<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 9, 2000
REGISTRATION NO. 333-42302
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------
AMENDMENT NO. 1
TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------
CELGENE CORPORATION
(Exact names of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 2834 22-2711928
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
</TABLE>
------------------
7 POWDER HORN DRIVE
WARREN, NEW JERSEY 07059
(732) 271-1001
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
------------------
JOHN W. JACKSON
CHAIRMAN OF THE BOARD AND CHIEF EXECUTIVE OFFICER
CELGENE CORPORATION
7 POWDER HORN DRIVE
WARREN, NEW JERSEY 07059
(732) 271-1001
(Name, address, including zip code, and
telephone number, including area code, of agent for service)
------------------
COPIES OF COMMUNICATIONS TO:
ROBERT A. CANTONE, ESQ.
PROSKAUER ROSE LLP
1585 BROADWAY
NEW YORK, NEW YORK 10036-8299
(212) 969-3000
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practical after the registration statement becomes effective and the effective
time of the proposed merger of Celgene Acquisition Corp. with and into Signal
Pharmaceuticals, Inc., as described in the Agreement and Plan of Merger dated
as of June 29, 2000, attached as Appendix A to the proxy statement/prospectus
forming a part of this registration statement.
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
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 WILL AMEND 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 THIS REGISTRATION STATEMENT SHALL THEREAFTER
BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE>
SIGNAL PHARMACEUTICALS, INC.
August 8, 2000
Dear Shareholder:
The boards of directors of Signal Pharmaceuticals, Inc. and Celgene
Corporation have agreed to merge our companies pursuant to an Agreement and
Plan of Merger dated June 29, 2000 among Signal, Celgene and Celgene
Acquisition Corp., a wholly-owned subsidiary of Celgene. If the merger is
completed, Signal will become a wholly-owned subsidiary of Celgene.
In the merger, Signal shareholders will receive 0.1257 of a share of
Celgene common stock for each share of Signal common stock that they own
(including shares of Signal preferred stock which will be converted into Signal
common stock immediately before the merger).
The common stock of Celgene is listed on the Nasdaq National Market under
the symbol "CELG." On August 4, 2000, the last reported sale price for Celgene
common stock was $54.25 per share.
The merger cannot be completed unless the shareholders of Signal approve
it.
Signal has scheduled a special meeting for its shareholders to vote on the
merger and on the conversion of the outstanding shares of Signal preferred
stock into shares of Signal common stock. Whether or not you plan to attend
this shareholders' meeting, please take the time to vote on the proposal to be
submitted at the meeting by completing and mailing the enclosed proxy card to
Signal. You may vote at the shareholders' meeting if you own shares of common
stock or preferred stock of Signal as of the close of business on August 4,
2000. The date, time and place of the shareholders' meeting is as follows:
AUGUST 21, 2000 AT 8:00 A.M., LOCAL TIME
SIGNAL PHARMACEUTICALS, INC.
5555 OBERLIN DRIVE
SAN DIEGO, CALIFORNIA 92121
This proxy statement/prospectus provides you with detailed information
about the matters to be considered by the Signal shareholders. We encourage you
to read this entire document carefully.
The board of directors believes that the matters to be presented at the
special meeting are in the best interests of Signal and its shareholders.
Therefore, the board of directors urges shareholders to vote in favor of the
proposals to be presented at the special meeting.
/s/ John P. Walker
John P. Walker
Chairman of the
Board
YOU SHOULD CAREFULLY CONSIDER THE RISK FACTORS BEGINNING ON PAGE 19 OF
THIS PROXY STATEMENT/PROSPECTUS.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
REGULATOR HAS APPROVED OR DISAPPROVED OF THE SECURITIES TO BE ISSUED IN
CONNECTION WITH THE MERGER OR DETERMINED IF THIS PROXY STATEMENT/PROSPECTUS IS
ACCURATE OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIME.
This proxy statement/prospectus is dated August 8, 2000 and is first being
mailed to shareholders on or about August 9, 2000.
<PAGE>
SIGNAL PHARMACEUTICALS, INC.
5555 OBERLIN DRIVE
SAN DIEGO, CALIFORNIA 92121
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON AUGUST 21, 2000
To the Shareholders of
Signal Pharmaceuticals, Inc.:
NOTICE IS HEREBY GIVEN that a Special Meeting of Shareholders of Signal
Pharmaceuticals, Inc., a California corporation, will be held at 8:00 a.m.,
local time, on August 21, 2000, at Signal's principal executive offices at 5555
Oberlin Drive, San Diego, California, for the following purposes:
1. To consider and vote upon a proposal to approve and adopt the Agreement and
Plan of Merger, dated as of June 29, 2000, by and among Celgene
Corporation, a Delaware corporation, Celgene Acquisition Corp., a
California corporation and a wholly-owned subsidiary of Celgene
Corporation, and Signal and to approve the principal terms of the merger
described in the merger agreement. The merger agreement provides for the
merger of Celgene Acquisition Corp. with and into Signal with the result
that Signal will become a wholly-owned subsidiary of Celgene Corporation.
The merger agreement also provides that Signal shareholders will receive
in the merger 0.1257 of a share of common stock, par value $.01 per share,
of Celgene Corporation in exchange for each share of common stock of
Signal that they own (including shares of Signal preferred stock which
will be converted into Signal common stock immediately before the merger).
The merger is described more fully in the attached proxy
statement/prospectus, which includes a copy of the merger agreement.
2. To consider and vote upon the conversion of all outstanding shares of
preferred stock of Signal into shares of common stock of Signal effective
immediately prior to the effective time of the merger. The merger
agreement provides that the merger will not occur unless all shares of
Signal preferred stock are converted into shares of Signal common stock
immediately before the merger.
3. To consider and act upon such other business and matters or proposals as may
properly come before the Signal meeting.
The board of directors of Signal has fixed the close of business on August
4, 2000 as the record date for determining the holders of Signal capital stock
having the right to receive notice of, and to vote at, the Signal meeting. Only
holders of record of Signal capital stock at the close of business on such date
are entitled to notice of, and to vote at, the Signal meeting. A list of
Signal's shareholders entitled to vote at the meeting will be available during
normal business hours at Signal's executive offices for ten days before the
Signal meeting for examination by any Signal shareholder for purposes germane
to the Signal meeting.
THE BOARD OF DIRECTORS OF SIGNAL UNANIMOUSLY RECOMMENDS THAT YOU VOTE
"FOR" APPROVAL AND ADOPTION OF THE MERGER AGREEMENT, THE PRINCIPAL TERMS OF THE
MERGER AND THE OTHER PROPOSALS PRESENTED AT THE SIGNAL MEETING.
Approval and adoption of the merger agreement and approval of the
principal terms of the merger require the affirmative vote of the holders of at
least a majority of the outstanding shares of Signal common stock and the
affirmative vote of the holders of at least a majority of the outstanding
shares of Signal preferred stock, each voting as a separate class, entitled to
vote at the Signal meeting. In addition, approval of the conversion of all
shares of Signal preferred stock into Signal common stock requires the
affirmative vote of the holders of at least 75% of the outstanding shares of
Signal preferred stock.
All shareholders are cordially invited to attend the Signal meeting in
person. Whether or not you expect to attend the Signal meeting, please sign and
mail promptly the enclosed proxy that is being solicited on behalf of the board
of directors of Signal. A return envelope that requires no postage if mailed in
the United States is enclosed for that purpose. The proxies of shareholders who
attend the meeting in person may be withdrawn, and such shareholders may vote
personally at the meeting.
<PAGE>
YOUR VOTE IS VERY IMPORTANT, REGARDLESS OF THE NUMBER OF SHARES YOU OWN.
PLEASE VOTE AS SOON AS POSSIBLE TO MAKE SURE THAT YOUR SHARES ARE REPRESENTED
AT THE MEETING. TO VOTE YOUR SHARES, YOU MAY COMPLETE AND RETURN THE ENCLOSED
PROXY CARD. IF YOU ARE A HOLDER OF RECORD, YOU MAY ALSO CAST YOUR VOTE IN
PERSON AT THE SPECIAL MEETING. IF YOU DO NOT VOTE, IT WILL HAVE THE SAME EFFECT
AS VOTING AGAINST THE MERGER.
By Order of the Board of Directors
/s/ John P. Walker
John P. Walker
Chairman of the Board
San Diego, California
August 8, 2000
YOUR VOTE IS IMPORTANT TO US.
PLEASE COMPLETE, SIGN, DATE AND RETURN YOUR PROXY.
HOLDERS OF SIGNAL CAPITAL STOCK SHOULD NOT
SEND STOCK CERTIFICATES WITH THEIR PROXY CARDS.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
QUESTIONS AND ANSWERS ABOUT THE MERGER
SUMMARY .................................................................................. 1
The Companies ........................................................................ 1
What Signal Shareholders Will Receive ................................................ 1
The Special Meeting .................................................................. 1
Our Recommendation to Shareholders ................................................... 2
Votes Required ....................................................................... 2
The Merger ........................................................................... 3
Reasons for the Merger ............................................................... 3
Interests of Signal Officers and Directors in the Merger That Are Different from the
Interests of Signal Shareholders ................................................... 3
Conditions to the Merger ............................................................. 3
Termination of the Merger Agreement .................................................. 4
Dissenters' Rights Available to Signal Shareholders Who Dissent from the Merger ...... 4
Anticipated Accounting Treatment of the Merger ....................................... 4
Regulatory Approvals ................................................................. 4
Listing of the Celgene Common Stock .................................................. 4
Financial Advisor's Opinion .......................................................... 4
Treatment of Stock Options and Warrants in the Merger ................................ 5
Tax Consequences ..................................................................... 5
Agreements with Certain Shareholders ................................................. 5
Option Agreement ..................................................................... 5
Agreement of Signal Affiliates ....................................................... 5
Comparative Per Share Information .................................................... 6
Comparative Per Share Market Price Information ....................................... 7
Forward-Looking Statements May Prove Inaccurate ...................................... 8
Summary of Celgene Selected Consolidated Financial Data .............................. 9
Summary of Signal Pharmaceuticals, Inc. Selected Financial Data ...................... 10
Unaudited Pro Forma Condensed Combined Financial Statements .......................... 11
Unaudited Pro Forma Condensed Combined Balance Sheet ................................. 12
Unaudited Pro Forma Condensed Combined Statement of Operations ....................... 13
Notes to Unaudited Pro Forma Condensed Combined Financial Statements ................. 17
RISK FACTORS ............................................................................. 19
Risks Relating to the Merger ......................................................... 19
Risks Relating to Celgene ............................................................ 20
Risks Associated with Investing in Celgene Common Stock .............................. 20
Risks Associated with Investing in the Business of Celgene ........................... 21
Risks Relating to Investing in the Pharmaceutical Industry ........................... 24
Risks Relating to Signal's Business .................................................. 26
THE COMPANIES ............................................................................ 34
Celgene Corporation .................................................................. 34
Signal Pharmaeuticals, Inc. .......................................................... 34
THE SIGNAL SPECIAL MEETING ............................................................... 36
Date, Time and Place of Special Meeting .............................................. 36
Matters to be Considered at the Signal Special Meeting ............................... 36
Signal Board Recommendation .......................................................... 36
</TABLE>
i
<PAGE>
<TABLE>
<CAPTION>
PAGE
<S> <C>
Votes Required and Outstanding Shares .................................................... 36
Quorum and Abstention .................................................................... 36
Voting of Proxies ........................................................................ 37
Revocability of Proxies .................................................................. 37
Solicitation ............................................................................. 37
Voting and Proxy Agreements .............................................................. 37
THE MERGER ............................................................................... 38
General Description of the Merger .................................................... 38
Background of the Merger ............................................................. 38
Recommendation of Signal's Board of Directors ........................................ 41
Signal's Reasons for the Merger ...................................................... 41
Celgene's Reasons for the Merger ..................................................... 43
Opinion and Analysis of Signal's Financial Advisor ................................... 44
Merger Consideration ................................................................. 49
Stock Options and Warrants ........................................................... 49
Dissenters' Rights ................................................................... 49
Effective Time ....................................................................... 50
Conversion of Shares; Procedures For Exchange of Certificates; No Fractional Shares .. 50
Nasdaq Listing ....................................................................... 51
Expenses ............................................................................. 51
Interests of Certain Persons in the Merger ........................................... 51
Material Federal Income Tax Consequences ............................................. 51
Accounting Treatment ................................................................. 54
Regulatory Approvals ................................................................. 54
Resale of Celgene Common Stock Following the Merger .................................. 54
THE MERGER AGREEMENT AND RELATED AGREEMENTS .............................................. 55
General .............................................................................. 55
Consideration to Be Received in the Merger ........................................... 55
Conditions to the Merger ............................................................. 55
Representations and Warranties ....................................................... 56
Covenants ............................................................................ 57
Termination .......................................................................... 60
Amendment; Waiver .................................................................... 61
Fees and Expenses .................................................................... 61
Voting and Proxy Agreement ........................................................... 61
Option Agreement ..................................................................... 61
Confidentiality Agreement ............................................................ 62
Agreement of Signal Affiliates ....................................................... 62
INFORMATION REGARDING CELGENE ............................................................ 63
Overview of Celgene's Business ....................................................... 63
Management ........................................................................... 79
Executive Compensation ............................................................... 81
Management's Discussion and Analysis of Financial Condition and Results of Operations 84
INFORMATION REGARDING SIGNAL ............................................................. 89
Overview of Signal's Business ........................................................ 89
Management ........................................................................... 103
Principal Stockholders of Signal ..................................................... 104
Management's Discussion and Analysis of Financial Condition and Results of Operations 107
</TABLE>
ii
<PAGE>
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Market Price of and Dividends on Signal's Common Equity and Related Shareholder Matters .. 111
DESCRIPTION OF CELGENE CAPITAL STOCK ..................................................... 112
Common Stock ......................................................................... 112
Preferred Stock ...................................................................... 112
Shareholder Rights Plan .............................................................. 112
Delaware Law and Selected By-Law Provisions .......................................... 113
Transfer Agent and Registrar ......................................................... 113
COMPARATIVE RIGHTS OF CELGENE STOCKHOLDERS AND SIGNAL
SHAREHOLDERS ............................................................................ 113
Size of the Board of Directors ....................................................... 114
Elimination of Cumulative Voting ..................................................... 114
Removal of Directors ................................................................. 114
Filling New Seats or Vacancies on the Board of Directors ............................. 115
Indemnification and Limitation of Liability .......................................... 115
Interested Director Transactions ..................................................... 116
Loans to Officers and Employees ...................................................... 116
Stockholder Derivative Suits ......................................................... 117
Elimination of Actions by Written Consent of Stockholders ............................ 117
Power to Call Special Meetings of Stockholders ....................................... 117
Stockholder Approval of Certain Business Combinations ................................ 117
Mergers .............................................................................. 118
Dissenters' Rights ................................................................... 119
OTHER MATTERS ............................................................................ 119
LEGAL MATTERS ............................................................................ 120
EXPERTS .................................................................................. 120
WHERE YOU CAN FIND MORE INFORMATION ...................................................... 120
FORWARD-LOOKING STATEMENTS ............................................................... 121
APPENDIX A Agreement and Plan of Merger
Exhibit A-1 Form of Voting and Proxy Agreement
Exhibit A-2 Form of Option Agreement
Exhibits B-1 and B-2 Form of Tax Representation Letters
Exhibit CForm of Affiliate Agreement
Exhibit DForm of Legal Opinion of Cooley Godward LLP
Exhibit EForm of Tax Opinion of Proskauer Rose LLP
Exhibit FForm of Legal Opinion of Proskauer Rose LLP
Exhibit GForm of Tax Opinion of Cooley Godward LLP
APPENDIX B California General Corporation Law--Dissenters' Rights
APPENDIX C Opinion of FleetBoston Robertson Stephens Inc.
INDEX TO CELGENE CONSOLIDATED FINANCIAL STATEMENTS ....................................... F-1
INDEX TO SIGNAL FINANCIAL STATEMENTS ..................................................... F-27
</TABLE>
iii
<PAGE>
QUESTIONS AND ANSWERS ABOUT THE MERGER
Q: WHY ARE THE TWO COMPANIES PROPOSING TO MERGE?
A: We believe that the merger of Celgene and Signal will create a
stronger, more competitive company capable of achieving greater financial
strength, operational efficiencies, technology development, earning power and
growth potential than either company would have on its own.
Q: WHAT WILL I RECEIVE IN THE MERGER?
A: As a result of the merger, Signal shareholders will receive 0.1257 of a
share of common stock, par value $.01 per share, of Celgene Corporation in
exchange for each share of common stock of Signal that they own (including
shares of Signal preferred stock which will be converted into Signal common
stock immediately before the merger). For example, if you own 1,000 shares of
Signal common stock, you will receive 125 shares of Celgene common stock in
exchange for your Signal shares. No fractional shares of Celgene common stock
will be issued; instead, you will receive cash for the fraction of a share of
Celgene common stock you would have otherwise received.
Q: WHAT PERCENTAGE OF THE OUTSTANDING COMMON STOCK OF CELGENE WOULD BE HELD BY
SIGNAL SHAREHOLDERS?
A: Signal shareholders would hold approximately 5.3% of the outstanding
common stock of Celgene immediately after the merger.
Q: WHEN DO YOU EXPECT THE MERGER TO BE COMPLETED?
A: We hope to complete the merger within two business days after the day
on which all the conditions set forth in the merger agreement are either
satisfied or waived.
Q: WHAT DO I NEED TO DO NOW?
A: After carefully reading and considering the information contained in
this document and its appendices, indicate on your proxy card how you want to
vote, and sign and mail the proxy card in the enclosed return envelope as soon
as possible, so that your shares may be represented at the special meeting. If
you sign and send in your proxy card and do not indicate how you want to vote,
we will count your proxy card as a vote in favor of the proposals to be voted
upon at your special meeting. If you do not vote or you abstain, it will have
the effect of a vote against the proposal or proposals presented to the special
meeting. The board of directors of Signal recommends voting in favor of the
merger agreement and the merger, and in favor of the conversion of all
outstanding shares of Signal preferred stock into shares of Signal common stock
immediately before the merger.
Q: WHAT IS THE REQUIRED VOTE TO APPROVE THE MERGER?
A: Approval and adoption of the merger agreement and approval of the
principal terms of the merger requires the affirmative vote of the holders of
at least a majority of the outstanding shares of Signal common stock and the
affirmative vote of the holders of at least a majority of the outstanding
shares of Signal preferred stock, each voting as a separate class, entitled to
vote at the Signal meeting. Celgene has entered into agreements with certain of
the shareholders of Signal pursuant to which these Signal shareholders have
granted to Celgene an irrevocable proxy to vote all of their shares of Signal
capital stock in favor of the approval and adoption of the merger agreement,
approval of the principal terms of the merger and conversion of the outstanding
shares of preferred stock into shares of common stock. As of the record date,
these shareholders owned shares representing approximately 55% of the
outstanding shares of Signal common stock and approximately 79% of Signal
preferred stock entitled to vote at the Signal special meeting. Accordingly,
Celgene has sufficient voting power to constitute a quorum and to approve all
matters to be considered at the Signal shareholders' meeting. Celgene has
agreed to vote all shares of Signal company stock and Signal preferred stock
subject to these agreements in favor of the merger proposal and the preferred
stock conversion proposal.
<PAGE>
Q: WHAT IS THE REQUIRED VOTE TO APPROVE THE CONVERSION OF SIGNAL PREFERRED
STOCK?
A: Approval of the conversion of all outstanding shares of Signal
preferred stock into shares of Signal common stock requires the affirmative
vote of the holders of at least 75% of the outstanding shares of Signal
preferred stock. The merger agreement provides that the merger will not occur
unless all shares of Signal preferred stock are converted into shares of Signal
common stock immediately before the merger. Celgene has entered into agreements
with certain shareholders of Signal pursuant to which these Signal shareholders
have granted to Celgene an irrevocable proxy to vote all of their preferred
shares of Signal stock in favor of the conversion of preferred stock. As of the
record date, these shareholders owned shares representing approximately 79% of
Signal preferred stock entitled to vote at the Signal special meeting.
Accordingly, Celgene has sufficient voting power to constitute a quorum and to
approve all matters to be considered at the Signal shareholders' meeting.
Celgene has agreed to vote all shares of Signal common stock and Signal
preferred stock subject to those agreements in favor of the merger proposal and
the preferred stock conversion proposal.
Q: IF I AM NOT GOING TO ATTEND THE SHAREHOLDER MEETING, SHOULD I RETURN MY
PROXY CARD INSTEAD?
A: Yes. Please fill out your proxy card and mail it to us in the enclosed
return envelope as soon as possible. Returning your proxy card ensures that
your shares will be represented at the special meeting.
Q: WHAT HAPPENS IF I DO NOT RETURN A PROXY CARD?
A: If you are a Signal shareholder, the failure to return your proxy card
will have the same effect as voting against the merger.
Q: MAY I VOTE IN PERSON?
A: Yes. You may attend the special meeting of Signal shareholders and vote
your shares in person rather than signing and returning your proxy card.
Q: WHAT DO I DO IF I WANT TO CHANGE MY VOTE?
A: You should send in a new, later dated, signed proxy card to Signal's
corporate secretary before the special meeting or attend the special meeting in
person and vote.
Q: SHOULD I SEND IN MY STOCK CERTIFICATES NOW?
A: No. After the merger is completed, we will send Signal shareholders
written instructions for exchanging their stock certificates.
Q: AM I ENTITLED TO DISSENTERS' RIGHTS?
A: Signal shareholders will be entitled to dissenters' rights in certain
instances.
Q: WHAT ARE THE TAX CONSEQUENCES TO SHAREHOLDERS OF THE MERGER?
A: The merger will not be a taxable event for federal income tax purposes
for Signal shareholders. Tax matters, however, are very complicated, and the
tax consequences of the merger to you will depend on the facts of your
particular situation. We encourage you to contact your tax advisors to
determine the tax consequences of the merger to you. To review the tax
consequences to Signal shareholders in greater detail, see pages 51 to 54 of
this proxy statement/prospectus.
Q: WHO CAN HELP ANSWER MY QUESTIONS?
A: If you would like additional copies of this proxy statement/prospectus
or if you have questions about the merger, you can contact us at Signal
Pharmaceuticals, Inc., 5555 Oberlin Drive, San Diego, California 92121,
Attention: Corporate Secretary.
<PAGE>
SUMMARY
This summary highlights selected information from this proxy
statement/prospectus and may not contain all of the information that is
important to you. In order to fully understand the merger and related
transactions and for a more complete description of the legal terms of the
merger and related transactions, you should read carefully this entire document
and the documents to which you are referred. See "Where You Can Find More
Information" on page 122. The merger agreement is attached as Appendix A to
this proxy statement/prospectus. We encourage you to read the merger agreement
as it is the legal document that governs the merger.
THE COMPANIES
SIGNAL PHARMACEUTICALS, INC.
5555 Oberlin Drive
San Diego, California 92121
(858) 558-7500
Signal Pharmaceuticals, Inc., a California corporation, is a biopharmaceutical
company focused on discovering and developing new classes of small molecule
drugs that regulate disease-associated genes. After the merger, Signal will be
a wholly-owned subsidiary of Celgene. Signal's principal executive offices will
continue to be located at 5555 Oberlin Drive, San Diego, California 92121.
CELGENE CORPORATION
7 Powder Horn Drive
Warren, New Jersey 07059
(732) 271-1001
Celgene Corporation, a Delaware corporation, is an independent
biopharmaceutical company engaged in the discovery, development and
commercialization of small molecule drugs for the treatment of cancer and
immunological diseases. Celgene's primary therapeutic focus is on the
development of orally adminstered, small molecule pharmaceuticals that regulate
tumor necrosis factor alpha, or TNF-, and are anti-angiogenic. TNF- has been
linked to the cause and symptoms of many chronic inflammatory and immunological
diseases. Anti-angiogenic drugs inhibit the growth of undesirable blood
vessels, including those that promote tumor growth.
WHAT SIGNAL SHAREHOLDERS WILL RECEIVE
Upon consummation of the merger, shareholders of Signal will receive 0.1257 of
a share of common stock, par value $.01 per share, of Celgene in exchange for
each share of common stock of Signal that they own (including shares of Signal
preferred stock which will be converted into Signal common stock immediately
before the merger). No fractional shares of Celgene common stock will be issued
in the merger; instead, Signal shareholders will receive cash for the fraction
of a share of Celgene common stock they would have otherwise received.
THE SPECIAL MEETING
The special meeting of shareholders of Signal will be held at 8;00 a.m., local
time, on August 21, 2000, at Signal's executive offices at 5555 Oberlin Drive,
San Diego, California. At the meeting, holders of Signal capital stock will
consider and vote upon:
o a proposal to approve and adopt the merger agreement and approve the
principal terms of the merger;
1
<PAGE>
o a proposal to approve the conversion of all outstanding shares of Signal
preferred stock into shares of Signal common stock, effective immediately
before the merger; and
o any other matters that may properly come before the meeting.
OUR RECOMMENDATION TO SHAREHOLDERS
The Signal board of directors believes that the merger is in the best interests
of its shareholders and recommends that the Signal shareholders vote "FOR" the
proposal to approve and adopt the merger agreement and approve the principal
terms of the merger and "FOR" the proposal to convert outstanding shares of
preferred stock into shares of common stock.
VOTES REQUIRED
Approval and adoption of the merger agreement and approval of the principal
terms of the merger require the affirmative vote of the holders of a majority
of the outstanding shares of Signal common stock and the affirmative vote of
the holders of a majority of the outstanding shares of Signal preferred stock,
each voting as a separate class, entitled to vote at the Signal meeting. In
addition, approval of the conversion of all shares of Signal preferred stock
into Signal common stock requires the affirmative vote of the holders of at
least 75% of the outstanding shares of Signal preferred stock. Celgene has
entered into agreements with certain shareholders of Signal pursuant to which
these Signal shareholders have granted to Celgene an irrevocable proxy to vote
all of their shares of Signal capital stock in favor of the approval and
adoption of the merger agreement and approval of the principal terms of the
merger and, where applicable, in favor of the conversion of preferred stock. As
of the record date, these shareholders owned shares representing approximately
55% of the outstanding shares of Signal common stock and approximately 79% of
Signal preferred stock entitled to vote at the Signal special meeting.
Accordingly, Celgene has sufficient voting power to constitute a quorum and to
approve all matters to be considered at the Signal shareholders' meeting.
Celgene has agreed to vote all shares of Signal common stock and Signal
preferred stock subject to those agreements in favor of the merger proposal and
the preferred stock conversion proposal. As of the record date, Signal
directors and executive officers and their affiliates owned approximately
6,798,825 shares of Signal capital stock which represented approximately 23% of
the outstanding shares of Signal capital stock entitled to vote at the Signal
special meeting.
PROCEDURES FOR VOTING YOUR SHARES. You may vote your shares by signing your
proxy card and mailing it in the enclosed return envelope. If you are a holder
of record, you may vote in person at the special meeting. If you do not include
instructions on how to vote your properly executed proxy card, your shares will
be voted FOR approval and adoption of the merger agreement, approval of the
principal terms of the merger and conversion of the outstanding shares of
preferred stock into shares of common stock. If you do not vote, it will have
the same effect as voting against the merger.
PROCEDURE FOR CHANGING YOUR VOTE. You can change your vote at any time before
your proxy is voted at the special meeting. You can do this in one of three
ways. First, you can send a written, signed notice stating that you are
revoking your proxy. Second, you can complete and submit a new proxy card. If
you choose either of these two methods, you must submit your notice of
revocation of your new proxy to the Secretary of Signal. Third, if you are a
holder of record, you can attend the special meeting and vote in person.
2
<PAGE>
THE MERGER
The merger agreement is attached as Appendix A to this proxy
statement/prospectus. We encourage you to read the merger agreement because it
is the legal document that governs the merger.
The merger agreement provides that, upon consummation of the merger, Celgene
Acquisition Corp. will merge with and into Signal. Signal will continue as the
surviving corporation and become a wholly-owned subsidiary of Celgene. The
merger will become effective upon the filing of an agreement of merger with the
Secretary of State of the State of California, or such other time as the
parties may specify. This filing is anticipated to be made two business days
after receipt of Signal shareholder approval and all required regulatory
approvals and the satisfaction or waiver of the other conditions to the merger.
REASONS FOR THE MERGER
Celgene
o strengthen research
o diversify pipeline
o accelerate discovery and development
Signal
Signal's board of directors determined that the proposed merger is in the best
interests of Signal and its shareholders based on a number of factors,
including the following:
o greater financial security and leverage leading to an enhanced negotiating
position with potential partners or licensees;
o the existence of a public market for the Celgene common stock;
o the strategic fit between Signal and Celgene; and
o the financial consideration to be received by Signal's shareholders.
INTERESTS OF SIGNAL OFFICERS AND DIRECTORS IN THE MERGER THAT ARE
DIFFERENT FROM THE INTERESTS OF SIGNAL SHAREHOLDERS
As of the record date, Signal directors and executive officers and their
affiliates owned 6,798,825 shares of Signal capital stock, which represented
approximately 23% of the outstanding shares of Signal capital stock entitled to
vote at the Signal special meeting. Pursuant to the merger agreement, Signal's
directors and executive officers will receive the same consideration for their
shares of Signal common stock as the other Signal shareholders. In addition, as
part of the merger, Alan Lewis, Signal's president and chief executive officer,
is negotiating an employment agreement with Celgene to be effective upon the
consummation of the merger.
As part of the merger, it is anticipated that certain former non-employee
directors of Signal will enter into consulting agreements with Signal to
provide services to Signal to be effective upon the consummation of the merger.
CONDITIONS TO THE MERGER
The obligations of Celgene and Signal to complete the merger are subject to the
satisfaction of conditions described below.
3
<PAGE>
TERMINATION OF THE MERGER AGREEMENT
Celgene and Signal can terminate the merger agreement by mutual written consent
and for various other reasons described below. The merger agreement provides
that if Signal's board withdraws its recommendation that shareholders vote for
the merger or solicits or recommends another acquisition transaction with a
third party, Signal will be required to pay Celgene a termination fee of
$10,000,000. If the merger is not completed by December 31, 2000 and Celgene
terminates the merger agreement, or if Signal shareholders do not approve the
merger, then Signal will also be required to pay Celgene a termination fee of
$10,000,000 if Signal signs or completes another acquisition transaction with a
third party within one year. In addition, if Signal or Celgene terminates the
merger agreement because of any material breach by the other of any
representation, warranty or covenant under the merger agreement, the breaching
party will be required to pay the other party $5,000,000. Signal would be
entitled to credit this payment against any termination fee owed to Celgene.
DISSENTERS' RIGHTS AVAILABLE TO SIGNAL SHAREHOLDERS
WHO DISSENT FROM THE MERGER
Signal shareholders will be entitled to dissenters' rights in some instances as
described below.
ANTICIPATED ACCOUNTING TREATMENT OF THE MERGER
The merger is intended to qualify as a pooling-of-interests. The
pooling-of-interests method of accounting assumes the companies had always been
combined, and the historical financial statements for periods prior to closing
of the merger are restated as though the companies had always been combined as
required under United States generally accepted accounting principles. The
assets and liabilities of Celgene and Signal will be carried forward by the
combined company at their historical recorded amounts.
REGULATORY APPROVALS
The Hart-Scott-Rodino Antitrust Improvements Act prohibits us from completing
the merger until we have furnished certain information and materials to the
Antitrust Division of the Department of Justice and the Federal Trade
Commission and the required waiting period has ended. On July 11, 2000, Celgene
and Signal each filed the required notification and report forms. The required
waiting period expires on August 10, 2000 unless extended or terminated
earlier. On August 4, 2000, Celgene received verbal notification that early
termination of the waiting period had been granted.
LISTING OF THE CELGENE COMMON STOCK
Celgene will use its reasonable best efforts to cause the shares of Celgene
common stock to be issued in connection with the merger to be approved for
quotation on the Nasdaq National Market or listed on such securities exchange
as Celgene common stock is then listed, subject to official notice of issuance.
FINANCIAL ADVISOR'S OPINION
Signal has received the opinion of FleetBoston Robertson Stephens Inc., dated
June 28, 2000, that as of the date of the opinion, and subject to and based on
the assumptions, limitations and qualifications referred to in the opinion, the
exchange ratio of 0.1257 of a share of Celgene common stock for each share of
Signal common stock was fair to the holders of Signal common stock from a
financial point of view. A copy of this opinion is attached as Appendix C. See
also "Opinion and Analysis of Signal's Financial Advisor."
4
<PAGE>
TREATMENT OF STOCK OPTIONS AND WARRANTS IN THE MERGER
Under the merger agreement, each option and warrant to purchase Signal common
stock or Series C-1 or Series C-2 preferred stock outstanding immediately prior
to the effective time of the merger, whether vested or unvested, will cease to
represent a right to acquire shares of Signal common stock or Series C-1 or
Series C-2 preferred stock and will be converted, at the effective time of the
merger, into an option or warrant to acquire, on the same terms and conditions,
the number of shares of Celgene common stock determined by multiplying the
number of shares of Signal common stock or Series C-1 or Series C-2 preferred
stock subject to that Signal stock option or warrant by 0.1257, rounded down,
if necessary, to the nearest whole share. The exercise price of these stock
options will be the exercise price for the stock option or warrant immediately
prior to the effective time of the merger divided by 0.1257, rounded up to the
nearest cent.
TAX CONSEQUENCES
You generally will not recognize income, gain or loss upon the exchange of the
Signal capital stock for Celgene common stock (except for a fractional share
for which cash is received). Your tax basis in Celgene common stock received
upon the exchange should generally be equal to your tax basis in the Signal
common stock exchanged. We encourage you to consult your tax advisor regarding
the tax consequences of the merger for your particular circumstances.
AGREEMENTS WITH CERTAIN SHAREHOLDERS
Celgene has entered into agreements with certain shareholders of Signal
pursuant to which these Signal shareholders have granted to Celgene an
irrevocable proxy to vote all of their shares of Signal capital stock in favor
of the approval and adoption of the merger agreement and approval of the
principal terms of the merger and, where applicable, in favor of the conversion
of preferred stock. As of the record date, these shareholders owned shares
representing approximately 55% of the outstanding shares of Signal common stock
and approximately 79% of Signal preferred stock entitled to vote at the Signal
special meeting. The shareholders agreement provides that it will terminate
upon the earlier of the completion of the merger and the termination of the
merger agreement in accordance with its terms.
OPTION AGREEMENT
In connection with the merger agreement, Signal entered into an option
agreement with Celgene in which Signal granted Celgene an option to purchase
2,000,000 shares of Signal common stock and stock appreciation rights with
respect to 3,000,000 shares of Signal common stock for a cash exercise price of
$6.60 per share, subject to adjustment as described in the option agreement.
The option agreement provides that Celgene can exercise the option upon the
happening of events as described elsewhere in this proxy statement/prospectus.
AGREEMENT OF SIGNAL AFFILIATES
Rule 145 under the Securities Act of 1933 regulates the disposition of
securities of "affiliates" of Signal in connection with the merger. Signal has
agreed to use its reasonable best efforts to cause each person who is
identified as an affiliate of Signal to deliver to Celgene, before the
effective time of the merger, a written affiliate agreement. Under these
affiliate agreements, each affiliate will represent that he, she or it has been
advised that the affiliate may not sell, transfer or otherwise dispose of
Celgene common stock issued to the affiliate in the merger unless the sale,
transfer or other disposition complies with certain conditions described
elsewhere in this proxy statement/prospectus.
5
<PAGE>
COMPARATIVE PER SHARE INFORMATION
The following table sets forth selected historical per share information of
Celgene and Signal and unaudited pro forma combined per share information after
giving effect to the merger between Celgene and Signal, under the
pooling-of-interests method of accounting, as if the companies have been
combined for all periods presented. You should read this information in
conjunction with the selected historical audited and unaudited financial
information, included elsewhere in this document, and the historical audited
financial statements of Celgene and Signal and related notes that are included
in this proxy statement/prospectus or incorporated in this document by
reference. The unaudited pro forma combined per share information is derived
from, and should be read in conjunction with, the unaudited pro forma condensed
combined financial statements and related notes included elsewhere in this
proxy statement/prospectus. Unaudited Pro Forma Signal Per Share Equivalents
are calculated by multiplying the corresponding Unaudited Pro Forma Combined
per share amounts by the exchange ratio of 0.1257.
The unaudited pro forma combined per share information does not purport to
represent what the actual financial position or results of operations of
Celgene and Signal would have been had the companies been combined for the
periods presented or to project Celgene's and Signal's financial position or
results of operations for any future date or period.
<TABLE>
<CAPTION>
THREE MONTHS FOR THE YEARS ENDED
ENDED MARCH 31, DECEMBER 31,
----------------- ---------------------------------------
2000 1999 1998 1997
----------------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
UNAUDITED PRO FORMA COMBINED
Per common share-basic and diluted:
Loss from continuing operations
applicable to common stockholders ......................... $ (0.11) $ (0.56) $ (0.75) $ (0.87)
Book value (deficit) at end of period (4) ................... 3.93 (0.18)
CELGENE -- HISTORICAL (1)
Per common share-basic and diluted:
Loss from continuing operations
applicable to common stockholders ......................... (0.05) (0.43) (0.66) (0.72)
Unaudited book value (deficit) at end of period (3) ......... 4.22 (0.30)
SIGNAL -- HISTORICAL
Per common share-basic and diluted:
Loss from continuing operations
applicable to common stockholders ......................... (0.98) (2.64) (1.65) (2.82)
Unaudited book value (deficit) at end of period (3) ......... (8.42) (9.72)
UNAUDITED PRO FORMA SIGNAL PER SHARE
EQUIVALENTS(2)
Per common share-basic and diluted:
Loss from continuing operations
applicable to common stockholders ......................... (0.01) (0.07) (0.09) (0.11)
Book value (deficit) at end of period (4) ................... 0.49 (0.02)
</TABLE>
-----------
(1) Amounts reflect a three-for-one stock split declared by Celgene and issued
on April 14, 2000.
(2) Amounts are calculated by multiplying the corresponding unaudited pro forma
combined per share amounts by the exchange ratio in the merger of 0.1257
of a share of Celgene common stock for each share of Signal common stock.
(3) Amounts are calculated by dividing the corresponding stockholders' equity
less any preferred stock liquidation preference by the corresponding
common shares outstanding.
(4) Amounts are calculated by dividing the corresponding stockholders' equity
by the corresponding common shares outstanding assuming conversion of
Signal preferred stock to common stock.
Note: No cash dividends were paid by Celgene or Signal during any of the
periods presented.
6
<PAGE>
COMPARATIVE PER SHARE MARKET PRICE INFORMATION
Celgene's common stock is traded on the Nasdaq National Market under the symbol
"CELG". The following table sets forth, for the periods indicated, the
intra-day high and low sale prices per share of common stock on the Nasdaq
National Market:
<TABLE>
<CAPTION>
HIGH* LOW*
------------ ------------
<S> <C> <C>
2000
Third Quarter (through August 4, 2000) ......... $ 56.250 $ 51.250
Second Quarter ................................. 68.500 25.000
First Quarter .................................. 62.333 18.917
1999
Fourth Quarter ................................. $ 24.208 $ 8.646
Third Quarter .................................. 9.667 4.875
Second Quarter ................................. 6.688 5.133
First Quarter .................................. 6.208 3.833
1998
Fourth Quarter ................................. $ 5.750 $ 2.563
Third Quarter .................................. 5.000 1.750
Second Quarter ................................. 3.833 3.000
First Quarter .................................. 3.875 2.354
</TABLE>
* The stock prices have been adjusted to reflect a three-for-one stock split
declared by Celgene and issued on April 14, 2000.
On June 29, 2000, the last trading day before the public announcement of the
proposed acquisition of Signal, the last reported sales price per share of
Celgene common stock was $53.50. On August 4, 2000, the last trading day before
the date of this proxy statement/prospectus, the last reported sales price per
share of Celgene common stock was $54.25. Because the securities of Signal are
not publicly traded, they have no readily ascertainable market value.
Because the market price of Celgene common stock is subject to fluctuation, the
market value of the shares of Celgene common stock that holders of Signal
capital stock will be entitled to receive pursuant to the merger may increase
or decrease prior to and following the merger. The exchange ratio is fixed and
will not be adjusted to compensate Signal's shareholders for decreases in the
market price of Celgene common stock which could occur prior to the merger
becoming effective. WE URGE SHAREHOLDERS TO OBTAIN CURRENT MARKET QUOTATIONS
FOR CELGENE COMMON STOCK. WE CANNOT ASSURE YOU AS TO THE FUTURE PRICES OR
MARKETS FOR CELGENE COMMON STOCK.
Neither Celgene nor Signal has paid any cash dividends in the past. Both
Celgene and Signal intend to retain future earnings, if any, to fund the
development and growth of their businesses and do not anticipate paying cash
dividends in the foreseeable future.
7
<PAGE>
FORWARD-LOOKING STATEMENTS MAY PROVE INACCURATE
Each of Signal and Celgene has made forward-looking statements in this proxy
statement/ prospectus, and in documents that are incorporated by reference in
this proxy statement/prospectus, that are subject to risks and uncertainties.
All statements included or incorporated by reference in this proxy
statement/prospectus or made by management of Celgene or Signal other than
statements of historical fact regarding Celgene, Signal or the combined company
are forward-looking statements. Examples of forward-looking statements include
statements regarding Celgene's, Signal's or the combined company's future
financial results, operating results, product successes, business strategies,
projected costs, future products, competitive positions and plans and
objectives of management for future operations. In some cases, you can identify
forward-looking statements by terminology, such as "may," "will," "should,"
"would," "expects," "plans," "anticipates," "believes," "estimates,"
"predicts," "potential," or "continue" or the negative of these terms or other
comparable terminology. Any expectations based on these forward-looking
statements are subject to risks and uncertainties and other important factors,
including those discussed in the "Risk Factors" section of this proxy
statement/prospectus. These and many other factors could affect the future
financial and operating results of Celgene, Signal or the combined company.
These factors could cause actual results to differ materially from expectations
based on forward-looking statements made in this document or elsewhere by or on
behalf of Celgene, Signal or the combined company.
8
<PAGE>
SUMMARY OF CELGENE SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial information of Celgene and
subsidiary is provided to aid your analysis of the financial aspects of the
merger. We derived this information from audited consolidated financial
statements for the years ended December 31, 1995 through 1999 and from
unaudited consolidated financial statements for the three months ended March
31, 2000 and March 31, 1999. This information is only a summary, and you should
read it in conjunction with Celgene's historical consolidated financial
statements and related notes and Management's Discussion and Analysis of
Financial Condition and Results of Operations contained in the annual reports,
quarterly reports and other information as included herein and on file with the
Securities and Exchange Commission. See "Where You Can Find More Information"
on page 122. Celgene's historical share and per share amounts included in this
proxy statement/prospectus have been retroactively restated to reflect the
three-for-one stock split declared and issued by Celgene on April 14, 2000.
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
MARCH 31,
------------------------
2000 1999
------------ -----------
In thousands, except per share data (UNAUDITED)
<S> <C> <C>
CONSOLIDATED STATEMENTS OF
OPERATIONS DATA:
Net revenues ................................ $ 11,866 $ 4,304
Costs and operating expenses ................ 16,546 10,496
Interest income/(expense), net .............. 1,536 (400)
Tax benefit ................................. -- --
-------- --------
Loss from continuing operations ............. (3,144) (6,592)
Preferred stock dividend (including
accretion and imputed dividends) .......... -- --
-------- --------
Loss from continuing operations
applicable to common stockholders .......... $ (3,144) $ (6,592)
======== ========
Per share basic and diluted:
Loss from continuing operations
applicable to common stockholders ......... $ (0.05) $ (0.13)
======== ========
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------
1999 1998 1997 1996 1995
------------ ------------ ------------ ------------ -----------
In thousands, except per share data
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF
OPERATIONS DATA:
Net revenues ................................ $ 26,210 $ 3,801 $ 1,122 $ 882 $ 472
Costs and operating expenses ................ 48,865 36,273 26,526 18,924 8,982
Interest income/(expense), net .............. (2,144) 449 384 984 143
Tax benefit ................................. 3,018 -- -- -- --
--------- --------- --------- --------- --------
Loss from continuing operations ............. (21,781) (32,023) (25,020) (17,058) (8,367)
Preferred stock dividend (including
accretion and imputed dividends) .......... -- 25 1,474 3,791 --
--------- --------- --------- --------- --------
Loss from continuing operations
applicable to common stockholders .......... $ (21,781) $ (32,048) $ (26,494) $ (20,849) $ (8,367)
========= ========= ========= ========= ========
Per share basic and diluted:
Loss from continuing operations
applicable to common stockholders ......... $ (0.43) $ (0.66) $ (0.72) $ (0.73) $ (0.35)
========= ========= ========= ========= ========
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
---------- -------------------------------------------------------------------
2000 1999 1998 1997 1996 1995
---------- ------------- ------------- ------------- ------------ ------------
(UNAUDITED)
In thousands
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE
SHEET DATA:
Cash and cash equivalents, and
marketable securities ................. $292,365 $ 19,527 $ 5,124 $ 13,583 $ 17,815 $ 11,713
Total assets ........................... 307,165 32,334 11,928 18,217 20,938 14,211
Convertible debentures ................. -- -- -- -- 2,026 4,592
Convertible notes ...................... 29,243 38,495 8,349 -- -- --
Accumulated deficit .................... (169,538) (166,394) (144,613) (119,521) (92,599) (70,989)
Stockholders' equity (deficit) ......... 271,123 (15,709) (3,733) 15,425 16,065 7,143
</TABLE>
9
<PAGE>
SUMMARY OF SIGNAL PHARMACEUTICALS, INC. SELECTED FINANCIAL DATA
The following selected financial information of Signal Pharmaceuticals,
Inc. is provided to aid your analysis of the financial aspects of the merger.
We derived this information from audited financial statements for the years
ended December 31, 1995 through 1999 and from unaudited financial statements
for the three months ended March 31, 2000 and March 31, 1999. This information
is only a summary, and you should read it in conjunction with the Signal
Pharmaceuticals, Inc. historical financial statements and related notes which
are included herein.
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
MARCH 31,
---------------------------
2000 1999
------------- -------------
In thousands, except per share data (UNAUDITED)
<S> <C> <C>
STATEMENTS OF OPERATIONS
DATA:
Net revenues ........................... $ 2,671 $ 2,923
Operating expenses ..................... 6,204 5,155
Interest income/(expense), net ......... 53 18
--------- ---------
Net loss ............................... (3,480) (2,214)
Preferred stock dividend
(including accretion and
imputed dividends) .................... -- --
--------- ---------
Net loss applicable to common
stockholders .......................... $ (3,480) $ (2,214)
========= =========
Net loss per share applicable to
common stockholders-basic and
diluted ............................... $ (0.98) $ (0.71)
========= =========
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------
1999 1998 1997 1996 1995
------------- ------------- ------------- ------------- -------------
In thousands, except per share data
<S> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS
DATA:
Net revenues ........................... $ 11,748 $ 15,414 $ 7,579 $ 3,933 $ 299
Operating expenses ..................... 19,759 20,371 13,128 10,195 7,110
Interest income/(expense), net ......... 155 600 (191) 53 329
--------- --------- --------- --------- ---------
Net loss ............................... (7,856) (4,357) (5,740) (6,209) (6,482)
Preferred stock dividend
(including accretion and
imputed dividends) .................... 818 -- -- -- --
--------- --------- --------- --------- ---------
Net loss applicable to common
stockholders .......................... $ (8,674) $ (4,357) $ (5,740) $ (6,209) $ (6,482)
========= ========= ========= ========= =========
Net loss per share applicable to
common stockholders-basic and
diluted ............................... $ (2.64) $ (1.65) $ (2.82) $ (3.69) $ (4.56)
========= ========= ========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
---------- ----------------------------------------------------------------------
2000 1999 1998 1997 1996 1995
---------- ------------ ----------- ----------- ------------ ------------
In thousands (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents,
and short-term investments ......... $ 6,337 $ 9,420 $ 12,952 $ 20,866 $ 5,460 $ 4,211
Total assets ........................ 11,650 14,539 19,558 23,838 9,047 6,866
Long-term obligations under
capital leases and
equipment notes payable ............ 1,570 1,805 2,460 1,548 2,746 513
Accumulated deficit ................. (41,257) (37,776) (29,102) (24,745) (19,005) (12,796)
Stockholders' equity ................ 3,411 5,983 12,125 15,164 1,512 5,574
</TABLE>
10
<PAGE>
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
The following unaudited pro forma condensed combined financial statements have
been prepared to give effect to the merger, using the pooling-of-interests
method of accounting.
The pro forma condensed combined financial statements reflect certain
assumptions deemed probable by management regarding the proposed merger (e.g.,
that share information used in the pro forma information approximates actual
share information at the Effective Date). No adjustments to the pro forma
condensed combined financial information have been made to account for
different possible results in connection with the foregoing, as management
believes that the impact on such information of the varying outcomes,
individually or in the aggregate, would not be materially different.
The unaudited pro forma condensed combined balance sheet as of March 31, 2000
combines the historical consolidated balance sheet of Celgene and the
historical balance sheet of Signal, giving effect to the merger as if it had
been consummated on March 31, 2000. The unaudited pro forma condensed combined
statements of operations combine the historical consolidated statements of
operations of Celgene and the historical statements of operations of Signal as
if the companies have been combined for all periods presented.
Celgene and Signal estimate that they will incur direct transaction costs of
approximately $7.5 million associated with the merger, which will be charged to
operations upon consummation of the merger.
Such pro forma condensed combined financial information is presented for
illustrative purposes only and is not necessarily indicative of the financial
position and results of operations that would have been actually achieved had
the merger occurred at the beginning of the periods presented, nor is it
necessarily indicative of future financial position or results of operations.
These pro forma condensed combined financial statements are based upon, and
should be read in conjunction with the respective historical consolidated
financial statements of Celgene, which are incorporated herein by reference,
and the historical financial statements of Signal, which are included elsewhere
in this proxy statement/prospectus.
11
<PAGE>
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
AS OF MARCH 31, 2000
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
CELGENE SIGNAL ADJUSTMENTS COMBINED
------------- ------------ ------------- ------------
(SEE NOTE 3)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ................................ $ 162,907 $ 5,815 $ $ 168,722
Marketable securities available for sale ................. 129,458 522 129,980
Accounts receivable ...................................... 5,689 78 5,767
Inventory ................................................ 2,615 -- 2,615
Other current assets ..................................... 1,701 1,050 2,751
---------- --------- ----------
Total current assets .................................... 302,370 7,465 309,835
Plant and equipment, net ................................. 2,436 3,101 5,537
Other assets ............................................. 2,359 1,084 3,443
---------- --------- ----------
Total assets ............................................ $ 307,165 $ 11,650 $ $ 318,815
========== ========= ========= ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ......................................... $ 2,573 $ 738 $ $ 3,311
Accrued expenses ......................................... 4,072 1,388 5,460
Accrued merger costs ..................................... -- -- 7,500 7,500
Current portion of capital lease and note obligation ..... 145 921 1,066
Current portion of deferred revenue ...................... -- 3,525 3,525
---------- --------- ----------
Total current liabilities ............................... 6,790 6,572 7,500 20,862
Capitalized lease and note obligation-net of current
portion ................................................. 9 1,570 1,579
Other non-current liabilities ............................ -- 97 97
Long-term convertible notes .............................. 29,243 -- 29,243
---------- --------- ----------
Total liabilities ....................................... 36,042 8,239 7,500 51,781
---------- --------- --------- ----------
Stockholders' equity:
Preferred stock, $.01 par value per share, 5,000,000
authorized; none outstanding at March 31, 2000 .......... -- -- -- --
Convertible preferred stock, 24,742,639 authorized;
24,492,639 shares issued and outstanding at March
31, 2000 ................................................ -- 41,331 (41,331) --
Common stock, $.01 par value per share, 120,000,000
authorized; 64,318,539 shares issued and outstanding
at March 31, 2000 (issued and outstanding 67,971,697
shares pro forma combined) (see note 3) ................. 643 -- 37 680
Common stock, 35,288,708 authorized; 4,569,873 shares
issued and outstanding at March 31, 2000 ................ -- 11,313 (11,313) --
Additional paid-in capital (see note 3) .................. 440,389 -- 52,607 492,996
Deferred compensation .................................... -- (7,843) -- (7,843)
Notes receivable from stockholders ....................... -- (133) -- (133)
Accumulated deficit ...................................... (169,538) (41,257) (7,500) (218,295)
Accumulated other comprehensive loss ..................... (371) -- -- (371)
---------- --------- --------- ----------
Total stockholders' equity .............................. 271,123 3,411 (7,500) 267,034
---------- --------- --------- ----------
Total liabilities and stockholders' equity .............. $ 307,165 $ 11,650 $ -- $ 318,815
========== ========= ========= ==========
</TABLE>
-----------
See accompanying notes to unaudited pro forma condensed combined financial
statements.
12
<PAGE>
UNAUDITED PRO FORMA CONDENSED COMBINED
STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2000
<TABLE>
<CAPTION>
PRO FORMA
CELGENE SIGNAL COMBINED
----------- ----------- -------------
(SEE NOTE 3)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Revenues:
Product sales ....................................................... $ 11,666 $ -- $ 11,666
Research contracts .................................................. 200 2,671 2,871
-------- -------- --------
Total revenues ..................................................... 11,866 2,671 14,537
Expenses:
Cost of goods sold .................................................. 1,664 -- 1,664
Research and development ............................................ 6,386 5,167 11,553
Selling, general and administrative ................................. 8,496 1,037 9,533
-------- -------- --------
Total expenses ..................................................... 16,546 6,204 22,750
Operating loss ........................................................ (4,680) (3,533) (8,213)
Other income and expense:
Interest income ..................................................... 2,314 116 2,430
Interest expense .................................................... 778 63 841
-------- -------- --------
Loss from continuing operations ....................................... $ (3,144) $ (3,480) $ (6,624)
======== ======== ========
Per share basic and diluted:
Loss from continuing operations ..................................... $ (0.05) $ (0.98) $ (0.11)
======== ======== ========
Weighted average number of shares of common stock outstanding ......... 58,706 3,538 62,229
======== ======== ========
</TABLE>
See accompanying notes to unaudited pro forma condensed combined financial
statements.
13
<PAGE>
UNAUDITED PRO FORMA CONDENSED COMBINED
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1999
<TABLE>
<CAPTION>
PRO FORMA
CELGENE SIGNAL COMBINED
------------ ----------- -------------
(SEE NOTE 3)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Revenues:
Product sales ........................................... $ 24,052 $ -- $ 24,052
Research contracts ...................................... 2,158 11,748 13,906
--------- -------- ----------
Total revenues ......................................... 26,210 11,748 37,958
Expenses:
Cost of goods sold ...................................... 2,983 -- 2,983
Research and development ................................ 19,646 16,748 36,394
Selling, general and administrative ..................... 26,236 3,011 29,247
--------- -------- ----------
Total expenses ......................................... 48,865 19,759 68,624
Operating loss ............................................ (22,655) (8,011) (30,666)
Other income and expense:
Interest income ......................................... 694 607 1,301
Interest expense ........................................ 2,838 452 3,290
--------- -------- ----------
Loss before tax benefit ................................... (24,799) (7,856) (32,655)
Tax benefit ............................................... 3,018 -- 3,018
--------- -------- ----------
Loss from continuing operations ........................... (21,781) (7,856) (29,637)
Preferred stock dividend (including accretion and imputed
dividends) ............................................. -- 818 818
--------- -------- ----------
Loss from continuing operations applicable to common
stockholders ............................................ $ (21,781) $ (8,674) $ (30,455)
========= ======== ==========
Per share basic and diluted:
Loss from continuing operations applicable to common
stockholders ........................................... $ (0.43) $ (2.64) $ (0.56)
========= ======== ==========
Weighted average number of shares of common stock outstanding 51,036 3,282 54,494
========= ======== ==========
</TABLE>
See accompanying notes to unaudited pro forma condensed combined financial
statements.
14
<PAGE>
UNAUDITED PRO FORMA CONDENSED COMBINED
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
PRO FORMA
CELGENE SIGNAL COMBINED
------------ ----------- -------------
(SEE NOTE 3)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Revenues:
Product sales ........................................... $ 3,266 $ -- $ 3,266
Research contracts ...................................... 535 15,414 15,949
--------- -------- ---------
Total revenues ......................................... 3,801 15,414 19,215
Expenses:
Cost of goods sold ...................................... 282 -- 282
Research and development ................................ 19,772 15,573 35,345
Selling, general and administrative ..................... 16,219 4,798 21,017
--------- -------- ---------
Total expenses ......................................... 36,273 20,371 56,644
Operating loss ............................................ (32,472) (4,957) (37,429)
Other income and expense:
Interest income ......................................... 705 1,052 1,757
Interest expense ........................................ 256 452 708
--------- -------- ---------
Loss from continuing operations ........................... (32,023) (4,357) (36,380)
Preferred stock dividend (including accretion and imputed
dividends) ............................................. 25 -- 25
--------- -------- ---------
Loss from continuing operations applicable to common
stockholders ............................................ $ (32,048) $ (4,357) $ (36,405)
========= ======== =========
Per share basic and diluted:
Loss from continuing operations applicable to common
stockholders ........................................... $ (0.66) $ (1.65) $ (0.75)
Weighted average number of shares of common stock
outstanding ............................................. 48,480 2,636 48,811
========= ======== =========
</TABLE>
See accompanying notes to unaudited pro forma condensed combined financial
statements.
15
<PAGE>
UNAUDITED PRO FORMA CONDENSED COMBINED
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
PRO FORMA
CELGENE SIGNAL COMBINED
------------ ----------- -------------
(SEE NOTE 3)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Revenues:
Product sales ........................................... $ -- $ -- $ --
Research contracts ...................................... 1,122 7,579 8,701
--------- -------- ---------
Total revenues ......................................... 1,122 7,579 8,701
Expenses:
Cost of goods sold ...................................... -- -- --
Research and development ................................ 17,380 10,337 27,717
Selling, general and administrative ..................... 9,146 2,791 11,937
--------- -------- ---------
Total expenses ......................................... 26,526 13,128 39,654
Operating loss ............................................ (25,404) (5,549) (30,953)
Other income and expense:
Interest income ......................................... 496 326 822
Interest expense ........................................ 112 517 629
--------- -------- ---------
Loss from continuing operations ........................... (25,020) (5,740) (30,760)
Preferred stock dividend (including accretion and imputed
dividends) ............................................. 1,474 -- 1,474
--------- -------- ---------
Loss from continuing operations applicable to common
stockholders ............................................ $ (26,494) $ (5,740) $ (32,234)
========= ======== =========
Per share basic and diluted:
Loss from continuing operations applicable to common
stockholders ........................................... $ (0.72) $ (2.82) $ (0.87)
========= ======== =========
Weighted average number of shares of common stock
outstanding ............................................. 36,645 2,032 36,900
========= ======== =========
</TABLE>
See accompanying notes to unaudited pro forma condensed combined financial
statements.
16
<PAGE>
NOTES TO UNAUDITED PRO FORMA
CONDENSED COMBINED FINANCIAL STATEMENTS
1. DESCRIPTION OF TRANSACTION AND BASIS OF PRESENTATION
The merger agreement provides that each outstanding share of Signal common
stock (including shares of Signal preferred stock which will be converted into
Signal common stock on a one-for-one basis immediately before the merger),
other than shares owned by holders who are exercising dissenters' rights under
California law, will be converted into the right to receive 0.1257 of a share
of Celgene common stock, par value $.01 per share in a tax-free transaction.
Also, the merger agreement provides that each option and warrant to purchase
Signal common stock or preferred stock will be converted into an option or
warrant to acquire Celgene common stock based on the aforementioned exchange
ratio. Based on Signal options and warrants outstanding as of July 31, 2000,
Celgene would issue options and warrants to purchase approximately 450,000
shares of Celgene common stock. In connection with the merger agreement, it is
anticipated that certain former non-employee directors of Signal, who hold
unvested Signal options which would convert into approximately 40,000 Celgene
options, will enter into consulting agreements with Signal to provide services
to Signal to be effective upon the consummation of the merger. As a result,
Celgene will be required to record compensation expense relative to the fair
value of such options which will be recognized over the remaining vesting
period. The merger is expected to be completed later this year. It is intended
to be accounted for under the pooling-of-interests method and, accordingly,
financial statements of the combined company will include Celgene's historical
consolidated financial statements restated to include the historical financial
statements of Signal. The merger is subject to customary closing conditions,
including regulatory approval.
2. ACCOUNTING POLICIES AND FINANCIAL STATEMENT CLASSIFICATIONS
Upon consummation of the merger, Celgene and Signal will review their
accounting policies and financial statement classifications. As a result of
that review, it may become necessary to restate the combined entity's financial
statements to conform to those accounting policies and classifications that are
determined to be more appropriate.
3. PRO FORMA ADJUSTMENTS
Adjustments to preferred stock, common stock, and additional paid-in-capital in
the unaudited pro forma condensed combined balance sheet at March 31, 2000
reflect the conversion of Signal's preferred shares to common shares just prior
to the merger and the issuance of Celgene's common stock in exchange for
Signal's common shares at the exchange ratio described in footnote 1. These
amounts were determined by multiplying Signal's outstanding preferred and
common shares at March 31, 2000 by the exchange ratio of 0.1257. The number of
shares to be issued at completion of the merger will be based on the actual
number of common and preferred shares of Signal outstanding at that time. In
addition, Celgene's historical common shares issued and outstanding at March
31, 2000 was adjusted in the unaudited pro forma condensed combined balance
sheet to reflect Celgene's three-for-one stock split declared and issued on
April 14, 2000. Celgene's historical share and per share amounts in the
unaudited pro forma condensed combined statements of operations and the
accompanying notes thereto have been retroactively restated to reflect the
three-for-one stock split.
Celgene and Signal estimate that they will incur direct transaction costs of
approximately $7.5 million associated with the merger consisting of transaction
fees for financial advisors, attorneys, accountants, financial printing and
other related charges. These nonrecurring transaction costs will be charged to
operations upon consummation of the merger. The unaudited pro forma condensed
combined balance sheet gives effect to the estimated direct transaction costs
by an increase to accumulated deficit and accrued merger costs. The estimated
direct transaction costs are not reflected in the unaudited pro forma condensed
combined statements of operations.
The pro forma combined basic and diluted earnings per share presented for the
years ended December 31, 1998 and 1997 are based on the combined basic and
diluted weighted average common shares of Celgene and Signal for each
respective period. The historical basic and diluted weighted average common
shares for Signal were converted at the exchange ratio of 0.1257 of a share of
Celgene common stock for each Signal common stock outstanding.
17
<PAGE>
NOTES TO UNAUDITED PRO FORMA
CONDENSED COMBINED FINANCIAL STATEMENTS - (CONTINUED)
3. PRO FORMA ADJUSTMENTS - (CONTINUED)
The following table reconciles the numbers of shares used in the pro forma
combined per share computations to the numbers set forth in Celgene's and
Signal's historical statements of operations:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------
1998 1997
----------- -----------
<S> <C> <C>
Shares used in per share calculation
(in thousands, except estimated exchange ratio)
Historical -- Celgene .......................... 48,480 36,645
Historical -- Signal ........................... 2,636 2,032
Estimated exchange ratio ....................... 0.1257 0.1257
------- -------
331 255
Pro forma combined ............................. 48,811 36,900
======= =======
</TABLE>
Conversion of the Signal convertible preferred stock outstanding was not
assumed for purposes of calculating the above pro forma combined per share
amounts because the effect would be anti-dilutive.
The pro forma combined basic and diluted earnings per share presented for
the three months ended March 31, 2000 and the year ended December 31, 1999 are
based on the assumption that the merger was completed on January 1, 1999.
Accordingly, the calculation of the weighted average number of shares of common
stock outstanding for these periods assume conversion of Signal preferred stock
into common stock as of January 1, 1999 or the date of issuance of such
preferred stock if later. The following table reconciles the numbers of shares
used in the pro forma combined per share computations to the numbers set forth
in Celgene's and Signal's historical statements of operations:
<TABLE>
<CAPTION>
THREE MONTHS YEAR ENDED
ENDED MARCH 31, 2000 DECEMBER 31, 1999
---------------------- ------------------
<S> <C> <C>
Shares used in per share calculation
(in thousands, except estimated exchange ratio)
Historical -- Celgene ........................... 58,706 51,036
Historical -- Signal ............................ 3,538 3,282
Estimated exchange ratio ........................ 0.1257 0.1257
------- -------
445 413
Assumed conversion of Signal preferred stock to
Signal common stock on a weighted average basis 24,492 24,223
Estimated exchange ratio ........................ 0.1257 0.1257
------- -------
3,078 3,045
------- -------
Pro forma combined .............................. 62,229 54,494
======= =======
</TABLE>
4. FORWARD-LOOKING STATEMENTS
The statements contained in this section may be deemed to be forward-looking
statements within the meaning of Section 27A of the Securities Act.
Forward-looking statements are typically identified by the words "believe,"
"expect," "anticipate," "intend," "estimate," and similar expressions. These
forward-looking statements are based largely on management's expectations and
are subject to a number of uncertainties. Actual results could differ
materially from these forward-looking statements. Neither Celgene nor Signal
undertake any obligation to update publicly or revise any forward-looking
statements. For a more complete discussion of the risks and uncertainties which
may affect such forward-looking statements, please refer to the section
entitled "Forward-Looking Statements."
18
<PAGE>
RISK FACTORS
In addition to the other information contained or incorporated by reference in
this proxy statement/prospectus, Signal shareholders should consider the
following risk factors before they decide whether or not to vote in favor of
the approval and adoption of the merger agreement, approval of the principal
terms of the merger and conversion of the outstanding shares of preferred stock
into shares of common stock. All share amounts of Celgene have been adjusted to
reflect the three-for-one stock split declared by Celgene and issued on April
14, 2000.
RISKS RELATING TO THE MERGER
FAILURE TO REALIZE THE BENEFITS OF INTEGRATING CELGENE'S AND SIGNAL'S
BUSINESSES, OPERATIONS AND PERSONNEL COULD DIMINISH THE EXPECTED BENEFITS OF
THE MERGER.
Achieving the expected benefits of the merger will depend in large part on the
successful integration of Celgene's and Signal's businesses, operations and
personnel in a timely and efficient manner. Celgene will need to integrate the
information systems, product development, administration and other
organizations of the two companies and the geographical distance between
Celgene's facilities in Warren, New Jersey, and Signal's facilities in San
Diego, California. This will be difficult and unpredictable because of possible
cultural conflicts and different opinions on technical, operational and other
integration decisions. Celgene will also need to integrate the employees of the
two companies. Celgene or Signal may experience disruption in its employee base
as a result of uncertainty in connection with the merger. There is also a risk
that key employees of Signal may seek employment elsewhere, including with
competitors. The operations, management and personnel of the two companies may
not be compatible, and Celgene or Signal may also experience the loss of key
personnel for that reason.
The diversion of management attention and any difficulties or delays
encountered in the transition and integration process could have a material
adverse effect on the combined company's business, financial condition and
operating results.
Celgene expects to incur costs from integrating Signal's operations and
personnel. These costs may be substantial and may include costs for:
o employee redeployment or severance; and
o conversion of information systems.
Celgene and Signal cannot assure you that they will be successful in these
integration efforts or that Celgene will realize the expected benefits of the
merger.
SIGNAL SHAREHOLDERS WILL RECEIVE A FIXED NUMBER OF SHARES OF CELGENE COMMON
STOCK IN THE MERGER, NOT A FIXED VALUE.
Upon completion of the merger, each of your shares will be converted into
0.1257 of a share of Celgene common stock. Since the exchange ratio is fixed,
the number of shares that Signal shareholders will receive in the merger will
not change, even if the market price of Celgene common stock changes. There
will be no adjustment of the exchange ratio or termination of the merger based
solely on fluctuations in the price of Celgene common stock. The market price
of Celgene common stock is subject to fluctuation. These market fluctuations
may cause a decline in the market price of Celgene common stock. The market
price of Celgene common stock upon and after completion of the merger could be
lower than the market price on the date of the merger agreement or the current
market price. Signal shareholders should obtain recent market quotations of
Celgene common stock before they vote on the merger.
IF THE MERGER AGREEMENT IS TERMINATED UNDER SPECIFIED CIRCUMSTANCES, SIGNAL MAY
HAVE TO PAY A SUBSTANTIAL BREAK-UP FEE OR LIQUIDATED DAMAGES TO CELGENE.
The merger agreement provides that if Signal's board withdraws its
recommendation that shareholders vote for the merger or solicits or recommends
another acquisition transaction with a third party, Signal will be required to
pay Celgene a termination fee of $10,000,000. If the merger is not completed by
December 31, 2000 and Celgene terminates the merger agreement, or if Signal
shareholders do not approve the merger, then Signal will also be required to
pay Celgene a termination fee of $10,000,000 if Signal signs or
19
<PAGE>
completes another acquisition transaction with a third party within one year.
In addition, if Signal or Celgene terminates the merger agreement because of
any material breach by the other of any representation, warranty or covenant
under the merger agreement, the breaching party will be required to pay the
other party $5,000,000.
RISKS RELATING TO CELGENE
In addition to other information in this proxy statement/prospectus, you should
carefully consider the following risk factors in evaluating Celgene's business.
RISKS ASSOCIATED WITH INVESTING IN CELGENE COMMON STOCK
THE PRICE OF CELGENE COMMON STOCK HAS EXPERIENCED SUBSTANTIAL VOLATILITY AND
MAY CONTINUE TO DO SO IN THE FUTURE.
There has been significant volatility in the market prices for publicly traded
shares of pharmaceutical companies, including Celgene. In 1999, the price of
Celgene's common stock fluctuated from a low of $3.833 to a high of $24.208. On
July 20, 2000, Celgene's common stock closed at a price of $49.125. The price
of Celgene's common stock may not remain at or exceed current levels. The
following factors may cause the market price of Celgene's common stock to
decline:
o announcements of technical or product developments by Celgene or its
competitors;
o market conditions for pharmaceutical and biotechnology stocks;
o market conditions generally;
o governmental regulation;
o healthcare legislation;
o public announcements regarding medical advances in the treatment of the
disease states that Celgene is targeting;
o patent or proprietary rights developments;
o changes in third-party reimbursement policies for Celgene's products;
o fluctuations in Celgene's operating results;
o unsuccessful clinical trials; or
o public announcement of the merger.
THE NUMBER OF SHARES OF CELGENE COMMON STOCK ELIGIBLE FOR FUTURE SALE COULD
CAUSE THE MARKET PRICE OF ITS COMMON STOCK TO DECLINE.
Future sales of substantial amounts of Celgene's common stock could cause the
market price of its common stock to decline. As of July 31, 2000, there were
outstanding stock options for 7,389,920 shares of common stock, of which
3,091,552 were currently exercisable, and warrants either outstanding or
issuable upon demand that are exercisable for 1,571,067 shares of common stock.
In addition, as part of the merger, Celgene will be assuming 3,106,693
outstanding options and 475,000 outstanding warrants of Signal which will
convert into 390,511 outstanding options and 59,707 outstanding warrants for
shares of Celgene common stock. Moreover, as of July 31, 2000, the 9.25%
convertible notes issued on September 16, 1998 can be converted into 2,386,389
shares of common stock, the 9.0% convertible notes issued on January 20, 1999
can be converted into 285,801 shares of common stock and the 9.0% convertible
notes issued on July 6, 1999 can be converted into 1,578,876 shares of common
stock.
20
<PAGE>
CELGENE MAY ISSUE ADDITIONAL EQUITY SECURITIES, WHICH WOULD LEAD TO DILUTION OF
YOUR OWNERSHIP INTEREST.
Celgene may seek to raise capital from an offering of senior and subordinated
debt securities, common stock, preferred stock or a combination thereof, at
such times and in such amounts as Celgene deems appropriate. These securities
may be used to acquire technology, products, product rights and businesses,
among other purposes. The issuance of additional equity securities or
securities convertible into equity securities for these or other purposes would
result in dilution of existing stockholders' equity interests in Celgene.
CELGENE'S SHAREHOLDER RIGHTS PLAN AND CERTAIN CHARTER AND BY-LAW PROVISIONS MAY
DETER A THIRD PARTY FROM ACQUIRING IT.
Celgene's board of directors has adopted a shareholder rights plan, the purpose
of which is to protect stockholders against unsolicited attempts to acquire
control of Celgene that do not offer a fair price to all of its stockholders.
The rights plan may have the effect of dissuading a potential acquiror from
making an offer for Celgene's common stock at a price that represents a premium
to the then current trading price.
Celgene's board of directors has the authority to issue, at any time, without
further stockholder approval, up to 5,000,000 shares of preferred stock, and to
determine the price, rights, privileges and preferences of those shares. Any
issuance of preferred stock could discourage a third party from acquiring a
majority of Celgene's outstanding voting stock. Additionally, Celgene's board
of directors has adopted certain amendments to its by-laws intended to
strengthen its board's position in the event of a hostile takeover attempt.
Furthermore, Celgene is subject to the provisions of Section 203 of the
Delaware General Corporation Law, an anti-takeover law, which may also dissuade
a potential acquiror of its common stock.
RISKS ASSOCIATED WITH INVESTING IN THE BUSINESS OF CELGENE.
IF CELGENE IS UNSUCCESSFUL IN DEVELOPING AND COMMERCIALIZING ITS PRODUCTS, ITS
BUSINESS, FINANCIAL CONDITION AND RESULTS OF OPERATIONS COULD BE MATERIALLY
ADVERSELY AFFECTED.
Many of Celgene's products and processes are in the early or mid-stages of
development and will require the commitment of substantial resources, extensive
research, development, preclinical testing, clinical trials, manufacturing
scale-up and regulatory approval prior to being ready for sale. Celgene has not
yet sold any of its products other than THALOMID(Reg. TM). All of its other
products will require further development, clinical testing and regulatory
approvals, and Celgene cannot assure you that commercially viable products will
result from these efforts. If any of Celgene's products, even if developed and
approved, cannot be successfully commercialized, Celgene's business, financial
condition and results of operations could be materially adversely affected.
DURING THE NEXT SEVERAL YEARS, CELGENE WILL BE VERY DEPENDENT ON THE COMMERCIAL
SUCCESS OF THALOMID.
At Celgene's present level of operations, it may not be able to attain
profitability if physicians prescribe THALOMID only for those who are diagnosed
with erythema nodosum leprosum, or ENL. Under current regulations of the U.S.
Food and Drug Administration, or FDA, Celgene is precluded from promoting
THALOMID outside this approved use. The market for the use of THALOMID in
patients suffering from ENL is relatively small. Celgene has initiated clinical
studies to examine whether or not THALOMID is effective and safe when used to
treat disorders other than ENL, but Celgene does not know whether these studies
will in fact demonstrate safety and efficacy, or if they do, whether Celgene
will succeed in receiving regulatory clearance to market THALOMID for
additional indications. If the results of these studies are negative, or if
adverse experiences are reported in these clinical studies or otherwise in
connection with the use of THALOMID by patients, this could undermine physician
and patient comfort with the product, could limit the commercial success of the
product and could even impact the acceptance of THALOMID in the ENL market. FDA
regulations restrict Celgene's ability to communicate the results of additional
clinical studies to patients and physicians without first obtaining approval
from the FDA to expand the authorized uses for this product.
21
<PAGE>
IF CELGENE'S PRODUCTS ARE NOT ACCEPTED BY THE MARKET, ITS BUSINESS, FINANCIAL
CONDITION AND RESULTS OF OPERATIONS COULD BE MATERIALLY ADVERSELY AFFECTED.
Celgene cannot assure you that those of Celgene's products that receive
regulatory clearance, including THALOMID, or those products for which no
regulatory clearance, is required, will achieve market acceptance. A number of
factors render the degree of market acceptance of its products uncertain,
including the extent to which Celgene can demonstrate the products' efficacy,
safety and advantages, if any, over competing products, as well as the
reimbursement policies of third party payors, such as government and private
insurance plans. Failure of Celgene's products to achieve market acceptance
would have a material adverse effect on its business, financial condition and
results of operations.
CELGENE FACES A RISK OF PRODUCT LIABILITY CLAIMS AND MAY NOT BE ABLE TO OBTAIN
INSURANCE.
Celgene may be subject to product liability or other claims based on
allegations that the use of its technology or products has resulted in adverse
effects, whether by participants in its clinical trials or by patients using
its products. Thalidomide, when used by pregnant women, has resulted in serious
birth defects. Therefore, necessary and strict precautions must be taken by
physicians prescribing the drug to women with childbearing potential, and
Celgene cannot assure you that such precautions will be observed in all cases
or, if observed, will be effective. Use of thalidomide has also been
associated, in a limited number of cases, with other side effects, including
nerve damage. Although Celgene has product liability insurance that it believes
is appropriate, Celgene cannot assure you that it will be able to obtain
additional coverage if required, or that such coverage will be adequate to
protect Celgene in the event claims are asserted against it. Celgene's
obligation to defend against or pay any product liability or other claim may
have a material adverse effect on its business, financial condition and results
of operations.
CELGENE HAS A HISTORY OF OPERATING LOSSES AND AN ACCUMULATED DEFICIT AND MAY
NEED TO SEEK ADDITIONAL FUNDING.
Celgene has sustained losses in each year since its incorporation in 1986.
Celgene sustained net losses of $21.8 million and $25.1 million for the years
ended December 31, 1999 and 1998, respectively, and $3.1 million for the three
months ended March 31, 2000. Celgene had an accumulated deficit of $166.4
million and $144.6 million at December 31, 1999 and 1998, respectively, and
$169.5 million at March 31, 2000. Celgene expects to make substantial
expenditures to further develop and commercialize its products, and, based on
these expenditures, it is probable that losses will continue for at least the
next six months or longer depending on when the merger is completed. Celgene
expects that its rate of spending will accelerate as the result of increased
clinical trial costs and expenses associated with regulatory approval and
commercialization of products now in development. In order to fund its future
operations, Celgene may seek additional capital. Celgene may not be able to
raise additional capital on reasonable terms, or at all. Celgene cannot assure
you, assuming it successfully raises additional funds, that Celgene will
achieve profitability or positive cash flow.
CELGENE MAY EXPERIENCE SIGNIFICANT FLUCTUATIONS IN ITS QUARTERLY OPERATING
RESULTS.
Celgene has historically experienced, and expects to continue for the
foreseeable future to experience, significant fluctuations in its quarterly
operating results. These fluctuations are due to a number of factors, many of
which are outside its control, and may result in volatility of its stock price.
Future operating results will depend on many factors, including:
o demand for its products;
o regulatory approvals for its products;
o the timing of the introduction and market acceptance of new products by
Celgene or competing companies;
o the timing of certain research and development milestones; and
o Celgene's ability to control its costs.
22
<PAGE>
CELGENE HAS NO MANUFACTURING CAPABILITIES AND IS DEPENDENT ON ONE SUPPLIER FOR
THE RAW MATERIAL AND ONE MANUFACTURER FOR THE FORMULATION AND ENCAPSULATION OF
THALOMID.
Celgene currently has no experience in, or its own facilities for,
manufacturing any products on a commercial scale. Currently, Celgene obtains
all of its bulk drug material for THALOMID from a single supplier and relies on
a single manufacturer to formulate and encapsulate THALOMID. The FDA requires
that all suppliers of pharmaceutical bulk material and all manufacturers of
pharmaceuticals for sale in or from the United States achieve and maintain
compliance with the FDA's current Good Manufacturing Practice, or cGMP,
regulations and guidelines. If the operations of the sole supplier or the sole
manufacturer were to become unavailable for any reason, the required FDA review
and approval of the operations of a new supplier or new manufacturer could
cause a delay in the manufacture of THALOMID which could have a material
adverse effect on Celgene's business, financial condition and results of
operations. Celgene intends to continue to utilize outside manufacturers if and
when needed to produce its other products on a commercial scale. If outside
manufacturers do not meet its requirements for quality, quantity or timeliness,
or do not achieve and maintain compliance with all applicable regulations,
Celgene's business, financial condition and results of operations could be
materially adversely affected.
CELGENE HAS LIMITED MARKETING AND DISTRIBUTION CAPABILITIES.
Although Celgene has an 80-person sales and commercialization group to sell
THALOMID, it may be required to seek a corporate partner to provide marketing
services with respect to its other products. Any delay in developing these
resources could have a material adverse impact on its results of operations.
Celgene has contracted with a specialty distributor to distribute THALOMID.
Failure of this specialty distributor to perform its obligations could have a
material adverse effect on Celgene's business, financial condition and results
of operations.
CELGENE IS DEPENDENT ON COLLABORATIONS AND LICENSES WITH THIRD PARTIES.
Celgene's ability to fully commercialize its products, if developed, may depend
to some extent upon joint ventures or other arrangements with established
pharmaceutical companies with the requisite experience and financial and other
resources to obtain regulatory approvals and to manufacture and market such
products. Accordingly, Celgene's success may depend, in part, upon the
subsequent success of such third parties in performing preclinical and clinical
trials, obtaining the requisite regulatory approvals, scaling up manufacturing,
successfully commercializing the licensed product candidates and otherwise
performing their obligations to Celgene. Celgene cannot assure you that:
o Celgene will be able to enter into joint ventures or other arrangements on
acceptable terms, if at all;
o Celgene's joint ventures or other arrangements will be successful;
o Celgene's joint ventures or other arrangements will lead to the successful
development and commercialization of any products;
o Celgene will be able to obtain or maintain proprietary rights or licenses to
any technology or products developed in connection with its joint ventures or
other arrangements; or
o Celgene will be able to preserve the confidentiality of any proprietary rights
or information developed in connection with its joint ventures or other
arrangements.
THE HAZARDOUS MATERIALS CELGENE USES IN ITS RESEARCH AND DEVELOPMENT COULD
RESULT IN SIGNIFICANT LIABILITIES WHICH COULD EXCEED ITS INSURANCE COVERAGE AND
FINANCIAL RESOURCES.
Celgene uses some hazardous materials in its research and development
activities. While Celgene believes that it is currently in substantial
compliance with the federal, state and local laws and regulations governing the
use of these materials, it cannot assure you that accidental injury or
contamination will not occur. Any such accident or contamination could result
in substantial liabilities, which could exceed Celgene's insurance coverage and
financial resources. Additionally, Celgene cannot assure you that the cost of
compliance with environmental and safety laws and regulations will not increase
in the future.
23
<PAGE>
RISKS RELATING TO INVESTING IN THE PHARMACEUTICAL INDUSTRY
THE PHARMACEUTICAL AND AGROCHEMICAL INDUSTRIES ARE SUBJECT TO EXTENSIVE
GOVERNMENT REGULATION AND THERE IS NO ASSURANCE OF REGULATORY APPROVAL.
The preclinical development, clinical trials, manufacturing, marketing and
labeling of pharmaceuticals are all subject to extensive regulation by numerous
governmental authorities and agencies in the United States and other countries.
Celgene cannot assure you that the combined company will be able to obtain the
necessary approvals required to market its products in any of these markets.
The testing, marketing and manufacturing of its products will require marketing
clearance from one or more of the following named governmental agencies, the
FDA and, in some cases, from the U.S. Environmental Protection Agency, or the
EPA, and the U.S. Department of Agriculture, or the USDA, as well as
governmental authorities outside of the United States which perform similar
roles. Certain of the combined company's pharmaceutical products in development
also fall under the Controlled Substances Act of 1970, or the CSA, which
requires authorization by the U.S. Drug Enforcement Administration, or the DEA,
of the U.S. Department of Justice in order to handle and distribute these
products. It is not possible to predict how long the approval processes of the
FDA, EPA, DEA or any other applicable federal, state or foreign regulatory
authority or agency for any of the combined company's products will take or
whether any such approvals ultimately will be granted. Positive results in
preclinical testing and/or early phases of clinical studies are no assurance of
success in later phases of the approval process. Risks associated with the
regulatory approval process include:
o in general, preclinical tests and clinical trials can take many years, and
require the expenditure of substantial resources, and the data obtained from
these tests and trials can be susceptible to varying interpretation that could
delay, limit or prevent regulatory clearance;
o delays or rejections may be encountered during any stage of the regulatory
approval process based upon the failure of the clinical or other data to
demonstrate compliance with, or upon the failure of the product to meet, a
regulatory agency's requirements for safety, efficacy and quality or, in the
case of a product seeking an orphan drug indication, because another designee
received clearance first;
o requirements for clearance may become more stringent due to changes in
regulatory agency policy, or the adoption of new regulations or legislation;
o the scope of any regulatory clearance, when obtained, may significantly limit
the indicated uses for which a product may be marketed;
o drugs and agrochemicals, as well as their manufacturers, are subject to
continuing and on-going review after marketing clearance, and discovery of
previously unknown problems with these products may result in restrictions on
their manufacture, sale or use or in their withdrawal from the market; and
o regulatory authorities and agencies may promulgate additional regulations
restricting the sale of existing and proposed products.
Once a product receives marketing clearance, Celgene cannot guarantee that the
FDA will permit the combined company to market that product for broader or
different applications, or that it will grant the combined company clearance
with respect to separate product applications which represent extensions of the
basic technology, or that existing clearances will not be withdrawn or modified
in a significant manner. In addition, it is possible that the FDA will
promulgate additional regulations restricting the sale of the combined
company's present or proposed products.
Labeling and promotional activities are subject to scrutiny by the FDA and
state regulatory agencies and, in some circumstances, by the Federal Trade
Commission. FDA enforcement policy prohibits the marketing of approved products
for unapproved, or off-label, uses. These regulations, and the FDA's
interpretation of them, may impair the combined company's ability to
effectively market THALOMID or other products which gain marketing clearance.
The FDA actively enforces regulations and policies prohibiting promotion of
off-label uses and the promotion of products for
24
<PAGE>
which marketing clearance has not been obtained. Failure to comply with these
requirements can result in regulatory enforcement action by the FDA. The FDA is
aware that physicians prescribe THALOMID for off-label uses and on April 21,
2000 Celgene received an FDA Warning Letter regarding off-label promotion.
Celgene has responded to the FDA and believes it has taken all actions
necessary to insure that THALOMID is properly and safely commercialized. FDA
clearance of THALOMID requires that Celgene distribute it under the rigid
standards of its S.T.E.P.S. program in order to maintain such clearances.
Delays in obtaining, or the failure to obtain and maintain, necessary approvals
from the FDA, EPA, DEA or other applicable regulatory authorities or agencies
for the combined company's proprietary products or regulatory enforcement
actions by FDA concerning its marketing practices would have a material adverse
effect on its business, financial condition and results of operations.
THE COMBINED COMPANY MAY NOT BE ABLE TO PROTECT ITS INTELLECTUAL PROPERTY.
The combined company's success will depend, in part, on its ability to obtain
and enforce patents, protect trade secrets, obtain licenses to technology owned
by third parties, when necessary, and conduct its business without infringing
upon the proprietary rights of others. The patent positions of pharmaceutical
firms, including the combined company's, can be uncertain and involve complex
legal and factual questions. In addition, the coverage sought in a patent
application may not be obtained or may be significantly reduced before the
patent is issued. Consequently, Celgene does not know whether any of the
combined company's pending applications, or any pending application the company
has licensed in from third parties, will result in the issuance of patents or,
if any patents are issued, whether they will provide significant proprietary
protection or commercial advantage. Since, under the current patent laws,
patent applications in the United States are maintained in secrecy until
patents issue, and since publications of discoveries in the scientific and
patent literature often lag behind actual discoveries, the combined company
cannot be certain that it was, or that the third parties from whom it has
licensed patents or patent applications were, the first to make the inventions
covered by the patents and patent applications in which the combined company
has rights, or that such patents and patent applications were the first to be
filed on such inventions. In the event that a third party has also filed a
patent application for any of the inventions described in the combined
company's patents or patent applications, or those it has licensed-in, the
combined company could become involved in an interference proceeding declared
by the United States Patent and Trademark Office to determine priority of
invention. Such an interference could result in the loss of a United States
patent or loss of any opportunity to secure United States patent protection for
that invention. Even if the eventual outcome is favorable to the combined
company, such interference proceedings could result in substantial cost to
Celgene. Moreover, different countries have different procedures for obtaining
patents, and patents issued in different countries provide different degrees of
protection against the use of a patented invention by others. There can be no
assurance, therefore, that the issuance to the combined company or its
licensor, in a given country, of a patent covering an invention will be
followed by the issuance, in other countries, of patents covering the same
invention, or that any judicial interpretation of the validity, enforceability
or scope of the claims in a patent issued in one country will be similar to the
judicial interpretation given to the corresponding patent issued in another
country. Furthermore, even if the combined company's patents, or those it has
license in, are found valid and enforceable, there can be no assurance that
competitors will not be able to design around such patents and compete with us
using the resulting alternative technology. If any of the combined company's
issued or licensed patents are infringed, we cannot guarantee that the combined
company will be successful in enforcing its intellectual property rights.
Moreover, Celgene cannot assure you that the combined company can successfully
defend against any patent infringement suit that may be brought against it by a
third party. Patent infringement lawsuits in the pharmaceutical and
biotechnology industries can be complex, lengthy and costly to both parties. An
adverse outcome in such a litigation could cause the combined company to lose
exclusivity relating to the subject matter delineated by such patent claims and
may have a material adverse effect on our business. If a third party is found
to have rights covering products or processes used by the combined company, we
could be forced to cease using these products or processes, subject to
significant liabilities to such third party and/or required to license
technologies from such third party. Further, the combined company relies upon
unpatented proprietary
25
<PAGE>
and trade secret technology that it tries to protect, in part, by
confidentiality agreements with its collaborative partners, employees,
consultants, outside scientific collaborators, sponsored researchers and other
advisors. Celgene cannot assure you that these agreements will not be breached
or that the combined company would have adequate remedies for any such breach.
Celgene cannot assure you that, despite precautions taken by the combined
company, others have not and will not obtain access to its proprietary
technology or that such technology will not be found to be non-proprietary or
not a trade secret. The combined company's right to practice the inventions
claimed in some patents which relate to THALOMID arises under licenses granted
to Celgene by others, including The Rockefeller University and EntreMed, Inc.
While Celgene believes these agreements to be valid and enforceable, Celgene
cannot assure you that the combined company's rights under these agreements
will continue or that disputes concerning these agreement will not arise. In
addition, certain of the grants contained in the licenses granted to Celgene
depend upon the validity and enforceability of other agreements to which
Celgene is not a party.
THE PHARMACEUTICAL AND AGROCHEMICAL INDUSTRIES ARE HIGHLY COMPETITIVE AND
SUBJECT TO RAPID AND SIGNIFICANT TECHNOLOGICAL CHANGE.
The pharmaceutical and agrochemical industries in which Celgene operates, and
the combined company will operate, are highly competitive and subject to rapid
and significant technological change. The combined company's present and
potential competitors include major chemical and pharmaceutical companies, as
well as specialized pharmaceutical firms. Most of these companies have
considerably greater financial, technical and marketing resources than the
combined company. The combined company also experiences competition from
universities and other research institutions and, in some instances, competes
with others in acquiring technology from these sources. The pharmaceutical and
agrochemical industries have undergone, and are expected to continue to
undergo, rapid and significant technological change, and we expect competition
to intensify as technical advances in each field are made and become more
widely known. The development of products or processes with significant
advantages over those that the combined company is seeking to develop could
have a material adverse effect on its business, financial condition and results
of operations.
SALES OF THE COMBINED COMPANY'S PRODUCTS ARE DEPENDENT ON THIRD-PARTY
REIMBURSEMENT.
Sales of the combined company's products will depend, in part, on the extent to
which the costs of its products will be paid by health maintenance, managed
care, pharmacy benefit and similar health care management organizations, or
reimbursed by government health administration authorities, private health
coverage insurers and other third-party payors. These health care management
organizations and third-party payors are increasingly challenging the prices
charged for medical products and services. Additionally, the containment of
health care costs has become a priority of federal and state governments, and
the prices of drugs have been targeted in this effort. We cannot assure you
that the combined company's products will be considered cost effective by
payors, that reimbursement will be available or, if available, that the level
of reimbursement will be sufficient to allow the combined company to sell its
products on a profitable basis.
RISKS RELATING TO SIGNAL'S BUSINESS
If the merger is approved and the merger agreement adopted, Signal will become
a wholly-owned subsidiary of Celgene. You should review the following risk
factors relating to Signal's business, since any negative factors affecting
Signal after the merger could affect Celgene's financial condition and could
cause the market price of Celgene's common stock to decline.
IF SIGNAL CONTINUES TO INCUR OPERATING LOSSES FOR LONGER THAN IT ANTICIPATES,
IT MAY NEVER BE PROFITABLE
Signal has generated operating losses since its inception in 1992 and as of
March 31, 2000 had an accumulated deficit of approximately $41.3 million.
Signal expects to continue to incur significant operating losses for the
foreseeable future as it continues to incur increasing costs related to
research and development, expansion of its operations and initiation of
clinical trials. Payments, if
26
<PAGE>
any, from Signal's corporate collaborators, interest income and governmental
grants are expected to be its only sources of revenue for the foreseeable
future. As of March 31, 2000, Signal has not received any significant milestone
revenue and has received license fees and research and development payments of
$43.3 million. Revenue from commercial sales of products based upon any drug
target or drug lead that Signal may identify is not expected for a number of
years, if at all. Any such revenue will depend on Signal's ability, alone or
with others, to successfully research, develop, obtain regulatory clearance
for, manufacture and market its products under development. The extent of
Signal's future losses may exceed its expectations and jeopardize its ability
to become a profitable business.
BECAUSE SIGNAL'S DRUG CANDIDATES ARE AT AN EARLY STAGE OF DEVELOPMENT, THERE IS
A HIGH RISK OF FAILURE.
Signal has no products that have received regulatory clearance for commercial
sale. In addition, Signal has no compounds in human testing, referred to as
clinical trials. All of its compounds are in the research or preclinical
development stage, and Signal faces the risks of failure inherent in
researching and developing drugs based on new technologies. None of Signal's
compounds may ever enter clinical trials, be commercialized or generate revenue
in the future.
THE DRUG DISCOVERY AND DEVELOPMENT PROCESS IS HIGHLY SPECULATIVE AND SIGNAL, OR
ITS COLLABORATORS WORKING WITH SIGNAL, MAY NEVER CREATE A COMMERCIAL DRUG.
The discovery and development of new drugs is highly uncertain and subject to a
number of significant risks that could prevent Signal or its collaborators from
ever creating a commercial drug. Drug leads and drug candidates that appear to
be promising at early stages of development may not enter clinical development
or reach the market for a number of reasons, including the possibilities that
the drug leads and drug candidates will:
o be found ineffective or cause harmful side effects during preclinical testing
or clinical trials;
o fail to receive necessary regulatory clearance;
o be difficult or expensive to manufacture on a commercial scale; or
o fail to generate market demand.
Signal's current and potential discoveries of the gene regulating pathways
associated with specific diseases may not lead to the development or
commercialization of drugs.
To date, none of the compounds generated by Signal or through its
collaborations has been approved for clinical testing. None may ever be
submitted for clinical testing. If Signal identifies any potential products,
either independently or through its collaborations, they will face the
following risks:
o its discovery and development programs may not be successfully initiated or
completed;
o any IND Signal files may not be accepted by the FDA or other applicable
regulatory authorities;
o clinical trials may not commence or be completed as planned;
o required regulatory clearance may not be obtained on a timely basis, if at
all; or
o any products for which clearance is obtained may not be commercially
successful.
In addition, success in preclinical testing and early stage clinical trials
does not ensure that later clinical trials will be successful.
IF SIGNAL CANNOT MAINTAIN ITS CURRENT CORPORATE COLLABORATIONS OR ENTER INTO
NEW CORPORATE COLLABORATIONS, SIGNAL MAY NEVER DEVELOP OR COMMERCIALIZE
PRODUCTS OR ACHIEVE PROFITABILITY.
Signal relies, to a significant extent, on its corporate collaborators to
provide funding that supports its research and to conduct some research,
preclinical and clinical development, manufacturing and marketing. As of March
31, 2000, approximately 90% of the revenue that Signal has received has
27
<PAGE>
been from its collaborations. Signal expects that a similar percentage of its
revenue for the foreseeable future will be generated by collaborations. If any
of Signal's corporate collaborators were to breach or terminate their agreement
with Signal or otherwise fail to conduct their collaborative activities
successfully and in a timely manner, the preclinical or clinical development or
commercialization of the affected drug candidates or research programs could be
delayed or terminated. In addition, Signal expects to rely on its corporate
collaborators for commercialization of some of Signal's products.
Signal's ability to continue to fund its research and development programs,
maintain adequate capital reserves and, ultimately, achieve profitability will
be dependent upon its and its collaborators' ability to achieve specified
milestones under existing collaborations with Serono, Axys, DuPont
Pharmaceuticals, Byk Gulden and Pliva or Signal's ability to enter into
additional collaborations. Signal has not yet entered into collaborations for a
number of its existing or prospective programs. Even if a potential
collaborator believes that Signal's technologies and research discoveries
justify entering into an agreement with Signal, its budgeting cycle, resources
or other priorities may not permit a timely collaboration. Signal also must
compete with other companies for the limited number of existing opportunities
to enter into collaborative arrangements.
Signal may not be able to negotiate additional collaborative agreements in the
future on acceptable terms, if at all. In particular, potential collaborators
may be unwilling to enter into an agreement that allows Signal to retain rights
in its focus areas of cancer and inflammatory disease. In addition, current or
future collaborative agreements may not be successful. Finally, current or
future collaborators may pursue or develop alternative technologies either on
their own or in collaboration with others, including Signal's competitors. In
the absence of such collaborative agreements, Signal may be required to delay
or curtail its research and development activities to a significant extent.
As of March 31, 2000, Signal has not received any significant milestone revenue
and has received license fees and research and development payments of $43.3
million. These payments have not covered all of the expenses incurred in
conducting Signal's business. Signal's future revenue will depend in part on
its ability to receive milestone payments and royalties triggered by the
continued development and commercialization of drugs by its collaborators, over
which Signal has little or no control.
Signal currently has arrangements with five corporate collaborators: Serono,
Axys, DuPont Pharmaceuticals, Byk Gulden and Pliva. If one of these
collaborators were to terminate its arrangement with Signal, it could cause a
substantial decrease in its revenue as well as potential delay or curtailment
of ongoing research and development activities. In general, Signal's
collaborations may be terminated upon a breach by either party. In particular,
the agreement with Serono may be terminated by a party upon a merger of the
other party. Moreover, some of Signal's collaborations may be terminated by its
collaborators if Signal fails to achieve specified research and development
milestones. Signal has in the past encountered, and may in the future
encounter, difficulty in satisfying some stated milestones under its
collaboration agreements.
Some of Signal's corporate or academic collaborators are conducting multiple
drug discovery and development efforts within each disease area that is the
subject of the collaboration with Signal. Generally, in each of Signal's
collaborations, Signal has agreed not to conduct independently, or with any
third party, any research that is in conflict with the rights granted under the
collaboration agreement. Signal's collaborations may have the effect of
limiting the areas of research and development that it may pursue.
BECAUSE SIGNAL EXPECTS TO GENERATE A SIGNIFICANT PERCENTAGE OF ITS FUTURE
REVENUES FROM CO-COMMERCIALIZATION AND PROFIT-SHARING ARRANGEMENTS, THE SUCCESS
OR FAILURE OF THESE ARRANGEMENTS WILL SIGNIFICANTLY IMPACT SIGNAL'S FUTURE
FINANCIAL RESULTS.
Under three of Signal's current collaborations, Signal has co-commercialization
or profit-sharing rights, and Signal will attempt to enter into additional
collaborations that provide Signal with similar rights. Because these types of
arrangements are expected to generate a larger percentage of Signal's future
revenues as compared with collaborations under which it receives only
royalties, these
28
<PAGE>
collaborations may disproportionately affect Signal's financial success. If
these collaborations are not successful, or if Signal decides to abandon or
license some or all of these co-commercialization or profit-sharing rights to
third parties, Signal may not achieve all of its financial objectives.
SIGNAL'S COMPETITORS MAY BE ABLE TO DEVELOP AND MARKET PRODUCTS MORE QUICKLY OR
THAT ARE MORE EFFECTIVE THAN SIGNAL'S, WHICH WOULD REDUCE OR ELIMINATE ITS
COMMERCIAL OPPORTUNITY.
The competition among pharmaceutical and biotechnology companies to identify
drug targets and drug candidates for development is intense and is expected to
increase. Signal's commercial opportunity will be reduced or eliminated if its
competitors develop and market products more quickly or that are more
effective, have fewer side effects, are easier to administer or are less
expensive than Signal's product candidates. Other companies have product
candidates in clinical trials to treat most of the diseases for which Signal is
seeking to discover and develop product candidates. Even if Signal or its
collaborators are successful in developing effective drugs, Signal's products
may not compete effectively with these products or other successful products.
In addition, Signal's competitors include fully integrated pharmaceutical
companies, biotechnology companies, universities and public and private
research institutions that have substantially greater capital resources, larger
research and development staffs and facilities, greater experience in drug
development and in obtaining regulatory clearance and greater manufacturing and
marketing capabilities than Signal does. These organizations also compete with
Signal to:
o attract qualified personnel;
o attract parties for acquisitions, joint ventures or other collaborations; and
o license the proprietary technology of institutions that is competitive with
the technology Signal is developing and applying.
BECAUSE SIGNAL MUST OBTAIN REGULATORY CLEARANCE TO TEST AND MARKET ITS PRODUCTS
IN THE UNITED STATES AND FOREIGN JURISDICTIONS, SIGNAL CANNOT PREDICT WHETHER
OR WHEN IT WILL BE PERMITTED TO COMMERCIALIZE ITS PRODUCTS.
The pharmaceutical industry is subject to stringent regulation by a wide range
of authorities in the geographic areas where Signal intends to develop and
commercialize products. A pharmaceutical product cannot be marketed in the
United States until it has completed rigorous preclinical testing and clinical
trials and an extensive regulatory clearance process implemented by the FDA.
Satisfaction of regulatory requirements typically takes many years, is
dependent upon the type, complexity and novelty of the product and requires the
expenditure of substantial resources.
Before commencing clinical trials in humans, Signal must submit and receive
clearance from the FDA by means of an IND application. Clinical trials are
subject to oversight by institutional review boards and the FDA and:
o must be conducted in conformance with the FDA's good laboratory practice
regulations;
o must meet requirements for institutional review board oversight;
o must meet requirements for informed consent;
o must meet requirements for good clinical and manufacturing practices;
o are subject to continuing FDA oversight;
o may require large numbers of test subjects; and
o may be suspended by Signal or the FDA at any time if it is believed that the
subjects participating in these trials are being exposed to unacceptable
health risks or if the FDA finds deficiencies in the IND application or the
conduct of these trials.
29
<PAGE>
Before receiving FDA clearance to market a product, Signal must demonstrate
that the product is safe and effective on the patient population that will be
treated. Data obtained from preclinical and clinical activities are susceptible
to varying interpretations that could delay, limit or prevent regulatory
clearances. Additionally, Signal has limited experience in conducting and
managing the clinical trials and manufacturing processes necessary to obtain
regulatory clearance.
If regulatory clearance of a product is granted, this clearance will be limited
to those disease states and conditions for which the product is demonstrated
through clinical trials to be safe and efficacious. Signal cannot ensure that
any compound developed by it, alone or with others, will prove to be safe and
efficacious in clinical trials and will meet all of the applicable regulatory
requirements needed to receive marketing clearance.
Outside the United States, Signal's ability to market a product is contingent
upon receiving a marketing authorization from the appropriate regulatory
authorities. This foreign regulatory approval process includes all of the risks
associated with FDA clearance described above.
SIGNAL EXPECTS THAT ITS QUARTERLY RESULTS OF OPERATIONS WILL FLUCTUATE, WHICH
MAY MAKE IT DIFFICULT TO PREDICT THE COMBINED COMPANY'S FUTURE PERFORMANCE.
Signal's quarterly operating results have fluctuated in the past and are likely
to do so in the future. If revenue declines or does not grow as anticipated,
Signal may not be able to correspondingly reduce its operating expenses. A
large portion of Signal's expenses, including expenses for facilities,
equipment, contracted research and personnel, is relatively fixed. In addition,
Signal is significantly increasing operating expenses in 2000. Failure to
achieve anticipated levels of revenue could therefore significantly harm
Signal's operating results for a particular fiscal period. Due to the
possibility of fluctuations in Signal's revenue and expenses, Signal believes
that quarter-to-quarter comparisons of its operating results are not a good
indication of its future performance. Some of the factors that could cause
Signal's operating results to fluctuate include:
o termination or reduction in the scope of Signal's corporate collaborations;
o the success rate of Signal's discovery and development efforts associated with
milestones and royalties;
o Signal's ability to enter into new agreements with corporate collaborators or
to extend the terms of its existing corporate collaboration agreements;
o Signal's ability to satisfy all applicable regulatory requirements; and
o general and industry-specific economic conditions that may affect Signal's
corporate collaborators' research and development expenditures.
IF SIGNAL'S TECHNOLOGIES OR THOSE OF ITS COLLABORATORS ARE ALLEGED OR FOUND TO
INFRINGE THE PATENTS OR PROPRIETARY RIGHTS OF OTHERS, SIGNAL MAY BE SUED, MAY
HAVE TO LICENSE THOSE RIGHTS FROM OTHERS ON UNFAVORABLE TERMS OR MAY CEASE
ACTIVITY.
Signal's commercial success will depend significantly on its ability to operate
without infringing the patents and proprietary rights of third parties.
Signal's technologies along with its licensors' and its collaborators'
technologies may infringe the patents or proprietary rights of others. An
adverse outcome in litigation or an interference to determine priority or other
proceeding in a court or patent office could subject us to significant
liabilities, require disputed rights to be licensed from or to other parties or
require Signal, its licensors or its collaborators to cease using a technology
necessary to carry out research, development and commercialization.
Litigation to challenge the validity of patents, to defend against patent
infringement claims of others or to assert infringement claims against others
can be expensive and time consuming, even if the outcome is favorable. An
outcome of any patent prosecution or litigation that is unfavorable to Signal
or one of its licensors or collaborators may have a material adverse effect on
Signal. Signal could incur substantial costs if its is required to defend
itself in patent suits brought by third parties, if Signal participates in
patent suits brought against or initiated by its licensors or collaborators or
if
30
<PAGE>
Signal initiate such suits. Signal may not have sufficient funds or resources
in the event of litigation. Additionally, Signal may not prevail in any such
action, or, even if Signal prevails, the cost may have a material adverse
affect on Signal.
A number of pharmaceutical companies, biotechnology companies, independent
researchers, universities and research institutions may have filed patent
applications or may have been granted patents that cover technologies similar
to the technologies owned, optioned by or licensed to Signal or its
collaborators. For instance, a number of patents may have been issued or may be
issued in the future on targets or their use in screens for evaluating the
activity of compounds on a specific drug target, called screening assays, that
could prevent Signal and its collaborators from developing screens using such
targets, compounds relating to such targets or relating to other aspects of
technology that Signal uses or expects to use. In addition, since United States
patents are secret until issued, Signal is unable to determine all of the
patents or patent applications that may materially affect its or its
collaborators' ability to make, use or sell any potential products.
Signal is aware of three issued United States patents relating to specific
methods for regulating gene expression. Signal may in the future have to prove
it is not infringing these patents or be required to obtain licenses to one or
more of these patents, and Signal does not know whether such licenses will be
available on commercially reasonable terms, or at all. Signal is also aware of
a United States patent which has been issued to a third party claiming subject
matter relating to the NF-kB pathway which appears to overlap with technology
claimed in some of its pending NF-kB patent applications. Signal believes that
one or more interference proceedings will be initiated by the U.S. Patent and
Trademark Office to determine priority of invention for this subject matter.
Signal cannot be certain of the outcome of any such proceedings. An adverse
outcome may have a material adverse effect on Signal. Even if Signal were to
prevail, this proceeding may have an adverse impact on Signal because such
proceedings are complex and costly.
Any conflicts resulting from third-party patent applications and patents could
significantly reduce the coverage of the patents owned, optioned by or licensed
to Signal or its collaborators and limit its ability or that of its
collaborators to obtain meaningful patent protection. If patents are issued to
third parties that contain competitive or conflicting claims, Signal, its
licensors or its collaborators may be legally prohibited from pursuing
research, development or commercialization of potential products or be required
to obtain licenses to these patents or to develop or obtain alternative
technology. Signal, its licensors and or its collaborators may be legally
prohibited from using patented technology, may not be able to obtain any
license to the patents and technologies of third parties on acceptable terms,
if at all, or may not be able to obtain or develop alternative technologies.
In addition, like many biopharmaceutical companies, Signal may from time to
time hire scientific personnel formerly employed by other companies involved in
one or more areas similar to the activities conducted by Signal. Signal or
these individuals may be subject to allegations of trade secret
misappropriation or other similar claims as a result of their prior
affiliations.
SIGNAL'S ABILITY TO COMPETE MAY DECREASE IF IT DOES NOT ADEQUATELY PROTECT ITS
INTELLECTUAL PROPERTY RIGHTS.
Signal's commercial success will depend in part on Signal's and its
collaborators' ability to obtain and maintain patent protection for Signal's
proprietary technologies, drug targets and potential products and to
effectively preserve its trade secrets. Because of the substantial length of
time and expense associated with bringing potential products through the
development and regulatory clearance processes to reach the marketplace, the
pharmaceutical industry places considerable importance on obtaining patent and
trade secret protection. Signal seeks patent protection for its proprietary
technology, drug targets and potential products. However, the patent positions
of pharmaceutical and biotechnology companies can be highly uncertain and
involve complex legal and factual questions. No consistent policy regarding the
breadth of claims allowed in biotechnology patents has emerged to date.
Accordingly, Signal cannot predict the type and breadth of claims allowed in
these patents.
The degree of future protection for Signal's proprietary rights is uncertain.
Many factors may affect Signal's patent position, including whether:
31
<PAGE>
o Signal was the first to invent the inventions covered by each of its pending
patent applications, and patents;
o Signal was the first to file patent applications for these inventions;
o others will independently develop similar or alternative technologies or
duplicate any of Signal's technologies;
o any of Signal's pending patent applications will result in issued patents;
o any patents issued to Signal or its collaborators will provide a basis for
commercially viable products, will provide Signal with any competitive
advantages or will not be challenged by third parties;
o Signal's licensors prevail in any interference or related proceeding
concerning Signal's licensed patents or licensed patent applications;
o Signal will develop additional proprietary technologies that are patentable;
or
o the patents of others will have an adverse effect on Signal's ability to do
business.
In addition to patent protection, Signal also relies on copyright protection,
trade secrets, know-how, continuing technological innovation and licensing
opportunities. Signal attempts to require its employees, consultants and some
collaborators to execute confidentiality and invention assignment agreements
upon commencement of a relationship with it; however, these agreements may not
provide meaningful protection for its trade secrets, confidential information
or inventions in the event of unauthorized use or disclosure of such
information, and adequate remedies may not exist in the event of such
unauthorized use or disclosure.
IF SIGNAL LOSES ITS KEY PERSONNEL OR IS UNABLE TO ATTRACT AND RETAIN QUALIFIED
PERSONNEL AS NECESSARY, IT COULD DELAY OR IMPAIR THE QUALITY OF SIGNAL'S
PRODUCT DEVELOPMENT PROGRAMS AND RESULT IN REDUCED RESEARCH AND DEVELOPMENT
EFFORTS.
Signal's success is highly dependent on the principal members of its scientific
and management staff, as well as it's scientific advisors and consultants. If
Signal loses the services of one or more of these individuals, it could prevent
Signal from advancing its technology, developing potential products or
achieving profitability. Signal may not be able to attract or retain qualified
employees in the future due to the intense competition for qualified personnel
among biotechnology and other technology-based businesses, particularly in the
San Diego area. If Signal is not able to attract and retain the necessary
personnel to accomplish its business objectives, Signal may experience
constraints that will adversely affect its ability to meet the demands of its
collaborators in a timely fashion or to support its internal research and
development programs. In particular, Signal's product development programs
depend on its ability to attract and retain highly skilled scientists,
including molecular biologists, biochemists and engineers, and clinical and
regulatory experts. Signal's employees are "at-will" which means they may quit
at any time and Signal may fire them at any time.
Signal's planned activities will require additional expertise in specific
industries and areas applicable to the products developed through its
technologies. These activities will require the addition of new personnel,
including management, and the development of additional expertise by existing
management personnel.
SIGNAL DEPENDS ON THIRD PARTIES TO PERFORM MANY PRECLINICAL AND CLINICAL
DEVELOPMENT ACTIVITIES, AND ITS DEVELOPMENT PROGRAMS MAY BE DELAYED OR
TERMINATED IF THEY FAIL TO PERFORM THEIR RESPONSIBILITIES COMPLETELY AND ON
TIME.
Signal relies and will continue to rely in part on third parties to perform
preclinical and clinical development activities. Specifically, Signal expects
to contract with third parties for the manufacture of drug product, the conduct
of preclinical animal studies, including studies regarding biological activity,
safety, absorption, metabolism and elimination of drug candidates, and the
performance of clinical trials for safety and efficacy in humans. Signal's
agreements for contract preclinical and
32
<PAGE>
clinical development services place substantial responsibilities on third
parties for development of its drug candidates which could result in delays in
or termination of development if these third parties fail to perform as
expected. Signal may not be able to maintain any of these existing
relationships, or establish new ones on favorable terms, if at all. Signal may
not be able to enter into these arrangements without undue delays or excessive
expenditures. Furthermore, these third parties may not perform as expected.
SIGNAL HAS NO MANUFACTURING EXPERIENCE AND MUST RELY ON THIRD-PARTY
MANUFACTURING.
To date, Signal has not manufactured any products for preclinical, clinical or
commercial purposes and does not have any manufacturing facilities. Signal
currently uses third-party contract manufacturers, and may in the future use
its corporate collaborators, for the production of materials for preclinical
and clinical trials and for the manufacture of future products for
commercialization. If Signal is unable to secure such outside manufacturing
capabilities, Signal will not be able to conduct preclinical product
development, clinical trials or commercialize its potential products as
planned.
SIGNAL'S BUSINESS INVOLVES THE USE OF HAZARDOUS MATERIALS WHICH COULD CAUSE
SIGNAL TO INCUR SUBSTANTIAL COSTS IN THE EVENT SUCH MATERIALS ARE NOT STORED,
HANDLED OR DISPOSED OF CORRECTLY.
Signal's research and development processes involve the controlled use of
hazardous materials, including infectious biological materials, chemicals and
various radioactive compounds. Signal is subject to federal, state and local
laws and regulations governing the use, manufacture, storage, handling and
disposal of hazardous materials and waste products. The risk of accidental
contamination or injury from these materials cannot be completely eliminated.
In the event of an accident, Signal could be held liable for any damages that
result and any such liability could exceed its resources and result in lengthy
interruption of business operations. If an accident occurred, Signal would
likely incur significant costs to comply with environmental laws and
regulations in the future.
SIGNAL MAY BE SUED FOR PRODUCT LIABILITY AND ITS INSURANCE COVERAGE MAY NOT BE
SUFFICIENT.
Signal may be held liable if any product Signal or its collaborators develop,
or any product which is made with the use of any of Signal's technologies,
causes injury or is found otherwise unsuitable during product testing,
manufacturing, marketing or sale. Signal currently has no product liability
insurance. When Signal attempts to obtain product liability insurance, this
insurance may be expensive, or may not fully cover its potential liabilities.
Inability to obtain sufficient insurance coverage at an acceptable cost or
otherwise to protect against potential product liability claims could prevent
or inhibit the commercialization of products developed by Signal or its
collaborators. If Signal is sued for any injury caused by its products,
Signal's liability could exceed its total assets.
33
<PAGE>
THE COMPANIES
CELGENE CORPORATION
Celgene Corporation, headquartered in Warren, New Jersey, is an independent
biopharmaceutical company engaged in the discovery, development and
commercialization of small molecule drugs for the treatment of cancer and
immunological diseases. Celgene's lead drug THALOMID(Reg. TM) received approval
from the FDA in 1998 for the treatment of ENL. Sales of THALOMID have been
rising rapidly and were $11.7 million in the first quarter of this year. Over
140 clinical trials are being conducted to determine the drug's potential
efficacy in a variety of cancer and inflammatory conditions.
Celgene's chiral program has developed a chirally pure version of Ritalin(Reg.
TM), the market standard treatment for the symptoms of Attention Deficit
Disorder and Attention Deficit Hyperactivity Disorder. This drug is the subject
of a major strategic alliance between Celgene and Novartis Pharma AG, and has
completed all regulatory trials. A New Drug Application will be submitted later
this year.
Celgene's oncology and immunology pipeline is highlighted by two classes of
novel, proprietary small molecule compounds. Selective Cytokine Inhibitory
Drugs or SelCIDs(TM) are potent inhibitors of tumor necrosis factor alpha or
TNF-. They act through the selective inhibition of the enzyme Phosphodiesterase
4 or PDE 4. Preclinical and animal studies have shown this class of compounds
to be significantly more active immunomodulators than THALOMID. The lead SelCID
was found to be well tolerated in Phase I trials. A pilot double blind,
placebo-controlled Phase II trial in Crohn's disease has recently been expanded
based on blinded positive responses. Additional trials in a wide range of
disease states will be initiated over the next twelve months for Celgene's lead
SelCID and the follow-on compounds.
The IMiDs(TM) or Immunomodulatory Drugs are a class of novel structural
analogues of thalidomide which have been demonstrated in preclinical tests to
be substantially more potent than thalidomide. Two lead IMiDs have completed
initial Phase I trials and were found to be well tolerated and nonsedating.
Phase I/II trials in multiple myeloma patients are scheduled to begin in the
next sixty days. It was recently announced that Celgene and the National Cancer
Institute have entered into a letter of intent regarding a major research
collaboration for the preclinical and clinical study of this class of
compounds.
The U.S. Patent and Trademark Office has issued Celgene numerous composition of
matter and use patents relating to Celgene's SelCIDs and IMiDs.
SIGNAL PHARMAEUTICALS, INC.
Signal Pharmaceuticals, Inc., headquartered in San Diego, California, is a
biopharmaceutical company focused on discovering and developing new classes of
small molecule drugs that regulate disease-associated genes.
Signal has developed and integrated a platform of target and drug discovery
technologies to accelerate the application of genomics to the discovery of
important new classes of gene regulating drugs. Signal's target and drug
discovery engine has enabled it to successfully identify gene regulating
targets and drug leads across six major classes of disease. Signal's drug
pipeline includes eight major drug discovery and development programs in the
fields of cancer, inflammation, bone metabolism, neurological and
cardiovascular disease and virology. Signal's SERM program has identified drug
leads with potential for preventing and treating breast, prostate and other
cancers, in addition to preventing and treating osteoporosis.
Signal's JNK program has generated drug leads that have demonstrated
significant disease-modifying activity in a preclinical arthritis model.
Because these compounds are potent and selective regulators of the TNF, IL-2
and gamma interferon gene pathways, they may have broad clinical utility in
34
<PAGE>
treating arthritis, stroke, cancer and other diseases. Signal also has
identified potent and selective inhibitors of the NF-k- pathway that regulates
cytokine genes (e.g., IL-1, IL-2, IL-6, IL-8 and TNF), and play a pivotal role
in immune-inflammatory diseases, cardiovascular diseases and cancer.
Signal researchers also are identifying new gene regulating molecules within
cells that provide a sustainable pipeline of drug targets for future drug
discovery programs. Signal conducts these discovery programs both independently
and in collaboration with leading academic researchers and pharmaceutical
partners.
35
<PAGE>
THE SIGNAL SPECIAL MEETING
DATE, TIME AND PLACE OF SPECIAL MEETING
This proxy statement/prospectus is being furnished to the holders of Signal
common stock and preferred stock in connection with the solicitation of proxies
by the Signal board for use at the Signal special meeting to be held at
Signal's principal offices, located at 5555 Oberlin Drive, San Diego,
California, on August 21, 2000 at 8:00 a.m. local time, and any adjournment or
postponement of that meeting.
MATTERS TO BE CONSIDERED AT THE SIGNAL SPECIAL MEETING
At the Signal special meeting, Signal shareholders will be asked to consider
and vote upon:
o the approval and adoption of the merger agreement and the approval of the
principal terms of the merger;
o with respect to the holders of Signal preferred stock, approval of the
conversion of all outstanding shares of Signal preferred stock into Signal
common stock effective immediately prior to the effective time of the merger;
and
o such other matters as may be properly brought before the meeting, or any
adjournment or postponement thereof.
SIGNAL BOARD RECOMMENDATION
The Signal board of directors unanimously approved the merger agreement and the
merger and unanimously recommends a vote for approval of the merger proposal
and the preferred stock conversion proposal.
VOTES REQUIRED AND OUTSTANDING SHARES
The approval of the merger proposal requires the affirmative vote of the
holders of a majority of the outstanding shares of Signal common stock and a
majority of the outstanding shares of Signal preferred stock, each voting as a
separate class. The approval of the preferred stock conversion proposal
requires the affirmative vote of 75% of the outstanding shares of Signal
preferred stock. In addition, under the terms of the merger agreement, in order
for the merger to occur, the holders of no more than 5% of the outstanding
shares of Signal may have perfected or be entitled to exercise dissenter's
rights under Chapter 13 of the California General Corporation Law.
Only holders of record of Signal common stock and preferred stock at the close
of business on August 4, 2000 will be entitled to notice of and to vote at the
Signal special meeting. At the close of business on the record date there were
4,957,939 shares of Signal common stock and 24,492,639 shares of Signal
preferred stock outstanding and entitled to vote. Each holder of record of
Signal common stock on the record date will be entitled to one vote for each
share held on all matters to be voted upon at the Signal special meeting. In
addition, the holders of Signal preferred stock will be entitled to one vote
for each share of Signal common stock into which such preferred stock is
convertible on all matters to be voted upon at the Signal special meeting.
Except for the shareholders identified herein under "Management and Other
Information Relating to Signal--Preferred Stockholders of Signal," as of the
record date, to the knowledge of Signal, no other person beneficially owned
more than 5% of the outstanding Signal common stock or preferred stock.
QUORUM AND ABSTENTIONS
The presence, in person or by properly executed proxy, of the holders of a
majority of the shares entitled to vote at the Signal special meeting is
necessary to constitute a quorum. Abstentions will be counted for purposes of
determining a quorum. For purposes of obtaining the required vote of a majority
of the outstanding shares for approval and adoption of the merger agreement and
the
36
<PAGE>
approval of the principal terms of the merger, the effect of an abstention will
be the same as a vote against the proposal. Abstentions will not be counted for
any purpose in determining approval of the conversion of the Signal preferred
stock into Signal common stock.
VOTING OF PROXIES
All shares of Signal common stock and preferred stock that are entitled to vote
and are represented at the Signal special meeting by properly executed proxies
received prior to or at the Signal special meeting, and not revoked, will be
voted at the Signal special meeting in accordance with the instructions
indicated on such proxies. If no instructions are indicated, such proxies will
be voted for approval of the merger proposal and for approval of the preferred
stock conversion proposal.
REVOCABILITY OF PROXIES
Any person giving a proxy pursuant to this solicitation has the power to revoke
it at any time before it is voted. It may be revoked by filing with the
corporate secretary of Signal at Signal's principal offices, a written notice
of revocation or a duly executed proxy bearing a later date, or it may be
revoked by attending the meeting and voting in person. Attendance at the
meeting will not, by itself, revoke a proxy.
Notwithstanding the preceding section, no shareholder who has entered into a
voting and proxy agreement with Celgene may revoke his, her or its irrevocable
proxy. A copy of a form of the voting and proxy agreement is attached to this
proxy statement/prospectus as Exhibit A-1 to Appendix A.
SOLICITATION
This prospectus/proxy statement was mailed to all Signal shareholders of record
as of the record date and constitutes notice of the Signal special meeting in
conformity with the requirements of California law. The cost of the
solicitation of proxies from holders of Signal common and preferred stock and
all related solicitation costs will be borne by Signal. In addition, Signal may
reimburse brokerage firms and other persons representing beneficial owners of
shares for their expenses in forwarding solicitation materials to such
beneficial owners. Original solicitation of proxies by mail may be supplemented
by telephone, telegram or personal solicitation by directors, officers or other
regular employees of Signal. No additional compensation will be paid to
directors, officers or other regular employees for such services.
VOTING AND PROXY AGREEMENTS
Pursuant to voting and proxy agreements dated June 29, 2000, between Celgene
and certain shareholders of Signal, these shareholders have granted Celgene an
irrevocable proxy to vote all of their Signal shares in favor of the approval
and adoption of the merger agreement and the approval of the principal terms of
the merger and, where applicable, in favor of the conversion of the Signal
preferred stock into Signal common stock. As of the record date, these
shareholders owned shares representing approximately 55% of the outstanding
shares of Signal common stock and approximately 79% of Signal preferred stock
entitled to vote at the Signal special meeting. Accordingly, Celgene has
sufficient voting power to constitute a quorum and to approve all matters to be
considered at the Signal special meeting, regardless of the vote of any other
shareholder. Celgene has agreed to vote all shares of Signal common stock and
Signal preferred stock subject to such voting and proxy agreements in favor of
the merger proposal and the preferred stock conversion proposal.
Holders of Signal capital stock should not send any certificates representing
Signal capital stock with the enclosed proxy card. If the merger is approved, a
letter of transmittal will be mailed after the effective time of the merger to
each person who is a holder of outstanding Signal capital stock immediately
before the effective time. Signal shareholders should send certificates
representing Signal capital stock to the exchange agent only after they receive
the instructions contained in the letter of transmittal and only in accordance
with those instructions.
37
<PAGE>
THE MERGER
GENERAL DESCRIPTION OF THE MERGER
THE MERGER. At the effective time, Celgene Acquisition Corp. will merge with
and into Signal. Signal will continue as the surviving corporation and become a
wholly-owned subsidiary of Celgene. At the effective time of the merger:
o each outstanding share of Signal common stock (including shares of Signal
preferred stock which will be converted into Signal common stock immediately
before the merger), other than shares owned by holders who are exercising
dissenters' rights under California law, will be converted into the right to
receive 0.1257 of a share of Celgene common stock, par value $.01 per share;
o each treasury share of Signal will be canceled;
o each outstanding share of common stock of Celgene Acquisition Corp. will be
converted into one share of common stock, no par value, of Signal, the
surviving corporation in the merger; and
o each option and warrant to purchase Signal common stock or Series C-1 or
Series C-2 preferred stock outstanding immediately prior to the effective time
of the merger, whether vested or unvested, will cease to represent a right to
acquire shares of Signal common stock or Series C-1 or Series C-2 preferred
stock and will be converted, at the effective time of the merger, into an
option or warrant to acquire, on the same terms and conditions, the number of
shares of Celgene common stock determined by multiplying the number of shares
of Signal common stock or Series C-1 or Series C-2 preferred stock subject to
that Signal stock option or warrant by 0.1257, rounded down, if necessary, to
the nearest whole share, at a price per share (rounded up to the nearest cent)
equal to the per share exercise price specified in that Signal stock option or
warrant divided by 0.1257.
No fractional shares of Celgene common stock will be issued in the merger;
instead, Signal shareholders will receive cash for the fraction of a share of
Celgene common stock they would have otherwise received. See "Conversion of
Shares; Procedures for Exchange of Certificates; No Fractional Shares."
BACKGROUND OF THE MERGER
During March and April 2000, representatives of Prudential Securities
Incorporated, Celgene's financial advisor, met with Dr. Sol J. Barer, Celgene's
president and chief operating officer, to discuss various strategic initiatives
available to Celgene. During these discussions, Prudential Securities suggested
that there might be a strong scientific fit between Celgene and Signal. On
April 3, 2000, Dr. Barer telephoned Dr. Alan J. Lewis, Signal's president and
chief executive officer. At this time, Dr. Barer indicated Celgene's interest
in learning more about Signal's research programs and suggested that he and Dr.
Lewis arrange to meet during Dr. Lewis' next visit to the East Coast to discuss
the scientific and business progress of both companies. Dr. Barer noted that he
was aware that Signal had filed a registration statement with the SEC regarding
a proposed initial public offering of Signal's common stock and that Signal was
awaiting appropriate market conditions to begin roadshow presentations.
Prior to Dr. Barer's telephone call, Dr. Lewis had made plans to be in
Connecticut during the week of April 10, 2000 and suggested to Dr. Barer that
they meet for dinner on April 11, 2000. On April 11, 2000, Dr. Lewis met for
dinner with Dr. Barer and John W. Jackson, Celgene's chief executive officer,
to discuss various potential strategic transactions between Signal and Celgene,
including research collaborations, equity investments and acquisition
transactions. Dr. Lewis informed Dr. Barer and Mr. Jackson that the proposed
initial public offering was Signal's first priority at that time, and,
accordingly, the parties agreed to proceed with discussions regarding potential
research collaboration opportunities.
38
<PAGE>
On April 18, 2000, at the meeting of Celgene's board of directors, also
attended by Proskauer Rose LLP, outside counsel to Celgene, and Robert J.
Hugin, Celgene's chief financial officer, Celgene's management presented an
overview of Signal to Celgene's board. Discussion at this meeting centered on
the need for Celgene to pursue a strategic transaction with a company like
Signal.
On May 3, 2000, Dr. Lewis and Bradley B. Gordon, Signal's senior vice president
finance and chief financial officer, met with representatives of FleetBoston
Robertson Stephens Inc., or Robertson Stephens, Signal's lead underwriter in
connection with its proposed initial public offering, at Signal's headquarters
to discuss strategic financing options, including proceeding with the proposed
initial public offering and pursuing potential merger and acquisition
opportunities.
On May 17, 2000, at a regularly scheduled meeting of Signal's board of
directors attended by representatives of Robertson Stephens and Cooley Godward
LLP, Signal's outside legal counsel, Dr. Lewis informed the board of Celgene's
interest in pursuing a potential research collaboration with Signal.
On May 17 and May 18, 2000, Mr. Jackson, Dr. Barer, Dr. David Stirling,
Celgene's chief scientific officer, and Dr. Jerome B. Zeldis, Celgene's senior
vice president, medical affairs, visited Signal's facility in San Diego,
California. At this meeting, Dr. Lewis, Mr. Gordon, Dr. David W. Anderson,
Signal's senior vice president and chief scientific officer, and Douglas E.
Richards, Signal's vice president, corporate development, presented an overview
of Signal's business, with a particular emphasis on Signal's research programs
in cancer and inflammation as potentially attractive collaboration
opportunities for Celgene. Celgene's management also provided Signal's
management with a brief scientific and business overview regarding Celgene
during this meeting.
On May 23, 2000, Dr. Barer telephoned Dr. Lewis to express Celgene's desire to
discuss a proposed acquisition of Signal by Celgene. In response to Dr. Barer's
call, Dr. Lewis called a telephonic special meeting of Signal's board of
directors on May 25, 2000, at which time Signal's board authorized officers of
Signal to proceed with discussions with Celgene regarding a potential merger.
Signal's board also authorized the officers to engage Robertson Stephens to act
as financial advisor to Signal in connection with such a transaction.
On May 25, 2000, Celgene and Signal entered into a mutual confidentiality
agreement to permit each company to obtain access to confidential information
about the other company.
During the period from May 25, 2000 to June 22, 2000, representatives of
Celgene and Signal and their respective financial and legal advisors conducted
substantial due diligence investigations of each other's business, intellectual
property and operations and further discussed the terms of a proposed merger.
On June 1, 2000, Celgene and Prudential Securities entered into a formal
engagement letter regarding the financial terms under which Prudential
Securities would serve as Celgene's exclusive financial advisor with respect to
the proposed acquisition of Signal.
On June 7, 2000, John P. Walker, Signal's chairman of the board, Drs. Lewis and
Anderson and Mr. Gordon visited Celgene's facility in Warren, New Jersey, and
met with Mr. Jackson, Dr. Barer and Mr. Hugin, to continue discussions
regarding the proposed merger. At the meeting, the parties discussed general
business and financial terms of the proposed merger.
On June 9, 2000, Dr. Lewis and Mr. Gordon met at Cooley Godward's offices in
San Diego with representatives of Cooley Godward and Ernst & Young LLP,
Signal's independent auditors, to discuss potential legal and accounting issues
regarding the proposed merger. Also on June 9, 2000, Signal's board of
directors held a telephonic special meeting to discuss the status of
negotiations regarding the proposed merger and potential financial terms of the
transaction.
On June 13, 2000, representatives of Robertson Stephens visited Celgene's
facility in Warren, New Jersey, to conduct further due diligence review of
Celgene on behalf of Signal and to discuss with Celgene the proposed structure
of the transaction, including proposed financial terms.
On June 15, 2000, Mr. Walker and Mr. Jackson had a telephone conversation to
discuss the financial terms of the proposed transaction.
39
<PAGE>
On June 16, 2000, Signal's board of directors held a telephonic special meeting
to discuss the status of negotiations regarding the proposed merger and
potential financial terms of the transaction.
On June 16, 2000, Dr. Barer, Joseph J. Day, Celgene's senior vice president,
planning and business development, Pennie & Edmonds, LLP, outside patent
counsel to Celgene, and Prudential Securities, met at the offices of Proskauer
Rose LLP, to discuss intellectual property and contractual due diligence.
On June 19, 2000, Proskauer Rose LLP, circulated a first draft of the proposed
merger agreement to Signal, Celgene and their respective representatives and
advisors. At this time, Proskauer Rose also circulated a first draft of a
letter of intent between the parties regarding the proposed merger, including a
binding obligation of Signal to pay a break-up fee to Celgene under specified
circumstances.
On June 20, 2000, Celgene's board of directors held a special meeting to review
the terms of the transaction with Signal and approved the concept of the
transaction at this meeting, representatives of Prudential Securities presented
a number of analyses to the Celgene board regarding the transaction.
On June 21 and 22, 2000, representatives of Celgene and Signal and their
respective financial and legal advisors met at the offices of Proskauer Rose in
New York City to negotiate the terms of the letter of intent and the merger
agreement.
On June 21, 2000, Dr. Lewis and Dr. Barer had lunch in New York and discussed
the potential role of Signal senior executives in a post-merger organization.
On June 22, 2000, Signal's board of directors held a telephonic special meeting
to receive a status report on Signal's due diligence investigations of Celgene
and the results of the continuing merger discussions with Celgene.
Representatives of Robertson Stephens and Cooley Godward participated in the
meeting. At the meeting, Signal's board considered the terms of the proposed
transaction with Celgene, including the terms of the proposed letter of intent
and merger agreement, as well as the terms of a proposed stock option to be
granted to Celgene to purchase shares of Signal common stock and arrangements
obligating officers, directors and principal shareholders of Signal to vote in
favor of the proposed merger. Signal's board also considered the preliminary
analyses of Robertson Stephens regarding the proposed merger from a financial
point of view, as well as alternatives to effecting the merger, including
possible financing alternatives. Based upon its review of the information
presented at the meeting, Signal's board authorized Signal's officers to enter
into the proposed letter of intent with Celgene and authorized Signal's
representatives to continue to negotiate the terms of the merger agreement and
related documents.
On June 22, 2000, Celgene and Signal entered into a letter of intent regarding
the terms of the proposed merger, including a binding obligation of Signal to
pay a break-up fee of $10,000,000 to Celgene under specified circumstances.
Between June 22, 2000 and June 28, 2000, representatives of Celgene and Signal
and their respective financial and legal advisors conducted negotiations
regarding the terms of the definitive merger agreement, option agreement, proxy
and voting agreements and related documents. During this time, the directors of
Signal received from Signal management reports on the status of the merger
negotiations and draft copies of the merger agreement and related documents.
On June 23, 2000, Dr. Barer, Mr. Hugin and representatives of Prudential
Securities visited Signal's offices in San Diego, California, to review Signal
programs and personnel evaluations, and to conduct further due diligence on
Signal.
On June 27, 2000, the compensation committee of Celgene's board of directors
held a telephonic meeting to review compensation issues relating to the
proposed transaction between Celgene and Signal. In addition, by a special
telephonic meeting, Celgene's board of directors delegated approval authority
for the merger to its executive committee.
On June 27, 2000, Dr. Lewis and Dr. Barer held a conference call to review the
conditions of approval of the transaction between Celgene and Signal by
Celgene's board of directors.
On June 28, 2000, Mr. Jackson, Dr. Barer, Dr. Lewis and Mr. Gordon held a
conference call to identify and review current open issues regarding the
transaction. In addition, on June 28, 2000, the Executive Committee of
Celgene's board of directors held a telephonic meeting whereby authority to
sign a merger agreement with Signal on behalf of Celgene was delegated to Mr.
Jackson.
40
<PAGE>
Another telephonic special meeting of Signal's board of directors was held on
June 28, 2000 to consider the terms of the merger agreement, the option
agreement, the proxy and voting agreements and the transactions contemplated
thereby. Representatives of Robertson Stephens and Cooley Godward participated
in the meeting. Prior to the meeting, Signal's directors had been provided with
near-final versions of the merger agreement and related documents, as well as a
draft of a fairness opinion from Robertson Stephens and financial analysis
underlying the opinion. At the meeting, Signal's board received a report from
Cooley Godward and Mr. Walker summarizing the terms of the merger agreement and
related arrangements. Specifically, the Cooley Godward representatives
discussed the material terms of the proposed merger, including the structure of
the merger, the tax and accounting treatment for the merger, the exchange
ratio, termination provisions and associated break-up fees and proposed
employment arrangements between Celgene and key employees of Signal. Signal's
board also received a presentation from Robertson Stephens regarding the
financial terms of the proposed merger and the analysis undertaken by Robertson
Stephens in connection with its opinion. Robertson Stephens then delivered to
Signal's board its opinion that the exchange ratio was fair, from a financial
point of view, to the shareholders of Signal.
Following the presentations by Robertson Stephens and Cooley Godward, Signal's
board reviewed the fairness opinion and other information presented by
Robertson Stephens and the terms of the merger, the merger agreement and the
related documents, and discussed the potential advantages and disadvantages of
and risks associated with the merger. After discussion, Signal's board
unanimously determined that the terms of the merger agreement and related
transactions were fair to, and in the best interests of, Signal and its
shareholders. Accordingly, Signal's board unanimously approved the merger, the
merger agreement, the option agreement, the proxy and voting agreements and all
related transactions and resolved to recommend that:
o the Signal shareholders vote in favor of approval of the principal terms of
the merger and adoption and approval of the merger; and
o the holders of Signal preferred stock vote in favor of approval of the
conversion of all outstanding shares of Signal preferred stock, effective
immediately prior to the effective time of the merger.
On June 29, 2000, numerous conference calls took place between key executives
of Celgene and Signal to work out the final details of the merger and the
merger agreement and other related agreements.
Following the approval of the Celgene board and the Signal board, the merger
agreement and related documents in their definitive forms were executed and
delivered by the parties on June 29, 2000. On June 30, 2000, Celgene and Signal
issued a joint press release publicly announcing the merger.
RECOMMENDATION OF SIGNAL'S BOARD OF DIRECTORS
Signal's board of directors has determined that the merger is advisable and in
the best interests of Signal and its shareholders and has unanimously
recommended a vote for:
o approval of the principal terms of the merger;
o approval and adoption of the merger; and
o conversion of the outstanding shares of Signal preferred stock into Signal
common stock, effective immediately prior to the effective time of the merger.
SIGNAL'S REASONS FOR THE MERGER
Signal's board of directors reviewed a wide variety of information and
considered a number of factors in connection with its evaluation of the merger
and the merger agreement, and determined that the proposed merger provides an
opportunity that serves the best interests of Signal and its shareholders. In
particular, Signal's board of directors considered, among other things:
o the likelihood that by providing Signal with greater financial security and
leverage, the merger may benefit Signal when negotiating with potential
collaboration partners or other licensees, enabling Signal to achieve improved
financial terms and conditions;
41
<PAGE>
o the existence of a public market for the Celgene common stock to be received
by Signal's shareholders in the merger, in contrast to the illiquid nature
of their present private holdings of Signal capital stock;
o the time and likelihood for realizing superior benefits through alternative
business strategies, including an initial public offering of Signal's common
stock;
o information concerning Signal's and Celgene's respective business models,
plans and operations, historical and projected financial performance and
future business prospects;
o the strategic fit between Signal and Celgene, including the benefits that
could be derived from combining Signal's proprietary discovery technologies
and programs with Celgene's development and commercialization capabilities and
programs, in particular:
o Celgene's expertise in clinical and regulatory matters regarding the
development and commercialization of pharmaceutical products;
o Celgene's experience in developing and commercializing pharmaceutical
products, which may improve Signal's ability to retain control and ownership
of product development programs until later stages, or permit Signal to
participate in the commercialization of any products it may develop and thus
retain a greater percentage of revenues and profits from product sales; and
o the complementary nature of Signal's and Celgene's strategic focus, scientific
and medical expertise and drug development programs in the fields of cancer
and inflammatory diseases;
o the financial consideration to be received by Signal's shareholders;
o the ability to retain significant upside potential, with potentially reduced
downside risk, through continued ownership of stock in a combined entity;
o the compatibility of the management and business of Signal with those of
Celgene;
o a presentation by Robertson Stephens regarding the merger, including its
fairness opinion;
o the opportunity for Signal's shareholders to receive Celgene common stock in a
"reorganization" within the meaning of Section 368(a) of the Code and thus
continue to participate in the growth of the business conducted by the
combined company after the merger without paying current United States federal
income tax (except to the extent that such shareholders receive cash in lieu
of fractional shares);
o the effect of the merger on Signal's employees and collaboration partners; and
o the terms and conditions of the merger, including:
o the nature of the option agreement and voting and proxy agreements to be
executed by Signal's officers and directors and some of Signal's shareholders;
o the limitations on Signal's ability to consider alternative acquisition
proposals from third parties following execution of the merger agreement; and
o the size of the break-up termination fees and the events that would result in
the payment of those fees.
Signal's board of directors also considered a variety of potentially negative
factors in its deliberations concerning the merger. In particular, Signal's
board considered, among other things:
o the potential disruption of Signal's business that might result from employee
uncertainty and lack of focus following announcement of the merger and in
connection with integrating the operations of Signal and Celgene;
o the possibility that the merger might not be consummated;
o the risk of withdrawing Signal's registration statement on Form S-1 and
discontinuing its proposed initial public offering;
42
<PAGE>
o the risk of disrupting relationships with current and prospective
collaboration partners, academic collaborators and key service providers;
o the effects of the public announcement of the merger on Signal's ability to
secure additional working capital financing on terms acceptable to Signal, its
ability to attract and retain key management and technical personnel and the
progress of certain of its development projects;
o the risk that the market price of Celgene common stock might decline in
response to the public announcement of the merger;
o the risks associated with potential volatility in the market price of Celgene
common stock;
o the risk that the other benefits sought to be achieved by the merger will not
be achieved; and
o other risks described above under "Risk Factors."
After taking into consideration all of the factors set forth above, Signal's
board of directors determined that the merger was in the best interests of
Signal and its shareholders and that Signal should proceed with the merger at
this time.
Signal does not intend the foregoing discussion of the information and factors
considered and given weight by Signal's board of directors to be exhaustive. In
view of the variety of factors that Signal's board of directors considered in
connection with its evaluation of the merger, Signal's board did not find it
practicable to, and did not, quantify or otherwise assign relative weights to
the specific factors that it considered in reaching its determination. In
addition, individual members of Signal's board may have given different weights
to different factors. For a discussion of the interests of some members of
Signal's management and Signal's board relating to the merger, you should read
"The Merger-- Related Agreements and Interests of Certain Persons in the
Merger."
CELGENE'S REASONS FOR THE MERGER
Celgene's primary reasons for seeking to consummate a business combination with
Signal are the beliefs of Celgene's board of directors and management that a
business combination would result in a number of benefits for Celgene and its
stockholders, including the belief that:
o The combination of Celgene's capabilities in drug development and
commercialization and Signal's research capabilities in gene regulation and
signal transduction technologies will position Celgene to capitalize on
anticipated developments in drug discovery based on advances in genomics and
proteomics.
o Signal's strengths are focused in the areas of intracellular signaling based
on gene and protein regulation. Celgene believes that future development of
new drugs will rely in important ways on the discovery of pharmaceuticals
designed to modulate targets within the cell and that regulate disease
associated genes and proteins.
o Signal's scientists, intellectual property, compound libraries and target
screens and emerging clinical candidates complements Celgene's existing
capabilities and provides added resources and expertise to further accelerate
the development of Celgene's IMiDs and SelCIDs programs.
43
<PAGE>
OPINION AND ANALYSIS OF SIGNAL'S FINANCIAL ADVISOR
Signal engaged Robertson Stephens to render an opinion as to the fairness of
the exchange ratio in the proposed merger, from a financial point of view, to
the "holders of Signal common stock." (See Appendix C for a copy of the full
opinion.) The "holders of Signal common stock" was defined in Robertson
Stephens' written opinion letter to the board of directors of Signal, dated
June 28, 2000, as all holders of Signal common stock (including holders of
Signal preferred stock which is to be converted into Signal common stock
immediately prior to the merger) other than Celgene, Celgene Acquisition Corp.,
any affiliates of Celgene or Celgene Acquisition Corp. or holders of dissenting
shares; provided, that with respect to any holders of Signal common stock who
are officers or directors (or who have representatives serving as directors) of
Signal, Robertson Stephens expressed its opinion as to such holders solely in
their capacity as holders of Signal common stock and did not taken into account
any other agreements or arrangements that they may have in connection with the
merger.
On June 28, 2000, at a meeting of Signal's board held to evaluate the proposed
merger, Robertson Stephens delivered its written opinion to Signal's board
that, as of June 28, 2000 and based on the matters considered and the
limitations on the review undertaken described in the opinion, the exchange
ratio in the proposed merger was fair from a financial point of view to the
holders of Signal common stock. The exchange ratio was determined through
negotiations between the respective managements of Signal and Celgene.
Robertson Stephens was not asked by, and did not recommend to, Signal that any
specific exchange ratio constituted the appropriate exchange ratio for the
merger.
You should consider the following when reading the discussion of the opinion of
Signal's financial advisor in this document:
o We urge you to read carefully the entire opinion of Robertson Stephens, which
is set forth in Appendix C to this proxy statement/prospectus and is
incorporated by reference. The following description of the Robertson Stephens
opinion is qualified by reference to the full opinion located in Appendix C.
The full opinion sets forth, among other things, the assumptions made by
Robertson Stephens, the matters it considered and the limitations on the
review undertaken.
o The Robertson Stephens opinion was prepared for the information of Signal's
board in connection with its evaluation of the merger and does not constitute
a recommendation to the shareholders of Signal or Celgene as to how they
should vote, or take any other action, with respect to the merger.
o The Robertson Stephens opinion did not address the relative merits of the
merger and the other business strategies that Signal's board has considered,
nor does it address the decision of Signal's board to proceed with the merger.
o The Robertson Stephens opinion was necessarily based upon market, economic and
other conditions that were in effect on, and information made available to
Robertson Stephens as of, the date of the opinion. You should understand that
subsequent developments may affect the conclusion expressed in the Robertson
Stephens opinion, and that Robertson Stephens disclaims any undertaking or
obligation to advise any person of any change in any matter affecting its
opinion which may come or be brought to Robertson Stephens attention after the
date of its opinion.
o The Robertson Stephens opinion was limited to the fairness, from a financial
point of view and as of the date thereof, of the exchange ratio in the merger
to the holders of Signal common stock.
o In connection with the preparation of its opinion, Robertson Stephens was not
authorized to solicit, and did not solicit, third parties regarding
alternatives to the merger.
OPINION AND ANALYSIS OF ROBERTSON STEPHENS
In connection with the preparation of the Robertson Stephens opinion, Robertson
Stephens:
o reviewed certain publicly available financial statements and other business
and financial information of Signal and Celgene, respectively;
44
<PAGE>
o reviewed certain internal financial statements and other financial and
operating data, including certain financial forecasts and other
forward-looking information, concerning Signal prepared by the management of
Signal;
o reviewed certain publicly available estimates of research analysts relating to
Celgene;
o held discussions with the respective managements of Signal and Celgene
concerning the businesses, past and current operations, financial condition
and future prospects of both Signal and Celgene, independently and combined,
including discussions with the managements of Signal and Celgene concerning
cost savings and other synergies that were expected to result from the merger
as well as their views regarding the strategic rationale for the merger;
o reviewed the financial terms and conditions set forth in drafts, dated June
26, 2000, of the merger agreement, the voting and proxy agreements and the
option agreement;
o reviewed the stock price and trading history of Celgene common stock;
o compared the financial performance of Celgene and the prices and trading
activity of Celgene common stock with that of certain other publicly traded
companies comparable to Celgene;
o compared the financial performance of Signal with that of certain publicly
traded companies comparable to Signal;
o compared the financial terms of the merger with the financial terms, to the
extent publicly available, of other transactions that Robertson Stephens
deemed relevant;
o reviewed the pro forma impact of the merger;
o participated in discussions and negotiations among representatives of Signal
and Celgene and their financial and legal advisors; and
o made such other studies and inquiries, and reviewed such other data, as
it deemed relevant.
In its review and analysis, and in arriving at its opinion, Robertson Stephens
assumed and relied upon the accuracy and completeness of all of the financial
and other information provided to Robertson Stephens (including information
furnished to it orally or otherwise discussed with it by the managements of
Signal and Celgene) or publicly available and neither attempted to verify, nor
assumed responsibility for verifying, any of such information. Robertson
Stephens relied upon the assurances of the managements of Signal and Celgene
that they were not aware of any facts that would make such information
inaccurate or misleading. Furthermore, Robertson Stephens did not obtain or
make, or assume any responsibility for obtaining or making, any independent
evaluation or appraisal of the properties, assets or liabilities (contingent or
otherwise) of Signal or Celgene, nor was it furnished with any such evaluation
or appraisal.
With respect to the financial forecasts and other forward-looking financial
information (and the assumptions and bases therefor) for each of Signal and
Celgene that Robertson Stephens reviewed, Robertson Stephens has assumed that:
o these forecasts and other forward-looking financial information were
reasonably prepared in good faith on the basis of reasonable assumptions;
o these forecasts and other forward-looking financial information reflected the
best currently available estimates and judgments as to the future financial
condition and performance of each of Signal and Celgene; and
o these forecasts and other forward-looking financial information would be
realized in the amounts and in the time periods currently estimated.
In addition, Robertson Stephens assumed that:
o the merger will be consummated upon the terms set forth in the drafts, dated
June 26, 2000, of the merger agreement, the voting and proxy agreements and
the option agreement without material alteration thereof, including, among
other things, that the merger will be accounted for as a
"pooling-of-interests" business combination in accordance with U.S. generally
accepted accounting principles;
45
<PAGE>
o the merger will be treated as a tax-free reorganization pursuant to the
Internal Revenue Code of 1986, as amended; and
o the historical financial statements of each of Signal and Celgene reviewed by
Robertson Stephens were prepared and fairly presented in accordance with U.S.
generally accepted accounting principles consistently applied.
Robertson Stephens expressed no opinion as to:
o the value of any employee agreement or other arrangement entered into in
connection with the merger;
o any tax or other consequences that may result from the merger; or
o what the value of the Celgene common stock will be when issued to Signal's
shareholders pursuant to the merger or the price at which the shares of
Celgene's common stock that are issued pursuant to the merger may be traded in
the future.
The following is a summary of the material financial analyses performed by
Robertson Stephens in connection with rendering its opinion. The summary of the
financial analyses is not a complete description of all of the analyses
performed by Robertson Stephens. Certain of the information in this section is
presented in tabular form. IN ORDER TO UNDERSTAND THE FINANCIAL ANALYSES
PERFORMED BY ROBERTSON STEPHENS, THESE TABLES MUST BE READ TOGETHER WITH THE
TEXT ACCOMPANYING EACH TABLE.
SIGNAL COMPARABLE COMPANY ANALYSIS
Using publicly available information, Robertson Stephens analyzed, among other
things, the total capitalization and trading multiples of the following
selected publicly traded companies in the pharmaceutical and biotechnology
industry which Robertson Stephens believed to be reasonably comparable to
Signal:
o Ariad Pharmaceuticals, Inc.
o AXYS Pharmaceuticals, Inc.
o Isis Pharmaceuticals, Inc.
o Microcide Pharmaceuticals, Inc.
o Sangamo BioSciences, Inc.
o Synaptic Pharmaceutical Corporation
o Tularik Inc.
Total capitalization means the market capitalization of the company's equity
plus debt outstanding less balance sheet cash. As set forth in the following
table, applying a range of multiples for the selected publicly traded companies
of estimated calendar year 2000 revenues and projected calendar year 2001 and
2002 revenues to corresponding revenue data for Signal resulted in the
following ranges of multiples of total capitalization, implied equity values,
prices per share and exchange ratios:
<TABLE>
<CAPTION>
IMPLIED EQUITY VALUES IMPLIED
CALENDAR YEAR MULTIPLE RANGE (IN MILLIONS) IMPLIED PRICE PER SHARE EXCHANGE RATIO
------------------------------ ---------------- ----------------------- ------------------------- -------------------
<S> <C> <C> <C> <C>
2000 (estimated) 21.0x - 50.6x $238.3 - $566.0 $7.32 - $17.40 0.1263 - 0.2999
2001 (projected) 24.5x - 57.0x $221.5 - $507.9 $6.81 - $15.61 0.1174 - 0.2692
2002 (projected) 22.1x - 72.3x $126.5 - $402.4 $3.89 - $12.37 0.0670 - 0.2133
MEAN $6.01 - $15.13 0.1036 - 0.2608
EXCHANGE RATIO IN THE MERGER 0.1257
</TABLE>
The implied equity values reflected Signal's net debt of $4.8 million as of
March 22, 2000. The implied share prices were based on 32,534,000 diluted
Signal shares outstanding using the treasury stock method for options and
warrants. The implied exchange ratios were based on a share price of $58.00 for
Celgene common stock. Revenue data for the selected publicly traded companies
were obtained from research analysts estimates and company reports.
46
<PAGE>
PRECEDENT TRANSACTION ANALYSIS
Using publicly available information, Robertson Stephens analyzed the
consideration offered and the premiums paid in the following selected
acquisition transactions in the biotechnology industry (listing the targets
followed by the acquiror and with the date these transactions were publicly
announced in parenthesis) which Robertson Stephens believed to be reasonably
comparable to the merger:
o LeukoSite, Inc./Millennium Pharmaceuticals, Inc. (October 14, 1999)
o Allelix Biopharmaceuticals, Inc./NPS Pharmaceuticals, Inc. (September 27,
1999)
o SUGEN, Inc./Pharmacia & Upjohn, Inc. (June 15, 1999)
o GeneMedicine, Inc./Megabios Corp. (October 26, 1998)
In analyzing these "precedent transactions," Robertson Stephens compared, among
other things, the total consideration in such transactions as a multiple of the
next twelve months, or "NTM", estimated revenues of the target prior to the
announcement of the transaction. All multiples for the precedent transactions
were based on public information available at the time of the announcement.
Based on this information and other publicly available information, the
following table illustrates the implied equity values, prices per share and
exchange ratios derived from applying a range of multiples of total
consideration that Robertson Stephens derived from these transactions to
corresponding revenue data for Signal:
<TABLE>
<CAPTION>
IMPLIED EQUITY
VALUES IMPLIED PRICE IMPLIED
MULTIPLE RANGE (IN MILLIONS) PER SHARE EXCHANGE RATIO
---------------- ---------------- ---------------- -------------------
<S> <C> <C> <C> <C>
NTM Revenue 5.8x - 29.5x $77.9 - $380.0 $2.40 - $11.68 0.0413 - 0.2014
EXCHANGE RATIO IN THE MERGER 0.1257
</TABLE>
FINANCING HISTORY ANALYSIS
Robertson Stephens reviewed the financing history of Signal. This review showed
a post-money equity valuation of Signal of $112.0 million, based on a private
placement of preferred stock on October 1, 1999, Signal's most recent financing
transaction. The latest post-money equity valuation resulted in an implied
price per share of Signal common stock of $3.44 and an implied exchange ratio
of 0.0594, as compared to an exchange ratio of 0.1257 in the merger.
IPO FILING ANALYSIS
Robertson Stephens reviewed the Form S-1 filed by Signal on March 22, 2000, in
connection with its proposed initial public offering. This review showed
implied equity values ranging from $205.5 million to $237.0 million, implied
prices per share of Signal common stock ranging from $6.32 to $7.28 and implied
exchange ratios ranging from 0.1089 to 0.1256, as compared to an exchange ratio
of 0.1257 in the merger.
CELGENE COMPARABLE COMPANY ANALYSIS
Using publicly available information, Robertson Stephens analyzed, among other
things, the total capitalization and trading multiples of the following
selected publicly traded companies in the pharmaceutical and biotechnology
industry which Robertson Stephens believed to be reasonably comparable to
Celegene:
o Cephalon, Inc.
o COR Therapeutics, Inc.
o SuperGen, Inc.
o Vertex Pharmaceuticals Incorporated
In examining these selected publicly traded companies, Robertson Stephens
calculated the total capitalization of each company as a multiple of its
respective estimated calendar year 2000 revenues and projected calendar year
2001 and 2002 revenues and compared such multiples to the
47
<PAGE>
corresponding multiples for Celgene. Revenue data for the selected publicly
traded companies were obtained from research analysts estimates and company
reports. Robertson Stephens' analysis of these selected publicly traded
companies resulted in the following multiples of total capitalization:
<TABLE>
<CAPTION>
CY 2000 REVENUE CY 2001 REVENUE CY 2002 REVENUE
(ESTIMATED) (PROJECTED) (PROJECTED)
----------------- ----------------- ----------------
<S> <C> <C> <C>
Mean 78.3x 25.0x 19.9x
Median 43.6x 17.2x 13.7x
Celgene 58.0x 34.0x 22.1x
</TABLE>
Based on an analysis of this data, Robertson Stephens concluded that the
trading multiples of Celgene common stock were within the range of the
comparable companies.
OTHER FACTORS
No company, business or transaction compared in the comparable companies
analysis or precedent transaction analysis is identical to Signal or the
proposed merger. Accordingly, an analysis of the results of the foregoing is
not entirely mathematical; rather it involves complex considerations and
judgments concerning differences in financial and operating characteristics and
other factors that could affect the public trading, acquisition and other
values of the comparable companies, precedent transactions or the business
segment, company or transaction to which they are being compared.
While this summary describes the analysis and factors that Robertson Stephens
deemed material in its presentation to the Signal board, it is not a
comprehensive description of all analysis and factors considered by Robertson
Stephens. The preparation of a fairness opinion is a complex process that
involves various determinations as to the most appropriate and relevant methods
of financial analysis and the application of these methods to the particular
circumstances. Therefore, a fairness opinion is not readily susceptible to
partial analysis or summary description. In arriving at its opinion, Robertson
Stephens did not attribute any particular weight to any analysis or factor
considered by it, but rather made qualitative judgments as to the significance
and relevance of each analysis and factor. Accordingly, Robertson Stephens
believes that its analyses must be considered as a whole and that selecting
portions of its analyses and of the factors considered by it, without
considering all analyses and factors, could create a misleading or incomplete
view of the evaluation process underlying its opinion. Several analytical
methodologies were employed and no one method of analysis should be regarded as
critical to the overall conclusion reached by Robertson Stephens. Each
analytical technique has inherent strengths and weaknesses, and the nature of
the available information may further affect the value of particular
techniques. The conclusion reached by Robertson Stephens is based on all
analyses and factors taken as a whole and also on application of Robertson
Stephens' own experience and judgment. This conclusion may involve significant
elements of subjective judgment and qualitative analysis. Robertson Stephens
expresses no opinion as to the value or merit standing alone of any one or more
parts of the analysis it performed. In performing its analyses, Robertson
Stephens made numerous assumptions with respect to industry performance,
general business and other conditions and matters, many of which are beyond the
control of Signal, Celgene or Robertson Stephens. Any estimates contained in
these analyses are not necessarily indicative of actual values or predictive of
future results or values, which may be significantly more or less favorable
than those suggested by these analyses. Accordingly, analyses relating to the
value of businesses do not purport to be appraisals or to reflect the prices at
which these businesses actually may be sold in the future, and these estimates
are inherently subject to uncertainty.
The engagement letter between Robertson Stephens and Signal provides that, for
its services, Robertson Stephens is entitled to receive a transaction fee equal
to an amount calculated pursuant to a formula based upon the aggregate
transaction value, which fee was approximately $2.8 million as of the date of
the fairness opinion. Such transaction fee will be payable upon completion of
the merger. Robertson Stephens also received a fee of $200,000 upon the
delivery of the Robertson Stephens fairness opinion, which fee is in addition
to the transaction fee and was payable without regard to the conclusion reached
in the opinion. Signal has also agreed to reimburse Robertson Stephens for its
reasonable and customary out-of-pocket expenses related to this work, including
legal fees (subject to certain limitations), and to
48
<PAGE>
indemnify and hold harmless Robertson Stephens and its affiliates and any other
person, director, employee or agent of Robertson Stephens or any of its
affiliates, or any person controlling Robertson Stephens or its affiliates, for
certain losses, claims, damages, expenses and liabilities relating to or
arising out of services provided by Robertson Stephens as financial advisor to
Signal. The terms of the fee arrangement with Robertson Stephens, which Signal
and Robertson Stephens believe are customary in transactions of this nature,
were negotiated at arm's length between Signal and Robertson Stephens, and the
Signal board was aware of these fee arrangements.
In the past, Robertson Stephens has provided certain investment banking
services to Signal, including acting as lead manager for Signal's filing of an
initial public offering, and Robertson Stephens and its affiliates are also
shareholders of Signal. In the ordinary course of its business, Robertson
Stephens may actively trade Celgene's securities for its own account and for
the account of its customers and, accordingly, may at any time hold a long or
short position in Celgene's securities.
Robertson Stephens is an internationally recognized investment banking firm and
was retained based on its experience as a financial advisor in connection with
mergers and acquisitions and in securities valuations generally. As part of its
investment banking business, Robertson Stephens is frequently engaged in the
valuation of businesses and their securities in connection with mergers and
acquisitions, negotiated underwritings, secondary distributions of securities,
private placements and other purposes.
MERGER CONSIDERATION
Upon consummation of the merger, each outstanding share of Signal common stock
(including shares of Signal preferred stock which will be converted into Signal
common stock immediately before the merger), other than shares owned by holders
who are exercising dissenters' rights under California law, will be converted
automatically into the right to receive 0.1257 of a share of Celgene common
stock, par value $.01 per share.
STOCK OPTIONS AND WARRANTS
Under the merger agreement, each option and warrant to purchase Signal common
stock or Series C-1 or Series C-2 preferred stock outstanding immediately prior
to the effective time of the merger, whether vested or unvested, will cease to
represent a right to acquire shares of Signal common stock or Series C-1 or
Series C-2 preferred stock and will be converted, at the effective time of the
merger, into an option or warrant to acquire, on the same terms and conditions,
the number of shares of Celgene common stock determined by multiplying the
number of shares of Signal common stock or Series C-1 or Series C-2 preferred
stock subject to that Signal stock option or warrant by 0.1257, rounded down,
if necessary, to the nearest whole share. The exercise price of these stock
options or warrants will be the exercise price for the stock option or warrant
immediately prior to the effective time of the merger divided by 0.1257,
rounded up to the nearest cent.
Celgene will file a registration statement on Form S-8 covering the issuances
of the shares of Celgene common stock subject to each Signal option or warrant.
DISSENTERS' RIGHTS
Under California law, holders of Signal capital stock who did not vote in favor
of the merger will be entitled to dissenters' rights as set forth in Sections
1300 through 1312 of the California General Corporation Law, a copy of which is
attached to this proxy statement as Appendix B.
A vote against the merger does not in itself constitute a demand for
dissenters' rights. In order to qualify for dissenters' rights, the shares in
question must satisfy each of the following requirements:
o the shares must have been outstanding on the date of determination of
shareholders entitled to vote on the merger;
o the shares must not have been voted in favor of the merger;
49
<PAGE>
o the holder of those shares must make a written demand that Signal repurchase
his or her shares at fair market value; and
o the shareholder must submit certificates representing those shares for
endorsement.
A Signal shareholder who properly follows the procedures for exercising
dissenters' rights for his or her stock may be entitled to receive in cash the
fair value of his or her stock instead of the consideration provided under the
terms of the merger agreement. The fair market value is the value of the shares
as of the day before the announcement of the merger.
Under California law, within ten days following the approval of the merger,
Signal is required to mail to all shareholders who did not vote in favor of the
merger a notice of the approval of the merger, a statement of the price
determined by Signal to represent the fair market value of the shares and a
description of the procedures for exercising dissenters' rights. The fair
market value set forth in the mailing is treated as an offer by Signal to
purchase any Signal shares at that price.
Signal shareholders who wish to exercise their dissenters' right must demand
that Signal repurchase their shares within thirty days after the date on which
the notice of approval of the merger was mailed. The demand must state the
number, class and fair market value of the shares. The fair market value set
forth in the demand is considered an offer by the dissenting shareholder to
sell his or her shares at that price within a thirty-day period. The
shareholder must also submit to Signal certificates for those shares to be
repurchased. Unless there is any dispute as to the fair market value or status
of the shares, Signal is required by law to pay the shareholder the fair market
value for his or her shares within thirty days of the date of agreement on the
price of the shares or within thirty days after any statutory or contractual
conditions to the merger are satisfied, whichever is later.
If Signal and the dissenting shareholder disagree as to the price of the shares
or disagree as to whether the shares qualify as dissenting, the shareholder may
bring an action in California Superior Court to resolve the dispute within six
months after the date on which the notice of the approval of the merger is
mailed.
EFFECTIVE TIME
The merger will become effective upon the filing of an agreement of merger with
the Secretary of State of the State of California, or such other time as the
parties may specify. This filing is anticipated to be made within two business
days after receipt of Signal shareholder approval and all required regulatory
approvals and the satisfaction or waiver of the other conditions to the merger.
See "The Merger Agreement and Related Agreements -- Conditions to the Merger."
CONVERSION OF SHARES; PROCEDURES FOR EXCHANGE OF CERTIFICATES; NO FRACTIONAL
SHARES
As promptly as practicable after the effective date of the merger, Celgene will
cause to be sent to each shareholder of record of Signal as of the effective
time of the merger transmittal materials for use in exchanging certificates of
Signal common stock (including shares of Signal preferred stock which will be
converted into Signal common stock immediately before the merger) for
certificates of Celgene common stock. The transmittal materials will contain
information and instructions on how to surrender Signal capital stock
certificates for new certificates representing Celgene common stock.
No fractional shares of Celgene common stock will be issued to holders of
Signal common stock in the merger; instead, Signal shareholders will receive
cash in lieu of the fraction of a share of Celgene common stock they would have
otherwise received following the effective time of the merger.
Until a holder of Signal common stock surrenders his, her or its certificates
representing shares of Signal capital stock, the certificates will, after the
effective time of the merger, represent for all purposes only the right to
receive Celgene common stock as specified in the merger agreement.
50
<PAGE>
SIGNAL SHAREHOLDERS SHOULD NOT SURRENDER THEIR STOCK CERTIFICATES FOR EXCHANGE
UNTIL THEY RECEIVE A TRANSMITTAL FORM.
NASDAQ LISTING
Celgene will use its commercially reasonable efforts to cause the shares of
Celgene common stock to be issued in connection with the merger to be approved
for quotation on the Nasdaq National Market or listed on such securities
exchange as Celgene common stock is then listed, subject to official notice of
issuance.
EXPENSES
Except for the costs of this proxy statement/prospectus, which will be paid by
Celgene, all costs and expenses incurred in connection with the merger
agreement and the transactions contemplated in the merger agreement will be
paid by the party incurring such costs or expenses.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
As of the record date, Signal directors and executive officers and their
affiliates owned approximately 6,853,825 shares of Signal capital stock, which
represented approximately 23% of the outstanding shares of Signal capital stock
entitled to vote at the Signal special meeting. Pursuant to the merger
agreement, Signal's directors and executive officers will receive the same
consideration for their shares of Signal common stock as the other Signal
shareholders.
Employment Agreement
As part of the merger, it is anticipated that Alan J. Lewis, president and
chief executive officer of Signal, will enter into an employment agreement with
Celgene to be effective upon the consummation of the merger. As of the date of
this proxy statement/prospectus, the terms of such agreement are under
negotiation between Dr. Lewis and Celgene.
Consulting Agreements
As part of the merger, it is anticipated that certain former non-employee
directors of Signal will enter into consulting agreements with Signal to
provide services to Signal to be effective upon the consummation of the merger.
MATERIAL FEDERAL INCOME TAX CONSEQUENCES
The following summarizes the material United States federal income tax
consequences of the merger to holders of Signal capital stock who exchange
their stock for Celgene common stock in the merger. This summary is for general
information purposes only and does not consider all aspects of federal income
taxation that may be relevant to you because of your particular circumstances.
This discussion is generally limited to the United States federal income tax
consequences to Signal shareholders who will hold their shares of Signal
capital stock as capital assets within the meaning of Section 1221 of the
Internal Revenue Code of 1986, as amended, and will hold their shares of
Celgene common stock received in exchange therefor as capital assets.
This summary does not deal with the United States federal income tax
consequences to persons subject to special treatment under the Internal Revenue
Code such as:
o banks, thrifts and other financial institutions;
o mutual funds;
o real estate investment trusts;
o regulated investment companies;
51
<PAGE>
o insurance companies;
o dealers in securities or currencies;
o tax-exempt investors;
o foreign shareholders;
o persons that will hold Celgene common stock as a position in a "straddle," or
as part of a "synthetic security" or "hedge," "conversion transaction" or
other integrated investment;
o persons who acquired the Signal capital stock pursuant to the exercise of
employee stock options or otherwise as compensation;
o persons whose shares of Signal capital stock are qualified small business
stock as defined by Section 1202 of the Internal Revenue Code;
o persons that have a "functional currency" other than the U.S. Dollar; and
o investors in pass-through entities, such as partnerships.
Further, it does not include any description of any alternative minimum tax
consequences or the consequences arising under United States federal gift and
estate taxes or the tax laws of any state, local or foreign government that may
be applicable to a holder of Celgene common stock.
Additionally the following discussion does not address:
o the tax consequences of transactions effectuated before, after or at the same
time as the merger, whether or not they are in connection with the merger,
including, without limitation, transactions in which Signal shares are
acquired or Celgene shares are disposed of;
o the tax consequences to holders of options issued by Signal which are assumed,
exercised or converted, as the case may be, in connection with the merger; or
o the tax consequences of the receipt of Celgene shares other than in exchange
for Signal shares.
This summary is based on the Internal Revenue Code, final and proposed Treasury
regulations thereunder and administrative and judicial interpretations thereof,
as of today. All of these are subject to change, possibly with retroactive
effect. Any change could alter the tax consequences to Celgene, Signal or the
Signal shareholders as described in this summary. Moreover, no rulings have
been or will be requested from the Internal Revenue Service with respect to any
of the matters addressed in this discussion.
You are advised to consult your tax advisor as to the United States federal
income tax consequences of the merger for your particular circumstances, as
well as the effect of any state, local, foreign or other tax laws and of
potential changes in applicable tax laws.
It is a condition to the obligation of the companies to consummate the merger
that each company receive an opinion at closing from its counsel, substantially
to the effect that the merger will be treated as a reorganization within the
meaning of Section 368(a) of the Internal Revenue Code. You should be aware
that these tax opinions do not bind the Internal Revenue Service. The Internal
Revenue Service could reach a different conclusion and a contrary position
could be sustained by a court. The tax opinions discussed in this section
assume and are conditioned upon the following:
o that all representations, warranties and statements made or agreed to by
Celgene, Celgene Acquisition Corp. and Signal, their managements, employees,
officers, directors and shareholders in connection with the merger, including,
but not limited to, those set forth in the merger agreement (including the
exhibits thereto) and the tax representation letters delivered to such counsel
by Celgene, Celgene Acquisition Corp. and Signal are true and accurate at all
relevant times;
52
<PAGE>
o that original documents submitted to such counsel (including signatures
thereto) are authentic, documents submitted to such counsel as copies conform
to the original documents, and that all of these documents have been (or will
be by the effective time) duly and validly executed and delivered where due
execution and delivery are a prerequisite to the effectiveness of these
documents;
o that all covenants contained in the merger agreement (including exhibits
thereto) and the tax representation letters, described above, are performed
without waiver or breach of any material provision of these covenants;
o that the merger will be reported by Celgene and Signal on their respective
U.S. federal income tax returns in a manner consistent with the opinions
rendered by such counsel; and
o that any representation or statement made "to the knowledge of" or similarly
qualified is correct without that qualification.
EXCHANGE OF SIGNAL CAPITAL STOCK INTO CELGENE COMMON STOCK
Subject to the assumptions and limitations discussed above, in the opinion of
Proskauer Rose LLP, tax counsel to Celgene, and Cooley Godward LLP, tax counsel
to Signal:
o the merger will be treated for federal income tax purposes as a reorganization
within the meaning of Section 368(a) of the Internal Revenue Code;
o no gain or loss will be recognized by Signal, Celgene or Celgene Acquisition
Corp. as a result of the merger;
o you will not recognize income, gain or loss upon the exchange of your Signal
capital stock for Celgene common stock in the merger, except to the extent of
cash, if any, received in payment for a fractional share of Celgene common
stock;
o your aggregate tax basis in the Celgene common stock received (including a
fractional share for which cash is received) should generally be equal to your
tax basis in the Signal capital stock exchanged;
o your holding period in Celgene common stock received should generally begin on
the date you acquired the Signal capital stock exchanged; and
o cash, if any received for a fractional share of Celgene common stock will be
treated as if you received the fractional share pursuant to the merger and
then sold such fractional share for cash. The amount of any gain or loss will
be equal to the difference between the ratable portion of your tax basis in
the Signal capital stock exchanged in the merger that is allocated to the
fractional share and the cash received for it. Any gain or loss will
constitute long-term capital gain or loss if your Signal capital stock has
been held for more than one year at the time of consummation of the merger.
Even if the merger qualifies as a reorganization, you would recognize income
upon receipt of Celgene common stock to the extent that, for example, any such
shares were determined to have been received in exchange for services, to
satisfy obligations or in consideration for anything other than the Signal
common stock surrendered. Generally, such income is taxable as ordinary income
upon receipt. In addition, to the extent that you were treated as receiving,
directly or indirectly, consideration other than Celgene common stock in
exchange for your Signal capital stock, gain or loss would have to be
recognized.
BACKUP WITHHOLDING
With respect to a cash payment received by a Signal shareholder in lieu of a
fractional share of Celgene common stock, a noncorporate shareholder of Signal
may be subject to backup withholding at a rate of 31%. However, backup
withholding will not apply to a shareholder who either (i)
53
<PAGE>
furnishes a correct taxpayer identification number and certifies that he or she
is not subject to backup withholding by completing the substitute Form W-9 that
will be included as part of the transmittal letter, or (ii) otherwise proves to
Celgene and its exchange agent that the shareholder is exempt from backup
withholding.
INFORMATION REPORTING
Each Signal shareholder that receives Celgene common stock in the merger will
be required to file a statement with his or her federal income tax return
setting forth his or her basis in the Signal capital stock surrendered and the
fair market value of the Celgene common stock received in the merger, and to
retain permanent records of these facts relating to the merger.
A successful challenge by the IRS to the reorganization status of the merger
would result in significant adverse tax consequences to you. Signal
shareholders would recognize taxable gain or loss with respect to each share of
Signal capital stock surrendered equal to the difference between each
shareholder's basis in such share and the fair market value, as of the
effective time of the merger, of the Celgene common stock received in exchange
therefor. In such event, your aggregate basis in the Celgene common stock
received would equal its fair market value, and the holding period of such
stock would begin the day after the effective date of the merger.
ACCOUNTING TREATMENT
The merger is intended to qualify as a pooling-of-interests. The
pooling-of-interests method of accounting assumes the companies had always been
combined, and the historical financial statements for periods prior to closing
of the merger are restated as though the companies had always been combined as
required under United States generally accepted accounting principles. The
assets and liabilities of Celgene and Signal will be carried forward by the
combined company at their historical recorded amounts.
REGULATORY APPROVALS
Transactions such as the merger are subject to review by the Department of
Justice and the Federal Trade Commission to determine whether they comply with
applicable antitrust laws. Under the provisions of the Hart-Scott-Rodino Act,
the merger may not be consummated until the specified waiting period
requirements of the HSR Act have been satisfied. Celgene and Signal filed
notification reports, together with requests for early termination of the
waiting period, with the Department of Justice and the Federal Trade Commission
under the HSR Act on July 11, 2000, and the waiting period terminates on August
10, 2000 unless extended or terminated earlier. On August 4, 2000, Celgene
received verbal notification that early termination of the waiting period had
been granted.
RESALE OF CELGENE COMMON STOCK FOLLOWING THE MERGER
The shares of Celgene common stock to be issued in connection with the merger
will be registered under the Securities Act of 1933 and will be freely
transferable under the Securities Act, except for shares of Celgene common
stock issued to any person who is deemed to be an "affiliate" of Signal at the
time of the special meeting. Persons who may be deemed to be affiliates include
individuals or entities that control, are controlled by, or are under the
common control of Signal and may include executive officers and directors of
Signal, as well as significant shareholders of Signal. Affiliates may not sell
their shares of Celgene common stock acquired in connection with the merger
except pursuant to:
o an effective registration statement under the Securities Act covering the
resale of those shares;
o an exemption under paragraph (d) of Rule 145 under the Securities Act; or
o any other applicable exemption under the Securities Act.
Celgene's registration statement on Form S-4, of which this proxy
statement/prospectus forms a part, does not cover the resale of shares of
Celgene common stock to be received by Signal's affiliates in the merger.
54
<PAGE>
THE MERGER AGREEMENT AND RELATED AGREEMENTS
The following description of the merger agreement does not purport to be
complete and is qualified in its entirety by reference to the merger agreement,
a copy of which is attached hereto as Appendix A and incorporated by reference
herein. Shareholders are urged to read the merger agreement in its entirety for
a more complete description of the merger.
GENERAL
THE MERGER. The merger agreement provides that, on the terms and subject to the
conditions of the merger agreement, Celgene Acquisition Corp. will merge with
and into Signal. As a result of this merger, Signal will become a wholly owned
subsidiary of Celgene. In the merger, shareholders of Signal will receive
0.1257 of a share of Celgene common stock, par value $.01 per share, for each
share of Signal common stock (including shares of Signal preferred stock which
will be converted into Signal common stock immediately before the merger). The
merger will become effective upon the filing of an agreement of merger with the
Secretary of State of the State of California, or such other time as the
parties may specify. This filing is anticipated to be made two business days
after receipt of Signal shareholder approval and the satisfaction or waiver of
the other conditions to the merger.
CONSIDERATION TO BE RECEIVED IN THE MERGER
The merger agreement provides that, upon consummation of the merger, each
outstanding share of Signal common stock (including shares of Signal preferred
stock which will be converted into Signal common stock immediately before the
merger), other than shares owned by holders who exercise dissenters' rights
under California law, will be converted automatically into the right to receive
0.1257 of a share of Celgene common stock.
EXCHANGE OF SHARES. As soon as practical after the effective time of the
merger, Celgene will cause to be sent to each shareholder of record of Signal
as representing the effective time of the merger transmittal materials for use
in exchanging certificates of Signal capital stock for certificates
representing Celgene common stock. The transmittal materials will contain
information and instructions on how to surrender Signal capital stock
certificates for new certificates representing Celgene common stock.
No fractional shares of Celgene common stock will be issued to holders of
Signal common stock; instead, Signal shareholders will receive cash for the
fraction of a share of Celgene common stock they would have otherwise received.
See "The Merger Agreement--Conversion of Shares; Procedures for Exchange of
Certificates; No Fractional Shares."
Until a holder of Signal common stock surrenders his, her or its certificates
representing shares of Signal capital stock, the certificates will, after the
effective time of the merger, represent for all purposes only the right to
receive the Celgene common stock specified in the merger agreement.
SIGNAL SHAREHOLDERS SHOULD NOT SURRENDER THEIR STOCK CERTIFICATES FOR EXCHANGE
UNTIL THEY RECEIVE A TRANSMITTAL FORM.
CONDITIONS TO THE MERGER
Under the merger agreement, the respective obligations of each party to effect
the merger are subject to the satisfaction or waiver of each of the following
conditions:
1. the adoption and approval of the merger agreement and the approval of the
principal terms of the merger by the affirmative vote of the holders of at
least a majority of the voting power of all outstanding shares of Signal
common stock and the affirmative vote of the holders of at least a
majority of the voting power of all outstanding shares of Signal preferred
stock (each voting as a separate class);
2. the number of shares of Signal common stock into which all dissenting
shares are convertible will not constitute in excess of 5% of the
outstanding shares of Signal immediately before the merger;
3. the Signal preferred shareholders must have approved the conversion of
their shares of preferred stock into Signal common stock immediately
before the merger;
55
<PAGE>
4. Celgene must have received affiliate agreements from each of the affiliates
of Signal;
5. Celgene must have obtained a letter from KPMG LLP, Celgene's independent
public accountants, dated as of the closing date of the merger, with
respect to Celgene, and from Ernst & Young LLP, Signal's independent
auditors, with respect to Signal, to the effect that, subject to customary
qualifications, said firms concur with managements' conclusion that the
merger qualifies for pooling-of-interests treatment for financial
reporting purposes in accordance with GAAP;
6. Signal must have terminated or modified any and all agreements with Nippon
Kayaku Co., Ltd. on terms acceptable to Celgene;
7. the absence of any law, judgment, order or proceeding preventing completion
of the merger;
8. all authorizations, permits, consents, orders or approvals of, or
declarations or filings with, any governmental entity or other person or
entity necessary to effect the transactions contemplated by the merger
agreement must have occurred, been filed or been obtained, as the case may
be;
9. each party must have obtained all licenses, franchises, permits,
privileges, immunities, approvals and other authorizations from all
governmental entities, whether by transfer, reissuance, modification or
otherwise, required to be obtained by it in connection with or for the
operation of the business as presently conducted and contemplated in the
merger agreement;
10. the registration statement on Form S-4, of which this proxy
statement/prospectus forms a part, must have been declared effective by
the SEC, and there must not be any stop order or proceedings seeking a
stop order;
11. the other party to the merger agreement must have performed and complied
with each agreement, covenant and obligation required to be performed or
complied with by it under the merger agreement;
12. since December 31, 1999, each party must not have suffered any event,
violation or other matter that would have a material adverse effect on the
business, condition (financial or otherwise), assets, liabilities,
operations, properties or prospects of such party;
13. the representations and warranties must be true and correct in all respects
as of the date of the merger agreement and as of the date of completion of
the merger with the same effect as though such representations and
warranties had been made at and as of such time, other than
representations and warranties that speak as of a specific date or time,
which need only be true and correct in all respects as of such date or
time;
14. each party must have delivered or caused to be delivered to the other party
each of the items required to be delivered in the merger agreement;
15. key Signal employees must have entered into employment agreements with the
surviving corporation; and
16. Celgene must have authorized listing on the Nasdaq National Market the
shares of its common stock to be issued in connection with the merger and
to be issuable upon exercise of converted Signal stock options and
warrants which Celgene will assume at the effective time of the merger.
REPRESENTATIONS AND WARRANTIES
The merger agreement contains various customary representations and warranties
of the parties, including the following representations by Signal:
o organization;
o authority relative to the merger agreement;
o capitalization;
o consents and approvals, no violation of law;
o financial statements;
o absence of undisclosed liabilities;
56
<PAGE>
o absence of certain changes or events; material contracts;
o title to properties; encumbrances;
o intellectual property;
o material contracts;
o litigation;
o no default;
o employee benefit plans; ERISA;
o taxes;
o environmental laws and regulations;
o labor matters;
o FDA matters;
o accounting matters;
o opinion of financial advisor;
o compliance with applicable law;
o brokers;
o affiliate transaction;
o tax matters;
o information in disclosure documents and registration statements; and
o vote required.
The following representations were also made by Celgene and Celgene Acquisition
Corp.:
o organization;
o authority relative to the merger agreement;
o capitalization;
o reports and financial statements;
o compliance with applicable law;
o absence of certain changes or events;
o litigation;
o opinion of financial advisor;
o accounting matters;
o tax matters;
o consents and approvals, no violations;
o brokers; and
o information in disclosure documents and registration statement.
COVENANTS
NON-SOLICITATION. The merger agreement provides that:
o Prior to the effective time of the merger, neither Signal, any of its
affiliates, nor any of the respective directors, officers, employees,
affiliates, agents or representatives of the foregoing (including, without
limitation, any investment banker, attorney or accountant retained by Signal)
will, directly or indirectly, solicit, initiate, facilitate or encourage
(including by way of furnishing or disclosing non-public information) any
inquiries or the making of any proposal with respect to or
57
<PAGE>
which may reasonably be expected to lead to, any merger, consolidation or
other business combination involving Signal or the acquisition of all or any
significant portion of the assets or capital stock of Signal, other than the
merger (any such proposal being referred to as an acquisition transaction)
or negotiate, explore or otherwise engage in discussions with any
corporation, partnership, person, other entity or group (as defined in
Section 13(d)(2) of the Exchange Act) (other than Celgene and its
representatives) in furtherance of such inquiries or with respect to any
acquisition transaction, or endorse any acquisition transaction, or enter
into any agreement, arrangement or understanding with respect to any such
acquisition transaction or which would require it to abandon, terminate or
fail to consummate the merger or any other transaction contemplated by the
merger agreement;
o Signal and its affiliates will immediately cease and cause to be terminated
any existing activities, discussions or negotiations with any person (other
than Celgene and its representatives) conducted heretofore with respect to any
acquisition transaction; and
o Signal will immediately advise Celgene in writing of any such inquiries or
proposals (or indications of a desire to make a proposal) received by (or
indicated to), any such information requested from, or any such negotiations
or discussions sought to be initiated or continued with, any of it, its
affiliates, or any of the respective directors, officers, employees, agents or
representatives of the foregoing, in each case from a corporation,
partnership, person or other entity or group (other than Celgene and its
representatives) with respect to an acquisition transaction, and the terms
thereof, including the identity of such third party, and to update on an
ongoing basis or upon Celgene's request, the status of such inquiry or
proposal, as well as any actions taken or other developments.
CONDUCT OF BUSINESS PENDING THE MERGER. Under the merger agreement, Signal has
agreed that from the date of the merger agreement until the earlier of the
effective time of the merger and the termination of the merger agreement, it
will not, except as agreed to with Celgene:
o conduct its business other than in the ordinary and usual course consistent
with past practice and shall use its reasonable efforts to preserve intact the
present business organization, keep available the services of its present
officers and key employees and preserve the goodwill of those having business
relationships with it;
o amend its charter, by-laws or other organizational documents or split, combine
or reclassify any shares of its outstanding capital stock or declare, set
aside or pay any dividend or other distribution payable in cash, stock or
property or directly or indirectly redeem or otherwise acquire any shares of
its capital stock;
o authorize for issuance, issue or sell or agree to issue or sell any shares of,
or rights to acquire or convert into shares of, its capital stock (whether
through the issuance or granting of options, warrants, commitments,
subscriptions, rights to purchase or otherwise), except for the issuance of
shares of Signal common stock upon the exercise of Signal stock options
outstanding on the date of the merger agreement;
o merge or consolidate with another entity;
o acquire or purchase an equity interest in or a substantial portion of the
assets of another corporation, partnership or other business organization or
otherwise acquire any assets outside the ordinary and usual course of business
and consistent with past practice or otherwise enter into any material
contract, commitment or transaction outside the ordinary and usual course of
business consistent with past practice;
o sell, lease, license, waive, release, transfer, encumber or otherwise dispose
of its material assets,
o incur, assume or prepay any material indebtedness or any other material
liabilities other than in the ordinary course of business consistent with past
practice and other than in connection with borrowing up to $2 million under a
secured line of credit with MMC/GATX Partnership No.1,
58
<PAGE>
o assume, guarantee, endorse or otherwise become liable or responsible (whether
directly, contingently or otherwise) for the obligations of any other person
other than customers, in each case in the ordinary course of business and
consistent with past practice,
o make, extend or modify in any material respect any loans, advances or capital
contributions to, or investments in, any other person,
o authorize or make capital expenditures in excess of the respective amounts set
forth on a schedule to the merger agreement
o permit any insurance policy naming Signal as a beneficiary or a loss payee to
be canceled or terminated other than in the ordinary course of business
o form a subsidiary or enter into any contract, agreement, commitment or
arrangement with respect to any of the foregoing;
o adopt, enter into, terminate or amend (except as required by applicable law)
any Signal employee benefit plan or other arrangement for the current or
future benefit or welfare of any director, officer, or current or former
employee or increase in any manner the compensation or fringe benefits of, or
pay any bonus to, any director, officer or employee (except for normal
increases in compensation in the ordinary course of business consistent with
past practice and accrued and unpaid bonuses in respect of Signal's fiscal
year ended December 31, 1999 that are consistent with past practice and have
been properly accrued and reflected on Signal's books and records) or take any
action to fund or in any other way secure or to accelerate or otherwise remove
restrictions with respect to, the payment of compensation or benefits under
any employee plan, agreement, contract, arrangement or other Signal employee
benefit plan (including Signal stock options);
o take any action with respect to, or make any material change in, its
accounting or tax policies or procedures, except as required by law or to
comply with GAAP; or
o take any action or allow any action to be taken by any of its affiliates which
would jeopardize the treatment of Celgene's merger with Signal as a
pooling-of-interests for accounting purposes or take any action which would
jeopardize qualification of the merger as a reorganization within the meaning
of Section 368(a) of the Internal Revenue Code of 1986, as amended.
SHAREHOLDERS' MEETING. Under the merger agreement, Signal has agreed to call,
give notice of, convene and hold a meeting of its shareholders on a date as
soon as reasonably practicable in accordance with the California General
Corporation Law and the federal securities law for the purpose of considering
and voting upon the adoption and approval of the merger agreement, the approval
of the principal terms of the merger and the approval of conversion of Signal
preferred stock. Subject to its fiduciary duties under applicable law, Signal
has agreed to take all lawful actions to solicit the approval of the merger by
Signal's shareholders.
OTHER COVENANTS. The merger agreement contains other covenants including
covenants relating to:
o preparation and filing of a proxy statement;
o access to information;
o pooling-of-interests accounting;
o coordination and cooperation with respect to tax matters;
o preparing and filing of disclosure documents;
o actions and filings with governmental bodies, agencies, officials or other
authorities and third parties;
o public announcements;
o maintaining books and records;
o filing of a Form S-4 registration statement;
o government authorizations; and
59
<PAGE>
o the listing of the Celgene common stock issued in the merger.
FURTHER ACTION. The merger agreement provides that each of the parties to the
merger agreement will use its best efforts to take all actions and to do all
other things necessary, proper or advisable to:
o consummate and make effective as promptly as practicable the transactions
contemplated by the merger agreement;
o obtain in a timely manner all necessary waivers, consents and approvals;
o effect all necessary registrations and filings; and
o otherwise satisfy or cause to be satisfied all conditions precedent to its
obligations under the merger agreement.
TERMINATION
The merger agreement provides that it may be terminated and the merger may be
abandoned:
o at any time before the closing of the merger, by mutual written consent of
Celgene and Signal;
o at any time before the closing of the merger, by either Celgene or Signal:
o in the event of a material breach of the merger agreement by the
non-terminating party; or
o upon notification to the non-terminating party by the terminating party that
the non-terminating party has failed to satisfy a condition set forth in the
merger agreement or in any related agreement contemplated in the merger
agreement required to be satisfied by such non-terminating party prior to or
at the closing date of the merger;
o at any time after December 31, 2000 by either Celgene or Signal if the merger
has not been consummated by that date. However this right to terminate will
not be available to any party whose failure to fulfill any obligation under
the merger agreement has been the cause of or resulted in the failure of the
merger to occur on or before that date;
o at any time by either Celgene or Signal if the Signal shareholders do not
approve the merger; and
o at any time before the closing of the merger by Celgene:
o if the Signal board of directors withdraws or materially amends its
recommendation to approve the merger or recommends another acquisition
proposal; or
o Signal breaches its agreement not to solicit, encourage, or participate in
discussions or negotiations, with respect to acquisition proposals with
parties other than Celgene.
In the event of the termination of the merger agreement, the merger agreement
provides that it will become void and there will be no liability on the part of
any party except that:
(a) if Signal's board withdraws its recommendation that shareholders vote for
the merger, or solicits or recommends another acquisition transaction with
a third party, then Signal will pay to Celgene $10 million dollars
immediately;
(b) if Signal breaches a representation or warranty or breaches a covenant,
then Signal will pay to Celgene $5 million immediately plus an additional
$5 million if Signal signs or completes another acquisition transaction
within one year;
(c) if the merger is not completed by December 31, 2000 and Celgene terminates
the merger agreement, or if Signal shareholders do not approve the merger,
then Signal will pay to Celgene $10 million if Signal signs or completes
another acquisition transaction with a third party within one year; and
(d) if Celgene breaches a representation or warranty or breaches a covenant,
then Celgene will pay to Signal $5 million immediately.
60
<PAGE>
In addition, Celgene's option to purchase shares of Signal common stock and
stock appreciation rights becomes immediately exercisable for one year with
respect to subparagraph (a) and becomes exercisable only if Signal signs or
completes another acquisition transaction within one year with respect to
subparagraphs (b) and (c).
AMENDMENT; WAIVER
The merger agreement may be amended at any time in a writing signed by each of
the parties. Once Signal shareholders have approved the merger, no amendment
that requires further approval by the Signal shareholders may be made without
such further approval.
At any time before the effective time of the merger, a party may in a document
signed by each party:
o extend the time for performance of any of the obligations or other acts of the
other parties;
o waive any inaccuracies in the representations and warranties of the other
parties contained in the merger agreement or in any document delivered
pursuant to the merger agreement; or
o waive compliance, where permissible, with any of the agreements or conditions
contained in the merger agreement.
FEES AND EXPENSES
Expenses related to the exchange of the shares of Signal common stock in the
merger will be paid by Signal. Expenses incurred in connection with the filing
fee for the registration statement and the printing of the proxy
statement/prospectus and the registration statement will be paid by Celgene.
Otherwise, all fees and expenses incurred in connection with the merger
agreement and the transactions contemplated thereby will be paid by the party
incurring the expenses, whether or not the merger is consummated.
VOTING AND PROXY AGREEMENT
In connection with the merger agreement, Celgene entered into individual voting
and proxy agreements with certain shareholders of Signal. These shareholders
combined represented approximately 55% of Signal common stock and 79% of Signal
preferred stock as of the record date.
The shareholders signing the voting and proxy agreement, among other things,
granted to Celgene an irrevocable proxy to vote their shares of Signal capital
stock in favor of the adoption and approval of the merger agreement, the
conversion of Signal preferred stock to Signal common stock and approval of the
principal terms of the merger and any other transactions contemplated by the
merger agreement. The voting and proxy agreement provides that it will
terminate upon the effective date of the merger and, in any event, any proxy
executed pursuant to the voting and proxy agreement will automatically
terminate upon termination of the merger agreement.
OPTION AGREEMENT
In connection with the merger agreement, Signal entered into an option
agreement with Celgene in which Signal granted Celgene an option to purchase
2,000,000 shares of Signal common stock and stock appreciation rights with
respect to 3,000,000 shares of Signal common stock for a cash exercise price of
$6.60 per share, subject to adjustment as described in the option agreement.
The option agreement provides that Celgene can exercise the option to purchase
all or part of the 2,000,000 shares as follows:
o if the merger agreement is terminated by Celgene because Signal's board of
directors withdraws or amends its recommendation or approval of the merger or
the merger agreement or makes a recommendation with respect to another
acquisition transaction, Celgene can exercise the option at any time during
the one year period beginning on the date of such termination; or
o if the merger agreement is terminated by Celgene because Signal has materially
breached any of its representations and warranties or covenants or agreements
under the merger agreement or the merger is not consummated before December
31, 2000, or by either Celgene or Signal because the
61
<PAGE>
approval of Signal's shareholders is not obtained and Signal has directly or
indirectly entered into a definitive agreement for or has consummated an
acquisition transaction within one year of such termination, then Celgene
can exercise the option from the date on which Celgene receives notice of
the event triggering its right to exercise the option to the date that is
three business days after the acquisition transaction occurs.
Under the option agreement, if Celgene exercises the option and then sells or
otherwise disposes of the shares, Signal will pay Celgene stock appreciation
rights in the form of an amount in cash equal to 3,000,000 multiplied by the
excess, if any, of the price per share Celgene receives in the sale or
disposition of the shares over $6.60.
The option agreement provides that it will terminate upon the effective date of
the merger or upon termination of the merger agreement other than as described
above. However, if Celgene is prohibited from exercising the option by actions
taken by the Federal Trade Commission or the Department of Justice in
connection with the Hart-Scott-Rodino Antitrust Improvements Act, the option
agreement will not terminate until the earlier of 30 days from the date such
prohibition is removed or six months after the date Celgene's right to exercise
the option would otherwise have terminated.
CONFIDENTIALITY AGREEMENT
Signal and Celgene entered into a confidentiality agreement on May 25, 2000
that provides for, among other things, the confidential treatment of the
discussions regarding the merger and the exchange of confidential information
concerning Signal and Celgene. Signal and Celgene subsequently entered into a
letter of intent, dated June 22, 2000, that confirmed the obligations contained
in the confidentiality agreement.
AGREEMENT OF SIGNAL AFFILIATES
Rule 145 under the Securities Act of 1933 regulates the disposition of
securities of "affiliates" of Signal in connection with the merger. At least 10
days before the effective date of the merger, Signal will deliver to Celgene a
list identifying all persons who are or may be deemed to be, at the time of the
Signal meeting, "affiliates" of Signal for purposes of Rule 145 under the
Securities Act. This list may be further updated before the effective time of
the merger. Signal has agreed to use its reasonable best efforts to cause each
person who is identified as an affiliate in this list to deliver to Celgene,
before the effective time of the merger, a written affiliate agreement. Under
these affiliate agreements, each affiliate will represent that he, she or it
has been advised that the affiliate may not sell, transfer or otherwise dispose
of Celgene common stock issued to the affiliate in the merger unless the sale,
transfer or other disposition:
(1) has been registered under the Securities Act;
(2) complies with the requirements of Rule 145 under the Securities Act;
(3) in the opinion of counsel reasonably acceptable to Celgene, is otherwise
exempt from registration under the Securities Act; or
(4) based on advice to the affiliate from the SEC, will not be the subject of
SEC action (and the staff of the SEC would not recommend any SEC action)
with respect to such sale, transfer or other disposition.
In addition, under these affiliate agreements each affiliate has further
represented that he, she or it will not sell, transfer or otherwise dispose of
any Celgene common stock received in the merger until after the publication of
financial statements reflecting the combined operating results of Signal and
Celgene for a period of not less than 30 days after the merger.
62
<PAGE>
INFORMATION REGARDING CELGENE
OVERVIEW OF CELGENE'S BUSINESS
Celgene Corporation, a Delaware Corporation incorporated in 1986, is an
independent biopharmaceutical company engaged primarily in the discovery,
development and commercialization of orally administered, small molecule drugs
for the treatment of cancer and immunological diseases. The key mechanisms of
action for Celgene's drugs are modulation of the overproduction of TNF-- and
inhibition of angiogenesis. Additionally, Celgene's chiral chemistry program
develops chirally pure versions of existing compounds for both pharmaceutical
and agrochemical markets. Celgene had total revenues of $26.2 million in 1999.
The FDA approved Celgene's first commercialized product, THALOMID, for sale in
the United States in July 1998. The approved indication for THALOMID is for the
treatment of acute cutaneous manifestations of moderate to severe ENL and as
maintenance therapy for prevention and suppression of cutaneous manifestation
recurrences. ENL is an inflammatory complication of leprosy. Celgene sells this
product in the United States through our 80 person sales and commercialization
organization.
Celgene's pipeline of new drugs is highlighted by two classes of orally
administered therapeutic agents: IMiDs and SelCIDs. The IMiD class is based on
the activity of THALOMID in modulating the overproduction of TNF-- and
inhibiting angiogenesis. In preclinical studies, Celgene's IMiDs have
demonstrated a higher level of activity than thalidomide. In animal models,
these compounds did not cause birth defects or sedation. Celgene completed
Phase I trials in the fourth quarter of 1999 for each of its lead IMiDs. The
results, announced in February, 2000, found that both IMiDs were well-tolerated
in healthy human volunteers.
The second class of compounds, SelCIDs, is designed to modulate TNF-- by
selectively inhibiting PDE 4, a key cell-signaling enzyme. Celgene's SelCIDs
are targeted to control inflammation without broad suppression of the immune
system. Phase I trials demonstrated Celgene's lead SelCID compound, CDC 801,
was safe and well tolerated. There were no signs of nausea or vomiting, common
side effects of known PDE 4 inhibitors. CDC 801 is being tested in a Phase II
pilot, placebo controlled trial for the treatment of Crohn's disease. This
trial is expected to be completed in the first half of 2000.
In the third quarter of 1999, Celgene announced favorable clinical results of
two Phase III pivotal efficacy trials for d-methylphenidate or d-MPH, a
chirally pure version of dl-methylphenidate. dl-methylphenidate is commonly
marketed as Ritalin(Reg. TM). d-methylphenidate is designed to treat the
symptoms of Attention Deficit Disorder, or ADD and Attention Deficit
Hyperactivity Disorder, or ADHD. Celgene expects that the final 12-month safety
trial will be completed in the first half of 2000 and Celgene plans to submit
an NDA to the FDA in the second half of 2000.
63
<PAGE>
CELGENE PRODUCT OVERVIEW
The target disease states for, and clinical trial status of, THALOMID and
Celgene's products and compounds currently under development are outlined in
the following table:
<TABLE>
<CAPTION>
PRODUCT INDICATION/INTENDED USE STATUS
---------- ------------------------------------------ ----------------------------------------
<S> <C> <C>
THALOMID Erythema Nodosum Leprosum (ENL) Approved
Multiple Myeloma Phase II trial data published and
presented at the American Society of
Hematology. Phase III pivotal trial
protocol in preparation.
Myelodysplastic Syndrome Phase II trial ongoing and initial data
presented at the American Society of
Hematology.
Leukemia Multiple Phase II trials underway.
Glioblastoma(1) Initial Phase II trials completed.
Other Phase II trials underway.
Liver Cancer Phase II trial underway.
Kidney Cancer Phase II trial underway.
Prostate Cancer(1) Initial Phase II trial completed.
Other Phase II trials underway.
Kaposi's Sarcoma(1) Phase II trial completed.
Cancer Cachexia Initial Phase II trial completed.
Sarcoidosis Initial Phase II trial completed.
Other Phase II trials underway.
Scleroderma Initial Phase II trial completed.
Recurrent Aphthous Stomatitis Phase III pivotal trial completed in
AIDS patients.
Crohn's disease Phase II trial completed and initial
data published.
Ulcerative Colitis Phase II trial underway.
Colon and Rectal Cancer(1) Phase II trial underway.
SelCIDs
CDC 801 Crohn's disease Phase II trial underway.
CC 7085 Crohn's disease Preclinical toxicology.
IMiDs
CDC 501 Blood cancers Initial Phase I trial completed.
CC 4047 Blood cancers Initial Phase I trial completed.
d-MPH Attention Deficit Disorder and Attention Phase III pivotal efficacy trials
Deficit Hyperactivity Disorder completed. Phase III safety trials
ongoing.
</TABLE>
----------
(1) At least one study supported by the National Cancer Institute
64
<PAGE>
OVERVIEW OF ONCOLOGY AND IMMUNOLOGY
Celgene's clinical and commercial focus is to produce a portfolio of highly
potent, selective drugs that have the potential to regulate the overproduction
of TNF-- and are anti-angiogenic.
TNF--, produced primarily by certain white blood cells, is one of a number of
proteins called cytokines that act as chemical messengers throughout the body
to regulate many aspects of the immune system. TNF-- is essential to mounting
an inflammatory response, which is the normal immune system reaction to
infection or injury that rids the body of foreign agents and promotes tissue
repair. However, chronic or excessive production of TNF-- has been implicated
in a number of acute and chronic inflammatory diseases. These disease states,
which are inadequately treated with existing therapies, include non-insulin
dependent diabetes, Alzheimer's disease, congestive heart failure, inflammatory
bowel disease, rheumatoid arthritis, cancer cachexia, Parkinson's disease,
multiple sclerosis and lupus.
Traditional therapies for these disease states include anti-inflammatory drugs
and immunosuppressive agents. These therapies often fail to achieve significant
clinical benefits and can cause serious side effects such as severe drops in
certain blood component counts, liver toxicity, osteoporosis, teratogenicity
and various endocrine abnormalities. Celgene believes that selective control
and reduction of TNF-- represents a promising new strategy for treating chronic
inflammatory diseases. In pursuit of this strategy, two broad classes of
compounds have been investigated: proteins and small synthetic molecules.
Anti-TNF-- proteins, including anti-TNF-- antibodies and TNF-- soluble
receptors, have demonstrated efficacy in the treatment of such chronic
inflammatory diseases as rheumatoid arthritis and Crohn's disease. While
initial doses of these anti-TNF-- proteins have been well tolerated and have
reduced disease activity in clinical studies, these proteins exhibit certain
shortcomings linked to their nature as proteins. First, they are large
molecules that must currently be injected or infused. Second, the period of
efficacy of a given dosage of a protein-based drug can decline with repeated
administration, rendering protein-based drugs more suitable for treatment of
acute pathological conditions rather than chronic disease states. This
limitation is due in part to increasing production by a patient's immune system
of antibodies that neutralize administered proteins.
There are a number of large molecule, protein-based therapeutic products under
development by other companies for TNF-- modulation. One product has received
approval from the FDA for the treatment of Crohn's disease and rheumatoid
arthritis, and another has received approval for rheumatoid arthritis.
Synthetic small molecule drugs, however, if successfully developed, may prove
to be preferable in the treatment of chronic inflammatory diseases, due to
factors such as oral dosing, lower cost of therapy and avoidance of undesirable
immune response that results in adverse side effects and reduced efficacy.
Celgene believes that our small molecule immunotherapeutic compounds have the
potential to selectively modulate TNF-- while affording these benefits.
In addition, research has indicated that Celgene's small molecule drug,
THALOMID, is anti-angiogenic. Angiogenesis is the fundamental biological
process by which new blood vessels are formed. Cancer cells require oxygen and
nutrients and initiate a biochemical mechanism that stimulates angiogenesis
which, in turn, provides the cancerous cells with the blood supply that they
need to grow. Inhibition of angiogenesis could adversely affect the graft of a
tumor and be a potential anti-cancer therapy. This therapy could be also used
in conjunction with radiation or more traditional chemotherapeutic agents.
Currently, a number of anti-angiogenic agents are being developed by a number
of companies. However, Celgene believes that THALOMID is the only product on
the market that has a direct anti-angiogenic effect. Moreover, preliminary
research suggests that Celgene's two new classes of small molecule
immunotherapeutic compounds -- one of which is based on thalidomide's activity
-- may be anti-angiogenic.
65
<PAGE>
THALOMID
In July 1998, Celgene received FDA approval to market THALOMID for treatment of
ENL and the product was launched in late September 1998. THALOMID is the first
drug approved under a special "Restricted Distribution for Safety" regulation
and is distributed through our S.T.E.P.S. program. Celgene's program is
designed to support the safe and appropriate use of THALOMID and has been made
a part of the approved labeling for THALOMID. Celgene is currently developing
THALOMID for the treatment of a variety of serious disease states for which
Celgene believes there are currently no adequate approved therapies. Celgene's
current intent is to seek FDA approval for THALOMID for at least one cancer of
the blood, such as multiple myeloma, one solid tumor cancer and an AIDS-related
indication.
The immunological and anti-angiogenic properties of THALOMID are being
investigated as the basis for treatment of a variety of oncological diseases,
and a number of trials are ongoing, some in cooperation with the NCI, to
evaluate the potential of the drug in cancer. Key investigations include
multiple myeloma, which was the subject of an article and editorial in the
November 18, 1999 issue of The New England Journal of Medicine, Volume 341,
Number 21, and glioblastoma multiforme, for which initial data were presented
in November 1999 at the Chemotherapy Foundation Symposium XVII in New York.
Additional presentations have been made at the 41st ASH Symposium in December
1999.
Celgene's work with thalidomide was originally based on a scientific
collaboration with The Rockefeller University's Laboratory of Cellular
Physiology and Immunology. In the early 1990s, researchers at The Rockefeller
University discovered that thalidomide is a selective modulator of TNF-- and,
therefore, could be of potential benefit in many serious immune-related disease
states, including cachexia and other AIDS-related conditions. Celgene believes
that, in serious and debilitating disease states, the risk of birth defects and
other potential side effects related to thalidomide is outweighed by the drug's
potential clinical benefits. The Rockefeller University has granted to Celgene
certain exclusive rights and licenses to manufacture, use and sell thalidomide
for treating the toxicity associated with high concentrations of TNF-- in
septic shock, cachexia and HIV-related disease states. Researchers at the
Children's Medical Center, which is affiliated with Harvard University,
discovered that thalidomide is anti-angiogenic and filed patents on this
utility. These patents, some of which have not issued in the United States, are
exclusively licensed to EntreMed, Inc. Celgene was granted an exclusive
sublicense to all of EntreMed's thalidomide patents in December 1998.
As a result of Celgene's own applications and designations acquired from
EntreMed, we now have Orphan Drug designations from the FDA for THALOMID
covering: primary brain malignancies; HIV associated wasting syndrome; severe
Recurrent Aphthous Stomatitis, or RAS, in severely, terminally
immunocompromised patients; clinical manifestations of mycobacterial infections
caused by Mycobacterium tuberculosis and non-tuberculous mycobacteria; ENL;
multiple myeloma; Crohn's disease and Kaposi's sarcoma. If the FDA approves any
of these indications for THALOMID, Celgene will be granted a seven-year period
of exclusivity during which time the FDA is prohibited, except under some
conditions, from approving another version of thalidomide for the approved
indication.
Thalidomide was developed initially as a sedative, and was also widely
prescribed by doctors in Europe in the late 1950s and early 1960s to pregnant
women for relief of morning sickness. After severe birth defects were later
observed with use of the drug, it was virtually removed from the world market.
Thalidomide was later discovered to have therapeutic effects in the treatment
of ENL, a disease that is rare in the United States but common in many parts of
the developing world. Although the FDA had never approved the marketing of
thalidomide, the U.S. Public Health Service has dispensed the drug for the
treatment of ENL for the past 25 years. Celgene notes that thalidomide's
history may limit market acceptance of THALOMID.
66
<PAGE>
ONCOLOGY
Cancer tissue has many blood vessels. This observation has led to the
realization that growth of blood vessels is essential for tumor growth,
invasion and metastasis. Specifically, developing solid primary tumors are
believed to remain clinically insignificant unless they can arrange to obtain
nourishment from their host. Biochemically, an invasive tumor acts by altering
a complex system of factors causing the formation of new blood vessels from
existing ones. Almost three decades ago, it was proposed that this tumor
angiogenesis could be a target of cancer therapy. Anti-angiogenic compounds
were believed to be able to work by reducing or halting remaining tumor growth
and could also be used in conjunction with more traditional chemotherapeutic
agents. Thalidomide was discovered to be anti-angiogenic at the Children's
Medical Center in Boston.
Celgene is currently working with the NCI and a number of clinical
investigators to assess the potential of THALOMID in the treatment of various
cancers. In the first 12 months after THALOMID was commercially launched in the
United States, approximately 70% of the product's prescriptions were in
oncology, as reported by prescribers on our S.T.E.P.S. program enrollment
surveys.
Multiple Myeloma. Multiple myeloma is a malignant proliferation of plasma cells
and plasmacytoid cells. It is the second most common blood borne malignancy and
is invariably fatal. According to the Leukemia Society of America, multiple
myeloma accounts for about 13% of blood borne disease and affects approximately
40,000 people in the United States. The incidence of this disease is
approximately four per 100,000, and approximately 14,400 cases are reported
annually with approximately 11,000 deaths associated with the disease every
year.
Clinical research published in the November 18, 1999 edition of The New England
Journal of Medicine, Volume 341, Number 21, reported results of a study
conducted at the University of Arkansas on the use of THALOMID in 84 multiple
myeloma patients with advanced stage disease and histories of extensive prior
chemotherapeutic interventions, radiation treatments and multiple bone marrow
transplants. This Phase II study found that 32% of the patients had a partial
response and 10% of the patients had a complete or nearly complete remission
based on decreases in paraprotein, the myeloma protein in serum, or Bence Jones
protein in urine, important markers of the progression of the disease. Clinical
data from 180 patients in this study was presented at the December 1999 ASH
meeting by researchers at the University of Arkansas who reported that 36% of
the patients achieved a 25% reduction in tumor burden. Eighteen patients
achieved paraprotein response of at least 90%, 14 patients achieved at least a
75% paraprotein response, 16 patients achieved at least a 50% paraprotein
response and four patients achieved a complete response. Side effects reported
by the investigators were constipation, weakness/fatigue and somnolence. A
number of additional presentations and posters presented confirmatory evidence
at the ASH meeting regarding the efficacy of THALOMID. In September 1999,
similar findings were reported at the International Myeloma Workshop in
Stockholm, Sweden on trials conducted at Cedars-Sinai Medical Center, Los
Angeles. In this Phase II, open label study of 20 relapsing or progressive
multiple myeloma patients utilizing low-dose THALOMID administered over an
eight-week trial period, 30% of patients experienced a greater than 50%
reduction of tumor burden. Further data confirming earlier trials was presented
at the Chemotherapy Foundation Symposium XVII in November 1999 in New York on
15 refractory patients treated at Saint Vincent's Medical Center, New York in
which there was observed a 67% overall response with THALOMID alone or in
combination with chemotherapy.
In the 12 months following the launch of THALOMID, as reported by prescribers
on Celgene's S.T.E.P.S. program enrollment surveys, approximately 30% of total
usage was in multiple myeloma. Based on this information and on the growing
volume of clinical trial data, Celgene's plan is to develop a
regulatory/clinical program based on what has been learned from these studies
and file a supplemental NDA for THALOMID for the treatment of multiple myeloma.
Glioblastoma Multiforme. Glioblastomas are the most common brain tumors and
account for 50% of all gliomas, an aggressive form of brain cancer. The usual
treatment of high-grade gliomas is surgical removal followed by radiation
therapy.
67
<PAGE>
Studies at the New York University School of Medicine and at the Dana Farber
Institute have demonstrated the potential for thalidomide as a treatment for
glioblastoma multiforme. Phase I/II data from the New York University trial
were presented in November 1999 at the Chemotherapy Foundation Symposium XVII
in New York. THALOMID in combination with carboplatin was administered to 71
patients with recurrent glioblastoma multiforme. At the maximum tolerated dose
of THALOMID, 53 of the patients were evaluated for efficacy, with 70%
experiencing responses, two with partial responses, 35 with disease
stabilization. The trial's most commonly reported side effects were
constipation and drowsiness. A Phase III trial will assess whether patients
benefited because of the higher carboplatin doses or if there was any synergy
between thalidomide and carboplatin. Additionally, a Phase II trial has been
initiated in collaboration with the NCI's Radiation Therapy Oncology Group to
investigate the effect of THALOMID and radiation as co-therapy for the
treatment of glioblastoma.
Other Oncology Indications. In addition to glioblastoma multiforme, the NCI is
currently investigating THALOMID in clinical trials on prostate, colorectal,
head and neck and non-small cell lung cancer. Other trials such as those in
liver cancer, kidney cancer and leukemia are being run by key investigators.
Recently, researchers in London reported that continuous, low-dose thalidomide
is useful as an agent in patients with advanced cancers as a palliative. That
study showed that three of 18 patients with kidney cancer also showed a
response benefit and three patients had stabilization of their disease for
periods of up to six months. In addition, four of 17 melanoma patients
experienced stable disease for up to six months. According to a report in the
medical journal Lancet, follow-up studies using higher doses have also shown
"encouraging results" in patients with kidney cancer. These researchers are now
testing thalidomide in combination with interferon or interleukin 2 in this
group. Similarly, the NCI reported trial results in which 63 patients were
treated with either a low dose or a high dose of thalidomide. Approximately 53%
of the low dose and 68% of the high dose patients had declines in prostate
specific antigen, a recognized marker for prostate cancer. If successful, these
studies would establish proof of principle, leading to the design of additional
trials, including pivotal studies.
IMMUNOLOGY
THALOMID has been shown to impact the immune system both in vitro and in vivo.
Examples of such biological activities include the inhibition of TNF--,
stimulation of the anti-inflammatory cytokine IL-10 and activation of T-cell
function. These types of activities could prove to have therapeutic benefit in
a variety of inflammatory, infectious and autoimmune diseases. The two key
areas of investigation at present involve inflammatory bowel disease and
serious complications associated with HIV/AIDS. In addition, other areas of
investigation include sarcoidosis, an inflammation of body tissue which often
attacks the lungs and lymph nodes, and scleroderma, a chronic tissue disorder.
Erythema Nodosum Leprosum. ENL is a complication of leprosy, a chronic
bacterial disease. Although the disease is relatively rare in the United
States, leprosy afflicts millions worldwide. ENL occurs in about 30% of leprosy
patients and is characterized by cutaneous lesions, acute inflammation, fever
and anorexia. On July 16, 1998, Celgene received approval from the FDA to
market THALOMID for the treatment of ENL.
Inflammatory Bowel Disease. According to the Crohn's and Colitis Foundation of
America, there are approximately one million Americans with active inflammatory
bowel disease. Inflammatory bowel disease is characterized by serious chronic
inflammation of the wall or any part of the gastrointestinal tract and results
in pain, bloating and diarrhea. In addition, the chronic inflammation may
result in abscesses and fistula formation. The most serious form of
inflammatory bowel disease is known as Crohn's disease with an estimated 70,000
to 125,000 U.S. patients diagnosed with active moderate to severe manifestation
of the disease.
A Phase II pilot study using THALOMID in patients with severe Crohn's disease
has been concluded at the Cedars-Sinai Medical Center, Los Angeles, and
reported in the journal Gastroenterology. About 70% of the patients suffering
from moderate to severe Crohn's disease who completed at least
68
<PAGE>
five weeks of the 12-week trial demonstrated a response when treated with low
dose THALOMID, with 20% of these patients experiencing remission. All patients
were able to reduce their steroid regimen by at least 50%, with 44% of patients
discontinuing steroids. Data from this trial suggests that THALOMID may provide
clinical benefit and potentially reduce the need for steroid treatment. This
combination of effects could mean improvement over current therapeutic options.
A similar Phase II pilot study has been initiated at Cedars-Sinai Medical
Center using THALOMID for chronically active ulcerative colitis, which is
another form of inflammatory bowel disease. Estimates of the prevalence of
ulcerative colitis in the United States generally range between 250,000 and
500,000. Recent preliminary data has shown that eight of 11 patients with
intractable bowel disease benefited from THALOMID.
HIV/AIDS. Recurrent Aphthous Stomatitis, or RAS, is a complication of AIDS
characterized by lesions of the oral cavity, esophagus and gastrointestinal
tract and may interfere with normal eating. Celgene believes RAS currently
afflicts an estimated 5,000 AIDS patients in the United States. Positive
results have been reported in a study conducted by the AIDS Clinical Trials
Group of the National Institutes of Health using a formulation of thalidomide
manufactured by a third party. In mid-1997, Celgene began a pivotal clinical
trial involving 84 patients for the evaluation of THALOMID in the treatment of
RAS, using the same principal investigator as the AIDS Clinical Trials Group
study. Celgene will be analyzing this clinical trial data in 2000 with a view
toward the possibility of a supplemental NDA submission to the FDA.
S.T.E.P.S. PROGRAM
Working with the FDA and other governmental agencies as well as certain
advocacy groups, Celgene designed and implemented its S.T.E.P.S. program, the
objective of which is the safe and appropriate use of THALOMID. This
proprietary program includes comprehensive physician, pharmacist and patient
education. Female patients are required to use contraception and are given
pregnancy tests regularly. All patients are also subject to other requirements,
including informed consent and participation in a confidential outcomes
registry managed on Celgene's behalf by an academic epidemiology research
group. Physicians are also required to comply with the educational,
contraception counseling, informed consent and pregnancy testing and other
elements of the program. Dispensing pharmacists are required to confirm that
the physician is a registered participant in the program, and that the patient
has signed an informed consent. Automatic refills are not permitted under the
program and each prescription may not exceed four weeks dosing. A new
prescription is required each month.
SALES AND COMMERCIALIZATION
Celgene has established an organization of approximately 80 persons to sell and
commercialize THALOMID. These individuals have considerable experience in the
pharmaceutical industry and many have experience with oncological and
immunological products. Celgene expects to expand its THALOMID sales and
commercialization group to support products it develops to treat oncological
and immunological diseases. Celgene intends to market and sell the products it
develops for indications with accessible patient populations. For drugs with
indications with larger patient populations, Celgene anticipates partnering
with other pharmaceutical companies. In addition, Celgene is positioned to
accelerate the expansion of these sales resources as appropriate to take
advantage of product in-licensing and product acquistion opportunities. Celgene
intends to establish commercial relationships with selected companies in other
countries to market THALOMID.
MANUFACTURING
THALOMID is formulated and encapsulated for Celgene by Penn Pharmaceuticals
Ltd. of Great Britain in an FDA approved facility devoted exclusively to the
production of THALOMID capsules. Both the bulk manufacturing facility that
produces the drug substance for THALOMID and the Penn facility have been
certified as cGMP compliant. In certain instances, Celgene may be required to
make substantial capital expenditures to access additional manufacturing
capacity. In addition,
69
<PAGE>
Celgene has established a contract with another cGMP certified bulk drug
substance supplier for THALOMID that will begin in 2001 once the regulatory
process is completed. Celgene is also actively seeking an alternate
manufacturer to provide additional capacity for the formulation and
encapsulation of THALOMID and expects that this will be concluded in 2000.
IMIDS
Celgene has designed and synthesized a number of novel structural analogues of
thalidomide called IMiDs which have been demonstrated in in vitro tests to be
substantially more potent than thalidomide. There can be no assurance, however,
that the same effect can be duplicated in humans. Animal models have suggested
that our IMiDs do not cause the birth defects associated with thalidomide.
Research on these compounds has identified two clinical trial candidates and
each has completed a Phase I trial. Research continues on follow-on compounds
with enhanced immunological and anti-angiogenic activity. IMiDs may have
potential for treating conditions where there is a deficiency in T-cell
activity, such as viral diseases including HIV-related diseases, or for
enhancing potential IL-12 mediated anti-tumor activities. In preclinical
studies, Celgene's lead IMiD compound has been shown to inhibit interleukins
1-beta, 6 and 12 while stimulating the production of interleukins 10 and 2 as
well as interferon gamma. The activity of T-cells is enhanced by the compound
up to 1,000 times more than with thalidomide. Celgene expects to advance its
lead IMiD, CDC 501, into a Phase II pilot trial in a blood cancer during 2000.
The U.S. Patent and Trademark Office has issued composition of matter and use
patents to Celgene relating to its IMiDs.
SELCIDS
Celgene has designed, synthesized and tested a large number of SelCIDs. These
compounds have demonstrated the ability to be highly specific inhibitors of
TNF-- overproduction in in vitro bioassays of human cells. SelCIDs appear to
have a specific inhibitory effect on PDE 4, which is linked to the
overproduction of TNF--. Studies have determined that many of the SelCIDs
decrease synthesis of TNF-- through selective inhibition of PDE 4. Preclinical
and animal tests have shown this class of compounds to be up to 10,000 times
more active with a longer half-life than THALOMID. Celgene believes that
control of TNF-- at its source, versus simple removal of circulating levels of
the cytokine, may facilitate more effective therapy without immune suppression.
There can be no assurance, however, that the same effect can be duplicated in
humans.
Celgene's lead SelCID, CDC 801, was found to be well tolerated in two Phase I
trials completed in 1999 in the United Kingdom. A Phase II pilot trial for this
compound in Crohn's disease commenced in 1999 at the Cedars-Sinai Medical
Center and results are expected in the first half of 2000. In addition, Celgene
expects to initiate a Phase II pilot trial for CDC 801 in a blood cancer during
2000. Other SelCIDs have been identified and the most advanced of these is
undergoing toxicological evaluation in preparation for the initiation of Phase
I trials. Unlike many therapeutics which inhibit PDE 4, SelCIDs have not shown
any evidence of acute nausea and vomiting in patients. The U.S. Patent and
Trademark Office has issued to Celgene composition of matter and use patents
relating to its SelCIDs.
CHIRAL CHEMISTRY
Many human pharmaceuticals and agrochemicals exist in two different
three-dimensional configurations that are identical in chemical structure but
are mirror images of each other. These conformations, known as enantiomers, or
isomers, generally interact differently with biological targets. In clinical
applications, one isomer may result in the desired therapeutic effect by
stimulating or inhibiting a targeted biological function, while the other
isomer may be inactive or cause undesirable side effects. In contrast to
racemic compositions which contain both isomers, the use of chirally pure
pharmaceuticals can result in significant clinical benefits such as reduced
toxicity and increased efficacy. In agrochemical applications, the use of
chirally pure chemicals can result in a substantially reduced volume of product
required to achieve the desired benefit, thereby potentially lowering
manufacturing costs and reducing the environmental burden as compared with
racemic chemicals.
70
<PAGE>
Celgene's biocatalytic process enables the efficient production of chirally
pure compounds. This patented process is based primarily on the use of enzymes
called aminotransaminases, which are optimized by Celgene through a variety of
techniques including genetic engineering. These enzymes catalyze the production
of only the desired stereoisomer of a chiral compound and can be used in
conventional chemical synthesis reactors at room temperature.
Celgene's biocatalytic process for producing chirally pure compounds differs
from the more common approach of producing racemic mixtures followed by
separation of the desired stereoisomer through resolution techniques such as
crystallization or chromatography. These traditional approaches to producing
chirally pure compounds can be cumbersome, result in low yields, use
substantial amounts of raw materials and involve the disposition of waste
product. Traditional approaches also are generally less economical than
Celgene's process. Celgene believes that its biocatalytic process can be
applied to the manufacture of a wide variety of organic chemicals.
Celgene believes there is a significant incremental opportunity in developing
selected, chirally pure versions of approved drugs currently sold in racemic
form. Compounds that have been approved and marketed have a significant body of
information regarding their safety and efficacy and consequently:
o the cost and duration of preclinical evaluations and clinical trials may be
reduced if reference may be made to data used in the course of obtaining
regulatory approval for the racemic parent compound;
o the risk of not obtaining regulatory approval may be reduced; and
o marketing risks may also be reduced due to the established market for the
parent compound.
Celgene has made significant progress over the past year in the development of
d-methylphenidate, the chirally pure version of Ritalin. Celgene has also made
significant progress in the development and production of chirally pure
agrochemicals. Celgene believes that the agrochemical market presents a
substantial opportunity because many agrochemicals produced in racemic form
could be manufactured in chirally pure form.
D-MPH
Celgene has completed two pivotal Phase III efficacy trials for its chirally
pure version of Ritalin. These trials found that d-methylphenidate met all
efficacy parameters for controlling symptoms of ADD and ADHD in school-age
children. Drugs containing dl-methylphenidate such as Ritalin have been used
for decades for the treatment of ADD and ADHD. Celgene believes that one
million children in the United States were treated with dl-methylphenidate and
other psychostimulants in 1998. Total U.S. sales in 1998 of drugs used to treat
the symptoms of ADD and ADHD were approximately $500 million.
More than 200 children participated in our pivotal trials. Both multi-center
trials compared d-methylphenidate to placebo; the second trial directly
compared the efficacy of both d-methylphenidate and dl-methylphenidate to
placebo. As compared to placebo, d-methylphenidate demonstrated a statistically
significant longer duration of action than dl-methylphenidate.
d-methylphenidate controlled the symptoms of ADD and ADHD at all times measured
in the study while dl-methylphenidate did not control the symptoms at the last
measurement. In both trials, behavioral and objective measures were examined.
d-methylphenidate had favorable scores over dl-methylphenidate in all
parameters measured. The results of the primary efficacy analysis indicated
that d-methylphenidate was significantly more effective than placebo as
evaluated by a behavioral scale, signifying an improvement in the clinical
status of the children. The results of the second trial confirmed the drug's
efficacy and indicated a significantly longer duration of action for
d-methylphenidate compared to dl-methlyphenidate as measured by a behavioral
scale. The Phase III safety trial is scheduled for completion in the first
quarter of 2000 and an NDA submission is anticipated later in the year.
Clinical trials on a pulsed release formulation are planned to commence in the
first half of 2000.
71
<PAGE>
On April 26, 2000 Celgene announced that it had entered into an agreement with
Novartis Pharma AG wherein Celgene granted to Novartis an exclusive worldwide
license (excluding Canada) for the development and marketing of
d-methylphenidate. Celgene also granted rights to all its related intellectual
property and patents, including new formulations of the currently marketed
Ritalin. Celgene received an upfront payment of $10 million in July 2000 and is
entitled to receive substantial milestone payments in addition to royalties on
the entire family of Ritalin drugs. The agreement was subject to regulatory
approval in the United States under the Hart-Scott-Rodino Pre-Merger
Notification Act for which the waiting period ended on June 10, 2000. In
Canada, where it is awaiting registration, d-methylphenidate is licensed to
Biovail Corporation, which purchased $2.5 million dollars worth of Celgene's
stock and will pay Celgene licensing fees, milestone payments and royalties.
Celgene has been issued patents for the use of d-methylphenidate for the
treatment of ADD and ADHD, and for the once-a-day administration of
methylphenidate drugs in a controlled or pulsed release formulation that
includes both the chirally pure d-methylphenidate and the racemic form. In
addition, Celgene has been issued process patents covering its manufacturing
process for the active substance.
CHIRALLY PURE AGROCHEMICALS
Celgro is applying our proprietary biocatalytic synthesis technology to
agrochemicals. Celgro's approach is to work with agrochemical companies to
adapt our biocatalytic technology to the manufacture of chirally pure versions
of their existing crop protection product and then license the technology to
these companies in exchange for royalties. Celgro will also seek to develop
chirally pure versions of existing agrochemicals on its own and then enter into
license agreements with third parties, who would manufacture and sell the
agrochemicals. Celgene expects that these arrangements typically will include
milestone payments, reimbursement of research and development expenses and
royalty arrangements. Celgene has entered into research and development
agreements with two leading agrochemical companies and initiatives are underway
to secure additional collaborations.
Celgene also believes that its chiral technology can be enabling in
agrochemical applications because it has the potential to significantly lower
manufacturing costs compared to conventional technologies and other chiral
technologies. Compared to Celgene's biocatalytic process, conventional
technologies require more raw materials and greater plant capacity to produce
the same effective quantity of product, while other chiral technologies require
specialized equipment, more expensive chiral agents, more raw material and
greater capacity for handling hazardous wastes produced in the separation
process. In addition, it is anticipated that the required application amount of
a chirally pure form of an agrochemical could be substantially less than the
racemic form and achieve the same or better results, thereby reducing
environmental burden. Agrochemicals are highly price sensitive and, therefore,
a process that produces chirally pure products at significant cost savings
could be in substantial demand.
PATENTS AND PROPRIETARY TECHNOLOGY
Patents and other proprietary rights are important to Celgene's business. It is
Celgene's policy to seek patent protection for its inventions, and also to rely
upon trade secrets, know-how, continuing technological innovations and
licensing opportunities to develop and maintain its competitive position.
Under an agreement with The Rockefeller University, Celgene has obtained
certain exclusive rights and licenses to manufacture, have manufactured, use
and sell products that are based on compounds that were identified in research
carried out by The Rockefeller University and Celgene, that have activity
associated with TNF-. The Rockefeller University has identified a method of
using thalidomide and certain thalidomide-like compounds to treat certain
symptoms associated with abnormal concentrations of TNF-, including those
manifested in septic shock, cachexia and HIV infection. In 1995, The
Rockefeller University was issued a U.S. patent which claims such methods. This
U.S. patent expires in 2012 and is included in the patent rights exclusively
licensed to us under the license from The Rockefeller University. However, The
Rockefeller University did not seek corresponding patents in any other country
in respect of this invention. The Rockefeller University
72
<PAGE>
has filed an additional U.S. patent application and an international patent
application relating to the activity of thalidomide related to interleukin-12.
Under the license from The Rockefeller University, Celgene was obligated to pay
certain specified royalties to The Rockefeller University on net sales of
licensed products for covered indications. In November 1999, Celgene agreed
with The Rockefeller University to substitute a lump sum payment and issue
stock options to The Rockefeller University and the inventors in lieu of the
royalties previously payable under the license. The license from The
Rockefeller University is coterminous with the last to expire of the licensed
patents and is terminable by The Rockefeller University only in the event of a
breach of the agreement's terms by Celgene which breach shall fail to be
remedied for more than sixty days after notice thereof. Any termination of the
license from The Rockefeller University could have a material adverse effect on
Celgene's business, financial condition and results of operations.
In 1998, Celgene was granted an exclusive sublicense to all of the thalidomide
patents and patent applications worldwide, exclusively licensed to EntreMed by
the Children's Medical Center Corp., which is affiliated with Harvard
University, related to the anti-angiogenic action of thalidomide. Three U.S.
patents issued to Children's Medical Center Corp. will expire in 2014.
Corresponding foreign patent applications and additional U.S. patent
applications are still pending. Further, Celgene has also exclusively
sublicensed pending U.S. and foreign patent applications related to the use of
thalidomide in combination with other therapeutic agents. There can be no
assurance that additional patents will issue, or that if patents issue, that
such patents will provide Celgene with significant proprietary protection or
commercial advantage. The license from EntreMed is coterminous with the last to
expire of the licensed patents and Celgene must pay royalties for at least 12
years from our first commercial sale in the United States. The EntreMed license
is terminable in the event of a breach by Celgene, which breach shall fail to
be remedied for 60 days after notice thereof. Any termination of the license
from EntreMed could have a material adverse affect on Celgene's business,
financial condition and results of operations.
Celgene has been issued a total of 36 U.S. patents and has filed an additional
15 U.S. patent applications. Of the issued patents, 14 relate to its oncologic
or immunologic compounds and uses and six are directed to methylphenidate
therapeutic compositions and processes. Celgene's U.S. patents expire between
2001 and 2019. Celgene has filed patient applications and in some instances has
obtained patents in certain other countries which correspond to some, but not
all of its U.S. patents. Celgene expects to continue to file patent
applications covering the use of its proprietary inventions.
Prior to the enactment in the United States of new laws adopting certain
changes mandated by the General Agreement on Tariffs and Trade, the exclusive
rights afforded by a U.S. patent were for a period of 17 years measured from
the date of grant. Under these new laws, the term of any U.S. patent granted on
an application filed subsequent to June 8, 1995 will terminate 20 years from
the date on which the patent application was filed in the United States or the
first priority date, whichever occurs first. Future patents granted on an
application filed before June 8, 1995 will have a term that terminates 20 years
from such date, or 17 years from the date of grant, whichever date is later.
Under the Drug Price Competition and Patent Term Restoration Act of 1984, a
U.S. product patent or use patent may be extended for up to five years under
certain circumstances to compensate the patent holder for the time required for
FDA regulatory review of the product. The benefits of this act are available
only to the first approved use of the active ingredient in the drug product and
may be applied only to one patent per drug product. There can be no assurance
that Celgene will be able to take advantage of this law.
Celgene's success will depend, in part, on its ability to obtain and enforce
patents, protect trade secrets, obtain licenses to technology owned by third
parties when necessary and conduct its business without infringing the
proprietary rights of others. The patent positions of pharmaceutical and
biotechnology firms, including Celgene's, can be uncertain and involve complex
legal and factual questions. In addition, the coverage sought in a patent
application can be significantly reduced before the patent is issued.
Consequently, Celgene does not know whether any of our owned or licensed
pending applications will
73
<PAGE>
result in the issuance of patents or, if any patents are issued, whether they
will provide significant proprietary protection or commercial advantage, or
whether they will be circumvented or infringed upon by others. Since patent
applications in the United States are maintained in secrecy until patents issue
and since publication of discoveries in the scientific or patent literature
often lag behind actual discoveries, Celgene cannot be certain that Celgene, or
its licensors, were the first to make the inventions covered by each of the
pending patent applications or that Celgene, or its licensors, were the first
to file patent applications for such inventions. In the event a third party has
also filed a patent for any of its inventions, Celgene, or its licensors, may
have to participate in interference proceedings declared by the U.S. patent and
Trademark Office to determine priority of invention, which could result in the
loss of a U.S. patent or loss of any opportunity to secure U.S. patent
protection for the invention. Even if the eventual outcome is favorable to
Celgene, such interference proceedings could result in substantial cost to
Celgene. Prosecution of patent applications and litigation to establish the
validity and scope of patents, to assert patent infringement claims against
others and to defend against patent infringement claims by others can be
expensive and time-consuming. There can be no assurance that, in the event that
claims of any of Celgene's owned or licensed patents are challenged by one or
more third parties, any court or patent authority ruling on such challenge will
determine that such patent claims are valid and enforceable. An adverse outcome
in such litigation could cause Celgene to lose exclusivity relating to the
subject matter delineated by such patent claims and may have a material adverse
effect on Celgene's business. If a third party is found to have rights covering
products or processes used by Celgene, we could be forced to cease using the
products or processes covered by the disputed rights, subject to significant
liabilities to such third party and/or required to license technologies from
such third party. Also, different countries have different procedures for
obtaining patents and patents issued by different countries provide different
degrees of protection against the use of a patented invention by others. There
can be no assurance, therefore, that the issuance to Celgene in one country of
a patent covering an invention will be followed by the issuance in other
countries of patents covering the same invention or that any judicial
interpretation of the validity, enforceability or scope of the claims in a
patent issued in one country will be similar to the judicial interpretation
given to a corresponding patent issued in another country. Furthermore, even if
Celgene's owned or licensed patents are determined to be valid and enforceable,
there can be no assurance that competitors will not be able to design around
such patents and compete with Celgene using the resulting alternative
technology. Celgene does not currently have, nor does it intend to seek, patent
protection relating to the use of THALOMID to treat ENL.
Celgene also relies upon unpatented, proprietary and trade secret technology
that it seeks to protect, in part, by confidentiality agreements with its
collaborative partners, employees, consultants, outside scientific
collaborators, sponsored researchers and other advisors. There can be no
assurance that these agreements provide meaningful protection or that they will
not be breached, that Celgene would have adequate remedies for any such breach
or that its trade secrets, proprietary know-how and technological advances will
not otherwise become known to others. In addition, there can be no assurance
that, despite precautions taken by Celgene, others have not and will not obtain
access to its proprietary technology or that such technology will not be found
to be non-proprietary or not a trade secret.
GOVERNMENTAL REGULATION
Regulation by governmental authorities in the United States and other countries
is a significant factor in the manufacture and marketing of pharmaceuticals and
in Celgene's ongoing research and development activities. All of Celgene's
therapeutic products will require regulatory approval by governmental agencies
prior to commercialization. In particular, human therapeutic products are
subject to rigorous preclinical testing and clinical trials and other
pre-marketing approval requirements by the FDA and regulatory authorities in
other countries. In the United States, various federal, and in some cases state
statutes and regulations also govern or impact upon the manufacturing, safety,
labeling, storage, record-keeping and marketing of such products. The lengthy
process of seeking required approvals and the continuing need for compliance
with applicable statutes and regulations, require the expenditure of
substantial resources. Regulatory approval, when and if obtained, may be
limited in scope which may significantly limit the indicated uses for which a
product
74
<PAGE>
may be marketed. Further, approved drugs, as well as their manufacturers, are
subject to ongoing review and discovery of previously unknown problems with
such products may result in restrictions on their manufacture, sale or use or
in their withdrawal from the market. Any failure by Celgene, its collaborators
or licensees to obtain or maintain, or any delay in obtaining regulatory
approvals could adversely affect the marketing of Celgene's products, and its
ability to receive product revenue, royalty revenue or profit sharing payments.
The activities required before a pharmaceutical may be marketed in the United
States begin with preclinical testing not involving human subjects. Preclinical
tests include laboratory evaluation of product chemistry and animal studies to
assess the potential safety and efficacy of a product and its formulations. The
results of these studies must be submitted to the FDA as part of an
Investigational New Drug application, or IND, which must be reviewed by the FDA
primarily for safety considerations before proposed clinical trials in humans
can begin.
Typically, clinical trials involve a three-phase process. In Phase I, clinical
trials are generally conducted with a small number of individuals to determine
the early safety and tolerability profile and the pattern of drug distribution
and metabolism within the body. If the Phase I trials are satisfactory, Phase
II clinical trials are conducted with groups of patients in order to determine
preliminary efficacy, dosing regimes and expanded evidence of safety. In Phase
III, large-scale, multi-center, adequately powered and well-controlled,
comparative clinical trials are conducted with patients in effort to provide
enough data for the statistical proof of efficacy and safety required by the
FDA and others. However, in some limited circumstances Phase III trials may be
modified to allow evaluation of safety and efficacy in a less regimented
manner, which may allow us to rely on historical data relating to the natural
course of disease in untreated patients. In some cases, as a condition of NDA
approval, confirmatory trials are required to be conducted after the FDA's
approval of an NDA in order to resolve any open issues. The FDA requires
monitoring of all aspects of clinical trials and reports of all adverse events
must be made to the agency, both before and after drug approval.
The results of the preclinical testing and clinical trials are submitted to the
FDA as part of an NDA for evaluation to determine if the product is adequate
for approval to commence commercial sales. In responding to an NDA, the FDA may
grant marketing approval, request additional information or deny the
application if it determines that the application does not satisfy its
regulatory approval criteria. When an NDA is approved, the manufacturer must
employ a system for obtaining reports of experience and side effects that are
associated with the drug and make appropriate submissions to the FDA.
Pursuant to the Orphan Drug Act, a sponsor may request that the FDA designate a
drug intended to treat a "rare disease or condition" as an "orphan drug." A
"rare disease or condition" is defined as one which affects less than 200,000
people in the United States or which affects more than 200,000 people, but for
which the cost of development and making available the drug is not expected to
be recovered from sales of the drug in the United States. Upon the approval of
the first NDA for a drug designated as an orphan drug for a specified
indication, the sponsor of the NDA is entitled to exclusive marketing rights in
the United States for such drug for that indication for seven years. Orphan
drugs may also be eligible for federal income tax credits for costs associated
with the drug's development. Possible amendment of the Orphan Drug Act by the
United States Congress and possible reinterpretation by the FDA are the subject
of frequent discussion. FDA regulations reflecting certain definitions,
limitations and procedures initially went into effect in January 1993 and were
amended in certain respects in 1998. Therefore, there is no assurance as to the
precise scope of protection that may be afforded by orphan drug status in the
future or that the current level of exclusivity and tax credits will remain in
effect. Celgene has received from the FDA orphan drug approval for thalidomide
for the treatment of ENL. Celgene also has received orphan drug designations
for thalidomide: for the treatment of multiple myeloma; for the treatment of
HIV-associated wasting syndrome; for the treatment of the clinical
manifestations of mycobacterial infection caused by Mycobacterium tuberculosis
and non-tuberculosis mycobacteria; for the treatment of severe recurrent
apthous stomatitis in severely, terminally compromised patients; and for the
treatment of Crohn's disease. Celgene also obtained orphan drug designation in
Kaposi's sarcoma and
75
<PAGE>
primary brain malignancies as part of its agreement with EntreMed. However,
there can be no assurance that another company also holding orphan drug
designation will not receive approval prior to Celgene for the use of
thalidomide for the treatment of one or more of these indications, other than
ENL. If that were to happen, Celgene's applications for that indication could
not be approved until the competing company's seven-year period of exclusivity
expired.
Among the conditions for NDA approval is the requirement that the prospective
manufacturer's quality control and manufacturing procedures continually conform
with the FDA's cGMP. In complying with cGMP, manufacturers must devote
extensive time, money and effort in the area of production and quality control
and quality assurance to maintain full technical compliance. Manufacturing
facilities and company records are subject to periodic inspections by the FDA
to ensure compliance. If a manufacturing facility is not in substantial
compliance with these requirements, regulatory enforcement action may be taken
by the FDA which may include seeking an injunction against shipment of products
from the facility and recall of products previously shipped from the facility.
Failure to comply with applicable FDA regulatory requirements can result in
informal administrative enforcement actions such as warning letters, recalls or
adverse publicity issued by the FDA or in legal actions such as seizures,
injunctions, fines based on the equitable remedy of disgorgement, restitution
and criminal prosecution.
Steps similar to those in the United States must be undertaken in virtually
every other country comprising the market for Celgene's products before any
such product can be commercialized in those countries. The approval procedure
and the time required for approval vary from country to country and may involve
additional testing. There can be no assurance that approvals will be granted on
a timely basis or at all. In addition, regulatory approval of prices is
required in most countries other than the United States. There can be no
assurance that the resulting prices would be sufficient to generate an
acceptable return to Celgene.
COMPETITION
The pharmaceutical and agrochemical industries in which Celgene competes are
each highly competitive. Celgene's competitors include major pharmaceutical and
biotechnology companies, most of which have considerably greater financial,
technical and marketing resources than Celgene. Celgene also experiences
competition in the development of its products and processes from universities
and other research institutions and, in some instances, compete with others in
acquiring technology from such sources.
Competition in the pharmaceutical industry, and specifically in the oncology
and immunology areas being addressed by Celgene, is particularly intense.
Numerous companies are pursuing techniques to modulate TNF-- production through
various combinations of monoclonal antibodies, TNF-- receptors and small
molecule approaches. Two U.S. companies, Centocor Inc., a wholly owned
subsidiary of Johnson & Johnson, and Immunex Corporation, have registered drugs
that block the disease-causing effects of TNF-- in inflammatory arthritis and
bowel disease. Both drug products are registered in the United States and in
Europe and have been marketed since 1998. In the United States the present cost
of TNF-- modulating drugs, not including medical or other charges, is between
$7,000 and $11,500 per patient year. Amgen Inc. is currently also developing a
soluble TNF-- receptor. BASF A.G. has a human antibody in development and
Celltech Group plc has a humanized antibody. In addition, a number of other
companies are attempting to address, with other technologies and products, the
disease states currently being targeted by Celgene. EntreMed is researching the
effectiveness of its own thalidomide analogues as anti-angiogenic agents in the
treatment of retinal disease and cancer. Andrulis Pharmaceuticals Corp., a
small, privately held company, is attempting to develop thalidomide for the
treatment of AIDS-related complications.
Several companies have established chiral products and chiral technologies.
Sepracor Inc. and Chiroscience Group plc are actively developing chirally pure
versions of pharmaceuticals currently marketed in racemic form. Chiroscience
has completed Phase I trials in the United Kingdom for a chirally pure version
of dl-methylphenidate and is working with Medeva plc, a leading supplier of
76
<PAGE>
dl-methylphenidate in the United States, towards full clinical development.
Chiroscience has also taken certain steps to assert patent and proprietary
rights with respect to its formulation of a chirally pure version of
dl-methylphenidate. The agrochemical market is large and, within this market,
efforts are underway by the in-house development staffs of agrochemical
companies to produce chirally pure versions of their existing racemic crop
protection agents.
The pharmaceutical and agrochemical industries have undergone, and are expected
to continue to undergo, rapid and significant technological change, and
competition is expected to intensify as technical advances in each field are
made and become more widely known. In order to compete effectively, Celgene
will be required to continually upgrade its scientific expertise and
technology, identify and retain capable management, and pursue scientifically
feasible and commercially viable opportunities.
Celgene's competition will be determined in part by the indications for which
its products are developed and ultimately approved by regulatory authorities.
An important factor in competition will be the timing of market introduction of
Celgene's or its competitors' products. Accordingly, the relative speed with
which Celgene can develop products, complete clinical trials and approval
processes and supply commercial quantities of products to the market will be
expected to be important competitive factors. Competition among products
approved for sale will be based, among other things, on product efficacy,
safety, convenience, reliability, availability, price and patent position.
MANUFACTURING
THALOMID is formulated and encapsulated for Celgene by Penn Pharmaceuticals
Ltd. of Great Britain in an FDA approved facility devoted exclusively to the
production of THALOMID capsules. Both the bulk manufacturing facility that
produces the drug substance for THALOMID and the Penn facility have been
certified as cGMP compliant. In certain instances, Celgene may be required to
make substantial capital expenditures to access additional manufacturing
capacity. In addition, Celgene has established a contract with another cGMP
certified bulk drug substance supplier for THALOMID that will begin in 2001
once the regulatory process is completed. Celgene is also actively seeking an
alternate manufacturer to provide additional capacity for the formulation and
encapsulation of THALOMID and expect that this will be concluded in 2000.
SALES AND COMMERCIALIZATION
Celgene has established an organization of approximately 80 persons to sell and
commercialize THALOMID. These individuals have considerable experience in the
pharmaceutical industry and many have experience with oncological and
immunological products. Celgene expects to expand our THALOMID sales and
commercialization group to support products it develops to treat oncological
and immunological diseases. Celgene intends to market and sell the products it
develops for indications with accessible patient populations. For drugs with
indications with larger patient populations, Celgene anticipates partnering
with other pharmaceutical companies. In addition, Celgene is positioned to
accelerate the expansion of these sales resources as appropriate to take
advantage of product in-licensing and product acquisition opportunities.
Celgene intends to establish commercial relationships with selected companies
in other countries to market THALOMID.
EMPLOYEES
As of March 15, 2000, Celgene had 151 full-time employees, 47 of whom were
engaged primarily in research and development activities, 60 of whom were
engaged in sales and commercialization activities and the remainder of whom
were engaged in executive and administrative activities. Of these employees, 55
have advanced degrees, including 26 who have Ph.D. degrees. Celgene also
maintains consulting arrangements with a number of scientists at various
universities and other research institutions in Europe and the United States.
FORWARD-LOOKING STATEMENTS
Certain statements contained in this proxy statement/prospectus are
forward-looking statements concerning Celgene's business, financial condition,
results of operations, economic performance and
77
<PAGE>
financial condition. Forward-looking statements within the meaning of Section
27A of the Securities Act of 1933 and within the meaning of Section 21E of the
Securities Exchange Act of 1934 are included, for example, in the discussions
about:
o Celgene's strategy;
o new product development or product introduction;
o product sales, royalties and contract revenues;
o expenses and net income;
o Celgene's credit risk management;
o Celgene's liquidity;
o Celgene's asset/liability risk management; and
o Celgene's operational and legal risks.
These statements involve risks and uncertainties. Actual results may differ
materially from those expressed or implied in those statements. Factors that
could cause such differences include, but are not limited to, those discussed
under "Risk Factors" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
PROPERTIES
Celgene leases a 44,500-square foot laboratory and office facility in Warren,
New Jersey, under a lease with an unaffiliated party, which has a term ending
in May 2002 with one five-year renewal option, and a 29,000-square foot
facility which has a term ending in July 2010 with two five-year renewal
options. Celgene also leases an 18,000-square foot laboratory and office
facility in North Brunswick, New Jersey, under a lease with an unaffiliated
party which has a term ending in December 2009 with two five-year renewal
options. Celgene believes that its laboratory facilities are adequate for its
research and development activities for at least the next 12 months.
LEGAL PROCEEDINGS
Celgene is not engaged in any material legal proceedings.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Celgene held a Special Meeting of Stockholders of Celgene Corporation on April
10, 2000. At this meeting, stockholders were asked to vote for an amendment to
Celgene's Certificate of Incorporation that would increase the number of
authorized shares of Celgene's common stock from 30,000,000 to 120,000,000
shares in order to effect a three-for-one stock split that was approved by
Celgene's Board of Directors on March 13, 2000. The Amended Certificate of
Incorporation was filed with the State of Delaware on April 11, 2000. The
amendment was approved by the following votes:
Adoption of amendment to Celgene's Certificate of Incorporation:
<TABLE>
<CAPTION>
NUMBER OF SHARES
---------------------------------------
FOR AGAINST ABSTAINED
-------------- --------- ----------
<S> <C> <C>
17,841,499 261,979 8,492
</TABLE>
DIVIDEND POLICY
Celgene has never declared or paid any cash dividends on our common stock.
Celgene currently intends to retain any future earnings for funding growth and,
therefore, does not anticipate paying any cash dividends on its common stock in
the foreseeable future.
78
<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
<TABLE>
<CAPTION>
NAME AGE POSITION
--------------------------------------- ----- --------------------------------------------------
<S> <C> <C>
John W. Jackson* ...................... 55 Chairman of the Board and Chief Executive
Officer
Sol J. Barer, Ph.D.* .................. 52 President, Chief Operating Officer, Director
Robert J. Hugin* ...................... 45 Chief Financial Officer and Senior Vice President
Jack L. Bowman ........................ 67 Director
Frank T. Cary ......................... 79 Director
Arthur Hull Hayes, Jr., M.D. .......... 66 Director
Gilla Kaplan, Ph.D. ................... 52 Director
Richard C. E. Morgan .................. 55 Director
Walter L. Robb, Ph.D. ................. 72 Director
Lee J. Schroeder ...................... 71 Director
</TABLE>
----------
* Executive Officer
JOHN W. JACKSON has been Celgene's Chairman of the Board and Chief Executive
Officer since January 1996. From February 1991 to January 1996, Mr. Jackson was
President of Gemini Medical, a consulting firm that he founded and which
specialized in services and investment advice to start-up medical device and
biotechnology companies. Previously, Mr. Jackson had been President of the
worldwide Medical Device Division of American Cyanamid, a major pharmaceutical
company, from February 1986 to January 1991 and served in various international
positions, including Vice President -- International for American Cyanamid from
1978 to 1986. Mr. Jackson served in several human health marketing positions at
Merck & Company, a major pharmaceutical company, from 1971 to 1978. Mr. Jackson
received a B.A. degree from Yale University and an M.B.A. from INSEAD, France.
SOL J. BARER, PH.D. has been Celgene's President since October 1993 and our
Chief Operating Officer and one of our directors since March 1994. Dr. Barer
was Celgene's Senior Vice President -- Science and Technology and Vice
President/General Manager -- Chiral Products from October 1990 to October 1993
and Celgene's Vice President -- Technology from September 1987 to October 1990.
Dr. Barer received a Ph.D. in organic and physical chemistry from Rutgers
University.
ROBERT J. HUGIN has been Celgene's Senior Vice President and Chief Financial
Officer since June 1999. Previously, Mr. Hugin had been a Managing Director at
J.P. Morgan & Co. Inc., which he joined in 1985. Mr. Hugin received an A.B.
degree from Princeton University and an M.B.A. from the University of Virginia.
JACK L. BOWMAN, one of Celgene's directors since April 1998, served as Company
Group Chairman of Johnson & Johnson from 1987 to 1994. From 1983 to 1987, Mr.
Bowman served as Executive Vice President of American Cyanamid. Mr. Bowman is
also a director of NeoRx Corporation, Cell Therapeutics, Inc., CytRx
Corporation, Cellegy Pharmaceuticals and Targeted Genetics.
FRANK T. CARY has been Chairman of the Executive Committee of Celgene's board
of directors since July 1990 and has been one of Celgene's directors since
1987. From 1973 to 1981, Mr. Cary was Chairman of the Board and Chief Executive
Officer of International Business Machines Corporation. Mr. Cary also is a
director of Cygnus Therapeutic Systems Inc., ICOS Corporation, Lincare Inc.,
Lexmark International Inc., Vion Pharmaceuticals Inc. and Teltrend, Inc.
ARTHUR HULL HAYES, JR., M.D., one of Celgene's directors since 1995, has been
President and Chief Operating Officer of MediScience Associates, a consulting
organization that works with pharmaceutical firms, biomedical companies and
foreign governments, since July 1991. Dr. Hayes has also been a partner in
Issue Sphere, a public affairs firm that focuses on health science issues,
since November 1995, as well as a professor in medicine, pharmacology and
family and community
79
<PAGE>
medicine at New York Medical College and clinical professor of medicine and
pharmacology at the Pennsylvania State University College of Medicine. From
1986 to 1990, Dr. Hayes was President and Chief Executive Officer of E.M.
Pharmaceuticals, a unit of E. Merck AG and from 1981 to 1983 was Commissioner
of the United States Food and Drug Administration. Dr. Hayes also is a director
of Myriad Genetics, Inc., NaPro BioTherapeutics, Inc. and Premier Research
Worldwide.
GILLA KAPLAN, PH.D., one of Celgene's directors since April 1998, is an
immunologist in the Laboratory of Cellular Physiology and Immunology at The
Rockefeller University in New York where she was appointed Assistant Professor
in 1985 and Associate Professor in 1990. Dr. Kaplan is a member of numerous
professional societies and has been the organizer of several major symposia on
tuberculosis. Dr. Kaplan has served as an advisor to the Global Program for
Vaccines and Immunization of the World Health Organization, has participated in
several NIH peer review panels, and is on the Editorial Board of Microbial Drug
Resistances, and Tubercle and Lung Disease. Dr. Kaplan is the author of more
than 100 scientific publications and has received international recognition for
her work. In 1995, she gave the Special Honorary Lecture at the American
Society for Microbiology and in 1997 was appointed a Fellow of the American
Academy of Microbiology.
RICHARD C. E. MORGAN, one of our directors since 1987, is a co-founder,
Chairman and Chief Executive Officer of incuVest LLC and a Managing Partner and
co-founder of Amphion Capital Management LLC. Prior to founding Amphion, he was
Managing General Partner of Wolfensohn Partners, L.P., the predecessor to
Amphion Ventures L.P. Mr. Morgan also serves as Chairman of AXCESS, Inc.,
Quidel Corp., ONTOS, Inc., IVEX Corporation and Quantrad, Inc. In addition, he
serves on the Board of Directors of ChromaVision Medical Systems, Inc. and
Indigo NV.
WALTER L. ROBB, PH.D., one of our directors since 1992, has been a private
consultant and President of Vantage Management Inc., a consulting and investor
services company, since January 1993. Mr. Robb was Senior Vice President for
Corporate Research and Development of General Electric Company, and a member of
its Corporate Executive Council from 1986 to December 1992. Mr. Robb also is
Chairman of the board of directors of Capital District Sports and a director of
Cree Research Inc., Mechanical Technology, Inc. and Plug Power, Inc.
LEE J. SCHROEDER, one of our directors since 1995, has been President of Lee
Schroeder & Associates, Inc., pharmaceutical business consultants, since 1985.
Mr. Schroeder was President of Fox Meyer Lincoln from 1983 to 1985, and was an
Executive Vice President of Sandoz, Inc. from 1981 to 1983. Mr. Schroeder also
is a director of Bryan LGH Hospital, MGI Pharmaceutical, Inc., Ascent
Pediatrics, Inc. and Interneuron Pharmaceuticals, Inc.
There are no family relationships between any of the directors and executive
officers of Celgene.
80
<PAGE>
EXECUTIVE COMPENSTION
Summary Compensation Table
The following table sets forth information about the compensation paid, or
payable, by Celgene for services rendered in all capacities to the Chief
Executive Officer of Celgene and each of the most highly paid executive
officers of Celgene who earned more than $100,000, for each of the last three
fiscal years in which such officers were executive officers for all or part of
the year.
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG-TERM COMPENSATION
------------------------------------------- -------------------------------------------
OTHER ANNUAL RESTRICTED SECURITIES ALL OTHER
NAME AND COMPENSATION STOCK UNDERLYING COMPENSATION
PRINCIPAL POSITION YEAR SALARY ($) BONUS ($) ($) AWARD(S) ($) OPTIONS # ($)
--------------------- ------ ---------------- ----------- -------------- -------------- ------------ ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
John W. Jackson 1999 300,000 390,000 19,200(1) 0 660,000 13,390(2)
Chairman and 1998 285,000 79,800 19,200(1) 0 300,000 13,390(2)
Chief Executive 1997 270,000 97,200 9,500(1) 0 0 13,390(2)
Officer
Sol J. Barer, Ph.D. 1999 255,833 230,250 19,200(1) 0 210,000 0
President and 1998 243,333 51,100 19,200(1) 0 150,000 0
Chief Operating 1997 232,500 63,647 9,500(1) 0 0 0
Officer
Robert J. Hugin 1999 127,385(3) 168,000 7,200 0 450,000 0
Sr. V. P. & Chief
Financial Officer
</TABLE>
----------
(1) Reflects matching contributions under Celgene's 401K plan.
(2) Reflects life insurance premiums for a life insurance policy for Mr.
Jackson.
(3) Mr. Hugin commenced his employment with Celgene in June, 1999.
Employment Agreements and Termination of Employment Arrangements
John W. Jackson, Sol J. Barer and Robert J. Hugin (each an "Executive") are
employed pursuant to substantially similar employment agreements (the
"Employment Agreements") providing for their continued employment until January
1, 2003 (the period during which Executive is employed is referred to as the
"Employment Period"). The Employment Period shall be automatically renewed for
successive one-year terms unless Celgene or Executive gives written notice to
the other at least six months prior to the expiration of the Employment Period.
The Employment Agreements provide Messrs. Jackson, Barer and Hugin with a base
salary (which may be increased by the Board of Directors, or a committee
thereof) of $300,000, $258,000 and $240,000, respectively, per annum. In
addition, each of the Employment Agreements provides for an annual target bonus
in an amount equal to 65%, 45% and 35%, respectively, of Executive's base
salary measured against objective criteria to be determined by the Board of
Directors, or a committee thereof. The Employment Agreements also provide that
Messrs. Jackson, Barer and Hugin are entitled to continue to participate in all
group health and insurance programs and all other fringe benefit or retirement
plans which are generally available to Celgene's employees. Each of the
Employment Agreements provides that if the Executive is terminated by Celgene
without cause or due to Executive's disability, he shall be entitled to receive
a lump-sum payment in an amount equal to Executive's annual base salary and a
pro rata share of Executive's annual target bonus. Upon the occurrence of a
change in control (as defined in the Employment Agreements) and thereafter,
each Employment Agreement provides that if, (a) at any time within one year of
a change in control Executive's employment is terminated by Celgene without
cause or for disability or by Executive for good reason (as defined in the
Employment Agreement) or (b) at any time within 90 days prior to a change in
control, Executive's employment is terminated by Celgene without cause or by
Executive for good reason, Executive shall be entitled to receive: (i) a lump
sum payment in an amount equal to three times Executive's base salary and three
times Executive's highest annual bonus within the three years prior to
81
<PAGE>
the change in control; (ii) any accrued benefits; (iii) payment of health and
welfare premiums for Executive and his dependants; and (iv) full and immediate
vesting of all stock options and equity awards; provided, however, that such
payment shall be reduced by any payments made to Executive prior to the change
in control pursuant to Sections 10(a)(iv) and (v) of the Employment Agreements.
Each Employment Agreement also provides that Executive shall be entitled to
receive a gross-up payment on any payments made to Executive that are subject
to the excise tax imposed by Section 4999 of the Internal Revenue Code, except
that a gross-up will not be made if the payments made to Executive do not
exceed 105% of the greatest amount that could be paid to Executive such that
the receipt of payments would not give rise to the excise tax. Each Executive
is subject to a non-compete which applies during the period the Executive is
employed and until the first anniversary of the date Executive's employment
terminates (the non-compete applies to the second anniversary of the date
Executive's employment terminates if the Executive receives change in control
payments and benefits).
Stock Options
The following table sets forth information for each of the named executive
officers with respect to the value of options exercised during the year ended
December 31, 1999 and the value of outstanding and unexercised options held as
of December 31, 1999. There were no SARs exercised during 1999 and none were
outstanding as of December 31, 1999.
Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-End Option
Values
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES UNDERLYING VALUE OF UNEXERCISED
SHARES UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS
ACQUIRED VALUE AT DECEMBER 31, 1999 AT DECEMBER 31, 1999(2)
ON EXERCISE REALIZED(1) ----------------------------- ----------------------------
NAME ($) ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
----------------------------- ------------- ------------ ------------- --------------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C>
John W. Jackson ............. 230,730 $3,475,762 619,270 860,000 $11,850,996 $15,640,820
Sol J. Barer, Ph.D. ......... 225,000 $2,887,380 527,238 310,002 $10,205,963 $ 5,740,440
Robert J. Hugin ............. -- -- -- 450,000 -- $ 8,156,250
</TABLE>
----------
(1) Represents the difference between the average high and low trading price of
the common stock on the Nasdaq National Market on the date the shares were
acquired and the average high and low exercise price of the options
exercised multiplied by the number of shares acquired upon exercise.
(2) Represents the difference between the closing market price of Celgene's
common stock as reported by Nasdaq on December 31, 1999 of $23.33 per
share and the exercise price per share of in-the-money options multiplied
by the number of shares underlying the in-the-money options.
Director Compensation
Directors do not receive salaries or cash fees for serving as directors nor do
they receive any cash compensation for serving on committees; however, all
members of the board of directors who are not employees of Celgene
("Non-Employee Directors") are reimbursed for their expenses for each meeting
attended and are eligible to receive stock options pursuant to the 1995
Non-Employee Directors' Plan (the "1995 Directors' Plan").
The Directors' Option Plan was adopted by the board of directors on April 5,
1995, and approved by Celgene's stockholders at the 1995 Annual Meeting of
Stockholders. At the Annual Meeting of Celgene held in 1997, the Director's
Option Plan was amended to increase the number of shares of Celgene's common
stock that may be issued upon exercise of options granted thereunder from
750,000 shares to 1,050,000 as adjusted for the three-for-one stock split. At
the Annual Meeting of Celgene held in 1999, the Directors' Option Plan was
amended to increase the number of shares of Celgene common stock that may be
issued upon exercise of options granted thereunder from 1,050,000 shares to
1,800,000 shares, as adjusted for the stock split. The Directors' Option Plan
currently provides for the granting to Non-Employee Directors of non-qualifed
options to purchase an aggregate of not more than 1,800,000 shares (subject to
adjustment in certain circumstances) of Celgene common stock.
82
<PAGE>
Under the Directors' Option Plan, each Non-Employee Director as of April 5, 1995
was granted non-qualifed option to purchase 60,000 shares of common stock, as
adjusted for the three-for-one stock split, and each new Non-Employee Director
upon the date of his or her election or appointment will be granted a
non-qualified option to purchase 20,000 shares of common stock. These initial
options vest in four equal annual installments commencing on the first
anniversary of the date of grant, assuming the Non-Employee Director remains a
director.
Upon the date of each Annual Meeting of Stockholders, each Non-Employee
Director is granted a non-qualified option to purchase 10,000 shares of Celgene
common stock (or a pro rata portion thereof if the director did not serve the
entire year since the date of the last annual meeting). These options vest in
full on the date of the first Annual Meeting of Stockholders held following the
date of the grant, assuming the Non-Employer Director is a director on that
date.
All options granted pursuant to the Directors' Option Plan will expire no later
than 10 years from the date of grant and no options may be granted after June
16, 2005. If a Non-Employee Director terminates his service on the board of
directors for any reason, options which were exercisable on the date of
termination and which have not expired may be exercised at any time until the
date of expiration of such options. In addition, if there is a change of
control and within two years thereafter a director is removed without cause (as
defined) or is not nominated for election by Celgene's stockholders, all
unvested portions of a stock options will automatically vest.
In 1999, pursuant to the Directors' Option Plan, each of Messrs. Bowman, Cary,
Hayes, Morgan, Robb, Schroeder and Dr. Kaplan received an option to purchase
30,000 shares of Celgene common stock at an exercise price of $5.2083 per
share, the fair market value of the stock on the date of the grant, as adjusted
for the Split.
Security Ownership of Certain Beneficial Owners and Management
The table below sets forth the beneficial ownership of Celgene's common stock
as of March 31, 2000 (i) by each director, (ii) by each of the named executive
officers, (iii) by all directors and executive officers of Celgene as a group,
and (iv) by all persons known by Celgene's board of directors to be beneficial
owners of more than five percent of the outstanding shares of common stock.
<TABLE>
<CAPTION>
AMOUNT AND NATURE
OF BENEFICIAL PERCENT OF
NAME OWNERSHIP CLASS
---------------------------------------------------------------- ---------------------- -----------
<S> <C> <C>
John W. Jackson ................................................ 1,164,399(1) 1.8%
Sol J. Barer, Ph.D. ............................................ 697,284(1)(2) 1.1%
Robert J. Hugin ................................................ 35,000(1) *
Frank T. Cary .................................................. 293,340 *
Arthur Hull Hayes, Jr., M.D .................................... 120,000(1) *
Richard C. E. Morgan ........................................... 237,270(1)(3) *
Walter L. Robb, Ph.D. .......................................... 300,000(1) *
Lee J. Schroeder ............................................... 168,000(1) *
Gilla Kaplan, Ph.D. ............................................ 50,100(1) *
Jack L. Bowman ................................................. 38,100(1) *
All directors and current executive officers of the Company as a
group (ten persons) ........................................... 3,103,493(4) 4.8%
Pilgrim Baxter & Associates Ltd.
825 Duportail Road
Wayne, PA 19087 ............................................... 3,361,200(5) 5.2%
</TABLE>
----------
* Less than one percent (1%).
(1) Includes shares of Common Stock which the directors and executive officers
have the right to acquire through the exercise of options within 60 days
of March 31, 2000, as follows: John W. Jackson -- 981,369; Sol J. Barer --
697,239; Robert J. Hugin -- 35,000; Frank T. Cary -- 0; Arthur Hull Hayes,
Jr. -- 120,000; Richard C. E. Morgan -- 75,000 shares; Walter L. Robb --
192,000; Lee J. Schroeder -- 60,000; Gilla Kaplan -- 50,100; Jack Bowman
-- 35,100. Does not include shares of
83
<PAGE>
Celgene common stock which the directors and executive officers had the
right to acquire through the exercise of options not exercisable within 60
days of March 31, 2000, as follows: John W. Jackson -- 740,001; Sol J. Barer
-- 290,001; Robert J. Hugin -- 520,000; Frank T. Cary -- 30,000; Arthur Hull
Hayes, Jr. -- 30,000; Richard C. E. Morgan -- 30,000; Walter L. Robb --
30,000; Lee J. Schroeder -- 30,000; Gilla Kaplan -- 60,000; and Jack L.
Bowman -- 60,000.
(2) Includes with respect to Dr. Barer, 45 shares owned by the daughter of Dr.
Barer, as to which shares Dr. Barer disclaims beneficial ownership.
(3) Includes with respect to Mr. Morgan, 270 shares owned by the son of Mr.
Morgan, as to which shares Mr. Morgan disclaims beneficial ownership.
(4) Includes or excludes, as the case may be, shares of Celgene common stock as
indicated in the preceding footnotes.
(5) Information regarding Pilgrim Baxter & Associates Ltd. was obtained from a
Schedule 13G, filed by it with the Securities and Exchange Commission.
Such Schedule 13G states that Pilgrim Baxter & Associates Ltd. is the
beneficial owner of and has the sole dispositive power over all such
shares of Common Stock and has sole voting power over 2,557,500 of those
shares.
Certain Relationships and Related Transactions
None.
DIVIDEND POLICY
Celgene has never declared or paid any cash dividends on our common stock.
Celgene currently intends to retain any future earnings for funding growth and,
therefore, does not anticipate paying any cash dividends on its common stock in
the foreseeable future.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
OVERVIEW
Celgene was organized in 1980 as a unit of Celanese Corporation, a chemical
company. Celgene's initial mandate was to apply biotechnology to the production
of fine and specialty chemicals. Following the 1986 merger of Celanese
Corporation with American Hoechst Corporation, Celgene was spun off as an
independent company. In July 1987, Celgene completed an initial public offering
of its common stock and commenced the development of chemical and biotreatment
processes for the chemical and pharmaceutical industries. Celgene discontinued
the biotreatment operations in 1994 to focus on its targeted small molecule
cancer and immunology compound development programs and its biocatalytic chiral
chemistry program.
Since 1990, Celgene's revenues have been generated primarily through research
and development relating to, and supply of, chirally pure intermediates to
pharmaceutical companies for use in new drug development and, to a lesser
degree, from agrochemical research and development contracts. However, as
Celgene developed its cancer and immunology programs, sales of chirally pure
intermediates became a less integral part of its strategic focus. Accordingly,
on January 9, 1998, Celgene completed the sale of its chiral intermediate
business to Cambrex Corporation for $15.0 million. The terms of the sale
provided for a payment of $7.5 million at closing and an additional amount of
future royalties not to exceed the net present value on the date of contract of
$7.5 million, with a guarantee of certain minimum payments beginning in the
third year after closing.
In late September 1998, Celgene commenced sales of its first commercial
product, THALOMID.
Celgene has sustained losses in each year since its inception in 1986. Celgene
sustained net losses of $21.8 million for the year ended December 31, 1999 and
$3.1 million for the three month period ended March 31, 2000 and at March 31,
2000, had an accumulated deficit of $169.5 million. Celgene expects to make
substantial expenditures to further commercialize and develop THALOMID, develop
its oncology and immunology programs and expand its chiral business. Based on
these expenditures, it is likely that losses will continue for at least the
next six months or longer depending on when the merger is completed.
Subject to the risks described elsewhere in this proxy statement/prospectus,
Celgene believes that there are significant market opportunities for the
products and processes under development by Celgene. To address these
opportunities in a timely and effective manner, Celgene intends to seek
84
<PAGE>
out collaborations and licensing arrangements with third parties. Celgene has
entered into agreements covering the manufacture and distribution for it of
certain compounds, such as THALOMID, and the development by Celgene of
processes for producing chirally pure crop protection agents for license to
agrochemical manufacturers. This development is performed through Celgro
Corporation, Celgene's wholly owned subsidiary.
Celgene has established a commercial organization to sell THALOMID and
currently employs 80 persons in this capacity. Celgene intends to develop and
market its own pharmaceuticals for indications with accessible patient
populations. For drugs with indications for larger patient populations, Celgene
anticipates partnering with other pharmaceutical companies. Celgene also
anticipates partnering with companies for the development and commercialization
of its chirally pure pharmaceutical and agrochemical products. Celgene expects
that these arrangements typically will include milestone payments,
reimbursement of research and development expenses and royalty arrangements.
Future operating results will depend on many factors, including demand for
Celgene's products, regulatory approvals of its products, the timing of the
introduction and market acceptance of new products by Celgene or competing
companies, the timing of research and development milestones and Celgene's
ability to control costs.
Celgene's historical share and per share amounts included in this proxy
statement/prospectus have been retroactively restated to reflect the
three-for-one stock split declared and issued on April 14, 2000.
RESULTS OF OPERATIONS
Three month period ended March 31, 2000 vs.
Three month period ended March 31, 1999
Total Revenues. Celgene's total revenues for the three months ended March 31,
2000 increased significantly to $11.9 million compared with $4.3 million in the
same period of 1999. Revenue in 2000 consisted of THALOMID sales of $11.7
million and research contract revenue of $200,000 compared with 1999 first
quarter THALOMID sales of $3.5 million and research contract revenue of
$813,000. 1999 research contract revenue included a milestone payment of
$500,000 related to the development of d-methylphenidate.
Cost of Goods Sold. Cost of goods sold during the first quarter 2000 was $1.7
million compared with approximately $656,000 in the comparable period in 1999.
The cost of goods sold in both years does not reflect raw material or
formulation and encapsulation costs of THALOMID, as these costs were charged as
research and development expenses prior to receiving FDA approval.
Research and development expenses. Research and development expenses increased
by 41% in the first quarter 2000 to approximately $6.4 million from
approximately $4.5 million in the same period in 1999. The increase was
primarily in spending for preclinical toxicology studies and clinical trials
for d-methylphenidate, THALOMID, and the SelCIDs and IMiDs.
Selling, general and administrative expenses. Selling, general and
administrative expenses for the three months ended March 31, 2000 increased by
60% to approximately $8.5 million from $5.3 million in the same period in 1999.
The increase was due primarily to the expansion of the sales and marketing
organization and related expenses of approximately $2.6 million, and
approximately $240,000 for warehousing and distribution.
Interest income and expense. Interest income for the first quarter 2000
increased significantly to approximately $2.3 million from $146,000 in the same
period in 1999. The increase was due to the investment of the net proceeds of
approximately $278 million from the follow-on public offering in February 2000.
Interest expense for the first quarter 2000 increased to approximately $778,000
from approximately $546,000 in the same period in 1999. The increase was due
primarily to the interest expense associated with the convertible notes issued
in January and July 1999.
85
<PAGE>
Net loss. The net loss for the period ended March 31, 2000 decreased by 52% to
$3.1 million from $6.6 million in the same period of 1999. The decrease was due
to the increase in gross profit of $7.2 million on the THALOMID sales and
higher net interest income of approximately $1.9 million offset by a decrease
in research contract revenue of approximately $613,000 and higher operating
expenses, approximately $5.0 million.
Fiscal Years Ended December 31, 1999, 1998 and 1997
Total revenues. Total revenues in 1999 increased significantly to approximately
$26.2 million from $3.8 million in 1998. The increase resulted from Celgene's
first full year of product sales of THALOMID in 1999 of approximately $24.1
million compared with $3.3 million of THALOMID sales in 1998. The 1998 sales of
THALOMID reflected only a partial year of sales, starting from the launch date
at the end of the third quarter. Revenue from research contracts increased to
$2.2 million in 1999 from $535,000 in 1998 and included a milestone payment of
$500,000 related to d-methylphenidate. The 1998 revenues increased by 238% to
approximately $3.8 million from approximately $1.1 million in 1997. This was
due to product sales of approximately $3.3 million of THALOMID which was
approved in 1998 by the FDA and a decrease in research contracts of
approximately $.6 million due to completion of a contract at the end of 1997
with a major agrochemical company.
Cost of goods sold. Cost of goods sold in 1999 was approximately $3.0 million
compared with approximately $282,000 in 1998. The cost of goods sold in both
years does not reflect raw material or formulation and encapsulation costs of
THALOMID, as these costs were charged as research and development expenses
prior to receiving FDA approval. There was no cost of goods sold in 1997.
Research and development expenses. Research and development expenses for 1999
were slightly lower at approximately $19.6 million compared with approximately
$19.8 million in 1998. Increased spending for clinical trials, primarily for
d-methylphenidate, was offset by a decrease in regulatory consulting fees,
university research program spending, and spending for THALOMID capsules which
was charged as research and development expense prior to receiving FDA approval
in July of 1998. Research and development expenses for 1998 increased by 14% to
approximately $19.8 million from approximately $17.4 million in 1997. This
increase was primarily due to an increase of approximately $1.5 million for
Celgene's chiral pharmaceutical program primarily for clinical trials and
preclinical toxicology studies and approximately $780,000 relating to Celgene's
immunotherapeutic program, primarily for clinical trials for potential new NDA
filings for THALOMID.
Selling, general and administrative expenses. Selling, general and
administrative expenses for 1999 increased by 62% over 1998, from approximately
$16.2 million to approximately $26.2 million. The increase was primarily in
sales and marketing expenses, approximately $3.6 million, warehousing and
distribution expenses, approximately $3.4 million, and expenditures relating to
medical affairs and drug safety costs, approximately $730,000, all to support
the commercialization and distribution of THALOMID.
Selling, general and administrative expenses for 1998 increased by 77% to
approximately $16.2 million from approximately $9.1 million in 1997. This was
primarily due to sales and marketing expenses, $4.8 million, in anticipation of
the THALOMID product launch as well as post launch selling activities. Other
increases were primarily related to the necessary infrastructure costs required
to support the commercial operations including medical affairs and drug safety
costs of $928,000, information systems development cost and additional finance
personnel, $423,000, and other administrative expenses such as legal,
consulting and investor relations of approximately $900,000.
Interest income and interest expense. Interest income for 1999 of $694,000 was
slightly down from $705,000 in 1998 as average cash balances were approximately
the same in both years. Interest income for 1998 increased by 42% to
approximately $705,000 from approximately $496,000 in 1997. The increase was
due to higher average cash balances in 1998.
Interest expense in 1999 was significantly higher than 1998, at approximately
$2.8 million compared with approximately $256,000 in 1998. The higher interest
expense resulted from the interest on the three convertible notes which were
issued in September 1998, January 1999 and July 1999. Interest expense for 1998
increased 129% to approximately $256,000 from $112,000 due primarily to the
interest expenses associated with the 9.5% convertible notes issued in
September 1998.
86
<PAGE>
Loss from continuing operations. The loss from continuing operations decreased
32% in 1999 compared with 1998, to approximately $21.8 million from
approximately $32.0 million. The decreased loss resulted from the higher gross
profit on THALOMID sales and an income tax benefit of $3.0 million from the
sale of a portion of our New Jersey state net operating loss carryforwards,
offset by increased selling, general and administrative costs and higher
interest expense. The loss from continuing operations increased 28% to
approximately $32.0 million in 1998 from approximately $25.0 million in 1997.
The increase was due primarily to spending related to the launch of THALOMID
and ongoing research programs in chiral pharmaceuticals and immunotherapeutics
as described above.
Loss from discontinued operations. The loss from discontinued operations
decreased to $60,000 in 1998 from $427,000 in 1997 due to the fact that the
chiral intermediate business was sold in early January 1998. Celgene recorded a
gain on the sale of the chiral intermediate assets of approximately $7.0
million in 1998.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, Celgene has financed its working capital requirements
primarily through private and public sales of its debt and equity securities,
income earned on the investment of the proceeds from the sale of such
securities, and revenues from research contracts and product sales. Through
December 31, 1999, Celgene raised approximately $100.0 million in net proceeds
from three public and three private offerings, including its initial public
offering in July 1987. Celgene also issued convertible notes in September 1998,
January 1999, and July 1999 with net proceeds aggregating approximately $38
million.
On February 16, 2000, Celgene completed an offering to sell 10,350,000 shares
of its common stock at a price of $33.67 per share. 8,802,000 shares were for
the account of Celgene and 1,548,000 shares were for the account of a selling
shareholder pursuant to the conversion of $9,288,000 of the 9%, January 1999
convertible notes held by that shareholder. Proceeds to Celgene, net of
expenses, were approximately $278 million.
Celgene's net working capital at March 31, 2000 increased significantly to
approximately $295.6 million (primarily cash and cash equivalents and
marketable securities) from approximately $18.5 million at December 31, 1999.
The increase in working capital was primarily due to the net proceeds received
from the public offering in February, 2000.
Cash and cash equivalents increased by $147.7 million in the first quarter 2000
and marketable securities increased by $125.2 million from December 31, 1999.
This reflects the receipt in February 2000 of funds from the public offering.
Celgene expects that its rate of spending will increase as the result of
increased clinical trial costs, increased expenses associated with the
regulatory approval process and commercialization of products currently in
development, increased costs related to the commercialization of THALOMID and
increased working capital requirements. Celgene believes that the funds
received from the public offering as well as the increasing revenues from sales
of THALOMID should be sufficient to fund its operations for the foreseeable
future.
RECENTLY ISSUED ACCOUNTING STANDARDS
In December 1999, the staff of the Securities and Exchange Commission issued
Staff Accounting Bulletin ("SAB") No. 101, Revenue Recognition in Financial
Statements. SAB 101 summarizes certain of the staff's views in applying
generally accepted accounting principles to revenue recognition in financial
statements, including the recognition of non-refundable fees received upon
entering into arrangements. SAB 101, as amended, must be adopted no later than
the fourth quarter of 2000 with an effective date of January 1, 2000 . Celgene
is in the process of evaluating this SAB and the effect it will have on its
consolidated financial statements and future revenue recognition policy.
YEAR 2000 COMPUTER SYSTEMS COMPLIANCE
All of Celgene's computer hardware and software has been upgraded for Year 2000
compliance. All of its key vendors have provided assurance that they are Year
2000 compliant. While there were no Year 2000 related problems at the
transition into the Year 2000, Celgene is maintaining our contingency plans in
the event any problems arise in the future.
87
<PAGE>
The statement contained in the foregoing Year 2000 readiness disclosures is
subject to protection under the Year 2000 Information and Readiness Disclosure
Act.
CAUTIONARY STATEMENTS FOR FORWARD-LOOKING INFORMATION
The Management's Discussion and Analysis of Financial Condition and Results of
Operations provided above contains certain forward-looking statements which
involve known and unknown risks, delays, uncertainties and other factors not
under Celgene's control which may cause actual results, performance and
achievements of Celgene to be materially different from the results,
performance or other expectations implied by these forward-looking statements.
These factors include results of current or pending clinical trials, actions by
the FDA and other factors detailed herein and in our other filings with the
Securities and Exchange Commission.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market Risk
Celgene does not use derivative financial instruments. Celgene's convertible
notes have a fixed interest rate.
88
<PAGE>
INFORMATION REGARDING SIGNAL
OVERVIEW OF SIGNAL'S BUSINESS
Signal Pharmaceuticals is a biopharmaceutical company focused on discovering
and developing new classes of "small molecule" drugs, which are drugs that can
be taken in pill form, that regulate disease-associated genes. Signal believes
its approach can convert valuable information coming from genomics initiatives
into new classes of superior drugs. Signal's drug discovery engine enables it
to identify and pursue potential gene-regulating drug targets across multiple
diseases and to rapidly identify drugs for development. Signal's efforts are
focused in several major disease areas in which abnormal gene regulation plays
an important role in the development of disease. These disease areas include
cancer, inflammatory disease, osteoporosis, cardiovascular disease,
neurological disease and viral infections.
Signal is conducting its drug discovery and development programs both
independently and with its corporate collaborators: Serono, Axys, DuPont
Pharmaceuticals, Byk Gulden and Pliva. Currently, Signal's corporate
collaborators fund significant portions of its research and development
expenditures. In two of its collaborative programs, Signal has retained United
States co-commercialization or profit-sharing rights for the areas of cancer
and inflammatory disease, and in another collaborative program, Signal has
retained worldwide co-development and commercialization rights.
BACKGROUND
GENES AND DISEASE
The human body contains an estimated 100,000 genes. Genes control all cellular
functions responsible for maintaining human health by serving as blueprints for
the production of proteins in cells, a process known as gene expression.
Proteins, which control a cell's biological functions, include hormones,
enzymes and cytokines that regulate cell growth, differentiation and survival.
Recent advances in cellular and molecular biology have shown that malfunctions
in gene regulation either cause or predispose humans to most diseases. These
malfunctions cause cells to produce inappropriate amounts or types of proteins.
For example, the uncontrolled proliferation of cells characteristic of cancer
and inflammatory diseases is the result of over-activation of multiple genes
and the proteins they produce, such as cytokines and enzymes. Conversely,
under-activation of critical genes and their protein products, such as tumor
suppressors and growth factors, also may give rise to disease, including cancer
and neurological disorders. Many complex diseases are caused by the abnormal
activity of not just one but multiple genes. Such complex diseases include
cancer and inflammatory, cardiovascular and neurological diseases.
REGULATION OF GENES BY GENE SWITCHES
Gene regulation is a highly controlled process in which specific sets of genes
are switched on and off in select tissues to maintain the body's essential
functions. Genes are controlled by networks of proteins inside cells which
relay information through pathways from a cell's surface to its nucleus where
genes are expressed. These pathways consist of several large and distinct
classes of gene regulating proteins, or gene switches, which include
transcription factors, kinases and ligases. Transcription factors are molecular
switches that bind to the regions of genes that control the level and duration
of gene expression and protein production. Kinases are enzymes that transmit
information within cells and ultimately lead to gene expression. Ligases
control the proper levels of gene regulating proteins in cells. Each of these
three classes of gene switches can control not just one but multiple genes that
contribute to disease. Therefore, drugs designed to target these gene switches
at pivotal points in a gene regulating pathway can have a major impact on the
subsequent expression of entire sets of genes that contribute to disease.
Genomics is the large-scale identification and sequencing of the genes that
comprise the human genome. Currently this information is being compiled in
databases, and sequencing of the entire human genome is nearing completion.
This genomic database provides a starting point for
89
<PAGE>
understanding the underlying role of genes in disease, but by itself is
inadequate to identify key disease-related gene switches. To realize the
substantial potential of genomics initiatives, key gene switches involved in
disease need to be identified to permit the rapid development of superior drug
therapies that regulate disease-associated genes.
SIGNAL'S GENE REGULATING DRUGS
Signal has developed and integrated a large set of target and drug discovery
technologies to accelerate the application of genomics to the discovery of
important new classes of gene regulating drugs. Signal first maps select gene
regulating pathways to identify drug targets, or gene switches, that control
specific genes that cause disease. This information is then used to discover
novel gene regulating drugs by applying Signal's drug discovery engine. This
engine consists of:
o Advanced cellular, molecular and genomic technologies. Signal uses information
produced from human genomics initiatives to map gene regulating pathways and
identify clinically important drug targets for specific diseases. Signal has
generated proprietary human cell lines, from multiple tissues of the body, to
create in vitro, or test tube, models of disease and to evaluate the activity
and selectivity of drug candidates. Signal also uses functional genomics and
proteomics, which is the large-scale linking of genes and their protein
products to their biological functions, for mapping gene regulating pathways
and identifying disease targets for use in drug discovery;
o High throughput screening systems and diverse compound libraries. Signal has
assembled a library of more than 200,000 distinct small molecule compounds and
natural products which it screens using its biochemical and cell-based
screening technologies. Signal's screening systems include a technology for
simultaneously screening multiple kinases to provide drug activity and
specificity data across multiple drug targets;
o A proprietary, specially designed kinase inhibitor library. Signal identified
the active sites, or molecular locks, on a number of gene regulating kinase
targets using its extensive knowledge of the three dimensional structures of
these targets. Signal believes gene regulating targets identified in the
future will contain similar locks. Signal's kinase inhibitor library is
designed to contain compounds expected to fit like molecular keys into these
locks, enhancing Signal's ability to identify effective inhibitors of current,
as well as yet-undiscovered, gene regulating targets. In addition, Signal
designs these compounds to have attractive pharmaceutical properties, such as
solubility, chemical stability, non-reactivity and the ability to be taken in
pill form; and
o Structure-based drug design. Signal uses its proprietary three-dimensional
models of drug targets, combined with advanced chemistry technologies, to
efficiently generate drug leads and advance drug candidates into preclinical
and clinical development.
Signal believes that, together, these integrated target and drug discovery
capabilities enable it to proceed rapidly from target identification to
screening and optimization of drug candidates. To date, Signal alone or with
its collaborators has identified 27 drug targets in 10 gene regulating pathways
with potential applications in at least six major disease areas. Signal also
has developed 29 drug discovery screens, identified 23 drug leads and commenced
evaluation of drug leads in 15 animal models of disease. Signal has developed
one preclinical drug candidate in its cancer program.
SIGNAL'S DRUG DEVELOPMENT PROGRAMS
Signal's drug discovery and development programs are focused in several disease
areas in which gene dysregulation plays a major role in the onset and
progression of disease. These diseases include cancer, inflammatory disease,
osteoporosis, cardiovascular disease, neurological disease and viral
infections.
CANCER PROGRAMS
Cancer is a group of diseases characterized by uncontrolled growth and spread
of abnormal cells in the body. Cancer results from abnormalities in the
expression of genes that regulate cell proliferation, cell migration and cell
death. Most current anti-cancer drugs kill both cancerous and normal cells,
90
<PAGE>
giving rise to serious toxic side effects. Signal is developing new classes of
drugs designed to selectively control abnormal gene regulating pathways which
cause the start or spread of cancer, with the goal of creating safer and more
effective cancer therapies.
Signal has five drug discovery and development programs focused on regulating
abnormal gene expression involved in the onset and progression of cancer.
Signal currently has one drug candidate, SP8490, in preclinical development for
preventing and treating breast cancer and other cancers. To date, Signal has
not filed an IND for this drug candidate. Signal also has three additional
series of drug leads for the potential treatment of cancer.
Estrogen Gene Regulation in Cancer
Estrogen is a hormone that has a broad spectrum of effects on tissues in both
women and men. Many of these biological effects are beneficial, including
maintenance of bone density and cardiovascular and neurological protection. In
addition to estrogen's positive effects, however, the hormone also is a potent
growth factor in the breast and uterus that has been demonstrated to increase
significantly the risk of cancer in women. In addition, estrogen contributes to
prostate cancer in men.
Two distinct estrogen receptors exist in the body, the estrogen receptor-alpha,
or ER--, and the estrogen receptor-beta, or ER--, each of which has a distinct
tissue distribution in the body. ER-- is found predominantly in bone and in
cardiovascular, breast and reproductive tissue, while ER-- is the predominantly
expressed estrogen receptor in the prostate and hippocampus region of the
brain. Given the tissue-selective expression of ER-- and ER--, estrogen
receptor modulators potentially can be designed to mimic the positive effects
and block the negative effects of estrogen in different tissues. Drugs that
modulate these receptors are termed selective estrogen receptor modulators, or
SERMs.
Unlike chemotherapeutic agents which often cause significant toxic side
effects, SERMs act through different, primarily non-toxic mechanisms. Currently
two SERMs are marketed for treatment of breast cancer. One of these SERMs,
tamoxifen, is the most widely prescribed anti-hormonal therapy for cancer
today. However, tamoxifen is associated with a number of adverse side effects,
including an increased risk for uterine cancer, blood clotting and hot flashes.
In addition, virtually all patients receiving tamoxifen become resistant to the
drug.
Signal is using its gene regulation expertise to design new classes of ER-- and
ER---selective SERMs with efficacy and safety profiles that Signal believes
will be superior to those of many current chemotherapies and tamoxifen. Signal
believes these SERMs have significant potential for preventing and treating
breast, endometrial, prostate, colon and other cancers whose growth is
dependent on estrogen.
SP8490 -- An ER-- Modulator
Using its drug discovery engine and expertise in estrogen gene regulating
pathways, Signal has discovered and is developing a series of SERMs with
improved efficacy and safety in animal models when compared with tamoxifen. In
animal studies, these drug leads were orally effective in preventing breast
cancer and demonstrated equal or superior efficacy to tamoxifen. Additionally,
these compounds displayed a superior safety profile on uterine tissue compared
to tamoxifen. A potential drug candidate, SP8490, currently is in preclinical
development.
ER-- Modulators
Signal has discovered and is developing a novel series of ER---selective SERMs
which currently are undergoing lead optimization. Signal's SERM-\S drug leads
represent a novel series of SERMs that, if successfully commercialized, may be
useful in treating the large number of cancer patients that develop ER-positive
cancers such as prostate, colon, ovarian and tamoxifen-resistant breast cancer.
In October 1999, Signal entered into a collaboration with Axys Pharmaceuticals
to discover and develop ER---selective SERMs for cancer therapy. This
collaboration and Signal's other collaborative arrangements are described below
under the heading "Corporate Collaborators."
91
<PAGE>
JNK Inhibitors for Cancer
The cJun N-terminal kinase, or JNK, pathway controls the expression of specific
sets of genes involved in cancer, including:
o cytokines and growth factors that promote the growth of cancer cells;
o molecules on the surface of cells that are responsible for cell-to-cell
attachment;
o tissue-destructive enzymes that enable tumors to spread to distant sites in
the body and invade normal tissues and organs, referred to as metastasis; and
o factors that lead to the growth of new blood vessels and aid in establishing
new tumors, referred to as angiogenic factors.
Signal is applying its expertise in the JNK gene regulating pathway to identify
novel cancer targets which play a fundamental role in tumor growth and to
design new classes of drugs that target abnormalities in the JNK gene
regulating pathway to inhibit the transformation, growth and spread of cancer.
Using its drug discovery engine, Signal has identified potent and selective
small molecule inhibitors of the JNK pathway which have demonstrated
anti-proliferative activity in tumor cell lines in vitro.
NF-kB Inhibitors for Cancer
The nuclear factor kappa B, or NF-kB, pathway controls the expression of
specific sets of genes involved in different stages of cancer development and
progression. These include specific cell survival factors that make cancer
cells resistant to radiation and chemotherapy. Using its gene regulating target
discovery expertise, Signal and its collaborators have mapped the NF-kB pathway
extensively and have identified multiple targets in the NF-kB gene regulating
pathway for use in drug discovery. Signal and its collaborators also have
demonstrated in vitro that inhibiting key NF-kB kinase targets significantly
increases the sensitivity of cancer cells to cancer chemotherapeutics. Signal
has identified small molecule inhibitors of a specific kinase target in the
NF-kB gene regulating pathway and is optimizing the pharmaceutical properties
of these drug leads. Signal plans to study these drug leads further in animal
models of cancer.
In November 1997, Signal entered into a collaboration with Serono to discover
and develop drugs that target the NF-kB pathway for the potential treatment of
certain cancers and other diseases.
Ligase Inhibitors for Cancer
Signal has discovered and validated in vitro ligase drug targets in the NF-kB
and other important gene regulating pathways. Ligases represent an important
new family of gene regulating targets because of their ability to precisely
maintain normal levels of proteins in cells. In cancer, certain proteins, such
as those that suppress the growth of tumors, are lost or diminished which
causes the progression of cancer. Signal has developed novel drug screens to
identify selective ligase inhibitors which Signal believes may restore normal
levels of proteins the body uses to prevent the emergence of cancer and
resistance to chemotherapy.
INFLAMMATORY DISEASE PROGRAMS
The human immune system is comprised of cells and biochemical substances that
protect the body from infectious organisms, physical injury and abnormal
cellular events such as cancer. Key components of the immune system, such as
white blood cells, are responsible for protective or inflammatory responses at
sites of injury and disease. Inflammatory diseases arise from over-activation
of the immune system resulting in the over-production of immune cells,
inflammatory proteins and tissue-destructive enzymes. These cells and proteins
attack and destroy healthy tissue, giving rise to a number of diseases such as
rheumatoid arthritis, osteoarthritis, allergies, asthma, inflammatory bowel
disease and psoriasis, as well as transplant rejection. Many current
anti-inflammatory drugs have
92
<PAGE>
dose-limiting side effects and only target a single disease mechanism. More
importantly, although these current drugs alleviate many symptoms of disease,
they generally do not target the underlying mechanisms and therefore do not
effectively modify disease processes or treat the underlying disease.
Signal is identifying drug targets in key inflammation pathways and screening
for new classes of small molecule drugs that regulate inflammatory diseases at
the level of gene function. Signal is optimizing, or plans to optimize,
inhibitors of gene regulating targets in three distinct inflammation pathways,
JNK, NF-kB and p38, and has demonstrated the efficacy of one series of drug
leads in animal models of asthma and arthritis.
JNK Inhibitors for Inflammatory Diseases
Activation of the JNK gene regulating pathway increases the expression of a set
of clinically important inflammatory genes, including tumor necrosis factor
alpha, or TNF, interleukin-2, or IL-2, and gamma interferon. There are multiple
types of the JNK regulatory enzyme, each of which controls the expression of
genes in specific cells and in response to specific stimuli. Signal has eight
issued United States patents, four issued foreign patents and related patent
applications covering JNK, its use in drug discovery and JNK inhibitors.
Over-activation of JNK causes or exacerbates several inflammatory and
autoimmune diseases, including rheumatoid arthritis, asthma and multiple
sclerosis.
Signal has developed and initiated high throughput screening for JNK1, JNK2 and
JNK3 inhibitors using proprietary biochemical and cell-based screens. Using its
kinase-focused inhibitor library, Signal has identified several potent
compounds that inhibit JNK1 and JNK2 activity. In addition to significantly
reducing inflammation, one of these drug leads prevents the destruction of
joints in an animal model of arthritis. This drug lead also demonstrates potent
disease-modifying activity in an animal model of asthma. Signal currently is
optimizing drug leads to improve the potency, selectivity and other
pharmaceutical properties of its JNK inhibitors. Signal also is developing
additional high throughput drug screens for several other drug targets in the
JNK pathway, including JNKK1 and JNKK2.
NF-kB Inhibitors for Inflammatory Diseases
NF-kB plays a pivotal role in inflammatory disease processes by regulating
cytokine genes, such as TNF, IL-1, IL-2, IL-6, IL-8, along with genes that code
for molecules on the surface of cells and the cyclooxygenase-2 or, COX-2,
inflammatory enzyme. Signal's researchers and collaborators have identified six
drug targets that regulate NF-kB activation. Signal's discovery of three of
these targets was reported in the journals Science, Nature and Cell. Signal
believes drugs that inhibit NF-kB and the activation of select
disease-associated genes will have potential disease modifying effects. Signal
has been issued four United States patents and it, along with its
collaborators, has filed related patent applications for targets in this
pathway.
Signal has developed and initiated high throughput screening for NF-kB
inhibitors using proprietary biochemical and cell-based screens. Signal also
has developed technology for profiling the effects of active compounds on a
number of immune-inflammatory genes and proteins in cells and animals. Using
its kinase inhibitor library, Signal has identified several small molecule drug
leads which selectively inhibit a kinase target in the NF-kB pathway. One of
these drug leads potently inhibits expression of the TNF inflammatory response
gene in an animal model. Signal is optimizing these drug leads to further
enhance potency, specificity and bioavailability and is developing additional
high throughput drug screens for other targets in the NF-kB pathway.
In November 1997, Signal initiated a collaborative development and license
agreement with Serono to discover novel NF-kB inhibitors for inflammatory and
other diseases.
p38 Inhibitors for Inflammatory Diseases
Activation of the p38 gene regulating pathway causes the expression of multiple
cytokine genes, including IL-1, IL-6, IL-8 and TNF, which regulate the
development and proliferation of cells in response to disease and tissue
injury. When inappropriately activated, the p38 pathway is believed to
93
<PAGE>
play an important role in diseases arising from abnormal production of
cytokines, including heart disease caused by harmful inflammatory events. To
date, Signal and its academic collaborators have identified five proprietary
drug targets in the p38 pathway. One of these targets is p38-2, a subtype of
p38, which is highly expressed in heart and skeletal muscle and not in most
other tissues. Signal and its collaborators have been issued four United States
patents for three drug targets in the p38 pathway, MKK3, MKK6 and p38-2, and
have filed related patent applications with regard to other potential drug
targets in this pathway. In the p38 pathway, Signal has screened two targets
using its kinase inhibitor compound library and has identified novel inhibitors
which it plans to optimize as drug leads.
OSTEOPOROSIS PROGRAM
The incidence of osteoporosis and bone fractures in women is significantly
increased during and following menopause. Estrogen has been used for hormone
replacement therapy, or HRT, for many years to prevent osteoporosis and
alleviate some of the other effects of menopause. However, HRT has several
negative side effects, including the increased risk of breast and uterine
cancer, which make it a poor treatment option for many women.
ER-- Modulators for Osteoporosis
SERMs are designed to mimic the beneficial effects of estrogen by inhibiting
bone loss in postmenopausal women, while avoiding some of estrogen's negative
effects. In 1998 Eli Lilly's raloxifene became the first and only FDA-approved
SERM for osteoporosis.
Signal has developed a novel series of ER---selective SERMs with superior
efficacy and safety when compared with raloxifene in preclinical animal
studies. In three separate animal studies, four of Signal's drug leads were
tested in comparison with estrogen and raloxifene for the ability to inhibit
bone loss. In those studies, Signal's orally administered drug leads were
demonstrated to be significantly superior to raloxifene in preventing bone loss
and in preserving bone strength. Signal's drug leads also demonstrated a
superior safety profile in uterine tissues, when compared with raloxifene. An
additional safety feature of Signal's drug leads is that they do not stimulate
cell proliferation in breast tissue. Signal's ER---selective SERMs also
demonstrated a favorable cholesterol-lowering profile in animal models. The
drug leads are well tolerated in animals and have not shown any negative
effects in genetic safety tests required by the FDA. These drugs, if
successfully developed, would provide clinicians with an alternative,
non-estrogen treatment for osteoporosis that also would minimize some of the
adverse effects associated with HRT, including an increased risk of breast and
uterine cancer.
CARDIOVASCULAR DISEASE PROGRAMS
Many cardiovascular diseases, including heart attack and congestive heart
failure, occur because of abnormal expression of genes in blood vessels and in
the heart. Heart attacks can occur when the cells that line blood vessels are
activated by injury or trauma. These damaged cells overproduce inflammatory
proteins such as molecules on the surface of cells that are responsible for
cell-to-cell attachment, growth factors and cytokines that lead to a buildup of
inflammatory cells and platelets in blood vessel walls. This buildup may block
normal blood flow and lead to atherosclerosis and heart attack. Many of these
proteins are controlled by the NF-kB, JNK and p38 gene regulating pathways. In
addition, the gradual increase of cholesterol in blood vessels may also cause
atherosclerosis and heart attacks. Estrogen enhances the clearance of bad
cholesterol from the blood by regulating gene expression in the liver.
Signal has identified several selective inhibitors of gene regulating targets
in the JNK, NF-kB and estrogen pathways. Signal has developed additional
screens which use proprietary human vascular cell lines to evaluate the
potential cardioprotective effects of its drug leads. Signal plans to test
these inhibitors in various animal models of cardiovascular disease.
94
<PAGE>
JNK Inhibitors for Cardiovascular Disease
Heart failure can occur when muscle cells in the heart fail due to a massive
influx of inflammatory cytokines such as TNF. As a result, the heart fails to
adequately pump blood to the body. The JNK pathway is a key regulator of TNF
gene expression and protein production. This pathway becomes over-activated in
cardiac tissue when the heart undergoes damage or other stress. Signal has
identified selective and potent inhibitors of the JNK pathway that are expected
to undergo evaluation in models of cardiovascular disease.
NF-kB and p38 Inhibitors for Cardiovascular Disease
Restenosis, or the narrowing of blood vessels that restricts blood flow, can
occur when cells that line the inside of blood vessels are over-stimulated
during balloon angioplasty procedures. This often causes the over-expression of
growth factor genes and subsequent over-proliferation of smooth muscle cells in
the blood vessel wall leading to a re-blocking of the blood vessel. NF-kB and
p38 pathways have been demonstrated to be over-activated in animal models of
angioplasty-induced restenosis. Signal has identified several inhibitors of
targets in these pathways that it intends to evaluate in models of
cardiovascular disease.
In November 1997, Signal entered into a collaboration with Serono to develop
inhibitors of NF-kB for potential treatment of cardiovascular and other
diseases.
Estrogen Gene Regulation for Cardiovascular Disease
Signal is applying multiple gene discovery technologies to identify gene
regulating drugs for preventing and treating cardiovascular diseases, including
its proprietary functional genomics technology known as PhaRMA(TM). Signal has
used these technologies to identify over 75 human genes that are regulated by
estrogen in human cardiovascular cells. Many of these genes are regulated by
estrogen in a tissue-selective manner. In addition, Signal has developed and
implemented a proprietary cell-based screening platform for profiling gene
expression in panels of estrogen-regulated genes in cardiovascular cells. These
advanced technologies have led to the discovery and development of new SERMs
which Signal believes will be cardio-protective.
NEUROLOGICAL DISEASE PROGRAMS
The human nervous system consists of two distinct components: the central
nervous system, or CNS, which includes the brain and spinal cord, and the
peripheral nervous system, or PNS, which includes all nerves outside the CNS.
Defects or damage in the CNS can lead to Parkinson's disease, Alzheimer's
disease, stroke or epilepsy, as well as psychiatric disorders such as
depression and schizophrenia. PNS disorders can lead to acute and chronic pain,
and peripheral neuropathies caused by chemotherapy and diabetes can cause
chronic sensory or motor defects.
Signal's researchers and collaborators have developed a proprietary cell
immortalization technology for producing cloned human neuronal cells that can
be designed to mimic important features of normal and diseased neurons and can
be used for target and drug discovery. Signal has engineered human neuronal and
other cell lines of the CNS and, Signal believes, the first human sensory
neuronal cell lines of the PNS. Unlike many other approaches, Signal's cell
lines are readily renewable and therefore are amenable to the application of
advanced genomic technologies for target and drug discovery.
JNK3 Inhibitors for Neurological Disease
Signal is applying its expertise in engineering neuronal cell lines and in
mapping the JNK gene regulating pathway to identify novel drug targets and drug
leads for neurological diseases. JNK3 is known to be located primarily in the
brain and mice engineered to be deficient in JNK3 are resistant to
experimentally induced epilepsy and stroke. For these reasons, Signal believes
JNK3 inhibitors will have therapeutic value for treating epilepsy, as well as
neurodegeneration associated with Alzheimer's
95
<PAGE>
disease, Parkinson's disease, stroke and head trauma. Using its high throughput
screening, Signal has identified potent and selective inhibitors of the JNK
gene regulating pathway, including the JNK3 drug target. Signal also has
demonstrated that one of its drug leads can block seizures in an animal model
of epilepsy and can prevent neuronal cell damage in a cellular model of
Parkinson's disease. Current efforts are focused on further enhancing potency,
selectivity and other pharmaceutical properties of Signal's drug leads for
preclinical development.
VIROLOGY PROGRAMS
Viruses are microorganisms that infect cells and can cause serious disease.
Despite the high incidence of chronic viral infections, only a limited number
of antiviral drugs have been approved to date. New classes of antiviral
treatments are needed which act on novel, virus-specific gene regulating
targets while overcoming problems of toxicity and viral resistance.
Signal's virology program is directed toward four viral gene regulating
targets: two regulatory factors for the hepatitis C virus, or HCV, a
transcription factor for human immunodeficiency virus, or HIV, and the E2
transcription factor for the human papilloma virus, or HPV. Signal and its
collaborators have validated each of these targets in vitro. Signal has
developed a proprietary viral infection screen for identifying novel inhibitors
of HPV gene activation. Signal has developed target-specific screens for small
molecule HCV and HIV inhibitors as part of its three-year collaboration with
DuPont Pharmaceuticals initiated in December 1997, and compounds with selective
antiviral activity have been identified. In December 1999, DuPont
Pharmaceuticals paid Signal a $1 million equity milestone for the successful
development of three novel high throughput screening drug discovery screens for
HCV and HIV antivirals.
ENGINE FOR DISCOVERING GENE REGULATING TARGETS
Signal is developing and applying advanced cellular, molecular and genomic
technologies to discover clinically important targets that are the focus of its
drug discovery programs and corporate collaborations. These discovery
technologies include:
Proprietary Human Cell Lines. Signal has developed a proprietary technology to
immortalize and engineer human cells for use in its target and drug discovery
programs. These cell lines are designed to include the relevant genes and
related pathways involved in both normal and abnormal cellular functions.
Signal uses proprietary human cell lines to develop in vitro models of
important disease processes, including bone metabolism, cardiovascular and
neurodegenerative disease. Signal then uses these human cell lines to identify
and validate novel disease-related genes and specific drug targets in gene
regulating pathways and in screens for drug discovery.
Functional Genomics and Proteomics. Signal applies functional genomics and
proteomics to determine the role specific genes and their protein products play
in health and disease. Signal has implemented advanced genomic technologies to
accelerate the identification and prioritization of gene regulating disease
targets. Signal has developed and filed a patent for its proprietary PhaRMA(TM)
genomics system, which is a technology to rapidly determine the differences in
gene expression between normal and diseased tissue and to evaluate the effects
of drug candidates on relevant genes within a cell or tissue. To map the gene
regulating pathways involved in specific diseases, Signal is developing
capabilities that integrate protein separation and analysis. Signal uses these
gene and protein discovery tools, in combination with its proprietary cell
lines, to generate a more comprehensive profile of gene regulating pathways
involved in diseases and to facilitate the rapid identification of novel and
specific therapeutic targets. For example, Signal is applying functional
genomics technologies to identify and characterize the role of genomic targets
and their regulatory pathways in cancer, inflammation, bone metabolism,
cardiovascular and neurological diseases.
Pathway Mapping and Target Identification. Signal applies cellular, molecular
and genomic techniques to elucidate the regulatory pathways of disease-related
genes. An initial step in this process involves mapping the regulatory regions
of disease-related genes to identify which transcription factors selectively
activate or inhibit each gene's expression. Signal then uses genomics and
proteomics to
96
<PAGE>
identify and characterize specific enzymes or other targets in a pathway that
regulate the activation of these transcription factors. When novel gene
regulating enzymes or other targets are identified, Signal applies advanced
computer programs to search proprietary and public gene databases and to
identify subtypes of these targets with distinct therapeutic applications and
specificity for different tissues.
After a potential target has been identified, Signal uses various techniques to
validate the role of newly identified molecular targets in specific disease
processes and to determine their utility for drug discovery.
ENGINE FOR DISCOVERING AND DEVELOPING GENE REGULATING DRUGS
Once key gene regulating drug targets are identified, Signal uses its advanced
drug discovery engine to rapidly discover and optimize drugs active on these
targets. These drug discovery technologies comprise:
Assay Development. Signal develops and uses biochemical and cell-based assays
to screen for compounds that regulate gene expression in a target- and
cell-specific manner. Signal's researchers have designed modular systems for
developing biochemical and cell-based assays, enabling Signal to substitute
different drug targets into standardized assay formats for use in various
discovery programs. Signal develops and uses biochemical assays to screen
compounds for activity on specific targets. These biochemical assays are
designed to mimic the functional activity of a drug target in its native
cellular environment. Signal's cell-based assays facilitate the identification
of compounds that modulate gene expression through distinct pathways and in
specific cell types. Signal has developed 29 drug discovery assays and is
continuing to develop additional high throughput screening assays.
High Throughput Screening. Signal uses automated, high-volume drug discovery
systems, known as high throughput screening, or HTS, systems for rapid,
target-specific screening of diverse compound libraries. These robotic systems
enhance the precision, reproducibility and integration of chemical and
biological data. Signal's screening library currently consists of more than
200,000 distinct compounds, which include small molecules, natural products and
compounds derived from combinatorial chemistry.
Signal's Kinase Inhibitor Library. Based on its knowledge of the three
dimensional structures of gene regulating targets, Signal has designed a large,
proprietary collection of compounds focused on kinase-binding small molecules.
This library currently consists of approximately 18,000 distinct drug-like
compounds, and Signal plans to continue expanding this proprietary
kinase-focused library. To date Signal has screened the library against seven
kinase gene regulating targets, and has successfully identified inhibitors with
attractive pharmaceutical properties for each of these targets.
Optimization and Preclinical Development of Drug Candidates. Signal develops
drug candidates by integrating its chemistry and pharmacology expertise. Signal
uses traditional medicinal chemistry approaches in conjunction with
combinatorial and computational chemistry to optimize potential drug
candidates. Signal further expedites the drug optimization process by employing
structure-based drug design techniques, which are techniques that use computer
models of drug targets to design drug candidates that interact more precisely
with a target. Signal's scientists have designed computer-generated
three-dimensional models of the JNK2, JNK3, ER-- and ER-- drug targets.
Throughout the drug optimization process Signal's chemists are guided by
results from efficacy, drug absorption, distribution, metabolism and safety
studies conducted by Signal's pharmacology and preclinical development group.
CORPORATE COLLABORATORS
Collaborative arrangements with pharmaceutical and biotechnology companies are
an integral part of Signal's business strategy. As of March 31, 2000, Signal
had received approximately $43.3 million in up front fees, research and
development funding, milestone payments and equity investments from its past
and current collaborators. Signal had a collaboration with Nippon Kayaku, which
was terminated in July 2000, a collaboration with Organon, which expired in
July 1999, and a collaboration with Tanabe, which was terminated in March 1998.
In connection with the termination of its collaboration
97
<PAGE>
with Nippon Kayaku, Signal granted Nippon Kayaku a worldwide, royalty-free
license to a compound the two parties term NSP6783 and other compounds involved
in the collaboration. The license is exclusive in the field of diagnosing,
treating or preventing diseases of the central and peripheral nervous systems
and is non-exclusive in all other fields. In connection with the termination of
its collaboration with Tanabe, Signal licensed exclusive worldwide rights for a
drug lead to Tanabe. In addition, the research phase of Signal's collaboration
with Roche Bioscience expired in August 1999, and Roche has exclusively
licensed two immortalized PNS cell lines from Signal for use in drug discovery
for pain, incontinence and peripheral vascular disease.
SERONO
In November 1997, Signal entered into a collaborative agreement with Serono,
under which Serono agreed to fund specified research for an initial three-year
period and which contained provisions for extensions to the initial research
term as further described below. The Serono collaboration is focused on
identifying compounds that modulate NF-kB gene regulating pathways to which
Serono has rights for all diseases. The original agreement granted Serono
exclusive rights to these compounds in all countries of the world except Asia.
In April 1999, Serono expanded the collaboration to include Asia by making a
$2.0 million license payment to Signal and agreeing to pay Signal milestones
and royalties for products commercialized in Asia. Under the original
agreement, Serono purchased approximately $10.1 million of Signal's Series E
and Series F preferred stock. Serono also agreed to provide Signal with annual
research and development support. In addition, Serono is obligated to make
payments to Signal based on the achievement of specified research and
development milestones and to pay Signal royalties on future sales of products
licensed under the collaboration. As of March 31, 2000 Serono had paid Signal
$8.0 million in research and development support.
Under an exclusive license that Signal granted to Serono, Serono will be
responsible for preclinical and clinical development of drug candidates and the
development of any drugs arising from the collaboration in all countries of the
world. Signal has co-promotion rights for all products marketed in the United
States, which are exercisable at any time during the term of the agreement and
up to 30 days following receipt of notice from Serono of the filing of an NDA
or equivalent regulatory application, with respect to products arising from the
collaboration. If Signal exercises its co-promotion rights, it will forego
royalties in exchange for a share of product revenue and Signal will be
obligated to reimburse Serono for Signal's share of development costs out of a
portion of revenue.
Under the original agreement, following the expiration of the initial
three-year research term, Serono's research support obligations were to
continue for additional three-year periods, unless terminated by Serono by
written notice given to Signal at least six months prior to the end of the
first three-year term or any subsequent three year term. In February 2000, the
parties amended the agreement to effectively extend the initial three-year
research term by one year and to provide Serono with the right to terminate the
collaborative research by written notice given to Signal at least three months
prior to the end of this one-year extension or any subsequent one-year
extension. Serono may also terminate the agreement upon six months' notice any
time after the end of the initial three-year term.
AXYS
In October 1999, Signal entered into a collaborative agreement with Axys
Pharmaceuticals, under which Axys agreed to fund specified research at Signal's
facility for two years. The agreement may be extended for an additional year at
Axys' option. The collaboration with Axys is focused on the discovery and
development of ER---selective SERMs for cancer therapy. Signal has rights for
all indications outside of cancer. Axys has exclusive worldwide development and
marketing rights to Signal's ER---selective SERMs for the treatment of cancer.
Axys will provide payments to Signal in the form of research funding at a level
approximating Signal's cost of this program, research milestones and royalties.
Signal may exercise a profit-share option in the United States and possibly
other territories at a predetermined point during development in lieu of
royalties on product sales. If Signal exercises this right, it will share
equally in the profits in the United States on product sales by
98
<PAGE>
Axys but will be responsible for an equal share of the remaining development
and commercialization costs in the United States. Either party may terminate
this agreement in the event a material breach by the other party remains
uncured for 90 days. As of March 31, 2000, Axys had paid Signal $2.0 million in
license fees and approximately $691,000 million in research funding.
DUPONT PHARMACEUTICALS
In December 1997, Signal entered into a collaborative agreement with DuPont
Pharmaceuticals, under which DuPont Pharmaceuticals agreed to fund specified
research at Signal's facility for three years. DuPont Pharmaceuticals has the
option to extend the research term for up to three additional years. The DuPont
Pharmaceuticals collaboration is focused on identifying compounds for the
treatment or prevention of HCV and HIV infections, and Signal has granted
DuPont Pharmaceuticals worldwide exclusive rights to these compounds. Under
this collaboration, Signal and DuPont Pharmaceuticals are responsible for
developing target-specific screening assays and are jointly responsible for
identifying lead compounds. DuPont Pharmaceuticals is solely responsible for
lead optimization and the worldwide development and commercialization of any
drugs arising from the collaboration.
DuPont Pharmaceuticals agreed to provide Signal with annual research and
development support at a level approximating Signal's cost of these programs.
DuPont Pharmaceuticals also is obligated to make payments to Signal upon the
achievement of specified research and development milestones and to pay Signal
royalties on any future product sales arising from the collaboration. This
agreement may be terminated by either party upon 60 days written notice upon a
material breach that remains uncured or upon the bankruptcy of the other party.
DuPont Pharmaceuticals paid Signal a license fee of $1.0 million and, through
March 31, 2000, had paid Signal $4.1 million to support research and
development efforts. In December 1999, DuPont Pharmaceuticals purchased 288,708
shares of Signal's Series F-1 preferred stock for an aggregate purchase price
of $1.0 million, under terms specified in the original agreement in December
1997. This represented a milestone payment for Signal's successful development
and validation of three new antiviral drug discovery assays, each of which is
designed to identify small molecule inhibitors of key HCV and HIV viral
targets.
BYK GULDEN
In June 2000, Signal entered into a collaborative agreement with Byk Gulden
Lomberg Chemische Fabrik GmbH focused on the discovery and optimization of
inhibitors of an unspecified kinase target being investigated by Byk Gulden.
Under the terms of the agreement, Signal will be responsible for constructing a
molecular model of the kinase target and for screening its proprietary kinase
inhibitor library to identify selective and specific inhibitors of this target.
Byk Gulden is obligated to pay Signal a license fee of $250,000 and has agreed
to fund specified research as part of this effort for three months and has the
right to extend this for an additional nine-month period. If Byk Gulden extends
the research funding, Signal will be responsible for optimizing library hits
using medicinal chemistry to generate lead compounds. Byk Gulden also is
obligated to make payments to Signal upon the achievement of specified
pre-clinical, clinical and commercialization milestones. In addition, Signal
will retain the right to modify any compound discovered or generated to
identify inhibitors of other targets in the same kinase family, and those
inhibitors will be owned exclusively by Signal. Either party may terminate this
agreement upon the bankruptcy, insolvency, dissolution or winding up of the
other party, or in the event a material breach by the other party remains
uncured for 60 days.
PLIVA
In July 2000, Signal entered into a collaborative agreement with Pliva d.d.
focused on the discovery and optimization of inhibitors of two unspecified
kinase targets being investigated by Pliva. Under the terms of the agreement,
Signal will be responsible for screening its proprietary kinase inhibitor
library, and possibly its diversity library, to identify selective and specific
inhibitors of each of these two targets. Pliva will pay Signal a license fee
and payments based on the achievement of specified research and development
milestones. In addition, if specified research milestones are achieved, Pliva
99
<PAGE>
will fund specified research at Signal for one year. For each kinase target,
Signal will have the sole option at a specified stage prior to human clinical
trials and again at a specified stage during human clinical trials to negotiate
a worldwide joint development agreement with Pliva which would reflect equal
sharing by the parties of both revenue and expenses associated with development
and commercialization of a licensed product arising from the collaboration. If
Signal elects not to exercise either of these options, Pliva will be obligated
to pay Signal royalties on net sales of licensed products. Either party may
terminate this agreement upon the bankruptcy, insolvency, dissolution or
winding up of the other party, or in the event a material breach by the other
party remains uncured for 60 days.
LICENSE AGREEMENTS
Signal has established a number of license agreements with academic
institutions. Signal's principal license agreements are:
THE REGENTS OF THE UNIVERSITY OF CALIFORNIA
In October 1993, Signal entered into a license agreement with The Regents of
the University of California, as amended in June 1997 and February 1998, under
which Signal obtained a worldwide exclusive license for the JNK gene regulating
enzyme based on the research of Dr. Michael Karin, one of Signal's scientific
founders and advisors. The license also covers methods for the production and
screening of nerve cells. In February 1998, Signal also secured from The
Regents exclusive worldwide license rights to certain patents filed by Dr.
Karin relating to specified NF-kB signaling molecules, IKK1 and IKK2. Under the
license agreement, Signal paid initial license fees and extension payments and
issued shares of Signal's common stock to The Regents, and is obligated to make
specified royalty and milestone payments. The term of the license remains in
effect for the life of the last-to-expire patent covered under each agreement.
THE UNIVERSITY OF MASSACHUSETTS
In October 1996 and 1997, Signal entered into worldwide exclusive license
agreements with the University of Massachusetts. Under the license agreements,
Signal has exclusive rights under patent applications and nonexclusive
worldwide rights under unpatented know-how to develop drugs targeting JNK and
three intracellular gene regulating proteins in the p38 pathway, MKK3, MKK4 and
MKK6, based on the research of Dr. Roger J. Davis, one of Signal's scientific
advisors. Upon entering into both of the license agreements, Signal paid a
license fee and issued shares of Signal's common stock to the University of
Massachusetts and is obligated to make royalty and milestone payments. The term
of the licenses remains in effect for the longer of 10 years or the life of the
last-to-expire patent under the agreements.
PATENTS AND PROPRIETARY RIGHTS
Signal will be able to protect its proprietary rights from unauthorized use by
third parties only to the extent that its proprietary rights are covered by
valid and enforceable patents or are effectively maintained as trade secrets.
Accordingly, Signal seeks patent protection for its proprietary technology,
targets and potential products. As of June 30, 2000, Signal owned or had
licensed 29 issued United States patents, 2 notices of allowance from the
United States Patent and Trademark Office, 9 corresponding issued foreign
patents and 35 pending United States patent applications. In addition, as of
that date, Signal owned or had licensed 7 corresponding international filings
under the Patent Cooperation Treaty and 43 pending foreign national patent
applications.
Signal's policy is to file patent applications and to protect technology,
inventions and improvements to inventions that are commercially important to
the development of Signal's business. Signal seeks United States and
international patent protection for the molecular targets it discovers, as well
as therapeutic products and processes, drug discovery technologies and other
inventions. Signal's commercial success will depend in part on obtaining this
patent protection. Signal also intends to seek
100
<PAGE>
patent protection or rely upon trade secret rights to protect other
technologies that may be used to discover and characterize molecular targets
and that may be used to develop novel drugs. Signal seeks protection, in part,
through confidentiality and proprietary information agreements.
Signal has developed proprietary technology for use in molecular target
discovery, regulatory pathway identification and assay design and, in addition
to Signal's issued patents, has filed a number of patent applications in these
areas. Also, an increasing percentage of Signal's recent patent applications
have been related to potential product candidates, or compounds, that it has
discovered.
Signal is aware of three issued United States patents relating to specific
methods for regulating gene expression. Signal believes that it has not
infringed, and is not currently infringing, the claims of the patents.
Nonetheless, Signal may in the future have to prove it is not infringing these
patents or be required to obtain licenses to one or more of these patents, and
Signal does not know whether such licenses will be available on commercially
reasonable terms, or at all. Signal is also aware of a United States patent
which has issued to a third party claiming subject matter relating to the NF-kB
pathway which appears to overlap with technology claimed in some of Signal's
pending NF-kB patent applications. Signal believes that one or more
interference proceedings will be initiated by the U.S. Patent and Trademark
Office to determine priority of invention for this subject matter. While Signal
cannot predict the outcome of any such proceedings, in the event Signal does
not prevail Signal believes it can use alternative methods for its NF-kB drug
discovery program for which it has issued United States patents that are not
claimed by the subject matter of the third party patents.
COMPETITION
Signal faces, and will continue to face, intense competition from
pharmaceutical and biotechnology companies and other commercial enterprises, as
well as numerous academic and research institutions and governmental agencies.
Other companies are pursuing the same and similar technologies, including the
discovery of targets that regulate genes. Many of Signal's competitors and
potential competitors have substantially greater advantages in the areas of
capital resources, research and development resources, manufacturing, sales and
marketing, and production facilities. Additionally, many of Signal's
competitors have significantly greater experience than it does in undertaking
target and drug discovery, preclinical product development, testing and
clinical trials of potential pharmaceutical products, and obtaining FDA and
other regulatory clearances.
Smaller companies also may prove to be significant competitors, particularly
through proprietary research discoveries and collaborative arrangements with
large pharmaceutical and established biotechnology companies. Many of Signal's
competitors have significant products that have been approved or are in
development and operate large, well-funded research and development programs.
Signal also faces competition from academic institutions, governmental agencies
and other public and private research organizations in developing drugs and in
recruiting and retaining highly qualified scientific and management personnel.
Signal's competitors, either alone or with their collaborative partners, may
succeed in developing technologies or drugs that are more effective, safer,
more affordable or more easily administered and may achieve patent protection
or commercialize drugs sooner than Signal. Developments by others may render
Signal's product candidates or Signal's technologies obsolete.
GOVERNMENT REGULATION
The manufacturing and marketing of Signal's potential products and ongoing
research and development activities are subject to extensive regulation by
numerous governmental authorities in the United States and other countries.
Before marketing in the United States, any drug developed by Signal must
undergo rigorous preclinical testing and clinical trials and an extensive
regulatory clearance process implemented by the FDA under the federal Food,
Drug, and Cosmetic Act. The FDA regulates, among other things, the development,
testing, manufacture, safety, efficacy, record keeping, labeling, storage,
clearance, advertising, promotion, sale and distribution of biopharmaceutical
products. None of Signal's product candidates has received marketing clearance
in the United States or any foreign market. The regulatory review and clearance
process, which includes preclinical testing and clinical trials of each product
101
<PAGE>
candidate, is lengthy, expensive and uncertain. Securing FDA clearance requires
the submission of extensive preclinical and clinical data and supporting
information to the FDA for each indication to establish a product candidate's
safety and efficacy. The process takes many years, requires the expenditure of
substantial resources, involves post-marketing surveillance, and may involve
ongoing requirements for post-marketing studies. Before commencing clinical
investigations in humans, Signal must submit to, and receive clearance from,
the FDA of an Investigational New Drug application. Signal expects to rely on
some of its corporate collaborators to file INDs and generally direct the
regulatory review process for some of Signal's products.
Outside the United States, Signal's ability to market a product is contingent
upon receiving a marketing authorization from the appropriate regulatory
authorities. The requirements governing the conduct of clinical trials,
marketing authorization, pricing and reimbursement vary widely from country to
country. At present, foreign marketing authorizations are applied for at a
national level, although within the European Union registration procedures are
available to companies wishing to market a product in more than one European
Union member state. If the regulatory authority is satisfied that adequate
evidence of safety, quality and efficacy has been presented, a marketing
authorization will be granted. This foreign regulatory approval process
involves all of the risks associated with FDA clearance discussed above.
MANUFACTURING
To date, Signal has not manufactured any products for preclinical, clinical or
commercial purposes and does not have any manufacturing facilities. Signal
intends to use third-party contract manufacturers or its corporate
collaborators for the production of material for use in preclinical and
clinical trials and for the manufacture of future products for
commercialization. Signal cannot assure you that it or any outside
manufacturers can produce potential products of suitable quality in sufficient
quantity in a cost-effective manner, if at all.
Signal and its contract manufacturers also are required to comply with the
applicable FDA and other applicable domestic and foreign regulatory
authorities' current good manufacturing practice regulations. Signal or its
contract manufacturers may not be able to comply with the applicable good
manufacturing practice requirements and other FDA or other applicable domestic
and foreign regulatory requirements.
OTHER THIRD PARTY SERVICES
In addition to manufacturing arrangements with third parties, Signal has also
contracted with third parties for the performance of preclinical studies,
including studies regarding the biological activity, safety, absorption,
metabolism and elimination of Signal's drug candidates, and Signal expects to
continue to contract with third parties for these and similar services. Signal
also expects that it will contract with third parties to conduct all clinical
trials, if any, of its drug candidates. There are multiple companies capable of
performing these services, and, accordingly, Signal does not expect to be
dependent on any single company for these services.
EMPLOYEES
As of June 30, 2000, Signal had 93 full-time employees, including 42 with Ph.D.
degrees. Of Signal's workforce, 75 employees are engaged in research and
development and 18 are engaged in business development, finance and
administration. Signal has assembled a group of experienced scientists and
managers skilled in each phase of target and drug discovery. Signal also
retains outside consultants. None of Signal's employees is covered by
collective bargaining arrangements, and Signal's management considers its
relationships with its employees to be good.
FACILITIES
Signal currently leases 25,000 square feet of laboratory and office space at
5555 Oberlin Drive, San Diego, California. Signal's lease for this facility
expires on January 31, 2001, with an option to renew for two additional periods
of three years each. Signal also leases 11,000 square feet of laboratory and
102
<PAGE>
office space at 5626 Oberlin Drive and 9,500 square feet of office space at
5627 Oberlin Drive, San Diego, California. Signal's leases for these facilities
expire on December 31, 2003. Signal believes that its existing facilities are
adequate to meet its business requirements for the near-term and that
additional space will be available on commercially reasonable terms, if
required.
LEGAL PROCEEDINGS
Signal is not a party to any legal proceedings at this time.
MANAGEMENT
EXECUTIVE OFFICERS
Alan J. Lewis, Ph.D., age 54, has served as Signal's chief executive
officer and as a director of Signal since 1996 and as Signal's president since
1994. Prior to joining Signal, Dr. Lewis worked for 15 years at the
Wyeth-Ayerst Research Division of American Home Products Corporation, a
pharmaceutical company, where he served as vice president of research from 1990
to 1994. At Wyeth-Ayerst, Dr. Lewis was responsible for drug discovery efforts
in CNS, cardiovascular, inflammatory, allergy and bone metabolism diseases. Dr.
Lewis currently serves as a director of Allergan Specialty Therapeutics, Inc.,
a pharmaceutical company and Discovery Partners International, Inc., a drug
discovery product and service company. He holds a Ph.D. in Pharmacology from
the University of Wales in Cardiff and completed his post-doctoral training at
Yale University.
EXECUTIVE COMPENSATION
Signal entered into an employment letter agreement with Alan J. Lewis, dated
December 8, 1993, providing for an annual salary, subject to adjustment from
time to time, a signing bonus of $50,000, additional bonuses and options
subject to specified performance milestones, assistance with home financing,
and an opportunity to acquire 450,000 shares of Signal common stock under
Signal's stock option plan. The term of the employment letter agreement was for
one year, renewable annually. During 1999 Alan J. Lewis received a salary in
the amount of $300,000 and a bonus in the amount of $54,000.
Alan J. Lewis was not granted any options during the fiscal year ended
December 31, 1999.
The following table sets forth summary information regarding the number and
value of options exercised by Dr. Lewis during 1999 and held by him as of
December 31, 1999.
AGGREGATED 1999 OPTION EXERCISES AND YEAR-END VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
OPTIONS AT YEAR END AT YEAR-END(1)
------------------------------- ------------------------------
SHARES
ACQUIRED ON VALUE
NAME EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
--------------- ------------- ---------- ------------- --------------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Alan J. Lewis -- $ -- 75,000 -- $16,500 --
</TABLE>
(1) The values of unexercised in-the-money options at year-end in the table
above were determined using the fair market value of the securities
underlying the option as of December 31, 1999 ($0.50 per share) minus the
per share exercise price multiplied by the number of shares.
Dr. Lewis' stock options are immediately exercisable for shares of restricted
common stock and are subject to a right of repurchase under a vesting schedule.
As of December 31, 1999 Dr. Lewis held 79,063 shares and 35,937 exercisable
options remaining subject to a vesting schedule.
103
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In June 1994, Signal loaned $250,000 to Alan J. Lewis to assist with the
purchase of a residence in connection with Dr. Lewis' relocation to San Diego,
California. Under the terms of a Promissory Note dated June 14, 1994, as
amended on May 14, 1998 and October 27, 1999, the principal amount of the loan
plus accrued interest shall be amortized over a period of five years following
June 14, 2002, with monthly payments commencing in July 2002. The principal
amount of the loan will be interest-free for eight years from the date of the
Promissory Note, and thereafter will accrue interest at the per annum rate of
7.52%, compounded annually. Interest will also begin to accrue at the same rate
in the event that Dr. Lewis' employment is terminated for any reason. The
parties also entered into a security agreement on the same date whereby Dr.
Lewis pledged all present and future shares of our common stock held by him
(plus all cash and stock dividends attributable to such shares) as security for
the loan. As of July 13, 2000, the total amount outstanding under this loan was
$250,000.
In May 1998, Signal loaned $62,000 to Alan J. Lewis in connection with the
exercise of options to purchase 425,000 shares of our common stock. Under the
terms of the promissory note, dated May 8, 1998, the principal amount of the
loan plus accrued interest at a per annum rate equal to 5.69%, compounded
annually, shall be due and payable five years from the date of the loan. Under
a stock pledge agreement entered into on the same date, Dr. Lewis pledged all
present and future shares of our common stock held by him, plus all cash and
stock dividends attributable to such shares, as security for the loan. As of
July 13, 2000, the total amount outstanding under this loan was $62,000.
PRINICIPAL STOCKHOLDERS OF SIGNAL
The following table sets forth information regarding the beneficial ownership
of common stock and preferred stock of Signal as of July 13, 2000 by:
o each person who is known by Signal to own beneficially more than five percent
of its common stock or preferred stock;
o each of the current directors, chief executive officer and other executive
officers of Signal who earned more than $100,000 during 1999; and
o all directors and executive officers of Signal as a group.
Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and generally includes voting or investment
power with respect to securities. Except as indicated by footnote, and subject
to community property laws where applicable, the shareholders named in the
table below have sole voting and investment power with respect to all shares of
common stock and preferred stock shown as beneficially owned by them. Perentage
ownership of
104
<PAGE>
common stock is based on 4,952,264 shares of common stock outstanding as of
July 13, 2000, together with applicable options and warrants for each
shareholder, and percentage ownership of preferred stock is based on 24,492,639
shares of preferred stock outstanding as of July 13, 2000.
<TABLE>
<CAPTION>
SHARES
ISUABLE UPON
EXERCISE OF
COMMON OPTIONS THAT PERCENTAGE OF PERCENTAGE OF
STOCK VEST WITHIN 60 COMMON STOCK PREFERRED STOCK
BENEFICIALY DAYS OF JULY BENEFICIALLY PREFERRED STOCK BENEFICIALLY
NAME OF BENEFICIAL OWNER OWNED 13, 2000 OWNED BENEFICIALLY OWNED OWNED
---------------------------------- ------------- ---------------- --------------- -------------------- ----------------
<S> <C> <C> <C> <C> <C>
Serono S.A. -- -- * 3,708,815 15.1%
15bis Chemin des Mines
1202 Geneva, Switzerland
Patrick F. Latterell(1) 150,000 -- 3.0% 2,822,142 11.5
Venrock Associates
30 Rockefeller Plaza,
Room 5508
New York, New York 10112
Accel Partners(2) 135,416 -- 2.7 2,832,666 11.6
428 University Avenue
Palo Alto, California 94301
Kleiner Perkins Caufield & Byers 33,332 -- * 2,832,670 11.6
2750 Sand Hill Road
Menlo Park, California 94025
Arnold Oronsky, Ph.D.(3) 41,666 41,666 * 2,222,163 9.1
InterWest Partners
3000 Sand Hill Road, Bldg. 3,
Suite 255
Menlo Park, California 94025
Lombard Oldier & Cie -- -- * 1,570,681 6.4
11, rue de la Corraterie 1204
Geneva, Switzerland
Oxford Bioscience Partners(4) -- -- * 1,481,442 6.0
650 Town Center Drive,
Suite 180
Costa Mesa, California 92626
U.S. Venture Partners(5) -- -- * 1,481.442 6.0
2180 Sand Hill Road,
Suite 300
Menlo Park, California 94025
Alan J. Lewis, Ph.D. 680,937 5,937 13.7 -- *
Harry F. Hixson, Ph.D.(6) 71,666 41,666 1.4 319,520 1.3
David W. Anderson, Ph.D. 293,666 93,666 5.8 -- *
Bradley B. Gordon 280,000 -- 5.7 -- *
John P. Walker(7) 150,000 -- 3.0 -- *
Douglas E. Richards 275,000 245,000 5.3 -- *
All directors and executive 1,942,935 427,935 36.1 5,363,825 21.9
officers as a group (8 persons)
*Less than one percent (1%)
</TABLE>
----------
(1) Includes 77,556 shares of common stock and 1,920,853 shares of preferred
stock held by Venrock Associates and 34,944 shares of common stock and
901,289 shares of preferred stock held by
105
<PAGE>
Venrock Associates II, L.P., entities for which Mr. Latterell is a general
partner. Mr. Latterell disclaims benefical ownership of all such shares,
except to the extent of his pecuniary or pro rata interest in such shares.
(2) Includes the following shares held by the following affiliated entities:
o 119,116 shares of common stock and 2,370,945 shares of preferred stock held
by Accel IV L.P.;
o 3,700 shares of common stock and 104,807 shares of preferred stock held by
Accel Investors '93 L.P.;
o 1,800 shares of common stock and 50,988 shares of preferred stock held by
Accel Keiretsu L.P.;
o 8,000 shares of common stock and 226,614 shares of preferred stock held by
Accel Japan L.P.;
o 2,200 shares of common stock and 62,317 shares of preferred stock held by
Ellmore C. Patterson Partners; and
o 600 shares of common stock and 16,995 shares of preferred stock held by
Prosper Partners.
(3) Includes 2,208,274 shares held by InterWest Partners V and 13,889 shares
held by InterWest Investors V, which are affiliated entities. Dr. Oronsky
is a general partner of InterWest Partners V. Dr. Oronsky disclaims
beneficial ownership of all such shares, except to the extent of his
pecuniary or pro rata interest in such shares.
(4) Includes the following shares held by the following affiliated entities:
o 927,772 shares held by Oxford Bioscience Partnters L.P.;
o 296,289 shares held by Oxford Bioscience Partners (Adjunct) L.P.; and
o 257,381 shares held by Oxford Bioscience Partners (Bermuda) Limited
Partnership.
(5) Includes:
o 1,281,448 shares held by U.S. Venture Partners IV, L.P.;
o 155,551 shares held by Second Ventures II, L.P.; and
o 44,443 shares held by USVP Entrepreneur Partners II, L.P.
(6) Includes 319,520 shares held by the Harry F. Hixson, Jr. Separate Property
Trust Dated December 15, 1995 , of which Dr. Hixson is the sole trustee.
(7) Includes 150,000 shares held by the Walker Living Trust Dated March 3,
1995, of which Mr. Walker is the sole trustee.
106
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Signal was incorporated in July 1992 and has devoted substantially all of its
resources since that time to research and development directed toward the
discovery of proprietary drug targets and novel small molecule drugs that
regulate genes associated with disease. Through both internally funded programs
and in conjunction with Signal's corporate collaborators, Signal is working to
identify gene regulating drug targets and potential drug products for treating
cancer, inflammatory disease, bone metabolic disease, cardiovascular disease,
neurological disease and viral infections. Signal has incurred significant
losses since inception, with an accumulated deficit of approximately $41.3
million as of March 31, 2000, due primarily to ongoing expenditures related to
its internally funded research and development programs. Signal expects to
continue to incur substantial expenditures and operating losses for at least
the next several years as Signal continues its target and drug discovery and
preclinical drug development efforts and retains its research and development
programs for longer periods of time prior to licensing rights to corporate
collaborations. Such activities will result in substantial research and
development expenses, general and administrative expenses and related capital
expenditures. Signal's results of operations have fluctuated from period to
period and likely will continue to fluctuate substantially in the future based
upon the timing, duration and composition of funding under various
collaborative agreements, the initiation, expansion and termination of research
and development programs, the acquisition of technologies, compound libraries
and product rights, as well as the progress of our research and development
programs. Results of operations for any period may be unrelated to results of
operations for any other period. In addition, historical results should not be
viewed as indicative of future operating results.
A key element of Signal's strategy is to enter into collaborations with
pharmaceutical and biotechnology companies in order to enhance and accelerate
its target and drug discovery programs and to fund its capital requirements.
Signal's principal sources of revenue for the next several years are expected
to consist of license fees and upfront payments, research and development
funding and milestone payments under such collaborations, government grants, if
any, and interest income. To date, Signal's revenue has been due primarily to
arrangements with the following collaborators: Tanabe, which was entered into
in March 1996 and concluded in March 1998; Organon, which was entered into in
July 1996 and concluded in August 1999; Roche Bioscience, which was entered
into in August 1996 and concluded in August 1999; Serono, which was entered
into in November 1997; DuPont Pharmaceuticals, which was entered into in
December 1997; Nippon Kayaku, which was entered into in February 1998 and
concluded in July 2000; Axys Pharmaceuticals, which was entered into in October
1999; Byk Gulden, which was entered into in June 2000; and Pliva, which was
entered into in July 2000.
Under Signal's collaborative arrangements, Signal has received payments of
approximately $56.4 million to date in license fees, research and development
payments and equity investments, of which approximately $39.8 million has been
recognized as revenue. To date, Signal has received an equity milestone of $1.0
million and license fees, upfront payments and research and development
payments of approximately $43.3 million. In 1997, Signal recognized aggregate
revenue of $725,000 in license fees and upfront payments, $6.6 million in
research and development payments from our collaborators and $264,000 in
government grants. In 1998, we recognized aggregate revenue of $3.1 million in
license fees and upfront payments, $11.9 million in research and development
payments from our collaborators and $387,000 in government grants. In 1999, we
recognized aggregate revenue of $1.9 million in license fees and upfront
payments, $9.4 million in research and development payments from our
collaborators and $528,000 in government grants.
RESULTS OF OPERATIONS
COMPARISON OF THREE MONTHS ENDED MARCH 31, 2000 AND 1999
Revenue. Revenue for the three months ended March 31, 2000 decreased to $2.7
million from $2.9 million for the three months ended March 31, 1999. The
decrease was due primarily to the conclusion
107
<PAGE>
of certain collaborative agreements resulting in decreased revenue of $1.1
million. Such decrease was partially offset by an amendment to the
collaborative and license agreement with Serono and the initiation of a new
collaboration agreement with Axys resulting in additional research and
development revenue of $300,000 and $625,000, respectively.
Research and Development Expenses. Signal's research and development expenses
for the three months ended March 31, 2000 increased to $5.2 million from $4.3
million for the three months ended March 31, 1999. The increase was due
primarily to increases in product development costs of $481,000 and deferred
compensation expense of $414,000.
General and Administrative Expenses. Signal's general and administrative
expenses for the three months ended March 31, 2000 increased to $1.0 million
from $809,000 on March 31, 1999. The increase was due primarily to increased
salary expense of $106,000, resulting from incentive bonuses and merit
increases, and increased deferred compensation expense of $70,000.
In June 2000, Signal expensed all of the accumulated costs related to its Form
S-1 Registration Statement filed with the Securities and Exchange Commission in
February 2000, of which $543,000 were included in other current assets at March
31, 2000.
Interest Income (Expense), Net. Net interest income for the three months ended
March 31, 2000 increased to $53,000 from $18,000 for the three months ended
March 31, 1999. The increase in net interest income was due primarily to
decreased interest expense on lower capital lease and note obligation balances.
COMPARISON OF YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
Revenue. Revenue for the year ended December 31, 1999 decreased to $11.7
million from $15.4 million for the year ended December 31, 1998. The decrease
was due primarily to the termination of the Tanabe agreement in 1998 that
resulted in decreased revenues of $4.1 million. Revenue for the year ended
December 31, 1998 increased to $15.4 million from $7.6 million for the year
ended December 31, 1997. The increase was due primarily to additional
collaborative agreements that were in place during 1998 and an amendment to the
collaborative agreement with Tanabe which events resulted in recognition of
additional research and development revenue of $6.4 million and $840,000,
respectively.
Research and Development Expenses. Signal's research and development expenses
for the year ended December 31, 1999 increased to $16.7 million from $15.6
million for the year ended December 31, 1998. The increase in 1999 was due
primarily to increased salary and relocation expense of $857,000, resulting
from the hiring of additional research and development personnel and increased
product development expense of $576,000. Research and development expenses for
the year ended December 31, 1997 increased to $15.6 million from $10.3 million
for the year ended December 31, 1997. The increase was due primarily to
increased expenses for salaries and relocation of $1.7 million resulting from
the hiring of additional research and development personnel, the purchase of
laboratory materials of $1.2 million for expansion of our research programs,
facilities expansion expenses of $506,000, depreciation expense of $500,000,
amortization of deferred compensation of $376,000, increased travel expenses of
$198,000 and the initiation of additional academic research collaborations of
$184,000.
General and Administrative Expenses. Signal's general and administrative
expenses for the year ended December 31, 1999 decreased to $3.0 million from
$4.8 million in 1998. The decrease was due primarily to reductions in fees for
professional services of $1.0 million, equipment rentals of $245,000 and salary
expense of $185,000 due to lower general and administrative headcount. Signal's
general and administrative expenses for the year ended December 31, 1998
increased to $4.8 million from $2.8 million for the year ended December 31,
1997. The increase was due primarily to increased fees for professional
services of $827,000, and increased salary expense of $591,000 resulting from
the hiring of additional personnel, amortization of deferred compensation of
$231,000 and facilities expansion of $160,000.
108
<PAGE>
Interest Income (Expense), Net. Net interest income (expense) for the years
ended December 31, 1999, 1998 and 1997 was $155,000, $600,000 and ($191,000),
respectively. The decrease in net interest income in 1999 form 1998 was due
primarily to lower average cash balances. The increase in net interest income
in 1998 from 1997 was due primarily to higher average cash balances.
Imputed Dividend. Due to Signal's achievement of a certain milestone in 1999,
DuPont Pharmaceuticals purchased 288,708 shares of Signal's Series F-1
Preferred Stock for total cash proceeds of $1.0 million. Signal recognized an
imputed dividend of $818,487 to reflect a beneficial conversion feature on
these preferred shares.
Income Taxes. At December 31, 1999, Signal, had federal and state net operating
loss carryforwards of approximately $30.6 million and $11.7 million,
respectively. The federal tax loss carryforwards will begin expiring in 2007,
unless previously used, and the state tax loss carryforwards will begin
expiring in 1998. Signal has provided a 100% valuation allowance against the
related deferred tax assets because realization of such tax benefits is not
assured. Future use of these carryforwards may be limited in any one fiscal
year under the Internal Revenue Code and similar state provisions; however, the
annual limitation will not prevent the entire amount of the carryforwards from
being used during the carryforward period. Therefore, Signal does not believe
any such limitation will have a material effect upon the use of these
carryforwards.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, Signal has funded its operations primarily through private
placements of preferred stock, funds provided under the Tanabe, Organon, Roche
Bioscience, Serono, DuPont Pharmaceuticals, Nippon Kayaku and Axys
Pharmaceuticals collaborative agreements, and, to a lesser extent, through debt
and equipment financing, interest income and government research grant revenue.
As of March 31, 2000, Signal had received $43.6 million in net proceeds from
the sales of equity securities, $43.3 million under its collaborative
agreements, $7.0 million in debt and equipment financing, $3.0 million in
interest income and $1.9 million in research grants from the NIH. As of March
31, 2000, Signal had approximately $6.3 million in cash, cash equivalents and
short-term investments.
Net cash used in operations for the three months ended March 31, 2000 was $2.7
million, compared to $111,000 for the three months ended March 31, 1999. Net
cash used in operations increased for the three months ended March 31, 2000
over the three months ended March 31, 1999 due primarily to internally funded
research programs, an increase in product development expenses and costs
related to the Registration Statement on Form S-1 filed by Signal during the
first quarter of 2000.
As of March 31, 2000, Signal had purchased with cash $5.3 million in property
and equipment, primarily for facility improvements and laboratory and office
equipment. Signal has financed approximately $4.9 million of our equipment
through capital leases and equipment note obligations.
Signal believes its existing capital resources, committed revenue from our
existing collaborations, committed debt financing under existing loan
agreements and interest income should be sufficient to fund its anticipated
operating expenses and capital requirements at least through the end of the
year 2000. Signal's future funding requirements include continued and increased
expenditures for research and development activities, as well as expenditures
related to facility improvements, the purchase of additional laboratory and
office equipment, the purchase of technology, compound libraries and product
rights, the repayment of debt, working capital and general corporate purposes.
Signal cannot assure you that changes in its research and development plans and
collaborations, the acquisition of additional technology, compound libraries
and product rights or other changes affecting its operating expenses or use of
capital will not result in the expenditure of available resources before such
time. The costs associated with the clinical development of new drugs are
substantial and generally increase over time. If Signal is successful in
advancing one or more drug candidates into clinical development, its need for
additional capital will increase substantially.
In any event, Signal will need to raise substantial additional capital to fund
its operations in future periods. Signal intends to seek additional funding
through collaborative arrangements, public or private equity or debt financing,
property and equipment financing or other financing sources that
109
<PAGE>
may be available. If additional funds are raised through the sale of equity
securities, substantial dilution to Signal may result. Debt financing, if
available, may involve restrictive covenants. Further, Signal cannot assure you
that additional financing will be available on acceptable terms, if at all. If
adequate funds are not available, Signal may be required to delay, or reduce
the scope of, or eliminate one or more of our research and development programs
or to obtain funds through strategic collaborations that are on unfavorable
terms or that may require us to relinquish rights to some of our technologies,
product candidates, products or marketing territories that we would otherwise
seek to retain. Signal's failure to raise capital when needed could have a
material adverse effect on its business, financial condition and results of
operations.
NEW ACCOUNTING PRONOUNCEMENTS.
Signal expects to adopt SFAS No. 133, Accounting for Derivative Instruments and
Hedging Activities, effective January 1, 2001. SFAS No. 133 will require Signal
to recognize all derivatives on the balance sheet at fair value. Signal does
not anticipate that the adoption of the SFAS No. 133 will have a significant
effect on its results of operations or financial positions.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We invest excess cash primarily in U.S. government securities and marketable
debt securities of financial institutions and corporations with strong credit
ratings. These instruments have maturities of three months or less when
acquired. We do not utilize derivative financial instruments, derivative
commodity instruments or other market risk sensitive instruments, positions or
transactions in any material fashion. Accordingly, we believe that, while the
instruments we hold are subject to changes in the financial standing of the
issuer of such securities, we are not subject to any material risks arising
from changes in interest rates, foreign currency exchange rates, commodity
prices, equity prices or other market changes that affect market risk sensitive
instruments.
RECENT DEVELOPMENTS
In June 2000, Signal entered into a secured line of credit for up to $5,000,000
that can be borrowed against through December 31, 2000, as needed. The proceeds
of any borrowings under the line of credit will be used for general corporate
purposes and working capital. The interest rate will float with the Treasury
rate as the proceeds are drawn down and then be fixed for the term, maintaining
the spread. Borrowings under the line of credit are payable in either twelve or
thirty-six monthly installments, at Signal's option, and are secured by the
assets of Signal. To date, Signal has not drawn down any proceeds from the line
of credit. In conjunction with the line of credit, Signal issued the creditor a
warrant to purchase up to 225,000 shares of Series C-2 Preferred Stock at a
price of $4.00 per share, of which 150,000 shares were issuable under the
warrant upon Signal's signing of a loan commitment letter in May 2000, and the
remaining 75,000 shares become issuable under the warrant upon any additional
borrowing against the line of credit greater than $2.5 million. The warrant
expires ten years from the date of grant.
In June 2000, Signal entered into a collaborative agreement with Byk Gulden
focused on the discovery and optimization of inhibitors of an unspecified
kinase target being investigated by Byk Gulden. Under the terms of the
agreement, Signal will be responsible for constructing a molecular model of the
kinase target and for screening its proprietary kinase inhibitor library to
identify small molecule inhibitors of this drug target. Byk Gulden is obligated
to pay Signal a license fee of $250,000 and has agreed to fund specified
research as part of this effort for three months and can extend research
funding under the agreement for an additional nine-month period. If Byk Gulden
extends the research funding, Signal will be responsible for optimizing
screening hits using medicinal chemistry to generate lead compounds. Byk Gulden
also will make preclinical, clinical and commercialization milestone payments
for compounds licensed by Byk Gulden which arise from the collaboration. In
addition, Signal will retain the right to modify any compound discovered or
generated by the collaboration to identify inhibitors of other targets in the
same kinase family, and such inhibitors will be owned exclusively by Signal.
Either party may terminate this agreement upon the bankruptcy, insolvency,
dissolution or winding up of the other party, or in the event a material breach
by the other party remains uncured for sixty days.
110
<PAGE>
In July 2000, Signal entered into a collaborative agreement with Pliva focused
on the discovery and optimization of inhibitors of two unspecified kinase
targets being investigated by Pliva. Under terms of the agreement, Signal will
be responsible for screening its proprietary kinase inhibitor library, and
potentially its diversity library, to identify small molecule inhibitors of
each of these two drug targets. Pliva will pay Signal a license fee and
payments based on the achievement of specified research and development
milestones. In addition, if specified research milestones are achieved, Pliva
will fund specified research at Signal. For each kinase target, Signal will
have the sole option at a specified stage prior to the start of human clinical
trials and again at a specified state during human clinical trials to negotiate
a worldwide joint development agreement which shall reflect equal sharing by
the parties of both revenue and expenses associated with development and
commercialization of a licensed product arising from the collaboration. If
Signal elects not to exercise either of these options, Pliva will be obligated
to pay Signal a royalty on net sales of licensed products. Either party may
terminate the collaboration agreement upon the bankruptcy, insolvency,
dissolution or winding up of the other party, or in the event a material breach
by the other party remains uncured for sixty days.
MARKET PRICE OF AND DIVIDENDS ON SIGNAL'S COMMON EQUITY
AND RELATED SHAREHOLDER MATTERS
There is no established public trading market for Signal's capital stock.
Signal has never declared or paid cash dividends on its capital stock. Signal
expects to retain future earnings, if any, for the development of its business
and does not anticipate paying any cash dividends in the foreseeable future. In
addition, the terms of its secured line of credit from MMC/GATX Partnership No.
1 prohibit Signal from paying any dividends and making any distributions and
limit Signal's ability to repurchase stock.
111
<PAGE>
DESCRIPTION OF CELGENE CAPITAL STOCK
As of July 13, 2000, Celgene's authorized capital stock consists of 120,000,000
shares of common stock, par value $.01 per share, and 5,000,000 shares of
preferred stock, par value $.01 per share, of which 520 shares have been
designated Series A convertible preferred stock and 20,000 shares have been
designated as Series B convertible preferred stock. As of July 13, 2000, there
were 66,526,483 shares of common stock outstanding, no shares of Series A
convertible preferred stock outstanding and no shares of Series B convertible
preferred stock outstanding.
COMMON STOCK
Holders of Celgene common stock are entitled to one vote for each share held on
all matters submitted to a vote of stockholders, and do not have cumulative
voting rights. Holders of common stock are entitled to receive ratably such
dividends, if any, as may be declared by Celgene's board of directors out of
funds legally available therefor, and subject to any preferential dividend
rights of any then outstanding preferred stock. Upon liquidation, dissolution,
or winding up of Celgene, the holders of common stock are entitled to receive
ratably Celgene's net assets available after the payment of all debts and other
liabilities and subject to any liquidation preference of any then outstanding
preferred stock. Holders of common stock have no preemptive, subscription or
conversion rights. There are no redemption or sinking fund provisions
applicable to the common stock. The outstanding shares of common stock are, and
the shares issued by Celgene in the merger will be when issued and paid for,
fully paid and non-assessable.
PREFERRED STOCK
Celgene's board of directors has the authority, subject to certain
restrictions, without further stockholder approval, to issue, at any time and
from time to time, shares of preferred stock in one or more series. Each such
series shall have such number of shares, designations, preferences, voting
powers, qualifications, and special or relative rights or privileges as shall
be determined by our board of directors, which may include, among others,
dividend rights, voting rights, redemption and sinking fund provisions,
liquidation preferences, conversion rights and preemptive rights, to the full
extent now or hereafter permitted by the laws of the State of Delaware.
The rights of the holders of common stock will be subject to, and may be
adversely affected by, the rights of holders of any preferred stock that may be
issued in the future. Such rights may include voting and conversion rights
which could adversely affect the holders of the common stock. Satisfaction of
any dividend preferences of outstanding preferred stock would reduce the amount
of funds available, if any, for the payment of dividends on common stock.
Holders of preferred stock would typically be entitled to receive a preference
payment.
SHAREHOLDER RIGHTS PLAN
Celgene's board of directors has adopted a shareholder rights plan. The
shareholder rights plan was adopted to give Celgene's board of directors
increased power to negotiate in Celgene's best interests and to discourage
appropriation of control of Celgene at a price that is unfair to its
stockholders. It is not intended to prevent fair offers for acquisition of
control determined by our board of directors to be in the best interests of
Celgene and its stockholders, nor is it intended to prevent a person or group
from obtaining representation on or control of Celgene's board of directors
through a proxy contest, or to relieve Celgene's board of directors of its
fiduciary duty to consider any proposal for its acquisition in good faith.
The shareholder rights plan involved the distribution of one "right" as a
dividend on each outstanding share of Celgene common stock to all holders of
record on September 26, 1996. Each right shall entitle the holder to purchase
one-tenth of a share of common stock. The rights trade in tandem with the
common stock until, and become exercisable upon, the occurrence of certain
triggering events, and the exercise price is based on the estimated long-term
value of Celgene common stock. The exercise of these rights becomes
economically attractive upon the triggering of
112
<PAGE>
certain "flip-in" or "flip-over" rights which work in conjunction with the
shareholder rights plan's basic provisions. The flip-in rights will permit
their holders to purchase shares of common stock at a discounted rate,
resulting in substantial dilution of an acquiror's voting and economic
interests in Celgene. The flip-over element of the shareholder rights plan
involves some mergers or significant asset purchasers, which trigger certain
rights to purchase shares of the acquiring or surviving company at a discount.
The shareholder rights plan contains a "permitted offer" exception which allows
offers determined by Celgene's board of directors to be in its best interests
and its stockholders to take place free of the diluting effects of the
shareholder rights plan's mechanisms. Celgene's board of directors retains the
rights, at all times prior to acquisition of 15% of Celgene's voting common
stock by an acquiror, to discontinue the shareholder rights plan through the
redemption of all rights, or to amend the shareholder rights plan in any
respect.
DELAWARE LAW AND SELECTED BY-LAW PROVISIONS
Celgene's board of directors has adopted certain amendments to its by-laws
intended to strengthen its board of directors' position in the event of a
hostile takeover attempt. These by-law provisions have the following effects:
o they provide that only persons who are nominated in accordance with the
procedures set forth in the by-laws shall be eligible for election as Celgene
directors, except as may be otherwise provided in the by-laws;
o they provide that only business brought before the annual meeting by
Celgene's board of directors or by a stockholder who complies with the
procedures set forth in the by-laws may be transacted at an annual meeting of
stockholders;
o they provide that only the chairman of the board, if any, the chief executive
officer, the president, the secretary or a majority of Celgene's board of
directors may call special meetings of Celgene stockholders;
o they establish a procedure for Celgene's board of directors to fix the record
date whenever stockholder action by written consent is undertaken; and
o they require a vote of holders of two-thirds of the outstanding share of
common stock to amend certain by-law provisions.
Furthermore, Celgene is subject to the provisions of Section 203 of the
Delaware General Corporation Law, an anti-takeover law. In general, the statute
prohibits a publicly held Delaware corporation from engaging in a "business
combination" with an "interested stockholder" for a period of three years after
the date of the transaction in which the person became an interested
stockholder, unless the business combination is approved in a prescribed
manner. For purposes of Section 203, a "business combination" included a
merger, asset sale or other transaction resulting in a financial benefit to the
interested stockholder, and an "interested stockholder" is a person who,
together with affiliates and associates, owns or within three years prior, did
own, 15% or more of the corporation's voting stock.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Celgene common stock is American Stock
Transfer & Trust Company. It is located at 40 Wall St., 46th Floor, New York,
NY, 10005, and its telephone number is (718) 921-8200.
COMPARATIVE RIGHTS OF CELGENE STOCKHOLDERS
AND SIGNAL SHAREHOLDERS
After the merger, the Signal shareholders will become stockholders of Celgene
and the Signal shareholders' rights will cease to be defined and governed by
the California General Corporation Law, and instead be defined and governed by
the Delaware General Corporation Law. In addition,
113
<PAGE>
rights of the Signal shareholders will no longer be defined and governed by
Signal's amended and restated articles of incorporation and by-laws. Instead,
each shareholder will become a stockholder of Celgene whose rights as a
stockholder will be defined and governed by Celgene's certificate of
incorporation, as amended, and by-laws. While the rights and privileges of
stockholders of a Delaware corporation (such as Celgene) are, in many
instances, comparable to those of shareholders of a California corporation
(such as Signal), there are differences. The following is a summary of the
material differences between the rights of holders of Signal capital stock and
the rights of holders of Celgene common stock at the date of this proxy
statement/prospectus. These differences arise from differences between Delaware
law and California law and between the Celgene certificate of incorporation and
the Celgene by-laws on the one hand and the Signal amended and restated
articles of incorporation and the Signal by-laws on the other.
SIZE OF THE BOARD OF DIRECTORS
Under California law, changes in the number of directors of a corporation must
generally be approved by a majority of the outstanding shares, although a board
of directors may fix the exact number of directors within a range stated in the
corporation's articles of incorporation or by-laws if that stated range has
been approved by the corporation's shareholders. Delaware law permits a
corporation's board of directors alone to change the authorized number or range
of directors by amendment of the corporation's by-laws, unless otherwise
prohibited by the corporation's certificate of incorporation (in which case a
change in the number of directors may be made only upon approval by the
stockholders). In any case, no reduction in the authorized number of directors
may have the effect of removing any director before that director's term of
office expires. The ability of the board of directors to change the number of
directors without stockholder approval enables a corporation to respond quickly
to a potential opportunity to attract the services of a qualified director or
to eliminate a vacancy for which a suitable candidate is not available.
The Signal by-laws provide for a board of directors within a range of five to
nine. The exact number of directors is currently set at seven. Directors are
elected at each annual meeting of the Signal shareholders. The stated range may
be changed only by amending the Signal by-laws, which requires the approval of
the Signal shareholders. The Celgene board currently consists of nine members.
Directors are elected at each annual meeting of Celgene stockholders. The
number of directors of the Celgene board may be changed by resolution by the
Celgene board of directors.
ELIMINATION OF CUMULATIVE VOTING
California law provides for cumulative voting in the election of directors,
unless, in the case of a listed corporation, its articles of incorporation or
by-laws provide otherwise. Because Signal is not a listed corporation, Signal
shareholders are entitled to cumulative voting in the election of directors.
Under Delaware law, cumulative voting is not mandatory, and a corporation's
certificate of incorporation must provide for cumulative voting rights if
stockholders are to be entitled to such rights. The Celgene certificate of
incorporation does not provide for cumulative voting.
REMOVAL OF DIRECTORS
Under California law, any director or the entire board of directors may be
removed, with or without cause, with the approval of a majority of the
outstanding shares entitled to vote. However, no individual director may be
removed (unless the entire board is removed) if the number of votes cast
against removal would be sufficient to elect the director under cumulative
voting, whether or not the corporation's articles of incorporation or by-laws
provide for cumulative voting. A corporation's board of directors may not
remove a director unless the director has been declared of unsound mind by an
order of court or convicted of a felony.
Stockholders of a Delaware corporation holding a majority of the outstanding
shares entitled to vote for directors may remove a director with or without
cause, except in cases involving classified boards or where cumulative voting
is permitted. The Celgene by-laws provide for removal with or without cause.
114
<PAGE>
FILLING NEW SEATS OR VACANCIES ON THE BOARD OF DIRECTORS
Unless otherwise provided in a corporation's articles of incorporation or
by-laws, under California law, any vacancy on a board of directors other than
one created by removal of a director may be filled by the remainder of the
corporation's board of directors. A vacancy created by removal of a director
may be filled by the board of directors only if the board is so authorized by
the corporation's articles of incorporation or by a by-law approved by the
corporation's shareholders.
Under Delaware law, vacancies and newly created directorships may be filled by
a majority of the directors then in office (even though less than a quorum),
unless (i) otherwise provided in the corporation's certificate of incorporation
or by-laws, or (ii) the certificate of incorporation directs that a particular
class is to elect the director, in which case any other directors elected by
that class, or a sole remaining director, must fill the vacancy.
The Signal by-laws provide that vacancies in the Signal board of directors may
be filled by a majority of the remaining directors, even if less than a quorum,
or by a sole remaining director; however, a vacancy created by the removal of a
director by the shareholders may be filled only by a vote of the shareholders.
The Celgene by-laws provides that new seats on the Celgene board of directors
or vacancies occurring for any cause may be filled by an affirmative vote of
the majority of stockholders generally entitled to vote in the election of
directors, or by the affirmative vote of a majority of the directors then in
office, even though less than a quorum. Newly created directorships resulting
from any increase in the authorized number of directors are filled only by the
affirmative vote of the directors then in office, even though less than a
quorum of the board.
INDEMNIFICATION AND LIMITATION OF LIABILITY
California and Delaware have similar laws governing indemnification by a
corporation of its officers, directors, employees and other agents. The laws of
both states also permit, with exceptions, a corporation to adopt charter
provisions eliminating the liability of its directors to the corporation or its
stockholders for monetary damages for breach of the directors' fiduciary duty
of care. There are nonetheless certain differences between the laws of the two
states respecting indemnification and limitation of liability, which are
summarized below.
The Signal articles of incorporation eliminate the liability of directors to
the corporation to the fullest extent permissible under California law.
California law does not permit the elimination of monetary liability based on:
o intentional misconduct or knowing and culpable violation of law;
o acts or omissions that a director believes to be contrary to the best
interests of the corporation or its shareholders or that involve the absence
of good faith on the part of the director;
o receipt of an improper personal benefit;
o acts or omissions that show reckless disregard for the director's duty to the
corporation or its shareholders, where the director in the ordinary course of
performing a director's duties should be aware of a risk of serious injury to
the corporation or its shareholders;
o acts or omissions that constitute an unexcused pattern of inattention that
amounts to an abdication of the director's duty to the corporation and its
shareholders;
o transactions between the corporation and a director who has a material
financial interest in the transaction; and
o liability for improper distributions, loans or guarantees.
The Celgene certificate of incorporation eliminates the liability of directors
to Celgene or its stockholders for monetary damages for breach of fiduciary
duty as a director to the fullest extent permissible under Delaware law. Under
Delaware law, such provision may not eliminate or limit director monetary
liability for:
115
<PAGE>
o breaches of the director's duty of loyalty to the corporation or its
stockholders;
o acts or omissions not in good faith or involving intentional misconduct or
knowing violations of law;
o the payment of unlawful dividends or unlawful stock repurchases or
redemptions; or
o transactions in which the director received an improper personal benefit. The
limitation of liability provisions also may not limit a director's liability
for violation of, or otherwise relieve Celgene or its directors from the
necessity of complying with, federal or state securities laws, or affect the
availability of nonmonetary remedies such as injunctive relief or rescission.
California law permits a California corporation to provide rights to
indemnification beyond those provided by law to the extent the additional
indemnification is authorized in the corporation's articles of incorporation.
Thus, California corporations may, by agreements or by-law provisions, make
mandatory the permissive indemnification provided by California law. The Signal
articles of incorporation permit indemnification beyond that expressly mandated
by California law, subject only to the limits on excess indemnification under
California law.
The Signal by-laws also contain indemnification provisions consistent with
those set forth in its charter. Both Delaware and California law state that the
indemnification provided by statute is not exclusive of any other rights under
any by-law, agreement, vote of shareholders, or of disinterested directors, or
otherwise.
INTERESTED DIRECTOR TRANSACTIONS
Under both California and Delaware law, contracts or transactions in which one
or more of a corporation's directors have an interest are not void or voidable
because of that interest if certain conditions are met. The conditions are
generally similar under California and Delaware law. Under California and
Delaware law, (a) either the shareholders or the board of directors must
approve the contract or transaction after full disclosure of the material
facts, and, in the case of board approval, the contract or transaction must
also be "just and reasonable" (in California) or "fair" (in Delaware) to the
corporation, or (b) the contract or transaction must have been "just and
reasonable" or "fair" (as applicable) as to the corporation at the time it was
approved. In the latter case, California law explicitly places the burden of
proof on the interested director. Under California law, if shareholder approval
is sought, the interested director is not entitled to vote his shares on any
action regarding the contract or transaction. If board approval is sought, the
contract or transaction must be approved by a majority vote of a quorum of the
directors, without counting the vote of any interested directors (except that
interested directors may be counted for purposes of establishing a quorum).
Under Delaware law, if stockholder approval is sought generally, the contract
or transaction must be approved in good faith by a majority of disinterested
stockholders. If board approval is sought, the contract or transaction must be
approved by a majority of the disinterested directors (even though less than a
majority of a quorum). Therefore, transactions that the Signal board of
directors might not be able to approve because of the number of interested
directors could be approved by a majority of the disinterested directors of
Celgene, although less than a majority of a quorum.
LOANS TO OFFICERS AND EMPLOYEES
Under California law, a corporation cannot make any loan or guaranty to or for
the benefit of a director or officer of the corporation or its parent unless
the loan or guaranty, or a plan providing for the loan or guaranty, is approved
by shareholders owning a majority of the outstanding shares of the corporation.
However, under California law, any corporation with 100 or more shareholders of
record may seek shareholder approval of a by-law provision authorizing the
board of directors alone to approve loans or guarantees to or on behalf of
officers (whether or not the officers are directors) if the board determines
that any loan or guaranty may reasonably be expected to benefit the
corporation. The Signal by-laws currently authorize the Signal board of
directors to approve such loans or guarantees.
116
<PAGE>
Under Delaware law, a corporation may make loans to, guaranty the obligations
of, or otherwise assist its officers or other employees and those of its
subsidiaries (including directors who are also officers or employees) when such
action, in the judgement of the directors, may reasonably be expected to
benefit the corporation.
STOCKHOLDER DERIVATIVE SUITS
California law provides that a shareholder bringing a derivative action on
behalf of a corporation need not have been a shareholder at the time of the
transaction in question, provided that certain tests are met. Under Delaware
law, a stockholder may bring a derivative action on behalf of the corporation
only if the stockholder was a stockholder of the corporation at the time of the
transaction in question or his or her stock thereafter devolved upon him or her
by operation of law. California law also provides that the corporation or the
defendant in a derivative suit may make a motion to the court for an order
requiring the plaintiff shareholder to furnish a security bond. Delaware does
not have a similar bond requirement.
ELIMINATION OF ACTIONS BY WRITTEN CONSENT OF STOCKHOLDERS
Under both California and Delaware law, shareholders may act by written consent
in lieu of a shareholder meeting. Both California and Delaware law permit a
corporation in its charter to eliminate actions by written consent. Neither
Signal nor Celgene has eliminated actions by written consent.
POWER TO CALL SPECIAL MEETINGS OF STOCKHOLDERS
Under California law and the Signal by-laws, a special meeting of shareholders
may be called by the board of directors, the chairman of the board, the
president, two or more members of the board, or by one or more holders of
shares entitled to cast not less than 10% of the votes at such meeting.
Under Delaware law, special meetings of stockholders may be called by a
corporation's board of directors or by the other person or persons authorized
by the corporation's certificate of incorporation or by-laws. Celgene's by-laws
provide that special meetings of stockholders may be called by the chairman of
the board, the chief executive officer, the president, the secretary or a
majority of directors.
STOCKHOLDER APPROVAL OF CERTAIN BUSINESS COMBINATIONS
In recent years, a number of states have adopted special laws designed to make
certain kinds of "unfriendly" corporate takeovers, or other transactions
involving a corporation and one or more of its significant shareholders, more
difficult. Under Section 203 of the Delaware law, certain "business
combinations" with "interested stockholders" of Delaware corporations are
subject to a three-year moratorium unless specified conditions are met. Under
Section 203 of the Delaware law, certain business combinations with a majority
shareholder require the delivery of a fairness opinion; however, there is no
equivalent provision in California law to Section 203, which addresses business
combinations with a significant but not majority holder.
Section 203 prohibits a Delaware corporation from engaging in a "business
combination" with an "interested stockholder" for three years following the
date that the person becomes an interested stockholder. With certain
exceptions, an interested stockholder is a person or group who or which owns
15% or more of the corporation's outstanding voting stock (including any rights
to acquire stock under an option, warrant, agreement, arrangement or
understanding, or upon the exercise of conversion or exchange rights, and stock
with respect to which the person has voting rights only), or is an affiliate or
associate of the corporation and was the owner of 15% or more of the voting
stock at any time within the previous three years.
For purposes of Section 203, the term "business combination" is defined broadly
to include mergers with or caused by the interested stockholder; sales or other
dispositions to the interested stockholder (except proportionately with the
corporation's other stockholders) of assets of the corporation or a
117
<PAGE>
subsidiary equal to 10% or more of the total market value of the corporation's
consolidated assets or its outstanding stock; the issuance or transfer by the
corporation or a subsidiary of stock of the corporation or the subsidiary to
the interested stockholder (except for transfers in a conversion or exchange or
a pro rata distribution or certain other transactions, none of which increase
the interested stockholder's proportionate ownership of any class or series of
the corporation's or such subsidiary's stock); or receipt by the interested
stockholder of the benefit (except proportionately as a stockholder), directly
or indirectly, of any loans, advances, guarantees, pledges, or other financial
benefits provided by or through the corporation or a subsidiary.
The three-year moratorium imposed on business combinations by Section 203 does
not apply if (a) before the stockholder becomes an interested stockholder, the
board of directors approves either the business combination or the transaction
which resulted in the person becoming an interested stockholder; (b) the
interested stockholder owns 85% of the corporation's voting stock upon
completion of the transaction which made him or her an interested stockholder
(excluding from the 85% calculation shares owned by directors who are also
officers of the target corporation and shares held by employee stock plans
which do not permit employees to decide confidentially whether to accept a
tender or exchange offer); or (c) after the person becomes an interested
stockholder, the board approves the business combination, and it is also
approved at a stockholder meeting by 66 2/3% of the voting stock not owned by
the interested stockholder.
Section 203 only applies to Delaware corporations which, like Celgene, (a) have
a class of voting stock that is listed on a national securities exchange, are
quoted on an interdealer quotation system such as the Nasdaq National Market or
(b) are held of record by more than 2,000 shareholders. However, a Delaware
corporation may elect not to be governed by Section 203 by a provision in its
original certificate of incorporation or an amendment or in its by-laws, which
amendment must be approved by majority shareholder vote and may not be further
amended by the board of directors. Celgene has not elected not to be governed
by Section 203; therefore, Section 203 will apply to Celgene.
Section 203 has been challenged in lawsuits arising out of ongoing takeover
disputes, and it is not yet clear whether and to what extent its
constitutionality will be upheld by the courts. Although the United States
District Court for the District of Delaware has consistently upheld the
constitutionality of Section 203, the Delaware Supreme Court has not yet
considered the issue. Section 203 has the effect of limiting the ability of a
potential acquiror to make a two-tiered bid for Celgene in which all
stockholders would not be treated equally. Signal shareholders should note that
the application of Section 203 to Celgene will confer upon the Celgene board
the power to reject a proposed business combination, even though a potential
acquiror could be offering a substantial premium for Celgene's shares over the
then current market price (assuming the stock is then publicly traded). Section
203 may also discourage certain potential acquirors unwilling to comply with
its provisions.
MERGERS
Both California and Delaware law generally require that a majority of the
holders of the stock of each of the acquiring and target corporations approve
statutory mergers. Delaware law does not require a stockholder vote of the
surviving corporation in a merger (unless the corporation provides otherwise in
its certificate of incorporation) if:
o the merger agreement does not amend the existing certificate of
incorporation,
o each share of the surviving corporation outstanding before the merger is an
identical outstanding share after the merger, and
o the number of shares to be issued by the surviving corporation in the merger
does not exceed 20% of the shares outstanding immediately before the merger.
California law contains a similar exception to its voting requirements for
reorganizations where shareholders or the corporation itself, or both,
immediately before the reorganization own immediately after the
reorganization equity securities constituting more than five-sixths of the
voting power of the surviving or acquiring corporation or its parent entity.
118
<PAGE>
Both California and Delaware law also require that a sale of all or
substantially all of the assets of a corporation be approved by a majority of
the voting shares of the corporation transferring such assets.
With exceptions, California law also requires that mergers, reorganizations,
certain sales of assets and similar transactions be approved by a majority vote
of each class of shares outstanding. The Signal Amended and Restated Articles
of Incorporation and California law require the approval of the holders of at
least a majority of the Signal common stock and at least a majority of the
Signal preferred stock.
By contrast, Delaware law generally does not require class voting, except in
certain transactions involving an amendment to the certificate of incorporation
which adversely affects a specific class of shares. The Celgene certificate of
incorporation does not require class voting.
DISSENTERS' RIGHTS
Under both California and Delaware law, a stockholder of a corporation
participating in major corporate transactions may, under varying circumstances,
be entitled to dissenters' rights under which the shareholder may receive cash
in the amount of the fair market value of his, her or its shares in lieu of the
consideration paid in the transaction.
The limitations on the availability of dissenters' rights under California law
are different from those under Delaware law. Shareholders of a California
corporation whose shares are not listed on a national securities exchange or on
a list of over-the-counter margin stocks issued by the Board of Governors of
the Federal Reserve System generally have dissenters' rights in certain
instances. As a result, dissenters' rights are available to the Signal
shareholders with respect to the merger. See "Dissenters' Rights" below and the
California General Corporation Law, Sections 1300 through 1312, a copy of which
is attached to this proxy statement/prospectus as Appendix B.
Under Delaware law, dissenters' rights are not available (a) with respect to
the sale, lease or exchange of all or substantially all of the assets of a
corporation, (b) with respect to a merger or consolidation by a corporation
whose shares are either listed on a national securities exchange or are held of
record by more than 2,000 holders if the stockholders receive only shares of
the surviving corporation or shares of any other corporation which are either
listed on a national securities exchange or held of record by more than 2,000
holders, plus cash in lieu of fractional shares, or (c) to stockholders of a
corporation surviving a merger if, among other conditions, no vote of the
stockholders of the surviving corporation is required to approve the merger.
THIS SUMMARY OF THE MATERIAL DIFFERENCES IN THE CORPORATION LAWS OF CALIFORNIA
AND DELAWARE, THE SIGNAL ARTICLES AND THE CELGENE CERTIFICATE AND THE SIGNAL
BY-LAWS AND THE CELGENE BY-LAWS DOES NOT PURPORT TO BE A COMPLETE LISTING OF
DIFFERENCES IN THE RIGHTS AND REMEDIES OF HOLDERS OF SHARES OF CALIFORNIA, AS
OPPOSED TO DELAWARE, CORPORATIONS AND SHAREHOLDERS OF SIGNAL AND STOCKHOLDERS
OF CELGENE IN PARTICULAR. THE DIFFERENCES CAN BE DETERMINED IN FULL BY
REFERENCE TO CALIFORNIA LAW, TO DELAWARE LAW AND THE SIGNAL ARTICLES AND THE
CELGENE CERTIFICATE AND THE SIGNAL BY-LAWS AND THE CELGENE BY-LAWS. IN
ADDITION, THE LAWS OF CALIFORNIA AND DELAWARE PROVIDE THAT SOME OF THE
STATUTORY PROVISIONS AS THEY AFFECT VARIOUS RIGHTS OF HOLDERS OF SHARES MAY BE
MODIFIED BY PROVISIONS IN THE ARTICLES OF INCORPORATION OR BY-LAWS OF THE
CORPORATION.
OTHER MATTERS
As of the date of this proxy statement/prospectus, the Signal board knows of no
matters that will be presented for consideration at the Signal meeting, other
than as described in this proxy statement/prospectus. If any other matters
properly come before the Signal meeting and are voted
119
<PAGE>
upon, the enclosed proxies will be deemed to confer discretionary authority on
the individuals named as proxies therein to vote the shares represented by such
proxies as to any such matters. The individuals named as proxies intend to vote
or not to vote in accordance with the recommendation of the management of
Signal.
LEGAL MATTERS
The validity of the Celgene common stock issuable under the merger and certain
legal matters relating to the merger and the transactions contemplated thereby
have been passed upon for Celgene by Proskauer Rose LLP, New York, New York.
Cooley Godward, LLP, San Diego, California, is acting as counsel to Signal in
connection with the merger and the transactions contemplated thereby.
EXPERTS
The consolidated financial statements and schedule of Celgene Corporation and
subsidiary as of December 31, 1999 and 1998, and for each of the years in the
three-year period ended December 31, 1999, have been included herein and in the
registration statement in reliance upon the report of KPMG LLP, independent
certified public accountants, appearing elsewhere herein, and upon the
authority of said firm as experts in accounting and auditing.
Ernst & Young LLP, independent auditors, have audited Signal financial
statements at December 31, 1999 and 1998, and for each of the three years in
the period ended December 31, 1999, as set forth in their report. Signal's
financial statements have been included in this proxy statement/prospectus and
elsewhere in this registration statement in reliance on Ernst & Young LLP's
report, given on their authority as experts in accounting and auditing.
The statements in this prospectus under the caption "Risk Factors--The combined
company may not be able to protect its intellectual property" have been
reviewed and approved by Mathews, Collins, Shepherd & Gould, P.A. and are
included herein in reliance upon such review and approval.
The statements in this prospectus that relate to thalidomide U.S. patent rights
licensed from The Rockefeller University and EntreMed/Children's Medical Center
Corp. under the caption "Risk Factors--The combined company may not be able to
protect its intellectual property" have been reviewed and approved by Pennie &
Edmonds LLP as special patent counsel to Celgene Corporation for these matters,
and are included herein in reliance upon their review and approval as experts
in U.S. patent law.
The statements in this prospectus under the caption "Risks Relating to
Investing in the Pharmaceutical Industry--The pharmaceutical and agrochemical
industries are subject to extensive government regulation and there is no
assurance of regulatory approval" have been reviewed and approved as they apply
to Celgene by Kleinfeld, Kaplan & Becker, as experts in such matters, and are
included herein in reliance upon such review and approval as experts.
WHERE YOU CAN FIND MORE INFORMATION
Celgene files reports with the SEC on a regular basis that contain financial
information about it and its results of operations. You may read or copy any
document that Celgene files with the SEC at the SEC's Public Reference Room at
450 Fifth Street, N.W., Washington, D.C. 20549 and 7 World Trade Center, Suite
1300, New York, New York 10048. You may obtain information about the Public
Reference Room by calling the SEC for more information at 1-800-SEC-0330.
Celgene's SEC filings are also available at the SEC's web site at
http://www.sec.gov.
This prospectus is part of a registration statement on Form S-4 Celgene filed
with the Securities and Exchange Commission. You should rely only on the
information or representations provided in this prospectus. Celgene has
authorized no one to provide you with different information. Celgene is not
making an offer of these securities in any state where the offer is not
permitted. You should not assume that the information in this prospectus is
accurate as of any date other than the date on the front of the document.
120
<PAGE>
FORWARD-LOOKING STATEMENTS
Each of Signal and Celgene has made forward-looking statements in this proxy
statement/ prospectus, and in documents that are incorporated by reference in
this proxy statement/prospectus, that are subject to risks and uncertainties.
All statements included or incorporated by reference in this proxy
statement/prospectus or made by management of Celgene or Signal other than
statements of historical fact regarding Celgene, Signal or the combined company
are forward-looking statements. Examples of forward-looking statements include
statements regarding Celgene's, Signal's or the combined company's future
financial results, operating results, product successes, business strategies,
projected costs, future products, competitive positions and plans and
objectives of management for future operations. In some cases, you can identify
forward-looking statements by terminology, such as "may," "will," "should,"
"would," "expects," "plans," "anticipates," "believes," "estimates,"
"predicts," "potential," or "continue" or the negative of these terms or other
comparable terminology. Any expectations based on these forward-looking
statements are subject to risks and uncertainties and other important factors,
including those discussed in the "Risk Factors" section of this proxy
statement/prospectus. These and many other factors could affect the future
financial and operating results of Celgene, Signal or the combined company.
These factors could cause actual results to differ materially from expectations
based on forward-looking statements made in this document or elsewhere by or on
behalf of Celgene, Signal or the combined company.
121
<PAGE>
APPENDIX A
AGREEMENT AND PLAN OF MERGER
BY AND AMONG
CELGENE CORPORATION,
CELGENE ACQUISITION CORP.
AND
SIGNAL PHARMACEUTICALS, INC.
DATED JUNE 29, 2000
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C> <C>
ARTICLE I
THE MERGER 1
Section 1.1 The Merger 1
Section 1.2. Effective Time of the Merger 1
Section 1.3. Closing 2
Section 1.4. Plan of Reorganization 2
ARTICLE II
THE SURVIVING CORPORATION 2
Section 2.1 Articles of Incorporation 2
Section 2.2 Bylaws 2
Section 2.3 Directors and Officers of Surviving Corporation 2
ARTICLE III
CONVERSION OF SHARES 2
Section 3.1 Exchange Ratio 2
Section 3.2 Exchange of Company Common Stock; Procedures 3
Section 3.3 Dividends; Transfer Taxes; Escheat 3
Section 3.4 No Fractional Securities 4
Section 3.5 Closing of Company Transfer Books 4
Section 3.6 Further Assurances 4
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF THE COMPANY 5
Section 4.1 Organization 5
Section 4.2 Capitalization 5
Section 4.3 Authority Relative to this Agreement 6
Section 4.4 Consents and Approvals; No Violations 6
Section 4.5 Financial Statements 6
Section 4.6 Absence of Certain Changes or Events; Material Contracts 7
Section 4.7 Litigation 7
Section 4.8 Absence of Undisclosed Liabilities 7
Section 4.9 No Default 7
Section 4.10 Taxes 7
Section 4.11 Title to Properties; Encumbrances 8
Section 4.12 Intellectual Property 9
Section 4.13 Compliance with Applicable Law 9
Section 4.14 Material Contracts 9
Section 4.15 FDA Matters 10
Section 4.16 Information in Disclosure Documents and Registration Statements 10
Section 4.17 Employee Benefit Plans; ERISA 11
Section 4.18 Environmental Laws and Regulations 12
Section 4.19 Vote Required 13
Section 4.20 Opinion of Financial Advisor 13
Section 4.21 Accounting Matters 13
Section 4.22 Labor Matters 13
Section 4.23 Affiliate Transactions 13
</TABLE>
i
<PAGE>
<TABLE>
<CAPTION>
PAGE
-----
<S> <C> <C>
Section 4.24 Brokers 13
Section 4.25 Tax Matters 13
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF PARENT AND MERGER SUB 14
Section 5.1 Organization 14
Section 5.2 Capitalization 14
Section 5.3 Authority Relative to this Agreement 14
Section 5.4 Consents and Approvals; No Violations 15
Section 5.5 Reports and Financial Statements 15
Section 5.6 Absence of Certain Changes or Events 15
Section 5.7 Information in Disclosure Documents and Registration Statement 15
Section 5.8 Compliance with Applicable Law 16
Section 5.9 Litigation 16
Section 5.10 Opinion of Financial Advisor 16
Section 5.11 Accounting Matters 16
Section 5.12 Tax Matters 16
Section 5.13 Brokers 16
ARTICLE VI
CONDUCT OF COMPANY BUSINESS PENDING THE MERGER 16
ARTICLE VII
ADDITIONAL AGREEMENTS 18
Section 7.1 Access and Information 18
Section 7.2 No Solicitation 18
Section 7.3 Registration Statement 18
Section 7.4 Tax Matters 19
Section 7.5 Proxy Statements; Stockholder Approval 19
Section 7.6 Compliance with the Securities Act 19
Section 7.7 Reasonable Best Efforts 20
Section 7.8 Voting and Proxy Agreement; Option Agreement 20
Section 7.9 Company Stock Options 20
Section 7.10 Public Announcements 21
Section 7.11 Expenses 21
Section 7.12 Listing Application 21
Section 7.13 Supplemental Disclosure 21
Section 7.14 Letters of Accountants 21
Section 7.15 Indemnification 22
Section 7.16. Other Agreements 22
ARTICLE VIII
CONDITIONS TO CONSUMMATION OF THE MERGER 22
Section 8.1 Conditions to Each Party's Obligation to Effect the Merger 22
Section 8.2 Conditions to Obligations of Parent and Sub to Effect the Merger 23
Section 8.3 Conditions to Obligation of the Company to Effect the Merger 24
</TABLE>
ii
<PAGE>
<TABLE>
<CAPTION>
PAGE
-----
<S> <C> <C>
ARTICLE IX
TERMINATION 25
Section 9.1 Termination 25
Section 9.2 Effect of Termination 25
ARTICLE X
GENERAL PROVISIONS 26
Section 10.1 Amendment and Modification 26
Section 10.2 Waiver 26
Section 10.3 Survivability; Investigations 26
Section 10.4 Notices 26
Section 10.5 Descriptive Headings; Interpretation 27
Section 10.6 Entire Agreement; Assignment 27
Section 10.7 Governing Law 27
Section 10.8 Severability 27
Section 10.9 Counterparts 27
EXHIBITS
Exhibit A-1 Form of Voting and Proxy Agreement
Exhibit A-2 Form of Options Agreement
Exhibit B Form of Tax Representation Letters
Exhibit C Form of Affiliate Agreement
Exhibit D Opinion of Cooley Godward LLP
Exhibit E Form of Tax Opinion of Proskauer Rose LLP
Exhibit F Form of Opinion of Proskauer Rose LLP
Exhibit G Form of Tax Opinion of Cooley Godward LLP
SCHEDULES
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
Schedule 4.1 Organization
Schedule 4.2(b)(i) Capitalization
Schedule 4.2(b)(ii) Capitalization
Schedule 4.2(b)(iii) Capitalization
Schedule 4.2(c) Capitalization
Schedule 4.3 Authority Relative to Agreement
Schedule 4.4 Consents and Approvals; No Violations
Schedule 4.5 Financial Statements
Schedule 4.6 Absence of Certain Changes or Events; Material Contracts
Schedule 4.7 Litigation
Schedule 4.8 Absence of Undisclosed Liabilities
Schedule 4.9 No Default
Schedule 4.10 Taxes
Schedule 4.11 Title to Properties; Encumbrances
Schedule 4.12(a)(i) Intellectual Property
Schedule 4.12(a)(ii) Intellectual Property
Schedule 4.12(b) Intellectual Property
Schedule 4.12(c) Intellectual Property
Schedule 4.12(d) Intellectual Property
Schedule 4.13 Compliance with Applicable Law
</TABLE>
iii
<PAGE>
<TABLE>
<CAPTION>
PAGE
-----
<S> <C> <C>
Schedule 4.14 Material Contracts
Schedule 4.15 FDA Matters
Schedule 4.16 Information in Disclosure Documents and RegistrationStatements
Schedule 4.17 Employee Benefit Plans; ERISA
Schedule 4.18 Environmental Laws and Regulations
Schedule 4.19 Vote Required
Schedule 4.21 Accounting Matters
Schedule 4.22 GCL Chapter 13
Schedule 4.23 Labor Matters
Schedule 4.24 Affiliate Transactions
Schedule 4.25 Brokers
Schedule 4.26 Tax Matters
SCHEDULES
REPRESENTATIONS AND WARRANTIES OF PARENT AND MERGER SUB
Schedule 5.2(c)(i) Capitalization
Schedule 5.2(c)(ii) Capitalization
Schedule 5.2(c)(iii) Capitalization
Schedule 5.4 Consents and Approvals; No Violations
Schedule 5.5 Absence of Certain Changes or Events
Schedule 5.6 Information in Disclosure Documents and Registration
Schedule 5.7 Compliance with Applicable Law
Schedule 5.8 Litigation
Schedule 5.10 Accounting Matters
Schedule 5.11 Tax Matters
Schedule 5.12 Brokers
</TABLE>
iv
<PAGE>
AGREEMENT AND PLAN OF MERGER
AGREEMENT AND PLAN OF MERGER dated June 29, 2000, by and among Celgene
Corporation, a Delaware corporation ("Parent"), Celgene Acquisition Corp., a
California corporation and wholly-owned subsidiary of Parent ("Sub"), and
Signal Pharmaceuticals, Inc., a California corporation (the "Company").
The Boards of Directors of Parent, Sub and the Company deem it advisable
and in the best interests of their respective stockholders that Parent acquire
the Company pursuant to the terms and conditions of this Agreement, and, in
furtherance of such acquisition, such Boards of Directors have unanimously
approved the merger of Sub with and into the Company in accordance with the
terms of this Agreement and the California General Corporation Law (the "GCL").
Concurrently with the execution and delivery of this Agreement and as a
condition and inducement to Parent's willingness to enter into this Agreement,
(i) the holders of the shares of the Common Stock of the Company (the "Company
Common Stock"), the Series A Preferred Stock of the Company, the Series B
Preferred Stock of the Company, the Series C Preferred Stock of the Company,
the Series D Preferred Stock of the Company, the Series E Preferred Stock of
the Company, the Series F Preferred Stock of the Company, and the Series F-1
Preferred Stock of the Company, (collectively, the "Company Preferred Stock"),
with sufficient voting power to approve the Merger (as defined in Section 1.1
hereof) and the conversion of the Company Preferred Stock to Company Common
Stock, are entering into an agreement with Parent in the form attached hereto
as Exhibit A-1 (the "Voting and Proxy Agreement") granting Parent the right to
vote such shares of the Company Common Stock and Company Preferred Stock in
accordance with the terms set forth in the Voting and Proxy Agreement; and (ii)
the Company is entering into an agreement with the Parent in the form attached
hereto as Exhibit A-2 (the "Option Agreement") granting Parent an option to
purchase 2,000,000 shares of Company Common Stock and stock appreciation rights
with respect to 3,000,000 shares of Company Common Stock in accordance with the
terms set forth in the Option Agreement.
For federal income tax purposes, it is intended that the Merger (as
defined in Section 1.1) shall qualify as a reorganization within the meaning of
Section 368(a) of the Internal Revenue Code of 1986, as amended (the "Code").
For accounting purposes, it is intended that the Merger shall be accounted
for as a pooling of interests.
In consideration of the foregoing and the respective representations,
warranties, covenants and agreements set forth herein, the parties hereto agree
as follows:
ARTICLE I
THE MERGER
Section 1.1. The Merger. In accordance with the provisions of this
Agreement and the GCL, at the Effective Time (as defined in Section 1.2), Sub
shall be merged with and into the Company (the "Merger"), the separate
existence of Sub shall thereupon cease, and the Company shall be the surviving
corporation in the Merger (sometimes hereinafter called the "Surviving
Corporation") and shall continue its corporate existence under the laws of the
State of California. The Merger shall have the effects set forth in Chapter 13
of the GCL.
Section 1.2. Effective Time of the Merger. The Merger shall become
effective at the time of filing of, or at such later time specified in, a
properly executed Agreement of Merger, in the form required by and executed in
accordance with the GCL, filed with the Secretary of State of the State of
California in accordance with the provisions of the GCL. Such filing shall be
made as soon as practicable (and in any event within two business days) after
the Closing (as defined in Section 1.3). When used in this Agreement, the term
"Effective Time" shall mean the date and time at which the Merger shall become
effective.
A-1
<PAGE>
Section 1.3. Closing. The closing of the transactions contemplated by this
Agreement (the "Closing") shall take place at the offices of Proskauer Rose
LLP, 1585 Broadway, New York, New York, at 10:00 a.m., as soon as practicable
(and in any event within two business days) after the day on which all of the
conditions set forth in Article VIII are satisfied or waived or on such other
date and at such other time and place as Parent and the Company shall agree
(such date, the "Closing Date").
Section 1.4. Plan of Reorganization. The parties to this Agreement hereby
adopt this Agreement as a "plan of reorganization" within the meaning of
Sections 1.368-2(g) and 1.368-2(a) of the United States Treasury Regulations.
ARTICLE II
THE SURVIVING CORPORATION
Section 2.1. Articles of Incorporation. The Articles of Incorporation of
the Company shall be the Articles of Incorporation of the Surviving Corporation
and shall be amended and restated in accordance with applicable law in such
form as Parent, in its sole discretion, shall determine.
Section 2.2. Bylaws. The Bylaws of Sub as in effect at the Effective Time
shall be the Bylaws of the Surviving Corporation until amended in accordance
with applicable law.
Section 2.3 Directors and Officers of Surviving Corporation.
(a) The directors of Sub at the Effective Time shall be the initial
directors of the Surviving Corporation and shall hold office from the Effective
Time until their respective successors are duly elected or appointed and
qualified in the manner provided in the Articles of Incorporation or Bylaws of
the Surviving Corporation or as otherwise provided by law.
(b) The officers of the Company at the Effective Time shall be the initial
officers of the Surviving Corporation and shall hold office from the Effective
Time until their respective successors are duly elected or appointed and
qualified in the manner provided in the Articles of Incorporation or Bylaws of
the Surviving Corporation, or as otherwise provided by law.
ARTICLE III
CONVERSION OF SHARES
Section 3.1. Exchange Ratio. At the Effective Time, by virtue of the
Merger and without any action on the part of the holder thereof:
(a) Each share of Company Common Stock issued and outstanding immediately
prior to the Effective Time (other than shares to be canceled in accordance
with Section 3.1(b) and other than shares of Company Common Stock as to which
appraisal rights shall have been duly demanded under the GCL ("Dissenting
Shares")) shall be converted into the right to receive 0.1257 (the "Exchange
Ratio") of a share of the common stock, $.01 par value per share, of Parent
("Parent Common Stock"), payable upon the surrender of the certificate formerly
representing such share of Company Common Stock.
(b) All shares of Company Common Stock and shares of Company Preferred
Stock that are held by the Company as treasury shares shall be canceled and
retired and cease to exist, and no securities of Parent or other consideration
shall be delivered in exchange therefor.
(c) Each share of Common Stock of Sub ("Sub Common Stock") issued and
outstanding immediately prior to the Effective Time shall be converted into and
become one fully paid and nonassessable share of Common Stock of the Surviving
Corporation.
(d) Each outstanding option to purchase Company Common Stock (each, a
"Company Stock Option"), and each warrant to purchase Company Common Stock or
Company Preferred Stock (each, a "Company Warrant") shall be assumed by Parent
as more specifically provided in Section 7.9 hereof.
A-2
<PAGE>
(e) The holders of Dissenting Shares, if any, shall be entitled to payment
by the Surviving Corporation of the appraised value of such shares to the
extent permitted by and in accordance with the provisions of Chapter 13 of the
GCL; provided, however, that (i) if any holder of the Dissenting Shares shall,
under the circumstances permitted by the GCL, subsequently deliver a written
withdrawal of such holder's demand for appraisal of such shares, or (ii) if any
holder fails to establish such holder's entitlement to rights to payment as
provided in such Chapter 13, or (iii) if neither any holder of Dissenting
Shares nor the Surviving Corporation has filed a petition demanding a
determination of the value of all Dissenting Shares within the time provided in
such Chapter 13, such holder or holders (as the case may be) shall forfeit such
right to payment for such shares and such shares shall thereupon be deemed to
have been converted into Parent Common Stock pursuant to Section 3.1(a) as of
the Effective Time. The Surviving Corporation shall be solely responsible for,
and shall pay out of its own funds, any amounts which become due and payable to
holders of Dissenting Shares, and such amounts shall not be paid directly or
indirectly by Parent.
Section 3.2. Exchange of Company Common Stock; Procedures.
(a) Prior to the Closing Date, Parent shall designate its stock transfer
agent and registrar, or other agent reasonably acceptable to the Company, to
act as Exchange Agent hereunder (the "Exchange Agent"). As soon as practicable
after the Effective Time, Parent shall deposit with or for the account of the
Exchange Agent stock certificates representing the number of shares of Parent
Common Stock issuable pursuant to Section 3.1, which shares of Parent Common
Stock shall be deemed to have been issued at the Effective Time.
(b) As soon as practicable after the Effective Time, Parent shall cause
the Exchange Agent to mail to each holder of record of a certificate or
certificates which immediately prior to the Effective Time represented
outstanding shares of Company Common Stock, including certificates representing
Company Preferred Stock that was converted into Company Common Stock in
connection with the Merger (the "Certificates") that were converted pursuant to
Section 3.1 into the right to receive shares of Parent Common Stock (i) a form
of letter of transmittal specifying that delivery shall be effected, and risk
of loss and title to the Certificates shall pass, only upon proper delivery of
the Certificates to the Exchange Agent and (ii) instructions for use in
surrendering such Certificates in exchange for certificates representing shares
of Parent Common Stock. Upon surrender of a Certificate for cancellation to the
Exchange Agent, together with such letter of transmittal, duly executed, the
holder of such Certificate shall be entitled to receive in exchange therefor
(x) a certificate representing that number of whole shares of Parent Common
Stock which such holder has the right to receive pursuant to the provisions of
this Article III and (y) cash in lieu of any fractional shares of Parent Common
Stock to which such holder is entitled pursuant to Section 3.4, after giving
effect to any required tax withholdings, and the Certificate so surrendered
shall forthwith be canceled. In the event of a transfer of ownership of Company
Common Stock which is not registered in the transfer records of the Company, a
certificate representing the proper number of shares of Parent Common Stock may
be issued to a transferee if the Certificate representing such Company Common
Stock is presented to the Exchange Agent, accompanied by all documents required
to evidence and effect such transfer, and by evidence that any applicable stock
transfer taxes have been paid. Until surrendered as contemplated by this
Section 3.2(b), each Certificate shall be deemed at any time after the
Effective Time to represent only the right to receive upon such surrender a
certificate representing shares of Parent Common Stock and cash in lieu of any
fractional shares of Parent Common Stock as contemplated by this Article III.
(c) If any Certificate shall have been lost, stolen or destroyed, the
person in whose name the shares of Company Common Stock represented by such
Certificate are registered on the books of the Company shall be entitled to
receive a certificate representing shares of Parent Common Stock and cash in
lieu of any fractional shares of Parent Common Stock as contemplated by this
Article III upon delivery of a duly executed letter of transmittal and an
appropriate affidavit and, if required by Parent, a bond (in such sum as Parent
may reasonably direct) as indemnity against any claim that may be made against
Parent or the Surviving Corporation with respect to such Certificate.
Section 3.3. Dividends; Transfer Taxes; Escheat. No dividends or
distributions that are declared on shares of Parent Common Stock will be paid
to persons entitled to receive certificates representing shares of Parent
Common Stock until such persons surrender their Certificates. Upon such
surrender, there shall
A-3
<PAGE>
be paid, to the person in whose name the certificates representing such shares
of Parent Common Stock shall be issued, any dividends or distributions with
respect to such shares of Parent Common Stock which have a record date after
the Effective Time and shall have become payable between the Effective Time and
the time of such surrender. In no event shall the person entitled to receive
such dividends or distributions be entitled to receive interest thereon.
Promptly following the date which is six months after the Effective Time, the
Exchange Agent shall deliver to the Surviving Corporation all cash,
certificates and other documents in its possession relating to the transactions
described in this Agreement, and any holders of Company Common Stock who have
not theretofore complied with this Article III shall look thereafter only to
the Surviving Corporation for the shares of Parent Common Stock, any dividends
or distributions thereon, and any cash in lieu of fractional shares thereof to
which they are entitled pursuant to this Article III. Notwithstanding the
foregoing, neither the Exchange Agent nor any party hereto shall be liable to a
holder of Company Common Stock for any shares of Parent Common Stock, any
dividends or distributions thereon or any cash in lieu of fractional shares
thereof delivered to a public official pursuant to applicable abandoned
property, escheat or similar laws upon the lapse of the applicable time periods
provided for therein.
Section 3.4. No Fractional Securities. No certificates or scrip
representing fractional shares of Parent Common Stock shall be issued upon the
surrender for exchange of Certificates, and such fractional interests shall not
entitle the owner thereof to vote or to any rights of a security holder. In
lieu of any such fractional securities, each holder of Company Common Stock who
would otherwise have been entitled to a fraction of a share of Parent Common
Stock upon surrender of such holder's Certificates (after aggregating all
fractional shares of Parent Common Stock issuable to such holder) will be
entitled to receive, and Parent will timely provide (or cause to be provided)
to the Exchange Agent sufficient funds to make, a cash payment (without
interest) determined by multiplying (i) the fractional interest to which such
holder would otherwise be entitled (after taking into account all shares of
Company Common Stock then held of record by such holder) and (ii) the average
of the per share closing prices for Parent Common Stock on the Nasdaq National
Market ("Nasdaq") for the five trading days immediately preceding the Effective
Time. It is understood (i) that the payment of cash in lieu of fractional
shares of Parent Common Stock is solely for the purpose of avoiding the expense
and inconvenience to Parent of issuing fractional shares and does not represent
separately bargained-for consideration and (ii) that no holder of Company
Common Stock will receive cash in lieu of fractional shares of Parent Common
Stock in an amount greater than the value of one full share of Parent Common
Stock.
Section 3.5. Closing of Company Transfer Books. At the Effective Time, the
stock transfer books of the Company shall be closed, and no transfer of shares
of Company Common Stock shall thereafter be made on such stock transfer books.
If, after the Effective Time, Certificates are presented to the Surviving
Corporation, they shall be canceled and exchanged as provided in this Article
III.
Section 3.6. Further Assurances. If, at any time after the Effective Time,
the Surviving Corporation shall consider or be advised that any deeds, bills of
sale, assignments, assurances or any other actions or things are necessary or
desirable to vest, perfect or confirm of record or otherwise in the Surviving
Corporation its right, title or interest in, to or under any of the rights,
properties or assets of either of Sub or the Company acquired or to be acquired
by the Surviving Corporation as a result of, or in connection with, the Merger
or otherwise to carry out this Agreement, the officers of the Surviving
Corporation shall be authorized to execute and deliver, in the name and on
behalf of each of Sub and the Company or otherwise, all such deeds, bills of
sale, assignments and assurances and to take and do, in such names and on such
behalf or otherwise, all such other actions and things as may be necessary or
desirable to vest, perfect or confirm any and all right, title and interest in,
to and under such rights, properties or assets in the Surviving Corporation or
otherwise to carry out the purposes of this Agreement.
A-4
<PAGE>
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company represents and warrants to Parent and Sub as follows:
Section 4.1. Organization. The Company is a corporation duly organized,
validly existing and in good standing under the laws of the State of California
and has the corporate power to carry on its business as it is now being
conducted or presently proposed to be conducted. The Company is duly qualified
as a foreign corporation to do business, and is in good standing, in each
jurisdiction where the character of its properties owned or held under lease or
the nature of its activities makes such qualification necessary, except where
the failure to be so qualified will not have a Company Material Adverse Effect.
A "Company Material Adverse Effect" means any event or condition (excluding
general economic conditions) that has a material adverse effect, individually
or in the aggregate, on the financial condition, results of operations,
business, assets, liabilities, prospects or properties of the Company or the
ability of the Company to perform any of its material obligations under, or to
consummate the Merger and the other transactions contemplated by, this
Agreement. The Company does not have any Subsidiaries. As used in this
Agreement, the term "Subsidiary" means, with respect to any party, any
corporation or other organization, whether incorporated or unincorporated, of
which (x) such party or any other Subsidiary of such party is a general partner
(excluding partnerships, the general partnership interests of which held by
such party or any Subsidiary of such party do not have a majority of the voting
interest in such partnership) or (y) at least a majority of the securities or
other interests having by their terms ordinary voting power to elect a majority
of the board of directors or others performing similar functions with respect
to such corporation or other organization is directly or indirectly owned or
controlled by such party and/or one or more of its Subsidiaries.
Section 4.2. Capitalization.
(a) The authorized capital stock of the Company consists of 37,563,708
shares of Company Common Stock and 24,967,639 shares of Preferred Stock, of
which 2,626,892 shares are designated as Series A Preferred Stock, 2,875,000
shares are designated as Series B Preferred Stock, 8,791,432 shares are
designated as Series C Preferred Stock, 250,000 shares are designated as Series
C-1 Preferred Stock, 225,000 shares are designated as Series C-2 Preferred
Stock, 732,601 shares are designated as Series D Preferred Stock, 6,455,493
shares are designated as Series E Preferred Stock, 2,722,513 shares are
designated as Series F Preferred Stock, and 288,708 shares are designated as
Series F-1 Preferred Stock. As of the date hereof, there are issued and
outstanding 4,874,722 shares of Company Common Stock, 2,626,892 shares of
Company Series A Preferred Stock, 2,875,000 shares of Company Series B
Preferred Stock, 8,791,432 shares of Company Series C Preferred Stock, 732,601
shares of Company Series D Preferred Stock, 6,455,493 shares of Company Series
E Preferred Stock, 2,722,513 shares of Company Series F Preferred Stock, and
288,708 shares of Company Series F-1 Preferred Stock. As of the date hereof
there are outstanding (i) Company Stock Options to acquire 3,034,058 shares of
Company Common Stock under all stock option plans of the Company or otherwise,
of which options to acquire 3,034,058 shares of Company Common Stock are
exercisable as of the date hereof, and (ii) Company Warrants to acquire 475,000
shares of Company Preferred Stock, of which Company Warrants to acquire 400,000
shares of Company Preferred Stock are exercisable as of the date hereof.
28,001,697 shares of Company Common Stock are reserved for issuance pursuant to
the Company Stock Options, the Company Warrants and all other Rights (as
hereinafter defined) to purchase or otherwise receive from the Company capital
stock or other securities of the Company. All of the issued and outstanding
shares of Company Common Stock and Company Preferred Stock are validly issued,
fully paid and nonassessable.
(b) Except as set forth on Schedule 4.2(b), (i) there is no outstanding
right, subscription, warrant, call, option or other agreement or arrangement
(including, without limitation, pursuant to any employee benefit plan) of any
kind (collectively, "Rights") to purchase or otherwise to receive from the
Company any of the authorized but unissued or treasury shares of the capital
stock or any other security of the Company or to require the Company to
purchase any such security, (ii) there is no outstanding security
A-5
<PAGE>
of any kind convertible into or exchangeable for such capital stock, and (iii)
there is no voting trust or other agreement or understanding to which the
Company is a party or is bound with respect to the voting of the capital stock
of the Company. The conversion of the Company Stock Options and the Company
Warrants provided for in Section 7.9 of this Agreement is in accordance with
the respective terms of the Company Stock Options and the plans under which
they were issued and the instruments governing the Company Warrants, as the
case may be.
(c) Since December 31, 1999, except as set forth on Schedule 4.2(c), the
Company has not in any manner accelerated or provided for the acceleration of
the vesting or exercisability of, or otherwise modified the terms and
conditions applicable to, any of the Company Stock Options or the Company
Warrants, whether set forth in the governing stock option plans of the Company,
a stock option grant, award or other agreement or otherwise. Except as set
forth on Schedule 4.2(c), none of the awards, grants or other agreements
pursuant to which Company Stock Options or the Company Warrants were issued
have provisions which accelerate the vesting or right to exercise such options
or warrants upon the execution of this Agreement (including the documents
attached as Exhibits hereto), the consummation of the transactions contemplated
hereby (or thereby) or any other "change of control" events.
Section 4.3. Authority Relative to this Agreement. The Company has the
requisite corporate power and authority to execute and deliver this Agreement
and the Option Agreement and to consummate the transactions contemplated hereby
and thereby. The execution and delivery of this Agreement and the Option
Agreement by the Company and the consummation by the Company of the
transactions contemplated on its part hereby and thereby have been duly
authorized by the Company's Board of Directors and, except for the approval of
its shareholders to be sought at the shareholders meeting contemplated by
Section 7.5(a) with respect to this Agreement, no other corporate proceedings
on the part of the Company are necessary to authorize this Agreement or the
Option Agreement or for the Company to consummate the transactions contemplated
hereby or thereby. This Agreement and the Option Agreement have been duly and
validly executed and delivered by the Company and each constitutes a valid and
binding agreement of the Company, enforceable against the Company in accordance
with its terms, subject to (i) laws of general application relating to
bankruptcy, insolvency and the relief of debtors, and (ii) rules of law
governing specific performance, injunctive relief and other equitable remedies.
Section 4.4. Consents and Approvals; No Violations. Neither the execution,
delivery and performance of this Agreement or the Option Agreement by the
Company, nor the consummation by the Company of the transactions contemplated
hereby or thereby, will (i) conflict with or result in any breach of any
provisions of the charter, by-laws or other organizational documents of the
Company, (ii) require a filing with, or a permit, authorization, consent or
approval of, any federal, state, local or foreign court, arbitral tribunal,
administrative agency or commission or other governmental or other regulatory
authority or administrative agency or commission (a "Governmental Entity"),
except in connection with or in order to comply with the applicable provisions
of the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the
"HSR Act"), the Securities Act of 1933, as amended (the "Securities Act"),
state securities or "blue sky" laws, and the filing and recordation of an
Agreement of Merger as required by the GCL, (iii) except as set forth on
Schedule 4.5, result in a violation or breach of, or constitute (with or
without due notice or lapse of time or both) a default (or give rise to any
right of termination, cancellation or acceleration) under, or result in the
creation of liens, pledges, security interests, claims, charges or other
encumbrances of any kind whatsoever ("Liens") on any property or asset of the
Company pursuant to, any of the terms, conditions or provisions of any Material
Contract (as defined below), or (iv) violate any law, order, writ, injunction,
decree, statute, rule or regulation of any Governmental Entity applicable to
the Company or any of its properties or assets.
Section 4.5. Financial Statements. The (a) audited balance sheets of the
Company as of December 31, 1998 and 1999, the related statements of operations,
stockholders' equity, and cash flows for each of the three years in the period
ended December 31, 1999, and (b) unaudited balance sheets of the Company as of
March 31, 1999 and 2000, the related statements of operations, stockholders'
equity, and cash flows for each of the three-month periods ended March 31, 1999
and March 31, 2000 are set forth as Schedule 4.5 hereto (collectively, the
"Financial Statements"). The Financial Statements have been prepared in
A-6
<PAGE>
accordance with generally accepted accounting principles ("GAAP") consistently
applied throughout the periods indicated and fairly present the consolidated
financial position of the Company as at the dates thereof and the results of
operations and cash flows of the Company for each of the periods then ended.
Except as set forth on Schedule 4.5, since January 1, 1997, there has been no
change in any of the significant accounting (including tax accounting)
policies, practices or procedures of the Company.
Section 4.6. Absence of Certain Changes or Events; Material Contracts.
Except as set forth on Schedule 4.6, since December 31, 1999, (i) the Company
has not conducted its business and operations other than in the ordinary course
of business and consistent with past practices or taken any actions that, if it
had been in effect, would have violated or been inconsistent with the
provisions of Article VI and (ii) other than general economic conditions, there
has not been any fact, event, circumstance or change affecting or relating to
the Company which has had or is reasonably likely to have a Company Material
Adverse Effect. Except as set forth on Schedule 4.6, the transactions
contemplated by this Agreement will not constitute a change of control under or
require the consent from or the giving of notice to a third party pursuant to
the terms, conditions or provisions of any Material Contract (as defined
below), or require any payment to be made under any Contract to which the
Company is a party.
Section 4.7. Litigation. Except as set forth on Schedule 4.7 hereto, there
is no suit, action, proceeding or investigation pending or, to the knowledge of
the Company, threatened against the Company; nor is there any judgment, decree,
injunction, ruling or order of any Governmental Entity outstanding against the
Company.
Section 4.8. Section Absence of Undisclosed Liabilities. Except for
liabilities or obligations which are accrued or reserved against in the
Financial Statements (or reflected in the notes thereto) or which were incurred
after March 31, 2000 in the ordinary course of business and consistent with
past practice, and except as set forth on Schedule 4.8, the Company does not
have any liabilities or obligations (whether absolute, accrued, contingent or
otherwise) of a nature required by GAAP to be reflected in a balance sheet (or
reflected in the notes thereto) or which would reasonably be expected to have a
Company Material Adverse Effect.
Section 4.9. No Default. Except as set forth on Schedule 4.9, the Company
is not in default or violation (and no event has occurred which with notice or
the lapse of time or both would constitute a default or violation) of (i) any
term, condition or provision of its charter, by-laws or comparable
organizational documents, (ii) any material term, condition or provision of any
Material Contract (as defined below), or (iii) any term, condition or provision
of any material order, writ, injunction or decree, or any material statute,
rule or regulation, of any Governmental Entity applicable to the Company.
Section 4.10. Taxes.
(a) The Company has heretofore delivered or made available to Parent true,
correct and complete copies of the federal, state, local and foreign Tax
Returns (as hereinafter defined) filed by the Company for each of the years
ended December 31, 1998, 1997, 1996, 1995 and 1994 inclusive. Except as set
forth on Schedule 4.10, the Company has duly filed, all material federal,
state, local and foreign income, franchise, sales and other Tax Returns
required to be filed by the Company. All such Tax Returns are true, correct and
complete, in all material respects, and the Company has paid all Taxes (as
hereinafter defined) shown on such Tax Returns and has made adequate provision
for payment of all accrued but unpaid material Taxes anticipated in respect of
all periods since the periods covered by such Tax Returns. Except as set forth
on Schedule 4.10, all material deficiencies assessed as a result of any
examination of Tax Returns of the Company by federal, state, local or foreign
tax authorities have been paid or reserved on the financial statements of the
Company in accordance with GAAP consistently applied, and true, correct and
complete copies of all revenue agent's reports, "30-day letters," or "90-day
letters" or similar written statements proposing or asserting any Tax
deficiency against the Company for any open year have been heretofore delivered
to Parent. The Company has heretofore delivered or will make available to
Parent true, correct and complete copies of all written tax-sharing agreements
and written descriptions of all such unwritten agreements or arrangements to
which the Company is a party. Except as set forth in Schedule 4.10, no material
Tax issue has been raised during the past five years by any federal, state,
local or foreign taxing authority which, if raised with regard to any
subsequent period, could reasonably
A-7
<PAGE>
be expected to result in a proposed material Tax deficiency for any such
subsequent period. Except as disclosed in Schedule 4.10 hereof, the Company has
not granted any extension or waiver of the statutory period of limitations
applicable to any claim for any material Taxes. Schedule 4.10 lists the
consolidated federal income tax returns of the Company that have been examined
by and settled with the Internal Revenue Service (the "Service"). Except as set
forth in Schedule 4.10, (i) no consent has been filed under Section 341(f) of
the Code with respect to the Company; (ii) the Company has not participated in,
or cooperated with, an international boycott within the meaning of Section 999
of the Code; and (iii) the Company has not issued or assumed any corporate
acquisition indebtedness, as defined in Section 279(b) of the Code. The Company
has complied (and until the Effective Time will comply) in all material
respects with all applicable laws, rules and regulations relating to the
payment and withholding of Taxes (including, without limitation, withholding of
Taxes pursuant to Sections 1441 and 1442 of the Code or similar provisions
under any foreign laws) and has, within the time and in the manner prescribed
by law, withheld from employee wages and paid over to the proper governmental
authorities all amounts required to be so withheld and paid over under all
applicable laws. Except as disclosed in Schedule 4.10 hereof, there are no
examinations being conducted of the Company's Tax Returns. Except as set foth
on Schedule 4.10, the Company will not be required to include in a taxable
period ending after the Effective Time material income attributable to a prior
taxable period that was not recognized in that prior taxable period or a result
of the installment method of accounting, the cash method of accounting, the
completed contract method of accounting, the long-term contract method of
accounting or a change in accounting method. No jurisdiction in which the
Company does not file Tax Returns has claimed in writing that, or questioned in
writing whether, the Company is obligated to file Tax Returns in that
jurisdiction.
(b) For purposes of this Agreement, the term "Taxes" shall mean all taxes,
charges, fees, levies, duties, imposts or other assessments, including, without
limitation, income, gross receipts, excise, property, sales, use, transfer,
gains, license, payroll, withholding, capital stock and franchise taxes,
imposed by the United States, or any state, local or foreign government or
subdivision or agency thereof, including any interest, penalties or additions
thereto. For purposes of this Agreement, the term "Tax Return" shall mean any
report, return or other information or document required to be supplied to a
taxing authority in connection with Taxes.
Section 4.11 Title to Properties; Encumbrances. Except as described in the
following sentence, the Company has good, valid and marketable title to, or a
valid leasehold interest in, all of its material properties and assets (real,
personal and mixed, tangible and intangible), including, without limitation,
all the properties and assets reflected in the balance sheet of the Company as
of March 31, 2000 (except for properties and assets disposed of in the ordinary
course of business and consistent with past practices since March 31, 2000).
Except as set forth on Schedule 4.11, none of such properties or assets are
subject to any Liens (whether absolute, accrued, contingent or otherwise),
except (i) Liens for taxes, assessments or other governmental charges not
delinquent or being contested in good faith and by appropriate proceedings and
with respect to which proper reserves have been taken by the Company and have
been duly reflected on its books and records and, with respect to reserves
taken on or prior to March 31, 2000, the Financial Statements ("Proper
Reserves"); (ii) deposits or pledges to secure obligations under workmen's
compensation, social security or similar laws, or under unemployment insurance
as to which the Company is not in default; (iii) deposits or pledges to secure
bids, tenders, contracts (other than contracts for the payment of money),
leases, statutory obligations, surety and appeal bonds and other obligations of
like nature arising in the ordinary course of business of the Company; (iv)
judgment Liens listed on Schedule 4.11 that have been stayed or bonded and
mechanics', workmen's, materialmen's or other like liens with respect to
obligations which are not due or which are being contested in good faith by the
Company and as to which they have taken Proper Reserves; and (v) minor
imperfections of title and encumbrances, if any, which are not substantial in
amount, do not materially detract from the value of the property or assets
subject thereto and do not materially impair the operations of any of the
Company.
A-8
<PAGE>
Section 4.12 Intellectual Property .
(a) Schedule 4.12 sets forth a list of (i) all patents, patent
applications, registered trademarks, trademark applications, registered
copyrights and copyright applications that are owned by the Company and (ii)
all agreements under which the Company is licensed or otherwise permitted, or
licenses or otherwise permits a third party, to use any of the following (each,
an "Intellectual Property Right"): patent, patent application, trademark
(whether registered or unregistered), trademark application, trade name,
service mark (whether registered or unregistered), service mark application,
copyright (whether registered or unregistered), copyright application, trade
secret, know-how, computer software, invention, design, proprietary right or
intellectual property right (collectively, the "Company Intellectual
Property").
(b) (i) The Company directly or indirectly owns, or is licensed or
otherwise possesses valid rights to use, all Company Intellectual Property
(including, without limitation, in connection with potential products under
development by the Company), (ii) no person is challenging the validity or
enforceability of, or to the knowledge of the Company, infringing or otherwise
violating, the Company Intellectual Property, and (iii) the Company is not and
will not be as a result of the execution and delivery of this Agreement or the
performance of its obligations hereunder, infringing or otherwise violating any
Intellectual Property Rights that are owned by any third party (collectively,
"Third Party Intellectual Property Rights").
(c) The Company Intellectual Property constitutes all the Intellectual
Property Rights necessary for the business of the Company as currently
conducted and as proposed to be conducted.
(d) All outstanding registrations and applications for Company
Intellectual Property (i) are valid, subsisting, in proper form and
enforceable, and have been duly maintained, including the submission of all
necessary filings and fees in accordance with the legal and administrative
requirements of the appropriate jurisdictions and (ii) have not lapsed, expired
or been abandoned, and no application or registration therefor is the subject
of any pending, or, to the knowledge of the Company, threatened legal or
governmental proceeding before any registration authority in any jurisdiction.
Section 4.13 Compliance with Applicable Law. Except as set forth on
Schedule 4.13, (i) the Company holds, and is in compliance with the terms of,
all material permits, licenses, exemptions, orders and approvals of all
Governmental Entities necessary for the current and presently proposed conduct
of its business ("Company Permits"), (ii) no fact exists or event has occurred,
and no action or proceeding is pending or, to the Company's knowledge,
threatened, that has a reasonable possibility of resulting in a revocation,
nonrenewal, termination, suspension or other material impairment of any
material Company Permits, (iii) the business of the Company is not being
conducted in violation, in any material respect, of any applicable law,
ordinance, regulation, judgment, decree or order of any Governmental Entity
("Applicable Law"), and (iv) to the knowledge of the Company, (x) no
investigation or review by any Governmental Entity with respect to the Company
is pending or threatened or has been undertaken within the past six years, and
(y) no Governmental Entity has indicated an intention to conduct the same.
Section 4.14 Material Contracts. Schedule 4.14 contains a true, complete
and correct list of all Material Contracts (as hereinafter defined) of the
Company, complete and correct copies of which have been provided to Parent.
Except as set forth in Schedule 4.14, all of the Material Contracts are valid,
binding and in full force and effect, and the Company is not in default (nor
has any event occurred that with notice or lapse of time or both would become a
default) of any of its material obligations under any of the Material
Contracts. Except as set forth in Schedule 4.14, to the Company's knowledge, no
contracting party to any Material Contract (other than the Company) is in
default (nor has any event occurred that with notice or lapse of time or both
would become a default) of any of its obligations under any of the Material
Contracts. Except as set forth in Schedule 4.14, no contracting party to any
Material Contract has notified (whether orally or in writing) the Company of
its intention to terminate, cancel or modify such Material Contract or
otherwise to reduce or change its activity thereunder so as to affect adversely
the benefits derived, or currently expected to be derived, by the Company under
such Material Contract. For purposes of this Agreement, "Material Contracts"
shall mean any written, oral or other agreement, contract, subcontract, lease,
understanding, instrument, note, option, warranty, purchase order, license,
sublicense, insurance policy, benefit plan or legally binding commitment or
undertaking of any nature (each, a "Contract") to which the Company is a party
or by which the Company or any of its properties or assets is bound:
A-9
<PAGE>
(a) relating to the acquisition, transfer, development, sharing or license
of any Company Intellectual Property (except for any Contract pursuant to which
any Company Intellectual Property is licensed to the Company under any third
party software license generally available to the public);
(b) that provides for indemnification by the Company of any officer,
director, employee or agent of the Company;
(c) imposing any restriction on the right or ability of the Company (A) to
compete with any other person, (B) to acquire any product or other asset or any
services from any other person or (C) to develop, sell, supply, distribute,
offer, support or service any product or any technology or other asset to or
for any other person;
(d) relating to any currency hedging;
(e) containing standstill or similar provisions;
(f) (A) to which any Governmental Entity is a party or under which any
Governmental Entity has any rights or obligations, or (B) directly or
indirectly benefitting any Governmental Entity;
(g) requiring that the Company give any notice or provide any information
to any person prior to considering or accepting any proposal, or prior to
entering into any discussions, agreement, arrangement or understanding relating
to any Acquisition Transaction (as defined below);
(h) that contemplates or involves the payment or delivery of cash or other
consideration in an amount or having a value in excess of $250,000 annually, or
contemplates or involves the performance of services having a value in excess
of $250,000 annually;
(i) that would be required to be filed as an exhibit to an annual report
on Form 10-K pursuant to Item 601 of Regulation S-K of the SEC; and
(j) that has had or could reasonably be expected to have a Company
Material Adverse Effect.
Section 4.15 FDA Matters.
(a) The Company is in compliance in all material respects with, and
current in the performance of, any obligation arising under any consent decree,
consent agreement, warning letter, Form 483 issued by or entered into with the
FDA or other notice, response or commitment made to the FDA or any comparable
state or Government Entity.
(b) The Company has disclosed to Parent any warning letters or material
Form 483s or similar notices, or other correspondence relating to the Company's
compliance status under applicable legal requirements from the FDA within the
last three years.
(c) Neither the Company nor, to the Company's knowledge, any of its
officers, employees or agents has knowingly committed any act, made any
statement, or failed to make any statement, that would reasonably be expected
to provide a basis for the FDA to invoke its policy respecting "Fraud, Untrue
Statements of Material Facts, Bribery, and Illegal Gratuities," set forth in 56
Fed. Reg. 46191 (September 10, 1991) and any amendments thereto.
(d) The Company has not been convicted of any crime or engaged in any
conduct which could result in debarment under 21 U.S.C. (section) 335a or any
similar state law or regulation.
(e) There are no proceedings pending with respect to a violation by the
Company of the Food, Drug and Cosmetic Act, FDA regulations adopted thereunder,
the Controlled Substance Act or any other legislation or regulation promulgated
by any other U.S. federal or state Governmental Entity that reasonably might be
expected to result in criminal liability.
Section 4.16 Information in Disclosure Documents and Registration
Statements. Except as otherwise set forth in this Article IV and Schedule 4.16
hereto, the information contained in the sections entitled "Business" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" of the Company's registration statement on Form S-1, as amended
(No. 333-30730), filed with the Securities and Exchange Commission ("SEC") does
not contain any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary in order to make the
statements therein, in light of
A-10
<PAGE>
the circumstances under which they are made, not misleading. None of the
information to be supplied by the Company for inclusion in (i) the Registration
Statement to be filed with the SEC by Parent on Form S-4 under the Securities
Act for the purpose of registering the shares of Parent Common Stock to be
issued in connection with the Merger (the "Registration Statement") or (ii) the
proxy statement to be distributed in connection with the Company's meeting of
shareholders to vote upon this Agreement (the "Proxy Statement") will, in the
case of the Registration Statement, at the time it becomes effective and at the
Effective Time, or, in the case of the Proxy Statement or any amendments
thereof or supplements thereto, at the time of the mailing of the Proxy
Statement and any amendments or supplements thereto, and at the time of the
meeting of shareholders of the Company to be held in connection with the
Merger, contain any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary in order to make the
statements therein, in light of the circumstances under which they are made,
not misleading. The Proxy Statement will comply as to form in all material
respects with the applicable provisions of the Securities Exchange Act of 1934,
as amended (the "Exchange Act"), and the rules and regulations promulgated
thereunder, except that no representation is made by the Company with respect
to statements made therein based on information supplied by Parent or its
representatives for inclusion in the Proxy Statement or with respect to
information concerning Parent or any of its Subsidiaries incorporated by
reference in the Proxy Statement.
Section 4.17 Employee Benefit Plans; ERISA.
(a) Schedule 4.17 hereto sets forth a true and complete list of all
"employee benefit plans" within the meaning of Section 3(3) of the Employee
Retirement Income Security Act of 1974, as amended ("ERISA"), and any other
bonus, profit sharing, compensation, pension, severance, deferred compensation,
fringe benefit, insurance, welfare, post-retirement, health, life, stock
option, stock purchase, restricted stock, tuition refund, service award,
company car, scholarship, relocation, disability, accident, sick, vacation,
holiday, termination, unemployment, individual employment, consulting,
executive compensation, incentive, commission, payroll practices, retention,
change in control, noncompetition, and other plans, agreements, policies, trust
funds, or arrangements (whether written or unwritten, insured or self-insured)
(1) established, maintained, sponsored, or contributed to (or with respect to
which any obligation to contribute has been undertaken) by the Company or any
entity that would be deemed a "single employer" with the Company under Section
414(b), (c), (m), or (o) of the Code or Section 4001 of ERISA (an "ERISA
Affiliate") on behalf of any employee, director or shareholder of the Company
(whether current, former, or retired) or their beneficiaries or (2) with
respect to which the Company or any ERISA Affiliate has or has had any
obligation on behalf of any such employee, director, shareholder or beneficiary
(each a "Company Plan" and, collectively, the "Company Plans"). True and
complete copies of each of the Company Plans and related documents have been
delivered to Parent.
(b) None of the Company, any ERISA Affiliate, or any of their respective
predecessors has ever contributed to, contributes to, has ever been required to
contribute to, or otherwise participated in or participates in or in any way,
directly or indirectly, has any liability with respect to any plan subject to
Section 412 of the Code, Section 302 of ERISA or Title IV of ERISA, including,
without limitation any, "multiemployer plan" (within the meaning of Sections
(3)(37) or 4001(a)(3) of ERISA or Section 414(f) of the Code), or any single
employer pension plan (within the meaning of Section 4001(a)(15) of ERISA)
which is subject to Sections 4063 and 4064 of ERISA.
(c) With respect to each of the Company Plans: (1) each Company Plan
intended to qualify under Section 401(a) of the Code is qualified and has
received a determination letter from the IRS to the effect that the Company
Plan is qualified under Section 401 of the Code and any trust maintained
pursuant thereto is exempt from federal income taxation under Section 501 of
the Code and nothing has occurred or is expected to occur through the date of
the Effective Time that caused or could cause the loss of such qualification or
exemption or the imposition of any penalty or tax liability; (2) all payments
required by any Company Plan, any collective bargaining agreement or other
agreement, or by law (including, without limitation, all contributions,
insurance premiums, or intercompany charges) with respect to all periods
through the date of the Effective Time shall have been made prior to the
Effective Time (on a pro rata basis where such payments are otherwise
discretionary at year end) or provided for by the
A-11
<PAGE>
Company as applicable, by full accruals as if all targets required by such
Company Plan had been or will be met at maximum levels on its financial
statements; (3) no claim, lawsuit, arbitration or other action relating to any
Company Plan has been threatened, asserted, instituted, or, to the knowledge of
the Company, is anticipated against the Company Plans (other than non-material
routine claims for benefits, and appeals of such claims), any trustee or
fiduciaries thereof, the Company, any ERISA Affiliate, any director, officer,
or employee thereof, or any of the assets of any trust of the Company Plans;
(4) the Company Plan complies and has been maintained and operated in
accordance with its terms and applicable law, including, without limitation,
ERISA and the Code; (5) no "prohibited transaction," within the meaning of
Section 4975 of the Code and Section 406 of ERISA, has occurred or is expected
to occur with respect to the Company Plan (and the consummation of the
transactions contemplated by this Agreement will not constitute or directly or
indirectly result in such a "prohibited transaction"); (6) no Company Plan is
or expected to be under audit or investigation by the Service, U.S. Department
of Labor, or any other governmental authority and no such completed audit, if
any, has resulted in the imposition of any tax or penalty; (7) with respect to
each Company Plan that is funded mostly or partially through an insurance
policy, neither the Company nor any ERISA Affiliate has any liability in the
nature of retroactive rate adjustment, loss sharing arrangement or other actual
or contingent liability arising wholly or partially out of events occurring on
or before the Effective Time.
(d) Except as set forth in Schedule 4.17, the consummation of the
transactions contemplated by this Agreement will not give rise to any
liability, including, without limitation, liability for severance pay,
unemployment compensation, termination pay, or withdrawal liability, or
accelerate the time of payment or vesting or increase the amount of
compensation or benefits due to any employee, director, or shareholder of the
Company (whether current, former, or retired) or their beneficiaries solely by
reason of such transactions or by reason of a termination following such
transactions. No amounts payable under any Company Plan will fail to be
deductible for federal income tax purposes by virtue of Sections 280G or 162(m)
of the Code. Neither the Company nor any ERISA Affiliate maintains, contributes
to, or in any way provides for any benefits of any kind whatsoever (other than
under Section 4980B of the Code, the Federal Social Security Act, or a plan
qualified under Section 401(a) of the Code) to any current or future retiree or
terminee. Neither the Company, any ERISA Affiliate, nor any officer or employee
thereof, has made any promises or commitments, whether legally binding or not,
to create any additional plan, agreement, or arrangement, or to modify or
change any existing Company Plan. No event, condition, or circumstance exists
that could result in an increase of the benefits provided under any Company
Plan or the expense of maintaining any Company Plan from the level of benefits
or expense incurred for the most recent fiscal year ended before the Effective
Time. Neither the Company nor any ERISA Affiliate has any unfunded liabilities
pursuant to any Company Plan that is not intended to be qualified under Section
401(a) of the Code and is an employee pension benefit plan within the meaning
of Section 3(2) of ERISA, a nonqualified deferred compensation plan or an
excess benefit plan. No event, condition, or circumstance exists that would
prevent the amendment or termination of any Company Plan.
Section 4.18 Environmental Laws and Regulations. Except as set forth on
Schedule 4.18(a): (i) the Company is and has been, in all material respects, in
compliance with, and there are no outstanding allegations by any person or
entity that the Company has not been in compliance with, all applicable laws,
rules, regulations, common law, ordinances, decrees, orders or other binding
legal requirements relating to pollution (including the treatment, storage and
disposal of wastes and the remediation of releases and threatened releases of
materials), the preservation of the environment, and the exposure to materials
in the environment or work place ("Environmental Laws") and (ii) the Company
currently holds all permits, licenses, registrations and other governmental
authorizations (including exemptions, waivers, and the like) and financial
assurance required under Environmental Laws for the Company to operate its
businesses as currently conducted.
(b) Except as set forth on Schedule 4.18(b), (i) there is no friable
asbestos-containing material in or on any real property currently owned, leased
or operated by the Company, and (ii) there are and, to the knowledge of the
Company, have been no underground storage tanks (whether or not required to be
registered under any applicable law), dumps, landfills, lagoons, surface
impoundments, injection wells or other land disposal units in or on any
property currently owned, leased or operated by the Company.
A-12
<PAGE>
(c) Except as set forth on Schedule 4.18(c), (i) the Company has not
received (x) any written communication from any person stating or alleging that
the Company may be a potentially responsible party under any Environmental Law
(including, without limitation, the Federal Comprehensive Environmental
Response, Compensation, and Liability Act of 1980, as amended) with respect to
any actual or alleged environmental contamination or (y) any request for
information under any Environmental Law from any Governmental Entity with
respect to any actual or alleged material environmental contamination; and (ii)
neither the Company nor any Governmental Entity is conducting or has conducted
(or, to the knowledge of the Company, is threatening to conduct) any
environmental remediation or investigation with respect to the Company or any
real property owned, leased or operated by the Company.
Section 4.19 Vote Required. The affirmative vote of the holders of (a) a
majority of the outstanding shares of the Company Common Stock,(b) a majority
of the outstanding shares of Company Preferred Stock, are the only votes of the
holders of any class or series of the Company's capital stock necessary to
approve the Merger and (c) 75% of the Company Preferred Stock as a class is
required to approve the conversion of the Company Common Stock into the Company
Preferred Stock. The Board of Directors of the Company, at a meeting duly
called and held on June 28, 2000, unanimously (i) approved this Agreement, the
Voting and Proxy Agreement and the Option Agreement, (ii) determined that the
transactions contemplated hereby and thereby are fair to and in the best
interests of the holders of Company Common Stock and Company Preferred Stock
and (iii) determined to recommend this Agreement, the Merger and the other
transactions contemplated hereby to such holders for approval and adoption. The
resolutions of the Company's Board of Directors taking the actions described in
the preceding sentence have not been rescinded, withdrawn, amended or otherwise
modified, remain in full force and effect, and constitute the only action of
such Board of Directors with respect to the Merger or the other transactions
contemplated by this Agreement.
Section 4.20 Opinion of Financial Advisor. The Company has received the
opinion of FleetBoston Robertson Stephens Inc., dated June 28, 2000,
substantially to the effect that the Exchange Ratio is fair to the holders of
the Company Common Stock from a financial point of view, a copy of which
opinion has been delivered to Parent.
Section 4.21 Accounting Matters. None of the Company or, to the Company's
knowledge, any of its directors, officers or stockholders has taken any action
or is aware of any condition which would prevent the accounting for the Merger
as a pooling of interests in accordance with Accounting Principles Board
Opinion No. 16, the interpretative releases pursuant thereto and the
pronouncements of the SEC.
Section 4.22 Labor Matters. The Company is not a party to, or bound by,
any collective bargaining agreement, contract or other understanding with a
labor union or labor organization, and, to the knowledge of the Company, there
is no activity involving any employees of the Company seeking to certify a
collective bargaining unit or engaging in any other organizational activity.
Section 4.23 Affiliate Transactions. Except as set forth in Schedule 4.24,
there are no Contracts or other transactions between the Company, on the one
hand, and any (i) officer or director of the Company, (ii) record or beneficial
owner of five percent or more of the voting securities of the Company or (iii)
affiliate (as such term is defined in Regulation 12b-2 promulgated under the
Exchange Act) of any such officer, director or beneficial owner, on the other
hand.
Section 4.24 Brokers. Except for its financial advisors, Robertson
Stephens, no broker, finder or financial advisor is entitled to any brokerage,
finder's or other fee or commission in connection with the Merger or the
transactions contemplated by this Agreement based upon arrangements made by or
on behalf of the Company, and the Company has delivered to the Parent true,
complete and correct copies of (or, in the case of any oral agreement or
arrangement, a true, complete and correct summary of) each agreement or
arrangement pursuant to which any of such advisors is entitled to any such fee
or commission.
Section 4.25 Tax Matters. The Company knows of no fact or circumstance
which is reasonably likely to cause the Merger to be treated other than as a
tax-free reorganization under Section 368(a) of the Code.
A-13
<PAGE>
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF PARENT AND MERGER SUB
Parent and Merger Sub represent and warrant to the Company as follows:
Section 5.1 Organization. Parent is a corporation duly organized, validly
existing and in good standing under the laws of the State of Delaware and has
the corporate power to carry on its business as it is now being conducted or
presently proposed to be conducted. Parent is duly qualified as a foreign
corporation to do business, and is in good standing, in each jurisdiction where
the character of its properties owned or held under lease or the nature of its
activities make such qualification necessary, except where the failure to be so
qualified will not have a Parent Material Adverse Effect. A "Parent Material
Adverse Effect" means any event or condition (excluding general economic
conditions) that has a material adverse effect individually or in the
aggregate, on the financial condition, results of operations, business, assets,
liabilities, prospects or properties of Parent and its Subsidiaries taken as a
whole or on the ability of Parent to perform any of its material obligations
under, or to consummate the Merger and the other transactions contemplated by
this Agreement. Sub is a corporation duly organized, validly existing and in
good standing under the laws of the State of California. Sub has not engaged in
any business (other than in connection with this Agreement and the transactions
contemplated hereby) since the date of its incorporation.
Section 5.2 Capitalization.
(a) The authorized capital stock of Parent consists of 120,000,000 shares
of Parent Common Stock and 5,000,000 shares of Preferred Stock, par value $.01
per share, of Parent ("Parent Preferred Stock"). As of June 27, 2000, (i) based
on information provided by Parent's transfer agent, 65,743,753 shares of Parent
Common Stock are issued and outstanding, (ii) no shares of Parent Preferred
Stock are issued and outstanding, (iii) options to acquire 7,227,670 shares of
Parent Common Stock (the "Parent Stock Options") are outstanding under all
stock option plans of Parent, and (iv) 10,139,826 shares of Parent Common Stock
are reserved for issuance pursuant to the Parent Stock Options and all other
Rights to purchase or otherwise receive from Parent capital stock or other
securities of Parent. All of the outstanding shares of capital stock of Parent
are, and the shares of Parent Common Stock issuable in the Merger in accordance
with this Agreement (including, without limitation, shares of Parent Common
Stock issuable upon exercise of Converted Options and Converted Warrants) will
be, when so issued, duly authorized, validly issued, fully paid and
nonassessable.
(b) The authorized capital stock of Sub consists of 1,000 shares of Sub
Common Stock, of which 1,000 shares, as of the date hereof, were issued and
outstanding. All of such outstanding shares are owned by Parent and are validly
issued, fully paid and nonassessable.
(c) Except as disclosed in Schedule 5.2, (i) there are no outstanding
Rights to purchase or otherwise to receive from Parent or Sub any of the
outstanding authorized but unissued or treasury shares of the capital stock or
any other security of Parent or Sub, (ii) there is no outstanding security of
any kind convertible into or exchangeable for such capital stock, and (iii)
there is no voting trust or other agreement or understanding to which Parent or
Sub is a party or is bound with respect to the voting of the capital stock of
Parent or Sub.
Section 5.3 Authority Relative to this Agreement. Each of Parent and Sub
has the requisite corporate power and authority to execute and deliver this
Agreement and the Option Agreement and to consummate the transactions
contemplated hereby and thereby. The execution and delivery of this Agreement
and the Option Agreement by each of Parent and Sub and the consummation by
Parent and Sub of the transactions contemplated on its part hereby and thereby
have been duly authorized by their respective Boards of Directors, and by
Parent as the sole stockholder of Sub, and no other corporate proceedings on
the part of Parent or Sub are necessary to authorize this Agreement or the
Option Agreement or for Parent and Sub to consummate the transactions
contemplated hereby or thereby. This Agreement and the Option Agreement each
have been duly and validly executed and delivered by each of Parent and Sub and
constitutes a valid and binding agreement of each of Parent and Sub,
enforceable
A-14
<PAGE>
against Parent and Sub in accordance with its terms, subject to (i) laws of
general application relating to bankruptcy, insolvency and the relief of
debtors, and (ii) rules of law governing specific performance, injunctive
relief and other equitable remedies.
Section 5.4 Consents and Approvals; No Violations. Neither the execution,
delivery and performance of this Agreement or the Option Agreement by Parent or
Sub, nor the consummation by Parent or Sub of the transactions contemplated
hereby or thereby will (i) conflict with or result in any breach of any
provisions of the Certificate of Incorporation or By-Laws of Parent or of Sub,
(ii) require a filing with, or a permit, authorization, consent or approval of,
any Governmental Entity except in connection with or in order to comply with
the applicable provisions of the HSR Act, the Securities Act, the Exchange Act,
state securities or "blue sky" laws, and the filing and recordation of an
Agreement of Merger as required by the GCL, (iii) except as set forth on
Schedule 5.4 hereto, result in a violation or breach of, or constitute (with or
without due notice or lapse of time or both) a default (or give rise to any
right of termination, cancellation or acceleration) under, or result in the
creation of a Lien on any property or asset of Parent or any of its
Subsidiaries pursuant to, any of the terms, conditions or provisions of any
material Contract to which Parent or Sub is a party or by which either of them
or any of their properties or assets may be bound or (iv) violate any law,
order, writ, injunction, decree, statute, rule or regulation of any
Governmental Entity applicable to Parent, Sub or any of their properties or
assets.
Section 5.5 Reports and Financial Statements. Parent has timely filed all
reports required to be filed with the SEC pursuant to the Exchange Act or the
Securities Act since December 31, 1997 (collectively, the "Parent SEC
Reports"), and has previously made available to the Company true and complete
copies of all such Parent SEC Reports. Such Parent SEC Reports, as of their
respective dates, complied in all material respects with the applicable
requirements of the Securities Act and the Exchange Act, as the case may be,
and none of such SEC Reports contained any untrue statement of a material fact
or omitted to state a material fact required to be stated therein or necessary
to make the statements therein, in light of the circumstances under which they
were made, not misleading. The financial statements of Parent included in the
Parent SEC Reports have been prepared in accordance with GAAP consistently
applied throughout the periods indicated (except as otherwise noted therein)
and fairly present the consolidated financial position of Parent and its
consolidated Subsidiaries as at the dates thereof and the consolidated results
of operations and cash flows of Parent and its consolidated Subsidiaries for
each of the periods then ended, except that in the case of the unaudited
consolidated financial statements included in any Form 10-Q, the presentation
and disclosures conform with the applicable rules of the Exchange Act, but
include all adjustments necessary to conform to GAAP requirements with respect
to interim financial statements. Since December 31, 1997, there has been no
change in any of the significant accounting (including tax accounting)
policies, practices or procedures of the Parent or, except as set forth on
Schedule 5.5, any of its consolidated Subsidiaries.
Section 5.6 Absence of Certain Changes or Events. Except as set forth in
the Parent SEC Reports, since March 31, 2000, (i) Parent has not conducted its
business and operations other than in the ordinary course of business and
consistent with past practices and (ii) there has not been any fact, event,
circumstance or change affecting or relating to Parent and its Subsidiaries
which has had or is reasonably likely to have a Parent Material Adverse Effect.
Section 5.7 Information in Disclosure Documents and Registration
Statement. None of the information to be supplied by Parent or Sub for
inclusion in (i) the Registration Statement or (ii) the Proxy Statement will in
the case of the Registration Statement, at the time it becomes effective and at
the Effective Time, or, in the case of the Proxy Statement or any amendments
thereof or supplements thereto, at the time of the mailing of the Proxy
Statement and any amendments or supplements thereto, and at the time of the
meeting of stockholders of the Company to be held in connection with the
Merger, contain any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary in order to make the
statements therein, in light of the circumstances under which they are made,
not misleading. The Registration Statement will comply as to form in all
material respects with the applicable provisions of the Securities Act and the
Exchange Act, and the rules and regulations promulgated thereunder, except that
no representation is made by Parent with respect to statements
A-15
<PAGE>
made therein based on information supplied by the Company or its
representatives for inclusion in the Registration Statement or the Proxy
Statement.
Section 5.8 Compliance with Applicable Law. Except as set forth on
Schedule 5.8 or as disclosed in the Parent SEC Reports, (i) the Parent and its
Subsidiaries hold, and are in compliance with the terms of, all material
permits, licenses, exemptions, orders and approvals of all Governmental
Entities necessary for the current and presently proposed conduct of their
respective businesses ("Parent Permits"), (ii) no fact exists or event has
occurred, and no action or proceeding is pending or, to Parent's knowledge,
threatened, that has a reasonable possibility of resulting in a revocation,
nonrenewal, termination, suspension or other material impairment of any
material Parent Permits, (iii) the businesses of Parent and its Subsidiaries
are not being conducted in violation of Applicable Law, and (iv) to the
knowledge of Parent, (x) no investigation or review by any Governmental Entity
with respect to Parent or its Subsidiaries is pending or threatened and (y) no
Governmental Entity has indicated an intention to conduct the same.
Section 5.9 Litigation. There is no suit, action, proceeding or
investigation pending or, to the knowledge of Parent, threatened against or
affecting Parent or any of its Subsidiaries, the outcome of which, in the
reasonable judgment of Parent, is likely to have a Parent Material Adverse
Effect; nor is there any judgment, decree, injunction, ruling or order of any
Governmental Entity outstanding against Parent or any of its Subsidiaries
having, or which is reasonably likely to have, a Parent Material Adverse
Effect.
Section 5.10 Opinion of Financial Advisor. Parent has received the opinion
of Prudential Securities, dated June 28, 2000, substantially to the effect that
the Exchange Ratio is fair to the holders of Parent Common Stock from a
financial point of view, a copy of which opinion has been delivered to the
Company.
Section 5.11 Accounting Matters. None of the Parent, any of its
Subsidiaries or, to Parent's knowledge, any of their respective directors,
officers or stockholders has taken any action or is aware of any condition
which would prevent the accounting for the Merger as a pooling of interests in
accordance with Accounting Principles Board Opinion No. 16, the interpretative
releases pursuant thereto and the pronouncements of the SEC.
Section 5.12 Tax Matters. Parent knows of no fact or circumstance which is
reasonably likely to cause the Merger to be treated other than as a tax-free
reorganization under Section 368(a) of the Code.
Section 5.13 Brokers. Except for its financial advisor, Prudential
Securities, no broker, finder or financial advisor is entitled to any
brokerage, finder's or other fee or commission in connection with the Merger or
the transactions contemplated by this Agreement based upon arrangements made by
or on behalf of Parent or Sub.
ARTICLE VI
CONDUCT OF COMPANY BUSINESS PENDING THE MERGER
From the date of this Agreement until the earlier of the Effective Time or the
termination of this Agreement, unless Parent shall otherwise agree in writing,
or as otherwise expressly contemplated by this Agreement:
(a) the Company shall conduct its business only in the ordinary and usual
course consistent with past practice, and the Company shall use its reasonable
efforts to preserve intact the present business organization, keep available
the services of its present officers and key employees, and preserve the
goodwill of those having business relationships with it;
(b) the Company shall not (i) amend its charter, bylaws or other
organizational documents, (ii) split, combine or reclassify any shares of its
outstanding capital stock, (iii) declare, set aside or pay any dividend or
other distribution payable in cash, stock or property, or (iv) directly or
indirectly redeem or otherwise acquire any shares of its capital stock;
A-16
<PAGE>
(c) the Company shall not, (i) authorize for issuance, issue or sell or
agree to issue or sell any shares of, or Rights to acquire or convertible into
any shares of, its capital stock (whether through the issuance or granting of
options, warrants, commitments, subscriptions, rights to purchase or
otherwise), except for the issuance of shares of Company Common Stock upon the
exercise of Company Stock Options outstanding on the date of this Agreement, or
amend any outstanding Company Stock Option, Company Warrant or other Right;
(ii) merge or consolidate with another entity; (iii) acquire or purchase an
equity interest in or a substantial portion of the assets of another
corporation, partnership or other business organization or otherwise acquire
any assets outside the ordinary and usual course of business and consistent
with past practice or otherwise enter into any material Contract, commitment or
transaction outside the ordinary and usual course of business consistent with
past practice; (iv) sell, lease, license, waive, release, transfer, encumber or
otherwise dispose of any of its material assets; (v) incur, assume or prepay
any material indebtedness or any other material liabilities other than in the
ordinary course of business and consistent with past practice and other than in
connection with borrowing up to $2 million under a secured line of credit with
MMC/GATX Partnership No. I; (vi) assume, guarantee, endorse or otherwise become
liable or responsible (whether directly, contingently or otherwise) for the
obligations of any other person other than customers, in each case in the
ordinary course of business and consistent with past practice; (vii) make,
extend or modify in any material respect any loans, advances or capital
contributions to, or investments in, any other person; (viii) authorize or make
capital expenditures in excess of the respective amounts set forth on Schedule
6 hereto; (ix) permit any insurance policy naming the Company as a beneficiary
or a loss payee to be canceled or terminated other than in the ordinary course
of business; (x) form any Subsidiary; or (xi) enter into any contract,
agreement, commitment or arrangement with respect to any of the foregoing;
(d) the Company shall not (i) adopt, enter into, terminate or amend
(except as may be required by Applicable Law) any Company Plan or other
arrangement for the current or future benefit or welfare of any director,
officer or current or former employee, (ii) increase in any manner the
compensation or fringe benefits of, or pay any bonus to, any director, officer
or employee (except for normal increases in compensation in the ordinary course
of business consistent with past practice and accrued and unpaid bonuses in
respect of the Company's fiscal year ended December 31, 1999 that are
consistent with past practice and have been properly accrued and reflected on
the Company's books and records), or (iii) take any action to fund or in any
other way secure, or to accelerate or otherwise remove restrictions with
respect to, the payment of compensation or benefits under any employee plan,
agreement, contract, arrangement or other Company Plan (including the Company
Stock Options);
(e) the Company shall not take any action with respect to, or make any
material change in, its accounting or tax policies or procedures, except as
required by law or to comply with GAAP; and
(f) the Company shall not (i) take any action or allow any action to be
taken by any of its affiliates which would jeopardize the treatment of Parent's
acquisition of the Company as a pooling of interests for accounting purposes;
or (ii) take any action which would jeopardize qualification of the Merger as a
reorganization within the meaning of Section 368(a) of the Code.
A-17
<PAGE>
ARTICLE VII
ADDITIONAL AGREEMENTS
Section 7.1 Access and Information. Each of the Company and Parent shall
(and shall cause its Subsidiaries and its and their respective officers,
directors, employees, auditors and agents to) afford to the other and to the
other's officers, employees, financial advisors, legal counsel, accountants,
consultants and other representatives reasonable access, during normal business
hours throughout the period from the date hereof until the earlier of the
Effective Time and the termination of this Agreement, to all of its books and
records and its properties, plants and personnel and, during such period, each
shall furnish promptly to the other a copy of each report, schedule and other
document filed or received by it pursuant to the requirements of federal
securities laws, provided that no investigation pursuant to this Section 7.1
shall affect any representations or warranties made herein or the conditions to
the obligations of the respective parties to consummate the Merger. Unless
otherwise required by law, each of Parent and the Company agrees that it (and
its respective Subsidiaries and its and their respective representatives) shall
hold in confidence all non-public information so acquired in accordance with
the terms of the confidentiality agreement between Parent and the Company
executed May 25, 2000 (the "Confidentiality Agreement").
Section 7.2 No Solicitation. Prior to the Effective Time, the Company
agrees that neither it, any of its affiliates, nor any of the respective
directors, officers, employees, affiliates, agents or representatives of the
foregoing (including, without limitation, any investment banker, attorney or
accountant retained by the Company) will, directly or indirectly, solicit,
initiate, facilitate or encourage (including by way of furnishing or disclosing
non-public information) any inquiries or the making of any proposal with
respect to or which may reasonably be expected to lead to, any merger,
consolidation or other business combination involving the Company or the
acquisition of all or any significant portion of the assets or capital stock of
the Company, other than the Merger (an "Acquisition Transaction") or negotiate,
explore or otherwise engage in discussions with any corporation, partnership,
person, other entity or group (as defined in Section 13(d)(2) of the Exchange
Act) (other than Parent and its representatives) in furtherance of such
inquiries or with respect to any Acquisition Transaction, or endorse any
Acquisition Transaction, or enter into any agreement, arrangement or
understanding with respect to any such Acquisition Transaction or which would
require it to abandon, terminate or fail to consummate the Merger or any other
transaction contemplated by this Agreement. The Company agrees that as of the
date hereof, it, its affiliates, and the respective directors, officers,
employees, agents and representatives of the foregoing, shall immediately cease
and cause to be terminated any existing activities, discussions or negotiations
with any person (other than Parent and its representatives) conducted
heretofore with respect to any Acquisition Transaction. The Company agrees to
immediately advise Parent in writing of any inquiries or proposals (or desire
to make a proposal) received by (or indicated to), any such information
requested from, or any such negotiations or discussions sought to be initiated
or continued with, any of it, its affiliates, or any of the respective
directors, officers, employees, agents or representatives of the foregoing, in
each case from a corporation, partnership, person or other entity or group
(other than Parent and its representatives) with respect to an Acquisition
Transaction, and the terms thereof, including the identity of such third party,
and to update on an ongoing basis or upon Parent's request, the status thereof,
as well as any actions taken or other developments pursuant to this Section
7.2(a).
Section 7.3 Registration Statement. As promptly as practicable, Parent
shall in consultation with the Company, prepare and file with the SEC the Proxy
Statement and the Registration Statement. Parent shall use its reasonable best
efforts to have the Registration Statement declared effective as soon as
practicable. Parent shall also use its reasonable best efforts to take any
action required to be taken under state securities or "blue sky" laws in
connection with the issuance of the shares of Parent Common Stock pursuant to
this Agreement in the Merger. The Company shall furnish Parent with all
information concerning the Company and the holders of its capital stock and
shall take such other action as Parent may reasonably request in connection
with the Registration Statement and the issuance of shares of Parent Common
Stock. If at any time prior to the Effective Time any event or circumstance
relating to Parent, any Subsidiary of Parent, the Company or their respective
officers or directors, should be
A-18
<PAGE>
discovered by such party which should be set forth in an amendment or a
supplement to the Registration Statement or Proxy Statement, such party shall
promptly inform the other thereof and take appropriate action in respect
thereof. As part of the Registration Statement, Parent shall include a reoffer
prospectus to enable resales of Parent Common Stock by holders of Parent Common
Stock who are not Affiliates (as defined in Section 7.6) and have executed and
delivered a Voting and Proxy Agreement.
Section 7.4 Tax Matters. At or prior to the filing of the Form S-4
Registration Statement, the Parent, Merger Sub and the Company shall execute
and deliver to Proskauer Rose LLP and to Cooley Godward LLP tax representation
letters substantially in the form of Exhibit B hereto. Parent, Merger Sub and
the Company shall each confirm to Proskauer Rose LLP and to Cooley Godward LLP
the accuracy and completeness as of the Effective Time of the tax
representation letters delivered pursuant to the immediately preceding
sentence. Parent and the Company shall use all reasonable efforts prior to and
following the Effective Time to cause the Merger to qualify as a tax free
reorganization under Section 368(a) of the Code. Following delivery of the tax
representation letters pursuant to the first sentence of this Section 7.4, each
of Parent and the Company shall use its reasonable efforts to cause Proskauer
Rose LLP and Cooley Godward LLP, respectively, to deliver to it a tax opinion
satisfying the requirements of Item 601 of Regulation S-K promulgated under the
Securities Act. In rendering such opinions, each of such counsel shall be
entitled to rely on the tax representation letters referred to in this Section
7.4.
Section 7.5 Proxy Statements; Stockholder Approval.
(a) The Company, acting through its Board of Directors, shall, subject to
and in accordance with applicable law and its Articles of Incorporation and
Bylaws, (i) promptly and duly call, give notice of and, as soon as practicable
following the date upon which the Registration Statement becomes effective,
hold a meeting of the holders of Company Common Stock and the holders of
Company Preferred Stock for the purpose of voting to (x) approve the principal
terms of the Merger, (y) adopt and approve the Merger, and (z) approve the
conversion of all outstanding shares of Company Preferred Stock, with such
conversion to be effective immediately prior to the Effective Time and subject
to the Effective Time occurring, (ii) recommend to the shareholders of the
Company that they vote in favor of the matters described in the preceding
clause (i), (iii) include in the Proxy Statement such recommendation and (iv)
take all reasonable and lawful action to solicit and obtain such vote in favor
of the matters described in clause (i) above.
(b) The Company, as promptly as practicable, shall cause the definitive
Proxy Statement to be mailed to its shareholders.
(c) At or prior to the Closing, the Company shall deliver to Parent a
certificate of its Secretary setting forth the voting results from its
shareholder meeting.
Section 7.6 Compliance with the Securities Act.
(a) At least 10 days prior to the Effective Time, the Company shall cause
to be delivered to Parent a list identifying all persons who were at the record
date for its shareholders' meeting convened in accordance with Section 7.5
hereof, "affiliates" of the Company, as that term is used in paragraphs (c) and
(d) of Rule 145 under the Securities Act (the "Affiliates").
(b) The Company shall use its reasonable best efforts to cause each person
who is identified as one of its Affiliates in its list referred to in Section
7.6(a) above to deliver to Parent (with a copy to the Company), at least 10
days prior to the Effective Time, a written agreement, in the form attached
hereto as Exhibit C (the "Affiliate Agreement").
(c) If any Affiliate of the Company refuses to provide an Affiliate
Agreement, Parent may place appropriate legends on the certificates evidencing
the shares of Parent Common Stock to be received by such Affiliate pursuant to
the terms of this Agreement and may issue appropriate stop transfer
instructions to the transfer agent for shares of Parent Common Stock to the
effect that the shares of Parent Common Stock received by such Affiliate
pursuant to this Agreement only may be sold, transferred or otherwise conveyed
(i) pursuant to an effective registration statement under the Securities Act,
(ii) in compliance with Rule 145 promulgated under the Securities Act, or (iii)
pursuant to another exemption under the Securities Act.
A-19
<PAGE>
Section 7.7 Reasonable Best Efforts. Subject to the terms and conditions
herein provided, each of the parties hereto agrees to use its reasonable best
efforts to take, or cause to be taken, all action and to do, or cause to be
done, all things necessary, proper or advisable under applicable laws and
regulations to consummate and make effective the transactions contemplated by
this Agreement, including, without limitation, the obtaining of all necessary
waivers, consents and approvals and the effecting of all necessary
registrations and filings. Without limiting the generality of the foregoing, as
promptly as practicable, the Company, Parent and Sub shall make all filings and
submissions under the HSR Act as may be reasonably required to be made in
connection with this Agreement and the transactions contemplated hereby.
Subject to the Confidentiality Agreement, the Company will furnish to Parent
and Sub, and Parent and Sub will furnish to the Company, such information and
assistance as the other may reasonably request in connection with the
preparation of any such filings or submissions. Subject to the Confidentiality
Agreement, the Company will provide Parent and Sub, and Parent and Sub will
provide the Company, with copies of all material written correspondence,
filings and communications (or memoranda setting forth the substance thereof)
between such party or any of its representatives and any Governmental Entity,
with respect to the obtaining of any waivers, consent or approvals and the
making of any registrations or filings, in each case that is necessary to
consummate the Merger and the other transactions contemplated hereby. In case
at any time after the Effective Time any further action is necessary or
desirable to carry out the purposes of this Agreement, the proper officers or
directors of Parent and the Surviving Corporation shall take all such necessary
action.
Section 7.8 Voting and Proxy Agreement; Option Agreement. Concurrently
herewith, and as an essential inducement for Parent's entering into this
Agreement, Parent is entering into the (a) Voting and Proxy Agreement with
certain holders of Company Common Stock with respect to all such shares of
Company Common Stock held by such holders and (b) Option Agreement with the
Company. Parent shall exercise its rights under the Voting and Proxy Agreement
to vote all such shares in the manner provided in the Voting and Proxy
Agreement.
Section 7.9 Company Stock Options. To the extent permitted by the
respective terms of the Company Stock Options and the plans under which they
were issued and the respective terms of the Company Warrants, at the Effective
Time, each of the Company Stock Options (and, solely with respect to such
options, the applicable option plans pursuant to which such options were
issued) and each of the Company Warrants which is outstanding immediately prior
to the Effective Time shall be assumed by Parent on the terms set forth herein
and converted automatically into an option or a warrant, as the case may be, to
purchase shares of Parent Common Stock (each, a "Converted Option" or a
"Converted Warrant," as the case may be) in an amount and at an exercise price
determined as provided below:
(a) The number of shares of Parent Common Stock to be subject to a
Converted Option or a Converted Warrant shall be equal to the product of the
number of shares of Company Common Stock or Company Preferred Stock remaining
subject (as of immediately prior to the Effective Time) to the original option
or warrant and the Exchange Ratio, provided that any fractional shares of
Parent Common Stock resulting from such multiplication shall be rounded down to
the nearest share; and
(b) The exercise price per share of Parent Common Stock under a Converted
Option or a Converted Warrant shall be equal to the exercise price per share of
Company Common Stock or Company Preferred Stock under the original option or
warrant divided by the Exchange Ratio, provided that such exercise price shall
be rounded up to the nearest cent.
The adjustment provided herein with respect to any options which are
"incentive stock options" (as defined in Section 422 of the Code) shall be
modified to the extent required to comply with Section 424(a) of the Code and
the applicable Treasury Regulations. After the Effective Time, each Converted
Option shall be exercisable and shall vest upon the same terms and conditions
as were applicable to the related Company Stock Option immediately prior to the
Effective Time, except that all references to the Company shall be deemed to be
references to Parent. Parent shall file with the SEC a registration statement
on Form S-8 (or other appropriate form) as soon as practicable (and in any
event within thirty (30) business days) after the Closing Date and shall take
any action required to be taken under state securities "blue sky" laws for
purposes of registering all shares of Parent Common Stock issuable after
A-20
<PAGE>
the Effective Time upon exercise of the Converted Options, and use all
reasonable efforts to have such registration statement (or a successor or
replacement registration statement) become effective with respect thereto as
promptly as practicable after the Effective Time and to remain in effect while
any of the Converted Options remain exercisable. Following the Closing, Parent
will send to each holder of a Converted Option or Converted Warrant a written
notice setting forth (i) the number of shares of Parent Common Stock subject to
such Converted Option or Converted Warrant and (ii) the exercise price per
share of Parent Common Stock issuable upon exercise of such Converted Option or
Converted Warrant. Promptly following the Closing, Parent shall reserve for
issuance in connection with the exercise of Converted Options and Converted
Warrants such number of shares of Parent Common Stock as shall be required to
be issued upon such exercise.
Section 7.10 Public Announcements. Each of Parent, Sub and the Company
agrees that it will not issue any press release or otherwise make any public
statement with respect to this Agreement (including the Exhibits hereto) or the
transactions contemplated hereby (or thereby) without the prior consent of the
other party, which consent shall not be unreasonably withheld or delayed;
provided, however, that such disclosure can be made without obtaining such
prior consent if (i) the disclosure is required by law or by obligations
imposed pursuant to any listing agreement with any national securities exchange
or quotation system and (ii) the party making such disclosure has first used
its reasonable best efforts to consult with (but not obtain the consent of) the
other party about the form and substance of such disclosure.
Section 7.11 Expenses. Except as otherwise set forth in Section 9.2,
whether or not the Merger is consummated, all costs and expenses incurred in
connection with this Agreement (including the Exhibits hereto) and the
transactions contemplated hereby (and thereby) shall be paid by the party
incurring such expenses, except that (i) the filing fee in connection with
filings under the HSR Act, (ii) the expenses incurred in connection with
printing the Registration Statement and the Proxy Statement and (iii) the
filing fee with the SEC relating to the Registration Statement or the Proxy
Statement will be paid by Parent.
Section 7.12 Listing Application. Parent will use its reasonable best
efforts to cause the shares of Parent Common Stock to be issued pursuant to
this Agreement in the Merger (as well as the shares of Parent Common Stock
issuable after the Effective Time upon exercise of the Converted Options and
Converted Warrants) to be listed for quotation and trading on the Nasdaq
National Market.
Section 7.13 Supplemental Disclosure. The Company shall give prompt notice
to Parent, and Parent shall give prompt notice to the Company, of (i) the
occurrence, or non-occurrence, of any event the occurrence, or non-occurrence,
of which would be likely to cause (x) any representation or warranty contained
in this Agreement to be untrue or inaccurate or (y) any covenant, condition or
agreement contained in this Agreement not to be complied with or satisfied and
(ii) any failure of the Company or Parent, as the case may be, to comply with
or satisfy any covenant, condition or agreement to be complied with or
satisfied by it hereunder; provided, however, that the delivery of any notice
pursuant to this Section 7.13 shall not have any effect for the purpose of
determining the satisfaction of the conditions set forth in Article VIII of
this Agreement or otherwise limit or affect the remedies available hereunder to
any party.
Section 7.14 Letters of Accountants.
(a) Parent shall use reasonable best efforts to cause to be delivered to
the Company a letter of KPMG LLP, Parent's independent auditors, dated a date
within two business days before the date on which the Registration Statement
shall become effective and addressed to the Company, in form and substance
reasonably satisfactory to the Company and customary in scope and substance for
letters delivered by independent public accountants in connection with
registration statements similar to the Registration Statement, which letter
shall be brought down to a date within two business days prior to the Effective
Time.
(b) The Company shall use reasonable best efforts to cause to be delivered
to Parent a letter of Ernst & Young LLP, the Company's independent auditors,
dated a date within two business days before the date on which the Registration
Statement shall become effective and addressed to Parent, in form and
A-21
<PAGE>
substance reasonably satisfactory to Parent and customary in scope and
substance for letters delivered by independent public accountants in connection
with registration statements similar to the Registration Statement, which
letter shall be brought down to a date within two business days prior to the
Effective Time.
Section 7.15 Indemnification.
(a) For a period of six years after the Effective Time, Parent shall cause
the Surviving Corporation to, indemnify, defend and hold harmless the present
and former directors, officers, employees and agents of the Company (each, an
"Indemnified Party") against any and all losses, costs, damages, claims and
liabilities (including reasonable attorneys' fees) arising out of the
Indemnified Party's service or services as a director, officer, employee or
agent of the Company or, if at the Company's request, of another corporation,
partnership, joint venture, trust or other enterprise occurring at or prior to
the Effective Time (including the transactions contemplated by or related to
this Agreement) to the fullest extent permitted under the Company's Articles of
Incorporation and Bylaws as in effect on the date hereof, including provisions
relating to advances of expenses incurred in the defense of any litigation,
action, claim or proceeding and whether or not Surviving Corporation is insured
against any such matter.
(b) The provisions of this Section 7.15 are intended to be for the benefit
of and shall be enforceable by, each Indemnified Party and his or her
respective heirs and representatives.
Section 7.16. Other Agreements. Prior to the Effective Time, the Company
will use its best efforts (a) to enter into consulting agreements with each of
the Company's non-employee directors on terms reasonably acceptable to Parent
and (b) terminate, effective as of the Effective Time, any and all provisions
of agreements with the Company's stockholders which give stockholders rights to
consult with and advise management of the Company on significant business
issues, examine the books and records of the Company (except as required by
applicable law), attend meetings of the Company's board of directors and submit
proposals or suggestions to management of the Company, other than in connection
with any collaboration agreements between the Company and the Company's
stockholders.
ARTICLE VIII
CONDITIONS TO CONSUMMATION OF THE MERGER
Section 8.1 Conditions to Each Party's Obligation to Effect the Merger.
The respective obligations of each party to effect the Merger shall be subject
to the satisfaction at or prior to the Effective Time of the following
conditions:
(a) HSR Approval. Any waiting period applicable to the consummation of the
Merger under the HSR Act shall have expired or been terminated, and no action
shall have been instituted by the Department of Justice or Federal Trade
Commission challenging or seeking to enjoin the consummation of this
transaction, which action shall have not been withdrawn or terminated.
(b) Stockholder Approvals. This Agreement and the transactions
contemplated hereby shall have been approved and adopted by the requisite vote
(as described in Section 4.19) of the shareholders of the Company, in
accordance with applicable law.
(c) Nasdaq Listing. The shares of Parent Common Stock issuable to the
holders of Company Common Stock pursuant to this Agreement in the Merger or
upon exercise of Converted Options and Converted Warrants shall have been
authorized for listing on the Nasdaq National Market, upon official notice of
issuance.
(d) Registration Statement. The Registration Statement shall have become
effective under the Securities Act and shall not be the subject of any stop
order or proceeding by the SEC seeking a stop order.
(e) No Order. No Governmental Entity (including a federal or state court)
of competent jurisdiction shall have enacted, issued, promulgated, enforced or
entered any statute, rule, regulation, executive order, decree, injunction or
other order (whether temporary, preliminary or permanent) which is in effect
A-22
<PAGE>
and which materially restricts, prevents or prohibits consummation of the
Merger or any transaction contemplated by this Agreement or has the effect of
making the Merger illegal; provided, however, that the parties shall use their
reasonable best efforts to cause any such decree, judgment, injunction or other
order to be vacated or lifted.
(f) Approvals. Other than the filing of Merger documents in accordance
with the GCL, all authorizations, consents, waivers, orders or approvals of, or
declarations or filings with, or expirations of waiting periods imposed by, any
Governmental Entity the failure of which to obtain, make or occur would,
individually or in the aggregate, have a material adverse effect at or after
the Effective Time on Parent and its Subsidiaries including the Surviving
Corporation and its Subsidiaries, shall have been obtained, been filed or have
occurred. Parent shall have received all state securities or "blue sky" permits
and other authorizations necessary to issue the shares of Parent Common Stock
pursuant to this Agreement in the Merger.
(g) Litigation. No preliminary or permanent injunction or other order
shall have been issued by any court or by any governmental or regulatory
agency, body or authority which enjoins, restrains or prohibits the
transactions contemplated hereby, including the consummation of the Merger or
has the effect of making the Merger illegal and which is in effect at the
Effective Time (each party agreeing to use its best efforts to have any such
injunction or order lifted).
Section 8.2 Conditions to Obligations of Parent and Sub to Effect the
Merger. The obligations of Parent and Sub to effect the Merger shall be subject
to the satisfaction at or prior to the Effective Time of the following
additional conditions, unless waived in writing by Parent:
(a) Representations and Warranties. (i) The aggregate effect of all
inaccuracies in the representations and warranties of the Company set forth in
this Agreement does not and will not have a Company Material Adverse Effect and
(ii) the representations and warranties of the Company that are qualified with
reference to a Company Material Adverse Effect or materiality shall, subject to
such qualification, be true and correct and the representations and warranties
that are not so qualified shall be true and correct in all material respects,
in each case as of the date hereof, and, except to the extent such
representations and warranties speak as of an earlier date, as of the Effective
Time as though made at and as of the Effective Time, and Parent shall have
received a certificate signed on behalf of the Company by the chief executive
officer or the chief financial officer of the Company to such effect.
(b) Performance of Obligations of the Company. The Company shall have
performed in all material respects all obligations required to be performed by
it under this Agreement at or prior to the Effective Time, and Parent shall
have received a certificate signed on behalf of the Company by the chief
executive officer or the chief financial officer of the Company to such effect.
(c) Affiliate Agreements. Parent shall have received the Affiliate
Agreements from each of the Affiliates of the Company, as contemplated in
Section 7.6.
(d) "Pooling Letter." Parent shall have received from KPMG LLP a letter,
dated the Closing Date and addressed to Parent, to the effect that, subject to
customary qualifications, KPMG LLP concurs with management's conclusion that
the Merger qualifies for pooling of interests treatment for financial reporting
purposes in accordance with GAAP, and Parent shall have received from the
Company, with the consent of Ernst & Young LLP, a copy of a letter, dated the
Closing Date, of Ernst & Young LLP addressed to the Company to the effect that,
subject to customary qualifications, the Merger qualifies for pooling of
interests for financial reporting purposes in accordance with GAAP.
(e) Dissenting Shares. The aggregate number of shares of Company Common
Stock into which all Dissenting Shares are convertible shall not constitute
more than 5% of the number of shares of Company Common Stock outstanding as of
immediately prior to the Effective Time (calculated assuming no dilution).
(f) Legal Opinion. Parent shall have received the opinion, dated the
Closing Date, of Cooley Godward LLP substantially to the effect set forth in
Exhibit D hereto.
A-23
<PAGE>
(g) Tax Opinion. Parent shall have received the legal opinion of Proskauer
Rose LLP dated as of the Closing Date and addressed to Parent, substantially to
the effect that the Merger will be treated for United States federal income tax
purposes as a reorganization within the meaning of Section 368 (a) of the Code
set forth in Exhibit E hereto (it being understood that, (i) in rendering such
opinion, Proskauer Rose LLP may rely upon the tax representation letters
referred to in Section 7.4, and (ii) if Proskauer Rose LLP does not render such
opinion or withdraws or modifies such opinion, this condition shall nonetheless
be deemed to be satisfied if Cooley Godward LLP renders such opinion, which
opinion shall not contain paragraph (g) on page 2 thereof).
(h) Employment Agreements. The Company shall have entered into employment
agreements with such of its key employees as are deemed sufficient by Parent in
the exercise of its reasonable judgment and on terms reasonably acceptable to
Parent (it being understood that the Company will not be required to enter into
any employment agreement with any employee that voluntarily elects to leave
employment with the Company); and
(i) Agreement with Nippon Kayaku Co., Ltd. The Company shall have
terminated or modified any and all agreements with Nippon Kayaku Co., Ltd. on
terms acceptable to Parent.
Section 8.3 Conditions to Obligation of the Company to Effect the Merger.
The obligation of the Company to effect the Merger shall be subject to the
satisfaction at or prior to the Effective Time of the following additional
conditions:
(a) Representations and Warranties. (i) The aggregate effect of all
inaccuracies in the representations and warranties of Parent set forth in this
Agreement does not and will not have a Parent Material Adverse Effect and (ii)
the representations and warranties of Parent contained in this Agreement that
are qualified with reference to a Parent Material Adverse Effect or materiality
shall be true and correct and the representations and warranties that are not
so qualified shall be true and correct in all material respects as of the date
hereof, and, except to the extent such representations and warranties speak as
of an earlier date, as of the Effective Time as though made on and as of the
Effective Time, and the Company shall have received a certificate signed on
behalf of Parent by the chief executive officer or the chief financial officer
of Parent to such effect.
(b) Performance of Obligations of Parent and Sub. Each of Parent and Sub
shall have performed in all material respects all obligations required to be
performed by it under this Agreement at or prior to the Effective Time, and the
Company shall have received a certificate signed on behalf of Parent by the
chief executive officer or the chief financial officer of Parent to such
effect.
(c) Legal Opinion. The Company shall have received an opinion, dated the
Closing Date, of Proskauer Rose LLP, reasonably satisfactory to the Company,
substantially to the effect set forth in Exhibit F hereto.
(d) Tax Opinion. The Company shall have received the legal opinion of
Cooley Godward LLP dated as of the Closing Date and addressed to the Company,
substantially to the effect that the Merger will be treated for United States
federal income tax purposes as a reorganization within the meaning of Section
368(a) of the Code set forth in Exhibit G hereto (it being understood that, (i)
in rendering such opinion, Cooley Godward LLP may rely upon the tax
representation letters referred to in Section 7.4, and (ii) if Cooley Godward
LLP does not render such opinion or withdraws or modified such opinion, this
condition shall nonetheless be deemed to be satisfied if Proskauer Rose LLP
renders such opinion, which opinion shall not contain paragraph (g) on page 2
thereof).
A-24
<PAGE>
ARTICLE IX
TERMINATION
Section 9.1 Termination. This Agreement may be terminated at any time
prior to the Effective Time, whether before or after approval by the
shareholders of the Company:
(a) by mutual consent of Parent and the Company;
(b) by either Parent or the Company, if (i) the Merger shall not have been
consummated before December 31, 2000, or (ii) the approval of the shareholders
of the Company required by Section 4.19 shall not have been obtained at a
meeting duly convened therefor or any adjournment thereof (unless, in the case
of any such termination pursuant to this Section 9.1(b), the failure to so
consummate the Merger by such date or to obtain such shareholder approval shall
have been caused by the action or failure to act of the party (or its
Subsidiaries) seeking to terminate this Agreement, which action or failure to
act constitutes a breach of this Agreement);
(c) by either Parent or the Company, if any permanent injunction or action
by any Governmental Entity of competent jurisdiction preventing the
consummation of the Merger shall have become final and nonappealable; provided,
however, that the party seeking to terminate this Agreement pursuant to this
Section 9.1(c) shall have used all reasonable efforts to remove such injunction
or overturn such action;
(d) by Parent, if (i) there has been a breach of any representations or
warranties (as of the time such representations or warranties were made) of the
Company set forth herein the effect of which, individually or together with all
other such breaches, is a Company Material Adverse Effect, (ii) there has been
a breach in any material respect of any of the covenants or agreements set
forth in this Agreement on the part of the Company, which breach is not curable
or, if curable, is not cured within 30 days after written notice of such breach
is given by Parent to the Company, or (iii) the Board of Directors of the
Company (x) withdraws or amends or modifies in a manner materially adverse to
Parent or Sub its recommendation or approval in respect of this Agreement or
the Merger, (y) makes any recommendation with respect to an Acquisition
Transaction (including making no recommendation or stating an inability to make
a recommendation), other than a recommendation to reject such Acquisition
Transaction, or (z) takes any action that would be prohibited by Section 7.2;
and
(e) by the Company, if (i) there has been a breach of any representations
or warranties (as of the time such representations or warranties were made) of
Parent set forth herein the effect of which, individually or together with all
other such breaches, is a Parent Material Adverse Effect, or (ii) there has
been a breach in any material respect of any of the covenants or agreements set
forth in this Agreement on the part of Parent, which breach is not curable or,
if curable, is not cured within 30 days after written notice of such breach is
given by the Company to Parent.
Section 9.2 Effect of Termination.
(a) In the event of termination of this Agreement pursuant to this Article
IX, the Merger shall be deemed abandoned and this Agreement shall forthwith
become void, without liability on the part of any party hereto, except as
provided in this Section 9.2, Section 7.1 and Section 7.11.
(b) If (x) Parent shall have terminated this Agreement pursuant to
Sections 9.1(d)(iii) or (y) either (1) Parent shall have terminated this
Agreement pursuant to Section 9.1(b)(i) or Parent or the Company shall have
terminated this Agreement pursuant to Section 9.1(b)(ii) or (2) Parent shall
have terminated this Agreement pursuant to Section 9.1(d)(i) or 9.1(d)(ii) and,
prior to or within one (1) year after any termination described in this clause
(y), the Company (or any of its Subsidiaries) shall have directly or indirectly
entered into a definitive agreement for, or shall have consummated, an
Acquisition Transaction, then, in any of such cases, the Company shall pay
Parent a termination fee of ten million dollars ($10,000,000); provided,
however, that any liquidated damage amounts previously paid by the Company to
Parent pursuant to Section 9.2(c) shall be credited against the termination fee
payable under this Section 9.2(b). Any fees or amounts payable under this
Section 9.2(b) shall be paid in same day funds
A-25
<PAGE>
no later than: (i) two business days after a termination described in clause
(x) of this Section 9.2(b); or (ii) concurrently with or prior to the entering
into of the definitive agreement for, or the consummation of, such Acquisition
Transaction, in the case of a termination described in clause (y) of this
Section 9.2(b).
(c) If Parent shall have terminated this Agreement pursuant to Sections
9.1(d)(i) or 9.1(d)(ii), then, in any of such cases, the Company shall pay to
Parent as liquidated damages and not as a penalty, five million dollars
($5,000,000). Such liquidated damage amount shall be payable no later than two
business days after such termination.
(d) If Company shall have terminated this Agreement pursuant to Sections
9.1(e)(i) or 9.1(e)(ii), then, in any of such cases, the Parent shall pay to
Company as liquidated damages and not as a penalty, five million dollars
($5,000,000). Such liquidated damage amount shall be payable no later than two
business days after such termination.
ARTICLE X
GENERAL PROVISIONS
Section 10.1 Amendment and Modification. At any time prior to the
Effective Time, this Agreement may be amended, modified or supplemented only by
written agreement (referring specifically to this Agreement) of Parent, Sub and
the Company with respect to any of the terms contained herein; provided,
however, that after any approval and adoption of this Agreement by the
shareholders of the Company, no such amendment, modification or supplementation
shall be made which under applicable law requires the approval of such
shareholders, without the further approval of such shareholders.
Section 10.2 Waiver. At any time prior to the Effective Time, Parent and
Sub, on the one hand, and the Company, on the other hand, may (i) extend the
time for the performance of any of the obligations or other acts of the other,
(ii) waive any inaccuracies in the representations and warranties of the other
contained herein or in any documents delivered pursuant hereto and (iii) waive
compliance by the other with any of the agreements or conditions contained
herein which may legally be waived. Any such extension or waiver shall be valid
only if set forth in an instrument in writing specifically referring to this
Agreement and signed on behalf of such party.
Section 10.3 Survivability; Investigations. The respective representations
and warranties of Parent and the Company contained herein or in any
certificates or other documents delivered prior to or as of the Effective Time
(i) shall not be deemed waived or otherwise affected by any investigation made
by any party hereto and (ii) shall not survive beyond the Effective Time. The
covenants and agreements of the parties hereto (including the Surviving
Corporation after the Merger) shall survive the Effective Time without
limitation (except for those which, by their terms, contemplate a shorter
survival period).
Section 10.4 Notices. All notices and other communications hereunder shall
be in writing and shall be delivered personally or by next-day courier or
telecopied with confirmation of receipt, to the parties at the addresses
specified below (or at such other address for a party as shall be specified by
like notice; provided that notices of a change of address shall be effective
only upon receipt thereof. Any such notice shall be effective upon receipt, if
personally delivered or telecopied, or one day after delivery to a courier for
next-day delivery.
(a) If to Parent or Sub, to:
Celgene Corporation
7 Powder Horn Drive
Warren, NJ 07059
Fax: (732) 805-3931
Attention: ----------------
with a copy to:
Proskauer Rose LLP
1585 Broadway
A-26
<PAGE>
New York, New York 10036
Fax: (212) 969-2900
Attention: Robert A. Cantone, Esq.
(b) if to the Company, to:
Signal Pharmaceuticals, Inc.
5555 Oberlin Drive
San Diego, CA 92121
Fax: ----------------
Attention: ----------------
with a copy to: Cooley Godward LLP
4365 Executive Drive, Suite 1100
San Diego, CA 92121
Fax: (858) 453-3555
Attention: L. Kay Chandler, Esq.
Section 10.5 Descriptive Headings; Interpretation. The headings contained
in this Agreement are for reference purposes only and shall not affect in any
way the meaning or interpretation of this Agreement. References in this
Agreement to Sections, Schedules, Exhibits or Articles mean a Section,
Schedule, Exhibit or Article of this Agreement unless otherwise indicated. The
term "person" shall mean and include an individual, a partnership, a joint
venture, a limited liability company, a corporation, a trust, a Governmental
Entity or an unincorporated organization.
Section 10.6 Entire Agreement; Assignment. This Agreement (including the
Schedules and other documents and instruments referred to herein), together
with the Proxy and Option Agreement and the Confidentiality Agreement,
constitute the entire agreement, and supersede all other prior agreements and
understandings, both written and oral, among the parties or any of them, with
respect to the subject matter hereof. This Agreement is not intended to confer
upon any person not a party hereto any rights or remedies hereunder, except as
provided in Section 7.15. This Agreement shall not be assigned by operation of
law or otherwise; provided that Parent or Sub may assign its rights and
obligations hereunder to a direct or indirect subsidiary of Parent, but no such
assignment shall relieve Parent or Sub, as the case may be, of its obligations
hereunder.
Section 10.7 Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of California without giving
effect to the provisions thereof relating to conflicts of law, except to the
extent relating to matters governed by the General Corporation Law of the State
of California.
Section 10.8 Severability. In case any one or more of the provisions
contained in this Agreement should be invalid, illegal or unenforceable in any
respect against a party hereto, the validity, legality and enforceability of
the remaining provisions contained herein shall not in any way be affected or
impaired thereby and such invalidity, illegality or unenforceability shall only
apply as to such party in the specific jurisdiction where such judgment shall
be made.
Section 10.9 Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed to be an original but all of which
shall constitute one and the same agreement.
A-27
<PAGE>
IN WITNESS WHEREFORE, each of Parent, Sub and the Company has caused this
Agreement to be executed on its behalf by its officers thereunto duly
authorized, all as of the date first above written.
CELGENE CORPORATION
By: /s/ John W. Jackson
------------------------------------
Name: John W. Jackson
Title: Chairman & CEO
SIGNAL PHARMACEUTICALS, INC.
By: /s/ Alan J. Lewis
------------------------------------
Name: Alan J. Lewis
Title: President and CEO
CELGENE ACQUISITION CORP.
By: /s/ Sol J. Barer
------------------------------------
Name: Sol J. Barer, Ph.D.
Title: President
A-28
<PAGE>
EXHIBIT A-1 TO AGREEMENT AND PLAN OF MERGER
VOTING AND PROXY AGREEMENT
VOTING AND PROXY AGREEMENT dated as of __________, 2000, by and among
Celgene Corporation, a Delaware corporation ("Parent"), and the persons listed
on Schedule A hereto (collectively, the "Stockholders" and each a
"Stockholder"), each a stockholder of Signal Pharmaceuticals, Inc., a
California corporation (the "Company").
Contemporaneously with the execution of this Agreement, the Company,
Parent and Cape May Acquisition Corp., a Delaware corporation and wholly-owned
subsidiary of Parent ("Sub"), are entering into an Agreement and Plan of Merger
(the "Merger Agreement") pursuant to which it is contemplated that Sub will be
merged with and into the Company (the "Merger") and the holders of the
Company's common stock (the "Company Common Stock") will be entitled to receive
shares of Parent's Common Stock, par value $.01 per share ("Parent Common
Stock"), for such shares of Company Common Stock.
Parent, as a condition to its willingness to enter into the Merger
Agreement, has required the Stockholders to grant Parent an irrevocable proxy
with respect to all of the shares of Company Common Stock and the Company's
Preferred Stock, par value $____ per shares (the "Company Preferred Stock")
owned by the Stockholders, together with any additional shares of Company
Common Stock hereafter acquired by the Stockholders (pursuant to Section 7, by
exercise of options or warrants, by conversion of debentures or otherwise,
acquired by such Stockholder) (such specified number of shares, and any
additional shares when and if acquired, being referred to as the "Shares") on
the terms and conditions hereinafter set forth.
The parties hereto agree as follows:
1. Irrevocable Proxy. Each Stockholder hereby irrevocably constitutes and
appoints Parent or any designee of Parent the lawful agent, attorney and proxy
of such Stockholder during the term of this Agreement, to vote all of such
Stockholder's Shares that such Stockholder has an irrevocable proxy to vote at
any meeting or in connection with any written consent of the Company's
stockholders (a) in favor of the Merger, (b) in favor of the Merger Agreement,
as such may be modified or amended from time to time, (c) in favor of the
conversion of the Company Preferred Stock to Company Common Stock, such
conversion to be (i) on the terms provided for in the Certificate of
Incorporation of the Company, (ii) effective immediately prior to the date and
time the Merger becomes effective and (iii) subject to the Merger becoming
effective, (d) against any Acquisition Transaction (other than the Merger) or
other merger, sale, or other business combination between the Company and any
other person or entity or any other action which would make it impractical for
Parent to effect a merger or other business combination of the Company with
Parent or Sub, and (e) against any other action or agreement that would result
in a breach of any covenant, representation or warranty or any other obligation
or agreement of the Company under the Merger Agreement or which would result in
any of the Company's obligations under the Merger Agreement not being
fulfilled. This power of attorney is irrevocable, is granted in consideration
of Parent entering into the Merger Agreement and is coupled with an interest
sufficient in law to support an irrevocable power. This appointment shall
revoke all prior attorneys and proxies appointed by any Stockholder at any time
with respect to the Shares and the matters set forth in clauses (a) through (d)
above and no subsequent attorneys or proxies will be appointed by such
Stockholder, or be effective, with respect thereto.
2. Representations and Warranties of the Stockholders. Each Stockholder
represents and warrants to Parent as follows:
(a) Ownership of Shares. That Stockholder is the sole beneficial owner of
the number of Shares set forth as being granted to that Stockholder on Schedule
A. The Shares set forth opposite that Stockholder's name on Schedule A
constitute all the RightsShares owned beneficially or of record by that
Stockholder. The Shares owned by that Stockholder are validly issued, fully
paid and
<PAGE>
nonassessable and such Shares set forth opposite that Stockholder's name on
Schedule A, are held by that Stockholder, or by a nominee or custodian for the
benefit of that Stockholder, free and clear of all liens, claims, security
interests, agreements and other encumbrances, except for encumbrances arising
under this Agreement.
(b) Power; Binding Agreement. That Stockholder has the legal capacity to
enter into and perform all of that Stockholder's obligations under this
Agreement. The execution, delivery and performance of this Agreement by that
Stockholder will not violate any other agreement to which that Stockholder is a
party, including, without limitation, any voting agreement, stockholders
agreement or voting trust. This Agreement has been duly and validly executed
and delivered by that Stockholder and constitutes a valid and binding
obligation of that Stockholder, enforceable against that Stockholder in
accordance with its terms, except as enforceability may be limited by
applicable bankruptcy, insolvency and similar laws affecting creditors' rights
generally and subject to general principles of equity. If that Stockholder is
married and that Stockholder's Shares constitute community property, this
Agreement has been duly authorized, executed and delivered by, and constitutes
a valid and binding obligation of, that Stockholder's spouse, enforceable
against that spouse in accordance with its terms, except as enforceability may
be limited by applicable bankruptcy, insolvency and similar laws affecting
creditors' rights generally and subject to general principles of equity.
(c) Consents and Approvals; No Violation. Neither the execution and
delivery of this Agreement by that Stockholder nor the consummation of the
transactions contemplated by this Agreement will: (i) require any consent,
approval, authorization or permit of, or filing with or notification to, any
person or entity or any governmental or regulatory authority, except in
connection with the HSR Act or pursuant to the Securities Exchange Act of 1934;
(ii) conflict with, result in a breach of, or result in a default (or give rise
to a right of termination, cancellation or acceleration) under any of the
terms, conditions or provisions of any note, license, agreement or other
instrument or obligation to which that Stockholder is a party or by which that
Stockholder or any of that Stockholder's assets may be bound; or (iii) violate
any order, writ, injunction, decree, statute, rule or regulation applicable to
that Stockholder or by which any of that Stockholder's assets are bound.
3. Representations and Warranties of Parent. Parent represents and
warrants to each Stockholder that:
(a) Power; Binding Agreement. Parent has the corporate power and authority
to enter into and perform all its obligations under this Agreement. The
execution, delivery and performance of this Agreement by Parent will not
violate any other agreement to which Parent is a party. This Agreement has been
duly and validly authorized, executed and delivered by Parent and constitutes a
valid and binding obligation of Parent, enforceable against Parent in
accordance with its terms, except as enforceability may be limited by
applicable bankruptcy, insolvency and similar laws affecting creditors' rights
generally and subject to general principles of equity.
(b) Consents and Approvals; No Violation. Neither the execution and
delivery of this Agreement by Parent nor the consummation by Parent of the
transactions contemplated by this Agreement will: (i) require any consent,
approval, authorization or permit of, or filing with or notification to, any
person or entity or any governmental or regulatory authority, except in
connection with the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as
amended or pursuant to the Securities Exchange Act of 1934; (ii) conflict with,
result in a breach of, or result in a default (or give rise to a right of
termination, cancellation or acceleration) under any of the terms, conditions
or provisions of any note, license, agreement or other instrument or obligation
to which Parent is a party or by which Parent or any of its assets may be
bound; or (iii) violate any order, writ, injunction, decree, statute, rule or
regulation applicable to Parent or by which any of its assets are bound.
4. Additional Covenants of the Stockholders. Each Stockholder hereby
covenants and agrees that:
(a) that Stockholder will not enter into any transaction, take any action,
or by inaction permit any event to occur that would (i) result in any of the
representations or warranties of such
A-1-2
<PAGE>
Stockholder herein contained not being true and correct at and as of the time
immediately after the occurrence of such transaction, action or event; or (ii)
have the effect of preventing or disabling that Stockholder from performing
that Stockholder's obligations under this Agreement;
(b) that Stockholder will not grant any proxies or powers of attorney with
respect to any Shares, deposit any Shares into a voting trust or enter into a
voting agreement with respect to such Shares; provided, however, that the
Stockholders may grant proxies to third parties provided that such proxies are
expressly made subject to the terms of this Agreement;
(c) until the termination of this Agreement, such Stockholder will at all
times use his, her or its best efforts in his, her or its capacity as a
stockholder of the Company to prevent the Company from taking any action in
violation of the Merger Agreement;
(d) from and after the date hereof until the termination of this
Agreement, other than under the circumstances contemplated by Section 7 hereof,
the Shares will not be sold, transferred, pledged, hypothecated, transferred by
gift, or otherwise disposed of in any manner whatsoever without notifying
Parent in advance and obtaining and delivering to Parent any evidence that
Parent may reasonably request to evidence the transferee's agreement to be
bound by this Agreement; provided, however, that in the event of such
Stockholder's death during the term of this Agreement, the Shares may be
transferred in accordance with the Stockholder's last will and testament, or if
none, in accordance with the applicable laws of intestate succession, in either
of which cases, the Shares shall remain subject in all respects to the terms of
this Agreement; and
(e) the Stockholder will execute and deliver any additional documents
reasonably necessary or desirable, in the opinion of Parent's or the Company's
counsel, to evidence the irrevocable proxy granted in Section 1 with respect to
the Shares or otherwise implement and effect the provisions of this Agreement.
5. No Solicitation. No Stockholder shall, in that Stockholder's capacity
as such, directly or indirectly, (a) solicit, initiate, facilitate or encourage
(including by way of furnishing or disclosing non-public information) any
inquiries or the making of any proposal with respect to any Acquisition
Transaction, (b) negotiate, explore or otherwise engage in discussion with any
person (other than Parent and its representatives) with respect to any
Acquisition Transaction, (c) agree to or endorse an Acquisition Transaction
with any person (other than Parent or Sub) or any agreement, arrangement or
understanding with respect to any such Acquisition Transaction or which would
require the Company to abandon, terminate or fail to consummate the Merger or
any other transaction contemplated by this Agreement, or (d) authorize or
permit any person or entity acting on behalf of that Stockholder to do any of
the foregoing. If any Stockholder receives any inquiry or proposal regarding
any Acquisition Transaction, that Stockholder shall promptly inform Parent of
that inquiry or proposal.
6. Legending of Certificates; Nominee Shares. Each Stockholder agrees to
submit to Parent contemporaneously with or promptly following execution of this
Agreement (or promptly following receipt of any additional certificates
representing any additional Shares) all certificates representing the Shares so
that Parent may note thereon a legend referring to the proxy granted to it by
this Agreement. If any of the Shares beneficially owned by a Stockholder are
held of record by a brokerage firm in "street name" or in the name of any other
nominee (a "Nominee," and, as to such Shares, "Nominee Shares"), the
Stockholder agrees that, upon written notice by Parent requesting it, such
Stockholder will within five days of the giving of such notice execute and
deliver to Parent a limited power of attorney in such form as shall be
reasonably satisfactory to Parent enabling Parent to require the Nominee to
grant to Parent an irrevocable proxy to the same effect as Section 1 hereof
with respect to the Nominee Shares held by such Nominee and to submit to Parent
the certificates representing such Nominee Shares for notation of the
above-referenced legend thereon.
7. Adjustments to Prevent Dilution, Etc. In the event of a stock dividend
or distribution, or any change in Company Common Stock by reason of any stock
dividend, split-up, recapitalization, combination, exchange of shares or the
like, the term "Shares" shall be deemed to refer to and include the Shares as
well as all such stock dividends and distributions and any shares into which or
for which any or all of the Shares may be changed or exchanged.
A-1-3
<PAGE>
8. Stockholder Capacity. No person executing this Agreement who is or
becomes during the term of this Agreement a director of the Company makes any
agreement in his or her capacity as a director. Each Stockholder is executing
and delivering this Agreement solely in that Stockholder's capacity as the
record and beneficial owner of that Stockholder's Shares. Notwithstanding
anything to the contrary in this Agreement, no action or inaction by a
Stockholder in his capacity as a director, officer, or employee of the Company
shall be deemed to contravene Section 5, as long as the action or inaction does
not contravene Section 7.2 of the Merger Agreement.
9. Termination. This Agreement shall terminate on the Effective Time of
the Merger; provided, however, that the appointment of Parent or any designee
of Parent as agent, attorney and proxy pursuant to Section 1 hereof, and any
proxy or other instrument executed pursuant thereto, shall in any event
automatically terminate upon the termination of the Merger Agreement.
10. Miscellaneous.
(a) No Waiver. The failure of any party to exercise any right, power or
remedy under this Agreement or otherwise available in respect of this Agreement
at law or in equity, or to insist upon compliance by any other party with that
party's obligations under this Agreement, shall not constitute a waiver of any
right to exercise any such or other right, power or remedy or to demand such
compliance.
(b) Notices. All notices and other communications hereunder shall be in
writing and shall be delivered personally or by next-day courier or telecopied
with confirmation of receipt, to the parties at the addresses specified below
(or at such other address for a party as shall be specified by like notice;
provided that notices of a change of address shall be effective only upon
receipt thereof). Any such notice shall be effective upon receipt, if
personally delivered or telecopied, or one day after delivery to a courier for
next-day delivery.
(i) If to Parent, to:
Celgene Corporation
-------------------------
-------------------------
Attn:
with a copy to:
Proskauer Rose LLP
1585 Broadway
New York, New York 10036
Attention: Robert A. Cantone, Esq.
(ii) if to a Stockholder, to:
-------------------------
-------------------------
-------------------------
-------------------------
with a copy to:
-------------------------
-------------------------
-------------------------
Fax:
Attention:
A-1-4
<PAGE>
(c) Descriptive Headings; Interpretation. The headings contained in this
Agreement are for reference purposes only and shall not affect in way the
meaning or interpretation of this Agreement. References in this Agreement to
Sections and Schedules mean a Section or Schedule of this Agreement unless
otherwise indicated. The terms "beneficially own" and "beneficial owner" with
respect to any securities shall have the same meaning as in, and shall be
determined in accordance with, Rule 13d-3 under the Securities Exchange Act of
1934.
(d) Entire Agreement; Assignment. This Agreement (including the schedule
and other documents and instruments referred to herein), together with the
Merger Agreement, constitute the entire agreement and supersede all other prior
agreements and understandings, both written and oral, among the parties or any
of them, with respect to the subject matter hereof. Except as otherwise
expressly provided herein, this Agreement is not intended to confer upon any
person not a party hereto any rights or remedies hereunder. Except as otherwise
expressly provided herein, this Agreement shall not be assigned by operation of
law or otherwise; provided that Parent or Sub may assign its rights and
obligations hereunder to a direct or indirect subsidiary of Parent, but no such
assignment shall relieve Parent or Sub, as the case may be, of its obligations
hereunder.
(e) Liability After Transfer. Each Stockholder agrees that,
notwithstanding any transfer of that Stockholder's Shares in accordance with
Section 4(d), that Stockholder shall remain liable for his or her performance
of all obligations under this Agreement.
(f) Injunctive Relief; Remedies Cumulative.
(i) Parent, on the one hand, and the Stockholders, on the other hand,
acknowledge that the other party will be irreparably harmed and that there will
be no adequate remedy at law for a violation of any of the covenants or
agreements of such party that are contained in this Agreement. It is
accordingly agreed that, in addition to any other remedies that may be
available to the non-breaching party upon the breach by any other party of such
covenants and agreements, the non-breaching party shall have the right to
obtain injunctive relief to restrain any breach or threatened breach of such
covenants or agreements or otherwise to obtain specific performance of any of
such covenants or agreements.
(ii) No remedy conferred upon or reserved to any party herein is intended
to be exclusive of any other remedy and every remedy shall be cumulative and in
addition to every other remedy herein or now or hereafter existing at law, in
equity or by statute.
(g) Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of California without giving effect to
the provisions thereof relating to conflicts of laws.
(h) Effect of Partial Invalidity. Whenever possible, each provision of
this Agreement shall be construed in such a manner as to be effective and valid
under applicable law. If any provision of this Agreement or the application
thereof to any party or circumstance shall be prohibited by or invalid under
applicable law, such provisions shall be ineffective to the extent of such
prohibition without invalidating the remainder of such provision or any other
provisions of this Agreement or the application of such provision to the other
party or other circumstances.
(i) Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed to be an original but all of which
shall constitute one and the same agreement.
A-1-5
<PAGE>
IN WITNESS WHEREOF, this Agreement has been executed by the parties as of
the date first above written.
THE STOCKHOLDERS:
-------------------------------------
-------------------------------------
-------------------------------------
-------------------------------------
CELGENE CORPORATION
By: ----------------------------------
Authorized Officer
A-1-6
<PAGE>
EXHIBIT A-2
OPTION AGREEMENT
OPTION AGREEMENT dated as of __________, 2000, by and among Celgene
Corporation, a Delaware corporation ("Parent") and Signal Pharmaceuticals,
Inc., a California corporation (the "Company").
Contemporaneously with the execution of this Agreement, the Company,
Parent and Celgene Acquisition Corp., a California corporation and wholly-owned
subsidiary of Parent ("Sub"), are entering into an Agreement and Plan of Merger
(the "Merger Agreement") pursuant to which it is contemplated that Sub will be
merged with and into the Company (the "Merger") and the holders of the
Company's Common Stock, (the "Company Common Stock") including holders of the
Company's Preferred Stock (the "Company Preferred Stock") which is to be
converted immediately prior to the Merger, will be entitled to receive shares
of Parent's Common Stock, par value $.01 per share ("Parent Common Stock"), for
such shares of Company Common Stock.
Parent, as a condition to its willingness to enter into the Merger
Agreement, has required the Company to grant Parent an option with respect to
2,000,000 shares of Company Common Stock (the "Shares") and stock appreciation
rights with respect to 3,000,000 shares of the Company Common Stock on the
terms and conditions hereinafter set forth.
The parties hereto agree as follows:
1. Grant of Option and Stock Appreciation Right.
(a) The Company hereby grants to Parent an option (collectively, the
"Option") to purchase the Shares and stock appreciation rights with respect to
3,000,000 shares of the Company Common Stock on the terms and conditions
hereinafter set forth. The consideration for the purchase of such Shares shall
be cash in the amount of $6.60 per share of Common Stock (the "Exercise
Price").
2. Exercise of Option. The Option shall be exercisable, in whole, but not
in part, by Parent as follows:
(a) If the Merger Agreement is terminated by Parent pursuant to
Section 9.1(d)(iii) of the Merger Agreement, then Parent may exercise the
Option at any time during the one year period beginning on the date of such
termination.
(b) If (i) the Merger Agreement is terminated by Parent pursuant to
Sections 9.1(d)(i) or 9.1(d)(ii) of the Merger Agreement, by Parent pursuant to
Section 9.1(b)(i), or by either Parent or the Company pursuant to
Section 9.1(b)(ii), and (ii) the Company (or any of its Subsidiaries) shall
have, directly or indirectly, entered into a definitive agreement for, or shall
have consummated, an Acquisition Transaction, as that term is defined in the
Merger Agreement, within one year of such termination, then Parent may exercise
the Option during the period beginning on the date on which Parent first
receives notice of the occurrence of the event triggering Parent's right to
exercise the Option and ending on the date three business days after the date
that the Acquisition Transaction (or any successive Acquisition Transaction or
any other Acquisition Transaction made in response thereto) occurs.
At any time when Parent wishes to exercise the Option, Parent shall give
written notice (the "Notice") to the Company specifying a place and a date not
less than two nor more than 20 business days from the date of the Notice for
the closing of such purchase (the "Closing"); provided, however, that such date
may be extended to the extent necessary to comply with the Hart-Scott-Rodino
Antitrust Improvements Act of 1976, as amended (the "HSR Act"), and applicable
regulations thereunder. The date on which the Parent gives the Notice shall be
deemed to be the date on which the Option is exercised. The Company agrees to
use its reasonable best efforts (subject to any applicable fiduciary duties) to
give Parent at least five business days prior written notice of the occurrence
of any event triggering Parent's right to exercise the Option.
A-2-1
<PAGE>
3. Payment and delivery of Certificate(s). At the Closing hereunder:
(a) Parent will pay to the Company the aggregate Exercise Price for the
Shares and the Company will deliver to Parent against receipt of such aggregate
Exercise Price as provided in Section 3(a), a certificate or certificates
representing the Shares so purchased by Parent.
(b) Notwithstanding any provisions herein to the contrary, in lieu of
exercising this Option for cash, Parent may elect to receive Shares equal to
the value (as determined below) of this Option by surrender of this Option in
which event the Company shall issue to Parent the number of Shares computed
using the following formula:
X = Y(A-B)
------
A
Where X = the number of Shares to be issued to Parent;
Y = the total number of Shares purchasable under this Option (at the
date of such calculation);
A = the greater of $6.60 or the consideration per share of Signal
Pharmaceuticals Common Stock in the "Acquisition
Transaction", if any, triggering Parent's right to exercise
the Option; and
B = Exercise Price (as adjusted to the date of such calculation).
For purposes of Rule 144 under the Securities Act, 17 CFR (section)230.144,
Parent and the Company agree that the exercise of this Option in accordance
with this Section 3(b) shall be deemed to be a conversion of such portion of
the Option, pursuant to the terms hereof, into Shares, to the fullest extent
permitted under such rule.
3A. Stock Appreciation Rights. In the event that Parent exercises the
Option and thereafter sells or otherwise disposes of the Shares, the Company
shall forthwith pay to Parent an amount in cash equal to (a) 3,000,000
multiplied by (b) the excess, if any, of the amount per Share realized by
Parent in such sale or other disposition over the Exercise Price. For purposes
of this Section 3A, the value of any non-cash consideration received for the
Shares shall equal the fair market value on the date of such sale or other
disposition.
4. Additional Covenants of the Company. The Company hereby covenants and
agrees that:
(a) the Company will not enter into any transaction, take any action, or
by inaction permit any event to occur that would have the effect of preventing
or disabling the Company from performing its obligations under this Agreement;
and
(b) the Company will execute and deliver any additional documents
reasonably necessary or desirable, in the opinion of Parent's or the Company's
counsel, to evidence the option granted in Section 1 with respect to the Shares
or otherwise implement and effect the provisions of this Agreement.
5. Reservation of Shares. The Company shall at all times reserve and keep
available out of authorized and unissued Company Common Stock, solely for the
purpose of providing for the exercise of the rights to purchase all Shares
granted pursuant to this Option, such number of shares of Company Common Stock
as shall, from time to time, be sufficient therefor. The Company covenants that
all shares of Company Common Stock issuable upon exercise of this Option, upon
receipt by the Company of the Exercise Price therefor or cancellation of this
Option pursuant to Section 3(b) hereof, shall be validly issued, fully paid,
nonassessable, and free of preemptive rights.
6. Adjustments. (a) In case the Company shall at any time after the date
hereof (i) declare a dividend on the outstanding Company Common Stock payable
in shares of its capital stock, (ii) subdivide the outstanding Company Common
Stock, (iii) combine the outstanding Company Common Stock into a smaller number
of shares, or (iv) issue any shares of its capital stock by reclassification of
the Company Common Stock (including any such reclassification in connection
with a
A-2-2
<PAGE>
consolidation or merger in which the Company is the continuing corporation),
then, in each case, the Exercise Price, and the number and kind of shares of
Company Common Stock receivable upon exercise of this Option, in effect at the
time of the record date for such dividend or of the effective date of such
subdivision, combination, or reclassification, shall be proportionately
adjusted so that Parent after such time shall be entitled to receive the
aggregate number and kind of shares which, if this Option had been exercised
immediately prior to such time, Parent would have owned upon such exercise and
been entitled to receive by virtue of such dividend, subdivision, combination,
or reclassification. Such adjustment shall be made successively whenever any
event listed above shall occur.
(b) In case the Company shall issue or fix a record date for the
issuance to all holders of Company Common Stock of rights, options, or warrants
to subscribe for or purchase Company Common Stock (or securities convertible
into or exchangeable for Company Common Stock) at a price per share (or having
a conversion or exchange price per share, if a security convertible into or
exchangeable for Company Common Stock) less than the Current Market Price per
share of Company Common Stock (as defined in Section 6(e) hereof) on such
record date, then, in each case, the Exercise Price shall be adjusted by
multiplying the Exercise Price in effect immediately prior to such record date
by a fraction, the numerator of which shall be the number of shares of Company
Common Stock outstanding on such record date plus the number of shares of
Company Common Stock which the aggregate offering price of the total number of
shares of Company Common Stock so to be offered (or the aggregate initial
conversion or exchange price of the convertible or exchangeable securities so
to be offered) would purchase at such Current Market Price and the denominator
of which shall be the number of shares of Company Common Stock outstanding on
such record date plus the number of additional shares of Company Common Stock
to be offered for subscription or purchase (or into which the convertible or
exchangeable securities so to be offered are initially convertible or
exchangeable). Such adjustment shall become effective at the close of business
on such record date; provided, however, that, to the extent the shares of
Company Common Stock (or securities convertible into or exchangeable for shares
of Company Common Stock) are not delivered, the Exercise Price shall be
readjusted after the expiration of such rights, options, or warrants, to the
Exercise Price which would then be in effect had the adjustments made upon the
issuance of such rights, options, or warrants been made upon the basis of
delivery of only the number of shares of Company Common Stock (or securities
convertible into or exchangeable for shares of Company Common Stock) actually
issued. In case any subscription price may be paid in a consideration part or
all of which shall be in a form other than cash, the value of such
consideration shall be as determined in good faith by the board of directors of
the Company, whose determination shall be conclusive absent manifest error.
Shares of Company Common Stock owned by or held for the account of the Company
or any majority-owned subsidiary shall be not deemed outstanding for the
purpose of any such computation.
(c) In case the Company shall distribute to all holders of Company
Common Stock (including any such distribution made to the stockholders of the
Company in connection with a consolidation or merger in which the Company is
the continuing corporation) evidences of its indebtedness or assets (other than
cash dividends or distributions and dividends payable in shares of Company
Common Stock), or rights, options, or warrants to subscribe for or purchase
Company Common Stock, or securities convertible into or exchangeable for shares
of Company Common Stock (excluding any of the foregoing with respect to the
issuance of which an adjustment of the Exercise Price is provided pursuant to
Section 6(b) hereof), then, in each case, the Exercise Price shall be adjusted
by multiplying the Exercise Price in effect immediately prior to the record
date for the determination of stockholders entitled to receive such
distribution by a fraction, the numerator of which shall be the Current Market
Price per share of Company Common Stock on such record date, less the fair
market value (as determined in good faith by the board of directors of the
Company, whose determination shall be conclusive absent manifest error) of the
portion of the evidences of indebtedness or assets so to be distributed, or of
such rights, options, or warrants or convertible or exchangeable securities,
applicable to one share, and the denominator of which shall be such Current
Market Price per share of Company Common Stock. Such adjustment shall be made
whenever any
A-2-3
<PAGE>
such distribution is made, and shall become effective on the date of such
distribution retroactive to the record date for the determination of
shareholders entitled to receive such distribution.
(d) For the purpose of any computation under this Section 6, the Current
Market Price per share of Company Common Stock on any date shall be deemed to
be the average of the daily closing prices for the 30 consecutive trading days
immediately preceding the date in question. The closing price for each day
shall be the last reported sales price regular way or, in case no such reported
sale takes place on such day, the closing bid price regular way, in either case
on the principal national securities exchange (including, for purposes hereof,
the NASDAQ National Market System) on which the Company Common Stock is listed
or admitted to trading or, if the Company Common Stock is not listed or
admitted to trading on any national securities exchange, the highest reported
bid price for the Company Common Stock as furnished by the National Association
of Securities Dealers, Inc. through NASDAQ or a similar organization if NASDAQ
is no longer reporting such information. If on any such date the Company Common
Stock is not listed or admitted to trading on any national securities exchange
and is not quoted by NASDAQ or any similar organization, the fair value of a
share of Company Common Stock on such date, as determined in good faith by the
board of directors of the Company, whose determination shall be conclusive
absent manifest error, shall be used.
(e) No adjustment in the Exercise Price shall be required if such
adjustment is less than $.05; provided, however, that any adjustment which by
reason of this Section 6 are not required to be made shall be carried forward
and taken into account in any subsequent adjustment. All calculations under
this Section 6 shall be made to the nearest cent or to the nearest
one-thousandth of a share, as the case may be.
(f) In any case in which this Section 6 shall require that an adjustment
in the Exercise Price be made effective as of a record date for a specified
event, the Company may elect to defer, until the occurrence of such event,
issuing to Parent, if Parent exercised this Option after such record date, the
shares of Company Common Stock, if any, issuable upon such exercise over and
above the shares of Company Common Stock, if any, issuable upon such exercise
on the basis of the Exercise Price in effect prior to such adjustment;
provided, however, that the Company shall deliver to Parent a due bill or other
appropriate instrument evidencing Holder's right to receive such additional
shares upon the occurrence of the event requiring such adjustment.
(g) Upon each adjustment of the Exercise Price as a result of the
calculations made in Sections 6(b) or 6(c) hereof, this Option shall thereafter
evidence the right to purchase, at the adjusted Exercise Price, that number of
Shares (calculated to the nearest thousandth) obtained by dividing (i) the
product obtained by multiplying the number of shares purchasable upon exercise
of this Option prior to adjustment of the number of shares by the Exercise
Price in effect prior to adjustment of the Exercise Price by (ii) the Exercise
Price in effect after such adjustment of the Exercise Price.
(h) Whenever there shall be an adjustment as provided in this Section 6,
the Company shall promptly cause written notice thereof to be sent by
registered mail, postage prepaid, to Parent, at its address set forth in the
Merger Agreement, which notice shall be accompanied by an officer's certificate
setting forth the number of Shares purchasable upon the exercise of this Option
and the Exercise Price after such adjustment and setting forth a brief
statement of the facts requiring such adjustment and the computation thereof,
which officer's certificate shall be conclusive evidence of the correctness of
any such adjustment absent manifest error.
(i) The Company shall not be required to issue fractions of shares of
Company Common Stock of other capital stock of the Company upon the exercise of
this Option. If any fraction or a share would be issuable on the exercise of
this Option (or specified portions thereof), the Company shall purchase such
fraction for an amount in cash equal to the same fraction of the Current Market
Price of such share of Company Common Stock on the date of exercise of this
Option.
A-2-4
<PAGE>
7. Mergers; Reclassifications.
(a) In case of any consolidation with or merger of the Company with or
into another corporation (other than a merger or consolidation in which the
Company is the surviving or continuing corporation), such successor corporation
shall (i) execute with Parent an agreement providing that Parent shall have the
right thereafter to receive upon exercise of this Option solely the kind and
amount of shares of stock and other securities, property, cash, or any
combination thereof receivable upon such consolidation, merger, sale, lease, or
conveyance by a holder of the number of shares of Company Common Stock for
which this Option might have been exercised immediately prior to such
consolidation, merger, sale, lease, or conveyance and (ii) make effective
provision in its certificate of incorporation or otherwise, if necessary, to
effect such agreement. Such agreement shall provide for adjustments which shall
be as nearly equivalent as practicable to the adjustments in Section 6.
(b) In case of any reclassification or change of the shares of Company
Common Stock issuable upon exercise of this Option (other than as a result of a
subdivision or combination, but including any change in the shares into two or
more classes or series of shares), or in case of any consolidation or merger of
another corporation into the Company in which the Company is the continuing
corporation and in which there is a reclassification or change (including a
change to the right to receive cash or other property) of the shares of Company
Common Stock (other than as a result of a subdivision or combination, but
including any change in the shares into two or more classes or series of
shares), Parent shall have the right thereafter to receive upon exercise of
this Option solely the kind and amount of shares of stock and other securities,
property, cash, or any combination thereof receivable upon such
reclassification, change, consolidation, or merger by a holder of the number of
shares of Company Common Stock for which this Option might have been exercised
immediately prior to such reclassification, change, consolidation, or merger.
Thereafter, appropriate provision shall be made for adjustments which shall be
as nearly equivalent as practicable to the adjustments in Section 6.
(c) The above provisions of this Section 7 shall similarly apply to
successive reclassifications and changes of shares of Company Common Stock and
to successive consolidations, mergers, sales, leases, or conveyances.
8. Notice of Certain Events. In case at any time the Company shall propose
(a) to pay any dividend or make any distribution on shares of Company
Common Stock in shares of Company Common Stock or make any other distribution
(other than regularly scheduled cash dividends which are not in a greater
amount per share than the most recent such cash dividend) to all holders of
Company Common Stock; or
(b) to issue any rights, warrants, or other securities to all holders of
Company Common Stock entitling them to purchase any additional shares of
Company Common Stock or any other rights, warrants, or other securities; or
(c) to effect any reclassification or change of outstanding shares of
Company Common Stock, or any consolidation or merger described in Section 7; or
(d) to effect any liquidation, dissolution, or winding-up of the
Company; or
(e) to take any other action which would cause an adjustment to the
Exercise Price;
then, and in any one or more of such cases, the Company shall give written
notice thereof, by registered mail, postage prepaid, to Parent at Parent's
address as set forth in the Merger Agreement, mailed at least 15 days prior to
the earliest of (i) the date as of which the holders of record of shares of
Company Common Stock to be entitled to receive any such dividend, distribution,
rights, warrants, or other securities are to be determined, (ii) the date on
which any such reclassification, change of outstanding shares of Company Common
Stock, consolidation, merger, liquidation, dissolution, or winding-up is
expected to become effective, and the date as of which it is expected that
holders of record of shares of Company Common Stock shall be entitled to
exchange their shares for securities
A-2-5
<PAGE>
or other property, if any, deliverable upon such reclassification, change of
outstanding shares, consolidation, merger, sale, lease, conveyance of property,
liquidation, dissolution, or winding-up, or (iii) the date of such action which
would require an adjustment to the Exercise Price.
9. Registration. Promptly after this Option shall become exercisable, the
Company shall use its best efforts to obtain all requisite consents to the
grant to Parent of the registration rights set forth in this Section 9 and
Section 10. Unless and until such consents are obtained, this Section 9 and
Section 10 shall not become effective.
(a) If, at any time during the Exercise Period or during the five-year
period following the exercise of this Option, the Company shall file a
registration statement (other than on Form S-4, Form S-8, or any successor
forms) with the Securities and Exchange Commission (the "Commission") covering,
in whole or in part, securities of the Company held by any person or entity
other than the Company, the Company shall give Parent at least 30 days prior
written notice of the filing of such registration statement. If requested by
Parent in writing within 20 days after receipt of any such notice, the Company
shall, at the Company's sole expense (other than the fees and disbursements of
counsel for Parent and the underwriting discounts, if any, payable in respect
of the Registrable Securities (as hereinafter defined) sold by Parent), use its
best efforts to register or qualify all or, at Parent's option, any portion of
the Registrable Securities concurrently with the registration of such other
securities, all to the extent requisite to permit the public offering and sale
of the Registrable Securities through the facilities of all appropriate
securities exchanges and the over-the-counter market, and will use its best
efforts through its officers, directors, auditors, and counsel to cause such
registration statement to become effective as promptly as practicable, subject
to any rights under that certain Amended and Restated Investor Rights
Agreement, dated September 9, 1997, as amended, between the Company and the
investors named therein. As used herein, "Registrable Securities" shall mean
this Option and the Shares which, in each case, have not been previously sold
pursuant to a registration statement or Rule 144 promulgated under the
Securities Act and which may not be sold by Parent pursuant to such Rule 144.
(b) In the event of a registration pursuant to the provisions of this
Section 9, the Company shall use its best efforts to cause the Registrable
Securities so registered to be registered or qualified for sale under the
securities or blue sky laws of such jurisdictions as Parent may reasonably
request; provided, however, that the Company shall not be required to qualify
to do business in any state by reason of this Section 9(b) in which it is not
otherwise required to qualify to do business.
(c) The Company shall keep effective any registration or qualification
contemplated by this Section 9 and shall from time to time amend or supplement
each applicable registration statement, preliminary prospectus, final
prospectus, application, document, and communication for such period of time as
shall be required to permit Parent to complete the offer and sale of the
Registrable Securities covered thereby on the terms described therein.
(d) In the event of a registration pursuant to the provisions of this
Section 9, the Company shall furnish to Parent such number of copies of the
registration statement and of each amendment and supplement thereto (in each
case, including all exhibits), such reasonable number of copies of each
prospectus contained in such registration statement and each supplement or
amendment thereto (including each preliminary prospectus), all of which shall
conform to the requirements of the Securities Act and the rules and regulations
thereunder, and such other documents, as Parent may reasonably request to
facilitate the disposition of the Registrable Securities included in such
registration.
(e) In the event of a registration pursuant to the provision of this
Section 9, Parent shall enter into a cross-indemnity agreement and a
contribution agreement, each in customary form, with each underwriter, if any,
and, if requested, enter into an underwriting agreement containing conventional
representations, warranties, allocation of expenses, and customary closing
conditions, including, but not limited to, opinions of counsel, with any
underwriter who acquires any Registrable Securities.
A-2-6
<PAGE>
10. Indemnification.
(a) Subject to the conditions set forth below, the Company agrees to
indemnify and hold harmless Parent, its officers, directors, partners,
employees, agents, and counsel, and each person, if any, who controls any such
person within the meaning of Section 15 of the Securities Act or Section 20(a)
of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), from
and against any and all loss, liability, charge, claim, damage, and expense
whatsoever (which shall include, for all purposes of this Section 10, but not
limited to, reasonable attorneys' fees and any and all reasonable expense
whatsoever incurred in investigating, preparing, or defending against any
litigation, commenced or threatened, or any claim whatsoever, and any and all
amounts paid in settlement of any claim or litigation), as and when incurred,
arising out of, based upon, or in connection with any untrue statement or
alleged untrue statement of a material fact contained (A) in any registration
statement, preliminary prospectus, or final prospectus (as from time to time
amended and supplemented), or any amendment or supplement thereto, relating to
the sale of any of the Registrable Securities, or (B) in any application or
other document or communication (in this Section 10 collectively called an
"application") executed by or on behalf of the Company or based upon written
information furnished by or on behalf of the Company filed in any jurisdiction
in order to register or qualify any of the Registrable Securities under the
securities or blue sky laws thereof or filed with the Commission or any
securities exchange; or any omission or alleged omission to state a material
fact required to be stated therein or necessary to make the statements therein
not misleading, unless such statement or omission was made in reliance upon and
in conformity with written information furnished to the Company with respect to
Parent by or on behalf of Parent expressly for inclusion in any registration
statement, preliminary prospectus, or final prospectus, or any amendment or
supplement thereto, or in any application, as the case may be. The foregoing
agreement to indemnify shall be in addition to any liability the Company may
otherwise have, including liabilities arising under this Option.
If any action is brought against Parent or any of its officers, directors,
partners, employees, agents, or counsel, or any controlling persons of such
person (an "indemnified party") in respect of which indemnity may be sought
against the Company pursuant to the foregoing paragraph, such indemnified party
or parties shall promptly notify the Company in writing of the institution of
such action (but the failure so to notify shall not relieve the Company from
any liability pursuant to this Section 10(a) or otherwise, except to the extent
it may have been prejudiced in any material respect by such failure), and the
Company shall promptly assume the defense of such action, including the
employment of counsel reasonably satisfactory to such indemnified party or
parties and payment of expenses. Such indemnified party or parties shall have
the right to employ its or their own counsel in any such case, but the fees and
expenses of such counsel shall be at the expense of such indemnified party or
parties unless the employment of such counsel shall have been authorized in
writing by the Company in connection with the defense of such action or the
Company shall not have promptly employed counsel reasonably satisfactory to
such indemnified party or parties to have charge of the defense of such action
or such indemnified party or parties shall have reasonably concluded that there
may be one or more legal defenses available to it or them or to other
indemnified parties which are different from or additional to those available
to the Company and such indemnified party or parties shall have reasonably
concluded that the availability of such defenses necessitates such indemnified
party or parties employing its or their own counsel, in any of which events
such fees and expenses shall be borne by the Company and the Company shall not
have the right to direct the defense of such action on behalf of the
indemnified party or parties; provided, however, that the Company shall in no
event be obligated to pay for more than one such counsel. Anything in this
Section 10 to the contrary notwithstanding, the Company shall not be liable for
any settlement of any such claim or action effected without its written
consent, which consent shall not be unreasonably withheld. The Company shall
not, without the prior written consent of each indemnified party that is not
released as described in this sentence, settle or compromise any action, or
permit a default or consent to the entry of judgment in or otherwise seek to
terminate any pending or threatened action, in respect of which indemnity may
be sought hereunder (whether or not any indemnified party is a party thereto),
unless such settlement, compromise, consent or termination includes an
unconditional release of each
A-2-7
<PAGE>
indemnified party from all liability in respect of such action. The Company
agrees promptly to notify Parent of the commencement of any litigation or
proceedings against the Company or any of its officers or directors in
connection with the sale of any Registrable Securities or any preliminary
prospectus, prospectus, registration statement, or amendment or supplement
thereto, or any application relating to any sale of any Registrable Securities.
With respect to any untrue statement or alleged untrue statement made in,
or omission or alleged omission from, any preliminary prospectus or final
prospectus, the indemnity agreement contained in this Section 10(a) with
respect to such preliminary prospectus or final prospectus, to the extent it is
based on the claim of a person who purchased Registrable Securities from
Parent, shall not inure to the benefit of Parent (or to the benefit of any of
its officers, directors, partners, employees, agents, counsel, or any person
controlling Parent) if the final prospectus (or the final prospectus as amended
or supplemented if the Company shall have filed with the Commission any
amendment or supplement thereto) which shall have been furnished to Parent
prior to the time written confirmation of such sale was sent to such person
does not contain such statement, alleged statement, omission, or alleged
omission and a copy of the final prospectus (or the final prospectus as amended
or supplemented if the Company shall have filed with the Commission any
amendment or supplement thereto) shall not have been sent or given to such
person and such person shall not otherwise have received a copy thereof at or
prior to the written confirmation of such sale to such person.
(b) Parent agrees to indemnify and hold harmless the Company, each
director of the Company, each officer of the Company who shall have signed any
registration statement covering Registrable Securities held by Parent, each
other person, if any, who controls the Company within the meaning of Section 15
of the Securities Act or Section 20(a) of the Exchange Act, and its or their
respective counsel, to the same extent as the foregoing indemnity from the
Company to Parent in Section 10(a), but only with respect to statements or
omissions, if any, made in any registration statement, preliminary prospectus,
or final prospectus (as from time to time amended and supplemented), or any
amendment or supplement thereto, or in any application, in reliance upon and in
conformity with written information furnished to the Company with respect to
Parent by or on behalf of Parent expressly for inclusion in any such
registration statement, preliminary prospectus, or final prospectus, or any
amendment or supplement thereto, or in any application, as the case may be. If
any action shall be brought against the Company or any other person so
indemnified based on any such registration statement, preliminary prospectus,
or final prospectus, or any amendment or supplement thereto, or in any
application, and in respect of which indemnity may be sought against Parent
pursuant to this Section 10(b), Parent shall have the rights and duties given
to the Company, and the Company and each other person so indemnified shall have
the rights and duties given to the indemnified parties, by the provisions of
Section 10(a).
(c) To provide for just and equitable contribution, if (i) an
indemnified party makes a claim for indemnification pursuant to Section 10(a)
or 10(b) (subject to the limitations thereof) but it is found in a final
judicial determination, not subject to further appeal, that such
indemnification may not be enforced in such case, even though this Agreement
expressly provides for indemnification in such case, or (ii) any indemnified or
indemnifying party seeks contribution under the Securities Act, the Exchange
Act or otherwise, then the Company (including for this purpose any contribution
made by or on behalf of any director of the Company, any officer of the Company
who signed any such registration statement, any controlling person of the
Company, and its or their respective counsel), as one entity, and Parent
(including for this purpose any contribution by or on behalf of an indemnified
party), as a second entity, shall contribute to the losses, liabilities,
claims, damages, and expenses whatsoever to which any of them may be subject,
on the basis of relevant equitable considerations such as the relative fault of
the Company and Parent in connection with the facts which resulted in such
losses, liabilities, claims, damages, and expenses. The relative fault, in the
case of an untrue statement, alleged untrue statement, omission, or alleged
omission, shall be determined by, among other things, whether such statement,
alleged statement, omission, or alleged omission relates to information
supplied by the Company or by Parent, and the parties' relative intent,
knowledge, access to information, and opportunity to correct or prevent such
statement, alleged statement, omission, or
A-2-8
<PAGE>
alleged omission. The Company and Parent agree that it would be unjust and
inequitable if the respective obligations of the Company and Parent for
contribution were determined by pro rata or per capita allocation of the
aggregate losses, liabilities, claims, damages, and expenses (even if Parent
and the other indemnified parties were treated as one entity for such purpose)
or by any other method of allocation that does not reflect the equitable
considerations referred to in this Section 10(c). In no case shall Parent be
responsible for a portion of the contribution obligation in excess of its pro
rata share based on the number of shares of Company Common Stock owned (or
which would be owned upon exercise of all Registrable Securities) by it and
included in such registration as compared to the number of shares of Company
Common Stock owned (or which would be owned upon exercise of all Registrable
Securities) by all persons and included in such registration. No person guilty
of a fraudulent misrepresentation (within the meaning of Section 11(f) of the
Securities Act) shall be entitled to contribution from any person who is not
guilty of such fraudulent misrepresentation. For purposes of this Section
10(c), each person, if any, who controls Parent within the meaning of Section
15 of the Securities Act or Section 20(a) of the Exchange Act and each officer,
director, partner, employee, agent, and counsel of Parent or control person
shall have the same rights to contribution as Parent or control person and each
person, if any, who controls the Company within the meaning of Section 15 of
the Securities Act or Section 20(a) of the Exchange Act, each officer of the
Company who shall have signed any such registration statement, each director of
the Company, and its or their respective counsel shall have the same rights to
contribution as the Company, subject in each case to the provision of this
Section 10(c). Anything in this Section 10(c) to the contrary notwithstanding,
no party shall be liable for contribution with respect to the settlement of any
claim or action effected without its written consent, which consent shall not
be unreasonably withheld. This Section 10(c) is intended to supersede any right
to contribution under the Securities Act, the Exchange Act or otherwise.
11. Termination; Extension. This Agreement shall terminate upon the
Effective Time (as that term is defined in the Merger Agreement) or upon
termination of the Merger Agreement other than as described in Section 2
hereof. Notwithstanding anything to the contrary in this Agreement, in the
event that Parent is at any time prohibited from exercising the Option as a
result of any actions by the Federal Trade Commission or the Department of
Justice in connection with the Hart-Scott-Rodino Antitrust Improvements Act,
then this Agreement shall not terminate until the earlier of (i) 30 days from
the date such prohibition is removed by the Federal Trade Commission or the
Department of Justice, or (ii) six months after the date Parent's right to
exercise the Option would otherwise have terminated.
12. Miscellaneous
(a) No Waiver. The failure of any party to exercise any right, power or
remedy under this Agreement or otherwise available in respect of this Agreement
at law or in equity, or to insist upon compliance by any other party with that
party's obligations under this Agreement, shall not constitute a waiver of any
right to exercise any such or other right, power or remedy or to demand such
compliance.
(b) Notices. All notices and other communications hereunder shall be in
writing and shall be delivered personally or by next-day courier or telecopied
with confirmation of receipt, to the parties at the addresses specified below
(or at such other address for a party as shall be specified by like notice;
provided that notices of a change of address shall be effective only upon
receipt thereof). Any such notice shall be effective upon receipt, if
personally delivered or telecopied, or one day after delivery to a courier for
next-day delivery.
(i) If to Parent, to:
Celgene Corporation
7 Powder Horn Drive
Warren, NJ 07059
Fax: (732) 805-3931
with a copy to:
A-2-9
<PAGE>
Proskauer Rose LLP
1585 Broadway
New York, New York 10036
Attention: Robert A. Cantone, Esq.
(ii) if to the Company, to:
Signal Pharmaceuticals, Inc.
5555 Oberlin Drive
San Diego, CA 92121
Fax:
Attention:
with a copy to:
Cooley Godward LLP
4365 Executive Drive, Suite 1100
San Diego, CA 92121
Fax: (858) 453-3555
Attention: L. Kay Chandler, Esq.
(c) Descriptive Headings; Interpretation. The headings contained in this
Agreement are for reference purposes only and shall not affect in way the
meaning or interpretation of this Agreement. References in this Agreement to
Sections and Schedules mean a Section or Schedule of this Agreement unless
otherwise indicated. The terms "beneficially own" and "beneficial owner" with
respect to any securities shall have the same meaning as in, and shall be
determined in accordance with, Rule 13d-3 under the Securities Exchange Act of
1934.
(d) Entire Agreement; Assignment. This Agreement (including the schedule
and other documents and instruments referred to herein), together with the
Merger Agreement, constitute the entire agreement and supersede all other prior
agreements and understandings, both written and oral, among the parties or any
of them, with respect to the subject matter hereof. Except as otherwise
expressly provided herein, this Agreement is not intended to confer upon any
person not a party hereto any rights or remedies hereunder. Except as otherwise
expressly provided herein, this Agreement shall not be assigned by operation of
law or otherwise; provided that Parent may assign its rights and obligations
hereunder to a direct or indirect subsidiary of Parent, but no such assignment
shall relieve Parent or Sub, as the case may be, of its obligations hereunder.
(e) Injunctive Relief; Remedies Cumulative.
(i) Parent, on the one hand, and the Company, on the other hand,
acknowledge that the other party will be irreparably harmed and that there will
be no adequate remedy at law for a violation of any of the covenants or
agreements of such party that are contained in this Agreement. It is
accordingly agreed that, in addition to any other remedies that may be
available to the non-breaching party upon the breach by any other party of such
covenants and agreements, the non-breaching party shall have the right to
obtain injunctive relief to restrain any breach or threatened breach of such
covenants or agreements or otherwise to obtain specific performance of any of
such covenants or agreements.
(ii) No remedy conferred upon or reserved to any party herein is
intended to be exclusive of any other remedy and every remedy shall be
cumulative and in addition to every other remedy herein or now or hereafter
existing at law, in equity or by statute.
(f) Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of California without giving effect to
the provisions thereof relating to conflicts of laws.
A-2-10
<PAGE>
(g) Effect of Partial Invalidity. Whenever possible, each provision of
this Agreement shall be construed in such a manner as to be effective and valid
under applicable law. If any provision of this Agreement or the application
thereof to any party or circumstance shall be prohibited by or invalid under
applicable law, such provisions shall be ineffective to the extent of such
prohibition without invalidating the remainder of such provision or any other
provisions of this Agreement or the application of such provision to the other
party or other circumstances.
(h) Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed to be an original but all of which
shall constitute one and the same agreement.
IN WITNESS WHEREOF, this Agreement has been executed by the parties as of
the date first above written.
SIGNAL PHARMACEUTICALS, INC.
By:-------------------------------------
Authorized Officer
CELGENE CORPORATION
By:-------------------------------------
Authorized Officer
A-2-11
<PAGE>
EXHIBIT B-1
FORM OF TAX REPRESENTATION LETTER TO BE DELIVERED BY PARENT AND MERGER SUB
Cooley Godward, LLP Proskauer, Rose LLP
4365 Executive Drive, Ste. 1100 1585 Broadway
San Diego, CA 92121-2128 New York, NY 10036
RE: MERGER PURSUANT TO THE AGREEMENT AND PLAN OF MERGER, INCLUDING
EXHIBITS AND SCHEDULES THERETO (THE "MERGER AGREEMENT") DATED AS
OF JUNE 29, 2000, BY AND AMONG CELGENE CORPORATION, A DELAWARE
CORPORATION ("PARENT"); CELGENE ACQUISITION CORP., A CALIFORNIA
CORPORATION ("MERGER SUB"); AND SIGNAL PHARMACEUTICALS, INC., A
CALIFORNIA CORPORATION (THE "COMPANY")
Ladies and Gentlemen:
This letter is supplied to you in connection with your rendering of
opinions regarding certain federal income tax consequences of the above
captioned merger (the "Merger"). Unless otherwise indicated, capitalized terms
not defined herein have the meanings set forth in the Merger Agreement.
After consulting with their counsel and auditors regarding the meaning of
and factual support for the following representations, the undersigned hereby
certify and represent that the following facts are now true and will continue
to be true through the Effective Time and thereafter where relevant:
1. Pursuant to the Merger, Merger Sub will merge with and into the
Company, and the Company will acquire all of the assets and liabilities of
Merger Sub. At least ninety percent (90%) of the fair market value of the net
assets and at least seventy percent (70%) of the fair market value of the gross
assets held by the Company immediately prior to the Merger and at least ninety
percent (90%) of the fair market value of the net assets and at least seventy
percent (70%) of the fair market value of the gross assets held by Merger Sub
immediately prior to the Merger will be held by the Company after the Merger.
For the purpose of determining the percentage of the Company's and Merger Sub's
net and gross assets held by the Company immediately following the Merger, the
following assets will be treated as property held by the Company or Merger Sub,
as the case may be, immediately prior to the Merger but not by the Company
subsequent to the Merger: (i) assets disposed of by the Company or Merger Sub
(other than assets transferred by Merger Sub to the Company in the Merger)
prior to or subsequent to the Merger and in contemplation thereof (including
without limitation any asset disposed of by the Company or Merger Sub, other
than in the ordinary course of business, pursuant to a plan or intent existing
during the period ending at the Effective Time and beginning with the
commencement of negotiations (whether formal or informal) with the Company
regarding the Merger (the "Pre-Merger Period")), (ii) assets used by the
Company or Merger Sub to pay expenses or liabilities in connection with the
Merger, (iii) assets used by the Company or Merger Sub to make payments to
Company stockholders perfecting appraisal rights or in lieu of fractional
shares of Parent Common Stock and (iv) assets used by the Company or Merger Sub
to make distribution, redemption or other payments in respect of Company stock
or rights to acquire such stock (including payments treated as such for tax
purposes) that are made in contemplation of the Merger or related thereto;
2. The Merger is being undertaken for business reasons and not for the
purpose of tax avoidance;
3. Prior to the Merger, Parent will be in "Control" of Merger Sub as
defined in Section 368(c) of the Internal Revenue Code of 1986, as amended (the
"Code"). As used herein, "Control" of a corporation shall consist of direct
ownership of stock possessing at least eighty percent (80%) of the total
combined voting power of all classes of stock entitled to vote and at lease
eighty percent (80%) of the total number of shares of each other class of stock
of the corporation. For purposes of
<PAGE>
determining Control, a person shall not be considered to own voting stock if
rights to vote such stock (or to restrict or otherwise control the voting of
such stock) are held by a third party (including a voting trust) other than an
agent of such person;
4. Merger Sub has been formed solely to consummate the Merger and, prior
to the Effective Time, Merger Sub has not conducted and will not conduct any
business activity or other operation of any kind (except for the issuance of
its stock to Parent;
5. In the Merger, shares of Company stock representing Control of the
Company will be exchanged solely for voting stock of Parent;
6. Parent has no plan or intention to cause the Company to issue
additional shares of stock after the Merger or take any other action that would
result in Parent losing Control of the Company;
7. Except for transfers described in both Section 368(a)(2)(C) of the
Code, and Treasury Regulation Section 1.368-2(k), Parent has no current plan or
intention to (i) liquidate the Company; (ii) merger the Company with or into
another corporation (including Parent or its affiliates); (iii) sell,
distribute or otherwise dispose of Company stock; or (iv) sell or otherwise
dispose of or cause the Company to sell or otherwise dispose of, any of the
Company's assets (or any assets acquired from Merger Sub) except for
dispositions made in the ordinary course of business or payment of expenses
incurred by the Company pursuant to the Merger;
8. No liabilities of any person will be assumed by Parent or the Company
as a part of the Merger;
9. Parent will cause the Company to continue its historic business or use
a significant portion of its historic business assets in a business following
the Merger;
10. Neither Parent nor any current or former affiliate of Parent owns, or
has owned during the past five (5) years, directly or indirectly, any shares of
Company stock, or the right to acquire or vote any such shares (except such
rights as are granted in the Merger Agreement);
11. Neither Parent nor Merger Sub is an investment company within the
meaning of Sections 368(a)(2)(F)(iii) and (iv) of the Code;
12. Parent has no plan or intention to reacquire any of its stock issued
in the Merger. Except for repurchases or redemptions of Parent Common Stock
that: (i) are consistent with past practices and pursuant to pre-existing,
seasoned and systematic purchase programs that were not created or modified in
connection with the Merger; or (ii) are made in connection with the termination
of employees in the ordinary course of business, neither the Company nor Parent
(nor any agent of Parent) nor any "related person" of the Company or Parent (as
such term is defined by Treasury Regulations Section 1.368-1(e)3)) will
repurchase or redeem any of the Parent Common Stock to be issued to the
stockholders of the Company in connection with the Merger;
13. Except with respect to payments of cash to stockholders of the Company
perfecting appraisal rights or in lieu of fractional shares of Parent Common
Stock, one hundred percent (100%) of the stock of the Company outstanding
immediately prior to the Merger will be exchanged solely for Parent Common;
14. The total fair market value of all consideration other than Parent
Common Stock received by stockholders of the Company in the Merger (including,
without limitation, cash paid to stockholders of the Company perfecting
appraisal rights or in lieu of fractional shares of Parent Common Stock) will
be less than ten percent (10%) of the aggregate fair market value of stock of
the Company outstanding immediately prior to the Merger;
15. Neither Parent nor Merger Sub is under the jurisdiction of court in a
Title 11 or similar case within the meaning of Section 368(a)3(A) of the Code;
16. The payment of cash in lieu of fractional shares of Parent Common
Stock is solely for the purpose of avoiding the expense and inconvenience to
Parent of issuing fractional shares and does not represent separately
bargained-for consideration. The total cash consideration that will be paid in
B-1-2
<PAGE>
the Merger to Company stockholders in lieu of fractional shares of Parent
Common Stock will not exceed one percent (1%) of the total consideration that
will be issued in the Merger to Company stockholders in exchange for their
shares of Company stock. The fractional share interests of each Company
stockholder will be aggregated and no Company stockholder will receive cash in
an amount greater than the value of one full share of Parent Common Stock;
17. At the Effective Time, the fair market value of the Parent Common
Stock received by each Company stockholder will be approximately equal to the
fair market value of the Company stock surrendered in exchange thereof, and the
aggregate consideration received by Company stockholders, as described in
Section of the Merger Agreement, in exchange for their Company stock will be
approximately equal to the fair market value of all of the outstanding shares
of Company stock immediately prior to the Merger;
18. Parent, Merger Sub, the Company and the stockholders of the Company
will each pay separately its or their own expenses in connection with the
Merger (other than expenses directly related to the transaction within the
guidelines set forth in Revenue Ruling 73-59, 1973-1 C.B. 187);
19. There is no intercorporate indebtedness existing between Parent and
the Company or between Merger Sub and the Company;
20. Parent will assume no liabilities of the Company or any Company
stockholder in connection with the Merger;
21. The terms of the Merger Agreement and all other agreements entered
into in connection therewith are the product of arm's length negotiations;
22. None of the payments received by any stockholder-employees or
stockholder-independent contractors of the Company that are designated as
compensation are actually separate consideration for, or allocable to, any of
their shares of Company stock; none of the shares of Parent Common Stock
received by any stockholder-employees or stockholder-independent contractors of
the Company in exchange for shares of Company stock are actually separate
consideration for, or allocable to, any employment agreement, consulting
agreement, covenant not to compete or release; and the compensation paid to any
stockholder-employees or stockholder-independent contractors of the Company
will be for services actually rendered and will be commensurate with amounts
paid to third parties bargaining at arm's length for similar services;
23. With respect to each instance, if any, in which shares of Company
stock have been purchased by a stockholder of Parent (a "Stockholder") during
the Pre-Merger Period (a "Stock Purchase"): (i) the Stock Purchase was not made
by such Stockholder as a representative, or for the benefit, of Parent; (ii)
the purchase price paid by such Stockholder pursuant to the Stock Purchase was
not and will not be advanced, and was not and will not be reimbursed, either
directly or indirectly, by Parent; (iii) at no times was such Stockholder or
any other party required or obligated to surrender to Parent Company stock
acquired in the Stock Purchase, and neither such Stockholder nor any other
party will be required to surrender to Parent the Parent Common Stock for which
such shares of Company stock will be exchanged in the Merger; and (iv) the
Stock Purchase was not a formal or informal condition to consummation of the
Merger;
24. Following the Merger, Parent, Merger Sub and the Company will comply
with the record-keeping and information filing requirements of Treasury
Regulations Section 1.368-3;
25. The Merger will be consummated in compliance with the material terms
of the Merger Agreement, none of the material terms and conditions therein have
been waived or modified, and Parent has no plan or intention to waive or modify
any such material terms and conditions;
26. Each of the representations made by Parent and Merger Sub in the
Merger Agreement and any other documents associated therewith is true and
accurate; and
27. The undersigned officer of each of Parent and Merger Sub is authorized
to make all of the certifications and representations on behalf of Parent and
Merger Sub, respectively, set forth herein.
B-1-3
<PAGE>
The undersigned recognize that (i) your opinions will be based on, among other
things, the accuracy of the representations set forth herein and on the
statements contained in the Merger Agreement and documents related thereto,
(ii) your opinions will be subject to certain limitations and qualifications
including that they may not be relied upon if any such representations are not
accurate in all material respects, or if any of the covenants or obligations
set forth in the Merger Agreement are not satisfied in all material respects
and (iii) your opinions will not address any tax consequences of the Merger or
any action taken in connection therewith except as expressly set forth in such
opinions.
Parent and Merger Sub undertake to inform you immediately should any of
the foregoing statements or representations become untrue, incorrect or
incomplete in any respect on or prior to the Effective Time.
Very truly yours,
CELGENE CORPORATION, a Delaware
Corporation
By: ----------------------------------
Printed
Name: ------------------------
Title: --------------------------------
CELGENE ACQUISITION CORP., a
California
Corporation
By: ----------------------------------
Printed
Name: ------------------------
Title: --------------------------------
B-1-4
<PAGE>
EXHIBIT B-2
FORM OF TAX REPRESENTATION LETTER TO BE DELIVERED BY COMPANY
<TABLE>
<S> <C>
Cooley Godward LLP Proskauer, Rose LLP
4365 Executive Drive, Ste. 1100 1585 Broadway
San Diego, CA 92121-2128 New York, NY 10036
</TABLE>
RE: MERGER PURSUANT TO THE AGREEMENT AND PLAN OF MERGER, INCLUDING
EXHIBITS AND SCHEDULES THERETO (THE "MERGER AGREEMENT") DATED AS
OF JUNE 29, 2000, BY AND AMONG CELGENE CORPORATION, A DELAWARE
CORPORATION ("PARENT"); CELGENE ACQUISITION CORP., A CALIFORNIA
CORPORATION ("MERGER SUB"); AND SIGNAL PHARMACEUTICALS, INC., A
CALIFORNIA CORPORATION (THE "COMPANY").
Ladies and Gentlemen:
This letter is supplied to you in connection with your rendering of
opinions regarding certain federal income tax consequences of the above
captioned merger (the "Merger"). Unless otherwise indicated, capitalized terms
not defined herein have the meanings set forth in the Merger Agreement.
After consulting with its counsel and auditors regarding the meaning of
and factual support for the following representations, the undersigned hereby
certifies and represents that the following facts are now true and will
continue to be true through the Effective Time and thereafter where relevant:
1. Pursuant to the Merger, Merger Sub will merge with and into the
Company, and the Company will acquire all of the assets and liabilities of
Merger Sub. At least ninety percent (90%) of the fair market value of the net
assets and at least seventy percent (70%) of the fair market value of the gross
assets held by the Company immediately prior to the Merger, and at least ninety
percent (90%) of the fair market value of the net assets and at least seventy
percent (70%) of the fair market value of the gross assets held by Merger Sub
immediately prior to the Merger will be held by the Company after the Merger.
For the purpose of determining the percentage of net and gross assets held by
the Company immediately following the Merger, the following assets will be
treated as property held by the Company or Merger Sub, as the case may be,
immediately prior to the Merger but not by the Company subsequent to the
Merger; (i) assets disposed of by the Company or Merger Sub (other than assets
transferred by Merger Sub to the Company in the Merger) prior to or subsequent
to the Merger and in contemplation thereof (including, without limitation, any
asset disposed of by the Company or Merger Sub, other than in the ordinary
course of business, pursuant to a plan or intent existing during the period
ending at the Effective Time and beginning with the commencement of
negotiations (whether formal or informal) with Parent regarding the Merger (the
"Pre-Merger Period")), (ii) assets used by the Company or Merger Sub to pay
expenses or liabilities incurred in connection with the Merger, (iii) assets
used by the Company or Merger Sub to make payments to Company stockholders
perfecting appraisal rights or in lieu of fractional shares of Parent Common
Stock, and (iv) assets used by the Company or Merger Sub to make distribution,
redemption or other payments in respect of Company stock or rights to acquire
such stock (including payments treated as such for tax purposes) that are made
in contemplation of the Merger or related thereto;
2. The Company has made no transfer of any of its assets (including any
distribution of assets with respect to, or in redemption of, stock) in
contemplation of the Merger or during the Pre-Merger Period other than (i) in
the ordinary course of business and (ii) payments for expenses incurred in
connection with the Merger;
3. The Merger is being undertaken for business reasons and not for the
purpose of tax avoidance;
4. At the Effective Time, the Company will have no stock or other equity
interests outstanding other than those set forth in Section ___ of the Merger
Agreement and will not have any warrants, options, convertible securities or
any other type of right outstanding pursuant to which any person could
<PAGE>
acquire any shares of Company stock or any other equity interest in the Company
that, if exercised or converted, could affect Parent's acquisition or retention
of "Control" of the Company (as defined in Section 368(c) of the Internal
Revenue Code of 1986, as amended (the "Code")). As used herein, "Control" of a
corporation shall consist of direct ownership of stock possessing at least
eighty percent (80%) of the total number of shares of each other class of stock
of the corporation. For purposes of determining Control, a person shall not be
considered to own voting stock if rights to vote such stock (or to restrict or
otherwise control the voting of such stock) are held by a third party
(including a voting trust) other than an agent of such person;
5. In the Merger, shares of Company stock representing Control of the
Company will be exchanged solely for voting stock of Parent. For purposes of
this certificate, shares of Company stock exchanged in the Merger for cash and
other property (including, without limitation, cash paid to Company
stockholders perfecting appraisal rights or in lieu of fractional shares of
Parent Common Stock) will be treated as shares of Company stock outstanding on
the date of the Merger but not exchanged for voting stock of Parent;
6. The liabilities of the Company have been incurred by the Company in the
ordinary course of its business;
7. The Company does not and will not at the Effective Time have any
liability (i) to any Company stockholder incurred in exchange for cash or other
asset transferred to the Company, or (ii) to Parent or Merger Sub;
8. No Company stockholder has guaranteed any Company indebtedness that is
currently outstanding or will be outstanding at the Effective Time;
9. The fair market value of the Company's assets will, at the Effective
Time, exceed the aggregate liabilities of the Company plus the amount of
liabilities, if any, to which such assets are subject;
10. Other than shares of Company stock or Company Options issued as
compensation to present or former service providers (including, without
limitation, employees and directors) of the Company in the ordinary course of
business, no issuances of Company stock or rights to acquire Company stock have
occurred or will occur during the Pre-Merger Period other than pursuant to
options, warrants or agreements outstanding prior to the Pre-Merger Period or
as otherwise specifically identified in the Merger Agreement;
11. Cash or other property paid to employees of the Company during the
Pre-Merger Period has been or will be in the ordinary course of business or
pursuant to agreements entered into prior to the Pre-Merger Period;
12. The Company is not and will not be at the Effective Time an
"investment company" within the meaning of Section 368(a)(2)(F)(iii) and (iv)
of the Code;
13. The Company is not under the jurisdiction of a court in a Title 11 or
similar case within the meaning of Section 368(a)(3)(A) of the Code;
14. The Company (i) has not redeemed and will not redeem any of its stock
prior to and in connection with the Merger, and (ii) has not made and will not
make any extraordinary distributions (within the meaning of Section
1.368-1T(e)(1) of the Treasury Regulations) with respect to its stock prior to
and in connection with the Merger. For the purposes of this representation,
extraordinary distributions will not include periodic dividends that are
consistent with the Company's historic dividend practices;
15. No person related to the Company (within the meaning of Section
1.368-1(e)(3) of the Treasury Regulations, without regard to Section
1.368-1(e)(3)(i)(A)) has acquired or will acquire any stock of the Company
prior to and in connection with the Merger;
16. Except with respect to payments of cash to Company stockholders
perfecting appraisal rights or in lieu of fractional shares of Parent Common
Stock, one hundred percent (100%) of the Company stock outstanding immediately
prior to the Merger will be exchanged solely for Parent voting stock. The
B-2-2
<PAGE>
total market value of all consideration other than shares of Parent Common
Stock that will be paid for shares of Company stock exchanged pursuant to the
Merger Agreement will be less than ten percent (10%) of the aggregate fair
market value of the shares of Company stock outstanding immediately prior to
the Merger;
17. At the Effective Time, the fair market value of the Parent Common
Stock received by each Company stockholder will be approximately equal to the
fair market value of the Company stock surrendered in exchange therefor, and
the aggregate consideration received by the Company stockholders, as described
in Section __ of the Merger Agreement, in exchange for their Company stock will
be approximately equal to the fair market of all of the outstanding shares of
Company stock immediately prior to the Merger;
18. Parent, Merger Sub, the Company and the stockholders of the Company
will each pay separately its or their own expenses in connection with the
Merger (other than expenses directly related to the transaction within the
guidelines set forth in Revenue Ruling 73-54, 1973-1, C.B. 187):
19. The terms of the Merger Agreement and all other agreements entered
into in conenction therewith are the product of arm's-length negotiations;
20. None of the payments received by any stockholder-employees or
stockholder-independent contractors of the Company that are designated as
compensation are actually separate consideration for, or allocable to, any of
their shares of Company stock; none of the shares of Parent Common Stock
received by any stockholder-employees or stockholder-independent contractors of
the Company in exchange for shares of Company stock are actually separate
consideration for, or allocable to, any employment agreement, consulting
agreement covenant not to compete or release; and the compensation paid to any
stockholder-employees or stockholder-independent contractors of the Company
will be for services actually rendered and will be commensurate with amounts
paid to third parties bargaining at arm's length for similar services;
21. No direct or indirect subsidiary (whether or not incorporated) of the
Company owns any share of Company stock;
22. The Company, to its best knowledge and belief, will continue its
historic business or use a significant portion of its historic business assets
in a business following the Merger;
23. There is no intercorporate indebtedness existing between Parent and
the Company or between Merger Sub and the Company;
24. The payment of cash in lieu of fractional shares of Parent Common
Stock in connection with the consummation of the Merger is solely for the
purpose of avoiding the expense and inconvenience to Parent of issuing
fractional shares and does not represent separately bargained-for
consideration. The total cash consideration that will be paid in the Merger to
Company stockholders instead of issuing fractional shares of Parent Common
Stock will not exceed one percent (1%) of the total consideration that will be
issued in the transaction to Company stockholders in exchange for their stock.
The fractional share interests of each stockholder will be aggregated and no
Company stockholder will receive cash in an amount equal to or greater than the
value of one full share of Parent Common Stock;
25. With respect to each instance, if any, in which shares of stock of the
Company have been purchased by a stockholder of Parent (a "Stockholder") during
the Pre-Merger Period (a "Stock Purchase"): (i) to the knowledge of the Company
(A) the Stock Purchase was mde by such Stockholder on its own behalf, rather
than as a representative, or for the benefit, of Parent (B) the Stock Purchase
was entered into solely to satisfy the separate interests of such Stockholder
and pursuant to the Stock Purchase was the product of arm's length
negotiations; and (ii) the Stock Purchase was not a formal or informal
condition to consummation of the Merger;
26. The Merger will be consummated in compliance with the material terms
of the Merger Agreement, none of the material terms and conditions therein have
been waived or modified, and the Company has no plan or intention to waive or
modify any such material terms and conditions;
B-2-3
<PAGE>
27. Each of the representations made by the Company in the Merger
Agreement and any other documents associated therewith is true and accurate;
and
28. The undersigned officer is authorized to make all of the
certifications and representations on behalf of the Company set forth herein.
The undersigned recognizes that (i) your opinions will be based on, among
other things, the accuracy of the representations set forth herein and on the
statements contained in the Merger Agreement and documents related thereto,
(ii) your opinions will be subject to certain limitations and qualifications
including that they may not be relied upon if any such representations are not
accurate in all material respects, or if any of the covenants and obligations
set forth in the Merger Agreement are not satisfied in all material respects
and (iii) your opinions will not address any tax consequences of the Merger or
any action taken in connection therewith except as expressly set forth in such
opinions.
Notwithstanding anything herein to the contrary, the undersigned makes no
representations regarding any actions or conduct of the Company pursuant to
Parent's exercise of control over the Company after the Merger.
The Company undertakes to inform you immediately should any of the
foregoing statements or representations become untrue, incorrect or incomplete
in any respect on or prior to the Effective Time.
Very truly yours,
SIGNAL PHARMACEUTICALS, INC., a California
Corporation
By: --------------------------------------
Printed
Name: -----------------------------
Title: -------------------------------------
B-2-4
<PAGE>
EXHIBIT C TO THE AGREEMENT AND PLAN OF MERGER
AFFILIATE AGREEMENT
THIS AFFILIATE AGREEMENT ("Affiliate Agreement") is being executed and
delivered as of ___________, 2000 by __________________________ ("Stockholder")
in favor of and for the benefit of Celgene Corporation, a Delaware corporation
("Parent").
RECITALS
A. Stockholder is a stockholder of, and is an officer and/or director of
Sunset, Inc., a California corporation (the "Company").
B. Parent, the Company and Celgene Acquisition Corp., a California
corporation and wholly-owned subsidiary of Parent ("Sub"), have entered into an
Agreement and Plan of Merger dated as of ________, 2000 (the "Merger
Agreement"), providing for the merger of Sub into the Company (the "Merger").
The Merger Agreement contemplates that, upon consummation of the Merger, the
holders of the Company's Common Stock (the "Company Common Stock"), including
holders of the Company's Preferred Stock (the "Company Preferred Stock") which
is to be converted immediately prior to the Merger, will be entitled to receive
shares of Parent's Common Stock, par value $.01 per share ("Parent Common
Stock"), for such shares of Company Common Stock.
C. Stockholder understands that the Parent Common Stock to be issued in
the Merger will be issued pursuant to a registration statement on Form S-4, and
that Stockholder may be deemed an "affiliate" of Parent as such term is defined
for purposes of paragraphs (c) and (d) of Rule 145 under the Securities Act of
1933, as amended (the "Securities Act").
AGREEMENT
Stockholder, intending to be legally bound, agrees as follows:
1. REPRESENTATIONS AND WARRANTIES OF STOCKHOLDERS. Stockholder represents
and warrants to Parent as follows:
a. Stockholder is the holder and "beneficial owner" (as defined in
Rule 13d-3 under the Securities Exchange Act of 1934, as amended) of the number
of outstanding shares of common stock of the Company set forth beneath
Stockholder's signature on the signature page hereof (the "Company Shares"),
and Stockholder has good and valid title to the Company Shares, free and clear
of any liens, pledges, security interests, adverse claims, equities, options,
proxies, charges, encumbrances or restrictions of any nature. Stockholder has
the sole right to vote and to dispose of the Company Shares.
b. Stockholder is the holder of options to purchase the number of shares
of common stock of the Company set forth beneath Stockholder's signature on the
signature page hereof (the "Company Options"), and Stockholder has good and
valid title to the Company Options, free and clear of any liens, pledges,
security interests, adverse claims, equities, options, proxies, charges,
encumbrances or restrictions of any nature.
c. Stockholder does not own, of record or beneficially, directly or
indirectly, any securities of the Company other than the Company Shares and the
Company Options.
d. Stockholder has carefully read this Affiliate Agreement and, to the
extent Stockholder felt necessary, has discussed with counsel the limitations
imposed on Stockholder's ability to sell, transfer or otherwise dispose of the
shares of Parent Common Stock that Stockholder is to receive in the Merger (the
"Parent Shares"). Stockholder fully understands the limitations this Affiliate
Agreement places upon Stockholder's ability to sell, transfer or otherwise
dispose of securities of Parent.
2. PROHIBITIONS AGAINST TRANSFER.
<PAGE>
a. Stockholder shall not sell, transfer, or otherwise dispose of any
Parent Shares until after the publication (the "Publication Date") of financial
statements reflecting the combined operating results of the Company and Parent
for a period of not less than 30 days from and after the Effective Time (as
such term is defined in the Merger Agreement).
b. From and after the Publication Date Stockholder shall not effect any
sale, transfer or other disposition of any Parent Shares unless:
(i) such sale, transfer or other disposition is effected pursuant to an
effective registration statement under the Securities Act;
(ii) such sale, transfer or other disposition is made in conformity with
the requirements of Rule 145 under the Securities Act, as evidenced by a
broker's letter and a representation letter executed by Stockholder
(satisfactory in form and content to Parent) stating that such requirements
have been met;
(iii) counsel reasonably satisfactory to Parent shall have advised
Parent in a written opinion letter (satisfactory in form and content to
Parent), upon which Parent may rely, that such sale, transfer or other
disposition will be exempt from the registration requirements of the Securities
Act; or
(iv) an authorized representative of the Securities and Exchange
Commission ("SEC") shall have rendered written advice to Stockholder to the
effect that the SEC would take no action, or that the staff of the SEC would
not recommend that the SEC take action, with respect to such sale, transfer or
other disposition, and a copy of such written advice and all other related
communications with the SEC shall have been delivered to Parent.
3. STOP TRANSFER INSTRUCTIONS; LEGEND.
Stockholder acknowledges and agrees that (a) stop transfer instructions
will be given to Parent's transfer agent with respect to the Parent Shares, and
(b) each certificate representing any of such Parent Shares shall bear a legend
identical or similar in effect to the following legend (together with any other
legend or legends required by applicable state securities laws or otherwise):
"THE SHARES REPRESENTED BY THIS CERTIFICATE WERE ISSUED IN A
TRANSACTION TO WHICH RULE 145(d) OF THE SECURITIES ACT OF 1933 APPLIES
AND MAY NOT BE OFFERED, SOLD OR OTHERWISE TRANSFERRED, ASSIGNED,
PLEDGED OR HYPOTHECATED EXCEPT IN ACCORDANCE WITH THE PROVISIONS OF
SUCH RULE AND IN ACCORDANCE WITH THE TERMS OF AN AGREEMENT DATED AS OF
__________, 2000, BETWEEN THE REGISTERED HOLDER HEREOF AND THE ISSUER,
A COPY OF WHICH IS ON FILE AT THE PRINCIPAL OFFICES OF THE ISSUER."
4. INDEPENDENCE OF OBLIGATIONS. The covenants and obligations of
Stockholder set forth in this Affiliate Agreement shall be construed as
independent of any other agreement or arrangement between Stockholder, on the
one hand, and the Company or Parent, on the other. The existence of any claim
or cause of action by Stockholder against the Company or Parent shall not
constitute a defense to the enforcement of any of such covenants or obligations
against Stockholder.
5. SPECIFIC PERFORMANCE. Stockholder agrees that in the event of any
breach or threatened breach by Stockholder of any covenant, obligation or other
provision contained in this Affiliate Agreement, Parent shall be entitled (in
addition to any other remedy that may be available to Parent) to: (a) a decree
or order of specific performance or mandamus to enforce the observance and
performance of such covenant, obligation or other provision; and (b) an
injunction restraining such breach or threatened breach. Stockholder further
agrees that neither Parent nor any other person or entity shall be required to
obtain, furnish or post any bond or similar instrument in connection with or as
a condition to obtaining any remedy referred to in this Section 5, and
Stockholder irrevocably waives any right he may have to require the obtaining,
furnishing or posting of any such bond or similar instrument.
C-2
<PAGE>
6. OTHER AGREEMENTS. Nothing in this Affiliate Agreement shall limit any
of the rights or remedies of Parent under the Merger Agreement, or any of the
rights or remedies of Parent or any of the obligations of Stockholder under any
agreement between Stockholder and Parent or any certificate or instrument
executed by Stockholder in favor of Parent; and nothing in the Merger Agreement
or in any other agreement, certificate or instrument shall limit any of the
rights or remedies of Parent or any of the obligations of Stockholder under
this Affiliate Agreement.
7. NOTICES. Any notice or other communication required or permitted to be
delivered to Stockholder or Parent under this Affiliate Agreement shall be in
writing and shall be deemed properly delivered, given and received when
delivered to the address or facsimile telephone number set forth beneath the
name of such party below (or to such other address or facsimile telephone
number as such party shall have specified in a written notice given to the
other party):
IF TO PARENT:
Celgene Corporation
-------------------------------
-------------------------------
Attn:
Facsimile:
IF TO STOCKHOLDER:
-------------------------------
-------------------------------
Attn:
Facsimile:
8. SEVERABILITY. If any provision of this Affiliate Agreement or any part
of any such provision is held under any circumstances to be invalid or
unenforceable in any jurisdiction, then (a) such provision or part thereof
shall, with respect to such circumstances and in such jurisdiction, be deemed
amended to conform to applicable laws so as to be valid and enforceable to the
fullest possible extent, (b) the invalidity or unenforceability of such
provision or part thereof under such circumstances and in such jurisdiction
shall not affect the validity or enforceability of such provision or part
thereof under any other circumstances or in any other jurisdiction, and (c) the
invalidity or unenforceability of the remainder of such provision or the
validity or enforceability of any other provision of this Affiliate Agreement.
Each provision of this Affiliate Agreement is separable from every other
provision of this Affiliate Agreement, and each part of each provision of this
Affiliate Agreement is separable from every other part of such provision.
9. APPLICABLE LAW. THIS AFFILIATE AGREEMENT IS MADE UNDER, AND SHALL BE
CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE LAWS OF CALIFORNIA APPLICABLE TO
AGREEMENTS MADE AND TO BE PERFORMED SOLELY THEREIN, WITHOUT GIVING EFFECT TO
PRINCIPLES OF CONFLICTS OF LAW.
10. TERM; WAIVER; TERMINATION. The term of the Agreement shall be for a
period of one year from the effective date of the Merger. No failure on the
part of Parent to exercise any power, right, privilege or remedy under this
Affiliate Agreement, and no delay on the part of Parent in exercising any
power, right, privilege or remedy under this Affiliate Agreement, shall operate
as a waiver of such power, right, privilege or remedy; and no single or partial
exercise of any such power, right, privilege or remedy shall preclude any other
or further exercise thereof or of any other power, right, privilege or remedy.
Parent shall not be deemed to have waived any claim arising out of this
Affiliate Agreement, or any power, right, privilege or remedy under this
Affiliate Agreement, unless the waiver of such claim, power, right, privilege
or remedy is expressly set forth in a written instrument
C-3
<PAGE>
duly executed and delivered on behalf of Parent; and any such waiver shall not
be applicable or have any effect except in the specific instance in which it is
given. If the Merger Agreement is terminated, this Affiliate Agreement shall
thereupon terminate.
11. CAPTIONS. The captions contained in this Affiliate Agreement are for
convenience of reference only, shall not be deemed to be a part of this
Affiliate Agreement and shall not be referred to in connection with the
construction or interpretation of this Affiliate Agreement.
12. FURTHER ASSURANCES. Stockholder shall execute and/or cause to be
delivered to Parent such instruments and other documents and shall take such
other actions as Parent may reasonably request to effectuate the intent and
purposes of this Affiliate Agreement.
13. ENTIRE AGREEMENT. This Affiliate Agreement, the Merger Agreement and
any Stockholder Agreement between Stockholder and Parent collectively set forth
the entire understanding of parent and Stockholder relating to the subject
matter hereof and thereof and supersede all other prior agreements and
understandings between Parent and Stockholder relating to the subject matter
hereof and thereof.
14. NON-EXCLUSIVITY. The rights and remedies of Parent hereunder are not
exclusive of or limited by any other rights or remedies which Parent may have,
whether at law, in equity, by contract or otherwise, all of which shall be
cumulative (and not alternative).
15. AMENDMENTS. This Affiliate Agreement may not be amended, modified,
altered or supplemented other than by means of a written instrument duly
executed and delivered on behalf of Parent and Stockholder.
16. ASSIGNMENT. This Affiliate Agreement and all obligations of
Stockholder hereunder are personal to Stockholder and may not be transferred or
delegated by Stockholder at any time. Parent may freely assign any or all of
its rights under this Affiliate Agreement, in whole or in part, to any other
person or entity without obtaining the consent or approval of Stockholder.
17. BINDING NATURE. Subject to Section 16, this Affiliate Agreement will
inure to the benefit of Parent and its successors and assigns and will be
binding upon Stockholder and Stockholder's representatives, executors,
administrators, estate, heirs, successors and assigns.
18. SURVIVAL. Each of the representations, warranties, covenants and
obligations contained in this Affiliate Agreement shall survive the
consummation of the Merger.
[END OF TEXT]
C-4
<PAGE>
Stockholder has executed this Affiliate Agreement on ____________, 2000.
-------------------------------
(Signature)
-------------------------------
(Print Name)
NUMBER OF OUTSTANDING SHARES OF
COMMON STOCK OF THE COMPANY HELD BY STOCKHOLDER:
-------------------------------
NUMBER OF SHARES OF COMMON STOCK OF THE COMPANY
SUBJECT TO OPTIONS HELD BY STOCKHOLDER:
-------------------------------
C-5
<PAGE>
EXHIBIT D
June __, 2000
Celgene Corporation
7 Powder Horn Drive
Warren, NJ 07059
Ladies and Gentlemen:
We have acted as counsel for Signal Pharmaceuticals, Inc., a California
corporation (the "Company"), in connection with that certain Agreement and Plan
of Merger dated as of June , 2000 (the "Merger Agreement"), by and among the
Company, Celgene Corporation ("Celgene"), and Cape May Acquisition Corp., a
California corporation and wholly-owned subsidiary of Celgene ("Merger Sub"),
pursuant to which Merger Sub will merge with and into the Company (the
"Merger"). We are rendering this opinion pursuant to Section 8.2(g) of the
Merger Agreement. Except as otherwise defined herein, capitalized terms used
but not defined herein have the respective meanings given to them in the Merger
Agreement.
In connection with this opinion, we have examined and relied upon the
representations and warranties as to factual matters contained in and made
pursuant to the Merger Agreement by the various parties and originals or copies
certified to our satisfaction, of such records, documents, certificates,
opinions, memoranda and other instruments as in our judgment are necessary or
appropriate to enable us to render the opinions expressed below. Where we
render an opinion "to the best of our knowledge" or concerning an item "of
which we are aware" or our opinion otherwise refers to our knowledge, it is
based solely upon (i) an inquiry of attorneys within this firm who perform
legal services for the Company, (ii) receipt of certificates executed by an
officer of the Company covering such matters and (iii) such other
investigation, if any, that we specifically set forth herein.
In rendering this opinion, we have assumed: the genuineness and authenticity of
all signatures on original documents; the authenticity of all documents
submitted to us as originals; the conformity to originals of all documents
submitted to us as copies; the accuracy, completeness and authenticity of
certificates of public officials; and the due authorization, execution and
delivery of all documents (except the due authorization, execution and delivery
of the Merger Agreement by the Company) where authorization, execution and
delivery are prerequisites to the effectiveness of such documents. We have also
assumed: that all individuals executing and delivering documents had the legal
capacity to so execute and deliver; that you have received all documents you
were to receive under the Merger Agreement; that the Merger Agreement is an
obligation binding upon you and Merger Sub; that you and Merger Sub have filed
any required California franchise or income tax returns and have paid any
required California franchise or income taxes; and that there are no extrinsic
agreements or understandings among the parties to the Merger Agreement that
would modify or interpret the terms of the Merger Agreement or the respective
rights or obligations of the parties thereunder.
<PAGE>
Celgene Corporation
June __, 2000
Page Two
Our opinion is expressed only with respect to the federal laws of the United
States of America, the laws of the State of California and the Delaware General
Corporation Law. We express no opinion as to whether the laws of any particular
jurisdiction apply, and no opinion to the extent that the laws of any other
jurisdiction are applicable to the subject matter hereof. We are not rendering
any opinion as to compliance with any fiduciary duty law, antitrust or
antifraud law, rule, or regulation relating to securities or to the sale or
issuance thereof, the voting of securities or disclosure made in connection
with the solicitation of shareholder approval of the Merger. Notwithstanding
anything herein to the contrary, no opinion is given or may be implied as to
compliance with any federal or sate securities laws pertaining to requirements
to register securities or obtain exemptions from such requirements.
With regard to our opinion in paragraph 5 below with respect to any material
default under any of the Company's material agreements, we have relied solely
upon (i) inquiries of officers of the Company; and (ii) an examination of the
Company contracts, agreements or arrangements set forth in Schedule 4.15 of the
Company Disclosure Schedules (the "Material Agreements"); we have made no
further investigation. Furthermore, with respect to the Material Agreements, we
have assumed there are no extrinsic agreements or understandings among the
parties to the Material Agreements that would modify or interpret the terms of
the Material Agreements or the respective rights or obligations of the parties
thereunder.
With regard to our opinion in paragraph 5 below with respect to the violation
or contravention of any governmental statute, rule or regulation, and with
regard to our opinion in paragraph 7 below with respect to registrations and
qualifications with any regulatory authority or governmental body in the United
States, our opinion is limited exclusively to the transactions contemplated by
the Merger Agreement.
On the basis of the foregoing, in reliance thereon and with the foregoing
qualifications, we are of the opinion that:
1. The Company has been duly incorporated and is validly existing as a
corporation in good standing under the laws of the State of California.
2. The Company has the requisite corporate power to own, operate and lease its
property and assets and to conduct its business as it is currently being
conducted. To our knowledge, the Company is qualified as a foreign corporation
to do business and is in good standing in each jurisdiction in the United
States in which the ownership of its property or the conduct of its business
requires such qualification, except where the failure to so qualify would not
have a material adverse effect on the assets, financial condition or operations
of the Company.
3. All corporate action on the part of the Company, its Board of Directors and
its shareholders necessary for the authorization, execution and delivery of the
Merger Agreement by the Company and the performance of the Company's
obligations under the Merger Agreement has been taken. The Merger Agreement has
been duly and validly authorized, executed and delivered by the Company and
constitutes a valid and binding agreement of the Company enforceable against
the Company in accordance with its terms, except as enforcement may be limited
by applicable bankruptcy, insolvency, reorganization, arrangement, moratorium
or other similar laws affecting creditors' rights, and subject to general
equity principles and to limitations on availability of equitable relief,
including specific performance.
4. The authorized capital stock of the Company consists of (i) 37,563,708
shares of Common Stock, of which shares have been issued and are
outstanding immediately prior to the Closing, and (ii) 24,967,639 shares of
Preferred Stock: (A) 2,626,892 of which have been designated as Series A
D-2
<PAGE>
Celgene Corporation
June __, 2000
Page Three
Preferred shares, all of which are outstanding immediately prior to the
Closing; (B) 2,875,000 of which have been designated Series B Preferred shares,
all of which are outstanding immediately prior to the Closing; (C) 8,791,432 of
which have been designated as Series C Preferred shares, 8,791,432 of which are
outstanding immediately prior to the Closing; (D) 250,000 of which have been
designated Series C-1 Preferred shares, none of which is outstanding
immediately prior to the Closing; (E) 225,000 of which have been designated
Series C-2 Preferred shares, none of which is outstanding immediately prior to
the Closing; (F) 732,601 of which have been designated Series D Preferred
shares, all of which are outstanding immediately prior to the Closing; (G)
6,455,493 of which have been designated as Series E Preferred shares, all of
which are outstanding immediately prior to the Closing; (H) 2,722,513 of which
have been designated Series F Preferred shares, all of which are outstanding
immediately prior to the Closing; and (I) 288,708 of which have been designated
as Series F-1 Preferred shares, all of which are outstanding immediately prior
to the Closing. To our knowledge, except as expressly set forth in the Company
Disclosure Schedules, there are no options, warrants, conversion privileges, or
other rights presently outstanding to purchase any authorized but unissued
capital stock of the Company. There are no voting agreements, co-sale rights or
rights of first refusal applicable to any of the Company's outstanding capital
stock under the Company's articles of incorporation, bylaws or any Material
Agreement.
5. The execution, delivery and performance by the Company of the Merger
Agreement and the consummation by the Company of the Merger as provided therein
do not violate any provision of the Company's Articles of Incorporation or
Bylaws, and do not constitute a material default (or give rise to any right of
termination, cancellation or acceleration) under any material provision of any
Material Agreement and do not violate or contravene (A) any governmental
statute, rule or regulation applicable to the Company or (B) any order, writ,
judgment, injunction, decree, determination or award which has been entered
against the Company and of which we are aware, the violation or contravention
of which would have a material adverse effect on the Company's business,
financial condition and results of operations.
6. To our knowledge, there is no action, proceeding or investigation pending or
threatened in writing against the Company before any court or administrative
agency that questions the validity of the Merger Agreement.
7. All consents, approvals, authorizations, or orders of, and filings,
registrations, and qualifications with any regulatory authority or governmental
body in the United States required to be obtained by the Company prior to the
Closing in connection with the Company's execution, delivery and performance of
the Merger Agreement and the consummation by the Company of the Merger as
contemplated therein have been made or obtained, other than the filing of the
Agreement of Merger with the Secretary of State of the State of California as
contemplated by Section 1.2 of the Merger Agreement.
8. Assuming due approval by the Board of Directors of Celgene and Merger Sub,
respectively, and the shareholders of the Merger Sub, and compliance by Celgene
and Merger Sub with all requirements of applicable law and the Merger agreement
necessary to effect the Merger, upon the filing of the Agreement of Merger
with, and acceptance of the Agreement of Merger by, the Secretary of State of
the State of California, the Merger will be effective.
D-3
<PAGE>
This opinion is intended solely for your benefit and is not to be made
available to or be relied upon by any other person, firm or entity without
prior written consent.
Sincerely,
COOLEY GODWARD LLP
D-4
<PAGE>
EXHIBIT E
, 2000
Celgene Corporation
7 Powder Horn Drive
Warren, NJ 07059
Ladies and Gentlemen:
This opinion is being delivered to you in connection with Section of the
Agreement and Plan of Merger dated as of June , 2000, (the "Reorganization
Agreement") by and among Celgene Corporation, a Delaware corporation
("Parent"), Celgene Acquisition Corp., a California corporation and wholly
owned subsidiary of Parent ("Merger Sub"), and Signal Pharmaceuticals, Inc., a
California corporation (the "Company").
Except as otherwise provided, capitalized terms used but not defined herein
shall have the meanings set forth in the Reorganization Agreement. All section
references, unless otherwise indicated, are to the Internal Revenue Code of
1986, as amended (the "Code").
We have acted as counsel to the Parent in connection with the Merger. As such,
and for the purpose of rendering this opinion, we have examined, and are
relying upon (without any independent investigation or review thereof) the
truth and accuracy, at all relevant times, of the statements, covenants,
representations and warranties contained in the following documents (including
all exhibits and schedules attached thereto):
(A) the Reorganization Agreement;
(B) the Registration Statement;
(C) those certain tax representation letters dated , 2000, and
delivered to us by Parent, Merger Sub and the Company (the "Tax Representation
Letters"); and
(D) such other instruments and documents related to the formation,
organization and operation of Parent, Merger Sub and the Company and to the
consummation of the Merger and the other transactions contemplated by the
Reorganization Agreement as we have deemed necessary or appropriate.
In connection with rendering this opinion, we have assumed (without any
independent investigation or review thereof) that:
(A) Original documents submitted to us (including signatures thereto) are
authentic, documents submitted to us as copies conform to the original
documents, and that all such documents Celgene Corporation , 2000 have
been (or will be by the Effective Time) duly and validly executed and delivered
where due execution and delivery are a prerequisite to the effectiveness
thereof;
(B) All representations, warranties and statements made or agreed to by
Parent, Merger Sub and the Company, their managements, employees, officers,
directors and stockholders in connection with the Merger, including, but not
limited to, those set forth in the Reorganization Agreement (including the
exhibits thereto) and the Tax Representation Letters are true and accurate at
all relevant times;
(C) All covenants contained in the Reorganization Agreement (including
exhibits thereto) and the Tax Representation Letters are performed without
waiver or breach of any material provision thereof;
(D) The Merger will be reported by Parent and the Company on their
respective federal income tax returns in a manner consistent with the opinion
set forth below;
(E) The Merger will be consummated in accordance with the Reorganization
Agreement without any waiver or breach of any material provision thereof, and
the Merger will be effective under applicable state law;
<PAGE>
Celgene Corporation
, 2000
Page 2
(F) Any representation or statement made "to the knowledge of" or
similarly qualified is correct without such qualification; and
(G) The opinion dated , 2000, rendered by Cooley Godward LLP to the
Company pursuant to the Reorganization Agreement has been delivered and has not
been withdrawn.
Based on our examination of the foregoing items and subject to the limitations,
qualifications, assumptions and caveats set forth herein, we are of the opinion
that, for federal income tax purposes, the Merger will be a reorganization
within the meaning of Section 368(a) of the Code.
This opinion does not address the various state, local or foreign tax
consequences that may result from the Merger or the other transactions
contemplated by the Reorganization Agreement. In addition, no opinion is
expressed as to any federal income tax consequence of the Merger or the other
transactions contemplated by the Reorganization Agreement except as
specifically set forth herein, and this opinion may not be relied upon except
with respect to the consequences specifically discussed herein. No opinion is
expressed as to the federal income tax treatment that may be relevant to a
particular investor in light of personal circumstances or to certain types of
investors subject to special treatment under the federal income tax laws (for
example, financial institutions, insurance companies, foreign individuals and
entities, tax-exempt entities, dealers in securities, persons who are subject
to the alternative minimum tax provisions of the Code, persons who acquired
their shares of Company capital stock pursuant to the exercise of an employee
option (or otherwise as compensation), persons whose shares of Company capital
stock are qualified small business stock for purposes of Section 1202 of the
Code, or persons who acquired Company capital stock as part of an integrated
investment, such as a "hedge," "straddle," or other risk reduction transaction,
composed of Company capital stock and one or more other positions).
No opinion is expressed as to any transaction other than the Merger as
described in the Reorganization Agreement, or as to any transaction whatsoever,
including the Merger, if any of the representations, warranties, statements and
assumptions material to our opinion and upon which we have relied are not
accurate and complete in all material respects at all relevant times.
This opinion only represents our best judgment as to the federal income tax
consequences of the Merger and is not binding on the Internal Revenue Service
or any court of law, tribunal, administrative agency or other governmental
body. The conclusions are based on the Code, existing judicial decisions,
administrative regulations and published rulings. No assurance can be given
that future legislative, judicial or administrative changes or interpretations
would not adversely affect the accuracy of the conclusions stated herein.
Nevertheless, by rendering this opinion, we undertake no responsibility to
advise you of any new developments in the application or interpretation of the
federal income tax laws.
This opinion is being delivered solely in connection with Section of the
Reorganization Agreement. It is intended for the benefit of Parent and may not
be relied upon or utilized for any other purpose or by any other person and may
not be made available to any other person without our prior written consent.
Sincerely,
PROSKAUER ROSE LLP
E-2
<PAGE>
EXHIBIT F TO THE AGREEMENT AND PLAN OF MERGER
, 2000
Signal Pharmaceuticals, Inc.
Re: Celgene Corporation and Celgene Acquisition Corp.
-------------------------------------------------
Ladies and Gentlemen:
We have acted as special counsel to Celgene Corporation, a Delaware corporation
(the "Parent"), and Celgene Acquisition Corp., a California corporation (the
"Sub"), in connection with the preparation, authorization, execution and
delivery of, and the consummation of the transactions contemplated by, the
Agreement and Plan of Merger, dated as of June , 2000 (the "Merger
Agreement"), among Parent, Sub and Signal Pharmaceuticals, Inc., a California
corporation (the "Company"). This opinion is being delivered to you pursuant to
Section 8.3(c) of the Merger Agreement. Capitalized terms used and not
otherwise defined herein shall have the meanings ascribed to them in the Merger
Agreement.
We have examined the Merger Agreement, Registration Statement and such
certificates of public officials, such certificates of officers of Parent and
Sub, the originals (or copies thereof) of such corporate documents and records
of Parent and Sub, and such other documents and instruments as we have deemed
necessary or appropriate for purposes of this opinion. In this connection, we
have assumed the legal capacity of natural persons, the genuineness of
signatures on, and the authenticity of, all documents so examined, the
conformity to originals of all documents submitted to us as copies, and that
all corporate records or other information made available to us by the Parent
and Sub, and on which we have relied, are complete in all respects. As to the
accuracy of matters of fact, we have relied solely upon the above-mentioned
certificates and upon the representations contained in the Merger Agreement and
other documents delivered pursuant thereto and have assumed that certificates
of public officials dated prior to the date hereof remain accurate as of the
date hereof.
Based on the foregoing, we are of the opinion that:
i. Parent is a corporation validly existing and in good standing under
the laws of the State of Delaware. Sub is a corporation duly formed,
validly existing and in good standing under the laws of the State of
California.
ii. The authorized capital stock of Parent consists of 120,000,000 shares
of Parent Common Stock and 5,000,000 shares of Parent Preferred Stock.
All of the shares of Parent Common Stock to be issued upon
consummation of the Merger (the "Merger Shares") are duly authorized
and, when issued in accordance with the Agreement, will be validly
issued, fully paid and nonassessable.
iii. The authorized capital stock of Sub consists of shares of Sub
Common Stock, of which shares, as of the date hereof, are issued
and outstanding. All of such outstanding shares are owned of record
and, to our knowledge, beneficially by Parent, and are validly issued,
fully paid and nonassessable.
iv. The Parent has all requisite corporate power and authority to own,
lease and operate its properties and to carry on its business as now
being conducted.
v. The issuance of the Merger Shares in accordance with the Merger
Agreement has been registered under the Securities Act of 1933, as
amended, and is either registered or exempt from registration under
all applicable state securities or blue sky laws.
<PAGE>
Signal Pharmaceuticals, Inc.
, 2000
Page 2
vi. Each of Parent and Sub has all necessary corporate power and
authority to execute and deliver the Agreement, to perform its
obligations thereunder, and to consummate the transactions
contemplated thereby. The execution, delivery and performance of the
Agreement and the consummation by Parent and Sub of the transactions
contemplated thereby have been authorized by all necessary corporate
action on the part of each of Parent and Sub. Upon the filing of the
Agreement of Merger with the Department of State of California, all
steps required to be taken by Parent and Sub under the laws of the
State of California to effect the Merger of Sub with and into the
Company shall have been duly and properly taken.
vii. The Agreement has been duly executed and delivered by each of Parent
and Sub and constitutes the valid and binding obligation of each of
Parent and Sub enforceable in accordance with its terms, except to the
extent that enforceability may be subject to applicable bankruptcy,
insolvency, fraudulent conveyance, fraudulent transfer,
reorganization, moratorium and similar laws presently or hereafter in
effect affecting the enforcement of creditors' rights generally and by
general equitable principles (regardless of whether enforcement is
sought in a proceeding in law or in equity).
viii. The execution, delivery and performance of the Agreement by each of
Parent and Sub and the consummation by each of Parent and Sub of the
transactions contemplated thereby will not result in a violation of
any provision of their respective certificates of incorporation (as
amended, in the case of Parent) or by-laws.
ix. Except for the filing of the Agreement of Merger in California, we
have no knowledge of any consent or approval which is required in
connection with the consummation by Parent and Sub of the transactions
contemplated by the Agreement which have not been obtained.
x. We have no knowledge of any action, suit, proceeding or investigation
which is pending or threatened which questions the validity of the
Agreement or any action taken or to be taken by Parent or Sub in
connection with the Agreement.
We have participated in the preparation of the Registration Statement and
meetings with members of management of Parent and its independent certified
public accountants relating to the disclosure contained in the Registration
Statement as it pertains to Parent or Sub. Although we are not passing upon and
do not assume any responsibility for the accuracy, completeness or fullness of
the information relating to Parent or Sub contained in the Registration
Statement, nothing has come to our attention that has caused us to believe that
at the date such materials were mailed to the shareholders of the Company,
and/or filed with the Commission, as applicable, and at the Closing Date, the
information relating to Parent or Sub in the Registration Statement contained
any misstatement of a material fact or omission of a material fact necessary to
make the statements therein, in light of the circumstances under which they
were made, not misleading (except that no statement is made with respect to any
financial statements or schedules, or other financial or statistical data
contained therein).
The foregoing opinions are subject to the following qualifications:
a. No opinion is expressed as to the enforceability of any choice of
law, jurisdiction, venue or service of process provisions of any
document.
b. Limitations imposed by state law, federal law or general equitable
principles upon the specified enforceability of any of the remedies,
covenants or other provisions of any applicable agreement and upon
the availability of injunctive relief or other equitable remedies,
regardless of whether enforcement of any such agreement is considered
in a proceeding in equity or at law.
F-2
<PAGE>
Signal Pharmaceuticals, Inc.
, 2000
Page 3
c. The unenforceability under certain circumstances of provisions
indemnifying a party against, or requiring contributions toward, that
party's liability for its own wrongful or negligent acts, or where
indemnification or contribution may be limited by state or federal
securities laws or is contrary to public policy.
We have further assumed with your permission, without any inquiry,
investigation or verification, the following matters:
i. That the factual matters (including representations and warranties)
contained in the Merger Agreement are true and correct as set forth
therein; and
ii. That any certificate, representation or document upon which we have
relied and which was given or dated earlier than the date of this
letter continues to remain accurate, insofar as relevant to the
opinions contained herein, from such earlier date through and including
the date hereof.
Our opinions hereunder are based solely upon the laws, rulings, administrative
interpretations and regulations in effect on the date hereof and are subject to
modification to the extent that such laws, rulings, interpretations and
regulations are changed in the future. By delivery of this letter, we have
assumed no obligation to update our opinions for changes in such laws, rulings,
interpretations and regulations or for events occurring subsequent to the date
hereof.
This opinion is limited to the matters stated herein and no opinion is implied
or may be inferred beyond the matters expressly stated herein.
The opinions expressed herein relate solely to the Delaware General Corporation
Law, the laws of the State of California and the federal laws of the United
States of America, and no opinion is expressed with respect to the laws of any
other jurisdiction.
Any references in this opinion to matters to our "knowledge" or words of
similar import refer only to the actual present knowledge of attorneys at our
firm who have been actively involved in this transaction, after due inquiry of
those attorneys. Except as otherwise stated herein, we have undertaken no
independent investigation or verification of factual matters.
This opinion is solely for the information of the addressees hereof and is not
to be quoted in whole or in part or otherwise referred to (except in a list of
closing documents), nor is it to be filed with any governmental agency or other
person without our prior written consent. Other than the addressees hereof, no
one is entitled to rely on this opinion without our prior written consent.
Very truly yours,
F-3
<PAGE>
EXHIBIT G
______, 2000
Signal Pharmaceuticals, Inc.
____________________
____________________
Ladies and Gentlemen:
This opinion is being delivered to you in connection with Section 8.3(d) of the
Agreement and Plan of Merger dated as of June , 2000 (the "Reorganization
Agreement") by and among Celgene Corporation, a Delaware corporation
("Parent"), Celgene Acquisition Corp., a California corporation and wholly
owned subsidiary of Parent ("Merger Sub"), and Signal Pharmaceuticals, Inc., a
California corporation (the "Company").
Except as otherwise provided, capitalized terms used but not defined herein
shall have the meanings set forth in the Reorganization Agreement. All section
references, unless otherwise indicated, are to the Internal Revenue Code of
1986, as amended (the "Code").
We have acted as counsel to the Company in connection with the Merger. As such,
and for the purpose of rendering this opinion, we have examined, and are
relying upon (without any independent investigation or review thereof) the
truth and accuracy, at all relevant times, of the statements, covenants,
representations and warranties contained in the following documents (including
all exhibits and schedules attached thereto):
(a) the Reorganization Agreement;
(b) the Registration Statement;
(c) those certain tax representation letters dated , 2000, and
delivered to us by Parent, Merger Sub and the Company (the "Tax Representation
Letters"); and
(d) such other instruments and documents related to the formation,
organization and operation of Parent, Merger Sub and the Company and to the
consummation of the Merger and the other transactions contemplated by the
Reorganization Agreement as we have deemed necessary or appropriate.
In connection with rendering this opinion, we have assumed (without any
independent investigation or review thereof) that:
(a) Original documents submitted to us (including signatures thereto) are
authentic, documents submitted to us as copies conform to the original
documents, and that all such documents have been
<PAGE>
Signal Pharmaceuticals, Inc.
_____________,2000
Page Two
(or will be by the Effective Time) duly and validly executed and delivered
where due execution and delivery are a prerequisite to the effectiveness
thereof;
(b) All representations, warranties and statements made or agreed to by
Parent, Merger Sub and the Company, their managements, employees, officers,
directors and stockholders in connection with the Merger, including, but not
limited to, those set forth in the Reorganization Agreement (including the
exhibits thereto) and the Tax Representation Letters are true and accurate at
all relevant times;
(c) All covenants contained in the Reorganization Agreement (including
exhibits thereto) and the Tax Representation Letters are performed without
waiver or breach of any material provision thereof;
(d) The merger will be reported by Parent and the Company on their
respective federal income tax returns in a manner consistent with the opinion
set forth below;
(e) The Merger will be consummated in accordance with the Reorganization
Agreement without any waiver or breach of any material provision thereof, and
the Merger will be effective under applicable state law;
(f) Any representation or statement made "to the knowledge of" or
similarly qualified is correct without such qualification; and
(g) The opinion dated ________,2000, rendered by Proskauer Rose LLP to
Parent pursuant to the Reorganization Agreement has been delivered and has not
been withdrawn.
Based on our examination of the foregoing items and subject to the limitations,
qualifications, assumptions and caveats set forth herein, we are of the opinion
that, for federal income tax purposes, the Merger will be a reorganization
within the meaning of Section 368(a) of the Code.
This opinion does not address the various state, local or foreign tax
consequences that may result from the Merger or the other transactions
contemplated by the Reorganization Agreement. In addition, no opinion is
expressed as to any federal income tax consequence of the Merger of the other
transactions contemplated by the Reorganization Agreement except as
specifically set forth herein, and this opinion may not be relied upon except
with respect to the consequences specifically discussed herein. No opinion is
expressed as to the federal income tax treatment that may be relevant to a
particular investor in light of personal circumstances or to certain types of
investors subject to special treatment under the federal income tax laws (for
example, financial institutions, insurance companies, foreign individuals and
entities, tax-exempt entities, dealers in securities, persons who are
G-2
<PAGE>
Signal Pharmaceuticals, Inc.
_____________,2000
Page Three
subject to the alternative minimum tax provisions of the Code, persons who
acquired their shares of Company capital stock pursuant to the exercise of an
employee option (or otherwise as compensation), persons whose shares of Company
capital stock are qualified small business stock for purposes of Section 1202
of the Code, or persons who acquired Company capital stock as part of an
integrated investment, such as a "hedge," "straddle," or other risk reduction
transaction, composed of Company capital stock and one or more other
positions).
No opinion is expressed as to any transaction other than the Merger as
described in the Reorganization Agreement, or as to any transaction whatsoever,
including the Merger, if any of the representations, warranties, statements and
assumptions material to our opinion and upon which we have relied are not
accurate and complete in all material respects at all relevant times.
This opinion only represents our best judgment as to the federal income tax
consequences of the Merger and is not binding on the Internal Revenue Service
or any court of law, tribunal, administrative agency or other governmental
body. The conclusions are based on the Code, existing judicial decisions,
administrative regulations and published rulings. No assurance can be given
that future legislative, judicial or administrative changes or interpretations
would not adversely affect the accuracy of the conclusions stated herein.
Nevertheless, by rendering this opinion, we undertake no responsibility to
advise you of any new developments in the application or interpretation of the
federal income tax laws.
This opinion is being delivered solely in connection with Section 8.3(d) of the
Reorganization Agreement. It is intended for the benefit of the Company and may
not be relied upon or utilized for any other purpose or by any other person and
may not be made available to any other person without our prior written
consent.
Sincerely,
COOLEY GODWARD LLP
G-3
<PAGE>
APPENDIX B
CALIFORNIA GENERAL CORPORATION LAW
CHAPTER 13. DISSENTERS' RIGHTS
1300. RIGHT TO REQUIRE PURCHASE - "DISSENTING SHARES" AND "DISSENTING
SHAREHOLDER" DEFINED. - (a) If the approval of the outstanding shares (Section
152) of a corporation is required for a reorganization under subdivisions (a)
and (b) or subdivision (e) or (f) of Section 1201, each shareholder of the
corporation entitled to vote on the transaction and each shareholder of a
subsidiary corporation in a short-form merger may, by complying with this
chapter, require the corporation in which the shareholder holds shares to
purchase for cash at their fair market value the shares owned by the
shareholder which are dissenting shares as defined in subdivision (b). The fair
market value shall be determined as of the day before the first announcement of
the terms of the proposed reorganization or short-form merger, excluding any
appreciation or depreciation in consequence of the proposed action, but
adjusted for any stock split, reverse stock split, or share dividend which
becomes effective thereafter.
(b) As used in this chapter, "dissenting shares" means shares which come within
all of the following descriptions:
(1) Which were not immediately prior to the reorganization or short-form merger
either (A) listed on any national securities exchange certified by the
Commissioner of Corporations; under subdivision (o) of Section 25100 or (B)
listed on the National Market System of the NASDAQ Stock Market, and the notice
of meeting of shareholders to act upon the reorganization summarizes this
section and Sections 1301, 1302, 1303 and 1304; provided, however, that this
provision does not apply to any shares with respect to which there exists any
restriction on transfer imposed by the corporation or by any law or regulation;
and provided, further, that this provision does not apply to any class of
shares described in subparagraph (A) or (B) if demands for payment are filed
with respect to 5 percent or more of the outstanding shares of that class.
(2) Which were outstanding on the date for the determination of shareholders
entitled to vote on the reorganization and (A) were not voted in favor of the
reorganization or, (B) if described in subparagraph (A) or (B) of paragraph (1)
(without regard to the provisos in that paragraph), were voted against the
reorganization, or which were held of record on the effective date of a
short-form merger; provided, however, that subparagraph (A) rather than
subparagraph (B) of this paragraph applies in any case where the approval
required by Section 1201 is sought by written consent rather than at a meeting.
(3) Which the dissenting shareholder has demanded that the corporation purchase
at their fair market value, in accordance with Section 1301.
(4) Which the dissenting shareholder has submitted for endorsement, in
accordance with Section 1302.
(c) As used in this chapter, "dissenting shareholder" means the recordholder of
dissenting shares and includes a transferee of record.
1301. DEMAND FOR PURCHASE. (a) If, in the case of a reorganization, any
shareholders of a corporation have a right under Section 1300, subject to
compliance with paragraphs (3) and (4) of subdivision (b) thereof, to require
the corporation to purchase their shares for cash, such corporation shall mail
to each such shareholder a notice of the approval of the reorganization by its
outstanding shares (Section 152) within 10 days after the date of such
approval, accompanied by a copy of Sections 1300, 1302, 1303, 1304 and this
section, a statement of the price determined by the corporation to represent
the fair market value of the dissenting shares, and a brief description of the
procedure to be followed if the shareholder desires to exercise the
shareholder's right under such sections. The statement of price constitutes an
offer by the corporation to purchase at the price stated any dissenting shares
as defined in subdivision (b) of Section 1300, unless they lose their status as
dissenting shares under Section 1309.
<PAGE>
(b) Any shareholder who has a right to require the corporation to purchase the
shareholder's shares for cash under Section 1300, subject to compliance with
paragraphs (3) and (4) of subdivision (b) thereof, and who desires the
corporation to purchase such shares shall make written demand upon the
corporation for the purchase of such shares and payment to the shareholder in
cash of their fair market value. The demand is not effective for any purpose
unless it is received by the corporation or any transfer agent thereof (1) in
the case of shares described in clause (i) or (ii) of paragraph (1) of
subdivision (b) of Section 1300 (without regard to the provisos in that
paragraph), not later than the date of the shareholders' meeting to vote upon
the reorganization, or (2) in any other case within 30 days after the date on
which the notice of the approval by the outstanding shares pursuant to
subdivision (a) or the notice pursuant to subdivision (i) of Section 1110 was
mailed to the shareholder.
(c) The demand shall state the number and class of the shares held of record by
the shareholder which the shareholder demands that the corporation purchase and
shall contain a statement of what such shareholder claims to be the fair market
value of those shares as of the day before the announcement of the proposed
reorganization or short-form merger. The statement of fair market value
constitutes an offer by the shareholder to sell the shares at such price.
1302. ENDORSEMENT OF SHARES. - Within 30 days after the date on which notice of
the approval by the outstanding shares or the notice pursuant to subdivision
(i) of Section 1110 was mailed to the shareholder, the shareholder shall submit
to the corporation at its principal office or at the office of any transfer
agent thereof, (a) if the shares are certificated securities, the shareholder's
certificates representing any shares which the shareholder demands that the
corporation purchase, to be stamped or endorsed with a statement that the
shares are dissenting shares or to be exchanged for certificates of appropriate
denomination so stamped or endorsed or (b) if the shares are uncertificated
securities, written notice of the number of shares which the shareholder
demands that the corporation purchase. Upon subsequent transfers of the
dissenting shares on the books of the corporation, the new certificates,
initial transaction statement, and other written statements issued therefor
shall bear a like statement, together with the name of the original dissenting
holder of the shares.
1303. AGREED PRICE - TIME FOR PAYMENT. - (a) If the corporation and the
shareholder agree that the shares are dissenting shares and agree upon the
price of the shares, the dissenting shareholder is entitled to the agreed price
with interest thereon at the legal rate on judgments from the date of the
agreement. Any agreements fixing the fair market value of any dissenting shares
as between the corporation and the holders thereof shall be filed with the
secretary of the corporation.
(b) Subject to the provisions of Section 1306, payment of the fair market value
of dissenting shares shall be made within 30 days after the amount thereof has
been agreed or within 30 days after any statutory or contractual conditions to
the reorganization are satisfied, whichever is later, and in the case of
certificated securities, subject to surrender of the certificates therefor,
unless provided otherwise by agreement.
1304. DISSENTERS' ACTION TO ENFORCE PAYMENT. - (a) If the corporation denies
that the shares are dissenting shares, or the corporation and the shareholder
fail to agree upon the fair market value of the shares, then the shareholder
demanding purchase of such shares as dissenting shares or any interested
corporation, within six months after the date on which notice of the approval
by the outstanding shares (Section 152) or notice pursuant to subdivision (i)
of Section 1110 was mailed to the shareholder, but not thereafter, may file a
complaint in the superior court of the proper county praying the court to
determine whether the shares are dissenting shares or the fair market value of
the dissenting shares or both or may intervene in any action pending on such a
complaint.
(b) Two or more dissenting shareholders may join as plaintiffs or be joined as
defendants in any such action and two or more such actions may be consolidated.
(c) On the trial of the action, the court shall determine the issues. If the
status of the shares as dissenting shares is in issue, the court shall first
determine that issue. If the fair market value of the dissenting shares is in
issue, the court shall determine, or shall appoint one or more impartial
appraisers to determine, the fair market value of the shares.
B-2
<PAGE>
1305. APPRAISERS' REPORT - PAYMENT - COSTS. - (a) If the court appoints an
appraiser or appraisers, they shall proceed forthwith to determine the fair
market value per share. Within the time fixed by the court, the appraisers, or
a majority of them, shall make and file a report in the office of the clerk of
the court. Thereupon, on the motion of any party, the report shall be submitted
to the court and considered on such evidence as the court considers relevant.
If the court finds the report reasonable, the court may confirm it.
(b) If a majority of the appraisers appointed fail to make and file a report
within 10 days from the date of their appointment or within such further time
as may be allowed by the court or the report is not confirmed by the court, the
court shall determine the fair market value of the dissenting shares.
(c) Subject to the provisions of Section 1306, judgment shall be rendered
against the corporation for payment of an amount equal to the fair market value
of each dissenting share multiplied by the number of dissenting shares which
any dissenting shareholder who is a party, or who has intervened, is entitled
to require the corporation to purchase, with interest thereon at the legal rate
from the date on which judgment was entered.
(d) Any such judgment shall be payable forthwith with respect to uncertificated
securities and, with respect to certificated securities, only upon the
endorsement and delivery to the corporation of the certificates for the shares
described in the judgment. Any party may appeal from the judgment.
(e) The costs of the action, including reasonable compensation to the
appraisers to be fixed by the court, shall be assessed or apportioned as the
court considers equitable, but, if the appraisal exceeds the price offered by
the corporation, the corporation shall pay the costs (including in the
discretion of the court attorneys' fees, fees of expert witnesses and interest
at the legal rate on judgments from the date of compliance with Sections 1300,
1301 and 1302 if the value awarded by the court for the shares is more than 125
percent of the price offered by the corporation under subdivision (a) of
Section 1301).
1306. DISSENTING SHAREHOLDER'S STATUS AS CREDITOR. - To the extent that the
provisions of Chapter 5 prevent the payment to any holders of dissenting shares
of their fair market value, they shall become creditors of the corporation for
the amount thereof together with interest at the legal rate on judgments until
the date of payment, but subordinate to all other creditors in any liquidation
proceeding, such debt to be payable when permissible under the provisions of
Chapter 5.
1307. DIVIDENDS PAID AS CREDIT AGAINST PAYMENT. - Cash dividends declared and
paid by the corporation upon the dissenting shares after the date of approval
of the reorganization by the outstanding shares (Section 152) and prior to
payment for the shares by the corporation shall be credited against the total
amount to be paid by the corporation therefor.
1308. CONTINUING RIGHTS AND PRIVILEGES OF DISSENTING SHAREHOLDERS. - Except as
expressly limited in this chapter, holders of dissenting shares continue to
have all the rights and privileges incident to their shares, until the fair
market value of their shares is agreed upon or determined. A dissenting
shareholder may not withdraw a demand for payment unless the corporation
consents thereto.
1309. TERMINATION OF DISSENTING SHAREHOLDER STATUS. - Dissenting shares lose
their status as dissenting shares and the holders thereof cease to be
dissenting shareholders and cease to be entitled to require the corporation to
purchase their shares upon the happening of any of the following:
(a) The corporation abandons the reorganization. Upon abandonment of the
reorganization, the corporation shall pay on demand to any dissenting
shareholder who has initiated proceedings in good faith under this chapter all
necessary expenses incurred in such proceedings and reasonable attorneys' fees.
(b) The shares are transferred prior to their submission for endorsement in
accordance with Section 1302 or are surrendered for conversion into shares of
another class in accordance with the articles.
B-3
<PAGE>
(c) The dissenting shareholder and the corporation do not agree upon the status
of the shares as dissenting shares or upon the purchase price of the shares,
and neither files a complaint or intervenes in a pending action as provided in
Section 1304, within six months after the date on which notice of the approval
by the outstanding shares or notice pursuant to subdivision (i) of Section 1110
was mailed to the shareholder.
(d) The dissenting shareholder, with the consent of the corporation, withdraws
the shareholder's demand for purchase of the dissenting shares.
1310. SUSPENSION OF PROCEEDINGS FOR PAYMENT PENDING LITIGATION. - If litigation
is instituted to test the sufficiency or regularity of the votes of the
shareholders in authorizing a reorganization, any proceedings under Section
1304 and 1305 shall be suspended until final determination of such litigation.
1311. EXEMPT SHARES. - This chapter, except Section 1312, does not apply to
classes of shares whose terms and provisions specifically set forth the amount
to be paid in respect to such shares in the event of a reorganization or
merger.
1312. ATTACKING VALIDITY OF REORGANIZATION OR MERGER. - (a) No shareholder of a
corporation who has a right under this chapter to demand payment of cash for
the shares held by the shareholder shall have any right at law or in equity to
attack the validity of the reorganization or short-form merger, or to have the
reorganization or short-form merger set aside or rescinded, except in an action
to test whether the number of shares required to authorize or approve the
reorganization have been legally voted in favor thereof; but any holder of
shares of a class whose terms and provisions specifically set forth the amount
to be paid in respect to them in the event of a reorganization or short-form
merger is entitled to payment in accordance with those terms and provisions or,
if the principal terms of the reorganization are approved pursuant to
subdivision (b) of Section 1202, is entitled to payment in accordance with the
terms and provisions of the approved reorganization.
(b) If one of the parties to a reorganization or short-form merger is directly
or indirectly controlled, by, or under common control with, another party to
the reorganization or short-form merger, subdivision (a) shall not apply to any
shareholder of such party who has not demanded payment of cash for such
shareholder's shares pursuant to this chapter; but if the shareholder
institutes any action to attack the validity of the reorganization or
short-form merger or to have the reorganization or short-form merger set aside
or rescinded, the shareholder shall not thereafter have any right to demand
payment of cash for the shareholder's shares pursuant to this chapter. The
court in any action attacking the validity of the reorganization or short-form
merger or to have the reorganization or short-form merger set aside or
rescinded shall not restrain or enjoin the consummation of the transaction
except upon 10 days' prior notice to the corporation and upon a determination
by the court that clearly no other remedy will adequately protect the
complaining shareholder or the class of shareholders of which such shareholder
is a member.
(c) If one of the parties to a reorganization or short-form merger is directly
or indirectly controlled by, or under common control with, another party to the
reorganization or short-form merger, in any action to attack the validity of
the reorganization or short-form merger or to have the reorganization or
short-form merger set aside or rescinded, (1) a party to a reorganization or
short-form merger which controls another party to the reorganization or
short-form merger shall have the burden of proving that the transaction is just
and reasonable as to the shareholders of the controlled party, and (2) a person
who controls two or more parties to a reorganization shall have the burden of
proving that the transaction is just and reasonable as to the shareholders of
any party so controlled.
B-4
<PAGE>
APPENDIX C
[GRAPHIC OMITTED]
June 28, 2000
Board of Directors
Signal Pharmaceuticals, Inc.
5555 Oberlin Drive
San Diego, CA 92121
Members of the Board:
We understand that Signal Pharmaceuticals, Inc. ("Company"), Celgene
Corporation ("Acquiror"), and Celgene Acquisition Corp. (a wholly owned
subsidiary of Acquiror, "Merger Sub") are proposing to enter into an Agreement
and Plan of Merger (the "Agreement") which will provide, among other things,
for the merger (the "Merger") of Merger Sub with and into the Company. Upon
consummation of the Merger, the Company will become a wholly owned subsidiary
of Acquiror.
Under the terms, and subject to the conditions, of the Agreement, (i)
immediately prior to the Merger, all outstanding shares of preferred stock of
the Company (collectively, "Company Preferred Stock") will be converted into
shares of common stock of the Company, par value $0.001 per share ("Company
Common Stock") and (ii) at effective time of the Merger, each outstanding share
of Company Common Stock, other than certain shares to be canceled pursuant to
the Agreement and shares held by stockholders who properly exercise dissenters'
rights ("Dissenting Shares"), will be converted into the right to receive
0.1257 shares (the "Exchange Ratio") of the common stock of Acquiror, par value
$0.01 per share ("Acquiror Common Stock"). In connection with the Agreement,
(i) certain holders of shares of Company Common Stock and Company Preferred
Stock will enter into Voting and Proxy Agreements with Acquiror (the "Voting
Agreements") and (ii) the Company and Acquiror will enter into a stock option
agreement (the "Option Agreement") granting Acquiror an option to purchase
shares of Company Common Stock in certain circumstances. The terms and
conditions of the Merger are set out more fully in the Agreement.
You have asked us whether, in our opinion, the Exchange Ratio is fair from a
financial point of view and as of the date hereof to the "Holders of Company
Common Stock." The "Holders of Company Common Stock" shall be defined as all
holders of Company Common Stock (including holders of Company Preferred Stock
which is to be converted into Company Common Stock immediately prior to the
Merger) other than Acquiror, Merger Sub, any affiliates of Acquiror or Merger
Sub or holders of Dissenting Shares; provided that with respect to any holders
--------
of Company Common Stock who are officers or directors (or who have
representatives serving as directors) of the Company, we have expressed our
opinion as to such holders solely in their capacity as holders of Company
Common Stock and have not taken into account any other agreements or
arrangements that they may have in connection with the Merger.
For the purposes of this opinion we have, among other things:
(i) reviewed certain publicly available financial statements and other
business and financial information of the Company and Acquiror,
respectively;
(ii) reviewed certain internal financial statements and other financial
and operating data, including certain financial forecasts and other
forward looking information, concerning the Company prepared by the
management of the Company;
(iii) reviewed certain publicly available estimates of research analysts
relating to Acquiror;
<PAGE>
Board of Directors
Signal Pharmaceuticals, Inc.
June 28, 2000
Page 2
(iv) held discussions with the respective managements of the Company and
Acquiror concerning the businesses, past and current operations,
financial condition and future prospects of both the Company and
Acquiror, independently and combined, including discussions with the
managements of the Company and Acquiror concerning cost savings and
other synergies that are expected to result from the Merger as well as
their views regarding the strategic rationale for the Merger;
(v) reviewed the financial terms and conditions set forth in drafts, dated
June 26, 2000, of the Agreement, Voting Agreements and Option Agreement
(collectively, the "Draft Agreements");
(vi) reviewed the stock price and trading history of Acquiror Common
Stock;
(vii) compared the financial performance of Acquiror and the prices and
trading activity of Acquiror Common Stock with that of certain other
publicly traded companies comparable with Acquiror;
(viii) compared the financial performance of the Company with that of
certain publicly traded companies comparable to the Company;
(ix) compared the financial terms of the Merger with the financial terms,
to the extent publicly available, of other transactions that we deemed
relevant;
(x) reviewed the pro forma impact of the Merger;
(xi) participated in discussions and negotiations among representatives of
the Company and Acquiror and their financial and legal advisors; and
(xii) made such other studies and inquiries, and reviewed such other
data, as we deemed relevant.
In our review and analysis, and in arriving at our opinion, we have assumed and
relied upon the accuracy and completeness of all of the financial and other
information provided to us (including information furnished to us orally or
otherwise discussed with us by the managements of the Company and Acquiror) or
publicly available and have neither attempted to verify, nor assumed
responsibility for verifying, any of such information. We have relied upon the
assurances of the managements of the Company and Acquiror that they are not
aware of any facts that would make such information inaccurate or misleading.
Furthermore, we did not obtain or make, or assume any responsibility for
obtaining or making, any independent evaluation or appraisal of the properties,
assets or liabilities (contingent or otherwise) of the Company or Acquiror, nor
were we furnished with any such evaluation or appraisal. With respect to the
financial forecasts and other forward looking financial information (and the
assumptions and bases therefore) for each of the Company and Acquiror that we
have reviewed, we have assumed that such forecasts and other forward looking
financial information have been reasonably prepared in good faith on the basis
of reasonable assumptions and reflect the best currently available estimates
and judgments as to the future financial condition and performance of each of
the Company and Acquiror, respectively, and we have further assumed that such
forecasts, and other forward looking financial information will be realized in
the amounts and in the time periods currently estimated. We have assumed that
the Merger will be consummated upon the terms set forth in the Draft Agreements
without material alteration thereof, including, among other things, that the
Merger will be accounted for as a "pooling-of-interests" business combination
in accordance with U.S. generally accepted accounting principles ("GAAP") and
that the Merger will be treated as a tax-free reorganization pursuant to the
Internal Revenue Code of 1986, as amended. In addition, we have assumed that
the historical financial statements of each of the Company and Acquiror
reviewed by us have been prepared and fairly presented in accordance with U.S.
GAAP consistently applied.
C-2
<PAGE>
Board of Directors
Signal Pharmaceuticals, Inc.
June 28, 2000
Page 3
This opinion is necessarily based upon market, economic and other conditions as
in effect on, and information made available to us as of, the date hereof. It
should be understood that subsequent developments may affect the conclusion
expressed in this opinion and that we disclaim any undertaking or obligation to
advise any person of any change in any fact or matter affecting this opinion
which may come or be brought to our attention after the date of this opinion.
Our opinion is limited to the fairness, from a financial point of view and as
to the date hereof, to the Holders of Company Common Stock of the Exchange
Ratio. We do not express any opinion as to (i) the value of any employee
agreement or other arrangement entered into in connection with the Merger, (ii)
any tax or other consequences that might result from the Merger or (iii) what
the value of Acquiror Common Stock will be when issued to the Company's
stockholders pursuant to the Merger or the price at which the shares of
Acquiror Common Stock that are issued pursuant to the Merger may be traded in
the future. Our opinion does not address the relative merits of the Merger and
the other business strategies that the Company's Board of Directors has
considered or may be considering, nor does it address the decision of the
Company's Board of Directors to proceed with the Merger.
In connection with the preparation of our opinion, we were not authorized to
solicit, and did not solicit, third parties regarding alternatives to the
Merger.
We are acting as financial advisor to the Company in connection with the Merger
and will receive (i) a fee contingent upon the delivery of this opinion
irrespective of the conclusion reached herein and (ii) an additional fee
contingent upon the consummation of the Merger. In addition, the Company has
agreed to indemnify us for certain liabilities that may arise out of our
engagement. In the past, we have provided certain investment banking services
to the Company including acting as lead manager for the Company's filing of an
initial public offering, and we and our affiliates are also shareholders of the
Company. In the ordinary course of business, we may trade in Acquiror's
securities for our own account and the account of our customers and,
accordingly, may at any time hold a long or short position in Acquiror's
securities.
Our opinion expressed herein is provided for the information of the Board of
Directors of the Company in connection with its evaluation of the Merger. Our
opinion is not intended to be and does not constitute a recommendation to any
stockholder of the Company as to how such stockholder should vote, or take any
other action, with respect to the Merger. This opinion may not be summarized,
described or referred to or furnished to any party except with our express
prior written consent.
Based upon and subject to the foregoing considerations, it is our opinion that,
as of the date hereof, the Exchange Ratio is fair to the Holders of Company
Common Stock from a financial point of view.
Very truly yours,
/s/ FleetBoston Robertson Stephens Inc.
FLEETBOSTON ROBERTSON STEPHENS INC.
C-3
<PAGE>
CELGENE CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
AUDITED CONSOLIDATED FINANCIAL STATEMENTS
Independent Auditors' Report ............................................................ F-2
Consolidated Balance Sheets as of December 31, 1998 and 1999 ............................ F-3
Consolidated Statements of Operations - Years Ended December 31, 1997, 1998, and 1999 ... F-4
Consolidated Statements of Stockholders' Equity (Deficit) - Years Ended December 31,
1997,1998 and 1999 .................................................................... F-5
Consolidated Statements of Cash Flows - Years Ended December 31, 1997, 1998 and 1999 .... F-6
Notes to Consolidated Financial Statements .............................................. F-8
AUDITED CONSOLIDATED FINANCIAL STATEMENT SCHEDULE
Schedule II - Valuation and Qualifying Accounts ......................................... F-19
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheet as of March 31, 2000 ......................................... F-20
Consolidated Statements of Operations - Three Months Ended March 31, 2000 and 1999 ...... F-21
Consolidated Statements of Cash Flows - Three Months Ended March 31, 2000 and 1999 ...... F-22
Notes to Unaudited Consolidated Fiinancial Statements ................................... F-24
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
CELGENE CORPORATION:
We have audited the consolidated financial statements of Celgene Corporation
and subsidiary as listed in the accompanying index. In connection with our
audits of the consolidated financial statements, we also have audited the
consolidated financial statement schedule as listed in the accompanying index.
These consolidated financial statements and consolidated financial statement
schedule are the responsibility of the Company's management. Our responsibility
is to express an opinion on these consolidated financial statements and
consolidated financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Celgene Corporation
and subsidiary as of December 31, 1998 and 1999, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1999, in conformity with generally accepted accounting
principles. Also in our opinion, the related consolidated financial statement
schedule, when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly, in all material respects, the
information set forth therein.
/s/ KPMG LLP
Short Hills, New Jersey January 27, 2000,
except as to paragraph 1 of note 14,
which is as of February 16, 2000
and paragraph 2 of note 14, which is
as of April 14, 2000
F-2
<PAGE>
CELGENE CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------
1998 1999
----------------- -----------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ........................................... $ 3,066,953 $ 15,255,422
Marketable securities available for sale ............................ 2,056,890 4,271,221
Accounts receivable, net of allowance of $43,386 and $121,437 at
December 31, 1998 and 1999, respectively ........................... 2,662,389 4,928,472
Inventory ........................................................... 1,571,408 2,456,059
Other current assets ................................................ 229,060 895,602
-------------- --------------
Total current assets ............................................. 9,586,700 27,806,776
Plant and equipment, net ............................................ 2,262,130 2,336,242
Other assets ........................................................ 79,167 2,190,652
-------------- --------------
Total assets ..................................................... $ 11,927,997 $ 32,333,670
============== ==============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable .................................................... $ 3,848,853 $ 2,358,563
Accrued expenses .................................................... 3,041,859 6,761,889
Capitalized lease obligation ........................................ 225,372 179,885
-------------- --------------
Total current liabilities ........................................ 7,116,084 9,300,337
Capitalized lease obligation-net of current portion ................. 195,578 22,924
Other non-current liabilities ....................................... -- 225,000
Long term convertible notes ......................................... 8,348,959 38,494,795
-------------- --------------
Total liabilities ................................................ 15,660,621 48,043,056
-------------- --------------
Stockholders' deficit:
Preferred stock,$.01 par value per share 5,000,000 authorized; none
outstanding at December 31,1998 and 1999 ...........................
Common stock, $.01 par value per share 120,000,000 authorized; issued
and outstanding 16,612,973 and 17,703,646 shares at December 31,
1998 and December 31,1999, respectively ............................ 166,130 177,036
Additional paid-in capital .......................................... 140,714,314 150,599,750
Accumulated deficit ................................................. (144,613,068) (166,394,268)
Accumulated other comprehensive loss ................................ -- (91,904)
-------------- --------------
Total stockholders' deficit ...................................... (3,732,624) (15,709,386)
-------------- --------------
Total liabilities and stockholders' deficit ...................... $ 11,927,997 $ 32,333,670
============== ==============
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
CELGENE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------------------------
1997 1998 1999
---------------- ---------------- -----------------
<S> <C> <C> <C>
Revenues:
Product sales ............................... $ -- $ 3,265,490 $ 24,052,124
Research contracts .......................... 1,122,193 535,000 2,157,500
------------- ------------- -------------
Total revenues ............................ 1,122,193 3,800,490 26,209,624
------------- ------------- -------------
Expenses: ....................................
Cost of goods sold .......................... -- 282,307 2,982,713
Research and development .................... 17,380,390 19,771,953 19,646,129
Selling, general and administrative ......... 9,145,456 16,218,486 26,235,802
------------- ------------- -------------
Total expenses ........................... 26,525,846 36,272,746 48,864,644
------------- ------------- -------------
Operating loss ............................... (25,403,653) (32,472,256) (22,655,020)
Other income and expense:
Interest income ............................. 495,580 705,215 694,390
Interest expense ............................ 111,771 255,832 2,838,480
------------- ------------- -------------
Loss before tax benefit ...................... (25,019,844) (32,022,873) (24,799,110)
Tax benefit (note 9) ......................... -- -- 3,017,910
------------- ------------- -------------
Loss from continuing operations .............. (25,019,844) (32,022,873) (21,781,200)
Discontinued operations: (note 10)
Loss from operations ........................ (427,183) (59,837) --
Gain on sale of chiral assets ............... -- 7,014,830 --
------------- ------------- -------------
Net loss ..................................... (25,447,027) (25,067,880) (21,781,200)
Accretion of premium payable on
preferred stock and warrants ................ 521,397 24,648 --
Deemed dividend for preferred stock
conversion discount ......................... 953,077 -- --
------------- ------------- -------------
Net loss applicable to common
stockholders ................................ $ (26,921,501) $ (25,092,528) $ (21,781,200)
============= ============= =============
Per share basic and diluted: (note 2)
Loss from continuing operations ............. $ (0.72) $ (0.66) $ (0.43)
Discontinued operations:
Loss from operations ...................... (0.01) (0.00) --
Gain on sale of chiral assets ............. -- 0.14 --
Net loss applicable to common
stockholders .............................. $ (0.73) $ (0.52) $ (0.43)
============= ============= =============
Weighted average number of shares of
common stock outstanding .................... 36,645,000 48,480,000 51,036,000
============= ============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
CELGENE CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
<TABLE>
<CAPTION>
COMMON STOCK PREFERRED STOCK TREASURY STOCK
------------------------ ---------------------------- ---------------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
------------ ----------- ----------- ---------------- ------------ --------------
<S> <C> <C> <C> <C> <C> <C>
Balances at January 1, 1997 ................. 10,611,422 $106,114 267 $ 13,883,416 (29,985) $ (100,239)
Exercised stock options ..................... 2,986 30
Shares issued in lieu of cash bonus ......... 5,000 50
Amortization of deferred compensation .
Conversion of convertible debenture ......... 441,248 4,412
Issuance of Series B Preferred Stock - net 5,000 4,046,923
Conversion of preferred stock ............... 2,166,193 21,662 (5,180) (14,654,071)
Accretion of premium on preferred stock 521,397
Redemption of preferred stock ............... (13) (721,287)
Deemed dividend on Series B Preferred
Stock and fair value of warrants ........... 953,077
Comprehensive loss:
Net loss ...................................
Net change in unrealized gain (loss) on
investment securities ......................
Total comprehensive loss ....................
Treasury shares issued ...................... 7,097 23,704
Issuance of common stock, net ............... 2,201,100 22,011
---------- --------
Balances at December 31, 1997 ............... 15,427,949 $154,279 74 $ 4,029,455 (22,888) $ (76,535)
Exercised stock options ..................... 283,120 2,831
Exercise of warrants ........................ 118,230 1,183
Costs related to secondary offering .........
Conversion of preferred stock ............... 575,669 5,757 (74) (4,054,103)
Accretion of premium on preferred stock 24,648
Shares issued for employee benefit plans 8,317 83 22,888 76,535
Sale of common stock ........................ 199,688 1,997
Net loss and comprehensive loss .............
Balances at December 31, 1998 ............... 16,612,973 $166,130 -- $ -- -- $ --
Exercised stock options ..................... 949,323 9,493
Exercise of warrants ........................ 59,434 594
Shares issued for employee benefit plans 81,916 819
Issuance of options related to license
agreement ..................................
Comprehensive loss:
Net loss ...................................
Net change in unrealized gain (loss) on
investment securities ......................
Total comprehensive loss ...................
Balances at December 31, 1999 .............. 17,703,646 $177,036 -- $ -- -- $ --
========== ======== ====== ============== ======= ==========
<CAPTION>
ACCUMULATED
OTHER
ADDITIONAL UNAMORTIZED COMPREHENSIVE
PAID-IN DEFERRED ACCUMULATED INCOME
CAPITAL COMPENSATION DEFICIT (LOSS) TOTAL
--------------- -------------- ------------------ -------------- -----------------
<S> <C> <C> <C> <C> <C>
Balances at January 1, 1997 ................. $ 94,770,176 $ (1,133) $ (92,599,039) $ 5,714 $ 16,065,009
Exercised stock options ..................... 20,187 20,217
Shares issued in lieu of cash bonus ......... 55,575 55,625
Amortization of deferred compensation . 1,133 1,133
Conversion of convertible debenture ......... 2,326,892 2,331,304
Issuance of Series B Preferred Stock - net 793,825 4,840,748
Conversion of preferred stock ............... 14,632,409 --
Accretion of premium on preferred stock (521,397) --
Redemption of preferred stock ............... (721,287)
Deemed dividend on Series B Preferred
Stock and fair value of warrants ........... (953,077) --
Comprehensive loss:
Net loss ................................... (25,447,027) (25,447,027)
Net change in unrealized gain (loss) on
investment securities ...................... (5,714) (5,714)
-------------
Total comprehensive loss .................... (25,452,741)
-------------
Treasury shares issued ...................... 55,250 78,954
Issuance of common stock, net ............... 18,184,119 18,206,130
------------ -------------
Balances at December 31, 1997 ............... $130,838,433 $ -- $ (119,520,540) $ -- $ 15,425,092
Exercised stock options ..................... 2,028,715 2,031,546
Exercise of warrants ........................ 986,883 988,066
Costs related to secondary offering ......... (73,136) (73,136)
Conversion of preferred stock ............... 4,048,346 --
Accretion of premium on preferred stock (24,648) --
Shares issued for employee benefit plans 387,070 463,688
Sale of common stock ........................ 2,498,003 2,500,000
Net loss and comprehensive loss ............. (25,067,880) (25,067,880)
-------------- -------------
Balances at December 31, 1998 ............... $140,714,314 $ -- $ (144,613,068) $ -- $ (3,732,624)
Exercised stock options ..................... 8,028,139 8,037,632
Exercise of warrants ........................ 361,398 361,992
Shares issued for employee benefit plans 799,004 799,823
Issuance of options related to license
agreement .................................. 696,895 696,895
Comprehensive loss:
Net loss ................................... (21,781,200) (21,781,200)
Net change in unrealized gain (loss) on
investment securities ...................... (91,904) (91,904)
Total comprehensive loss ................... (21,873,104)
-------------
Balances at December 31, 1999 .............. $150,599,750 $ -- $ (166,394,268) $ (91,904) $ (15,709,386)
============ ========= ============== ========= =============
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
CELGENE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------------------------
1997 1998 1999
----------------- ----------------- -----------------
<S> <C> <C> <C>
Cash flows from operating activities:
Loss from continuing operations ............................... $ (25,019,844) $ (32,022,873) $ (21,781,200)
Adjustments to reconcile loss from continuing operations
to net cash used in operating activities:
Depreciation ............................................... 380,364 812,555 993,389
Provision for losses on accounts receivable ................ -- 43,386 78,051
Amortization of convertible debt costs ..................... 126,577 -- --
Amortization of deferred compensation ...................... 1,133 -- --
Interest on convertible debentures ......................... 68,736 -- --
Issuance of stock award .................................... 55,625 -- --
Amortization of debt issuance costs ........................ -- -- 250,000
Amortization of discount on convertible note ............... -- -- 145,836
Shares issued for employee benefit plans ................... 78,954 463,688 799,823
Change in current assets & liabilities:
Increase in inventory ........................................ -- (1,571,408) (884,651)
Increase(decrease) in accounts payable and accrued
expenses ................................................... (379,091) 4,659,517 2,454,740
Increase in accounts receivable .............................. (1,051,789) (1,275,391) (2,344,133)
(Increase)decrease in other assets ........................... 150,304 124,206 (416,544)
------------- ------------- -------------
Net cash used in continuing operations ........................ (25,589,031) (28,766,320) (20,704,689)
Net cash used in discontinued operations ...................... (302,996) (59,837) --
------------- ------------- -------------
Net cash used in operating activities ......................... (25,892,027) (28,826,157) (20,704,689)
------------- ------------- -------------
Cash flows from investing activities:
Capital expenditures .......................................... (1,240,775) (788,661) (1,782,090)
Proceeds from sales and maturities of marketable
securities available for sale ................................ 47,470,593 8,559,604 2,495,992
Purchases of marketable securities available for sale ......... (30,584,284) (10,616,494) (4,802,227)
Proceeds from sale of chiral assets ........................... -- 7,500,000 --
Purchase of license rights .................................... -- -- (450,000)
------------- ------------- -------------
Net cash provided by (used in) investing activities ........... 15,645,534 4,654,449 (4,538,325)
------------- ------------- -------------
Cash flows from financing activities:
Net proceeds from secondary offering .......................... 18,206,130 -- --
Costs related to secondary offering ........................... -- (73,136) --
Proceeds from sale of stock ................................... -- 2,500,000 --
Proceeds from exercise of common stock options and
warrants ..................................................... 20,217 3,019,612 8,399,624
Redemption of Series A preferred stock ........................ (721,287) -- --
Net proceeds from issuance of preferred stock ................. 4,840,748 -- --
Capital lease buyout .......................................... -- (400,414) (218,141)
Capital lease funding ......................................... 561,169 260,195 --
Debt issuance costs ........................................... -- -- (750,000)
Net proceeds from issuance of convertible notes ............... -- 8,348,959 30,000,000
------------- ------------- -------------
Net cash provided by financing activities ..................... 22,906,977 13,655,216 37,431,483
------------- ------------- -------------
Net increase (decrease) in cash and cash equivalents .......... 12,660,484 (10,516,492) 12,188,469
Cash and cash equivalents at beginning of year ................ 922,961 13,583,445 3,066,953
------------- ------------- -------------
Cash and cash equivalents at end of year ...................... $ 13,583,445 $ 3,066,953 $ 15,255,422
============= ============= =============
</TABLE>
F-6
<PAGE>
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------------------
1997 1998 1999
--------------- -------------- --------------
<S> <C> <C> <C>
Non-cash investing activity:
Change in net unrealized gain(loss) on marketable
securities available for sale ........................... $ (5,714) $ -- $ (91,904)
=========== =========== ==========
Issuance of options related to license agreement ......... $ -- $ -- $ 696,895
=========== =========== ==========
Non-cash financing activities:
Issuance of common stock upon the conversion of
convertible debentures and accrued interest thereon,
net ..................................................... $ 2,331,304 $ -- $ --
=========== =========== ==========
Accretion of premium payable on preferred stock and
warrants ................................................ $ 521,397 $ 24,648 $ --
=========== =========== ==========
Deemed dividend for preferred stock conversion discount $ 953,077 $ -- $ --
=========== =========== ==========
Issuance of common stock upon the conversion of
convertible preferred stock and accrued accretion
thereon, net ............................................ $14,654,071 $ 4,054,103 $ --
=========== =========== ==========
Supplemental disclosure of cash flow information:
Interest paid ............................................ $ 20,599 $ 19,766 $1,504,441
=========== =========== ==========
Cash received related to tax benefit ..................... $ -- $ -- $3,017,910
=========== =========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE>
CELGENE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1998, AND 1999
(1) NATURE OF BUSINESS AND LIQUIDITY
Celgene Corporation and its subsidiary (collectively "Celgene" or the
"Company") is an independent biopharmaceutical company engaged in the
discovery, development and commercialization of novel human pharmaceuticals for
the treatment of cancer and immunological diseases. The Company's primary
therapeutic focus is on the development of orally administered, small molecule
pharmaceuticals that regulate tumor necrosis factor alpha, or TNF--, and are
anti-angiogenic. TNF-- has been linked to the cause and symptoms of many
chronic inflammatory and immunological diseases. Anti-angiogenic drugs inhibit
the growth of undesirable blood vessels, including those that promote tumor
growth. Our lead product, THALOMID(TM) (thalidomide), was approved for sale in
the United States by the U.S. Food and Drug Administration, ("FDA"), on July
16, 1998. THALOMID is approved for the treatment of erythema nodosum leprosum,
("ENL"), an inflammatory complication of leprosy. Our cancer and immunology
pharmaceutical pipeline is highlighted by two classes of novel and proprietary
oral therapeutic agents, IMiDs, or ImmunoModulatory Drugs, and SelCIDs, or
Selective Cytokine Inhibitory Drugs. Both classes are being developed for the
treatment of cancer, chronic inflammatory diseases, such as inflammatory bowel
disease and rheumatoid arthritis, and other diseases of the immune system.
The Company expects that its rate of spending will increase as the result of
increased clinical trial costs, increased expenses associated with the
regulatory approval process and commercialization of products now in
development, increased costs related to the commercialization of THALOMID, and
increased working capital requirements. This increased spending will be
mitigated by the collection of receivables resulting from sales of THALOMID. It
is anticipated that the increasing sales of THALOMID, as well as existing cash
resources, will be sufficient to fund operations through 2000.
The consolidated financial statements include the parent Company and its
subsidiary Celgro. All inter-company transactions have been eliminated. The
preparation of the consolidated financial statements requires management to
make estimates and assumptions that affect reported amounts and disclosures.
Actual results could differ from those estimates. The Company is subject to
certain risks and uncertainties such as uncertainty of product development,
uncertainties regarding regulatory approval, no assurance of market acceptance
of products, risk of product liability, uncertain scope of patent and
proprietary rights, intense competition, and rapid technological change.
(2)SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) CASH EQUIVALENTS
At December 31, 1998 and 1999, cash equivalents consisted principally of funds
invested in money market funds, and United States government securities such as
treasury bills and notes.
(B) MARKETABLE SECURITIES
The Company classifies all of its marketable securities as securities available
for sale. Such securities are held for an indefinite period of time and were
intended to be used to meet the ongoing liquidity needs of the Company.
Realized gains and losses are included in operations and are measured using the
specific cost identification method.
(C) INVENTORY
Inventories are priced at lower of cost or market using the first-in, first-out
(FIFO) method. Prior to FDA approval, the raw material, formulation and
encapsulation costs related to THALOMID production were recorded as research
and development expense.
F-8
<PAGE>
CELGENE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1998, AND 1999- (CONTINUED)
(D) LONG-LIVED ASSETS
Plant and equipment are stated at cost. Depreciation of plant and equipment is
provided using the straight-line method. The estimated useful lives of fixed
assets are as follows:
<TABLE>
<S> <C>
Laboratory equipment and machinery ......... 5-10 years
Furniture and fixtures ..................... 5-10 years
</TABLE>
Amortization of leasehold improvements is calculated using the straight-line
method over the term of the lease or the life of the asset, whichever is
shorter. Maintenance and repairs are charged to operations as incurred, while
renewals and improvements are capitalized.
The Company reviews long-lived assets for impairment whenever events or changes
in business circumstances occur that indicate that the carrying amount of the
assets may not be recoverable. The Company assesses the recoverability of
long-lived assets held and to be used based on undiscounted cash flows and
measures the impairment, if any, using discounted cash flows.
(E) RESEARCH AND DEVELOPMENT COSTS
All research and development costs are expensed as incurred.
(F) INCOME TAXES
The Company utilizes the asset and liability method of accounting for income
taxes. Under this method, deferred tax assets and liabilities are determined
based on the difference between the financial statement carrying amounts and
tax bases of assets and liabilities using enacted tax rates in effect for years
in which the temporary differences are expected to reverse.
Research and development tax credits will be recognized as a reduction of the
provision for income taxes when realized.
(G) REVENUE RECOGNITION
Revenue from the sale of products is recognized upon product shipment. Revenue
under research contracts is recorded as earned under the contracts, generally
as services are provided. Revenue is recognized immediately for nonrefundable
license fees when agreement terms require no additional performance on the part
of the Company.
(H) STOCK OPTION PLAN
The Company applies the intrinsic value-based method of accounting prescribed
by Accounting Principles Board ("APB") Opinion No. 25, Accounting for Stock
Issued to Employees, and related interpretations, in accounting for its fixed
plan stock options. As such, compensation expense would be recorded on the date
of grant only if the current market price of the underlying stock exceeded the
exercise price. Statement of Financial Accounting Standard ("SFAS") No. 123,
Accounting for Stock-Based Compensation, established accounting and disclosure
requirements using a fair value-based method of accounting for stock-based
employee compensation plans. As allowed by SFAS No. 123, the Company has
elected to continue to apply the intrinsic value-based method of accounting
described above, and has adopted the disclosure requirements of SFAS No. 123.
(I) EARNINGS PER SHARE
"Basic" earnings per common share equals net income divided by weighted average
common shares outstanding during the period. "Diluted" earnings per common
share equals net income divided by the sum of weighted average common shares
outstanding during the period plus common stock equivalents if dilutive. The
Company's basic and diluted per share amounts are the same since the
F-9
<PAGE>
CELGENE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1998, AND 1999- (CONTINUED)
assumed exercise of stock options, and warrants, and the conversion of
convertible debentures and preferred stock are all anti-dilutive. The amount of
common stock equivalents excluded from the calculation were 11,312,862 in 1997,
11,590,605 in 1998 and 15,889,872 in 1999.
(J) COMPREHENSIVE INCOME
Comprehensive income (loss) consists of net losses and the change in net
unrealized gains (losses) on securities and is presented in the consolidated
statements of stockholders' equity (deficit).
(K) PRESENTATION
In connection with the disposition of the Company's chiral intermediate
operation in January 1998 (see note 10), the 1997 and 1998 financial results
applicable to continuing operations exclude amounts from this discontinued
operation.
(L) FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value, which equals carrying value, of marketable securities available
for sale is based on quoted market prices. For all other financial instruments,
excluding convertible notes (see note 6), their carrying value approximates
fair value due to the short maturity of these instruments.
In June 1998, SFAS No. 133, Accounting for Derivative Instruments and Hedging
Activities was issued and, as amended, is effective for all fiscal years
beginning after June 15, 2000. SFAS No. 133 standardizes the accounting for
derivative instruments including certain derivative instruments embedded in
other contracts and requires derivative instruments to be recognized as assets
and liabilities and be recorded at fair value. The Company is currently not
party to any derivative instruments. Any future transactions involving
derivative instruments will be evaluated based on SFAS No. 133.
(M) OTHER ASSETS
Other assets include certain patent rights, the cost of which is amortized
using the straight line method over the life of the patents. The weighted
average remaining patent life at December 31, 1999 is 12 years.
(3) INVENTORY
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------
1998 1999
============== ==============
<S> <C> <C>
Raw materials ........... $ 440,400 $ 1,411,663
Work in process ......... 535,494 647,841
Finished goods .......... 595,514 396,555
----------- -----------
$ 1,571,408 $ 2,456,059
=========== ===========
</TABLE>
Inventory costs prior to FDA approval of THALOMID on July 16, 1998 were
expensed as research and development costs.
F-10
<PAGE>
CELGENE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1998, AND 1999- (CONTINUED)
(4) PLANT AND EQUIPMENT
Plant and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------
1998 1999
-------------- --------------
<S> <C> <C>
Leasehold improvements ..................... $ 4,008,246 $ 4,375,013
Laboratory equipment and machinery ......... 4,874,733 5,323,897
Furniture and fixtures ..................... 470,667 605,623
Leased equipment ........................... 675,304 675,304
----------- -----------
10,028,950 10,979,837
Less: accumulated depreciation ............. 7,766,820 8,643,595
----------- -----------
$ 2,262,130 $ 2,336,242
=========== ===========
</TABLE>
(5) ACCRUED EXPENSES
Accrued expenses consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------
1998 1999
-------------- --------------
<S> <C> <C>
Professional and consulting fees ......... $ 787,381 $ 905,072
Accrued compensation ..................... 1,650,048 3,098,540
Accrued interest and royalties ........... 361,809 1,989,394
Other .................................... 242,621 768,883
----------- -----------
$ 3,041,859 $ 6,761,889
=========== ===========
</TABLE>
(6) CONVERTIBLE DEBT
On September 16, 1998, the Company issued a convertible note to an
institutional investor in the amount of $8,750,000. The note has a five year
term and a coupon rate of 9.25% with interest payable on a semi-annual basis.
The note contains a conversion feature that allows the note holder to convert
the note into common shares at $3.67 per share. The Company can redeem the note
after three years at 103% of the principal amount (two years if the Company's
stock trades at $8.26 or higher for a period of 20 consecutive trading days).
This note was issued at a discount of $437,500 which is being amortized over
three years.
On January 20, 1999, the Company issued to an institutional investor a
convertible note in the amount of $15,000,000. The note has a five year term
and a coupon rate of 9% with interest payable on a semi-annual basis. The note
contains a conversion feature that allows the note holder to convert the note
into common shares after one year at $6 per share. The Company can redeem the
note after three years at 103% of the principal amount (two years under certain
conditions). Issuance costs of $750,000 incurred in connection with this note
are being amortized over three years.
On July 6, 1999, the Company issued to a third institutional investor a
convertible note in the amount of $15,000,000. The note has a five year term
and a coupon rate of 9% with interest payable on a semi-annual basis. The note
contains a conversion feature that allows the note holder to convert the note
into common shares after one year at $6.33 per share. The Company can redeem
the note after three years at 103% of the principal amount (two years under
certain conditions). There was no fee or discount associated with this note.
F-11
<PAGE>
CELGENE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1998, AND 1999- (CONTINUED)
At December 31, 1999, the fair value of the Company's convertible notes
exceeded their carrying value, reflecting the increase to $23.33 per share in
the market value of the Company's common stock at that date.
(7) STOCKHOLDERS' EQUITY
PREFERRED STOCK
The Board of Directors has the authority to issue, at any time, without further
stockholder approval, up to 5,000,000 shares of preferred stock, and to
determine the price, rights, privileges, and preferences of those shares.
SERIES A CONVERTIBLE PREFERRED STOCK
During 1996, in a private placement, the Company completed the sale of 503
shares of Series A Convertible Preferred Stock, par value $.01 per share, at an
issue price of $50,000 per share. All of the shares of the Series A Convertible
Preferred Stock with their respective accrued accretion, had been converted or
redeemed into 10,026,606 shares of common stock at December 31, 1998.
During 1996, the Company had issued warrants valued at $138,156, that entitle
certain stockholders of the Series A Convertible Preferred Stock to purchase
460,521 shares of common stock at an exercise price of $3.83. The warrants were
issued in exchange for the deferral of conversion for 90 days. All these
warrants either expired or were exercised for 10,254 shares of common stock at
December 31, 1998. In connection with the private placement, the Company also
granted to certain executives and affiliates of the placement agent warrants,
valued at $60,168, to purchase an aggregate of 200,559 shares of common stock
at an exercise price of $6.84, subject to proportional adjustment in the event
that the Company undertakes a stock split, stock dividend, recapitalization or
similar event. These warrants are exercisable for a period of five years from
the date of issuance. As of December 31, 1999, 105,117 warrants were exercised
to purchase 69,966 shares of common stock.
SERIES B CONVERTIBLE PREFERRED STOCK
During 1997, in a private placement, the Company completed the sale of 5,000
shares of Series B Convertible Preferred Stock (the "Series B Preferred"), par
value $.01 per share, at an issue price of $1,000 per share. The Company
received net proceeds, after offering costs of $4,840,748. Shares could be
converted at an initial conversion price of $2.17 per share. All shares of the
Series B Preferred had been converted into 2,365,407 shares of common stock at
December 31, 1998.
Upon request of the purchasers of the Series B Preferred, the Company is
required to issue warrants to acquire a number of shares of common stock equal
to (i) 1,500,000 divided by the Conversion Price in effect on the Issuance Date
(692,307 warrants as of December 31, 1999) plus (ii) 37.5% of the conversion
shares issuable on such issuance date upon conversion of all shares of Series B
Preferred issued through the issuance date (865,383 warrants as of December 31,
1999). All such warrants will have a term of four years from the issuance date
and an exercise price equal to 115% of the conversion price in effect on the
issuance date ($2.17 at December 31, 1999). The fair value of warrants at the
issuance date was $0.43 per warrant. As of December 31, 1999 no warrants have
been exercised.
RIGHTS PLAN
During 1996, the Company adopted a shareholder rights plan ("Rights Plan"). The
Rights Plan involves the distribution of one "Right" as a dividend on each
outstanding share of the Company's common stock to each holder of record on
September 26, 1996. Each Right shall entitle the holder to purchase one-tenth
of a share of common stock. The Rights trade in tandem with the common stock
until, and are exercisable upon, certain triggering events, and the exercise
price is based on the
F-12
<PAGE>
CELGENE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1998, AND 1999- (CONTINUED)
estimated long term value of the Company's common stock. In certain
circumstances, the Rights Plan permits the holders to purchase shares of the
Company's common stock at a discounted rate. The Company's Board of Directors
retains the right at all times prior to acquisition of 15% of our voting common
stock by an acquiror, to discontinue the Rights Plan through the redemption of
all rights or to amend the Rights Plan in any respect.
(8) STOCK BASED COMPENSATION
(A) STOCK OPTIONS
The Company has two Incentive Plans that provide for the granting of options,
restricted stock awards, stock appreciation rights, performance awards and
other stock-based awards to employees and officers of the Company to purchase
not more than an aggregate of 4,200,000 shares of common stock under the 1992
plan and 4,500,000 shares of common stock under the 1998 plan, subject to
adjustment under certain circumstances. The Management Compensation and
Development Committee of the Board of Directors (the "Committee") determines
the type, amount and terms, including vesting, of any awards made under the
Incentive Plans. The Plans terminate in 2002 and 2008, respectively.
With respect to options granted under the Incentive Plans, the exercise price
may not be less than the fair market value of the common stock on the date of
grant. In general, each option granted under the Plans vests evenly over a
three or four year period and expires 10 years from the date of grant, subject
to earlier expiration in case of termination of employment. The vesting period
for options and restricted stock awards granted under the Plans is subject to
certain acceleration provisions if a change in control, as defined in the
Plans, occurs.
On June 16, 1995, the stockholders of the Company approved the 1995
Non-Employee Directors' Incentive Plan, which provides for the granting of
non-qualified stock options to purchase an aggregate of not more than 1,050,000
shares of common stock (subject to adjustment under certain circumstances) to
directors of the Company who are not officers or employees of the Company
("Non-Employee Directors"). Each new Non-Employee Director, upon the date of
election or appointment, receives an option to purchase 20,000 shares of common
stock. Additionally, upon the date of each annual meeting of stockholders, each
continuing Non-Employee Director receives an option to purchase 10,000 shares
of common stock (or a pro rata portion thereof for service less than one year).
The shares subject to each non-employee director's option grant of 20,000
shares vest in four equal annual installments commencing on the first
anniversary of the date of grant. The shares subject to an annual meeting
option grant vest in full on the date of the first annual meeting of
stockholders held following the date of grant. On June 22, 1999, the
stockholders of the Company approved an amendment to the 1995 Non-Employee
Directors' Incentive Plan that a.) increased the number of shares to 1,800,000
and b.) provided for a discretionary grant upon the date of each annual meeting
of an additional option to purchase up to 5,000 shares to a non-employee
director who serves as a member (but not a chairman) of a committee of the
Board of Directors and up to 10,000 shares to a non-employee director who
serves as the chairman of a committee of the Board of Directors. All options
are granted at an exercise price that equals the fair market value of the
Company's common stock at the grant date and expire 10 years after the date of
grant. This plan terminates in 2005.
F-13
<PAGE>
CELGENE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1998, AND 1999- (CONTINUED)
The weighted-average fair value per share for stock options granted was $3.09
for the 1999 options, $1.32 for the 1998 options and $1.31 for those granted in
1997. The Company estimated the fair values using the Black-Scholes option
pricing model and used the following assumptions:
<TABLE>
<CAPTION>
1997 1998 1999
---------- ---------- ----------
<S> <C> <C> <C>
Risk-free interest rate ....................... 6.37% 5.68% 6.38%
Expected stock price volatility ............... 55% 66% 46%
Expected term until exercise (years) .......... 3.09 2.86 4.98
Expected dividend yield ....................... 0% 0% 0%
</TABLE>
The Company does not record compensation expense for stock option grants. The
following table summarizes results as if compensation expense was recorded for
the annual option grants under the fair value method:
<TABLE>
<CAPTION>
(THOUSANDS OF DOLLARS,
EXCEPT PER SHARE DATA) 1997 1998 1999
--------------------------------------------------------------- -------------- -------------- --------------
<S> <C> <C> <C>
Net loss applicable to common stockholders:
As reported ............................................. $ (26,922) $ (25,093) $ (21,781)
Pro forma ............................................... (28,652) (26,745) (25,491)
Net loss per share applicable to common stockholders basic
and diluted:
As reported ............................................. (0.73) (0.52) (0.43)
Pro forma ............................................... (0.78) (0.55) (0.50)
</TABLE>
The pro forma effects on net loss applicable to common stockholders and net
loss per share applicable to common stockholders (basic and diluted) for 1997,
1998 and 1999 may not be representative of the pro forma effects in future
years since compensation cost is allocated on a straight-line basis over the
vesting periods of the grants, which extends beyond the reported years.
F-14
<PAGE>
CELGENE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1998, AND 1999- (CONTINUED)
The following table summarizes the stock option activity for the aforementioned
Plans:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
SHARES -----------------------------------
AVAILABLE WEIGHTED AVERAGE
FOR GRANT SHARES PRICE PER SHARE
--------------- --------------- -----------------
<S> <C> <C> <C>
Balance January 1, 1997 ........... 1,328,535 6,018,642 $ 3.20
Authorized ....................... 1,500,000 -- --
Expired .......................... (224,391) -- --
Granted .......................... (1,478,325) 1,478,325 3.13
Exercised ........................ -- (20,958) 2.61
Cancelled ........................ 426,081 (426,081) 3.12
---------- --------- --------
Balance December 31, 1997 ......... 1,551,900 7,049,928 3.20
Authorized ....................... 4,860,000 -- --
Expired .......................... (255,285) -- --
Granted .......................... (1,679,949) 1,679,949 2.96
Exercised ........................ -- (849,360) 2.39
Cancelled ........................ 596,178 (596,178) 3.58
---------- --------- --------
Balance December 31, 1998 ......... 5,072,844 7,284,339 3.21
Authorized ....................... 750,000 -- --
Expired .......................... (210,141) -- --
Granted .......................... (2,671,590) 2,671,590 6.42
Exercised ........................ -- (2,847,969) 2.82
Cancelled ........................ 126,159 (126,159) 3.55
---------- ---------- --------
Balance December 31, 1999 ......... 3,067,272 6,981,801 $ 4.59
========== ========== ========
</TABLE>
The following table summarizes information concerning options outstanding under
the Plans at December 31, 1999:
<TABLE>
<CAPTION>
WEIGHTED WEIGHTED WEIGHTED
NUMBER AVERAGE AVERAGE NUMBER AVERAGE
RANGE OF OUTSTANDING EXERCISE REMAINING EXERCISABLE EXERCISE
EXERCISE PRICE AT 12/31/99 PRICE TERM (YRS.) AT 12/31/99 PRICE
---------------- ------------- ---------- ------------- ------------- -----------
<S> <C> <C> <C> <C> <C>
1.67 -- 3.00 1,882,554 $ 2.59 6.8 968,898 $ 2.42
3.00 -- 4.33 1,352,760 3.56 6.9 884,583 3.56
4.34 -- 6.00 3,411,987 5.31 8.2 1,048,221 4.81
6.00 + 334,500 12.58 9.8 -- --
--------- ------- --- --------- --------
6,981,801 $ 4.59 7.6 2,901,702 $ 3.63
========= ======= === ========= ========
</TABLE>
(B) STOCK AWARDS
On January 1, 1997, the Company awarded 15,000 shares to the Company's Chairman
and Chief Executive Officer, which were immediately vested. The fair value of
$55,625 for this award was expensed.
(C) WARRANTS
In connection with the retention of an investment firm to assist in the sale
and issuance of the Series A Convertible Preferred Stock, the Company, in 1996
granted to such firm, warrants to purchase until March 10, 2001, 200,559 shares
of common stock at a price of $6.84. There were 95,442 warrants outstanding as
of December 31, 1999.
In connection with the placement of the Series B Convertible Preferred Stock in
June, 1997, the Company has an obligation to issue warrants to purchase
1,557,690 shares of common stock until June 1, 2002, at a price of $2.49 per
share. As of December 31, 1999 these warrants were outstanding.
F-15
<PAGE>
CELGENE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1998, AND 1999- (CONTINUED)
(9) INCOME TAXES
At December 31, 1998 and 1999, the tax effects of temporary differences that
give rise to deferred tax assets are as follows:
<TABLE>
<CAPTION>
1998 1999
--------------- ---------------
<S> <C> <C>
Deferred assets:
Federal and state net operating loss carryforwards ...................... $ 54,779,000 $ 73,147,000
Research and experimentation tax credit carryforwards ................... 3,235,000 3,984,000
Plant and equipment, principally due to differences in depreciation ..... 772,000 1,075,000
Patents, principally due to differences in amortization ................. 62,000 58,000
Accrued expenses ........................................................ 665,000 560,000
------------- -------------
Total deferred tax assets ............................................ 59,513,000 78,824,000
Valuation allowance ..................................................... (59,513,000) (78,824,000)
------------- -------------
Net deferred tax assets .............................................. $ -- $ --
============= =============
</TABLE>
A valuation allowance is provided when it is more likely than not that some
portion or all of the deferred tax assets will not be realized. At December 31,
1999, the Company had Federal net operating loss carryforwards of approximately
$184,000,000 and state net operating loss carryforwards of approximately
$121,000,000 that will expire in the years 2001 through 2019. State net
operating loss carryforwards differ from Federal net operating loss
carryforwards primarily due to the fact that the Company sold approximately
$39,000,000 of its state net operating loss carryforwards during 1999 and
approximately $24,000,000 has expired. The Company also has research and
experimentation credit carryforwards of approximately $3,984,000 that expire in
the years 2001 through 2019. Ultimate utilization/availability of such net
operating losses and credits may be curtailed if a significant change in
ownership occurs. Of the deferred tax asset related to the Federal and state
net operating loss carryforwards, approximately $12,500,000 relates to a tax
deduction for non qualified stock options. The Company will increase paid in
capital when these benefits are realized for tax purposes.
(10) DISCONTINUED OPERATION
On January 9, 1998, the Company concluded an agreement with Cambrex Corporation
("Cambrex") for Cambrex to acquire Celgene's chiral intermediate business for
approximately $15 million. The Company received $7.5 million upon the closing
of the transaction, and will receive future royalties with a present value not
exceeding $7.5 million, with certain minimum royalty payments in the third
through sixth year following the closing of the transaction. Included in the
transaction are the rights to Celgene's enzymatic technology for the production
of chirally pure intermediates for the pharmaceutical industry, including the
current pipeline of third party products and the equipment and personnel
associated with the business.
(11) MARKETABLE SECURITIES AVAILABLE FOR SALE
Marketable securities available for sale at December 31, 1999 include debt
securities with maturities ranging from January 2000 to August 2004. A summary
of marketable securities at December 31, 1999 is as follows:
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
UNREALIZED UNREALIZED FAIR
COST GAIN LOSS VALUE
------------- ------------ ------------ -------------
<S> <C> <C> <C> <C>
Government Bonds & Notes ......... $2,313,125 -- $ (25,579) $2,287,546
Government Agencies .............. 2,050,000 -- (66,325) 1,983,675
---------- -- --------- ----------
Total ........................... $4,363,125 -- $ (91,904) $4,271,221
========== == ========= ==========
</TABLE>
Marketable securities available for sale at December 31, 1998 include debt
securities with maturities ranging from March, 1999 to October, 2002.
Marketable securities at December 31, 1998 include Corporate Bonds ($1,006,890)
and U.S. Government and agency obligations ($1,050,000). The cost equaled fair
market value.
F-16
<PAGE>
CELGENE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1998, AND 1999- (CONTINUED)
(12) COMMITMENTS AND CONTINGENCIES
(A) LEASES
Celgene leases its main laboratory and office facilities in Warren Township,
New Jersey. The current lease term for the main laboratory and office space
expires in 2002 and has one five-year renewal option. Annual payments are
$330,000. The lease provides that at the end of each five-year term, the rent
will be increased based upon the change in the consumer price index, but in no
case shall the increase be greater than 20%. Celgene is also required to pay
additional amounts for real estate taxes, utilities, and maintenance. Total
rental expense amounted to $477,000, $486,000 and $479,000 in 1997, 1998 and
1999, respectively. Celgene has subleased 12,500 square feet of this facility
to Cambrex Corporation for up to three years for the Chiral Intermediate
business which Cambrex purchased on January 9, 1998.
In November, 1999, the Company leased an additional 29,000 square feet of
office and laboratory space in the same building facility in Warren, New Jersey
adjacent to our existing leased space. The initial term of the lease extends to
July 2010 with two five year renewal options.
In March 1999, the Company entered into a lease agreement with The New Jersey
Economic Development Authority (NJEDA) to lease approximately 18,000 square
feet of office and laboratory space in North Brunswick, New Jersey for Celgro,
our agrochemical subsidiary. The lease agreement is for ten years commencing
January 1, 2000 and provides for two five year renewal terms.
In July, 1997, the Company entered into an equipment leasing agreement; under
the agreement, the Company can lease up to $1,000,000 of equipment for a three
year term after which the Company can purchase the equipment for a nominal
value. Through December 31, 1999, the Company has leased $675,000 of laboratory
equipment under this agreement.
The following table shows the approximate minimum lease commitments for the
next five years:
<TABLE>
<CAPTION>
2000 2001 2002 2003 2004 AFTER 2004
------------- ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
$1,257,000 $1,106,000 $1,086,000 $1,122,000 $1,131,000 $4,903,000
</TABLE>
(B) EMPLOYMENT AGREEMENTS
Celgene has employment agreements with certain officers and employees. The
related outstanding commitment for 2000 is approximately $1.3 million.
Employment contracts provide for an increase in compensation reflecting annual
reviews and related salary adjustments.
(C) CONTRACTS
Pursuant to the terms of a research and development agreement with The
Rockefeller University ("Rockefeller"), the Company has purchased for cash and
stock options the world-wide exclusive license to manufacture and market any
drugs, including THALOMID, which may result from the research performed at
Rockefeller and funded by the Company. The portion of the agreement that
provides for research services to be performed by Rockefeller is renewable for
one year terms upon agreement of both parties. Under terms of the current
research agreement extension, the Company is committed to pay Rockefeller
$504,000 annually for research.
The Company has an agreement with Penn Pharmaceutical, Ltd. of Great Britain
("Penn") for the production of THALOMID. Penn manufactures THALOMID and sells
it exclusively to the Company. The agreement is renewable for one year terms
and has been renewed for 2000, for facility payments totaling approximately
$480,000.
In October 1997, the Company entered into a contract with Boston University to
manage the surveillance registry which is intended to monitor compliance to the
requirements of the Company's S.T.E.P.S. (System for THALOMID Education and
Prescribing Safety) program for all THALOMID patients. The contract has been
renewed for 2000. Under the terms of the agreement, quarterly payments of
approximately $395,000 are required. The contract is renewable for one year
terms upon agreement of both parties.
F-17
<PAGE>
CELGENE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1998, AND 1999- (CONTINUED)
In December 1997, the Company entered into a research agreement with the
University of Glasgow for clinical testing and evaluation of certain of
Celgene's patented compounds. Under terms of the agreement, the Company agreed
to pay the University approximately $200,000 in two annual installments. The
term of the original agreement was for two years and has been extended through
2000.
In June 1998, the Company entered into a research agreement with a contract
research organization to manage the pivotal clinical trial for
d-methylphenidate encompassing four separate protocols. The agreement is for
approximately two years and is estimated at approximately $5.0 million over the
life of the agreement.
In December 1998, the Company entered into an exclusive license agreement with
EntreMed, Inc. ("EntreMed") whereby EntreMed granted to us an exclusive license
to its patent and technology rights for thalidomide. In return, EntreMed will
receive royalties on all sales of THALOMID.
(D) CONTINGENCIES
The Company believes it maintains insurance coverage adequate for its current
needs.
The Company's operations are subject to environmental laws and regulations
which impose limitations on the discharge of pollutants into the air and water
and establish standards for the treatment, storage and disposal of solid and
hazardous wastes. The Company reviews the effects of such laws and regulations
on its operation and modifies its operations as appropriate. The Company
believes that it is in substantial compliance with all applicable environmental
laws and regulations.
(13) SEGMENTS
Effective January 1, 1998, the Company adopted SFAS No. 131, Disclosures about
Segments of an Enterprise and Related Information. As discussed in Note 1, the
Company manages its operations as one line of business of discovery,
development and commercialization of orally administered, small molecule drugs
for the treatment of cancer and immunological diseases. Additionally, our
chiral chemistry program develops chirally pure versions of existing compounds
for both pharmaceutical and agrochemical markets. The Company markets and sells
its products in the United States. During 1999, no single customer accounted
for more than 3% of the Company's product sales.
(14) SUBSEQUENT EVENTS
On February 16, 2000, the Company completed an offering to sell 10,350,000
shares of its common stock at a price of $33.67 per share. 8,802,000 shares
were for the account of the Company and 1,548,000 shares were for the account
of a selling shareholder pursuant to the conversion of $9,288,000 of the 9%,
January 1999 convertible notes held by that shareholder. Proceeds to the
Company, net of expenses, were approximately $278 million.
On April 14, 2000, the Company effected a three-for-one stock split for
stockholders of record as of April 11, 2000. On April 10, 2000, the Company's
stockholders approved an increase in the number of authorized shares of common
stock from 30,000,000 to 120,000,000. All share and per share amounts in the
consolidated statements of operations and share and per share amounts disclosed
in the accompanying notes to consolidated financial statements have been
retroactively restated to reflect the three-for-one stock split. Share and per
share amounts in the consolidated balance sheets and consolidated statements of
stockholders' equity (deficit) have not been retroactively restated to reflect
the stock split.
F-18
<PAGE>
SCHEDULE II-VALUATION AND QUALIFYING ACCOUNTS
CELGENE CORPORATION
<TABLE>
<CAPTION>
BALANCE AT ADDITIONS BALANCE AT
BEGINNING OF CHARGED TO END OF
YEAR EXPENSE DEDUCTIONS YEAR
-------------- ------------ ------------ -----------
<S> <C> <C> <C> <C>
Year ended December 31, 1998
Allowance for doubtful accounts .......... -- 43,386 -- 43,386
-- ------ -- ------
-- 43,386 -- 43,386
Year ended December 31, 1999
Allowance for doubtful accounts .......... 43,386 58,051 -- 101,437
Allowance for customer discounts ......... -- 453,208 433,208 20,000
------ ------- ------- -------
43,386 511,259 433,208 121,437
====== ======= ======= =======
</TABLE>
F-19
<PAGE>
CELGENE CORPORATION
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
<TABLE>
<CAPTION>
MARCH 31, 2000
-----------------
<S> <C>
ASSETS:
Current assets:
Cash and cash equivalents ........................................................... $ 162,907,319
Marketable securities available for sale ............................................ 129,457,911
Accounts receivable, net of allowance of $186,317 at March 31, 2000.................. 5,689,067
Inventory ........................................................................... 2,614,501
Other current assets ................................................................ 1,701,074
--------------
Total current assets .............................................................. 302,369,872
Plant and equipment, net ............................................................ 2,436,231
Other assets ........................................................................ 2,358,486
--------------
Total assets ...................................................................... $ 307,164,589
==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable .................................................................... $ 2,573,316
Accrued expenses .................................................................... 4,071,529
Capitalized lease obligations ....................................................... 145,226
--------------
Total current liabilities ......................................................... 6,790,071
Capitalized lease obligations-net of current portion ................................ 8,469
Long term convertible notes ......................................................... 29,243,254
--------------
Total liabilities ................................................................. 36,041,794
--------------
Stockholders' equity:
Common stock, $.01 par value per share, 120,000,000 shares authorized; issued and
outstanding 21,439,513 at March 31, 2000 .......................................... 214,395
Additional paid-in capital .......................................................... 440,817,775
Accumulated deficit ................................................................. (169,538,715)
Accumulated other comprehensive loss ................................................ (370,660)
--------------
Total stockholders' equity ........................................................ 271,122,795
--------------
Total liabilities and stockholders' equity ........................................... $ 307,164,589
==============
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-20
<PAGE>
CELGENE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTH PERIOD ENDED MARCH 31,
-------------------------------------
2000 1999
----------------- -----------------
<S> <C> <C>
Revenues:
Product sales .................................. $ 11,665,919 $ 3,492,068
Research contracts ............................. 200,000 812,500
------------- -------------
Total revenues ............................... 11,865,919 4,304,568
Expenses:
Cost of goods sold ............................. 1,663,712 655,850
Research and development ....................... 6,385,741 4,515,304
Selling, general and administrative ............ 8,496,638 5,325,402
------------- -------------
Total expenses ............................... 16,546,091 10,496,556
Operating loss .................................. (4,680,172) (6,191,988)
Interest income ................................ 2,313,997 145,994
Interest expense ............................... 778,271 545,795
------------- -------------
Net loss ........................................ $ (3,144,446) $ (6,591,789)
============= =============
Per share basic and diluted:
Net loss ....................................... $ (0.05) $ (0.13)
============= =============
Weighted average number of shares of common stock
outstanding .................................... 58,706,000 50,265,000
============= =============
</TABLE>
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS.
F-21
<PAGE>
CELGENE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTH PERIOD ENDED MARCH 31,
------------------------------------
2000 1999
----------------- ----------------
<S> <C> <C>
Cash flows from operating activities:
Net loss ...................................................... $ (3,144,446) $ (6,591,789)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation ................................................. 265,234 205,322
Provision for losses on accounts receivable .................. 64,880 17,574
Shares issued for employee benefit plans ..................... 1,047,755 799,823
Amortization of debt issuance costs .......................... 62,500 62,500
Amortization of discount on convertible note ................. 36,459 36,459
Change in current assets & liabilities:
Increase in inventory ........................................ (158,442) (287,908)
Increase(decrease) in accounts payable and accrued expenses (2,615,357) 646,640
Increase in accounts receivable .............................. (825,475) (577,502)
Increase in other assets ..................................... (960,472) (112,855)
---------- ------------
Net cash used in operating activities ......................... (6,227,364) (5,801,736)
Cash flows from investing activities:
Capital expenditures .......................................... (737,642) (53,043)
Proceeds from sales and maturities of marketable securities
available for sale ........................................... 1,510,859 1,046,570
Purchases of marketable securities available for sale ......... (126,976,305) (4,495,493)
------------ ------------
Net cash used in investing activities ......................... (126,203,088) (3,501,966)
Cash flows from financing activities:
Net proceeds from follow-on public offering ................... 277,896,182 --
Proceeds from exercise of common stock options and warrants. 2,235,281 1,324,165
Capital lease buyout .......................................... (49,114) (41,888)
Debt issuance costs ........................................... -- (750,000)
Net proceeds from issuance of convertible notes ............... -- 15,000,000
------------ ------------
Net cash provided by financing activities ..................... 280,082,349 15,532,277
------------ ------------
Net (decrease) increase in cash and cash equivalents .......... 147,651,897 6,228,575
Cash and cash equivalents at beginning of period .............. 15,255,422 3,066,953
------------ ------------
Cash and cash equivalents at end of period .................... $ 162,907,319 $ 9,295,528
============== ============
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-22
<PAGE>
CELGENE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED) - (CONTINUED)
<TABLE>
<CAPTION>
THREE MONTH PERIOD ENDED
MARCH 31,
---------------------------
2000 1999
------------- -----------
<S> <C> <C>
Non-cash investing activity:
Change in net unrealized gain(loss) on marketable securities
available for sale ........................................ $ 278,756 $ --
========== ========
Non-cash financing activity:
Conversion of convertible notes ............................ $9,288,000 $ --
========== ========
Supplemental disclosure of cash flow information:
Interest Paid .............................................. $1,811,026 $410,638
========== ========
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-23
<PAGE>
CELGENE CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000
1. BASIS OF PRESENTATION
The unaudited consolidated financial statements have been prepared from
the books and records of Celgene Corporation (the "Company") in accordance with
generally accepted accounting principles for interim financial information
pursuant to Rule 10-01 of Regulation S-X. Accordingly, they do not include all
of the information and footnotes required by generally accepted accounting
principles for complete annual financial statements.
In the opinion of management, all adjustments (consisting only of normal
recurring accruals) considered necessary for a fair presentation have been
included. Interim results may not be indicative of the results that may be
expected for the year.
The interim consolidated financial statements should be read in
conjunction with the consolidated financial statements and notes thereto
included in the Company's latest annual report on Form 10K.
2. EARNINGS PER SHARE
"Basic" earnings per common share equals net income divided by weighted
average common shares outstanding during the period. "Diluted" earnings per
common share equals net income divided by the sum of weighted average common
shares outstanding during the period plus common stock equivalents if dilutive.
The Company's basic and diluted per share amounts are the same since the
assumed exercise of stock options and warrants, and the conversion of
convertible notes are all anti-dilutive. The amount of common stock equivalents
excluded from the calculation were 15,219,159 at March 31, 2000 and 14,400,195
at March 31,1999.
3. INVENTORY
<TABLE>
<CAPTION>
MARCH 31,
2000
-------------
<S> <C>
Raw materials ........... $1,249,564
Work in process ......... 1,178,898
Finished goods .......... 186,039
----------
$2,614,501
==========
</TABLE>
4. RIGHTS PLAN
On February 17, 2000, the Company's Board of Directors approved an
amendment to the Company's shareholder rights plan adopted in 1996 ("Rights
Plan"), changing the initial exercise price thereunder from $100.00 per Right
(as defined in the original Rights Plan agreement) to $700.00 per Right and
extending the final expiration date of the Rights Plan to February 17, 2010.
5. CONVERTIBLE NOTES
On September 16, 1998, the Company issued a convertible note to an
institutional investor in the amount of $8,750,000. The note has a five year
term and a coupon rate of 9.25% with interest payable on a semi-annual basis.
The note contains a conversion feature that allows the note holder to convert
the note into common shares at $3.67 per share. The Company can redeem the note
after three years at 103% of the principal amount, (two years if the Company's
stock trades at $8.26 or higher for a period of 20 consecutive trading days).
This note was issued at a discount of $437,500 which is being amortized over
three years.
On January 20, 1999, the Company issued to an institutional investor a
convertible note in the amount of $15,000,000. The note has a five year term
and a coupon rate of 9% with interest payable on a semi-annual basis. The note
contains a conversion feature that allows the note holder to convert
F-24
<PAGE>
CELGENE CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000 - (CONTINUED)
the note into common shares after one year at $6 per share. The Company can
redeem the note after three years at 103% of the principal amount (two years
under certain conditions). Issuance costs of $750,000 incurred in connection
with this note are being amortized over three years. At March 31, 2000,
$5,712,000 of this convertible note remains outstanding (See note 6).
On July 6, 1999, the Company issued to a third institutional investor a
convertible note in the amount of $15,000,000. The note has a five year term
and a coupon rate of 9% with interest payable on a semi-annual basis. The note
contains a conversion feature that allows the note holder to convert the note
into common shares after one year at $6.33 per share. The Company can redeem
the note after three years at 103% of the principal amount (two years under
certain conditions). There was no fee or discount associated with this note.
6. PUBLIC OFFERING
On February 16, 2000, the Company completed an offering to sell 10,350,000
shares of its common stock at a price of $33.67 per share. 8,802,000 shares
were for the account of the Company and 1,548,000 were for the account of a
selling shareholder pursuant to the conversion of $9,288,000 of the 9%, January
1999 convertible notes held by that shareholder. Proceeds to the Company, net
of expenses, were approximately $278 million.
7. COMMON STOCK SPLIT AND AUTHORIZED SHARES
On April 14, 2000, the Company effected a three-for-one stock split for
stockholders of record as of April 11, 2000. On April 10, 2000, the Company's
stockholders approved an increase in the number of authorized shares of common
stock from 30,000,000 to 120,000,000. All share and per share amounts in the
unaudited consolidated statements of operations and share and per share amounts
disclosed in the accompanying notes to unaudited consolidated financial
statements have been retroactively restated to reflect the three-for-one stock
split. Share and per share amounts in the unaudited consolidated balance sheet
have not been retroactively restated to reflect the stock split.
8. MARKETABLE SECURITIES AVAILABLE FOR SALE
Marketable securities available for sale at March 31, 2000 include debt
securities with maturities ranging from November 2000 to August 2004. A summary
of marketable securities at March 31, 2000 is as follows:
<TABLE>
<CAPTION>
GROSS ESTIMATED
GROSS UNREALIZED FAIR
COST UNREALIZED GAIN LOSS VALUE
--------------- ----------------- -------------- ---------------
<S> <C> <C> <C> <C>
Government Bonds & Notes ......... $ 2,798,321 -- $ (12,207) $ 2,786,114
Government Agencies .............. 127,030,250 -- (358,453) 126,671,797
------------ -- ---------- ------------
Total ........................... $129,828,571 -- $ (370,660) $129,457,911
============ == ========== ============
</TABLE>
9. COMPREHENSIVE LOSS AND RECENTLY ISSUED ACCOUNTING PRONOUNCEMENT
Comprehensive loss includes net loss and other comprehensive loss which
refers to those revenues, expenses, gains and losses which are excluded from
net loss. Other comprehensive loss includes the change in unrealized gains and
losses on marketable securities classified as available-for-sale.
F-25
<PAGE>
CELGENE CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000 - (CONTINUED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
----------------------------------
MARCH 31, 2000 MARCH 31, 1999
---------------- ---------------
<S> <C> <C>
Net Loss ........................... $ (3,144,446) $ (6,591,789)
Other Comprehensive Loss ........... (278,756) --
------------ ------------
Total Comprehensive Loss ......... $ (3,423,202) $ (6,591,789)
============ ============
</TABLE>
In December 1999, the staff of the Securities and Exchange Commission
issued Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in
Financial Statements". SAB 101 summarizes certain of the staff's views in
applying generaly accepted accounting principles to the revenue recognition in
financial statements, including the recognition of non-refundable fees received
upon entering into arrangements. SAB 101, as amended, must be adopted no later
than the fourth quarter of 2000 with an effective date of January 1, 2000. The
Company is in the process of evaluating this SAB and the effect it will have on
its consolidated financial statements and future revenue recognition policy.
In June 1998, Statement of Financial Accounting Standard ("SFAS") No. 133,
"Accounting for Derivative Instruments and Hedging Activities", was issued and
is effective for all fiscal quarters of all fiscal years beginning after June
15, 2000. SFAS No. 133 requires derivative instruments to be recognized as
Assets and Liabilities and be recorded at Fair Value. The Company is currently
not party to any Derivative Instruments. Any future transactions involving
Derivative Instruments will be evaluated based on SFAS No.133.
10. SUBSEQUENT EVENTS
On April 26, 2000, the Company announced that it had entered into an
agreement with Novartis Pharma AG wherein the Company granted an exclusive
worldwide license (excluding Canada) for the development and marketing of
d-methylphenidate, its chirally pure version of Ritalin(Reg. TM), to Novartis.
The Company also granted rights to all its related intellectual property and
patents, including new formulations of the currently marketed Ritalin. The
Company received an upfront payment of $10 million in July 2000 and is entitled
to receive significant milestone payments in addition to royalties on the
entire family of Ritalin drugs. The agreement was subject to regulatory
approval in the United States under the Hart-Scott-Rodino Pre-Merger
Notification Act for which the waiting period ended June 10, 2000.
On June 29, 2000, the Company entered into an agreement to merge with
Signal Pharmaceuticals, Inc. ("Signal"), a privately held San Diego-based
biopharmaceutical company focused on the discovery and development of drugs
that regulate genes associated with disease. The agreement is subject to
regulatory approval in the United States under the Hart-Scott-Rodino Pre-Merger
Notification Act. On August 4, 2000, the Company received verbal notification
that early termination of the waiting period had been granted. The merger is
expected to be accounted for using the pooling-of-interest method of
accounting. In accordance with the merger agreement, Celgene will acquire all
of the outstanding shares of Signal common and preferred stock for
approximately 3.7 million shares of Celgene common stock. Signal shareholders
will receive in the merger 0.1257 of a share of common stock, par value $.01
per share, of Celgene in exchange for each share of common stock of Signal that
they own. In addition, based on Signal's outstanding stock options and warrants
on July 31, 2000, Celgene will issue options and warrants to purchase
approximately 450,000 shares of Celgene common stock. On July 26, 2000, the
Company filed a registration statement with the Securities and Exchange
Commission to register the common shares of the Company to be issued to holders
of Signal common stock.
F-26
<PAGE>
SIGNAL PHARMACEUTICALS, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Report of Ernst & Young LLP, Independent Auditors .......... F-28
Balance Sheets ............................................. F-29
Statements of Operations ................................... F-30
Statements of Stockholders' Equity ......................... F-31
Statements of Cash Flows ................................... F-32
Notes to Financial Statements .............................. F-34
</TABLE>
F-27
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors
Signal Pharmaceuticals, Inc.
We have audited the accompanying balance sheets of Signal Pharmaceuticals,
Inc. as of December 31, 1998 and 1999, and the related statements of
operations, stockholders' equity, and cash flows for each of the three years in
the period ended December 31, 1999. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Signal Pharmaceuticals,
Inc. at December 31, 1998 and 1999, and the results of its operations and its
cash flows for each of the three years in the period ended December 1999, in
conformity with accounting principles generally accepted in the United States.
Ernst & Young LLP
San Diego, California
February 4, 2000
F-28
<PAGE>
SIGNAL PHARMACEUTICALS, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
-------------------------------- ----------------
1998 1999 2000
--------------- --------------- ----------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ................................. $ 6,496,363 $ 6,613,834 $ 5,815,144
Short-term investments .................................... 6,456,226 2,806,093 522,226
Grant revenue receivable .................................. 147,248 108,959 77,425
Other current assets ...................................... 487,234 427,394 1,049,964
------------- ------------- -------------
Total current assets .................................... 13,587,071 9,956,280 7,464,759
Property and equipment, net ................................ 4,497,541 3,405,147 3,100,525
Licensed technology, net ................................... 916,668 583,338 499,004
Deposits and other assets .................................. 223,520 202,605 195,430
Notes receivable from officers ............................. 333,419 391,495 390,000
------------- ------------- -------------
Total assets ............................................ $ 19,558,219 $ 14,538,865 $ 11,649,718
============= ============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable .......................................... $ 461,967 $ 896,260 $ 738,488
Accrued liabilities ....................................... 872,484 522,454 1,387,742
Current portion of promissory note ........................ 1,000,080 396,817 158,589
Current portion of obligations under capital leases
and equipment notes payable ............................. 432,122 730,765 762,542
Current portion of deferred revenue under
collaborative agreements ................................ 1,697,775 3,449,790 3,524,795
------------- ------------- -------------
Total current liabilities ............................... 4,464,428 5,996,086 6,572,156
Promissory note, net of current portion .................... 349,674 -- --
Obligations under capital leases and equipment notes
payable, net of current portion ........................... 2,110,651 1,805,297 1,569,610
Deferred revenue under collaborative agreements, net
of current portion ........................................ 333,324 650,002 --
Deferred rent .............................................. 174,705 104,918 96,581
Commitments ................................................
Stockholders' equity:
Convertible Preferred Stock, 24,742,639 shares
authorized; 24,203,931, 24,492,639 and 24,492,639
shares issued and outstanding at December 31, 1998,
1999 and March 31, 2000, respectively; liquidation
preference -- $40,909,587 at December 31, 1998 and
$41,909,587 at December 31, 1999 and March 31,
2000, respectively ...................................... 39,519,431 41,330,800 41,330,800
Common stock, 35,288,708 shares authorized; 3,533,556,
3,695,228 and 4,569,873 shares issued and outstanding
at December 31, 1998, 1999 and March 31, 2000,
respectively ............................................ 2,720,121 3,795,460 11,313,761
Deferred compensation ...................................... (922,892) (1,272,014) (7,843,407)
Notes receivable from stockholders ......................... (95,600) (95,600) (133,100)
Accumulated other comprehensive income ..................... 6,226 -- --
Accumulated deficit ........................................ (29,101,849) (37,776,084) (41,256,683)
------------- ------------- -------------
Total stockholders' equity ................................ 12,125,437 5,982,562 3,411,371
------------- ------------- -------------
Total liabilities and stockholders' equity ................ $ 19,558,219 $ 14,538,865 $ 11,649,718
============= ============= =============
</TABLE>
SEE ACCOMPANYING NOTES.
F-29
<PAGE>
SIGNAL PHARMACEUTICALS, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, THREE MONTH ENDED MARCH 31,
----------------------------------------------- -------------------------------
1997 1998 1999 1999 2000
--------------- --------------- --------------- --------------- ---------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenue under collaborative
agreements:
Related party ......................... $ 250,000 $ 3,000,000 $ 4,525,000 $ 750,000 $ 1,675,000
Unrelated parties ..................... 7,065,356 12,027,064 6,695,715 2,019,755 939,864
Grant income ........................... 264,257 387,178 527,610 153,290 55,862
------------ ------------ ------------ ------------ ------------
Total Revenue ....................... 7,579,613 15,414,242 11,748,325 2,923,045 2,670,726
------------ ------------ ------------ ------------ ------------
Expenses:
Research and development .............. 10,337,318 15,572,627 16,747,627 4,346,239 5,167,494
General and administrative ............ 2,791,084 4,798,262 3,010,975 808,623 1,036,714
------------ ------------ ------------ ------------ ------------
Total Expenses ...................... 13,128,402 20,370,889 19,758,602 5,154,862 6,204,208
------------ ------------ ------------ ------------ ------------
Loss from operations ................... (5,548,789) (4,956,647) (8,010,277) (2,231,817) (3,533,482)
Interest income ........................ 325,529 1,052,854 607,413 144,419 115,766
Interest expense ....................... (516,709) (452,609) (452,884) (126,219) (62,883)
------------ ------------ ------------ ------------ ------------
Net loss ............................... (5,739,969) (4,356,402) (7,855,748) (2,213,617) (3,480,599)
Inputed dividend on preferred stock..... -- -- (818,487) -- --
------------ ------------ ------------ ------------ ------------
Net loss applicable to common
shareholders .......................... $ (5,739,969) $ (4,356,402) $ (8,674,235) $ (2,213,617) $ (3,480,599)
============ ============ ============ ============ ============
Historical net loss per share
applicable to common
shareholders, basic and diluted ....... $ (2.82) $ (1.65) $ (2.64) $ (0.71) $ (0.98)
============ ============ ============ ============ ============
Weighted average shares outstanding,
basic and diluted ..................... 2,032,385 2,636,087 3,282,083 3,112,412 3,537,909
============ ============ ============ ============ ============
</TABLE>
SEE ACCOMPANYING NOTES.
F-30
<PAGE>
SIGNAL PHARMACEUTICALS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
CONVERTIBLE
PREFERRED STOCK COMMON STOCK
---------------------------- --------------------------
SHARES AMOUNT SHARES AMOUNT
------------ --------------- ----------- --------------
<S> <C> <C> <C> <C>
Balance at December 31, 1996 ................ 14,793,324 $ 20,380,220 2,088,099 $ 137,608
Issuance of Series D preferred stock ....... 232,601 -- -- --
Issuance of Series E preferred stock ....... 6,455,493 10,977,131 -- --
Issuance of Series F preferred stock ....... 2,722,513 8,162,080 -- --
Issuance of common stock, net of
repurchases ............................... -- -- 546,223 99,436
Issuance of common stock for technology
and services .............................. -- -- 22,500 --
Deferred compensation ...................... -- -- -- 615,855
Amortization of deferred compensation ...... -- -- -- --
Net loss ................................... -- -- -- --
Unrealized gain on available for sale
securities ................................ -- -- -- --
Comprehensive loss ......................... -- -- -- --
---------- ------------ --------- -----------
Balance at December 31, 1997 ................ 24,203,931 39,519,431 2,656,822 852,899
Issuance of common stock, net of
repurchases ............................... -- -- 611,734 121,052
Issuance of common stock for
technology ................................ -- -- 265,000 727,000
Deferred compensation ...................... -- -- -- 1,019,170
Amortization of deferred compensation ...... -- -- -- --
Net loss ................................... -- -- -- --
Unrealized loss on available for sale
securities ................................ -- -- -- --
Comprehensive loss ......................... -- -- -- --
---------- ------------ --------- -----------
Balance at December 31, 1998 ................ 24,203,931 39,519,431 3,533,556 2,720,121
Issuance of Series F-1 preferred stock ..... 288,708 992,882 -- --
Issuance of common stock, net of
repurchases ............................... -- -- 160,248 26,177
Deferred compensation ...................... -- -- -- 1,024,244
Amortization of deferred compensation ...... -- -- -- --
Issuance of common stock and options
for services .............................. -- -- 1,424 24,918
Imputed dividend on Series F-1
preferred stock ........................... -- 818,487 -- --
Net loss ................................... -- -- -- --
Unrealized loss on available for sale
securities ................................ -- -- -- --
Comprehensive loss ......................... -- -- -- --
---------- ------------ --------- -----------
Balance at December 31, 1999 ................ 24,492,639 41,330,800 3,695,228 3,795,460
Issuance of common stock, net of
repurchases (unaudited) ................... -- -- 874,645 286,008
Deferred compensation (unaudited) .......... -- -- -- 7,232,293
Amortization of deferred compensation
(unaudited) ............................... -- -- -- --
Net loss (unaudited) ....................... -- -- -- --
Unrealized loss on available for sale
securities (unaudited) .................... -- -- -- --
Comprehensive loss (unaudited) ............. -- -- -- --
---------- ------------ --------- -----------
Balance at March 31, 2000 (unaudited) ....... 24,492,639 $ 41,330,800 4,569,873 $11,313,761
========== ============ ========= ===========
<CAPTION>
NOTES ACCUMULATED
RECEIVABLE OTHER TOTAL
DEFERRED FROM COMPREHENSIVE ACCUMULATED STOCKHOLDERS'
COMPENSATION STOCKHOLDERS INCOME (LOSS) DEFICIT EQUITY
---------------- -------------- --------------- ----------------- ---------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1996 ................ $ -- $ -- $ -- $ (19,005,478) $ 1,512,350
Issuance of Series D preferred stock ....... -- -- -- -- --
Issuance of Series E preferred stock ....... -- -- -- -- 10,977,131
Issuance of Series F preferred stock ....... -- -- -- -- 8,162,080
Issuance of common stock, net of
repurchases ............................... -- -- -- -- 99,436
Issuance of common stock for technology
and services .............................. -- -- -- -- --
Deferred compensation ...................... (615,855) -- -- -- --
Amortization of deferred compensation ...... 104,345 -- -- -- 104,345
Net loss ................................... -- -- -- (5,739,969) (5,739,969)
Unrealized gain on available for sale
securities ................................ -- -- 48,341 -- 48,341
-------------
Comprehensive loss ......................... -- -- -- -- (5,691,628)
------------ ---------- ---------- ------------- -------------
Balance at December 31, 1997 ................ (511,510) -- 48,341 (24,745,447) 15,163,714
Issuance of common stock, net of
repurchases ............................... -- (95,600) -- -- 25,452
Issuance of common stock for
technology ................................ -- -- -- -- 727,000
Deferred compensation ...................... (1,019,170) -- -- -- --
Amortization of deferred compensation ...... 607,788 -- -- -- 607,788
Net loss ................................... -- -- -- (4,356,402) (4,356,402)
Unrealized loss on available for sale
securities ................................ -- -- (42,115) -- (42,115)
-------------
Comprehensive loss ......................... -- -- -- -- (4,398,517)
------------ ---------- ---------- ------------- -------------
Balance at December 31, 1998 ................ (922,892) (95,600) 6,226 (29,101,849) 12,125,437
Issuance of Series F-1 preferred stock ..... -- -- -- -- 992,882
Issuance of common stock, net of
repurchases ............................... -- -- -- -- 26,177
Deferred compensation ...................... (1,024,244) -- -- -- --
Amortization of deferred compensation ...... 675,122 -- -- -- 675,122
Issuance of common stock and options
for services .............................. -- -- -- -- 24,918
Imputed dividend on Series F-1
preferred stock ........................... -- -- -- (818,487) --
Net loss ................................... -- -- -- (7,855,748) (7,855,748)
Unrealized loss on available for sale
securities ................................ -- -- (6,226) -- (6,226)
-------------
Comprehensive loss ......................... -- -- -- -- (7,861,974)
------------ ---------- ---------- ------------- -------------
Balance at December 31, 1999 ................ (1,272,014) (95,600) -- (37,776,084) 5,982,562
Issuance of common stock, net of
repurchases (unaudited) ................... -- (37,500) -- -- 248,508
Deferred compensation (unaudited) .......... (7,232,293) -- -- -- --
Amortization of deferred compensation
(unaudited) ............................... 660,900 -- -- -- 660,900
Net loss (unaudited) ....................... -- -- -- (3,480,599) (3,480,599)
Unrealized loss on available for sale
securities (unaudited) .................... -- -- -- -- --
-------------
Comprehensive loss (unaudited) ............. -- -- -- -- (3,480,599)
------------ ---------- ---------- ------------- -------------
Balance at March 31, 2000 (unaudited) ....... $ (7,843,407) $ (133,100) $ -- $ (41,256,683) $ 3,411,371
============ ========== ========== ============= =============
</TABLE>
SEE ACCOMPANYING NOTES.
F-31
<PAGE>
SIGNAL PHARMACEUTICALS, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, THREE MONTHS ENDED MARCH 31,
-------------------------------------------------- ---------------------------------
1997 1998 1999 1999 2000
---------------- ---------------- ---------------- ---------------- ----------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net loss ............................. $ (5,739,969) $ (4,356,402) $ (7,855,748) $ (2,213,858) $ (3,480,599)
Adjustments to reconcile net loss
to net cash used for operating
activities:
Depreciation and amortization...... 879,327 1,498,312 1,711,501 365,528 428,118
Amortization of interest
expense related to warrants....... 47,142 47,142 47,142 11,786 11,786
Amortization of deferred
compensation ..................... 104,345 607,788 675,122 139,704 660,900
Amortization of purchased
technology ....................... -- 83,332 333,330 83,334 84,334
Common stock and stock
options issued for technology
and services ..................... 14,600 7,000 24,918 -- 36,405
Deferred revenue under
collaborative agreements ......... 1,363,134 (2,334,111) 2,068,693 1,389,120 (574,997)
Deferred rent ..................... 10,316 96,538 (69,787) (18,558) (8,337)
Changes in operating assets and
liabilities:
Other current assets .............. 246,997 (354,667) 98,129 63,791 (591,036)
Accounts payable .................. (158,004) 193,253 434,293 460,016 (157,772)
Accrued liabilities ............... 895,120 (335,235) (350,030) (391,835) 865,288
------------- ------------- ------------- ------------ ------------
Net cash flows used for
operating activities ............ (2,336,992) (4,847,050) (2,882,437) (110,972) (2,725,910)
------------- ------------- ------------- ------------ ------------
INVESTING ACTIVITIES
Purchases of short-term
investments ......................... (12,081,165) (15,585,368) (11,642,049) (2,804,301) (2,262,192)
Maturities of short-term
investments ......................... -- 21,216,533 15,285,956 5,670,968 4,546,059
Purchases of property and
equipment ........................... (630,220) (1,400,252) (92,979) (342,780) (123,496)
Purchase of technology ............... -- (280,000) -- -- --
Other assets ......................... 341,038 (117,501) (37,161) 1,057 8,670
------------- ------------- ------------- ------------ ------------
Net cash flows provided by
(used for) investing
activities ...................... (12,370,347) 3,833,412 3,513,767 2,524,944 2,169,041
------------- ------------- ------------- ------------ ------------
FINANCING ACTIVITIES
Principal payments on obligations
under capital leases, equipment
notes payable and promissory
note ................................ (1,239,935) (1,251,920) (1,532,918) (160,619) (453,924)
Issuance of preferred stock, net ..... 19,139,211 -- 992,882 -- --
Issuance of common stock, net ........ 84,836 25,452 26,177 8,760 212,103
------------- ------------- ------------- ------------ ------------
Net cash flows provided by
(used for) financing
activities ...................... 17,984,112 (1,226,468) (513,859) (151,859) (241,821)
------------- ------------- ------------- ------------ ------------
Increase (decrease) in cash and
cash equivalents .................... 3,276,773 (2,240,106) 117,471 2,262,113 (798,690)
Cash and cash equivalents at
beginning of year ................... 5,459,696 8,736,469 6,496,363 6,496,363 6,613,834
------------- ------------- ------------- ------------ ------------
Cash and cash equivalents at end
of year ............................. $ 8,736,469 $ 6,496,363 $ 6,613,834 $ 8,758,476 $ 5,815,144
============= ============= ============= ============ ============
</TABLE>
F-32
<PAGE>
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, THREE MONTHS ENDED MARCH 31,
-------------------------------------------- ----------------------------
1997 1998 1999 1999 2000
----------- ------------- -------------- ----------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION:
Interest paid ................... $469,565 $ 395,462 $ 452,884 $126,219 $ 62,883
======== ========== ========== ======== ==========
SUPPLEMENTAL SCHEDULE OF NONCASH
INVESTING AND FINANCING
ACTIVITIES:
Capital lease obligations entered
into for equipment ............. $221,507 $2,343,033 $ 526,128 $ 79,604 $ --
======== ========== ========== ======== ==========
Issuance of common stock for
technology ..................... $ -- $ 720,000 $ -- $ -- $ --
======== ========== ========== ======== ==========
Issuance of common stock for
promissory notes from
stockholders ................... $ -- $ 95,600 $ -- $ -- $ 37,500
======== ========== ========== ======== ==========
Comprehensive income (loss) on
investments .................... $ 48,341 $ (42,115) $ (6,226) $ (6,226) $ --
======== ========== ========== ======== ==========
Deferred compensation related to
stock options .................. $615,855 $1,019,170 $1,024,244 $120,391 $7,232,293
======== ========== ========== ======== ==========
Imputed dividend on Series F-1
preferred stock ................ $ -- $ -- $ 818,487 $ -- $ --
======== ========== ========== ======== ==========
</TABLE>
F-33
<PAGE>
SIGNAL PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS
(INFORMATION SUBSEQUENT TO DECEMBER 31, 1999 AND PERTAINING TO MARCH 31, 2000
AND THE THREE MONTHS ENDED MARCH 31, 1999 AND 2000 IS UNAUDITED.)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND BUSINESS ACTIVITY
Signal Pharmaceuticals, Inc. ("Signal" or the "Company") is an integrated drug
discovery and development company focused on identifying new classes of small
molecule drugs that regulate disease-associated genes. Utilizing biological
information from the field of human genomics, the Company applies advanced
cellular, molecular and genomic technologies to map gene regulating pathways in
cells and to identify proprietary molecular targets that control genes and
result in disease. Signal is advancing the application of genomics beyond
identifying and elucidating the function of genes to designing novel classes of
disease-modifying drugs that selectively regulate the activation of
disease-causing genes.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and related
disclosures at the date of the financial statements, and the amounts of
revenues and expenses reported during the period. Actual results could differ
from those estimates.
CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
The Company considers instruments purchased with an original maturity of three
months or less, principally a money market account and U.S. government and
corporate debt securities, to be cash equivalents.
All investment securities are classified as available-for-sale, and are carried
at fair value. Unrealized gains and losses, if any, are reported in a separate
component of stockholders' equity. The cost of debt securities is adjusted for
amortization of premiums and accretion of discounts to maturity. The
amortization, along with realized gains and losses, is included in interest
income. The cost of securities sold is based on the specific identification
method.
INTERIM FINANCIAL INFORMATION
The financial information as of March 31, 2000 and for the three months ended
March 31, 1999 and 2000 is unaudited and includes all adjustments, consisting
only of normal recurring adjustments, that the Company's management considers
necessary for the fair presentation of the Company's operating results and cash
flows for such periods. Results for the three-month period ended March 31, 2000
are not necessarily indicative of results to be expected for the full fiscal
year 2000 or any future period.
CONCENTRATION OF CREDIT RISK
Cash, cash equivalents, and short-term investments are financial instruments
that potentially subject the Company to concentration of credit risk. The
Company invests its excess cash primarily in U.S. government securities and
marketable debt securities of financial institutions and corporations with
strong credit ratings. The Company also has established guidelines relative to
diversification and maturities to maintain safety and liquidity. These
guidelines are reviewed periodically and may be modified to take advantage of
trends in yields and interest rates. Pursuant to Company policy, the Company
has historically held the investments to maturity. However, the Company has the
ability to sell these investments before maturity and has therefore classified
the investments as available for sale. The Company has not experienced any
significant losses on its investments.
F-34
<PAGE>
SIGNAL PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS
(INFORMATION SUBSEQUENT TO DECEMBER 31, 1999 AND PERTAINING TO MARCH 31, 2000
AND THE THREE MONTHS ENDED MARCH 31,1999 AND 2000 IS UNAUDITED.) - (CONTINUED)
FINANCIAL INSTRUMENTS
The fair value of the financial instruments approximates their carrying value.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost and depreciated over the estimated
useful lives of the assets (three to five years) using the straight-line
method. Leasehold improvements are stated at cost and amortized on a
straight-line basis over the shorter of the estimated useful life of the assets
or the lease term.
LICENSED TECHNOLOGY
Licensed technology is stated at cost and depreciated over the estimated useful
life of three years using the straight-line method. The licensed technology is
reported net of accumulated amortization of $83,332, $416,662 and $500,996 as
of December 31, 1998 and 1999 and March 31, 2000, respectively.
IMPAIRMENT OF LONG-LIVED ASSETS
In accordance with SFAS No. 121, Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed of, if indicators of impairment
exist, the Company assesses the recoverability of the affected long-lived
assets by determining whether the carrying value of such assets can be
recovered through undiscounted future operating cash flows. If impairment is
indicated, the Company will value the asset at fair value. While the Company's
current and historical operating and cash flow losses are indicators of
impairment, the Company believes the future cash flows to be received from the
long-lived assets will exceed the assets' carrying value, and accordingly the
Company has not recognized any impairment losses through March 31, 2000.
REVENUE RECOGNITION
Contract revenue is recognized ratably over the period during which the
research is conducted, which approximates the actual costs incurred to perform
the research services. Up-front license fees received under these agreements
are recorded as deferred revenue and recognized ratably over the initial term
of the contract. If the initial term of the agreement is subsequently modified
by the collaborator, the period over which the up-front license fee is
recognized is modified accordingly on a prospective basis. Revenues from the
achievement of research and development milestones will be recognized when and
if the milestones are achieved. Continuation of certain contracts and grants
are dependent upon the Company achieving specific contractual milestones;
however, none of the payments received to date are refundable regardless of the
outcome of the project. Grant revenue is recognized in accordance with the
terms of the grant and as services are performed, which generally equals the
related research and development expense.
Axys Pharmaceutical ("Axys") is a related party, as the chief executive officer
of Axys serves on the Board of Directors of the Company. Therefore, revenues of
$625,000 recognized in 1999 and the three months ended March 31, 2000 from Axys
are classified as related party revenue.
Ares Serono S.A. ("Ares") is a related party, based on its ownership interest
in the Company. Therefore, revenues of $3,000,000, $3,900,000 and $1,050,000
recognized from Ares in 1998, 1999 and the three months ended March 31, 2000,
respectively, are classified as related party revenue. The Company does not
have the right or the obligation to repurchase any of the rights provided to
Ares, or to refund any research payments received from Ares under the
collaboration, nor does it intend to do so.
F-35
<PAGE>
SIGNAL PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS
(INFORMATION SUBSEQUENT TO DECEMBER 31, 1999 AND PERTAINING TO MARCH 31, 2000
AND THE THREE MONTHS ENDED MARCH 31,1999 AND 2000 IS UNAUDITED.) - (CONTINUED)
The Company's revenue is concentrated among a small number of customers, as
follows:
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS ENDED
DECEMBER 31, MARCH 31,
-------------------------- -----------------
1997 1998 1999 1999 2000
-------- -------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
DuPont ......................... -- 12% 20% 20% 23%
Ares ........................... * 19% 33% 26% 39%
Roche Bioscience ............... 21% * * * *
Organon ........................ 34% 19% 13% 25% --
Nippon Kayaku .................. -- 12% 20% 17% 11%
Tanabe ......................... 39% 27% -- -- --
Axys ........................... -- -- * -- 23%
</TABLE>
* Amount earned represents less than 10% of revenues for the period.
The Company's revenue under collaborative agreements is derived from the
following:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, THREE MONTHS ENDED MARCH 31,
----------------------------------------- ----------------------------
1997 1998 1999 1999 2000
------------- ------------- ------------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
License fees from collaborative agreements ........... $ 724,992 $ 3,139,566 $ 1,858,332 $ 208,329 $ 658,329
Research and development revenues under
collaborative agreements ............................ 6,590,364 11,887,498 9,362,383 2,561,426 1,956,535
---------- ----------- ----------- ---------- ----------
Total revenue under collaborative agreements ......... $7,315,356 $15,027,064 $11,220,715 $2,769,755 $2,614,864
========== =========== =========== ========== ==========
</TABLE>
RESEARCH AND DEVELOPMENT COSTS
Research and development costs are expensed as incurred.
SOFTWARE COSTS
Purchased software is capitalized at cost and amortized over the estimated
useful life, generally three years. The Company has no significant
internally-developed software.
STOCK-BASED COMPENSATION
As permitted by SFAS 123, Accounting for Stock-Based Compensation, the Company
has elected to follow Accounting Principles Board Opinion No. 25, Accounting
for Stock Issued to Employees, and related Interpretations ("APB 25") in
accounting for its employee stock options. Under APB 25, when the exercise
price of the Company's employee stock options equals the fair value of the
underlying stock on the date of grant, no compensation expense is recognized.
When the exercise price of the employee or director stock options is less than
the fair value of the underlying stock on the grant date, the Company records
deferred compensation for the difference and amortizes this amount to expense
in accordance with FASB Interpretation No. 28 ("FIN 28") over the vesting
period of the options. Options or stock awards issued to non-employees and
consultants are recorded at their fair value as determined in accordance with
SFAS No. 123 and EITF 96-18 and recognized over the related service period.
COMPREHENSIVE INCOME (LOSS)
In accordance with SFAS No. 130, Reporting Comprehensive Income, unrealized
gains or losses on the Company's available-for-sale securities and foreign
currency translation adjustments, which prior to adoption were reported
separately in stockholders' equity, are included in other comprehensive income
(loss).
F-36
<PAGE>
SIGNAL PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS
(INFORMATION SUBSEQUENT TO DECEMBER 31, 1999 AND PERTAINING TO MARCH 31, 2000
AND THE THREE MONTHS ENDED MARCH 31, 1999 AND 2000 IS UNAUDITED.) - (CONTINUED)
SEGMENT REPORTING
SFAS No. 131, Disclosure About Segments of an Enterprise and Related
Information, requires the use of a management approach in identifying and
disclosing financial information about segments of an enterprise. Management
has determined that the Company operates in one business segment.
NET LOSS PER SHARE
In accordance with SFAS No. 128, Earnings Per Share, and SEC Staff Accounting
Bulletin (or SAB) No. 98, basic net loss per share is computed by dividing the
net loss for the period by the weighted average number of common shares
outstanding during the period. Diluted net loss per share is computed by
dividing the net loss for the period by the weighted average number of common
and common equivalent shares outstanding during the period. Potentially
dilutive securities composed of incremental common shares issuable upon the
exercise of stock options and warrants, and common shares issuable on
conversion of preferred stock, were excluded from historical diluted loss per
share because of their anti-dilutive effect.
Under the provisions of SAB No. 98, common shares issued for nominal
consideration, if any, would be included in the per share calculations as if
they were outstanding for all periods presented. No common shares have been
issued for nominal consideration.
NEW ACCOUNTING PRONOUNCEMENTS
The Company expects to adopt SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, effective January 1, 2001. SFAS No. 133
will require the Company to recognize all derivatives on the balance sheet at
fair value. The Company does not anticipate that the adoption of the SFAS No.
133 will have a significant effect on its results of operations or financial
position.
2. BALANCE SHEET INFORMATION
INVESTMENTS
The following is a summary of the Company's cash, cash equivalents and
short-term investments, all of which mature within one year of the balance
sheet date:
<TABLE>
<CAPTION>
DECEMBER 31, 1998 DECEMBER 31, 1999
------------------------------------------ ----------------------------------------
GROSS GROSS
UNREALIZED ESTIMATED UNREALIZED ESTIMATED
COST GAINS FAIR VALUE COST GAINS FAIR VALUE
-------------- ------------ -------------- -------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Cash ................ $ 6,496,363 $ -- $ 6,496,363 $ 4,636,426 $-- $4,636,426
Corporate debt
securities ......... 6,450,000 6,226 6,456,226 4,783,501 -- 4,783,501
----------- ------ ----------- ----------- --- ----------
$12,946,363 $6,226 $12,952,589 $ 9,419,927 $-- $9,419,927
=========== ====== =========== =========== === ==========
<CAPTION>
MARCH 31, 2000
------------------------------------------
(UNAUDITED)
GROSS
UNREALIZED ESTIMATED
COST GAINS FAIR VALUE
-------------- ------------ --------------
<S> <C> <C> <C>
Cash ................ $ 6,337,370 $-- $ 6,337,370
Corporate debt
securities ......... -- -- --
----------- --- -----------
$ 6,337,370 $-- $ 6,337,370
=========== === ===========
</TABLE>
There were no gross realized gains or losses on sales of available-for-sale
securities for the years ended December 31, 1998 or 1999 or the three months
ended March 31, 2000. The gross unrealized gains of $6,226, $0 and $0 at
December 31, 1998 and 1999 and March 31, 2000, respectively, are reflected as a
separate component of stockholders' equity. The unrealized gain had no cash
effect and therefore is not reflected in the statement of cash flows.
F-37
<PAGE>
SIGNAL PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS
(INFORMATION SUBSEQUENT TO DECEMBER 31, 1999 AND PERTAINING TO MARCH 31, 2000
AND THE THREE MONTHS ENDED MARCH 31, 1999 AND 2000 IS UNAUDITED.) - (CONTINUED)
PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
------------------------------- ---------------
1998 1999 2000
--------------- --------------- ---------------
(UNAUDITED)
<S> <C> <C> <C>
Machinery and equipment ....................... $ 4,818,472 $ 5,328,565 $ 5,387,847
Office furniture and equipment ................ 1,597,943 1,655,263 1,679,718
Leasehold improvements ........................ 1,915,689 1,967,383 2,007,142
------------ ------------ ------------
8,332,104 8,951,211 9,074,707
Less accumulated depreciation and amortization. (3,834,563) (5,546,064) (5,974,182)
------------ ------------ ------------
$ 4,497,541 $ 3,405,147 $ 3,100,525
============ ============ ============
</TABLE>
DEPOSITS AND OTHER ASSETS
Deposits and other assets consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
--------------------- ------------
1998 1999 2000
---------- ---------- ------------
(UNAUDITED)
<S> <C> <C> <C>
Deposits ................ $ 73,520 $ 52,605 $ 45,430
Restricted cash ......... 150,000 150,000 150,000
-------- -------- --------
$223,520 $202,605 $195,430
======== ======== ========
</TABLE>
3. COMMITMENTS
LEASES
The Company leases its office and research facilities under three operating
lease agreements. The minimum annual rents are subject to specified annual
rental increases. The Company also reimburses the lessor for taxes, insurance
and operating costs associated with the leases. Under the terms of the lease,
the Company has an outstanding letter of credit for $150,000 in favor of the
lessor, which is fully collateralized by cash. Accordingly, such cash is
classified as restricted in the balance sheet.
In addition, the Company leases certain machinery and equipment and office
furniture under capital leases with three year terms and options to extend the
lease term to five years.
LONG-TERM DEBT
In November 1996, the Company issued a secured promissory note for $3,000,000.
The proceeds of the note payable were used for general corporate purposes and
working capital. The note payable accrues interest at a rate of 14%, is due May
22, 2000, and is secured by certain assets of the Company.
In conjunction with the issuance of the promissory note, the Company issued the
creditor a warrant to purchase 250,000 shares of Series C-1 Preferred Stock at
a price of $2.10 per share. The warrant expires at the earliest of ten years
from the date of grant or five years from the date of an initial public
offering. The warrant was valued at $165,000, which has been recorded as a
discount on the related debt. The value of the warrant is being amortized as
interest expense over the period of the debt.
F-38
<PAGE>
SIGNAL PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS
(INFORMATION SUBSEQUENT TO DECEMBER 31, 1999 AND PERTAINING TO MARCH 31, 2000
AND THE THREE MONTHS ENDED MARCH 31, 1999 AND 2000 IS UNAUDITED.) - (CONTINUED)
Annual future minimum lease and equipment note payments as of December 31, 1999
are as follows:
<TABLE>
<CAPTION>
OBLIGATIONS
UNDER
CAPITAL
LEASES AND
OPERATING EQUIPMENT
YEAR ENDING DECEMBER 31, LEASES NOTES PAYABLE
---------------------------------------------------------------- ------------- --------------
<S> <C> <C>
2000 ...................................................... $ 935,032 $ 964,616
2001 ...................................................... 430,502 967,662
2002 ...................................................... 432,295 857,701
2003 ...................................................... 443,370 61,861
---------- ----------
Total minimum lease and equipment note payments ......... $2,241,199 2,851,840
==========
Less amount representing interest .......................... (315,778)
----------
Present value of remaining minimum capital lease and
equipment lease line payments ............................ 2,536,062
Less amount due in one year ................................ (730,765)
----------
Long-term portion of obligations under capital leases and
equipment notes payable .................................. $1,805,297
==========
</TABLE>
Rent expense for equipment and facility leases was $784,337, $809,028, $771,302
and $244,696 for the years ended December 31, 1997, 1998 and 1999, and the
three months ended March 31, 2000, respectively.
Cost and accumulated depreciation of equipment under capital leases and
equipment notes payable were as follows:
<TABLE>
<CAPTION>
ACCUMULATED
COST DEPRECIATION
------------- -------------
<S> <C> <C>
December 31, 1998 .................. $2,943,246 $ 594,452
December 31, 1999 .................. $3,458,659 $1,213,886
March 31, 2000 (unaudited) ......... $2,872,076 $ 938,116
</TABLE>
4. SPONSORED RESEARCH AND LICENSE AGREEMENTS
In connection with certain license agreements, the Company paid fees of
$196,333 and $87,000 for the years ended December 31, 1998 and 1999,
respectively, which were charged to research and development. In addition, the
Company paid $280,000 in cash and issued 240,000 shares of common stock related
to a license agreement with the University of Massachusetts in 1998. The
Company determined the value of the common shares issued as $720,000 and
capitalized the total consideration of $1.0 million as licensed technology. The
Company has future commitments to pay up to an additional $4,100,000 to the
licensees based on the achievement of certain milestones, as well as royalties
upon commercial sales, if any, of certain products. Such fees or milestone
payments may also involve the issuance of up to 60,000 shares of common stock,
which would be recorded at the fair value at the date of issuance.
Axys
On October 15, 1999, the Company entered into a two-year collaborative research
and license agreement with Axys to develop and commercialize certain compounds
for use in the prevention and/or treatment of certain human diseases. The
Company received an initial non-refundable license fee of $2,000,000 and will
receive additional payments based on the achievement of certain program
milestones, as well as royalties upon commercial sales of certain products, if
any. We may exercise a
F-39
<PAGE>
SIGNAL PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS
(INFORMATION SUBSEQUENT TO DECEMBER 31, 1999 AND PERTAINING TO MARCH 31, 2000
AND THE THREE MONTHS ENDED MARCH 31, 1999 AND 2000 IS UNAUDITED.) - (CONTINUED)
profit share option in the United States and possibly other territories at a
predetermined point during development in lieu of royalties on product sales.
In addition, Axys has agreed to pay the Company certain amounts for the full
time equivalent personnel working on the research.
Nippon Kayaku
In February 1998, the Company entered into a two-year collaborative research
and license agreement with Nippon Kayaku to develop and commercialize products
based on or derived from a compound supplied by Nippon Kayaku for the treatment
and prevention of diseases and disorders of the CNS and PNS. Nippon Kayaku has
agreed to pay the Company certain amounts for the full-time equivalent
personnel working on the research. Each party is obligated to pay the other
royalties on future product sales arising from the collaboration.
In February 2000, following the initial research phase of the collaboration,
the Company executed an interim agreement with Nippon Kayaku under which the
Company agreed to enter into a joint agreement to develop and commercialize
neuroprotectant drugs for PNS and CNS disorders.
In July 2000, Signal and Nippon Kayaku mutually agreed to conclude their
collaboration. Nippon Kayaku was granted a worldwide, royalty-free license to
certain compounds involved in the collaboration.
Dupont
On December 26, 1997, the Company entered into a three-year collaborative
research and license agreement with DuPont Pharmaceuticals ("DuPont") to
develop and commercialize novel products for the treatment and prevention of
human immunodeficiency virus and hepatitis C virus infection. The Company
received an initial non-refundable license fee of $1,000,000 and will receive
additional payments based on the achievement of certain program milestones, as
well as royalties upon commercial sales of certain products, if any. In
addition, DuPont has agreed to pay the Company certain amounts for the full
time equivalent personnel working on the research. Due to the Company's
achievement of a certain milestone in 1999, DuPont purchased 288,708 shares of
Series F-1 Preferred Stock for total cash proceeds of $1,000,000. In accordance
with EITF 98-5 the Company recognized an imputed dividend of $818,487 to
reflect a beneficial conversion feature on these preferred shares.
Ares-Serono
On November 25, 1997, the Company entered into a three-year collaborative
research, development and license agreement with Ares to perform research
within the field of the modulation of NF-kB. The Company will receive payments
based on the achievement of certain program milestones, as well as royalties
upon commercial sales of certain products, if any. In addition, Ares has agreed
to pay the Company certain amounts for the full time equivalent personnel
working on the research. In conjunction with the license agreement, Ares
purchased 2,722,513 shares of the Company's Series F Preferred Stock at $3.01
per share for a total of $8,194,761.
Roche Bioscience
On August 26, 1996, the Company entered into a three-year collaborative
research agreement with Roche Bioscience ("Roche") to conduct a joint research
program to develop human and rat nociceptive and/or sensory neuronal cell
lines. The Company received an initial non-refundable license fee of $500,000
and will receive additional payments based on the achievement of certain
program milestones. In addition, Roche has paid the Company certain amounts for
the full time equivalent personnel working on the research. In 1999, the
Company and Roche agreed to conclude their collaboration; therefore, the
Company has no future performance obligations under this collaboration.
F-40
<PAGE>
SIGNAL PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS
(INFORMATION SUBSEQUENT TO DECEMBER 31, 1999 AND PERTAINING TO MARCH 31, 2000
AND THE THREE MONTHS ENDED MARCH 31, 1999 AND 2000 IS UNAUDITED.) - (CONTINUED)
Organon
On July 30, 1996, the Company entered into a three-year collaborative research
agreement with N.V. Organon ("Organon") to assist Organon in the discovery and
development of tissue-specific, estrogen-regulated genes. The Company received
an initial non-refundable license fee of $1,000,000 and will receive additional
payments based on the achievement of certain program milestones, as well as
royalties upon commercial sales of certain products, if any. In addition,
Organon has paid the Company certain amounts for the full time equivalent
personnel performing the research. In 1999, the Company and Organon agreed to
conclude their collaboration; therefore, the Company has no future performance
obligations under this collaboration.
Tanabe
From March 1996 to March 1998, Signal and Tanabe were engaged in a
collaborative program under which Tanabe funded certain research by Signal in
target and drug discovery in the fields of inflammatory disease and
osteoporosis. In connection with the collaboration, Tanabe paid Signal an
initial $1,000,000 non-refundable license fee and reimbursed Signal for
research and development costs. Tanabe also purchased 500,000 shares of
Signal's Series D Preferred Stock at $4.00 per share. Pursuant to certain
anti-dilution provisions of the Series D Preferred Stock agreement triggered by
the sale of shares of the Company's Series E Preferred Stock at $1.91 per
share, the Company issued an additional 232,601 shares of Series D Preferred
Stock to Tanabe during 1997.
In March 1998, Signal and Tanabe mutually agreed to conclude their
collaboration and Tanabe licensed from Signal a lead compound that was
discovered during the collaboration. Signal retained all other intellectual
property rights, including rights to all other drug targets and drug leads,
created before or during the collaboration. Tanabe paid an additional
non-refundable fee of $1,800,000 to Signal for the exclusive worldwide license
to the lead compound and is obligated to make payments to Signal based on the
achievement of certain research and development milestones and royalties on any
future product sales. Signal has no future performance obligations under this
collaboration.
5. STOCKHOLDERS' EQUITY
CONVERTIBLE PREFERRED STOCK
A summary of the convertible preferred stock at December 31, 1999 and March 31,
2000 is as follows:
<TABLE>
<CAPTION>
SHARES ISSUED PREFERENCE IN
AND OUTSTANDING LIQUIDATION
----------------- --------------
<S> <C> <C>
Series A ................ 2,626,892 $ 2,626,892
Series B ................ 2,875,000 3,450,000
Series C ................ 8,791,432 12,308,005
Series D ................ 732,601 2,000,000
Series E ................ 6,455,493 12,329,929
Series F ................ 2,722,513 8,194,761
Series F-1 .............. 288,708 1,000,000
--------- -----------
24,492,639 $41,909,587
========== ===========
</TABLE>
Each of the shares of Series A, B, C, D, E, F and F-1 preferred stock is
convertible on a one-for-one basis, at the option of the holder, into shares of
the Company's common stock. Therefore, 24,492,639 shares of common stock have
been reserved for issuance upon conversion of the preferred stock, subject to
certain anti-dilution adjustments. The preferred stock will convert
automatically upon the
F-41
<PAGE>
SIGNAL PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS
(INFORMATION SUBSEQUENT TO DECEMBER 31, 1999 AND PERTAINING TO MARCH 31, 2000
AND THE THREE MONTHS ENDED MARCH 31, 1999 AND 2000 IS UNAUDITED.) - (CONTINUED)
closing of an underwritten public offering of the Company's common stock with
proceeds to the Company of at least $15,000,000 and at a price not less than
$5.00 per share after adjustment for any stock splits. The holders of the
Series A, B, C, E and F preferred stock as a group are entitled to elect four
directors to the Board of Directors, and in all other matters the holder of
each share of preferred stock is entitled to one vote for each share of common
stock into which it would convert.
Annual dividends of $.08, $.10, $.11, $.32, $.15, $.24 and $.28 per share of
Series A, B, C, D, E, F and F-1 preferred stock, respectively, are payable
whenever funds are legally available and when and as declared by the Board of
Directors.
COMMON STOCK
In connection with certain stock purchase agreements, the Company has the
option to repurchase, at the original issue price, unvested shares in the event
of termination of employment or engagement. Shares issued under these
agreements generally vest over four to five years. At December 31, 1999 and
March 31, 2000, 257,793 and 341,728 shares, respectively, were subject to
repurchase by the Company.
STOCK OPTION PLANS
In June 1993, the Company adopted the 1993 Founders' Stock Option Plan (the
"Founders' Plan"), under which 550,000 shares of common stock were reserved for
issuance upon exercise of options granted by the Company. The Founders' Plan
provides for the grant of incentive and nonstatutory options. The exercise
price of incentive stock options must equal at least the fair market value on
the date of grant, and the exercise price of nonstatutory stock options may be
no less than 85% of the fair market value on the date of grant. The maximum
term of options granted under the Founders' Plan is ten years. Options
generally are immediately exercisable. Common stock or options issued under the
Founders' Plan generally vest over five years. Unvested shares issued pursuant
to the exercise of options are subject to repurchase, at the original purchase
price, in the event of termination of employment or engagement.
In November 1993, the Company adopted the 1993 Stock Option Plan, under which
450,000 shares of the Company's common stock were reserved for issuance upon
exercise of options granted by the Company under provisions similar to the
Founders' Plan. In 1995 and 1996, the Company authorized an additional
1,000,000 and 1,050,000 shares, respectively, of the Company's common stock to
be reserved for issuance upon exercise of options granted by the Company under
the 1993 Stock Option Plan.
In June 1997, the Company adopted the 1997 Stock Option Plan, under which
1,000,000 shares of common stock were reserved for issuance upon exercise of
options granted by the Company. In February 1998, the Company authorized an
additional 2,000,000 shares of the Company's common stock to be reserved for
issuance upon exercise of options granted by the Company under the 1997 Stock
Option Plan. The options contain similar provisions to those options issued
under the 1993 Founders' Stock Option Plan and the 1993 Stock Option Plan.
F-42
<PAGE>
SIGNAL PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS
(INFORMATION SUBSEQUENT TO DECEMBER 31, 1999 AND PERTAINING TO MARCH 31, 2000
AND THE THREE MONTHS ENDED MARCH 31, 1999 AND 2000 IS UNAUDITED.) - (CONTINUED)
A summary of the Company's stock option activity and related information
follows:
<TABLE>
<CAPTION>
THREE
MONTHS ENDED
YEARS ENDED DECEMBER 31, MARCH 31, 2000
----------------------------------------------------------------------------- ------------------------
1997 1998 1999
------------------------- ------------------------- -------------------------
WEIGHTED- WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
------------- ----------- ------------- ----------- ------------- ----------- ------------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Outstanding at
beginning of period..... 1,592,300 $ .13 2,168,495 $ .20 3,264,200 $ .33 2,987,222 $ .36
Granted ................. 1,246,695 $ .27 1,987,500 $ .43 350,200 $ .50 1,437,750 $ 1.30
Exercised ............... (555,090) $ .15 (713,304) $ .19 (161,998) $ .15 (879,399) $ 1.04
Cancelled ............... (115,410) $ .16 (178,491) $ .30 (465,180) $ .38 (59,454) $ .32
--------- ----- --------- ----- --------- ------ --------- -------
Outstanding at end of
period ................. 2,168,495 $ .20 3,264,200 $ .33 2,987,222 $ .36 3,486,119 $ .75
========= ===== ========= ===== ========= ====== ========= =======
Vested options at end
of period .............. 501,064 $ .11 539,650 $ .15 1,365,406 $ .32 811,637 $ .39
========= ===== ========= ===== ========= ====== ========= =======
</TABLE>
Exercise prices for options outstanding as of March 31, 2000 ranged from $.10
to $1.50. The weighted average remaining contractual life of those options at
March 31, 2000 is 6.6 years. The weighted-average fair value of options granted
in 1997, 1998 and 1999, using the minimum value pricing model, was $.07, $.11
and $.11, respectively.
As of March 31, 2000, options for 2,358,433 common shares were available for
future grant.
The Company recorded $615,855, $1,019,170, $1,024,244 and $7,232,293 of
deferred compensation for options granted during the years ended December 31,
1997, 1998 and 1999 and the three months ended March 31, 2000, respectively,
representing the difference between the option exercise price and the estimated
fair value of the underlying stock for financial statement presentation
purposes. The Company is amortizing the deferred compensation over the vesting
period of the options. The Company recorded $104,345, $607,788, $675,122 and
$660,900 of compensation expense during the years ended December 31, 1997, 1998
and 1999 and the three months ended March 31, 2000, respectively.
Pro forma information regarding net loss is required to be disclosed by SFAS
123, and has been determined as if the Company had accounted for its employee
stock options under the fair value method prescribed in that Statement. The
fair value of these options was estimated at the date of grant using the
minimum value pricing model with the following weighted-average assumptions for
1997, 1998 and 1999 and the three months ended March 31, 2000: risk-free
interest rate of 6%, dividend yield of 0%; and an expected life of four years.
The minimum value pricing model is similar to the Black-Scholes option
valuation model which was developed for use in estimating the fair value of
traded options which have no vesting restrictions and are fully transferable,
except that it excludes the factor for volatility. In addition, option
valuation models require the input of highly subjective assumptions. Because
the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the vesting period of the related options. The
adjusted pro forma net loss for the years ended December 31, 1997, 1998 and
1999 was $5,757,845, $4,384,804 and $7,913,695, respectively. The effects are
not likely to be representative of the effects on pro forma net loss in future
years because it does not take into consideration pro forma compensation
expense related to grants made prior to 1996.
F-43
<PAGE>
SIGNAL PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS
(INFORMATION SUBSEQUENT TO DECEMBER 31, 1999 AND PERTAINING TO MARCH 31, 2000
AND THE THREE MONTHS ENDED MARCH 31, 1999 AND 2000 IS UNAUDITED.) - (CONTINUED)
COMMON SHARES RESERVED FOR FUTURE ISSUANCE
At March 31, 2000, the Company has reserved shares of common stock for future
issuance as follows:
<TABLE>
<S> <C>
Conversion of convertible preferred stock ......... 24,492,639
Stock option plans ................................ 5,844,552
Warrants .......................................... 250,000
----------
30,587,191
==========
</TABLE>
6. INCOME TAXES
Significant components of the Company's deferred tax assets as of December 31,
1998 and 1999 are shown below. A valuation allowance of $15,290,000, of which
$2,779,000 is related to 1999, has been recognized as of December 31, 1999 to
offset the deferred tax assets as realization of such assets is uncertain.
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------
1998 1999
---------------- ----------------
<S> <C> <C>
DEFERRED TAX ASSETS:
Capitalized research expenses ....................... $ 965,000 $ 921,000
Net operating loss carryforwards .................... 9,276,000 11,389,000
Research and development credits .................... 1,458,000 1,877,000
Depreciation ........................................ 57,000 952,000
Other, net .......................................... 755,000 151,000
------------- -------------
Total deferred tax assets ........................... 12,511,000 15,290,000
Valuation allowance for deferred tax assets ......... (12,511,000) (15,290,000)
------------- -------------
Net deferred taxes .................................. $ -- $ --
============= =============
</TABLE>
At December 31, 1999, the Company has federal and California net operating loss
carryforwards of approximately $30,621,000 and $11,680,000, respectively. The
difference between the federal and California tax loss carryforwards is
attributable to the capitalization of research and development expenses for
California tax purposes and the fifty percent limitation on California loss
carryforwards prior to 1997. The federal tax loss carryforwards will begin
expiring in 2007, unless previously utilized. The California tax loss
carryforwards will continue to expire in 2000 (approximately $1,035,000 expired
in 1999). The Company also has federal and California research and development
tax credit carryforwards of approximately $1,368,000 and $783,000,
respectively, which will begin expiring in 2008 unless previously utilized.
Pursuant to Sections 382 and 383 of the Internal Revenue Code, the annual use
of the Company's net operating loss and credit carryforwards may be limited if
a cumulative change in ownership (as defined) of more than 50% occurs within a
three-year testing period.
7. SUBSEQUENT EVENT (UNAUDITED)
In January 2000, the Company's Board of Directors adopted the 2000 Equity
Incentive Plan, which amended the 1993 Stock Option Plans and the 1997 Stock
Option Plan. The Board of Directors also increased the share reserve of the
2000 Equity Incentive Plan to 9,050,000 shares.
F-44
<PAGE>
SIGNAL PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS
(INFORMATION SUBSEQUENT TO DECEMBER 31, 1999 AND PERTAINING TO MARCH 31, 2000
AND THE THREE MONTHS ENDED MARCH 31, 1999 AND 2000 IS UNAUDITED.) - (CONTINUED)
In June 2000, Signal issued a secured promissory note for up to $5,000,000 that
can be borrowed against through December 31, 2000, as needed. The proceeds of
the note will be used for general corporate purposes and working capital. The
interest rate will float with the Treasury rate as the proceeds are drawn down
and then be fixed for the term, maintaining the spread. The note is payable in
either twelve or thirty-six monthly installments, at Signal's option, and is
secured by the assets of the Company. To date, Signal has not drawn down any
proceeds from the note. In conjunction with the issuance of the promissory
note, Signal issued the creditor a warrant to purchase up to 225,000 shares of
Series C-2 Preferred Stock at a price of $4.00 per share, of which 150,000
shares were issuable under the warrant upon Signal's signing of a loan
commitment letter in May 2000, and the remaining 75,000 shares become issuable
under the warrant upon any additional borrowing against the note greater than
$2.5 million. The warrant expires ten years from the date of grant.
Accordingly, the Company increased its authorized shares of Preferred Stock
from 24,742,639 to 24,967,639.
On June 29, 2000, the Company entered into an agreement and plan of merger with
Celgene Corporation ("Celgene") in which Celgene will acquire all of the
outstanding shares of Signal common and preferred stock for approximately 3.7
million shares of Celgene common stock. Signal stockholders will receive .1257
of a share of common stock, par value $.01 per share, of Celgene in exchange
for each share of common stock of Signal. The acquisition will be accounted for
using the pooling of interests method of accounting.
F-45
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The General Corporation Law of the State of Delaware, or the DGCL, permits
Celgene and its stockholders to limit directors' exposure to liability for
certain breaches of the directors' fiduciary duty, either in a suit on behalf
of Celgene or in an action by stockholders of Celgene.
The Certificate of Incorporation of Celgene, or the Charter, eliminates the
liability of directors of Celgene to Celgene or its stockholders for monetary
damages arising out of the directors' breach of their fiduciary duty of care.
The Charter also authorizes Celgene to indemnify its directors, officers,
incorporators, employees and agents with respect to certain costs, expenses,
and amounts incurred in connection with an action, suit or proceeding by reason
of the fact that such person was serving as a director, officer, incorporator,
employee or agent of Celgene. In addition, the Charter permits Celgene to
provide additional indemnification rights to its officers and directors and to
indemnify them to the greatest extent possible under the DGCL. Celgene has
entered into indemnification agreements with each of its officers and directors
and intends to enter into indemnification agreements with each of its future
officers and directors. Pursuant to such indemnification agreements, Celgene
has agreed to indemnify its officers and directors against certain liabilities,
including liabilities arising out of the offering made by this registration
statement.
Celgene maintains a standard form of officers' and directors' liability
insurance policy which provides coverage to the officers and directors of
Celgene for certain liabilities, including certain liabilities which may arise
out of the registration statement.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(A) EXHIBITS
The following exhibits are filed herewith or incorporated herein by reference.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
-------- --------------------------------------------------------------------------------------------
<S> <C>
2.1 Agreement and Plan of Merger, dated as of June 29, 2000, among Celgene Corporation,
Celgene Acquisition Corp. and Signal Pharmaceuticals, Inc. (incorporated by reference to
Appendix A to the proxy statement/prospectus filed as part of this registration statement).
2.2 Form of Voting and Proxy Agreement among Celgene Corporation and the Shareholders
listed on Schedule A thereto (incorporated by reference to Exhibit A-1 to Appendix A to
the proxy statement/prospectus filed as part of this registration statement).
2.3 Form of Option Agreement between Celgene Corporation and Signal Pharmaceuticals, Inc.
(incorporated by reference to Exhibit A-2 to Appendix A to the proxy
statement/prospectus filed as part of this registration statement).
2.4 Form of Affiliate Agreement of affiliates of Signal Pharmaceuticals, Inc. (incorporated by
reference to Exhibit C to Appendix A to the proxy statement/prospectus filed as part of
this registration statement).
5.1 Opinion of Proskauer Rose LLP, counsel to Celgene Corporation, as to the legality of the
Celgene common stock being registered hereby.
8.1 Opinion of Proskauer Rose LLP, counsel to Celgene Corporation, regarding tax matters.
8.2 Opinion of Cooley Godward LLP, counsel to Signal Pharmaceuticals, Inc. regarding tax
matters.
23.1 Consent of KPMG LLP.
23.2 Consent of Proskauer Rose LLP (incorporated by reference to Exhibits 5.1 and 8.1).
</TABLE>
II-1
<PAGE>
<TABLE>
<CAPTION>
23.3 Consent of Pennie & Edmonds LLP.
<S> <C>
23.4 Consent of Kleinfeld, Kaplan & Becker.
23.5 Consent of Mathew, Collins, Shepherd & Gould, P.A.
23.6 Consent of Cooley Godward LLP (incorporated by reference to Exhibit 8.2).
23.7 Consent of FleetBoston Robertson Stephens Inc.*
23.8 Consent of Ernst & Young LLP, Independent Auditors
24.1 Power of Attorney.*
99.1 Form of Proxy to be used in connection with special meeting of shareholders of Signal
Pharmaceuticals, Inc.*
</TABLE>
----------
* Previously filed.
(B) FINANCIAL STATEMENT SCHEDULES
All schedules have been omitted as the required information is presented in the
consolidated financial statements or related notes incorporated by reference in
the proxy statement/prospectus or are not applicable.
(C) REPORTS, OPINIONS AND APPRAISALS
Opinion of FleetBoston Robertson Stephens Inc. (incorporated by reference to
Appendix C to the proxy statement/prospectus filed as part of this registration
statement).
ITEM 22. UNDERTAKINGS
(a) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of the
Securities Act of 1933;
(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. Notwithstanding the foregoing,
any increase or decrease in volume of securities offered (if the
total dollar value of securities offered would not exceed that which
was registered) and any deviation from the low or high and of the
estimated maximum offering range may be reflected in the form of
prospectus filed with the Commission pursuant to Rule 424(b) if, in
the aggregate, the changes in volume and price represent no more
than 20 percent change in the maximum aggregate offering price set
forth in the "Calculation of Registration Fee" table in the
effective 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 (a)(1)(i) and (a)(1)(ii) do not apply if
the registration statement is on Form S-3, Form S-8 or Form F-3, and the
information required to be included in a post-effective amendment by those
paragraphs is contained in periodic reports filed with or furnished to the
Commission by the registrant pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 that are incorporated by reference in the
registration statement.
II-2
<PAGE>
(2) That, for the purpose of determining any liability under the Securities
Act of 1933, 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.
(b) The undersigned 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 the 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.
(c) The registrant undertakes that every prospectus: (i) that is filed pursuant
to paragraph (c) 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 of 1933, 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.
(d) Insofar as indemnification for liabilities arising under the Securities Act
of 1933 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 Act and is, therefore, unenforceable. In the event that
such 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 Act and will be governed by the final
adjudication of such issue.
(e) 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.
(f) 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.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-4 and has duly caused this registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the city of Warren, State of New Jersey on August 8, 2000.
CELGENE CORPORATION
By: /s/ John W. Jackson
------------------------------------
John W. Jackson
Chairman of the Board
and Chief Executive Officer
Pursuant to the requirements of the Securities Act, this registration statement
has been signed below by the persons whose signatures appear below, which
persons have signed such registration statement in the capacities indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
<S> <C> <C>
/s/ John W. Jackson Chairman of the Board and Chief August 8, 2000
------------------------------ Executive Officer (Principal Executive
John W. Jackson Officer)
/s/ John W. Jackson President, Chief Operating Officer and August 8, 2000
------------------------------ Director
Sol J. Barer
/s/ John W. Jackson Chief Financial Officer (Principal August 8, 2000
------------------------------ Accounting and Financial Officer)
Robert J. Hugin
/s/ John W. Jackson Director August 8, 2000
------------------------------
Jack L. Bowman
/s/ John W. Jackson Director August 8, 2000
------------------------------
Frank T. Cary
/s/ John W. Jackson Director August 8, 2000
------------------------------
Gilla Kaplan
/s/ John W. Jackson Director August 8, 2000
------------------------------
Arthur Hull Hayes, Jr.
/s/ John W. Jackson Director August 8, 2000
------------------------------
Richard C.E. Morgan
/s/ John W. Jackson Director August 8, 2000
------------------------------
Walter L. Robb
/s/ John W. Jackson Director August 8, 2000
------------------------------
Lee J. Schroeder
</TABLE>
II-4
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
-------- --------------------------------------------------------------------------------------------
<S> <C>
2.1 Agreement and Plan of Merger, dated as of June 29, 2000, among Celgene Corporation,
Celgene Acquisition Corp. and Signal Pharmaceuticals, Inc. (incorporated by reference to
Appendix A to the proxy statement/prospectus filed as part of this registration statement).
2.2 Form of Voting and Proxy Agreement among Celgene Corporation and the Shareholders
listed on Schedule A thereto (incorporated by reference to Exhibit A-1 to Appendix A to
the proxy statement/prospectus filed as part of this registration statement).
2.3 Form of Option Agreement between Celgene Corporation and Signal Pharmaceuticals, Inc.
(incorporated by reference to Exhibit A-2 to Appendix A to the proxy
statement/prospectus filed as part of this registration statement).
2.4 Form of Affiliate Agreement of affiliates of Signal Pharmaceuticals, Inc. (incorporated by
reference to Exhibit C to Appendix A to the proxy statement/prospectus filed as part of
this registration statement).
5.1 Opinion of Proskauer Rose LLP, counsel to Celgene Corporation, as to the legality of the
Celgene common stock being registered hereby.
8.1 Opinion of Proskauer Rose LLP, counsel to Celgene Corporation, regarding tax matters.
8.2 Opinion of Cooley Godward LLP, counsel to Signal Pharmaceuticals, Inc. regarding tax
matters.
23.1 Consent of KPMG LLP.
23.2 Consent of Proskauer Rose LLP (incorporated by reference to Exhibit 5.1 and 8.1).
23.3 Consent of Pennie & Edmonds LLP.
23.4 Consent of Kleinfeld, Kaplan & Becker.
23.5 Consent of Mathew, Collins, Shepherd & Gould, P.A.
23.6 Consent of Cooley Godward LLP (incorporated by reference to Exhibit 8.2).
23.7 Consent of FleetBoston Robertson Stephens Inc.*
23.8 Consent of Ernst & Young LLP, Independent Auditors
24.1 Power of Attorney.*
99.1 Form of Proxy to be used in connection with special meeting of shareholders of Signal
Pharmaceuticals, Inc.*
</TABLE>
----------
* Previously filed.
