commencement dates thereof) prior to the commencement of the
Participation Period and to establish overlapping Participation Periods.
(b) ENROLLMENT. Any individual who, on the day preceding the first day
of a Participation Period, qualifies as an Eligible Employee may elect to become
a Participant in the Plan for such Participation Period by executing the
enrollment form prescribed for this purpose by the Board; the enrollment form
shall specify the series of Stock to be purchased by the Eligible Employee. The
enrollment form shall be filed with the Company not later than the last working
day prior to the commencement of such Participation Period.
(c) DURATION OF PARTICIPATION. Once enrolled, a Participant shall
continue to participate in the Plan for each succeeding Participation Period
until he or she discontinues contributions, withdraws from the Plan or ceases to
be an Eligible Employee. A Participant who discontinues contributions under
Section 5(d) or withdraws from the Plan under Section 6(a) may again become a
Participant, if he or she then is an Eligible Employee, by following the
procedure described in subsection (b) above.
5. EMPLOYEE CONTRIBUTIONS
(a) FREQUENCY OF PAYROLL DEDUCTIONS. A Participant may purchase shares
of Stock under the Plan solely by means of payroll deductions. Payroll
deductions, as designated by the Participant pursuant to subsection (b) below,
shall commence with the first payday in the Participation Period and shall
continue on each subsequent payday during participation in the Plan.
<PAGE>
(b) AMOUNT OF PAYROLL DEDUCTIONS. An Eligible Employee shall designate
on the enrollment form the portion of his or her Compensation that he or she
elects to have withheld for the purchase of Stock. Such portion shall be a whole
percentage of the Eligible Employee's compensation, but not less than 1% nor
more than 15%; provided, however, that the Board shall have the right to change
the maximum permissible withholding percentage prior to the commencement of a
Participation Period.
(c) CHANGING WITHHOLDING RATE. If a Participant wishes to change the
rate of payroll withholding, he or she may do so by filing a new enrollment form
with the Company not later than the last working day prior to the commencement
of the Participation Period for which such change is to be effective.
Additionally, a Participant may decrease the rate of his or her payroll
withholding once but not more than once during a Participation Period by filing
a new enrollment form; the decrease in rate shall become effective as soon as
reasonably practicable after such form has been received by the Company.
(d) DISCONTINUING PAYROLL DEDUCTIONS. If a Participant wishes to
discontinue employee contributions entirely, he or she may do so by filing a new
enrollment form at any time. Payroll withholding shall cease as soon as
reasonably practicable after such form has been received by the Company. Amounts
credited to a Participant's Plan Account prior to his or her election to
discontinue contributions shall be used to purchase Stock in accordance with the
terms of Section 8(c).
6. WITHDRAWAL FROM THE PLAN
(a) WITHDRAWAL. A Participant may elect to withdraw from the Plan by
filing the prescribed form with the Company at any time. As soon as reasonably
practicable thereafter, payroll deductions shall cease and the entire amount
then credited to the Participant's Plan Account shall be refunded to him or her
in cash, without interest. No partial withdrawals shall be permitted.
(b) RE-ENROLLMENT AFTER WITHDRAWAL. A former Participant who has
withdrawn from the Plan shall not be a Participant until he or she re-enrolls
for a subsequent Participation Period under Section 4(b).
7. TERMINATION
(a) TERMINATION OF EMPLOYMENT. Termination of employment as an Eligible
Employee for any reason, including death, shall be treated as an automatic
withdrawal from the Plan under Section 6(a).
(b) DEATH. In the event of the Participant's death, the amount credited
to his or her Plan Account shall be paid to a beneficiary designated by him or
her for this purpose on the prescribed form or, if none, to the Participant's
estate.
8. PLAN ACCOUNTS AND PURCHASE OF SHARES
(a) PLAN ACCOUNTS. The Company shall maintain a Plan Account on its
books in the name of each Participant. As of each payday in a Participation
Period, the amount deducted from the Participant's Compensation shall be
credited to the Participant's Plan Account. No interest shall be credited to
Plan Accounts.
(b) PURCHASE PRICE. The Purchase Price for each share of Stock shall be
the lower of (i) 85% of the Fair Market Value of such share on the first day of
the Participation Period or (ii) 85% of the Fair Market Value of such share on
the last day in the Participation Period or the Alternative Purchase Date, if
applicable.
(c) ALTERNATIVE PURCHASE DATE. The Alternative Purchase Date for the
Plan shall be (i) June 30 for the Participation Period commencing January 1 and
terminating the following December 31 and (ii) December 31 for the Plan
Participation Period commencing July 1 and terminating the following June 30 or
such other date(s) during the Participation Period which the Board has chosen
prior to the commencement of such Participation Period.
<PAGE>
(d) NUMBER OF SHARES PURCHASED. As of the earlier of (i) the last day
of each Participation Period or (ii) the Alternative Purchase Date, each
Participant shall be deemed to have elected to purchase the number of whole
shares of Stock calculated in accordance with this subsection (d), unless the
Participant has previously elected to withdraw from the Plan in accordance with
Section 6(a). The amount then in the Participant's Plan Account shall be divided
by the Purchase Price, and the number of whole shares that results shall be
purchased from the Company with the funds in the Participant's Plan Account. The
foregoing notwithstanding, no Participant shall purchase more than a maximum of
3,000 shares of Stock with respect to any one year period nor shares of Stock in
excess of the amounts set forth in Sections 9 and 13(a). Proceeds from the sale
of Stock pursuant to rights granted under the Plan shall constitute general
funds of the Company.
(e) AVAILABLE SHARES INSUFFICIENT. In the event that the aggregate
number of shares that all Participants elect to purchase on a purchase date
exceeds the maximum number of shares remaining available for issuance under
Section 13(a), then the number of shares to which each Participant is entitled
shall be determined by multiplying the number of shares available for issuance
by a fraction, the numerator of which is the number of shares that such
Participant has elected to purchase and the denominator of which is the number
of shares that all Participants have elected to purchase.
(f) ISSUANCE OF STOCK. Certificates representing the number of shares
of Stock purchased shall be issued as soon as reasonably practicable after their
purchase. Shares may be registered in the name of the Participant or jointly in
the name of the Participant and his or her spouse as joint tenants with right of
survivorship or as community property. Alternatively, the Board may, in its
discretion, enter into an arrangement with a broker(s) pursuant to which shares
issued under the Plan are issued in the name of the broker and held for the
accounts of Plan Participants.
(g) TAX OBLIGATIONS. On the purchase date of the Stock, or when some or
all of the Stock issued under the Plan is disposed of, the Participant must make
adequate provision for federal, state, or other tax withholding obligations, if
any, which arise upon the purchase or disposition of the Stock. The Company may
withhold from a Participant's Compensation the amount necessary for the Company
to meet its applicable withholding obligations, including any withholding
required to make available to the Company any tax deductions or benefits
attributable to sale or early disposition of Stock by the Participant.
(h) UNUSED CASH BALANCES. Any amount remaining in the Participant's
Plan Account that represents the Purchase Price for a fractional share shall be
carried over in the Participant's Plan Account to the next purchase date. Any
amount remaining in the Participant's Plan Account that represents the Purchase
Price for whole shares which could not be purchased under subsection (d) above
shall be refunded to the Participant in cash, without interest.
9. LIMITATIONS ON STOCK OWNERSHIP
Any other provision of the Plan notwithstanding, no Participant shall
be granted a right to purchase Stock under the Plan if:
(a) Such Participant, immediately after his or her election to purchase
such Stock would own stock possessing more than 5% of the total combined voting
power or value of all classes of stock of the Company or its Affiliates; or
(b) Under the terms of the Plan, such Participant's rights to purchase
Stock under this and all other qualified employee stock purchase plans of the
Company or any Affiliate of the Company would accrue at a rate that exceeds
$25,000 of the Fair Market Value of the Stock (determined at the time when such
right is granted) for each calendar year for which such right or option is
outstanding at any time.
Ownership of Stock shall be determined after applying the attribution
rules of Section 424(d) of the Code. For purposes of this Section 9, each
Participant shall be considered to own any Stock that he or she has a right or
option to purchase under this or any other plan.
<PAGE>
10. RIGHTS NOT TRANSFERABLE
The rights of any Participant under the Plan, or any Participant's
interest in any Stock or moneys to which he or she may be entitled under the
Plan, shall not be transferable by voluntary or involuntary assignment or by
operation of law, or in any other manner other than by will or the laws of
descent and distribution. If a Participant in any manner attempts to transfer,
assign or otherwise encumber his or her rights or interest under the Plan, other
than by will or the laws of descent and distribution, then such act shall be
treated as an election by the Participant to withdraw from the Plan under
Section 6(a).
11. NO RIGHTS AS AN EMPLOYEE
Nothing in the Plan shall be construed to give any person the right to
remain in the employ of a Participating Company. Each Participating Company
reserves the right to terminate the employment of any person at any time, with
or without cause.
12. NO RIGHTS AS A SHAREHOLDER
A Participant shall have no rights as a Shareholder with respect to any
shares that he or she has purchased, or may have a right to purchase under the
Plan until the date of issuance of a stock certificate for such shares.
13. STOCK OFFERED UNDER THE PLAN
(a) AUTHORIZED SHARES. As of October 28, 1998, the aggregate number of
shares of Stock remaining available for purchase under the Plan is __________,
including the 200,000 shares of Stock approved by the Shareholders on such date,
subject to adjustment pursuant to this Section 13.
(b) ANTI-DILUTION ADJUSTMENTS. The aggregate number of shares of Stock
offered under the Plan, the 3,000 share limitation described in Section 8(c) and
the price of shares that any Participant has elected to purchase shall be
adjusted proportionately by the Board for any increase or decrease in the number
of outstanding shares of Stock resulting from a subdivision or consolidation of
shares, the payment of a stock dividend, any other increase or decrease in such
shares effected without receipt or payment of consideration by the Company or
the distribution of the shares of a subsidiary to the Company's Shareholders.
(c) REORGANIZATIONS. In the event of a dissolution or liquidation of
the Company, or a merger or consolidation to which the Company is a constituent
corporation, the Plan shall terminate unless the plan of merger, consolidation
or reorganization provides otherwise, and all amounts that have been withheld
but not yet applied to purchase Stock hereunder shall be refunded, without
interest; provided, however, that in lieu of terminating the right of a
Participant to purchase Stock during the course of a Participation Period, the
Board, on at least ten days written notice to a Participant, may elect to
shorten the duration of the Participation Period to end immediately prior to the
event causing such termination. Such written notice shall advise the Participant
of the new date on which the Participant Period will end and that his or her
option to purchase Stock will be exercised automatically on that date unless the
Participant withdraws from the Plan prior to that date. The Plan shall in no
event be construed to restrict in any way the Company's right to undertake a
dissolution, liquidation, merger, consolidation or other reorganization.
14. AMENDMENT OR DISCONTINUANCE
The Board of Directors shall have the right to amend, suspend or
terminate the Plan at any time and without notice; provided, that no
Participant's existing rights are adversely affected thereby and that, except as
provided in Section 13, any increase in the aggregate number of shares of Stock
to be issued under the Plan shall be subject to approval by a vote of the
Shareholders of the Company. Provided further the Board shall not have the right
to amend the Plan in any manner which will cause it to fail to meet the
qualification requirements of Code Section 423. Unless sooner terminated, the
Plan shall terminate on December 4, 2002.
<PAGE>
15. SPECIAL RULE FOR DIRECTORS AND OFFICERS
Any other provision of the Plan notwithstanding, to the extent mandated
by SEC Rule 16b-3 a Participant who is a member of the Board of Directors or an
officer of the Company shall be subject to such other conditions as are required
to satisfy the requirements necessary for the exemptions provided by Rule 16b-3
to be available.
16. SHAREHOLDER APPROVAL
The Plan was originally approved by the Company's Shareholders on
December 4, 1992 and an increase in the number of shares of Stock available
under the Plan was later approved by the Shareholders on October 28, 1998.
17. EXECUTION
To record the adoption of the Plan by the Board on October 15, 1992,
effective as of January 1, 1993, the amendment of the Plan by the Directors
Compensation Committee on June 6, 1994, and the subsequent amendment of the Plan
by the Board on August 6, 1998, the Company has caused its duly authorized
officer to affix the corporate name hereto.
AGOURON PHARMACEUTICALS, INC.
By ________________________
Peter Johnson, President
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 317 of the California General Corporation Law generally
provides indemnification to officers and directors of the Company against
expenses, judgments, fines and amounts paid in settlement under certain
conditions and subject to certain limitations.
Article VII of the articles of incorporation of the Company provides
that liability of the directors of the Company for monetary damages shall be
eliminated to the fullest extent permissible under California law. Further,
Article VIII of the articles of incorporation authorizes the Company to provide
indemnification of agents (as defined in Section 317) for breach of duty to the
Company and its shareholders through bylaw provisions or through agreements with
such agents, or both, in excess of the indemnification otherwise permitted by
Section 317, subject to the limits on such excess indemnification set forth in
Section 317.
Section 3.15 of the bylaws of the Company authorizes the Company to
indemnify any person who was or is a party, or is threatened to be made a party,
to any proceeding (other than actions by or in the right of the Company to
procure a judgment in its favor) by reason of the fact that such person is or
was an agent of the Company, against expenses, judgments, fines, settlements and
other amounts actually and reasonably incurred in connection with such
proceeding if such person acted in good faith and in a manner such person
reasonably believed to be in the best interests of the Company. Section 3.15
also authorizes the Company to indemnify any person who was or is a party, or is
threatened to be made a party, to any threatened, pending or completed action by
or in the right of the Company to procure a judgment in its favor by reason of
the fact that such person is or was an agent of the Company against expenses
actually and reasonably incurred by such person in connection with the defense
or settlement of such action if such person acted in good faith.
Any indemnification under Section 3.15 is to be made by the Company
only if authorized in the specific case upon determination that indemnification
of the agent is proper in the circumstances because the agent has met the
applicable standard of conduct required by Paragraphs 3.15.2 or 3.15.3 of the
bylaws.
Pursuant to authorization provided under the articles of incorporation
and the bylaws, the Company has entered into indemnification agreements with
each of its present directors. The Company has also entered into similar
agreements with certain of the Company's officers who are not directors.
Generally, the indemnification agreements attempt to provide the maximum
protection permitted by California law as it may be amended from time to time.
Moreover, the indemnification agreements provide for certain additional
indemnification. Under such additional indemnification provisions, however, an
individual will not receive indemnification for judgments, settlements or
expenses if he or she is found liable to the Company (except to the extent the
court determines he or she is fairly and reasonably entitled to indemnity for
expenses) for settlements not approved by the Company or for settlements and
expenses if the settlement is not approved by the court. The indemnification
agreements provide for the Company to advance to the individual any and all
reasonable expenses (including legal fees and expenses) incurred in
investigating or defending any such action, suit or proceeding. In order to
receive an advance of expenses, the individual must submit to the Company copies
of invoices presented to him or her for such expenses. Also, the individual must
repay such advances upon a final judicial decision that he or she is not
entitled to indemnification.
Section 3.15 of the bylaws also provides that, in the event of a
determination by the Board of Directors of the Company to purchase insurance for
certain of its agents, the Company shall purchase and maintain insurance on
behalf of any such agent against liability asserted against or incurred by the
agent in such capacity or arising out of the agent's status, whether or not the
Company would have the power to indemnify the agent against such liability under
the provisions of Section 3.15.
<PAGE>
The Company has in effect directors and officers liability insurance
policies which insure directors and officers of the Company. The policies expire
on October 13, 1998. Although the Company intends to renew the policies on or
before their expiration date, there can be no assurance that the policies will
be renewed on terms acceptable to the Company. Under the policies, the directors
and officers of the Company are insured against loss arising from claims made
against them due to wrongful acts while acting in their individual and
collective capacities as directors and officers, subject to certain exclusions.
In addition, the policies insure the Company against losses for which its
directors and officers are entitled to indemnification, subject to a retention
of $250,000 payable by the Company. The policies are "claims made" policies and
provide coverage only for losses arising out of claims first made against the
Company and reported to the insurer during the policy period.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
NUMBER DESCRIPTION
3.1 Form of Restated Articles of Incorporation. (Included
as Annex II to the Proxy Statement/ Prospectus
contained in Part I of this Registration Statement).
5.1 Opinion of Pillsbury Madison & Sutro LLP.
8.1 Opinion of Pillsbury Madison & Sutro LLP.
(Previously filed.)
10.1 Amended and Restated Agouron Stock Option Plan.
(Included as Annex VI to the Proxy
Statement/Prospectus contained in Part I
of this Registration Statement.)
10.2 Amended and Restated Employee Stock Purchase Plan.
(Included as Annex VII to the Proxy
Statement/Prospectus contained in Part I of this
Registration Statement.)
10.3 Amended and Restated Rights Agreement dated November
7, 1996, as proposed to be amended, between the
Registrant and ChaseMellon Shareholder Services
L.L.C.
(Previously filed.)
23.1 Consent of PricewaterhouseCoopers LLP.
23.2 Consent of Pillsbury Madison & Sutro LLP.
(Included in their opinions set forth as Exhibits
5.1 and 8.1)
24.1 Power of Attorney. (Contained on Signature Page
of this Registration Statement.)
(Previously filed.)
99.1 Form of Proxy.
(b) Financial Statement Schedules (Included in Annex IV, Annex V and Annex VI
to the Proxy Statement and Prospectus contained in Part I of this
Registration Statement). (Previously filed.)
ITEM 22. UNDERTAKINGS
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are
being made, a post-effective amendment to the
Registration Statement:
(i) To include any prospectus required by Section 10(a)(3)
of the Securities Act;
<PAGE>
(ii) To reflect in the prospectus any facts or events arising
after the effective date of the Registration Statement (or the most
recent post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the Registration Statement; and
(iii) To include any material information with respect to the
plan of distribution not previously disclosed in the Registration
Statement or any material change to such information in the
Registration Statement;
provided, however, that paragraphs (i) and (ii) do not apply if the
information required to be included in a post-effective amendment by
those paragraphs is contained in periodic reports filed by the
Registrant pursuant to Section 13 or Section 15(d) of the Exchange Act
that are incorporated by reference in the Registration Statement.
(2) That, for the purpose of determining any liability under
the Securities Act, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at
the termination of the offering.
The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933 (the "Securities
Act"), each filing of the registrant's annual report pursuant to Section 13(a)
or Section 15(d) of the Securities Exchange Act of 1934 (the "Exchange Act")
(and, where applicable, each filing of an employee benefit plan's annual report
pursuant to Section 15(d) of the Exchange Act) that is incorporated by reference
in the registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
The undersigned registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Items 4, 10(b), 11 or 13 of this Form within one business day of receipt of such
request, and to send the incorporated documents by first class mail or other
equally prompt means. This includes information contained in documents filed
subsequent to the effective date of the registration statement through the date
of responding to the request.
The undersigned registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
The registrant hereby undertakes as follows: that prior to any public
reoffering of the securities registered hereunder through use of a prospectus
which is a part of this registration statement, by any person or party who is
deemed to be an underwriter within the meaning of Rule 145(c), the issuer
undertakes that such reoffering prospectus will contain the information called
for by the applicable registration form with respect to reofferings by persons
who may be deemed underwriters, in addition to the information called for by the
other Items of the applicable form.
<PAGE>
The registrant undertakes that every prospectus (i) that is filed
pursuant to the paragraph immediately preceding, or (ii) that purports to meet
the requirements of section 10(a)(3) of the Act and is used in connection with
an offering of securities subject to Rule 415, will be filed as a part of an
amendment to the registration statement and will not be used until such
amendment is effective, and that, for purposes of determining any liability
under the Securities Act, each such post-effective amendment shall be deemed to
be a new registration statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant has duly caused this Amendment No. 1 to the S-4 Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of San Diego, State of California, on the 5th day of
November, 1998.
AGOURON PHARMACEUTICALS, INC.
By: /S/ GARY E. FRIEDMAN
_________________________________
Gary E. Friedman, Esq.
VICE PRESIDENT, GENERAL COUNSEL,
AND SECRETARY
<PAGE>
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
<S> <C> <C> <C> <C> <C> <C>
*
- ------------------------------------------ President, Chief Executive November 5, 1998
Peter Johnson Officer and Director
/S/ STEVEN S. COWELL
- ------------------------------------------ Corporate Vice President, Finance November 5, 1998
Steven S. Cowell and Chief Financial Officer
/S/ GARY E. FRIEDMAN
- ------------------------------------------ Corporate Vice President, General November 5, 1998
Gary E. Friedman Counsel, Secretary and Director
* Director November 5, 1998
- ------------------------------------------
John N. Abelson
* Director November 5, 1998
- ------------------------------------------
Patricia M. Cloherty
* Director November 5, 1998
- ------------------------------------------
A.E. Cohen
* Director November 5, 1998
- ------------------------------------------
Michael E. Herman
* Director November 5, 1998
- ------------------------------------------
Irving S. Johnson
* Director November 5, 1998
- ------------------------------------------
Antonie T. Knoppers
* Director November 5, 1998
- ------------------------------------------
Melvin I. Simon
* /S/ GARY E. FRIEDMAN November 5, 1998
- ------------------------------------------
Gary E. Friedman (Attorney in Fact)
</TABLE>
<PAGE>
EXHIBIT INDEX
NUMBER DESCRIPTION
3.1 Form of Restated Articles of Incorporation. (Included
as Annex II to the Proxy Statement/ Prospectus
contained in Part I of this Registration Statement).
5.1 Opinion of Pillsbury Madison & Sutro LLP.
8.1 Opinion of Pillsbury Madison & Sutro LLP.
(Previously filed.)
10.1 Amended and Restated Agouron Stock Option Plan.
(Included as Annex VI to the Proxy
Statement/Prospectus contained in Part I of this
Registration Statement.)
10.2 Amended and Restated Employee Stock Purchase Plan.
(Included as Annex VII to the Proxy
Statement/Prospectus contained in Part I of this
Registration Statement.)
10.3 Amended and Restated Rights Agreement dated November
7, 1996, as proposed to be amended, between the
Registrant and ChaseMellon Shareholder Services
L.L.C.
(Previously filed.)
23.1 Consent of PricewaterhouseCoopers LLP.
23.2 Consent of Pillsbury Madison & Sutro LLP.
(Included in their opinions set forth as Exhibits
5.1 and 8.1)
24.1 Power of Attorney. (Contained on Signature Page
of this Registration Statement.)
(Previously filed.)
99.1 Form of Proxy.
EXHIBIT 5.1
November 3, 1998
Agouron Pharmaceuticals, Inc.
10350 North Torrey Pines Road
La Jolla, California 92037
Re: Registration Statement on Form S-4
Ladies and Gentlemen:
We are acting as counsel for Agouron Pharmaceuticals, Inc., a California
corporation (the "Company"), in connection with the registration under the
Securities Act of 1933, as amended, of shares of Agouron Pharmaceuticals Stock
and shares of Oncology Division Stock (collectively, the "Shares") to be issued
as a result of the Reclassification of the shares of the Existing Common Stock,
together with rights to purchase shares of Series B Participating Preferred
Stock, no par value, and Series C Participating Preferred Stock, no par value,
of the Company (collectively, the "Rights"). In this regard we have participated
in the preparation of a Registration Statement on Form S-4 relating to such
Shares and such Rights. Such Registration Statement, as amended, is herein
referred to as the "Registration Statement." Capitalized terms used but not
defined herein have the meanings ascribed to them in the Registration Statement.
We assume, for purposes of this opinion, the approval by the shareholders of the
Company of the Divisional Stock Proposal as set forth in the Registration
Statement, and the effectiveness of the Restated Articles.
We are of the opinion that:
1. When the Reclassification has become effective in the manner
described in the Registration Statement and in accordance with the resolutions
adopted by the Board of Directors of the Company (the "Board"), the outstanding
shares of Existing Common Stock will be validly reclassified and redesignated as
shares of Agouron Pharmaceuticals Stock and Oncology Division Stock and, when
issued by the Company as a result of the Reclassification in the manner
described in the Registration Statement and in accordance with the resolutions
adopted by the Board, the Shares will be duly authorized, legally issued, fully
paid and nonassessable.
2. When the Reclassification has become effective and the Restated
Rights Agreement has been executed and delivered in the manner described in the
Registration Statement and in accordance with the resolutions adopted by the
Board, the Common Stock Rights will be validly redesignated as Agouron Stock
Rights and Oncology Stock Rights, and, when issued in accordance with the
Restated Rights Agreement, such Rights will be duly authorized and legally
issued.
<PAGE>
We hereby consent to the filing of this opinion as Exhibit 5.1 to the
Registration Statement and to the use of our name under the caption "Legal
Matters" in the Registration Statement and in the Proxy Statement/Prospectus
included therein.
Very truly yours,
/s/ Pillsbury Madison & Sutro LLP
_________________________________
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this
Registration Statement on Form S-4 of Agouron Pharmaceuticals, Inc., Agouron
Pharmaceuticals and Oncology Division of our report dated July 16, 1998,
relating to the financial statements of Agouron Pharmaceuticals, Inc. and our
reports dated August 10, 1998, relating to the financial statements of Agouron
Pharmaceuticals and Oncology Division, which appear in such Prospectus. We also
consent to the reference to us under the heading "Experts" in such Prospectus.
PRICEWATERHOUSECOOPERS LLP
San Diego, California
November 4, 1998
EXHIBIT 99.1
AGOURON PHARMACEUTICALS, INC.
10350 NORTH TORREY PINES ROAD
LA JOLLA, CALIFORNIA 92037-1020
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby appoints Peter Johnson and Gary E. Friedman, and
each of them, with full power of substitution, as proxies to represent and to
vote, as designated below, all the shares of common stock of Agouron
Pharmaceuticals, Inc., held of record by the undersigned on October 19, 1998, at
the Annual Meeting of Shareholders to be held on December 16, 1998 and at any
adjournments or postponements thereof.
THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED IN THE MANNER DIRECTED
HEREIN BY THE UNDERSIGNED SHAREHOLDER. IF NO OTHER DIRECTION IS MADE, THIS PROXY
WILL BE VOTED FOR THE ELECTION OF THE DIRECTOR NOMINEES LISTED ON THE OTHER SIDE
AND FOR PROPOSALS 2, 3, 4 AND 5. IF CUMULATIVE VOTING PROCEDURES ARE INVOKED AT
THE MEETING AND THIS PROXY CARD INDICATES "FOR" OR GIVES NO DIRECTION ON
PROPOSAL 1, THE DESIGNATED PROXIES ARE AUTHORIZED TO DISTRIBUTE THE VOTES
REPRESENTED BY THIS PROXY IN THEIR DISCRETION SO AS TO ELECT THE MAXIMUM NUMBER
OF MANAGEMENT NOMINEES WHICH MAY BE ELECTED BY CUMULATIVE VOTING.
FOLD AND DETACH HERE
[ L O G O ]
Please check the appropriate box on the voting
card to R.S.V.P. your attendance at the Meeting on December
16, 1998 at 10:00 a.m.
or phone Agouron Investor Relations at 1-800-501-2474.
<PAGE>
<TABLE>
<CAPTION>
Please mark
your vote
as
indicated in
this example
The Board recommends a vote FOR Proposals 1, 2, 3, 4 & 5.
<S> <C> <C> <C> <C> <C> <C> <C>
1. Proposal 1
FOR ALL WITHHELD FOR AGAINST ABSTAIN
ELECTION OF DIRECTORS NOMINEES FOR 2. Proposal 2-
ALL APPROVAL OF
DIVISIONAL
Peter Johnson STOCK PROPOSAL
Gary E. Friedman
John N. Abelson 3. Proposal 3-
Patricia M. Cloherty APPROVAL OF
A.E. Cohen AMENDMENT TO 1996
Michael E. Herman STOCK OPTION PLAN
Irving S. Johnson
Antonie T. Knoppers 4. Proposal 4-
Melvin I. Simon APPROVAL OF
AMENDMENT TO
EMPLOYEE STOCK
PURCHASE PLAN
5. Proposal 5-
RATIFICATION
OF SELECTION OF
INDEPENDENT ACCOUNTANTS
WITHHELD FOR: (To withhold authority to vote for any
individual nominee, write that nominee's name in the space Check here if you
provided below.) plan to attend the
Annual Meeting.
- -------------------------------------------------------------
</TABLE>
Note: The proxies of the undersigned may vote according to their discretion
on any other matter that may properly come before the meeting.
Signature(s) Date , 1998 NOTE: Please sign as name appears hereon. Joint owners
should each sign. When signing as attorney, executor, administrator, trustee or
guardian, please give full title as such.
FOLD AND DETACH HERE