<PAGE>
As filed with the Securities and Exchange Commission on December 7, 1999
Registration No. 333-89177
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------
AMENDMENT NO. 3
TO
FORM S-1
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
---------------
TULARIK INC.
(Exact name of registrant as specified in its charter)
---------------
<TABLE>
<S> <C> <C>
Delaware 8731 94-3148800
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
</TABLE>
---------------
Two Corporate Drive
South San Francisco, California 94080
(650) 825-7000
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
---------------
David V. Goeddel
Chief Executive Officer
Tularik Inc.
Two Corporate Drive
South San Francisco, California 94080
(650) 825-7000
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
---------------
Copies to:
<TABLE>
<S> <C>
Suzanne Sawochka Hooper, Esq. David A. Hahn, Esq.
Stephen N. Rosenfield, Esq. Christopher L. Kaufman, Esq.
Cooley Godward LLP Latham & Watkins
Five Palo Alto Square 701 B Street
3000 El Camino Real Suite 2100
Palo Alto, CA 94306-2155 San Diego, CA 92101
(650) 843-5000 (619) 236-1234
</TABLE>
---------------
Approximate date of proposed sale to the public: As soon as practicable
after the Registration Statement becomes effective.
---------------
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended (the "Securities Act"), check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
number 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 number of the earlier effective registration statement for the
same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. [_]
---------------
The registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the registrant
shall file a further amendment which specifically states that this
Registration Statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933, as amended, or until the
Registration Statement shall become effective on such date as the Commission,
acting pursuant to said Section 8(a), may determine.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this prospectus is not complete and may be changed. We may +
+not sell these securities until the registration statement filed with the +
+Securities and Exchange Commission is effective. This prospectus is not an +
+offer to sell these securities and we are not soliciting offers to buy. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
PROSPECTUS Subject to Completion, dated December 7, 1999
6,250,000 Shares
[TULARIK INC. LOGO]
Common Stock
- --------------------------------------------------------------------------------
This is our initial public offering of shares of common stock. We are
offering 4,781,250 shares in public offerings in the United States and
Canada and outside the United States and Canada. No public market
currently exists for our shares. Our common stock has been approved
for quotation on the Nasdaq National Market under the symbol
"TLRK." We expect the initial public offering price to be between
$11.00 and $13.00 per share.
Pharma Vision 2000 AG, our largest stockholder, has expressed an interest in
acquiring additional shares in a direct offering of our common stock that
would allow it to maintain its 23.5% ownership interest in us. We are
offering 1,468,750 shares of common stock in the direct offering.
Any sales to Pharma Vision in the direct offering will be made at
the initial public offering price concurrent with the public
offerings.
Investing in the shares involves risks. "Risk Factors" begin on page 7.
<TABLE>
<CAPTION>
Per
Share Total
----- -----
<S> <C> <C>
Public Offering Price............................................... $ $
Underwriting Discount............................................... $ $
Proceeds to Tularik................................................. $ $
</TABLE>
We have granted the U.S. underwriters and international managers 30-day options
to purchase up to an aggregate of 717,187 additional shares of common stock
solely to cover over-allotments, if any. Pharma Vision 2000 AG has expressed an
interest in acquiring up to an additional 220,313 shares of our common stock in
order to maintain its 23.5% ownership interest in us in the event the over-
allotment options are exercised.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if
this prospectus is accurate or complete. Any representation to the contrary is
a criminal offense.
Lehman Brothers expects to deliver the shares on or about December , 1999.
- --------------------------------------------------------------------------------
Lehman Brothers
Hambrecht & Quist
J.P. Morgan & Co.
Warburg Dillon Read LLC
, 1999
<PAGE>
Inside Front Cover
Most human diseases are linked to the inappropriate activation of genes, which
causes over-production of harmful proteins or under-production of beneficial
proteins. Tularik is committed to the discovery of novel drugs that can be
administered orally to treat disease by blocking or amplifying the activation
of genes.
Graphic Description: Graphic depicting how pills amplify beneficial activation
of genes or block harmful activation of genes.
Developing drugs to treat human disease by regulating genes.
Example: Inflammatory diseases/Immune system protein binds to cell surface and
causes inflammation.
Tularik's drug discovery platform is directed toward identifying numerous novel
proteins within a cell that are linked to disease--enabling us to identify
multiple drug targets and to focus on those that are optimal.
Graphic Description: Graphic depicting an example of the activation of genes
and the multiple protein components inside the cell that could be potential
drug targets.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary....................................................... 4
Risk Factors............................................................. 7
Use of Proceeds.......................................................... 19
Dividend Policy.......................................................... 19
Capitalization........................................................... 20
Dilution................................................................. 21
Selected Consolidated Financial Data..................................... 22
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 23
Business................................................................. 30
</TABLE>
<TABLE>
<CAPTION>
Page
----
<S> <C>
Management................................................................. 55
Related Party Transactions................................................. 67
Principal Stockholders..................................................... 69
Description of Capital Stock............................................... 71
Shares Eligible for Future Sale............................................ 73
Underwriting............................................................... 75
Legal Matters.............................................................. 80
Experts.................................................................... 80
Where You Can Find More Information........................................ 80
Index to Financial Statements ............................................. F-1
</TABLE>
----------------
ABOUT THIS PROSPECTUS
You should rely only on the information contained in this prospectus. We have
not authorized anyone to provide you with information different from that
contained in this prospectus. This prospectus is not an offer to sell or a
solicitation of an offer to buy our common stock in any jurisdiction where it
is unlawful. The information contained in this prospectus is accurate only as
of the date of this prospectus, regardless of the time of delivery of this
prospectus or of any sale of common stock. This preliminary prospectus is
subject to completion prior to this offering.
Some of the statements under the captions "Prospectus Summary," "Risk
Factors," "Use of Proceeds," "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Business" and elsewhere in this
prospectus are "forward-looking statements." These forward-looking statements
include, but are not limited to, statements about our plans, objectives,
expectations and intentions and other statements contained in the prospectus
that are not historical facts. When used in this prospectus, the words
"anticipates," "believes," "continue," "could," "estimates," "expects,"
"intends," "may," "plans," "seeks," "should" or "will" or the negative of these
terms or similar expressions are generally intended to identify forward-looking
statements. Because these forward-looking statements involve risks and
uncertainties, there are important factors that could cause actual results to
differ materially from those expressed or implied by these forward-looking
statements, including our plans, objectives, expectations and intentions and
other factors discussed under "Risk Factors."
"Tularik" and the Tularik logo are trademarks of Tularik Inc. Other
trademarks and trade names appearing in this prospectus are the property of
their holders.
3
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and the consolidated financial statements and notes appearing
elsewhere in this prospectus. Unless otherwise indicated, information in this
prospectus assumes that the underwriters do not exercise their over-allotment
options and assumes the conversion of all of our preferred stock into common
stock upon completion of these offerings.
Tularik
Tularik engages in the discovery and development of a broad range of novel
and superior orally available drugs based on gene regulation. Building on our
scientific strengths, we intend to become a world-class pharmaceutical company.
Our research programs, all of which address large commercial markets, include
cancer, cytomegalovirus, diabetes, obesity, inflammation, immune disorders,
high blood cholesterol levels, known as hypercholesterolemia, bacterial
diseases and a class of drug targets called orphan nuclear receptors because
their exact function is unknown and they are located within the nucleus of the
cell. We have diversified our drug discovery and development efforts not only
across a large number of diseases, but also across multiple promising targets
and drug candidates for these diseases.
Gene regulation is the selective activation and deactivation of genes within
a cell and is fundamental to the development or progression of most diseases.
Our drug discovery approach, which is based on gene regulation, is amenable to
the discovery of orally available drugs. These drugs are well suited for the
treatment of chronic diseases requiring the daily administration of medications
over many years. We also selectively pursue drug candidates with mechanisms of
action other than gene regulation.
Our drug discovery and development expertise includes molecular biology,
biochemistry, structural biology, chemistry, pharmacology and human testing. To
complement our internal capabilities, we collaborate with world-renowned
scientists and clinicians and with leading pharmaceutical companies. We believe
that our integration of biology, chemistry and pharmacology enhances our
ability to find novel gene regulating drugs and that our drug discovery and
development efforts are highly efficient and productive. To date, we have:
. identified numerous novel proteins that regulate the expression of
disease-causing genes;
. established more than 80 automated drug testing systems, known as high
throughput screening assays, that mimic the diseases addressed by our
programs;
. conducted more than 15 million drug screens using a library of more than
500,000 distinct compounds and natural products;
. identified 14 drug leads, seven of which are being optimized by chemists;
. identified one cytomegalovirus drug candidate that is undergoing
preclinical testing consisting of animal studies designed to determine
the feasibility of human testing;
. identified one cancer drug candidate for which an Investigational New
Drug application has been approved by the U.S. Food and Drug
Administration;
. identified one cancer drug candidate that is undergoing human testing
designed to determine safety, known as phase 1 clinical trials; and
. obtained a license for a cancer drug candidate that has completed phase 1
clinical trials and that we expect to enter human testing designed to
determine efficacy, known as phase 2 clinical trials, during 2000.
We have commenced, or are preparing for, human testing of three cancer drug
candidates: lometrexol, T138067, which we refer to as T67, and T900607, which
we refer to as T607. Our most advanced drug candidate, which we recently
licensed from Eli Lilly, is called lometrexol. The utility of cancer drugs like
lometrexol has been proven by methotrexate, a drug used extensively in the
treatment of several tumor types. We expect to commence phase 2 clinical trials
of lometrexol in 2000. T67 acts on the same protein targeted by the cancer
drugs Taxol and vincristine. In contrast to these drugs, T67 retains its
activity against tumor cells that are multiple drug resistant and is able to
enter the brain. We have enrolled 29 patients in phase 1 clinical
4
<PAGE>
trials of T67 to date. Pending successful completion of these trials, we will
initiate phase 2 clinical trials of T67 in several tumor types, including brain
tumors. T607 is an analog of T67, has the same target and is similarly active
against multiple drug resistant tumors. Animal studies indicate that T607 is
distinct from T67 because T607 has a reduced ability to enter the brain, which
may make it suitable for the treatment of different tumor types than T67. We
recently received approval of an Investigational New Drug application for T607.
We intend to commercialize drugs independently and through collaborations
with pharmaceutical partners. To assist in the commercialization of some of our
products, and to fund research and development activities, we have established
and will continue to pursue collaborations with selected pharmaceutical and
biotechnology companies. We currently have corporate collaborations in six of
our research programs: with Knoll relating to obesity; with Japan Tobacco
relating to orphan nuclear receptors; with Roche Bioscience relating to
inflammation; with Japan Tobacco relating to obesity/diabetes; with Taisho
relating to immune disorders; and with Sumitomo relating to
hypercholesterolemia. We have retained significant rights to independently
market products resulting from most of our programs, including worldwide
commercialization rights to our cancer, bacterial diseases and cytomegalovirus
programs and North American commercialization rights in four of our externally
funded programs. As of September 30, 1999, we had received a total of $121.3
million from our current and former corporate collaborators, including $108.3
million in research funding and $13.0 million from equity purchases.
To date, we have funded our operations primarily through the sale of equity
securities, non-equity payments from collaborators and interest income. We
expect our sources of revenue, if any, for the next several years to consist
primarily of payments under corporate collaborations and interest income.
As of September 30, 1999, 41 U.S. patents based on our discoveries had been
issued or allowed. In addition, as of that date, we had 47 patent applications
pending in the United States and had filed several corresponding foreign patent
applications.
Tularik was incorporated in California in 1991 and reincorporated in Delaware
in 1997. Our principal office is located at Two Corporate Drive, South San
Francisco, California 94080, and our telephone number is (650) 825-7000.
The Offerings
<TABLE>
<C> <S>
Common Stock offered in the public offerings........ 4,781,250 shares
Common Stock offered in the direct offering......... 1,468,750 shares
Common Stock to be outstanding after the offerings.. 41,521,375 shares
Research and development
and general corporate
purposes. See "Use of
Use of proceeds..................................... Proceeds."
Proposed Nasdaq National Market Symbol.............. "TLRK"
</TABLE>
The number of shares of common stock to be outstanding after the offerings is
based on the number of shares outstanding as of September 30, 1999 and
excludes:
. 5,955,965 shares of common stock underlying options outstanding as of
September 30, 1999 at a weighted average exercise price of $2.23 per
share;
. 1,015,091 shares of common stock underlying warrants outstanding as of
September 30, 1999 at a weighted average exercise price of $10.17 per
share;
. 436,112 shares available for issuance or future grant under our stock
option plans; and
. 500,000 shares available for issuance under our employee stock purchase
plan.
5
<PAGE>
Summary Consolidated Financial Data
The following tables summarize our consolidated financial data. The pro forma
information contained in the consolidated statements of operations data gives
effect to the automatic conversion of all convertible preferred stock into
common stock upon the completion of this offering. The as adjusted column of
the consolidated balance sheet data reflects the conversion of our preferred
stock into common stock and the sale of 6,250,000 shares of our common stock in
the public offerings and the direct offering at an assumed initial public
offering price of $12.00 per share, after deducting the estimated underwriting
discount and offering expenses payable by us.
<TABLE>
<CAPTION>
Nine Months
Year Ended December 31, Ended September 30,
------------------------------------------- --------------------
1994 1995 1996 1997 1998 1998 1999
------- ------- ------- ------- ------- --------- ---------
(in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C> <C> <C>
Consolidated Statements of Op-
erations Data:
Collaborative research
and development
revenue............... $ 5,618 $11,124 $15,297 $20,009 $21,362 $ 13,664 $ 17,856
Total operating ex-
penses(1)............. 12,153 15,980 22,252 49,468 38,297 27,799 40,478
Net loss(1)............ (5,898) (3,607) (5,480) (25,374) (10,539) (9,303) (18,954)
Basic and diluted net
loss per share........ $ (2.27) $ (0.91) $ (1.09) $ (4.19) $ (1.55) $ (1.40) $ (2.57)
Shares used in comput-
ing basic and
diluted net loss per
share................. 2,601 3,957 5,034 6,063 6,791 6,666 7,388
Pro forma basic and di-
luted net loss per
share................. $ (0.31) $ (0.55)
Shares used in comput-
ing pro forma
basic and diluted net
loss per share........ 33,687 34,314
</TABLE>
<TABLE>
<CAPTION>
As of September 30,
As of 1999
December 31, ---------------------
1998 Actual As Adjusted
------------ -------- -----------
(in thousands)
<S> <C> <C> <C>
Consolidated Balance Sheet Data:
Cash, cash equivalents and marketable
securities................................ $119,324 $104,188 $174,172
Working capital............................ 94,535 84,401 154,385
Total assets............................... 136,778 131,026 201,010
Long-term obligations, less current
portion................................... 4,734 10,254 10,254
Deferred compensation...................... (679) (5,377) (5,377)
Accumulated deficit........................ (61,857) (80,811) (80,811)
Total stockholders' equity................. 110,898 95,556 165,540
</TABLE>
- --------
(1) Total operating expenses in 1997 include a non-cash charge of $18.9 million
for acquired in-process research and development in connection with our
acquisition of Amplicon Corp. You should read Note 6 of notes to
consolidated financial statements for information about this acquisition.
6
<PAGE>
RISK FACTORS
An investment in our common stock is risky. You should carefully consider the
following risks, as well as the other information contained in this prospectus.
If any of the following risks actually occurs, our business could be harmed. In
that case, the trading price of our common stock could decline, and you might
lose all or part of your investment. The risks and uncertainties described
below are not the only ones facing us. Additional risks and uncertainties not
presently known to us, or that we currently see as immaterial, may also harm
our business. If any of these additonal risks or uncertainties occur, the
trading price of our common stock could decline, and you might lose all or part
of your investment.
RISKS RELATED TO TULARIK
If we continue to incur operating losses for a period longer than anticipated,
we may be unable to continue our operations.
We have generated operating losses since we began operations in November
1991. The extent of our future losses and the timing of profitability are
highly uncertain, and we may never achieve profitable operations. We have been
engaged in discovering and developing drugs since inception, which requires
significant research and development expenditures. To date, we have no products
that have generated any revenue. As of September 30, 1999, we had an
accumulated deficit of approximately $80.8 million. Even if we succeed in
developing a commercial product, we expect to incur losses for at least the
next several years and expect that these losses will increase as we expand our
research and development activities. If the time required to generate product
revenues and achieve profitability is longer than anticipated, we may not be
able to continue our operations. If we fail to obtain the necessary capital, we
will not be able to fund our operations.
Because our product candidates are in an early state of development, there is a
high risk of failure.
We have no products that have received regulatory approval for commercial
sale. All of our product candidates are in early stages of development, and we
face the risks of failure inherent in developing drugs based on new
technologies. None of our prospective products, including lometrexol, T67 and
T607, is expected to be commercially available until at least 2004. Two of our
drug candidates, T67 and T607, operate in a similar manner. Based on results at
any stage of clinical trials, we may decide to discontinue development of one
or both of these compounds. Additionally, even if the clinical results are
favorable for both compounds, we may decide to commercialize only one of the
compounds.
Our products must satisfy rigorous standards of safety and efficacy before
they can be approved by the FDA and international regulatory authorities for
commercial use. We will need to conduct significant additional research, animal
testing, referred to as preclinical testing, and human testing, referred to as
clinical trials, before we can file applications with the FDA for product
approval. Clinical trials are expensive and have a high risk of failure. In
addition, to compete effectively, our products must be easy to use, cost-
effective and economical to manufacture on a commercial scale. We may not
achieve any of these objectives. Any of our products may not attain market
acceptance. Typically, there is a high rate of attrition for products in
preclinical testing and clinical trials. Also, third parties may develop
superior products or have proprietary rights that preclude us from marketing
our products. If research and testing is not successful or we fail to obtain
regulatory approval, we will be unable to market and sell our future product
candidates.
The progress and results of our animal and human testing are uncertain.
Preclinical testing and clinical development are long, expensive and
uncertain processes. It may take us several years to complete our testing, and
failure can occur at any stage of testing. Interim results of trials do not
necessarily predict final results, and acceptable results in early trials may
not be repeated in later trials. Success in preclinical testing and early
clinical trials does not ensure that later clinical trials will be successful.
7
<PAGE>
A number of companies in the pharmaceutical industry, including biotechnology
companies, have suffered significant setbacks in advanced clinical trials, even
after promising results in earlier trials. Commercialization of our product
candidates depends upon successful completion of clinical trials. We must
provide the FDA and foreign regulatory authorities with clinical data that
demonstrates the safety and efficacy of our products before they can be
approved for commercial sale. While we have recently licensed a product
candidate that is ready for the stage of human testing designed to determine
efficacy, known as phase 2 clinical trials, none of the product candidates that
we have internally developed have advanced beyond the stage of human testing
designed to determine safety, known as phase 1 clinical trials.
Any clinical trial may fail to produce results satisfactory to the FDA.
Preclinical and clinical data can be interpreted in different ways, which could
delay, limit or prevent regulatory approval. Negative or inconclusive results
or adverse medical events during a clinical trial could cause a clinical trial
to be repeated or a program to be terminated. We typically rely on third-party
clinical investigators to conduct our clinical trials and other third-party
organizations to perform data collection and analysis, and as a result, we may
face additional delaying factors outside our control.
We do not know whether planned clinical trials will begin on time or whether
any of our clinical trials will be completed on schedule or at all. We do not
know whether any clinical trials will result in marketable products. Our
product development costs will increase if we have delays in testing or
approvals or if we need to perform more or larger clinical trials than planned.
If the delays are significant, our financial results and the commercial
prospects for our products will be harmed, and our ability to become profitable
will be delayed.
Our first three clinical candidates are directed to the treatment of cancer.
Cancer drugs generally have a narrow therapeutic window between efficacy and
toxicity. If unacceptable toxicity is observed in clinical trials, the trials
may be terminated at an early stage. Drug-related deaths may occur in phase 1
clinical trials with anti-cancer drugs, because drugs for the treatment of
cancer are typically dangerous and phase 1 patients are critically ill and
heavily pre-treated. Several deaths occurred during Eli Lilly's phase 1
clinical trials of lometrexol.
We do not know whether our existing or any future clinical trials will
demonstrate sufficient safety and efficacy necessary to obtain the requisite
regulatory approvals or will result in marketable products. Our failure to
adequately demonstrate the safety and efficacy of our products under
development will prevent receipt of FDA approval and, ultimately,
commercialization of our products.
For additional information concerning the testing of our prospective
products, see "Business--Government Regulation."
Because we must obtain regulatory approval to market our products in the United
States and foreign jurisdictions, we cannot predict whether or when we will be
permitted to commercialize our products.
The pharmaceutical industry is subject to stringent regulation by a wide
range of authorities. We cannot predict whether regulatory clearance will be
obtained for any product we develop. 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. Of particular
significance are the requirements covering research and development, testing,
manufacturing, quality control, labeling and promotion of drugs for human use.
Before commencing clinical trials in humans, we must submit and receive
approval from the FDA of an Investigational New Drug application. Clinical
trials are subject to oversight by institutional review boards and the FDA and:
. must be conducted in conformance with the FDA's good laboratory practice
regulations;
. must meet requirements for institutional review board oversight;
8
<PAGE>
. must meet requirements for informed consent;
. must meet requirements for good clinical practices;
. are subject to continuing FDA oversight;
. may require large numbers of test subjects; and
. may be suspended by us 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 Investigational New
Drug application or the conduct of these trials.
Before receiving FDA clearance to market a product, we 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. In addition, delays or rejections may be encountered based upon
additional government regulation from future legislation or administrative
action or changes in FDA policy during the period of product development,
clinical trials and FDA regulatory review. Failure to comply with applicable
FDA or other applicable regulatory requirements may result in criminal
prosecution, civil penalties, recall or seizure of products, total or partial
suspension of production or injunction, as well as other regulatory action
against our potential products or us. Additionally, we have limited experience
in conducting and managing the clinical trials necessary to obtain regulatory
approval.
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. We cannot
ensure that any compound developed by us, 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, our 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.
For additional information concerning regulatory approval of our prospective
products, see "Business--Government Regulation."
Failure to attract, retain and motivate skilled personnel and cultivate key
academic collaborations will delay our product development programs and our
research and development efforts.
We are a small company with approximately 200 employees, and our success
depends on our continued ability to attract, retain and motivate highly
qualified management and scientific personnel and on our ability to develop and
maintain important relationships with leading academic institutions and
scientists. Competition for personnel and academic collaborations is intense.
In particular, our product development programs depend on our ability to
attract and retain highly skilled chemists and clinical development personnel.
If we lose the services of any of these personnel, in particular, David V.
Goeddel, our Chief Executive Officer, it could impede significantly the
achievement of our research and development objectives. If we fail to negotiate
additional acceptable collaborations with academic institutions and scientists,
or if our existing academic collaborations were to be unsuccessful, our product
development programs may be delayed. In addition, we will need to hire
additional personnel and develop additional academic collaborations as we
continue to expand our research and development activities. We do not know if
we will be able to attract, retain or motivate personnel or maintain
relationships.
The drug discovery methods we employ are relatively new and may not lead to the
development of drugs.
The drug discovery methods we employ based upon gene regulation are
relatively new. We do not know if these methods will lead to the discovery of
commercially viable drugs. None of our cancer product candidates undergoing
clinical testing acts by gene regulation. There is limited scientific
understanding generally relating to gene expression and the role of genes in
complex diseases and relatively few products based on gene discoveries have
been developed and commercialized by drug manufacturers. Even if we are
successful in
9
<PAGE>
identifying the pathways that cells use to control the expression of genes
associated with specific diseases, these discoveries may not lead to the
development of drugs. Furthermore, our drug discovery efforts are focused on a
number of target genes, the functions of which have not yet been fully
identified. As a result, the safety and efficacy of drugs that alter the
expression of these genes have not yet been established. As a result, we cannot
assure you that our research and development activities will result in any
commercially viable products. We expect to continue to in-license or acquire
additional product candidates to augment the results of our internal research
activities, and in-licensed candidates may not prove to be successful.
If we cannot maintain our current corporate collaborations and enter into new
corporate collaborations, our product development could be delayed.
We rely, to a significant extent, on our corporate collaborators to provide
funding in support of our research and to jointly conduct some research and
preclinical testing functions. If any of our corporate collaborators were to
breach or terminate their agreement with us or otherwise fail to conduct the
collaborative activities successfully and in a timely manner, the preclinical
or clinical development or commercialization of the affected product candidates
or research programs could be delayed or terminated. We cannot control the
amount and timing of resources our corporate collaborators devote to our
programs or potential products. In addition, we expect to rely on our corporate
collaborators for commercialization of some of our products.
The continuation of any of our partnered drug discovery and development
programs may be dependent on the periodic renewal of our corporate
collaborations. All of our corporate collaborations have terms of six or fewer
years, which is less than the period required for the discovery, clinical
development and commercialization of most drugs. Each of our corporate
collaboration agreements provides that, upon expiration of a specified period
after commencement of the agreement, the corporate collaborator has the right
to terminate the agreement on short notice, and each corporate collaboration
agreement, other than the agreement with Roche Bioscience, provides that these
terminations do not require cause. Our collaboration with Yamanouchi
Pharmaceutical Co. was terminated by Yamanouchi in November 1996, and our
collaboration with Merck & Co. was terminated by Merck in March 1999. Our
existing corporate collaboration agreements also may terminate before the full
term of the collaborations. Moreover, we may not be able to renew these
collaborations on acceptable terms, if at all. We believe that our Sumitomo
collaboration will expire and not be renewed at the end of its five-year term
in January 2000. Although we are negotiating with Taisho regarding alternative
collaborative opportunities, we believe that Taisho will terminate its current
agreement with us in March 2000. If funding from one or more of our corporate
collaborations were reduced or terminated, including the expected expiration of
the Sumitomo collaboration and termination of the Taisho collaboration, we
would be required to devote additional internal resources to product
development or scale back or terminate some development programs or seek
alternative corporate collaborators.
There have been a significant number of recent business combinations among
large pharmaceutical companies that have resulted in a reduced number of
potential future corporate collaborators. If business combinations involving
our corporate collaborators were to occur, the effect could be to diminish,
terminate or cause delays in one or more of our corporate collaborations.
Until recently, our corporate collaboration strategy focused on partnering
with pharmaceutical companies to fund our research in gene regulation. Over the
past two years, as our partnered and unpartnered research has led to product
candidates, our corporate collaboration strategy has evolved. In addition to
seeking collaborations for our research-stage programs, we also seek to enter
into collaborations for the development of compounds discovered through our
research and development efforts. The timing of these collaborations may be
linked to clinical results of our product candidates. As a result, we expect
our net spending on research and development to increase significantly and that
our corporate collaborators will fund a smaller percentage of our expenses than
historically.
We may not be able to negotiate additional corporate collaborations on
acceptable terms, if at all, and these collaborations may not be successful.
Our quarterly operating results may fluctuate significantly
10
<PAGE>
depending on the initiation of new corporate collaboration agreements or the
termination of existing corporate collaboration agreements.
If we do not realize value from our retained commercialization rights, we may
not achieve our commercial objectives.
If we do not effectively exploit the commercialization rights we have
retained, we may not achieve profitability. In most of our corporate
collaborations, we have retained various commercialization rights for the
development and marketing of pharmaceutical products, including rights for
specific pharmaceutical indications or in specified geographical regions. For a
description of programs for which we have retained commercialization rights,
see "Business--Corporate Collaborations." We may take advantage of these
currently retained rights directly or may exploit retained rights through
collaborations with others. The value of these rights, if any, will be largely
derived from our ability, directly or with collaborators, to develop and
commercialize drugs, the success of which is also uncertain.
The exploitation of retained commercialization rights requires sufficient
capital; technological, product development, manufacturing and regulatory
expertise and resources; and marketing and sales personnel. We may not be able
to develop or obtain these resources in sufficient quantity or of a sufficient
quality level to enable us to achieve our objectives. To the extent that we are
required to rely on third parties for these resources, failure to establish and
maintain our relationships will affect our ability to realize value from our
retained commercialization rights. If we seek to commercialize products for
which we have retained rights through joint ventures or collaborations, we may
be required to relinquish material rights on terms that may not be favorable to
us. We do not know whether we will be able to enter into any agreements on
acceptable terms, if at all, or that we will be able to realize any value from
our retained commercialization rights.
If we fail to obtain the capital necessary to fund our operations, we will be
unable to successfully develop products.
We expect that significant additional financing will be required in the
future to fund operations. We do not know whether additional financing will be
available when needed, or that, if available, we will obtain financing on terms
favorable to our stockholders or us. We have consumed substantial amounts of
cash to date and expect capital outlays and operating expenditures to increase
over the next several years as we expand our infrastructure and research and
development activities. We may raise this financing through public or private
equity offerings, debt financings or additional corporate collaboration and
licensing arrangements.
We believe that the net proceeds from the offerings, existing cash and
investment securities and anticipated cash flow from existing collaborations
will be sufficient to support our current operating plan through at least the
end of 2001. We have based this estimate on assumptions that may prove to be
wrong. Our future capital requirements depend on many factors that affect our
research, development, collaboration and sales and marketing activities. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
To the extent we raise additional capital by issuing equity securities, our
stockholders may experience substantial dilution. To the extent that we raise
additional funds through collaboration and licensing arrangements, we may be
required to relinquish some rights to our technologies or product candidates,
or grant licenses on terms that are not favorable to us. If adequate funds are
not available, we will not be able to continue developing our products.
If our competitors develop and market products that are more effective than
ours, our commercial opportunity will be reduced or eliminated.
Our commercial opportunity will be reduced or eliminated if our competitors
develop and market products that are more effective, have fewer side effects or
are less expensive than our product candidates. With respect
11
<PAGE>
to our drug discovery programs, other companies have product candidates in
clinical trials to treat each of the diseases for which we are seeking to
discover and develop product candidates. These competing potential drugs are
further advanced in development than are any of our potential products and may
result in effective, commercially successful products. Even if our
collaborators or we are successful in developing effective drugs, our products
may not compete effectively with these products or other successful products.
Our competitors may succeed in developing and marketing products either that
are more effective than those that we may develop, alone or with our
collaborators, or that are marketed before any products we develop are
marketed.
Our competitors include fully integrated pharmaceutical companies and
biotechnology companies that currently have drug and target discovery efforts
and universities and public and private research institutions. In addition,
companies pursuing different but related fields represent substantial
competition. Many of the organizations competing with us have substantially
greater capital resources, larger research and development staffs and
facilities, greater experience in drug development and in obtaining regulatory
approvals and greater marketing capabilities than we do. These organizations
also compete with us to:
. attract qualified personnel;
. attract parties for acquisitions, joint ventures or other collaborations;
and
. license the proprietary technology of these institutions that is
competitive with the technology we are practicing.
If our competitors successfully enter into partnering arrangements or license
agreements with academic research institutions, we will then be precluded from
pursuing those specific opportunities. Since each of these opportunities is
unique, we may not be able to find an acceptable substitute.
Because it is difficult and costly to protect our proprietary rights, we cannot
ensure their protection.
Our commercial success will depend in part on obtaining patent protection on
our products and successfully defending these patents against third party
challenges. 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, we cannot predict the breadth of
claims allowed in these companies' patents.
The degree of future protection for our proprietary rights is uncertain and
we cannot ensure that:
. we were the first to make the inventions covered by each of our pending
patent applications;
. we were the first to file patent applications for these inventions;
. others will not independently develop similar or alternative technologies
or duplicate any of our technologies;
. any of our pending patent applications will result in issued patents;
. any patents issued to us or our collaborators will provide a basis for
commercially viable products or will provide us with any competitive
advantages or will not be challenged by third parties;
. we will develop additional proprietary technologies that are patentable;
or
. the patents of others will not have an adverse effect on our ability to
do business.
In addition, we could incur substantial costs in litigation if we are
required to defend against patent suits brought by third parties or if we
initiate these suits.
Others may have filed and in the future are likely to file patent
applications covering genes, gene products or therapeutic products that are
similar or identical to ours. We cannot assure you that any patent application
will not have priority over patent applications filed by us. Any legal action
against our collaborators or us claiming damages and seeking to enjoin
commercial activities relating to the affected products and processes could, in
addition to subjecting us to potential liability for damages, require our
collaborator or us to obtain a license to continue to manufacture or market the
affected products and processes. We cannot predict whether we or our
collaborators would prevail in any of these actions or that any license
required under any of these patents would be made available on commercially
acceptable terms, if at all. We believe that there may be
12
<PAGE>
significant litigation in the industry regarding patent and other intellectual
property rights. If we become involved in litigation, it could consume a
substantial portion of our managerial and financial resources.
We rely on trade secrets to protect technology where we believe patent
protection is not appropriate or obtainable. However, trade secrets are
difficult to protect. While we require employees, academic collaborators and
consultants to enter into confidentiality agreements, we may not be able to
adequately protect our trade secrets or other proprietary information.
We are a party to various license agreements that give us rights to use
specified technologies in our research and development processes. If we are not
able to continue to license this technology on commercially reasonable terms,
our product development and research may be delayed. In addition, we generally
do not control the prosecution of in-licensed technology, and accordingly are
unable to exercise the same degree of control over this intellectual property
as we exercise over our internally developed technology.
Our research collaborators and scientific advisors have rights to publish
data and information in which we have rights. If we cannot maintain the
confidentiality of our technology and other confidential information in
connection with our collaborations, then our ability to receive patent
protection or protect our proprietary information will be imperiled.
If we are unable to contract with third parties to manufacture our products in
sufficient quantities and at an acceptable cost, we may be unable to meet
demand for our products and lose potential revenues.
Completion of our clinical trials and commercialization of our product
candidates require access to, or development of, facilities to manufacture a
sufficient supply of our product candidates. We will depend on our
collaborators or third parties for the manufacture of compounds for
preclinical, clinical and commercial purposes in their FDA-approved
manufacturing facilities. Our products may be in competition with other
products for access to these facilities. Consequently, our products may be
subject to delays in manufacture if collaborators or outside contractors give
other products greater priority than our products. For this and other reasons,
our collaborators or third parties may not be able to manufacture these
products in a cost-effective or timely manner. If not performed in a timely
manner, the clinical trial development of our product candidates or their
submission for regulatory approval could be delayed, and our ability to deliver
products on a timely basis could be impaired or precluded. We may not be able
to enter into any necessary third-party manufacturing arrangements on
acceptable terms, if at all. Our current dependence upon others for the
manufacture of our products may adversely affect our future profit margin and
our ability to commercialize products on a timely and competitive basis. In
particular, our current supply of finished product of lometrexol is limited and
may not be sufficient for completion of all phases of clinical development. The
manufacture of lometrexol is complex, and it may be difficult to efficiently
manufacture or to secure an adequate supply of this compound in a timely manner
or on an economical basis. We do not intend to develop or acquire facilities
for the manufacture of product candidates for clinical trials or commercial
purposes in the foreseeable future.
If we are unable to create sales, marketing and distribution capabilities or
enter into agreements with third parties to perform these functions, we will
not be able to commercialize products.
We currently have no sales, marketing or distribution capability. In order to
commercialize any products, we must internally develop sales, marketing and
distribution capabilities or make arrangements with a third party to perform
these services. We intend to market some products directly and rely on
relationships with one or more pharmaceutical companies with established
distribution systems and direct sales forces to market other products. To
market any of our products directly, we must develop a marketing and sales
force with technical expertise and with supporting distribution capabilities.
We may not be able to establish in-house sales and distribution capabilities or
relationships with third parties. To the extent that we enter into co-promotion
or other licensing arrangements, our product revenues are likely to be lower
than if we directly marketed and sold our products, and any revenues we receive
will depend upon the efforts of third parties, which efforts may not be
successful.
13
<PAGE>
Our ability to generate revenues will be diminished if we fail to obtain
acceptable prices or an adequate level of reimbursement for our products from
third-party payors.
The continuing efforts of government and third-party payors to contain or
reduce the costs of health care through various means will limit our commercial
opportunity. For example, in some foreign markets, pricing and profitability of
prescription pharmaceuticals are subject to government control. In the United
States, we expect that there will continue to be a number of federal and state
proposals to implement similar government control. In addition, increasing
emphasis on managed care in the United States will continue to put pressure on
the pricing of pharmaceutical products. Cost control initiatives could decrease
the price that any of our collaborators or we would receive for any products in
the future. Further, cost control initiatives could adversely affect our
collaborators' ability to commercialize our products, and our ability to
realize royalties from this commercialization.
Our ability to commercialize pharmaceutical products, alone or with
collaborators, may depend in part on the extent to which reimbursement for the
products will be available from:
. government and health administration authorities;
. private health insurers; and
. other third-party payors.
Significant uncertainty exists as to the reimbursement status of newly
approved health care products. Third-party payors, including Medicare, are
challenging the prices charged for medical products and services. Government
and other third-party payors increasingly are attempting to contain health care
costs by limiting both coverage and the level of reimbursement for new drugs
and by refusing, in some cases, to provide coverage for uses of approved
products for disease indications for which the FDA has not granted labeling
approval. Third-party insurance coverage may not be available to patients for
any products we discover and develop, alone or with collaborators. If
government and other third-party payors do not provide adequate coverage and
reimbursement levels for our products, the market acceptance of these products
may be reduced.
If conflicts arise between our collaborators, advisors or directors and us,
they may act in their self-interest, which may be adverse to your best
interests.
If conflicts arise between us and our corporate or academic collaborators or
scientific advisors, the other party may act in its self-interest and not in
the interest of our stockholders. Some of our corporate or academic
collaborators are conducting multiple product development efforts within each
disease area that is the subject of the collaboration with us. Generally, in
each of our collaborations, we have agreed not to conduct independently, or
with any third party, any research that is competitive with the research
conducted under our collaborations. Our collaborations may have the effect of
limiting the areas of research that we may pursue, either alone or with others.
Our collaborators, however, may develop, either alone or with others, products
in related fields that are competitive with the products or potential products
that are the subject of these collaborations. Competing products, either
developed by the collaborators or to which the collaborators have rights, may
result in their withdrawal of support for our product candidates.
Genentech, Inc. is a potential competitor of ours and is also one of our
investors. David V. Goeddel, our Chief Executive Officer and a member of our
Board of Directors, is a consultant to Genentech. Mark J. Levin, a member of
our Board of Directors, is Chairman, President and Chief Executive Officer of
Millennium Pharmaceuticals, Inc., and Grant Heidrich, a member of our Board of
Directors, also serves on the board of directors of Millennium. Millennium has
publicly disclosed that it is pursuing an obesity program that is competitive
with, and may have scientific overlap with, our program.
We may incur significant costs if Year 2000 compliance issues are not properly
addressed.
We use and rely on a wide variety of information technologies, computer
systems and scientific equipment containing computer chips dedicated to a
specific task. Some of our older computer software programs and equipment are
unable to distinguish between the year 1900 and the year 2000. As a result,
time-sensitive
14
<PAGE>
functions of those software programs and equipment may misinterpret dates after
January 1, 2000 to refer to the twentieth century rather than the twenty-first
century. This could cause system or equipment shutdowns, failures or
miscalculations resulting in inaccuracies in computer output or disruptions of
operations, including inaccurate processing of financial information and/or
temporary inabilities to engage in normal business activities. In addition to
risks associated with our own computer systems and equipment, we have
relationships with, and are to varying degrees dependent upon, a large number
of third parties that provide information, goods and services to us. These
include financial institutions, suppliers, vendors, research partners and
governmental entities.
We have largely completed our assessment of our internal systems affected by
the Year 2000 issue and anticipate that we will not be required to modify or
replace significant portions of our software so that our computer systems will
properly utilize dates past December 31, 1999. We have initiated communications
with our significant suppliers to determine the extent to which we are
vulnerable to those parties' failure to solve their own Year 2000 issues. At
this time, we cannot predict the level of year 2000 readiness with respect to
our significant suppliers. We intend to continue to monitor the progress of
these third parties and will develop contingency plans in the event we become
aware that one or more of these third parties fails to solve their Year 2000
issues in such a way as to affect our operations. If significant numbers of
these third parties experience failures in their computer systems or equipment
due to Year 2000 non-compliance, it could affect our ability to engage in
normal business activities.
Year 2000 issues affecting our business, if not adequately addressed by us,
our significant suppliers and our significant service providers could have a
number of "worst case" consequences. These include the loss of historical data
and our inability to continue our research efforts.
If product liability lawsuits are successfully brought against us, we may incur
substantial liabilities and may be required to limit commercialization of our
products.
The testing and marketing of medical products entail an inherent risk of
product liability. If we cannot successfully defend ourselves against product
liability claims, we may incur substantial liabilities or be required to limit
commercialization of our products. Our inability to obtain sufficient product
liability insurance at an acceptable cost to protect against potential product
liability claims could prevent or inhibit the commercialization of
pharmaceutical products we develop, alone or with corporate collaborators. We
currently carry clinical trial insurance but do not carry product liability
insurance. Our corporate collaborators or we may not be able to obtain
insurance at a reasonable cost, if at all. While under various circumstances we
are entitled to be indemnified against losses by our corporate collaborators,
indemnification may not be available or adequate should any claim arise.
If we use biological and hazardous materials in a manner that causes injury or
violates laws, we may be liable for damages.
Our research and development activities involve the controlled use of
potentially harmful biological materials as well as hazardous materials,
chemicals and various radioactive compounds. We cannot completely eliminate the
risk of accidental contamination or injury from the use, storage, handling or
disposal of these materials. In the event of contamination or injury, we could
be held liable for damages that result, and any liability could exceed our
resources. We are subject to federal, state and local laws and regulations
governing the use, storage, handling and disposal of these materials and
specified waste products. The cost of compliance with these laws and
regulations could be significant.
RISKS RELATED TO THE OFFERINGS
If our officers, directors and largest stockholders choose to act together,
they may be able to control our management and operations, acting in their best
interests and not necessarily those of other stockholders.
Following completion of the offerings, our directors, executive officers and
principal stockholders and their affiliates will beneficially own approximately
42.7% of our common stock, based on their beneficial
15
<PAGE>
ownership as of September 30, 1999. Accordingly, they collectively will have
the ability to determine the election of all of our directors and to determine
the outcome of most corporate actions requiring stockholder approval. They may
exercise this ability in a manner that advances their best interests and not
necessarily those of other stockholders.
In particular, Pharma Vision 2000 AG, a closed-end mutual fund investing in
pharmaceutical companies such as Roche, Glaxo and Hoechst, currently owns
approximately 23.5% of our outstanding common stock. Pharma Vision has
expressed an interest in acquiring directly from us concurrently with the
public offerings additional shares of common stock that would allow it to
maintain its approximate percentage ownership. Peter Sjostrand, a member of our
Board of Directors, and David V. Goeddel, our Chief Executive Officer and a
member of our Board of Directors, are members of the board of directors of
Pharma Vision. Pharma Vision is not a party to any standstill or other
agreement limiting its ability to acquire additional shares of our capital
stock and may in the future, through open market purchases or otherwise,
acquire additional shares of our common stock.
Anti-takeover provisions in our charter documents and under Delaware law may
make an acquisition of us, which may be beneficial to our stockholders, more
difficult.
Provisions of our amended and restated certificate of incorporation and
bylaws, as well as provisions of Delaware law, could make it more difficult for
a third party to acquire us, even if doing so would benefit our stockholders.
These provisions:
. establish that members of the board of directors may be removed only for
cause upon the affirmative vote of stockholders owning at least two-
thirds of our capital stock;
. authorize the issuance of "blank check" preferred stock that could be
issued by our board of directors to increase the number of outstanding
shares and thwart a takeover attempt;
. limit who may call a special meeting of stockholders;
. prohibit stockholder action by written consent, thereby requiring all
stockholder actions to be taken at a meeting of our stockholders; and
. establish advance notice requirements for nominations for election to the
board of directors or for proposing matters that can be acted upon at
stockholder meetings.
In addition, until November 2000, Section 203 of the Delaware General
Corporation Law may discourage, delay or prevent a third party from acquiring
us.
Our stock price may be volatile, and your investment in our stock could decline
in value.
Prior to this offering, there has been no public market for the common stock
and an active public market for our common stock may not develop or be
sustained after the offerings. The initial public offering price will be
determined by negotiations between the representatives of the underwriters and
us and may not be indicative of future market prices. Among the factors to be
considered in determining the initial public offering price of the common
stock, in addition to prevailing market conditions, will be:
. estimates of our business potential and earnings prospects;
. an assessment of our management; and
. the consideration of the above factors in relation to market valuations
of companies in related businesses.
The market prices for securities of biotechnology companies in general have
been highly volatile and may continue to be highly volatile in the future. The
following factors, in addition to other risk factors described in this section,
may have a significant impact on the market price of our common stock:
. announcements of technological innovations or new commercial products by
our competitors or us;
. developments concerning proprietary rights, including patents;
16
<PAGE>
. developments concerning our collaborations;
. publicity regarding actual or potential medical results relating to
products under development by our competitors or us;
. regulatory developments in the United States and foreign countries;
. litigation;
. economic and other external factors or other disaster or crisis; or
. period-to-period fluctuations in financial results.
If our stockholders sell substantial amounts of our common stock after the
offerings, the market price of our common stock may fall.
If our stockholders sell substantial amounts of our common stock, including
shares issued upon the exercise of outstanding options and warrants, the market
price of our common stock may fall. These sales also might make it more
difficult for us to sell equity or equity-related securities in the future at a
time and price that we deem appropriate. After completion of the offerings, we
will have outstanding 41,521,375 shares of common stock, including 1,468,750
shares sold to Pharma Vision in the direct offering, and assuming no exercise
of outstanding options or warrants after September 30, 1999 and no exercise of
the underwriters' over-allotment options. Of these shares, the following will
be available for sale in the public market as follows:
. unless held by affiliates, the 4,781,250 shares sold in the public
offerings, the 1,468,750 shares sold to Pharma Vision in the direct
offering and an additional 2,144,474 shares will be freely tradable upon
completion of the offerings;
. 424,249 shares will be eligible for sale beginning 90 days after the date
of this prospectus;
. 32,704,652 shares will be eligible for sale upon the expiration of lock-
up agreements, beginning 180 days after the date of this prospectus; and
. 3,709,202 shares will be eligible for sale upon the exercise of vested
options 180 days after the date of this prospectus.
We intend to file a registration statement on Form S-8 covering an aggregate
of 6,371,768 shares issuable upon exercise of options to purchase common stock
and common stock reserved for issuance under our stock plans within 90 days
after the effective date of the Registration Statement of which this prospectus
is a part. For an additional description of the eligibility of shares for sale
into the public market following the offerings, see "Shares Eligible for Future
Sale."
The offerings will cause dilution in net tangible book value.
Purchasers in the public offerings and the direct offering will experience
immediate and substantial dilution in the net tangible book value of the common
stock from the initial public offering price. Additional dilution is likely to
occur upon exercise of options and warrants granted by us.
17
<PAGE>
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Some statements contained in this prospectus are forward-looking statements
concerning our operations, economic performance and financial condition.
Forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended, and within the meaning of Section 21E of the
Securities Exchange Act of 1934, as amended, are included, for example, in the
discussions about:
. our strategy;
. sufficiency of our cash resources;
. revenues from existing and new collaborations;
. product development;
. our research and development and other expenses;
. our operational and legal risks; and
. Year 2000 issues.
These statements involve risks and uncertainties. Actual results may differ
materially from those expressed or implied in those statements. Factors that
could cause these 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."
18
<PAGE>
USE OF PROCEEDS
The net proceeds to us from the sale of the 4,781,250 shares of common stock
in the public offerings are estimated to be $52,359,000 ($60,363,000 if the
underwriters' over-allotment options are exercised in full), assuming an
initial public offering price of $12.00 per share and after deducting the
estimated underwriting discount and offering expenses. In addition, we will
receive $17,625,000 ($20,269,000 if the underwriters' over-allotment options
are exercised in full and Pharma Vision maintains its 23.5% ownership interest
in us) of additional proceeds if the direct offering to Pharma Vision is
consummated, assuming an initial public offering price of $12.00 per share. We
intend to use the net proceeds for research and development and general
corporate purposes. We may also use a portion of the net proceeds to acquire or
invest in businesses, products and technologies that are complementary to our
own, although no acquisitions are planned or being negotiated as of the date of
this prospectus, and no portion of the net proceeds has been allocated for any
specific acquisition. Pending these uses, the net proceeds will be invested in
investment-grade interest-bearing securities.
The principal purposes of the offerings are to increase our capitalization
and financial flexibility, to provide a public market for our common stock and
to facilitate access to public equity markets. As of the date of this
prospectus we cannot specify with certainty all of the particular uses for the
net proceeds we will have upon completion of the offerings. Accordingly, our
management will have broad discretion in the application of net proceeds.
DIVIDEND POLICY
We have never declared or paid any cash dividends on our capital stock. We
currently intend to retain earnings, if any, to support the development of our
business and do not anticipate paying cash dividends for the foreseeable
future.
19
<PAGE>
CAPITALIZATION
The following table sets forth our actual capitalization as of September 30,
1999. Our capitalization is also presented:
. on a pro forma basis to give effect to the automatic conversion of all of
our preferred stock into an aggregate of 26,953,539 shares of common
stock, which will occur upon the closing of the offerings; and
. on a pro forma as adjusted basis to reflect our receipt of the net
proceeds from the sale of 4,781,250 shares of common stock in the public
offerings and 1,468,750 shares of common stock to Pharma Vision in the
direct offering at an assumed initial public offering price of $12.00 per
share, after deducting the estimated underwriting discount and offering
expenses.
<TABLE>
<CAPTION>
As of September 30, 1999
--------------------------------
Pro Forma
Actual Pro Forma As Adjusted
-------- --------- -----------
(in thousands, except share
and per share amounts)
<S> <C> <C> <C>
Long-term obligations, less current portion.... $ 10,254 $ 10,254 $ 10,254
Stockholders' equity:
Preferred stock, $0.001 par value, 33,000,000
shares authorized, 26,953,539 shares issued
and outstanding, actual, none issued
pro forma and pro forma as adjusted......... 27 -- --
Common stock, $0.001 par value; 55,000,000
shares authorized; 8,317,836 shares issued
and outstanding, actual; 35,271,375 shares
issued and outstanding, pro forma; and
41,521,375 shares issued and outstanding,
pro forma as adjusted....................... 8 35 41
Additional paid-in capital................... 182,356 182,356 252,334
Notes receivable from stockholders........... (647) (647) (647)
Deferred compensation........................ (5,377) (5,377) (5,377)
Accumulated deficit.......................... (80,811) (80,811) (80,811)
-------- -------- ---------
Total stockholders' equity................. 95,556 95,556 165,540
-------- -------- ---------
Total capitalization..................... $105,810 $105,810 $ 175,794
======== ======== =========
</TABLE>
The number of shares of common stock to be outstanding after the offerings is
based on the number of shares outstanding as of September 30, 1999 and
excludes:
. 5,955,965 shares of common stock underlying options outstanding as of
September 30, 1999 at a weighted average exercise price of $2.23 per
share;
. 1,015,091 shares of common stock underlying warrants outstanding as of
September 30, 1999 at a weighted average exercise price of $10.17 per
share;
. 436,112 shares available for issuance or future grant under our stock
option plans; and
. 500,000 shares available for issuance under our employee stock purchase
plan.
See "Selected Consolidated Financial Data," "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the consolidated
financial statements and notes thereto included in this prospectus.
20
<PAGE>
DILUTION
The pro forma net tangible book value of the common stock as of September 30,
1999 was $95.6 million or $2.71 per share, after giving effect to the automatic
conversion of all outstanding shares of preferred stock into an aggregate of
26,953,539 shares of common stock, which will occur upon the closing of the
offerings. After giving effect to the sale of the common stock in the public
offerings and the direct offering to Pharma Vision at an assumed initial public
offering price of $12.00 per share, assuming that the underwriters' over-
allotment options are not exercised, and after deducting the estimated
underwriting discount and offering expenses, the adjusted pro forma net
tangible book value at September 30, 1999, would have been $165.5 million, or
$3.99 per share.
Pro forma net tangible book value per share before the offerings has been
determined by dividing pro forma net tangible book value (total tangible assets
less total liabilities) by the pro forma number of shares of common stock
outstanding at September 30, 1999. The offerings will result in an increase in
pro forma net tangible book value per share of $1.28 to existing stockholders
and dilution in pro forma net tangible book value per share of $8.01 to new
investors who purchase shares in the public offerings and the direct offering.
Dilution is determined by subtracting pro forma net tangible book value per
share after the public offerings and the direct offering from the assumed
initial public offering price of $12.00 per share. The following table
illustrates this dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price......................... $12.00
Pro forma net tangible book value per share at September 30,
1999......................................................... $2.71
Increase attributable to new investors........................ 1.28
-----
Pro forma net tangible book value per share after the public
offerings and the direct offering............................ 3.99
------
Dilution in net tangible book value to new investors.......... $ 8.01
======
</TABLE>
If the underwriters' over-allotment options are exercised in full and Pharma
Vision maintains its 23.5% ownership in us, the pro forma net tangible book
value per share after the offerings would be $4.15 per share, the increase in
net tangible book value per share to existing stockholders would be $1.44 per
share and the dilution in net tangible book value to new investors would be
$7.85 per share.
The following table summarizes, on a pro forma basis as of September 30,
1999, the differences between the total consideration paid and the average
price per share paid by the existing stockholders and the new investors with
respect to the number of shares of common stock purchased from us based on an
assumed public offering price of $12.00 per share:
<TABLE>
<CAPTION>
Shares Total Consideration Average
------------------ -------------------- Price
Number Percent Amount Percent Per Share
---------- ------- ------------ ------- ---------
<S> <C> <C> <C> <C> <C>
New investors................. 6,250,000 15.1% $ 75,000,000 30.0% $12.00
Existing stockholders......... 35,271,375 84.9 175,263,000 70.0 4.97
---------- ----- ------------ -----
Total....................... 41,521,375 100.0% $250,263,000 100.0%
========== ===== ============ =====
</TABLE>
These tables do not assume exercise of stock options and warrants outstanding
at September 30, 1999 and include 515,432 shares subject to repurchase by us at
a weighted average price of $2.01.
At September 30, 1999, there were 5,955,965 shares of common stock issuable
upon exercise of outstanding stock options at a weighted average exercise price
of $2.23 per share and 1,015,091 shares of common stock issuable upon exercise
of outstanding warrants at a weighted average exercise price of $10.17 per
share.
21
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
This section presents our historical consolidated financial data. You should
read carefully the consolidated financial statements included in this
prospectus, including the notes to the consolidated financial statements and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations." The selected data in this section is not intended to replace the
consolidated financial statements.
We derived the consolidated statement of operations data for the years ended
December 31, 1996, 1997 and 1998 and for the nine months ended September 30,
1999 and the consolidated balance sheet data as of December 31, 1997 and 1998
and September 30, 1999 from the audited consolidated financial statements
included in this prospectus. Ernst & Young LLP, our independent auditors,
audited these consolidated financial statements. The consolidated statement of
operations data for the years ended December 31, 1994 and 1995 and the
consolidated balance sheet data as of December 31, 1994, 1995 and 1996 are
derived from our audited financial statements that are not included in this
prospectus. The consolidated statement of operations data for the nine months
ended September 30, 1998 are derived from our unaudited consolidated financial
statements but have been prepared on a basis consistent with our audited
financial statements and the notes thereto and include all adjustments
(consisting only of normal recurring adjustments) that we consider necessary
for a fair presentation of the information. Historical results are not
necessarily indicative of future results. See notes to the consolidated
financial statements for an explanation of the method used to determine the
number of shares used in computing pro forma basic and diluted loss per share.
<TABLE>
<CAPTION>
Nine Months
Year Ended December 31, Ended September 30,
------------------------------------------------ --------------------------
1994 1995 1996 1997 1998 1998 1999
-------- -------- -------- -------- -------- ----------- -------------
(in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C> <C> <C>
Consolidated Statements
of Operations Data:
Revenue:
Collaborative research
and development....... $ 5,618 $ 11,124 $ 15,297 $ 20,009 $ 21,362 $ 13,664 $ 17,856
Operating expenses:
Research and
development........... 9,934 13,473 18,622 26,546 33,264 24,149 31,855
Acquired in-process
research and
development........... -- -- -- 18,902 -- -- 3,000
General and
administrative........ 2,219 2,507 3,630 4,020 5,002 3,650 3,903
Amortization of
deferred stock
compensation.......... -- -- -- -- 31 -- 1,720
-------- -------- -------- -------- -------- ----------- -----------
12,153 15,980 22,252 49,468 38,297 27,799 40,478
-------- -------- -------- -------- -------- ----------- -----------
Loss from operations.... (6,535) (4,856) (6,955) (29,459) (16,935) (14,135) (22,622)
Interest income, net.... 637 1,249 1,475 4,085 6,396 4,832 3,668
-------- -------- -------- -------- -------- ----------- -----------
Net loss................ $ (5,898) $ (3,607) $ (5,480) $(25,374) $(10,539) $ (9,303) $ (18,954)
======== ======== ======== ======== ======== =========== ===========
Basic and diluted net
loss per share......... $ (2.27) $ (0.91) $ (1.09) $ (4.19) $ (1.55) $ (1.40) $ (2.57)
======== ======== ======== ======== ======== =========== ===========
Shares used in computing
basic and diluted net
loss per share......... 2,601 3,957 5,034 6,063 6,791 6,666 7,388
======== ======== ======== ======== ======== =========== ===========
Pro forma basic and
diluted net loss per
share.................. $ (0.31) $ (0.55)
======== ===========
Shares used in computing
pro forma basic and
diluted net loss per
share.................. 33,687 34,314
======== ===========
<CAPTION>
December 31,
------------------------------------------------ September 30,
1994 1995 1996 1997 1998 1999
-------- -------- -------- -------- -------- -------------
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Consolidated Balance
Sheet Data:
Cash, cash equivalents
and marketable
securities............. $ 22,338 $ 25,181 $ 77,078 $124,406 $119,324 $ 104,188
Working capital......... 15,236 15,193 69,394 116,527 94,535 84,401
Total assets............ 28,395 29,617 83,409 133,522 136,778 131,026
Long-term obligations,
less current portion... 2,477 1,712 2,128 3,456 4,734 10,254
Deferred compensation... -- -- -- -- (679) (5,377)
Accumulated deficit..... (16,857) (20,464) (25,944) (51,318) (61,857) (80,811)
Total stockholders'
equity................. 18,435 17,753 72,905 120,856 110,898 95,556
</TABLE>
22
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion and analysis in conjunction with the
"Selected Consolidated Financial Data," consolidated financial statements and
related notes included elsewhere in this prospectus.
Overview
Since our founding in November 1991, we have been engaged in the discovery
and development of a broad range of novel, orally available drugs, most of
which act through gene regulation. Our research programs include cancer,
cytomegalovirus, diabetes, obesity, inflammation, immune disorders, high blood
cholesterol levels, known as hypercholesterolemia, and bacterial diseases and a
class of drug targets called orphan nuclear receptors. We have incurred net
losses since inception and expect to incur substantial and increasing losses
for at least the next several years as we expand our research and development
activities. To date, we have funded our operations primarily through the sale
of equity securities, non-equity payments from collaborators and interest
income. As of September 30, 1999, our accumulated deficit was approximately
$80.8 million. We received aggregate research funding under research and
development collaborations between 1995 and September 30, 1999 as follows:
<TABLE>
<CAPTION>
Nine Months
Year Ended December 31, Ended
----------------------- September 30,
1995 1996 1997 1998 1999
----- ----- ----- ----- -------------
(in millions)
<S> <C> <C> <C> <C> <C>
Research funding received................. $13.5 $12.5 $20.0 $29.8 $21.0
</TABLE>
We expect our sources of revenue, if any, for the next several years to
consist primarily of payments under corporate collaborations and interest
income. The process of developing our products will require significant
additional research and development, preclinical testing and clinical trials,
as well as regulatory approval. These activities, together with our general and
administrative expenses, are expected to result in substantial operating losses
for the foreseeable future. We will not receive product revenue unless we or
our collaborative partners complete clinical trials, obtain regulatory approval
and successfully commercialize one or more of our products.
In order to accelerate product commercialization and finance research
activities, we are currently engaged in collaborations with leading
pharmaceutical companies as summarized below:
Collaborator Research Program Commencement Date
Knoll Obesity November 1998
Japan Tobacco Orphan Nuclear Receptors September 1998
Roche Bioscience Inflammation July 1997
Japan Tobacco Obesity/Diabetes September 1996
Taisho Immune Disorders April 1995
Sumitomo Hypercholesterolemia January 1995
Under the terms of the collaborations identified above, as of September 30,
1999, our partners had agreed to provide future research funding of up to
approximately $50.7 million over a five-year period as set forth in the table
below, including $33.5 million subject to possible cancellation, as well as
additional payments upon the achievement of specific research and development
milestones and royalties upon commercialization of any products. Research
funding that is payable in the future under existing collaborations was as
follows as of September 30, 1999:
<TABLE>
<CAPTION>
Three Months Year Ending December
Ending 31,
December 31, ----------------------
1999 2000 2001 2002 2003
------------ ----- ----- ----- ----
(in millions)
<S> <C> <C> <C> <C> <C>
Contractual future research funding........ $2.7 $18.0 $14.5 $12.0 $3.5
</TABLE>
23
<PAGE>
Previously, we also had collaborations with Yamanouchi relating to
inflammation (commenced in November 1993, ended in November 1996) and with
Merck relating to viral disease (commenced in December 1993, ended in March
1999). Our collaborations with Sumitomo and Taisho are scheduled to end in
accordance with their terms during 2000 and 2001, respectively. Furthermore,
Taisho has the right to terminate its agreement with us during 2000, prior to
the scheduled expiration of the agreement in 2001. We do not expect the
Sumitomo collaboration to be extended. Although we are negotiating with Taisho
regarding alternative collaborative opportunities, we believe that Taisho will
exercise its contractual right to terminate its current agreement with us in
March 2000. During 1999, we received an aggregate of $6.7 million from these
agreements and from our prior collaboration with Merck. We do not expect to
receive any funding from Sumitomo or Merck and may not receive any further
funding from Taisho during 2000. Accordingly, if we do not enter into new
corporate collaborations, collaborative research and development revenue and
cash received from collaborative partners will decline for the foreseeable
future.
Acquisition
On October 31, 1997, we acquired Amplicon Corp., a research organization
engaged principally in identifying and characterizing human genes involved in
particular cancers. In connection with the acquisition, we issued 1,620,004
shares of preferred stock and warrants to acquire an additional 245,456 shares
of preferred stock in exchange for all of Amplicon's outstanding capital stock.
In addition, all outstanding stock options to purchase Amplicon common stock
were replaced with options and warrants to purchase shares of our preferred
stock. The aggregate value of the consideration issued to the Amplicon
stockholders and option holders was $18.9 million. The acquisition was recorded
using the purchase method of accounting. Accordingly, we allocated the purchase
price to the assets acquired and liabilities assumed based on their estimated
fair values as of the date of acquisition. The operating results of Amplicon
are included in our consolidated statements of operations data from the
effective date of the acquisition.
At the date of the acquisition, Amplicon's sole activity was performing basic
research to identify genes that may result in the development of diagnostic and
therapeutic products for the treatment of cancer. Prior to the acquisition,
Amplicon had discovered over twenty novel genetic regions that are commonly
mutated in human cancers and was actively searching within these regions for
genes that play an important role in the development of cancer. Amplicon's
efforts to identify cancer genes relied heavily on a proprietary methodology,
known as Representational Difference Analysis, that is distinct from other
methods as a result of its ability to identify non-inherited genetic mutations.
The Representational Difference Analysis methodology is specifically applicable
to the discovery of cancer genes, acquired genetic mutations and pathogens and
does not have alternative future uses.
From the date of the acquisition through September 30, 1999, we incurred $6.2
million (less than 9% of total research and development expenses during the
period) of expenses in connection with the effort to discover cancer genes at
Amplicon. We have no plans to significantly change our rate of investment in
the cancer gene discovery project for the foreseeable future. To date, no
products have been developed from this project, technological feasibility has
not been proven and no corporate collaborations have been consummated based on
the research at Amplicon. Accordingly, the future benefits of the ongoing
research remain uncertain. Due to the absence of tangible products from the
research and the uncertainties of the discovery process, we are not able to
precisely predict the time and resources that will be necessary to develop and
obtain regulatory approval for any product that may be discovered using the
acquired methodology.
In order to determine the value of the cancer gene discovery project and the
related methodology at the time of the acquisition, we considered a wide range
of estimates of the time and resources necessary to identify, characterize,
develop and obtain regulatory approval for potential cancer diagnostics and
therapeutics and the related market size and potential cash flows from
developed products. We also considered the risks associated with the
development process, including the inherent difficulties and uncertainties in
successfully developing diagnostic and therapeutic products, thereby achieving
technological feasibility, and the risk related to changes in target markets.
Using this approach, we concluded that the estimated fair value of the acquired
24
<PAGE>
in-process research and development was $21.4 million at the date of
acquisition. Accordingly, the purchase price was allocated to the tangible and
intangible net assets acquired and $18.9 million was expensed as acquired in-
process research and development. We believe this amount did not exceed the
amount a third party would have paid for the project.
License Agreement
On September 24, 1999, we executed a license agreement with Eli Lilly under
which we obtained an exclusive, worldwide, royalty-bearing license to make, use
and sell pharmaceutical products containing a compound known as lometrexol. In
connection with this agreement, we paid $3.0 million to Eli Lilly as an initial
license fee and agreed to pay specified milestones and royalties upon
successful commercialization of lometrexol. Under the agreement, Eli Lilly
granted us a license to its proprietary technology relating to lometrexol, and
also a sublicense under an exclusive license granted to Eli Lilly by Princeton
University relating to lometrexol. Eli Lilly has specified obligations under
the agreement to maintain the license from Princeton. Eli Lilly has the right
to match the material terms of any offer made by a third party to Tularik for
commercialization rights relating to lometrexol products. We may terminate the
agreement with Eli Lilly upon written notice. Eli Lilly may terminate our
license in specified major countries if we fail to use reasonable diligence to
develop lometrexol products in these countries and may terminate the agreement
if we fail to use appropriate diligence to develop lometrexol products in a
predetermined number of major countries. If Eli Lilly terminates the agreement,
Eli Lilly obtains a nonexclusive, royalty-bearing, worldwide license to our
technical improvements to lometrexol.
At the date of the license agreement, lometrexol had completed the first of
three phases of clinical trials required to seek regulatory approval from the
FDA. No trials had been commenced that could have demonstrated, with
statistical significance, the effectiveness of lometrexol as a treatment for
any type of cancer. These trials, necessary to establish the technological
feasibility of lometrexol, will not be completed for at least several years. In
addition, lometrexol has no known alternative future uses. Accordingly, the
initial license payment was allocated to acquired in-process research and
development and expensed at the time of the agreement.
Stock Compensation
During the year ended December 31, 1998 and the nine months ended September
30, 1999, in connection with the grant of stock options to employees, we
recorded deferred stock compensation totaling $7.1 million, representing the
difference between the deemed fair value of our common stock for financial
reporting purposes on the date these options were granted and the exercise
price. This amount is included as a reduction of stockholders' equity and is
being amortized over the vesting period of the individual options, generally
four years, using the graded vesting method. The graded vesting method provides
for vesting of portions of the overall award at interim dates and results in
higher vesting in earlier years than straight-line vesting. We recorded
amortization of deferred stock compensation of $31,000 for the year ended
December 31, 1998 and $1.7 million for the nine months ended September 30,
1999. At September 30, 1999, we had a total of $5.4 million remaining to be
amortized over the vesting periods of the stock options. We anticipate that
additional deferred compensation will be recorded for options granted after
September 30, 1999. You should read Note 2 of notes to consolidated financial
statements.
Results of Operations
Nine Months Ended September 30, 1999 and 1998
Collaborative research and development revenue. Collaborative research and
development revenue was $17.9 million for the nine months ended September 30,
1999, compared with $13.7 million during the nine months ended September 30,
1998. The increase in 1999 was principally attributable to revenue from new
corporate collaboration agreements signed in the second half of 1998. These
included agreements with Japan
25
<PAGE>
Tobacco in the area of orphan nuclear receptors and with Knoll in obesity. The
effect of these new agreements was partially offset by lower revenue from the
collaboration with Merck, which ended in March 1999. We expect collaborative
research and development revenue to decline for the foreseeable future as
existing collaborations expire at the end of their terms. We believe that our
Sumitomo collaboration will expire and not be renewed at the end of its five-
year term in January 2000. Although we are negotiating with Taisho regarding
alternative collaborative opportunities, we believe that Taisho will exercise
its contractual right to terminate its current agreement with us in March 2000.
Until recently, our corporate collaboration strategy focused on funding
research in gene regulation. Over the past two years, as this research has led
to product candidates, our corporate collaboration strategy has evolved. In
addition to seeking corporate collaborations for our research-stage programs,
we also seek to enter into collaborations for the development of compounds
discovered through our research and development efforts. The timing of these
collaborations may be linked to clinical results of our product candidates.
Research and development expenses. Research and development expenses were
$31.9 million for the nine months ended September 30, 1999, compared with $24.1
million during the nine months ended September 30, 1998. This increase was
primarily attributable to increases in employee costs, clinical and preclinical
costs and higher occupancy costs associated with a second building at our South
San Francisco, California facility, which we occupied in January 1999. We
expect research and development expenses to increase significantly in future
periods, particularly as new and existing product candidates advance into later
stages of development. Additionally, we expect that corporate collaborations
will fund a smaller percentage of our research and development expenses than
historically.
Acquired in-process research and development was written off during the nine
months ended September 30, 1999 in connection with the license agreement we
executed with Eli Lilly, which was effective September 24, 1999. You should
read Note 7 of the notes to consolidated financial statements.
General and administrative expenses. General and administrative expenses were
$3.9 million for the nine months ended September 30, 1999, compared with $3.7
million during the nine months ended September 30, 1998. This increase was
primarily attributable to higher employee and occupancy costs. We expect that
general and administrative expenses will increase in the future to support
continued growth of our research and development efforts and to accommodate new
demands associated with operating as a public company.
Amortization of deferred compensation. Amortization of deferred stock
compensation was $1.7 million for the nine months ended September 30, 1999.
There was no amortization of deferred stock compensation for the nine months
ended September 30, 1998. We recorded aggregate deferred stock compensation of
$7.1 million in the period from October 1, 1998 through September 30, 1999 for
options awarded to employees with exercise prices below the deemed fair value
for financial reporting purposes of our common stock on their respective grant
dates.
Interest income, net. Net interest income was $3.7 million for the nine
months ended September 30, 1999, compared with $4.8 million during the
corresponding period in 1998. The decrease in net interest income resulted from
lower average interest-bearing balances and higher debt balances during the
1999 period.
Years Ended December 31, 1998, 1997 and 1996
Collaborative research and development revenue. Collaborative research and
development revenue was $21.4 million in 1998, compared with $20.0 million in
1997 and $15.3 million in 1996. The increase in 1998 was principally
attributable to revenue from new collaboration agreements signed in 1998 with
Japan Tobacco in the area of orphan nuclear receptors and Knoll in obesity. The
increase in 1997 compared with 1996 was primarily due to a new collaboration
with Roche Bioscience to provide funding for our inflammation program after the
termination by Yamanouchi and the first full year of our collaboration with
Japan Tobacco in obesity/diabetes. These factors were partially offset by the
termination by Yamanouchi in November 1996 of its collaboration with us in the
inflammation area, which had accounted for $4.7 million of collaborative
research and development revenue during 1996.
26
<PAGE>
Research and development expenses. Research and development expenses were
$33.3 million in 1998, compared with $26.5 million in 1997 and $18.6 million in
1996. The increase in 1998 was primarily attributable to increases in employee
costs and clinical and preclinical development expenses as we added a research
program in the area of orphan nuclear receptors, acquired Amplicon and
increased the level of resources committed to existing research efforts.
Employee costs and development expenses also contributed to the increase in
research and development expenses in 1997 as compared with 1996. In addition,
1997 was our first full year in a new facility in South San Francisco,
California, which we occupied in April 1996 to accommodate our growth. This new
facility led to higher occupancy costs in 1997 than we incurred in 1996.
Acquired in-process research and development of $18.9 million was written-off
during 1997 in connection with our acquisition of Amplicon, which was effective
October 31, 1997. You should read Note 6 of the notes to consolidated financial
statements.
General and administrative expenses. General and administrative expenses were
$5.0 million, $4.0 million and $3.6 million in 1998, 1997 and 1996,
respectively. These increases reflected higher employee costs associated with
growth of most functional areas in support of our expanding research and
development activities. During this three-year period, general and
administrative expenses increased an aggregate 39% compared with 79% growth in
research and development expenses.
Amortization of deferred stock compensation. Amortization of deferred stock
compensation was $31,000 in 1998. There was no amortization of deferred stock
compensation in 1997 and 1996. In 1998, we recorded deferred stock compensation
of approximately $710,000 for options awarded to employees with exercise prices
below the deemed fair value for financial reporting purposes of our common
stock on their respective grant dates.
Interest income, net. Net interest income was $6.4 million, $4.1 million and
$1.5 million in 1998, 1997 and 1996, respectively. These increases were due
primarily to sequentially higher interest-bearing balances as a result of
preferred stock financings in 1997 and 1996.
Liquidity and Capital Resources
Since inception, our primary sources of funds have been the sale of equity
securities, non-equity payments from collaborators and interest income. As of
September 30, 1999, we had raised $161.1 million from the sale of equity
securities, including $13.0 million from collaborators, and received $108.3
million in non-equity payments from collaborators. Aggregate interest income
earned since our inception was $21.5 million through September 30, 1999.
We had cash, cash equivalents and marketable securities of $104.2 million at
September 30, 1999, a decrease of $15.1 million from December 31, 1998. Cash
used in operations during the nine months ended September 30, 1999 was $11.6
million. Cash used to purchase a restricted investment in connection with a
secured financing arrangement was $4.0 million. Cash used for purchases of
equipment and leasehold improvements totaled $8.5 million during the nine
months ended September 30, 1999. Cash received from equipment financing during
the nine months ended September 30, 1999 was $10.1 million. The annual interest
rates of these financings ranged from 9.0% to 12.0% and the financing
arrangements have terms of approximately 4 years each. As of September 30,
1999,we had $2.9 million available under equipment financing arrangements,
which we expect to utilize in 2000. Repayments of long-term obligations totaled
$2.5 million during the nine months ended September 30, 1999. Cash received
from stock option exercises during the nine months ended September 30, 1999 was
$1.4 million. We expect operating spending to increase in the future as we
expand operations to support the development of new and existing product
candidates while capital spending is expected to decrease moderately from 1999
levels now that leasehold improvements in our second building have been
completed.
During the three year period ended December 31, 1998, cash used in operating
and investing activities was $10.5 million and $70.7 million, respectively.
Uses of cash in operating activities were primarily to fund net
27
<PAGE>
losses, excluding noncash charges. Uses of cash in investing activities
included $58.9 million used for net purchases of available-for-sale securities,
$9.2 million for capital expenditures, $2.0 million in purchases of long-term
investments and $500,000 related to the acquisition of Amplicon. Financing
activities provided cash of $116.5 million during the three year period ended
December 31, 1998. This amount represented primarily proceeds from the sale of
equity securities.
Our forecast of the period of time through which our financial resources will
be adequate to support our operations is a forward-looking statement that
involves risks and uncertainties, and actual results could vary as a result of
a number of factors. We believe that our existing cash and investment
securities and anticipated cash flow from existing collaborations together with
the net proceeds of the public offerings and the direct offering to Pharma
Vision will be sufficient to support our current operating plan through at
least the end of 2001. We have based this estimate on assumptions that may
prove to be wrong. Our future capital requirements will depend on many factors,
including:
. the progress of our research activities;
. the number and scope of our research programs;
. the progress of our preclinical and clinical development activities;
. the progress of the development efforts of our collaborators;
. our ability to establish and maintain current and new collaboration and
licensing arrangements;
. our ability to achieve our milestones and receive funding under
collaboration arrangements;
. the costs involved in enforcing patent claims and other intellectual
property rights;
. the costs and timing of regulatory approvals; and
. the costs of establishing sales, marketing and distribution capabilities.
Future capital requirements will also depend on the extent to which we
acquire or invest in businesses, products and technologies. Until we can
generate sufficient levels of cash from our operations, which we do not expect
to achieve for at least several years, we expect to finance future cash needs
through the sale of equity securities, strategic collaborations and debt
financing as well as interest income earned on cash balances. We cannot assure
you that additional financing or collaboration and licensing arrangements will
be available when needed or that, if available, this financing will be obtained
on terms favorable to us or our stockholders. Insufficient funds may require us
to delay, scale back or eliminate some or all of our research or development
programs, to lose rights under existing licenses or to relinquish greater or
all rights to product candidates at an earlier stage of development or on less
favorable terms than we would otherwise choose or may adversely affect our
ability to operate as a going concern. If additional funds are raised by
issuing equity securities, substantial dilution to existing stockholders may
result.
Our cash and investments policy emphasizes liquidity and preservation of
principal over other portfolio considerations. We select investments that
maximize interest income to the extent possible given these two constraints. We
satisfy liquidity requirements by investing excess cash in securities with
different maturities to match projected cash needs and limit concentration of
credit risk by diversifying our investments among a variety of high credit-
quality issuers.
As of September 30, 1999, we had federal net operating loss carryforwards of
approximately $54.2 million to offset future taxable income. We also had
federal research and development tax credit carryforwards of approximately $3.9
million. If not utilized, net operating loss and credit carryforwards will
begin to expire in 2007. Utilization of the net operating losses and credits
may be subject to a substantial annual limitation due to ownership change
limitations provided by the Internal Revenue Code of 1986. The annual
limitation may result in the expiration of our net operating losses and credits
before they can be used. You should read Note 13 of notes to consolidated
financial statements.
Year 2000 Compliance
We use and rely on a wide variety of information technologies, computer
systems and scientific equipment containing computer chips dedicated to a
specific task. Some of our older computer software programs and
28
<PAGE>
equipment are unable to distinguish between the year 1900 and the year 2000. As
a result, time-sensitive functions of those software programs and equipment may
misinterpret dates after January 1, 2000 to refer to the twentieth century
rather than the twenty-first century. This could cause system or equipment
shutdowns, failures or miscalculations resulting in inaccuracies in computer
output or disruptions of operations, including inaccurate processing of
financial information and/or temporary inabilities to engage in normal business
activities. In addition to risks associated with our own computer systems and
equipment, we have relationships with, and are to varying degrees dependent
upon, a large number of third parties that provide information, goods and
services to us. These include financial institutions, suppliers, vendors,
research partners and governmental entities.
We have largely completed our assessment of our internal systems affected by
the Year 2000 issue and anticipate that we will not be required to modify or
replace significant portions of our software so that our computer systems will
properly utilize dates past December 31, 1999. We have initiated communications
with our significant suppliers to determine the extent to which we are
vulnerable to those parties' failure to solve their own Year 2000 issues. At
this time, we cannot predict the level of Year 2000 readiness with respect to
our significant suppliers. We intend to continue to monitor the progress of
these third parties. We have developed contingency plans to address potential
third party Year 2000 problems. These contingency plans include the procurement
of additional back-up power for our facilities in case of power outages,
selection of alternative suppliers for particular supplies if these supplies
become unavailable, and alternative methods of payment to suppliers and
employees if our payment systems become temporarily inoperable. If significant
numbers of these third parties experience failures in their computer systems or
equipment due to Year 2000 non-compliance, it could affect our ability to
engage in normal business activities. We have incurred $75,000 of expenses to
date to address various Year 2000 issues.
If we, our customers, our providers of hardware and software, or our third-
party computer network providers fail to remedy any Year 2000 issues, the
reasonably likely worst case scenario would be the loss of historical data and
interruption of our research programs, which could have a material adverse
effect on our business, financial condition and results of operations by
causing a significant number of operational inconveniences and inefficiences
that may divert our time and attention and financial and human resources from
our ordinary research and business activities. Presently we are unable to
quantitatively estimate the duration and extent of any interruption, or
estimate the effect these interruptions may have on our future revenue.
Disclosure About Market Risk
Our exposure to market risk is principally confined to our cash equivalents
and investments that have maturities of less than two years. We maintain a non-
trading investment portfolio of investment grade, liquid debt securities that
limits the amount of credit exposure to any one issue, issuer or type of
instrument. The securities in our investment portfolio are not leveraged, are
classified as available for sale and are therefore subject to interest rate
risk. We currently do not hedge interest rate exposure. If market interest
rates were to increase by 100 basis points, or 1%, from September 30, 1999
levels, the fair value of our portfolio would decline by approximately
$356,000. The modeling technique used measures the change in fair values
arising from an immediate hypothetical shift in market interest rates and
assumes ending fair values include principal plus accrued interest.
29
<PAGE>
BUSINESS
Overview
Tularik engages in the discovery and development of a broad range of novel
and superior orally available drugs based on gene regulation. Building on our
scientific strengths, we intend to become a world-class pharmaceutical company.
Our research programs, all of which address large commercial markets, include
cancer, cytomegalovirus, diabetes, obesity, inflammation, immune disorders,
high blood cholesterol levels, known as hypercholesterolemia, bacterial
diseases and a class of drug targets called orphan nuclear receptors because
their exact function is unknown and they are located within the nucleus of the
cell. We have diversified our drug discovery and development efforts not only
across a large number of diseases, but also across multiple promising targets
and drug candidates for these diseases.
Background
Small Molecule Drugs. Because small molecule drugs are generally administered
orally, they remain the preferred treatment for most diseases, and are
particularly appropriate for the treatment of chronic diseases requiring the
daily administration of medications over many years. Historically, the
opportunity to commercialize small molecule drugs has been limited by the
difficulty inherent in discovering safe and effective small molecule
therapeutics.
Molecular Biology Revolution. Groundbreaking advances in molecular biology in
the late 1970s expanded the range of drug treatment options beyond small
molecule drugs. Early biotechnology companies, such as Amgen and Genentech,
capitalized on these scientific advances by utilizing the coding elements of
genes to produce protein therapeutics. Unlike many small molecule drugs,
protein therapeutics must be given by injection. Dr. David V. Goeddel, our
Chief Executive Officer, was instrumental in the discovery and
commercialization of numerous therapeutic proteins at Genentech, including
human insulin, growth hormone and tissue plasminogen activator. These advances
in molecular biology led to other protein, DNA and gene related approaches.
More recently, chemistry-based drug development disciplines have been directed
toward finding small molecule drugs that interact with specific molecular
targets to achieve a desired therapeutic effect.
Gene Expression. The human body is composed of specialized cells that perform
different functions and are organized into tissues and organs. All cells in the
human body contain the same set of approximately 100,000 genes, referred to as
the human genome. Approximately 10% of the total number of genes are activated,
or expressed, in an individual human cell, and different subsets of genes are
activated in distinct cell types. Most genes direct the production of specific
proteins through a two-step decoding process, resulting in the production of
approximately 10,000 different proteins in a typical cell. Proteins, such as
hormones, enzymes and receptors, carry out critical biological functions. Gene
activation is known as gene expression, and the selective activation of
different subsets of genes in distinct cell types is referred to as
differential gene expression. All functions of cells, tissues and organs are
controlled by differential gene expression. As an example, cells in the
pancreas known as beta cells make large amounts of the insulin protein, which
is secreted and which circulates throughout the body, regulating glucose
metabolism. The exclusive production of insulin by these cells reflects the
fact that its encoding gene, the insulin gene, is expressed only in these
specialized cells. In all other cells of the body, the insulin gene is not
expressed. Differential gene expression results in the carefully controlled, or
regulated, production of functional proteins, such as insulin.
Regulation of Gene Expression. Central to the process of differential gene
expression are the regulatory elements of genes that are responsible for
determining when and where in the body a gene is expressed, or switched on. The
regulatory elements of genes operate by interacting with a specialized category
of proteins called transcription factors, which are responsible for turning the
genes on and off. In addition, the activities of transcription factors are
themselves controlled by a network of gene regulation pathways composed of
proteins. Transcription factors and the other proteins in this network of gene
regulation pathways represent potential targets for therapeutic intervention,
or drug discovery targets, because of their potential to switch genes on and
off. These protein targets reside inside the cell.
30
<PAGE>
The Role of Gene Regulation in Disease. When one or more steps in a normal
cellular pathway is upset or blocked, disrupting the normal balance or function
of essential proteins, disease may occur. This disruption can occur because of
an intrinsic defect, a harmful environmental stimulus or a combination of both.
Intrinsic defects arise from mutations in particular genes, which can either
affect the level of gene expression or alter the protein that is produced.
Inappropriate gene regulation, resulting in overexpression or underexpression
of a protein or group of proteins, plays an important role in numerous
diseases, including cardiovascular disease, inflammation and immune disorders
and metabolic diseases such as obesity and diabetes. Furthermore, infectious
agents, such as bacteria and viruses, rely on gene regulation to survive and
proliferate in the human body.
The Regulation of Genes with Small Molecule Drugs. Commencing in the 1970s, a
pioneering group of academic scientists, including Drs. Steven L. McKnight and
Robert Tjian, two of our founders, directed their research towards
understanding the regulatory elements of genes in order to clarify the
mechanisms responsible for turning genes on and off. The results of this
research suggested an approach to discovering novel drugs that target these
gene regulatory mechanisms that are within the cell, or intracellular. Protein
therapeutics are inappropriate for these targets because they are not small
molecules and therefore cannot penetrate the cell. By contrast, small molecules
are ideally suited for stimulating or inhibiting the function of intracellular
targets.
Tularik Advantage
We are a pioneer in the application of gene regulation biology to drug
discovery. Our drug discovery platform is directed toward the discovery of gene
regulating pathways and orally available drugs that act on these pathways. We
believe that our understanding of gene regulation, the strength of our
scientific and management team and the efficiencies captured through our
integrated drug discovery and development platform place us in a leading
position to discover, develop and commercialize novel, orally available drugs.
Advantages of Gene Regulation Approach. Approaches to drug discovery that
seek drug targets through the random sequencing of portions of the human genome
generally do not lead to an understanding of the relevance of discovered genes
as drug targets. Similarly, the identification of genes or proteins without an
understanding of the pathways by which they operate may not permit
identification of the optimal point of pharmaceutical intervention. In
contrast, our approach based on gene regulation permits the identification of
multiple targets within a pathway or subpathway that regulates genes and
increases the likelihood that we will be able to identify the optimal target
for effective therapeutic intervention. The potential to regulate the part of
the pathway that causes a specific disease without impacting other parts of the
same pathway that perform other functions may allow us to develop drugs that
have fewer side effects than less specific drugs. Many intracellular targets
associated with gene regulation pathways are well suited for small molecule,
orally available drugs. In addition, we believe that understanding the
mechanism of action of drug candidates that act by gene regulation may allow us
to select clinical indications and design clinical trials that have more
predictable results than has typically been the case. Finally, gene regulation
is fundamental to the development or progression of most diseases and,
therefore, may have broad applicability.
Integrated Drug Discovery and Development Platform. We have developed a drug
discovery and development infrastructure that we believe positions us to become
a leading pharmaceutical company. Our drug discovery and development expertise
includes molecular biology, biochemistry, structural biology, chemistry,
pharmacology and human testing. Our management team has extensive drug
discovery and development experience with large pharmaceutical companies. To
complement our internal capabilities, we collaborate with world-renowned
scientists and clinicians and with leading pharmaceutical companies. We believe
that our integration of biology, chemistry and pharmacology enhances our
ability to find novel gene regulating drugs and that our drug discovery and
development efforts are highly efficient and productive. To date, we have:
. identified numerous novel proteins that regulate the expression of
disease-causing genes;
. established more than 80 automated drug testing systems, known as high
throughput screening assays, that mimic the diseases addressed by our
programs;
31
<PAGE>
. conducted more than 15 million drug screens using a library of more than
500,000 distinct compounds and natural products;
. identified 14 drug leads, seven of which are being optimized by chemists;
. identified one cytomegalovirus drug candidate that is undergoing
preclinical testing consisting of animal studies designed to determine
the feasibility of human testing;
. identified one cancer drug candidate for which an Investigational New
Drug application has been approved by the FDA;
. identified one cancer drug candidate that is undergoing human testing
designed to determine safety, known as phase 1 clinical trials; and
. obtained a license for a cancer drug candidate that has completed phase 1
clinical trials and that we expect to enter human testing designed to
determine efficacy, known as phase 2 clinical trials, during 2000.
Clinical Candidates. We have commenced, or are preparing for, human testing
of three cancer drug candidates: lometrexol, T138067, which we refer to as T67,
and T900607, which we refer to as T607. Our most advanced drug candidate, which
we recently licensed from Eli Lilly, is called lometrexol. The utility of
cancer drugs like lometrexol has been proven by methotrexate, a drug that has
been used extensively in the treatment of several tumor types. We expect to
commence phase 2 clinical trials of lometrexol in 2000. T67 acts on the same
protein targeted by the cancer drugs Taxol and vincristine. In contrast to
these drugs, T67 retains its activity against tumor cells that are multiple
drug resistant and is able to enter the brain. We have enrolled 29 patients in
phase 1 trials of T67 to date. Pending successful completion of these trials,
we will initiate phase 2 clinical trials of T67 in several tumor types,
including brain tumors. T607 is an analog of T67, has the same target and is
similarly active against multiple drug resistant tumors. Animal studies
indicate that T607 is distinct from T67 because T607 has a reduced ability to
enter the brain, which may make it suitable for the treatment of different
tumor types than T67. We recently received approval of an Investigational New
Drug application for T607.
Attractive Commercial Opportunities. Our programs address cancer,
cytomegalovirus, diabetes, obesity, inflammation, immune disorders, high blood
cholesterol levels, known as hypercholesterolemia, bacterial diseases and a
class of drug targets called orphan nuclear receptors because their exact
function is unknown and they are located within the nucleus of the cell. These
programs offer potential opportunities to develop drugs for many therapeutic
indications. The significant unmet medical and quality-of-life needs for these
diseases represent large commercial markets. We intend to commercialize drugs
independently and through collaborations with pharmaceutical partners, and to
date we have retained significant rights to independently market products
resulting from most of our programs. The breadth of our current activities and
the potential for the application of our platform to additional diseases
reduces the risks associated with drug discovery, development and
commercialization.
Our Strategy
Our objective is to build a world-class pharmaceutical company that
discovers, develops and commercializes novel and superior drugs that act by
gene regulation. The key elements of our scientific and business strategy to
achieve our objective are:
Emphasize scientific excellence across our multidisciplinary drug discovery
and development platform. We intend to build on the excellence in biology
embodied in our target discovery, assay development and screening capabilities
by continuing to integrate high quality efforts in structural biology,
chemistry, pharmacology and preclinical and clinical development. We plan to
add management and technical expertise at each stage of our growth. Important
components of our strategy include entering into collaborations with leading
academic scientists and pharmaceutical companies and internally developing and
in-licensing state-of-the-art technologies as needed.
Focus on diseases representing large market opportunities with significant
unmet medical needs. Our drug discovery efforts generally target diseases that
represent large commercial opportunities and that are
32
<PAGE>
underserved by available therapeutic alternatives. Shortcomings of currently
available treatments may include limited efficacy, side effects or method of
delivery. In particular, we believe that orally available drugs that treat
disease with a high degree of specificity without these shortcomings will have
strong commercial potential.
Develop orally available small molecule drugs. Our drug discovery and
development efforts focus on orally available small molecule drugs. The major
advantage of small molecule therapeutics is the potential for oral
administration. In addition, these drugs can be manufactured by conventional
methods, resulting in lower manufacturing costs and higher margins than for
other types of drugs, such as protein therapeutics.
Increase likelihood of commercial success through diversification. To reduce
the risks inherent in drug discovery and development and our reliance on any
one of our programs, we have diversified our drug discovery and development
efforts by pursuing a large number of diseases and multiple promising targets
and drug candidates for these diseases. Where appropriate, we intend to pursue
product candidates that act through mechanisms of action other than gene
regulation.
Sustain a pipeline of drug candidates and accelerate drug development. We
expect our productive and efficient drug discovery and development platform,
coupled with the breadth of our programs, to consistently yield a large number
of drug candidates. We subject each product candidate to rigorous preclinical
scrutiny and determine its mechanism of action before we enter clinical trials.
This enables us to obtain the best drug candidate for each indication and to
focus financial resources only on drug candidates that we believe are the most
likely to become drugs. We may be able to accelerate approval and
commercialization by developing a detailed understanding of our products'
characteristics, which may enable us to select optimal clinical indications and
design the most appropriate clinical trials. We intend to augment our internal
discovery and development efforts by obtaining licenses to promising clinical
candidates.
Commercialize pharmaceuticals in selected markets. We intend to build a
world-class pharmaceutical company with the objective of bringing to market
novel and superior drugs that are proprietary to us. In North America, we
intend to develop a focused sales force to market products to specialty
physicians. We intend to seek corporate collaborations or joint ventures for
drugs prescribed by general practice physicians or a large number of
specialists. In addition, we also intend to continue to selectively collaborate
with pharmaceutical and biotechnology companies to accelerate product
commercialization in Asia and possibly Europe. Currently, five corporate
partners fund significant portions of six of our programs. We have retained
worldwide commercialization rights to our cancer, bacterial diseases and
cytomegalovirus programs and North American commercialization rights in four of
our externally funded programs.
33
<PAGE>
Product Development
Our drug discovery and development system is broadly applicable to a wide
range of diseases. We have applied this system to diseases that represent large
medical markets with significant patient populations that are underserved by
current therapeutic products. Our pipeline includes two cancer drug candidates
in clinical testing, one cancer drug candidate for which an Investigational New
Drug application has been approved, one preclinical cytomegalovirus drug
candidate and 14 drug leads in our other programs. The following table
summarizes key information in our nine programs:
<TABLE>
<CAPTION>
Program Status (1) Key Achievements
- -------------------------------------------------------------------------------
<C> <C> <S>
Cancer
Lometrexol Preparing for phase 2 Licensed from Eli Lilly a
clinical trials drug candidate with phase 1
clinical responses in a
range of human tumors.
T67 Phase 1 clinical trials Discovered an agent that
binds to a clinically
proven cancer target and
inhibits growth of multiple
drug resistant tumors in
animals.
T607 Investigational New Drug Generated second-generation
application approved analog of T67 that may have
advantages for treating
particular types of tumors.
- -------------------------------------------------------------------------------
Cytomegalovirus Preclinical Development Discovered compounds that
are orally active in animal
models of human
cytomegalovirus infection
and plan to file an
Investigational New Drug
application in 2000.
- -------------------------------------------------------------------------------
Diabetes Lead Optimization Identified compounds with
activity in animal models
predictive of anti-diabetic
efficacy.
- -------------------------------------------------------------------------------
Obesity Lead Optimization Discovered a series of
compounds that increase the
circulating level of a
protein that causes weight
loss in animals.
- -------------------------------------------------------------------------------
Inflammation Lead Optimization Elucidated key gene
regulation pathways and
discovered numerous
proteins involved in
inflammatory gene
regulation. Identified a
lead compound that inhibits
expression of inflammatory
response genes in animal
models.
- -------------------------------------------------------------------------------
Immune Disorders Lead Optimization Discovered and validated
two human transcription
factors as targets for
allergy/asthma and
autoimmune diseases.
Identified a series of
compounds that inhibit the
human transcription factor
that is a target for
allergy/asthma.
- -------------------------------------------------------------------------------
Hypercholesterolemia Lead Optimization Identified lead compounds
that lower cholesterol in
animals. Discovered
regulatory pathways
involved in cholesterol
metabolism.
- -------------------------------------------------------------------------------
Bacterial Diseases Lead Optimization Identified a series of
compounds that demonstrate
antibacterial activity and
confirmed protein target
using genetic techniques.
- -------------------------------------------------------------------------------
Orphan Nuclear Receptors Lead Optimization Discovered two nuclear
receptors. Developed novel
biochemical screening
technology to identify
nuclear receptor
modulators. Identified lead
series and initiated
chemistry.
</TABLE>
- --------
(1) "Lead Optimization"
Ongoing chemistry effort to improve potency, toxicity,
specificity and/or other properties of drug leads.
Evaluation of drug leads in relevant models.
"Preclinical Development"
Pharmacology and toxicology testing in preclinical models
to gather data necessary to comply with applicable
regulatory protocols prior to submission of an
Investigational New Drug application to the FDA.
34
<PAGE>
Cancer
Cancer is a group of diseases characterized by uncontrolled growth and
proliferation of abnormal cells. This growth ultimately invades vital organs
and often results in death. The worldwide market for branded cancer drugs
totaled approximately $7.8 billion in 1998 and is projected to grow at an 8.5%
compound annual growth rate. Cancer is the second leading cause of death in the
United States, exceeded only by cardiovascular disease. In 1999, it is
estimated that 1.22 million people will be diagnosed with cancer, and more than
550,000 patients will die of cancer. The five-year survival rates for patients
with metastatic cancers, or cancers that have spread from the primary tumor,
are poor; for example: 13% for colorectal cancer, 12% for lung cancer and 21%
for breast cancer. These poor survival rates reflect the limitations of current
treatments and the fact that cancers develop resistance to currently available
treatments. In addition, current treatments are often associated with severe
side effects. As a result, there is a medical need for the development of more
effective and less toxic treatments.
We currently have three drug candidates in our cancer program.
Lometrexol. We have licensed a cancer drug candidate known as lometrexol from
Eli Lilly. Lometrexol is an antifolate. Antifolates, which disrupt the
synthesis of DNA, have been validated for use in the treatment of cancer. For
example, methotrexate, which acts by a mechanism of action similar to that of
lometrexol, has been used extensively in the treatment of breast, bladder and
head and neck cancers. Eli Lilly conducted phase 1 trials of lometrexol both
with and without folic acid supplementation. Several deaths were observed in
phase 1 trials of lometrexol. However, patients treated with lometrexol who
received oral supplementation with folic acid demonstrated greatly improved
tolerance to the drug.
During the course of phase 1 clinical trials, Eli Lilly observed a total of
five partial responses and one complete response in different tumor types and
in different centers. Partial responses were noted for patients with melanoma,
breast cancer, soft tissue sarcoma, ovarian cancer and non-small cell lung
cancer. Despite the fact that it is unusual to see complete responses in phase
1 clinical trials because patients enrolling in these trials tend to be heavily
pre-treated and are typically at an advanced stage in the progression of their
disease, Eli Lilly noted a complete response lasting more than 18 months in a
patient with head and neck cancer.
We anticipate that we will commence phase 2 clinical trials of lometrexol in
2000. We have not yet selected the five or six tumor types to be treated during
phase 2 clinical trials, but we expect the trials will include melanoma and
soft tissue sarcoma patients. The primary endpoint of these studies will be
efficacy, as assessed by response rate.
T67. Our scientists have discovered T67, a cancer compound that binds
irreversibly to tubulin, the cellular building block of microtubules, which are
essential to cell division. T67 disrupts microtubule function, causing the cell
to die and potentially resulting in tumor shrinkage. Since cancer cells divide
more rapidly than normal cells and microtubules are essential for cell
division, cancer cells are more sensitive than normal cells to treatment with
T67. This concept has been proven clinically by other tubulin-active agents
such as Taxol and vincristine; however, over time, many tumors become resistant
to these drugs.
T67 causes tumor shrinkage in a variety of human tumors implanted into mice.
T67 retains its activity against those tumors and cell lines that are multiple
drug resistant. In contrast, these multiple drug resistant cells and tumors
were resistant to Taxol and doxorubicin. T67 demonstrates enhanced activity
when used in combination with cisplatin against the MX-1 mammary tumor
implanted into mice. T67 is currently in phase 1 clinical trials. A total of
four studies based on varying dosing regimens are either ongoing or planned at
major medical centers in the United States. To date, we have enrolled 29
patients and have observed a dose-limiting toxicity of neuropathy in one
patient at the highest administered dose. We expect to continue to enroll
additional patients at a lower dose level. This lower dose results in drug
levels that are sufficient to induce anti-tumor activity in animals. We expect
that data from the phase 1 clinical trials establishing a phase 2 infusion dose
and schedule will be available in 2000. Assuming that a tolerable dose and
schedule can be identified for
35
<PAGE>
repeat administration, we expect to initiate a number of phase 2 clinical
trials to determine anti-tumor activity. We expect to conduct one of these
trials in glioblastoma, a type of brain cancer, exploiting the ability of T67
to enter the brain. In the event that T67 has sufficient activity in refractory
tumor types for which no other treatment exists, T67 would be a potential
candidate for accelerated approval by the FDA.
T607. In November 1999, we received approval of an Investigational New Drug
application for T607, an analog of T67. This drug also binds irreversibly to
tubulin. Animal studies indicate that T607 is different from T67 in that T607
may be given by rapid injection, or bolus, and also has a reduced propensity to
enter the brain. This may be a desirable feature for treatment of peripheral
tumors. We intend to evaluate three different dosing schedules of T607 in phase
1 clinical trials.
Cancer Gene Discovery. We seek to discover cancer genes using a proprietary
technique known as Representational Difference Analysis. Representational
Difference Analysis works by sampling DNA from healthy and diseased cells from
the same person, and rapidly comparing the samples to identify mutant cancer
genes. Representational Difference Analysis does not require either prior
hereditary clues or an extensive sample collection from high-risk families that
have a history of disease. Prior to the time we obtained a license to this
technology, Representational Difference Analysis was utilized to isolate two
tumor suppressor genes, BRCA2 and PTEN.
Cytomegalovirus
Cytomegalovirus is a common virus that causes serious infection in patients
with compromised or immature immune systems, particularly transplant
recipients, AIDS patients and infants born to cytomegalovirus-infected mothers.
In the bone marrow and solid organ transplant population, cytomegalovirus can
cause life-threatening pneumonia. In the AIDS patient population, retinitis
caused by cytomegalovirus is the primary cause of blindness. Cytomegalovirus
infection in newborns can cause death or severe neurological damage, typically
deafness. In 1997, the incidence of cytomegalovirus disease worldwide totaled
approximately 31,000 patients, and worldwide revenues for cytomegalovirus drugs
totaled approximately $143 million and are projected to grow at a 6.5% compound
annual growth rate. Current therapy for cytomegalovirus disease is associated
with significant toxicity and poor oral bioavailability. These features limit
the utility of the current drugs in preventative therapy in patients at high
risk, such as patients receiving bone marrow transplants, and for treatment of
active infection in newborns.
We have identified a class of potent and orally available cytomegalovirus
compounds that interfere with the replication machinery of cytomegalovirus. We
believe that this class of compounds is the first to target a specific
cytomegalovirus-encoded enzyme that is necessary for initiating the synthesis
of viral DNA. This class of compounds is efficacious against clinical
cytomegalovirus taken from patients who have developed resistance to current
therapies. Animal toxicity studies suggest that this class of compounds will be
safer than current therapies. Because they can be taken orally, our
cytomegalovirus drug candidates may also be practical for use in preventative
settings, such as in transplant patients.
We have commenced preclinical testing of several advanced candidates. We
anticipate filing an Investigational New Drug application on a lead compound in
2000.
Diabetes
Diabetes mellitus is a chronic, progressively debilitating disease that
affected approximately 124 million people worldwide in 1997. Type II diabetes
represents 90% of the total population of people with diabetes, and its
prevalence is increasing as a function of the aging population and the
increasing population of obese people in the world. Worldwide sales for oral
type II diabetes drugs in 1998 totaled approximately $3.0 billion and are
expected to grow at a 35% compound annual growth rate. Type II diabetes usually
develops after the age of 40 and is characterized by the body's inability to
respond to insulin. Recently, a new class of drugs has been
36
<PAGE>
introduced that permit type II diabetics to make better use of the insulin
produced by their bodies or taken by injection. Members of this class,
including the drug Rezulin, have proven to be moderately efficacious for the
treatment of type II diabetes but have also been associated with undesirable
side effects, such as liver toxicity and weight gain. These side effects limit
the number of eligible patients and increase the costs associated with
monitoring for adverse effects after initiation of treatment.
Our scientists have implemented a biochemical assay that employs the same
transcription factor that is targeted by Rezulin. Our current efforts are
focused on optimizing a lead series of potent and orally available agents
identified in this assay that improve insulin sensitivity and lower blood
glucose in animals. We believe that this series offers the potential for an
anti-diabetes drug with improved profile relative to existing agents. We have
commenced animal studies and a chemistry effort to clarify and exploit these
advantages.
We have collaborated with Japan Tobacco in obesity/diabetes research since
September 1996.
Obesity
Body weight is determined and regulated by a variety of genetic and
environmental factors. Weight change is influenced by eating behavior and by
energy utilization as determined by exercise and metabolic rate. Obesity
increases the risk of serious human diseases, including type II diabetes,
coronary artery disease and hypertension. At least 70 million people in the
United States are currently classified as obese. There is a large, unmet need
for a treatment for obesity. Recently, two drugs have been approved for this
disease, Xenical and Meridia, and no other drugs are approved specifically for
obesity. Since the beginning of 1999, these products generated combined
revenues of more than $500 million.
We have a robust program that currently is focused upon three pathways
involved in obesity. The first of these pathways involves the obese, or Ob,
gene. The Ob gene encodes the protein leptin, is expressed exclusively in fat
tissue and is regulated by diverse stimuli. When administered intravenously to
obese mice, the leptin protein results in significant weight loss. Our
scientists have established an assay that uses a genetically altered fat cell
line that is sensitive to stimuli responsible for controlling the Ob gene,
making it ideally suited for use in assays to identify compounds that will
regulate the Ob gene. We have identified a series of compounds in this assay
that increase leptin in the blood of laboratory animals. We have commenced
additional studies of the mechanism by which these compounds regulate the Ob
gene.
The second pathway we are evaluating involves a family of proteins known to
play a major role in determining metabolic rate. Studies have shown that there
is correlation between metabolic rate and the ability to turn food calories
into heat instead of storing food calories in fat cells. The ability to
dissipate food calories as heat in turn relies on this family of proteins. This
family of proteins is an important class of potential targets for the treatment
of obesity. Our scientists have established a panel of biochemical and cell-
based assays directed towards the identification of small molecule compounds
that selectively modulate the activity of this family of proteins. We have
commenced high throughput screening using these proprietary assays.
A third area of obesity research focuses on pathways involved in preventing
the creation of fat cells. In cell culture experiments using a compound we have
identified, our scientists have demonstrated that inhibiting a transcription
factor known as PPARg prevents the formation of fat cells.
We have collaborated with Knoll in obesity research since November 1998. We
have collaborated with Japan Tobacco in obesity/diabetes research since
September 1996.
Inflammation
Under normal circumstances, inflammation is an important defense response to
injury and infection. An early step in the inflammatory response is the
recruitment of white blood cells, or leukocytes, from the circulatory system to
damaged or infected tissue. Excessive or prolonged accumulation of leukocytes
can lead to inflammatory conditions, including asthma, inflammatory bowel
disease, multiple sclerosis, psoriasis,
37
<PAGE>
rheumatoid arthritis and septic shock. In 1998, a total of approximately 28
million individuals in the United States suffered from these diseases.
Worldwide sales of non-steroidal anti-inflammatory drugs totaled approximately
$6.0 billion in 1998 and are expected to grow at a 4% compound annual growth
rate. An estimated 400,000 individuals in the United States and Europe have
Crohn's disease, a serious chronic inflammatory disease of the small and large
intestine.
Inflammatory messengers act by binding to specific cell surface receptors
that, in turn, set off signaling events culminating in the expression of many
inflammatory response genes. The crucial roles played by particular
inflammatory messengers in several inflammatory disease states have been
clearly demonstrated by studies utilizing antibodies and soluble receptors that
neutralize the activities of particular inflammatory messengers. The efficacy
demonstrated by Enbrel, a soluble inflammatory messenger receptor, has
validated this concept for the treatment of rheumatoid arthritis. We believe
that an orally available drug of comparable efficacy would represent formidable
competition for drugs that must be injected, such as Enbrel.
Several key inflammatory response genes are regulated by a single
transcription factor, NF-kB. Our scientists have discovered numerous novel
regulatory proteins in the gene regulation pathways leading from the receptors
for particular inflammatory messengers and have elucidated their roles in NF-kB
activation. On the basis of these landmark discoveries, our scientists are
recognized as leaders in this field of research.
Based upon this research, our scientists have determined that some of these
regulatory proteins appear to be exclusively dedicated to NF-kB activation and
the inflammatory response and therefore represent ideal drug discovery targets.
We are employing several of these targets in high throughput screening assays,
and a lead compound that inhibits one of the key components involved in NF-kB
activation is currently undergoing optimization. We believe that our
discoveries and the expertise we have developed in this disease area place us
in a leading position to identify the next generation of important anti-
inflammatory drugs.
We have collaborated with Roche Bioscience in inflammation research since
July 1997.
Immune Disorders
Many diseases result from defects in the immune system, including allergic
rhinitis, asthma, type I diabetes and rheumatoid arthritis. It is estimated
that a total of approximately 55 million people in the United States suffered
from these common immune disorders in 1998. Respiratory therapies including
anti-asthmatic and allergy relief medications totaled approximately $11.2
billion in worldwide revenues in 1998 and are expected to grow at a 16%
compound annual growth rate.
Our scientists have discovered two human transcription factors, STAT6 and
STAT4, that are key proteins involved in immune regulation. When
overstimulated, these proteins are instrumental in the development of allergy
and asthma in the case of STAT6, and in the development of autoimmune diseases
such as rheumatoid arthritis and inflammatory bowel disease in the case of
STAT4. Experiments in animals have demonstrated that disabling these proteins
is safe and blocks inappropriate immune responses. These results demonstrate
that STAT6 and STAT4 are excellent drug discovery targets. Our goal is to
discover drugs capable of selectively blocking STAT6 or STAT4 function.
Toward this end, we developed cell-based assays for high throughput screening
that enable the identification of compounds that interfere with functions
controlled by STAT proteins. We have also developed biochemical assays for high
throughput screening that permit the identification of compounds that will
inhibit STAT protein activation. Finally, our scientists have identified short
peptides, or protein fragments, that inhibit STAT function. These peptides have
served as leads for a chemistry optimization program and have also enabled the
synthesis of a drug candidate that completely inhibits STAT6 function in cells,
validating the underlying basis of this approach. The structures of several
proprietary STAT6 inhibitors bound to specific sites on the target protein have
been determined by X-ray crystallography and are being utilized to guide our
chemistry effort.
We have collaborated with Taisho in immune disorders research since April
1995.
38
<PAGE>
Hypercholesterolemia
Cardiovascular disease is the leading cause of death in the developed world.
The most clinically significant diseases, angina and myocardial infarction, are
causally related to elevated levels of low-density lipoprotein, or LDL,
cholesterol in the blood stream. The risk of death begins to increase when LDL
cholesterol levels rise above 126 mg/dl and progressively worsens with higher
levels. A total of approximately 39 million people in the United States have
LDL cholesterol levels above 168 mg/dl.
To date, statins are the most successful drugs for lowering LDL cholesterol
levels. Worldwide revenues for statins totaled approximately $9.6 billion in
1998 and are expected to grow at a 20% compound annual growth rate. Statins
lower LDL cholesterol levels in the bloodstream by indirectly increasing the
number of LDL receptors on the surface of cells. Despite the success of
statins, there is a significant patient population, particularly those
individuals having substantially elevated blood cholesterol levels, for which
these drugs alone are insufficient to achieve the desired efficacy. We believe
that a drug that either directly increases expression of LDL receptors or
induces cholesterol clearance mechanisms may show improved efficacy relative to
the current agents.
Toward this end, we have established proprietary assays for high throughput
screening that utilize liver cells to measure the compound-induced activity of
the LDL receptor gene. Using this approach, we have identified compounds that
lower serum cholesterol in animal models. This class of compounds is the focus
of a chemistry optimization effort.
Our scientists have also extended the understanding of the mechanism
regulating an important enzyme that is responsible for the body's clearance of
cholesterol. These scientists have discovered important transcription factors
involved in the process. They have also identified a natural receptor for bile
acids, which are the end products of cholesterol metabolism and suppress the
expression of this enzyme. We have established proprietary biochemical assays
for high throughput screening to detect inhibitors of this bile acid receptor
and are presently evaluating the therapeutic potential of early leads derived
from the screening effort.
We have a research collaboration with Professors Michael Brown and Joseph
Goldstein of the University of Texas Southwestern Medical School at Dallas, to
develop a detailed understanding of the intracellular events controlling
cholesterol metabolism. Professors Brown and Goldstein won a Nobel Prize for
their work in this area. This collaboration is currently focused upon
elucidating mechanisms involved in regulation of the transcription factors that
have been shown by Brown and Goldstein to activate the LDL receptor gene.
Efforts in this area have led to the establishment of a unique cell-based assay
for high throughput screening to identify compounds that modulate a novel
target discovered by Brown and Goldstein. Compounds that are active in this
assay are expected to lead to increased expression of the LDL receptor gene. We
have also established a biochemical assay to complement the ongoing cell-based
screening efforts. We have been collaborating with Professors Brown and
Goldstein since October 1992 and have the exclusive right to license the
results of the Brown and Goldstein research in this area.
We have collaborated with Sumitomo in hypercholesterolemia research since
January 1995.
Bacterial Diseases
The extensive use of antibiotics during the past three decades has
contributed significantly to the emergence of antibiotic-resistant strains of
bacteria. Worldwide revenues for broad-spectrum penicillins totaled
approximately $3.8 billion in 1998 and are expected to grow at a 4% compound
annual growth rate. Despite the wide variety of classes of antibiotics
currently available for clinical use, patients can die from an infection with
any one of multiple drug resistant forms of bacteria, including Mycobacterium
tuberculosis, Staphylococcus aureus or Enterococcus faecalis. With an estimated
two million patients developing hospital-acquired infections in the United
States each year and 90,000 deaths resulting from those infections, the need to
overcome evolving bacterial resistance is the major driving force behind
ongoing efforts to discover and develop chemical classes of antibacterial
agents for clinical use.
39
<PAGE>
We have focused our efforts on a number of cellular processes essential for
bacterial growth. RNA polymerase is a bacterial enzyme that is a proven
antibacterial target, because the potent antibiotic rifampicin inhibits a
subunit of this enzyme. The clinical utility of rifampicin, however, is
diminished by the rapid emergence of drug resistance. We have identified a
novel class of inhibitors of RNA polymerase that have antibacterial activity
against rifampicin-resistant bacteria. The current focus of this program
involves a lead candidate that is undergoing chemistry optimization.
Orphan Nuclear Receptors
Nuclear receptors are a family of transcription factors that play important
roles in nearly all aspects of development and adult physiology and therefore
have relevance to multiple disease indications. These receptors are activated
by naturally occurring hormones known as ligands, and many have therefore been
discovered to be targets for important orally available drugs, including
Premarin for estrogen replacement, levothyroxine, or Synthroid, for
hypothyroidism, tamoxifen for breast cancer, Pulmicort for asthma and Rezulin
for type II diabetes. Worldwide revenues for these five drugs totaled an
aggregate of more than $4 billion in 1998.
Until the natural ligand corresponding to a nuclear receptor is identified,
members of the nuclear receptor family are classified as orphan nuclear
receptors. Of the nearly 50 nuclear receptors identified to date, approximately
two-thirds are orphan nuclear receptors. Although the exact functions of these
orphan nuclear receptors are not known, the fact that nuclear receptors are
biologically important and are activated by small molecules makes this an
attractive opportunity for discovery of important new medicines. As an example
of the commercial potential of drugs that target orphan nuclear receptors, it
has recently been discovered that the antidiabetic drug Rezulin targets the
orphan nuclear receptor known as PPARg.
Our scientists are using proprietary screens to enable the discovery of both
stimulators and inhibitors for many orphan nuclear receptors and have
discovered two novel human orphan nuclear receptors. We are applying multiple
technologies, such as gene knock-out and X-ray crystallography, to both
elucidate function and guide drug discovery in this area. We have initiated
several assays for high throughput screening, and the first leads are
undergoing functional characterization in both cell-based and animal studies.
We have collaborated with Japan Tobacco in orphan nuclear receptor research
since September 1998.
40
<PAGE>
Drug Discovery and Development
We believe that our integrated drug discovery and development platform places
us in a leading position to discover, develop and commercialize novel, orally
available drugs. The following chart illustrates our drug discovery and
development system:
[FLOW CHART APPEARS HERE]
41
<PAGE>
Target Identification and Validation
A key focus of our scientists is to establish a link between specific genes
and diseases. Following the identification of such a link, we seek to identify
and characterize important proteins and regulatory pathways responsible for the
expression of these genes. Our ability to identify multiple targets within a
gene regulatory pathway or subpathway that regulates genes increases the
likelihood that we will be able to identify the optimal target for therapeutic
intervention.
Our scientists use a combination of biochemical, molecular biological and
genetic approaches to discover novel regulatory proteins. Once a regulatory
protein has been identified, we clone and express the gene that encodes that
protein. Cloning the regulatory protein allows us to conduct target validation,
which is the biological evaluation of the protein's specific function in the
disease process. We evaluate the physiological function of potential drug
targets we discover by manipulating their expression in cells, by mapping the
pathways by which they interact with other regulatory proteins to regulate
genes and by understanding the cell types in which they are expressed. This
information can be critical to assessing the suitability of a gene regulatory
protein as a target for pharmaceutical intervention.
In our target discovery efforts, we also search publicly available genome
databases, including data derived from the Human Genome Project. In the cancer
area, we seek to discover novel cancer genes using Representational Difference
Analysis. Some of these cancer genes may be targets for small molecule
intervention.
Where the target validation process indicates that a particular regulatory
protein may not be the most appropriate molecular target for assay development,
we use cellular and molecular biology studies to identify other proteins
involved in the same biochemical pathway(s) that may be better molecular
targets for drug discovery and therapeutic intervention. The target validation
process also provides us with opportunities to discover additional components
of the cellular pathway that may lead to identification of additional drug
discovery targets.
Primary Assays
We use primary assays specific to each target or program to rapidly search
our compound screening library for chemical structures that hold promise for
further study, or hits. We design and implement two main types of primary
assays, as described below.
Biochemical Assays. Our scientists use the results of target identification
efforts to craft specialized biochemical assays in which one or more target
proteins are reconstituted in a system that closely mimics their native
environment. At this stage, we adapt the assay to an automated format to allow
for high throughput screening. Biochemical assays provide several advantages in
the search for new drugs. In a biochemical assay, the components and mechanism
of action of the drug candidates are already known. This precision minimizes
inaccurate results and false-positive readings, thereby accelerating the
discovery process. Additionally, the identification of lead compounds using
biochemical assays bypasses the potential problems of false-negative readings
associated with the ability of a compound to penetrate a cell or the intrinsic
ability of cells to break down chemicals before they reach a target. Once hits
are identified, these properties can be subsequently manipulated through
chemistry. Since biochemical assays are usually highly amenable to high
throughput screening, results can be obtained rapidly and reproduced
consistently. We will perform high throughput screening with approximately 35
biochemical assays in 1999.
Cell-based Assays. High throughput screening using intact cell-based assays
complements and extends our biochemical screening capabilities. A major
advantage of cell-based assays over biochemical assays is that cell-based
assays allow analysis of sample activity in an environment similar to the one
in which a drug would act. In addition, the toxicity and ability to penetrate
into the cell can be assessed. In contrast to biochemical assays, where the
target protein for a drug is known, cell-based assays offer an additional
opportunity to discover drugs interacting with novel, previously unknown,
target proteins. We will perform high throughput screening with approximately
ten cell-based assays during 1999.
42
<PAGE>
High Throughput Screening
We have developed innovative hardware and software systems to automate the
entire drug screening process, from the preparation of solutions of the test
substances for screening to the analysis of the data generated from the assays.
In our automated screening facility, we can annually generate more than eight
million sample evaluations in our assays. Our automated systems can be
configured to run a wide variety of assay formats. Our data management system
stores the data for hundreds of thousands of samples, each tested in dozens of
assays. This relationally integrated system manages sample inventories through
a bar code system, configures plates for a wide variety of experiments and
coordinates the screening of large numbers of plates across multiple assays.
The data management system electronically recalls and presents data in formats
that allow rapid recognition of active compounds or extracts. This gives each
of our scientists the ability to analyze the results for a given assay within
the context of the entire drug discovery database, including the results of all
past screening assays.
Screening Library
Access to large libraries of highly diverse molecular structures is an
important aspect of our drug discovery efforts. We currently have a library of
over 500,000 synthetic compounds and natural product extracts. This library
includes in excess of 300,000 individual synthetic compounds. The screening
collection also includes combinatorial chemical libraries that contain in
excess of 200,000 synthetic compounds incorporating desirable molecular
features. Our library includes a natural product collection that currently
numbers in excess of 118,000 independent samples derived from microbial, plant
and marine sources. This library is supplemented with chemical libraries
provided by our collaborators for specific programs.
Secondary Assays
Secondary assays are designed to eliminate those "hits" that lack potency or
specificity, or have unwanted characteristics. If a compound survives the
secondary assay screening process, it is then subjected to further testing and
ultimately chemistry optimization. Generally, hits with promising results in
animal models and desirable chemical characteristics become lead compounds.
Lead Optimization
Regardless of whether a lead compound is obtained from biochemical or cell-
based assays, the pharmaceutical properties of that compound must be improved
before clinical development. This is the process of lead optimization.
Chemistry. We carry out traditional structure-activity relationship studies
of potential lead compounds and conduct lead optimization utilizing chemistry
techniques to synthesize new analogs of a lead compound with improved
properties. Our natural products chemists handle the separation, isolation and
structure elucidation of bioactive components derived from our natural product
extracts. In addition, we have computational chemistry capabilities, including
molecular modeling, to support lead optimization.
We complement this activity with directed combinatorial chemistry, which
enables the synthesis of thousands of chemical analogs of lead compounds
quickly. We continue to expand our efforts in this area as we believe that the
continued development of combinatorial chemistry technology will streamline the
ability of our chemists to improve upon promising lead compounds and facilitate
the expansion of our proprietary screening library.
Structural Biology. Structural biology techniques aid in drug design and
optimization by providing molecular "snapshots" that allow scientists to
visualize the interactions between a drug or lead and its protein target. These
interactions are analogous to the fit between a lock and a key. Nuclear
magnetic resonance, spectroscopy and X-ray crystallography comprise the
essential techniques of structural biology. We have
43
<PAGE>
established state of the art laboratories that allow us to readily utilize
these powerful tools for lead optimization. Utilizing structural information,
chemists can design and synthesize new analogs of lead compounds that are
likely to have a better fit with the target protein, and hence have greater
potency. We are applying structural biology broadly and have ongoing efforts in
many of our drug discovery programs.
Pharmacology and Preclinical Development
We believe that the rapid characterization and optimization of lead compounds
identified in high throughput screening will generate high-quality preclinical
development candidates. Our pharmacology and preclinical development group
facilitates lead optimization by characterizing lead compounds with respect to
pharmacokinetics, potency, efficacy and selectivity. The generation of proof-
of-principle data in animals and the establishment of standard pharmacological
models with which to assess lead compounds represent integral components of
lead optimization. As programs move through the lead optimization stage, our
pharmacology and preclinical development group supports our chemists and
biologists by performing the necessary studies, including toxicology, for
Investigational New Drug application submissions.
Clinical Development
We have assembled a team of experts in drug development to design and
implement clinical trials and to analyze the data derived from these studies.
The clinical development group possesses expertise in project management.
Research and Development Expenses
Our research and development expenses were $31.9 million for the nine months
ended September 30, 1999, $33.3 million in 1998, $26.5 million in 1997 and
$18.6 million in 1996.
Corporate Collaborations
To assist in product commercialization and fund research and development
activities, we have established and will continue to pursue corporate
collaborations with selected pharmaceutical and biotechnology companies. We
currently have corporate collaborations in six of our research programs: Knoll
relating to obesity; Japan Tobacco relating to orphan nuclear receptors; Roche
Bioscience relating to inflammation; Japan Tobacco relating to
obesity/diabetes; Taisho relating to immune disorders; and Sumitomo relating to
hypercholesterolemia. As of September 30, 1999, we had received a total of
$121.3 million, including $108.3 million in research funding and $13.0 million
from equity purchases, from these collaborators as well as under a prior
alliance with Yamanouchi that was terminated by Yamanouchi in November 1996 and
a prior alliance with Merck that was terminated by Merck in March 1999. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Overview" for additional details related to funding received to
date and future funding payable under existing corporate collaboration
agreements. In addition, we have a number of scientific collaborations with
academic and medical institutions and biotechnology companies under which we
have in-licensed technology. We intend to pursue further collaborations as
appropriate.
Our corporate collaboration agreements generally contain the following terms.
Every corporate collaboration agreement, except the agreement with Knoll,
provides that each party will retain ownership of all inventions and any
related patents made solely by its employees during the course of the
collaboration, except as limited by each party's license rights described
below. In every corporate collaboration agreement, we have agreed not to
conduct research in specified areas, independently or with any commercial third
party, that is in the same field and in the same geographical territory as that
covered by the corporate collaboration agreement.
44
<PAGE>
The table below summarizes the economic rights currently held by us and our
corporate collaborators in each of our programs and additional details relating
to specific corporate collaboration agreements.
<TABLE>
<CAPTION>
Economic Rights Holder
----------------------------------------------------------------------------------
Corporate
Program Collaborator North America Europe Asia (2)
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Cancer (1) -- Tularik Tularik Tularik
- -------------------------------------------------------------------------------------------------------------------
Cytomegalovirus -- Tularik Tularik Tularik
- -------------------------------------------------------------------------------------------------------------------
Diabetes (certain Japan Tobacco Profit split Profit split Profit split
targets)
- -------------------------------------------------------------------------------------------------------------------
Obesity (certain Knoll Knoll (Royalties shared Knoll (Royalties shared Profit split (with
targets) with Japan Tobacco) with Japan Tobacco) Japan Tobacco)
- -------------------------------------------------------------------------------------------------------------------
Obesity (certain Japan Tobacco Profit split Profit split Profit split
targets)
- -------------------------------------------------------------------------------------------------------------------
Inflammation
Inflammatory bowel Roche Bioscience Tularik (Royalties to Tularik (Royalties to Tularik (Royalties to
disease, skin diseases Roche Bioscience) Roche Bioscience) Roche Bioscience)
and eye diseases
Other indications Roche Bioscience Roche Bioscience Roche Bioscience Roche Bioscience
(Royalties to Tularik) (Royalties to Tularik) (Royalties to Tularik)
- -------------------------------------------------------------------------------------------------------------------
Immune Disorders Taisho Tularik Tularik Taisho (Royalties
(certain targets) to Tularik)
- -------------------------------------------------------------------------------------------------------------------
Hypercholesterolemia Sumitomo Tularik Tularik Sumitomo (Royalties
(certain targets) to Tularik)
- -------------------------------------------------------------------------------------------------------------------
Bacterial Diseases -- Tularik Tularik Tularik
- -------------------------------------------------------------------------------------------------------------------
Orphan Nuclear Receptors Japan Tobacco Profit split Profit split Profit split
</TABLE>
(1) We have agreed to pay Eli Lilly a royalty and to make milestone payments on
sales of lometrexol, as described below.
(2) Composition of Asian territory varies by agreement.
Knoll AG (Obesity)
Effective November 1998, we established a five-year research collaboration
with Knoll to discover, develop and market compounds that act on specified
obesity-related targets. Under the collaboration agreement, Tularik has
established assays for these obesity-related targets. Knoll and Tularik are
each to provide compound libraries, conduct screening and provide expertise to
support biology, pharmacology and chemistry for identified lead compounds.
Once the parties select a compound for preclinical testing in the treatment
or prevention of obesity, Knoll has the right to enter into a separate license
agreement granting Knoll exclusive rights to develop, manufacture and sell the
compound in countries other than in specified Asian countries for indications
related to obesity. Any license would survive termination of the research
portion of the collaboration, and require Knoll to pay to us milestones and
royalties. Each party has defined rights to develop compounds identified during
the course of performance of the research collaboration for indications and
uses other than obesity, subject to the payment to the other party in
particular circumstances of a royalty on product sales. The collaboration
agreement grants us exclusive rights under collaboration technology and
nonexclusive rights under specified Knoll technology to develop, manufacture
and sell obesity products in specified Asian countries, subject to the payment
of royalties to Knoll on sales of products if we obtain a license under
applicable Knoll technology. Knoll has a right of first refusal to obtain Asian
rights in the event that Japan Tobacco's rights terminate or expire. The rights
retained in specified Asian countries are subject to the Japan Tobacco
obesity/diabetes agreement.
45
<PAGE>
Knoll may terminate the collaboration agreement on the third or fourth
anniversary of the effective date upon prior written notice. Either party may
terminate the agreement at any time upon a material breach by the other party
of its obligations under the agreement. When the research collaboration
terminates, each party will retain rights to technology invented by it during
the collaboration or contributed by it to the collaboration, subject to the
rights and licenses described above. The parties would cross license to each
other the right to commercialize products already identified in the program.
Japan Tobacco (Orphan Nuclear Receptors)
Effective September 1998, we established a five-year collaboration with Japan
Tobacco to discover, develop and market compounds that act by regulating orphan
nuclear receptors. We have developed assays and screened library compounds
against a number of orphan nuclear receptors. Both parties will participate in
chemistry and other preclinical activities for identified lead compounds.
The collaboration is structured to provide for the equal sharing of expenses
and profits on a worldwide basis. We retain exclusive marketing and sales
rights in the United States and Canada. Japan Tobacco retains exclusive
marketing and sales rights in Japan and Korea. Japan Tobacco and we jointly
determine marketing strategy in other countries. Japan Tobacco will be required
to provide funding for our research efforts and to make benchmark payments to
us based on clinical progress.
The research collaboration may be terminated by Japan Tobacco at the end of
the third and fourth years of the five-year research collaboration, on prior
written notice. Either party may elect to terminate its participation in the
co-promotion of products upon prior written notice to the other party, in which
case the other party may exclusively commercialize a product subject to the
payment of a royalty to the party that elects not to participate in co-
promotion. Either party may terminate the agreement at any time upon a material
breach by the other party of its obligations under the agreement.
Roche Bioscience (Inflammation)
We established a five-year research and development collaboration with Roche
Bioscience in July 1997 to discover, develop and market anti-inflammatory gene
regulating drugs.
The agreement provides that we will establish assays for particular targets
within these signaling pathways and conduct high throughout screening of
compounds from the Roche Bioscience and Tularik libraries. Roche Bioscience
provides expertise and funding to support molecular structure validation and
chemistry. Roche Bioscience has exclusive, worldwide manufacturing and
marketing rights to develop and commercialize identified compounds resulting
from the research program for specified indications. Roche Bioscience is
obligated to pay us benchmark payments based on clinical progress and royalties
on sales of these compounds for the Roche Bioscience indications. We have
exclusive, worldwide manufacturing and marketing rights to develop and
commercialize other compounds resulting from the research program for other
specified indications. We are obligated to pay Roche Bioscience royalties on
sales of these compounds for indications we have retained. Our retained
indications include inflammatory bowel disease, as well as eye and skin
diseases. Tularik and Roche Bioscience are responsible for funding preclinical
testing and clinical development of compounds for their respective indications.
Roche Bioscience retains rights of first negotiation and of first refusal to
develop and commercialize various types of compounds identified both within and
outside the scope of the collaboration.
Roche Bioscience may terminate the research collaboration at the end of the
third year of the five-year research collaboration, on prior written notice, if
the then current research plan does not provide opportunities for new products
or if we have not discharged our obligations under the research collaboration.
For a specified period at the conclusion of the collaboration, either party may
commercialize compounds resulting from the research program for all
indications, subject to the payment of royalties on sales of the compound. The
first
46
<PAGE>
party to commence preclinical development of a compound receives exclusive
commercialization rights to the compound and must pay the other party royalties
on the compound and, in the case of compounds commercialized by Roche
Bioscience, benchmark payments. After the specified period, the first party to
commence preclinical development of a compound resulting from the research
program receives exclusive commercialization rights to the compound and may
commercialize the compound without paying royalties to the other party. Either
party may terminate the agreement at any time upon a material breach by the
other party or in connection with the other party's bankruptcy.
Japan Tobacco (Obesity/Diabetes)
We established a five-year collaboration with Japan Tobacco in September 1996
to research and develop products that regulate expression of genes implicated
in obesity and diabetes. The collaboration was amended in September 1998 and
currently addresses three gene regulatory pathways involved in obesity and
diabetes. We have developed assays and screened library compounds against a
number of obesity and diabetes targets. Both parties will participate in
chemistry and other preclinical activities for identified lead compounds.
The collaboration is structured to provide for the equal sharing of expenses
and profits on a worldwide basis. We retain exclusive marketing and sales
rights in the United States and Canada (with the exception of those obesity
targets that have been committed to Knoll). Japan Tobacco retains exclusive
marketing and sales rights in Japan and Korea, and Japan Tobacco and we will
jointly determine a sales and marketing strategy other than for those countries
in which Knoll may have rights to products that are active against specified
targets. Japan Tobacco will be required to provide funding for our research
efforts and to make benchmark payments to us based on clinical progress.
The research collaboration may be terminated by Japan Tobacco at the end of
the fourth year of the five-year research collaboration, on prior written
notice. Either party may elect to terminate its participation in the co-
promotion of products upon prior written notice to the other party, in which
case the other party may exclusively commercialize a product subject to the
payment of a royalty to the party that elects not to participate in co-
promotion. Either party may terminate the agreement at any time upon a material
breach by the other party of its obligations under the agreement.
Under the terms of a related stock purchase agreement, Japan Tobacco
purchased 600,000 shares of Series F Preferred Stock at $10.00 per share in
September 1996, for an aggregate purchase price of $6.0 million.
Taisho Pharmaceutical Co. (Immune Disorders)
Effective April 1995, we established a five-year research and development
collaboration with Taisho focused on therapeutic modulation of the human immune
function. In January 1998, the parties extended the alliance for an additional
year. The goals of the research collaboration are to identify and develop
compounds that inhibit or promote the activity of STAT6 and STAT4.
Provided the research collaboration continues for the full six-year term,
Taisho will have exclusive rights to manufacture and sell products resulting
from the collaboration for therapeutic modulation of immune function in Japan
and in specified other Asian countries. Taisho will be required to make
benchmark payments to us based on clinical progress and royalty payments based
on sales in Taisho's territory. We will have exclusive rights in the rest of
the world, without any payment obligation to Taisho, unless the research
collaboration terminates prior to the full six-year term for our default under
the agreement or bankruptcy.
Taisho has the right to terminate the collaboration with written notice
before the commencement of the sixth year. Although we are negotiating with
Taisho regarding alternative collaborative opportunities, we believe that
Taisho will exercise its contractual right to terminate its current agreement
with us in March 2000. In this event, we will have exclusive, worldwide,
royalty-free rights to all products identified in the collaboration. Either
party may terminate the agreement at any time upon a material breach by the
other party of its obligations under the agreement or upon the other party's
bankruptcy.
47
<PAGE>
Sumitomo Pharmaceuticals Co. (Hypercholesterolemia)
Effective January 1995, we established a five-year research and development
collaboration with Sumitomo to discover, develop and market compounds that act
to upregulate the gene encoding the low density lipoprotein, or LDL, receptor
and thereby lower serum LDL cholesterol. Under the collaboration agreement, we
have established assays for upregulators of the LDL receptor gene. Sumitomo and
Tularik are each to provide compound libraries, conduct screening and provide
expertise to support biology, pharmacology and chemistry for identified lead
compounds.
Sumitomo has the right to enter into a license agreement granting it
exclusive rights to develop, manufacture and sell in specified Asian countries
any compound selected for preclinical testing during the term of the
collaboration or during a specified period after expiration or termination of
the research program. Sumitomo must make benchmark payments to Tularik, and if
it obtains a license, as described above, royalty payments based on sales of
product in specified Asian countries. The collaboration agreement grants us
exclusive rights to develop, manufacture and sell licensed products in the rest
of the world, without payment obligation to Sumitomo. The license to Tularik
and the license to Sumitomo, if any, would survive termination of the research
portion of the collaboration, which we expect to terminate in January 2000 at
the expiration of the five-year term. When the research collaboration
terminates, each party will retain rights to technology invented by it during
the collaboration or contributed by it to the collaboration, subject to the
foregoing licenses. Any compound conceived during the research period and
reduced to practice within a year of termination will revert to us if not
licensed by Sumitomo within the specified period after the termination of the
research collaboration.
Under the terms of a related stock purchase agreement, Sumitomo purchased
400,000 shares of our Series E Preferred Stock at $7.50 per share in February
1995 for an aggregate purchase price of $3.0 million.
Other Agreements
Eli Lilly (Lometrexol)
Effective September 24, 1999, we executed a license agreement with Eli Lilly
under which we obtained an exclusive, worldwide, royalty-bearing license to
make, use and sell pharmaceutical products containing a compound known as
lometrexol, and purchased related inventory. We would owe Eli Lilly milestones
and royalties upon successful commercialization of lometrexol. Eli Lilly filed
an Investigational New Drug application for lometrexol, a treatment for cancer,
in August 1988, a Clinical Trial Exemption for the United Kingdom in June 1991
and subsequently conducted phase 1 trials of lometrexol in cancer patients in
the United States and Europe. Under the agreement, Eli Lilly granted us a
license under Eli Lilly's proprietary technology relating to lometrexol, and
also a sublicense under the exclusive license granted to Eli Lilly by Princeton
University relating to lometrexol. Eli Lilly has specified obligations under
the agreement to maintain the license from Princeton. Eli Lilly has a right to
match the material terms of any offer made by a third party for
commercialization of lometrexol products.
We may terminate the agreement with Eli Lilly upon written notice. Eli Lilly
may terminate our license in specified major countries if we fail to use
reasonable diligence to develop lometrexol products in these countries, and may
terminate the agreement if we fail to use appropriate diligence to develop
lometrexol products in a predetermined number of major countries. Each party
has the right to terminate the agreement if the other party becomes insolvent
or fails to cure a breach of the agreement. If Eli Lilly terminates the
agreement, Eli Lilly obtains a nonexclusive, royalty-bearing, worldwide license
to our technical improvements to lometrexol.
Cold Spring Harbor Laboratory (Representational Difference Analysis)
Amplicon had been the exclusive licensee of the rights of Cold Spring Harbor
Laboratory in Representational Difference Analysis, and we acquired these
rights held by Amplicon when we acquired
48
<PAGE>
Amplicon. In connection with our acquisition of Amplicon, we established a
research collaboration with Cold Spring Harbor Laboratory. As part of this
collaboration, Dr. Michael Wigler of Cold Spring Harbor Laboratory supervises
research using Representational Difference Analysis to search for tumor
suppressor genes and DNA sequences that are amplified in cancer. In addition,
we may elect to obtain licenses under inventions made under the research
collaboration. Either party may terminate the research collaboration for
breach. We may terminate the license agreement after October 2002. We intend to
utilize the results of this research collaboration and new discoveries from
Dr. Wigler's laboratory to develop proprietary high throughout screens for drug
discovery.
Merck & Co. (Viral Diseases)
Effective December 1993, we established a five-year collaboration with Merck
to discover and develop compounds for the prevention or treatment of specified
viruses. This research collaboration ended in March 1999. Merck has exclusive,
worldwide manufacturing and marketing rights to develop and commercialize
products resulting from the human immunodeficiency virus, or HIV, program,
subject to obligations to pay to us benchmark payments based on clinical
progress and royalties on sales of HIV products. In November 1999, Merck orally
waived an option to assume responsibility for the development of our
cytomegalovirus drug candidate.
Under the terms of a related stock purchase agreement, Merck purchased
400,000 shares of Series D Preferred Stock at $5.00 per share in January 1994
for an aggregate purchase price of $2.0 million.
Patents and Proprietary Rights
We will be able to protect our proprietary rights from unauthorized use by
third parties only to the extent that our proprietary rights are covered by
valid and enforceable patents or are effectively maintained as trade secrets.
Accordingly, patents and other proprietary rights are an essential element of
our business. As of September 30, 1999, 41 U.S. patents based on our
discoveries had been issued or allowed. In addition, as of that date, we had 47
patent applications pending in the United States and had filed several
corresponding foreign patent applications. Our policy is to file patent
applications and to protect technology, inventions and improvements to
inventions that are commercially important to the development of our business.
We seek U.S. and international patent protection for the genes we discover, as
well as therapeutic products and processes, drug screening methodologies,
transgenic animals, diagnostics and other inventions based on these genes. Our
commercial success will depend in part on obtaining this patent protection. We
also intend to seek patent protection or rely upon trade secret rights to
protect other technologies that may be used to discover and characterize genes
and that may be used to develop novel drugs. We seek protection, in part,
through confidentiality and proprietary information agreements. We are a party
to various license agreements that give us rights to use technologies in our
research and development processes.
We believe that we have developed proprietary technology for use in gene
discovery, regulatory pathway identification and assay design and have filed a
number of patent applications in these areas. In addition, an increasing
percentage of our recent patent applications have been related to potential
product candidates, or compounds, that we have discovered.
We have received letters from OSI Pharmaceuticals, Inc. indicating that OSI
believes that Tularik is utilizing patented technology relating to a
methodology for discovering transcription-based drugs and relating to the use
of orally available compounds to modulate gene transcription. OSI has offered
to license this technology to Tularik in exchange for milestones and a royalty
of .75% on net sales of products covered by the claims of these patents. We
believe that we do not infringe any valid and enforceable claims of these
patents and intend to vigorously defend any litigation commenced by OSI in
connection with its claims. We cannot predict whether any litigation will be
commenced, what claims OSI would assert or the outcome of any litigation.
49
<PAGE>
Competition
We face, and will continue to face, intense competition from organizations
such as large pharmaceutical and biotechnology companies, as well as academic
and research institutions and government agencies. Our major competitors
include fully integrated pharmaceutical companies that have extensive drug
discovery efforts and are developing novel small molecule pharmaceuticals. We
face significant competition from organizations that are pursuing the same or
similar technologies, including the discovery of targets that regulate genes,
as the technologies used by us in our drug discovery efforts and from
organizations that are pursuing pharmaceuticals that are competitive with our
potential products.
Many of these companies and institutions, either alone or together with their
collaborative partners, have substantially greater financial resources and
larger research and development staffs than we do. In addition, many of these
competitors, either alone or together with their collaborative partners, have
significantly greater experience than we do in:
. developing products;
. undertaking preclinical testing and clinical trials;
. obtaining FDA and other regulatory approvals of products; and
. manufacturing and marketing products.
Accordingly, our competitors may succeed in obtaining patent protection,
receiving FDA approval or commercializing products before us. If we commence
commercial product sales, we will be competing against companies with greater
marketing and manufacturing capabilities, areas in which we have limited or no
experience.
In addition, any product candidate that we successfully develop may compete
with existing therapies that have long histories of safe and effective use.
Competition may also arise from:
. other drug development technologies and methods of preventing or reducing
the incidence of disease;
. new small molecules; or
. other classes of therapeutic agents.
Developments by others may render our product candidates or technologies
obsolete or noncompetitive. We face and will continue to face intense
competition from other companies for collaborative arrangements with
pharmaceutical and biotechnology companies, for establishing relationships with
academic and research institutions, and for licenses to proprietary technology.
These competitors, either alone or with their collaborative partners, may
succeed in developing technologies or products that are more effective than
ours.
Our ability to compete successfully will depend, in part, on our ability to:
. develop proprietary products;
. develop and maintain products that reach the market first, are
technologically superior to and/or are of lower cost than other products
in the market;
. attract and retain scientific and product development personnel;
. obtain patent or other proprietary protection for our products and
technologies;
. obtain required regulatory approvals; and
. manufacture, market and sell any product that we develop.
Government Regulation
The manufacturing and marketing of our potential products and our 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 us 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,
50
<PAGE>
testing, manufacture, safety, efficacy, record keeping, labeling, storage,
approval, advertising, promotion, sale and distribution of biopharmaceutical
products. None of our product candidates has been approved for sale in the
United States or any foreign market. The regulatory review and approval
process, which includes preclinical testing and clinical trials of each product
candidate, is lengthy, expensive and uncertain. Securing FDA approval 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 approval 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, we must submit to, and receive approval
from, the FDA of an Investigational New Drug application. We expect to rely on
some of our collaborative partners to file Investigational New Drug
applications and generally direct the regulatory approval process for some of
our products.
Clinical testing must meet requirements for institutional review board
oversight, informed consent and good clinical practices. Clinical testing must
be conducted under FDA oversight. Before receiving FDA clearance to market a
product, we must demonstrate that the product is safe and effective on the
patient population that will be treated. If regulatory clearance of a product
is granted, this clearance will be limited to those disease states and
conditions for which the product is useful, as demonstrated through clinical
studies. Marketing or promoting a drug for an unapproved indication is
generally prohibited. Furthermore, clearance may entail ongoing requirements
for post-marketing studies. Even if this regulatory clearance is obtained, a
marketed product, its manufacturer and its manufacturing facilities are subject
to continual review and periodic inspections by the FDA. Discovery of
previously unknown problems with a product, manufacturer or facility may result
in restrictions on this product or manufacturer, including costly recalls or
withdrawal of the product from the market.
The length of time necessary to complete clinical trials varies significantly
and may be difficult to predict. Clinical results are frequently susceptible to
varying interpretations that may delay, limit or prevent regulatory approvals.
Additional factors that can cause delay or termination of our clinical trials,
or the costs of these trials to increase, include:
. slow patient enrollment due to the nature of the protocol, the proximity
of patients to clinical sites, the eligibility criteria for the study or
other factors;
. inadequately trained or insufficient personnel at the study site to
assist in overseeing and monitoring clinical trials;
. delays in approvals from a study site's review board;
. longer treatment time required to demonstrate effectiveness or determine
the appropriate product dose;
. lack of sufficient supplies of the product candidate;
. adverse medical events or side effects in treated patients; and
. lack of effectiveness of the product candidate being tested.
Any drug is likely to produce some toxicities or undesirable side effects in
animals and in humans when administered at sufficiently high doses and/or for
sufficiently long periods of time. Unacceptable toxicities or side effects may
occur at any dose level at any time in the course of studies in animals
designed to identify unacceptable effects of a drug candidate, known as
toxicological studies, or clinical trials of our potential products. The
appearance of any unacceptable toxicity or side effect could cause us or
regulatory authorities to interrupt, limit, delay or abort the development of
any of our product candidates and could ultimately prevent their clearance by
the FDA or foreign regulatory authorities for any or all targeted indications.
Any of our contract manufacturers and we also are required to comply with the
applicable FDA current good manufacturing practice regulations. Good
manufacturing practice regulations include requirements relating to quality
control and quality assurance as well as the corresponding maintenance of
records and documentation. Manufacturing facilities are subject to inspection
by the FDA. These facilities must be approved before we can use them in
commercial manufacturing of our products. Our contract manufacturers or
51
<PAGE>
we may not be able to comply with the applicable good manufacturing practice
requirements and other FDA regulatory requirements. If our contract
manufacturers or we fail to comply, our business, financial condition and
results of operations may be materially adversely affected.
Outside the United States, our 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 Community registration procedures
are available to companies wishing to market a product in more than one EC
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.
Employees
As of September 30, 1999, we had 204 full-time employees, of whom 94 hold
Ph.D. and/or M.D. degrees and 26 hold other advanced degrees. Of our total
workforce, 173 are engaged in research and development activities and 31 are
engaged in business development, finance and administration. None of our
employees is represented by a collective bargaining agreement, nor have we
experienced work stoppages. We believe that our relations with our employees
are good.
Facilities
Our facilities consist of approximately 146,000 square feet of research and
office space located at Two Corporate Drive, South San Francisco, California
that is leased to us until 2011. We have options to renew these leases for two
additional periods of five years each. We have leased approximately 14,500
square feet of research and office space located at 266 Pulaski Road,
Greenlawn, New York that is leased to us until 2005. We believe that the space
needed to accommodate our growth through the year 2003 is available.
Scientific Advisory Boards
We utilize scientists and physicians to advise us on scientific and medical
matters as part of our Scientific Advisory Board including experts in human
genetics, mouse genetics, molecular biology, biochemistry, cell biology,
chemistry, infectious diseases, immunology and structural biology. Generally,
each of our scientific and medical advisors and consultants has received our
common stock or an option to purchase our common stock.
Robert Tjian, Ph.D. is one of our founders and has been the Chairman of the
Scientific Advisory Board since its inception. Dr. Tjian is an investigator of
the Howard Hughes Medical Institute at the University of California, Berkeley.
Dr. Tjian is one of the world leaders in the field of transcription factor
biochemistry and was the first to clone and characterize a promoter-selective
human transcription factor (Sp1 in 1986). He has been a member of the National
Academy of Sciences since 1991. Dr. Tjian received the California Scientist of
the Year Award in 1994.
The following is a list of our other Scientific Advisory Board members:
James P. Allison, Ph.D. is Professor of Immunology and Co-Chairman of the
Department of Molecular & Cell Biology and an investigator of the Howard Hughes
Medical Institute at the University of California, Berkeley. Dr. Allison is a
leader in the field of cellular immunology. Dr. Allison was elected to the
National Academy of Sciences in 1997.
Paul A. Bartlett, Ph.D. is Professor of the Chemistry Department at the
University of California, Berkeley. Dr. Bartlett is an expert in the field of
bioorganic molecules, medicinal chemistry and combinatorial chemistry. He is
one of the founders of Pharmacopoeia, Inc.
52
<PAGE>
Michael S. Brown, M.D. is Professor of Medicine and Genetics and Joseph L.
Goldstein, M.D. is Professor and Chairman of the Department of Molecular
Genetics at University of Texas Southwestern Medical Center at Dallas. Working
as a team, Drs. Brown and Goldstein pioneered a multidisciplinary approach to
the study of hypercholesterolemia by using a combination of biochemistry,
somatic cell genetics, molecular biology and, most recently, gene regulation
and cell biology. In 1985, Drs. Brown and Goldstein were awarded the Nobel
Prize in Medicine for their work in the regulation of cholesterol metabolism,
and in 1988 they received the National Medal of Science. They were elected to
the National Academy of Sciences in 1980.
E.J. Corey, Ph.D. is Sheldon Emery Professor of Organic Chemistry in the
Chemistry Department at Harvard University. Dr. Corey is a leader in organic
synthetic chemistry, including applications for manufacturing of
pharmaceuticals and applying computers to organic chemical problems. In 1988,
Dr. Corey received the National Medal of Science and in 1990, he was awarded
the Nobel Prize in Chemistry for his development of the theory and methodology
of organic synthesis.
Donald E. Ganem, M.D. is Professor of Microbiology and Medicine at the
University of California, San Francisco. Dr. Ganem is a leader in the area of
human viruses and microbial infectious agents.
Richard M. Losick, Ph.D. is Professor and Chairman of the Department of
Molecular & Cellular Biology at Harvard University. Dr. Losick is a leader in
the field of microbial development and gene regulation. Dr. Losick was elected
to the National Academy of Sciences in 1992 and to the American Academy of Arts
and Sciences in 1996.
Brian W. Matthews, Ph.D., D.Sc. is Professor of Physics and Molecular Biology
and an investigator of the Howard Hughes Medical Institute at the University of
Oregon, Eugene. He is one of the world's leaders in structural biology and
biophysics, with a special expertise in X-ray crystallography and is a pioneer
in the study of protein folding, protein:protein interactions and protein:DNA
interactions. Dr. Matthews was elected to the National Academy of Sciences in
1986.
Kim Nasmyth, Ph.D. is a Professor and Director of the Research Institute of
Molecular Pathology in Vienna. Dr. Nasmyth is an expert in the area of yeast
genetics, cell cycle regulation and cancer biology.
Bruce W. Stillman, Ph.D. is Director of the Cold Spring Harbor Laboratory on
Long Island, New York. Dr. Stillman is an expert in the area of DNA
replication, cell cycle control and tumor biology. He is a fellow of the Royal
Society.
James Wells, Ph.D. is co-founder and chief scientific officer of Sunesis,
Inc. Dr. Wells is a leader in the field of biomolecular design, protein
structure and function as well as molecular biology and phage display
technology. Dr. Wells was elected to the National Academy of Sciences in 1999.
Keith R. Yamamoto, Ph.D. is Chairman of the Department of Cellular and
Molecular Pharmacology at the University of California, San Francisco. Dr.
Yamamoto is a leader in the field of steroid receptors, a special class of
inducible transcriptional regulators. Dr. Yamamoto was elected to the National
Academy of Sciences in 1990.
Oncology Scientific Advisory Board
In addition to our Scientific Advisory Board, we utilize a number of
scientists and physicians to advise us on scientific and medical matters as
part of our Oncology Scientific Advisory Board.
David Botstein, Ph.D. is a Professor at Stanford University and is the
chairman of the Stanford Department of Genetics. Dr. Botstein is a member of
the National Academy of Sciences.
Larry Norton, M.D. heads the Division of Solid Tumor Oncology at Memorial
Sloan Kettering Cancer Center. Dr. Norton is a leading clinical oncologist and
an expert in the treatment of breast cancer.
53
<PAGE>
Bruce W. Stillman, Ph.D.--See above.
Michael Wigler, Ph.D. is an Investigator at Cold Spring Harbor Laboratory.
Dr. Wigler focuses his research on cancer genes, such as the ras oncogene and
tumor suppressor genes. Dr. Wigler is a member of the National Academy of
Sciences.
Clinical Oncology Scientific Advisory Board
A global oncology advisory panel guides our clinical oncology program.
Members include:
Dr. Hilary Calvert, University of Newcastle, UK
Dr. Ross Donehower, Johns Hopkins Hospital, Baltimore, USA
Dr. Axel Hanauske, Munich, Germany
Dr. David Newell, University of Newcastle, UK
Dr. Larry Norton, Memorial Sloan Kettering Cancer Center, New York, USA
Dr. Eric Rowinsky, Institute of Drug Development, San Antonio, Texas, USA
54
<PAGE>
MANAGEMENT
Executive Officers and Directors
The following table sets forth information regarding our executive officers
and directors as of September 30, 1999.
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
David V. Goeddel, Ph.D............. 48 Chief Executive Officer and Director
Andrew J. Perlman, M.D., Ph.D...... 51 Executive Vice President
Yasunori Kaneko, M.D............... 46 Vice President, Business Development
Corinne H. Lyle.................... 39 Vice President, Chief Financial Officer
William J. Rieflin................. 39 Vice President, General Counsel and Secretary
Terry J. Rosen, Ph.D............... 40 Vice President, Research Operations
Pieter B.M.W.M. Timmermans, Ph.D... 49 Vice President, Pharmacology and Preclinical Development
A. Grant Heidrich, III............. 47 Director
Mark J. Levin...................... 49 Director
Paul A. Marks, M.D................. 73 Director
Edward R. McCracken................ 55 Director
Steven L. McKnight, Ph.D........... 50 Director
Peter J. Sjostrand, M.D............ 53 Director
</TABLE>
David V. Goeddel, Ph.D. co-founded Tularik in November 1991 and has served as
a member of our board of directors since inception and as our Chief Executive
Officer since April 1996. From April 1996 to December 1997, Dr. Goeddel served
as our President and from inception to March 1996, Dr. Goeddel served as our
Vice President, Research. Dr. Goeddel was the first scientist hired by
Genentech, Inc. and from 1978 to 1993 served in various positions, including
Fellow and Staff Scientist and Director of Molecular Biology. Dr. Goeddel's
pioneering work in the field of gene cloning and expression of human proteins
has been the basis for five significant marketed therapeutics developed by
Genentech, including human insulin, human growth hormone, interferon-alpha,
interferon-gamma and tissue plasminogen activator. Based on his contributions
in gene cloning and expression of human proteins, Dr. Goeddel was elected to
the National Academy of Sciences and the American Academy of Arts and Sciences.
Since 1998, Dr. Goeddel has served on the board of directors of Pharma Vision
2000 AG, an investor in Tularik. Dr. Goeddel holds a Ph.D. in Biochemistry from
the University of Colorado and subsequently performed postdoctoral research at
Stanford Research Institute.
Andrew J. Perlman, M.D., Ph.D. has served as our Executive Vice President
since September 1999. From November 1997 to September 1999, Dr. Perlman served
as our Vice President, Medical Research and Corporate Development. From January
1993 to November 1997, Dr. Perlman served as our Vice President of Medical
Research. Prior to joining Tularik, Dr. Perlman held senior clinical research
positions at Genentech, Inc. Previously, Dr. Perlman served as a faculty member
in the Department of Medicine at Stanford University. Dr. Perlman is a director
of SangStat Medical Corporation. Dr. Perlman holds an M.D. degree and Ph.D. in
Physiology from New York University.
Yasunori Kaneko, M.D. has served as our Vice President, Business Development
since June 1992. Dr. Kaneko served as our Chief Financial Officer from June
1992 to October 1996. Prior to joining Tularik, Dr. Kaneko held senior
positions at Isis Pharmaceuticals, Inc., Paribas Capital Markets Limited
(Tokyo, Japan) and Genentech, Inc. Since 1998, Dr. Kaneko has served on the
board of directors of Leukosite Inc. Dr. Kaneko holds an M.D. from Keio
University (Tokyo, Japan) and an M.B.A. from Stanford University.
Corinne H. Lyle has served as our Vice President, Chief Financial Officer
since October 1998. From April 1996 to August 1998, Ms. Lyle was an investment
banker at Warburg Dillon Read LLC. Previously, Ms. Lyle was with PaineWebber
Incorporated and Kidder Peabody & Co. Incorporated as an investment banker.
Ms. Lyle holds an M.B.A. from Harvard Business School.
55
<PAGE>
William J. Rieflin has served as our Vice President, General Counsel and
Secretary since August 1996. From May 1992 to July 1996, Mr. Rieflin worked at
AMSCO International, Inc., serving in various positions, including Vice
President-Human Resources, General Counsel and Secretary. Previously, Mr.
Rieflin was an associate at the law firm of Sidley & Austin. Mr. Rieflin holds
a J.D. from Stanford Law School and an M.B.A. from the University of Chicago
Graduate School of Business.
Terry J. Rosen, Ph.D. has served as our Vice President, Research Operations
since October 1996. From June 1996 to October 1996, Dr. Rosen served as our
Vice President, Medicinal Chemistry and from October 1993 to June 1996 he
served as our Director, Medicinal Chemistry. Prior to joining Tularik, Dr.
Rosen worked at Pfizer Inc and Abbott Laboratories. Dr. Rosen holds a Ph.D. in
Organic Chemistry from the University of California, Berkeley.
Pieter B.M.W.M. Timmermans, Ph.D. has served as our Vice President,
Pharmacology and Preclinical Development since January 1997. From June 1984 to
December 1996, Dr. Timmermans worked at the DuPont Merck Pharmaceutical
Company, and its predecessor, E.I. DuPont de Nemours & Company, serving in
various positions including Vice President of Drug Discovery and Senior Vice
President of Research. While at DuPont, Dr. Timmermans led the team that
discovered the nonpeptide angiotensin II receptor antagonist, Cozaar, which is
currently marketed by Merck. Dr. Timmermans holds a Ph.D. in Pharmacology from
the University of Amsterdam.
A. Grant Heidrich, III has served as a member of our board of directors since
November 1991. Mr. Heidrich joined Mayfield Fund in 1982 and is currently a
general partner of Mayfield Fund. Mr. Heidrich serves on the board of directors
of Millennium Pharmaceuticals, Inc. and several private companies. Mr. Heidrich
holds an M.B.A. from Columbia University Graduate School of Business.
Mark J. Levin has served as a member of our board of directors since November
1991. From November 1991 to March 1992, Mr. Levin served as our Chief Executive
Officer. Since November 1994, he has served as the Chief Executive Officer of
Millennium Pharmaceuticals, Inc. and has served as a member of its board of
directors since its inception in 1993 and as its Chairman of the Board since
March 1996. Previously, Mr. Levin was a partner at Mayfield Fund. Mr. Levin
serves on the board of directors of CytoTherapeutics Inc. Mr. Levin holds an
M.S. from Washington University in St. Louis.
Paul A. Marks, M.D. has served as a member of our board of directors since
December 1993. Since July 1980, Dr. Marks has served as the President and Chief
Executive Officer of Memorial Sloan-Kettering Cancer Center. Previously, Dr.
Marks was the Vice President for Health Sciences and Director of the Cancer
Center at Columbia University Medical Center. Dr. Marks is a member of the
National Academy of Sciences and the Institute of Medicine and is a Fellow of
the American Academy of Arts and Sciences. Dr. Marks serves on the board of
directors of several Dreyfus Mutual Funds. Dr. Marks holds an M.D. from the
College of Physicians and Surgeons, Columbia University.
Edward R. McCracken has served as a member of our board of directors since
August 1993. From 1984 to 1998, Mr. McCracken served as Chief Executive Officer
of Silicon Graphics, Inc. Before joining Silicon Graphics, Mr. McCracken spent
16 years with Hewlett-Packard Company, where he worked in a variety of senior
management positions. Mr. McCracken serves as Chairman of the Board of The
PRASAD Project, a charitable foundation, and serves on the board of directors
of CustomerCast Inc., National Semiconductor Corporation and Minnesota Mining
and Manufacturing Company. Mr. McCracken holds an M.B.A. from Stanford
University.
Steven L. McKnight, Ph.D. co-founded Tularik in November 1991 and has served
as a member of our board of directors since inception. From September 1992 to
September 1995, Dr. McKnight served as our Director, Biology. Since January
1997, Dr. McKnight has been a consultant to Tularik. Dr. McKnight has
56
<PAGE>
served as Professor and Chairman of the Department of Biochemistry at the
University of Texas Southwestern Medical Center since 1995. Previously, Dr.
McKnight was an investigator at the Howard Hughes Medical Institute at the
Carnegie Institution of Washington. Dr. McKnight is recognized as one of the
world leaders in gene regulation based in part on his discovery of leucine
zipper proteins. Dr. McKnight is a member of the National Academy of Sciences
and the American Academy of Arts and Sciences. Dr. McKnight holds a Ph.D. in
Biology from the University of Virginia.
Peter J. Sjostrand, M.D. has served as a member of our board of directors
since October 1996. Dr. Sjostrand is a partner of the BZ Group of Switzerland.
From 1975 to 1993, Dr. Sjostrand held various senior management positions at
Astra AB, including Executive Vice President, Chief Financial Officer and
Regional Director of the Americas. Dr. Sjostrand serves on the board of
directors of Pharma Vision 2000 AG, an investor in Tularik, and AGA AB. Dr.
Sjostrand holds an M.D. from Karolinska Institute in Stockholm, Sweden.
Our executive officers are appointed by our board of directors and serve
until their successors are elected or appointed. There are no family
relationships among any of our directors or executive officers. No director has
a contractual right to serve as a member of our board of directors.
Board Committees
Audit Committee. Our audit committee, consisting of Mr. Heidrich and Mr.
Levin, reviews our internal accounting procedures and the services provided by
our independent auditors.
Compensation Committee. Our compensation committee, consisting of Mr.
Heidrich and Mr. McCracken, reviews and recommends to our board of directors
the compensation and benefits of all our officers and establishes and reviews
general policies relating to compensation and benefits of our employees.
Compensation Committee Interlocks and Insider Participation
During 1998, our compensation committee consisted of Robert A. Swanson, Mr.
Heidrich and Mr. McCracken. None of the members of our compensation committee
has at any time been an officer or employee of Tularik. No interlocking
relationship exists between our board of directors or compensation committee
and the board of directors or compensation committee of any other company, nor
has any interlocking relationship existed in the past.
Compensation of Directors
We do not provide cash compensation to members of our board of directors for
serving on our board of directors or for attendance at committee meetings.
Members of our board of directors are reimbursed for some expenses in
connection with attendance at board and committee meetings. In April 1998 and
in April 1999, each of our non-employee directors received an option to
purchase 8,000 shares of common stock at an exercise price of $3.00 per share
under our 1997 Non-Employee Directors' Stock Option Plan. In consideration for
consulting services, we granted Dr. McKnight additional options to purchase an
aggregate of 50,000 shares of common stock, 25,000 shares in each of June 1998
and in June 1999, at an exercise price of $3.00 per share. The $3.00 per share
exercise price for these options was equal to the fair market value of the
common stock on
57
<PAGE>
the date of grant as determined by our compensation committee. These options
vest in a series of equal annual installments beginning on the grant date of
the option and extending through the next four years of service. For more
information, see "Benefit Plans--1997 Non-Employee Directors' Stock Option
Plan."
In consideration for consulting services, in addition to the options
described above, we pay Dr. McKnight $85,000 per year. Dr. McKnight spends
approximately 20% of his time providing consulting services to Tularik.
Between January 1995 and February 1998, we forgave $165,968 of the principal
and $24,780 of the interest due on a loan of $240,000 we provided to Dr.
McKnight in June 1992 to cover housing differential costs in connection with
his move to California from another state. In addition, we have paid $153,082
to Dr. McKnight to offset taxable income to him arising as a consequence of our
loan forgiveness. No amounts are due by Dr. McKnight on this loan.
Executive Compensation
The following table sets forth information concerning the compensation that
we paid during 1998 to our Chief Executive Officer and each of the four other
most highly compensated executive officers that earned more than $100,000
during 1998. All option grants were made under our 1997 Equity Incentive Plan.
Summary Compensation Table
<TABLE>
<CAPTION>
Annual Long-Term
Compensation Compensation
------------ ------------------
Securities All Other
Name and Principal Position Salary($) Underlying Options Compensation($)(2)
- --------------------------- ------------ ------------------ ------------------
<S> <C> <C> <C>
David V. Goeddel, Ph.D...... $324,077 150,000 $879
Chief Executive Officer and
Director
John P. McLaughlin(1)....... $275,000 500,000 $663
President
Yasunori Kaneko, M.D. ...... $246,671 50,000 $2,924
Vice President, Business
Development
Andrew J. Perlman, M.D.,
Ph.D....................... $234,231 50,000 $2,988
Vice President, Medical
Research and Corporate
Development
Pieter B.M.W.M. Timmermans,
Ph.D....................... $229,538 50,000 $876
Vice President,
Pharmacology and
Preclinical Development
</TABLE>
- --------
(1) Mr. McLaughlin resigned as President of Tularik effective as of September
30, 1999.
(2) Includes term-life insurance premiums paid by us on behalf of these named
executive officers, wellness benefits and taxable travel reimbursement.
58
<PAGE>
The following table sets forth summary information regarding the option
grants made to our Chief Executive Officer and each of our four other most
highly paid executive officers during 1998. Options granted to purchase shares
of our common stock under our 1997 Equity Incentive Plan are generally
immediately exercisable by the optionee but are subject to a right of
repurchase according to the vesting schedule of each specific grant. In the
event that a purchaser ceases to provide service to Tularik and its affiliates,
we have the right to repurchase any of that person's unvested shares of common
stock at the original option exercise price. The exercise price per share is
equal to the fair market value of our common stock on the date of grant as
determined by our board of directors. The percentage of total options was
calculated based on options to purchase an aggregate of 1,849,700 shares of
common stock granted to employees under our 1997 Equity Incentive Plan in 1998.
The potential realizable value was calculated based on the ten-year term of the
options and assumed rates of stock appreciation of 5% and 10%, compounded
annually from the date the options were granted to their expiration date based
on the fair market value of the common stock on the date of grant. Twenty-five
percent of the initial option vests on the one year anniversary of employment
and the remainder vest in a series of equal monthly installments beginning on
the one year anniversary of employment and continuing over the next three years
of service. Options granted after the one year anniversary of employment vest
in a series of equal monthly installments beginning from the vesting start date
and continuing over the next four years of service. See "Benefit Plans" for a
description of the material terms of these options.
Option Grants in 1998
<TABLE>
<CAPTION>
Potential
Realizable Value
at Assumed Annual
Rates of
Number of Percent of Stock Price
Securities Total Options Appreciation for
Underlying Granted to Exercise Option Term
Options Employees in Price Expiration -----------------
Name Granted Fiscal Year (per share) Date 5% 10%
- ---- ---------- ------------- ----------- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
David V. Goeddel,
Ph.D................... 150,000 8.1% $3.00 6/17/08 $283,003 $717,185
John P. McLaughlin...... 500,000 27.0% $3.00 1/21/08(1) $149,219 $305,507
Yasunori Kaneko, M.D.... 50,000 2.7% $3.00 6/17/08 $ 94,334 $239,062
Andrew J. Perlman, M.D.,
Ph.D................... 50,000 2.7% $3.00 6/17/08 $ 94,334 $239,062
Pieter B.M.W.M.
Timmermans, Ph.D....... 50,000 2.7% $3.00 6/17/08 $ 94,334 $239,062
</TABLE>
- --------
(1) In connection with Mr. McLaughlin's resignation, the expiration date for
250,001 of these options is December 31, 1999. The potential realizable
value calculations are based upon this expiration date. 249,999 of these
options were not vested as of September 30, 1999 and may not be exercised.
The following table sets forth summary information regarding the number and
value of options held as of December 31, 1998 for our Chief Executive Officer
and each of our four most highly compensated executive officers. Our Chief
Executive Officer and each of our four most highly compensated executive
officers did not acquire any shares upon exercise of options in 1998. Amounts
shown in the value of unexercised in-the-money options at December 31, 1998
column are based on the assumed initial public offering price of $12.00,
without taking into account any taxes that may be payable in connection with
the transaction, multiplied by the number of shares underlying the option, less
the aggregate exercise price payable for these shares.
1998 Option Values
<TABLE>
<CAPTION>
Number of Securities
Underlying Unexercised Value of Unexercised
Options at In-the-Money Options at
December 31, 1998 December 31, 1998
------------------------- -------------------------
Name Vested Unvested Exercisable Unexercisable
- ---- ----------- ----------- ----------- -------------
<S> <C> <C> <C> <C>
David V. Goeddel,
Ph.D. ................. 493,750 356,250 $8,937,500 --
John P. McLaughlin...... 125,001 374,999 $4,500,000 --
Andrew J. Perlman, M.D.,
Ph.D. ................. 129,792 105,208 $2,433,750 --
Yasunori Kaneko, M.D. .. 118,750 131,250 $2,587,500 --
Pieter B.M.W.M.
Timmermans, Ph.D. ..... 22,223 61,110 $ 749,997 --
</TABLE>
59
<PAGE>
Benefit Plans
Since 1991, we have established four plans under which employees, officers,
non-employee directors and consultants may purchase or receive common stock
through incentive stock options, nonstatutory stock options, restricted stock
and stock bonuses. These plans are the 1991 Stock Plan, the 1997 Equity
Incentive Plan, 1997 Non-Employee Directors' Stock Option Plan and the 1999
Employee Stock Purchase Plan. In addition, we have established two defined
contribution plans that are intended to be qualified under Section 401(a) of
the Internal Revenue Code, as amended. They are the Tularik Salary Savings Plan
and the Tularik Matching Plan.
Long Term Incentive Plans
1991 Stock Plan. In November 1991, we adopted our 1991 Stock Plan. Our board
subsequently amended the 1991 plan in 1991, 1992, 1993, 1994, 1995 and 1996,
and the stockholders approved these amendments. The 1991 plan will terminate in
November 2001 unless it is terminated earlier by our board.
The 1991 plan provides for the grant of stock awards, including:
. incentive stock options, as defined by Section 422 of the Code that may
be granted solely to employees (including officers); and
. nonstatutory stock options (stock options other than incentive stock
options) and restricted stock purchase awards that may be granted to
employees (including officers) and consultants.
Stock Options. Stock options are granted subject to stock option agreements.
The exercise price for an incentive stock option cannot be less than 100% of
the fair market value of the common stock on the date of grant. The exercise
price for a nonstatutory stock option cannot be less than 85% of the fair
market value of the common stock on the date of grant. Options granted under
the 1991 plan vest at the rate specified in the option agreement.
In general, the term of stock options granted under the 1991 plan may not
exceed ten years. Unless the terms of an optionee's stock option agreement
provide for earlier termination, in the event an optionee's service
relationship with us, or any affiliate of ours, ceases due to disability or
death, the optionee (or his beneficiary) may exercise any vested options up to
12 months after the date this service relationship ends. If an optionee's
relationship with us, or any affiliate of ours, ceases for any reason other
than disability or death, the optionee may (unless the terms of the stock
option agreement provide for earlier termination) exercise any vested options
up to ninety days from cessation of service.
Acceptable consideration for the purchase of common stock issued under the
1991 plan is determined by our board of directors and may include cash, common
stock previously owned by the optionee, a deferred payment arrangement,
surrender of a portion of the option covering common stock having a fair market
value equal to the exercise price of all of the option, directions to a broker
to sell the common stock and deliver the exercise price from the sale proceeds,
an irrevocable subscription agreement obligating the optionee to pay for the
common stock within twelve months, and any other legal consideration approved
by our board.
Generally, an optionee may not transfer a stock option other than by will or
the laws of descent or distribution. However, an optionee may designate a
beneficiary who may exercise the option following the optionee's death.
Tax Limitations on Stock Option Grants. Under current tax laws, incentive
stock options may be granted only to our employees. The aggregate fair market
value, determined at the time of grant, of shares of our common stock with
respect to incentive stock options that are exercisable for the first time by
an optionee during any calendar year under all of our stock plans may not
exceed $100,000. No incentive stock option (and prior to our stock being
publicly traded, no nonstatutory stock option) may be granted to any person
who, at the
60
<PAGE>
time of the grant, owns or is deemed to own stock possessing more than 10% of
the total combined voting power of Tularik or any affiliate unless the
following conditions are satisfied:
. the option exercise price must be at least 110% of the fair market value
of the stock subject to the option on the date of grant; and
. the term of any incentive stock option award must not exceed five years
from the date of grant.
Restricted Stock Awards. The purchase price for each restricted stock award
granted must be at least 50% of the fair market value of the stock on the date
of the award or at the time the purchase is consummated. The restricted stock
award may be exercised for a period not to exceed 30 days from the date of the
grant of the right. The restricted stock awards may be subject to a right of
repurchase given to Tularik under the terms of the restricted stock award
grant.
Changes in Control. Upon specified changes in control of Tularik as provided
under the 1991 plan, all outstanding options under the 1991 plan either will be
assumed or substituted for by any surviving entity or its parent or subsidiary
corporation, if any. For stock options granted prior to January 4, 1992, if the
surviving entity or its parent or subsidiary corporation, if any, determines
not to assume or substitute the options, the board of directors shall provide
for the options to be fully exercisable for a period of 15 days from the date
of notice. If the board of directors makes the options fully exercisable for
this 15-day period, the options will terminate at the end of this period.
Authorized Shares. An aggregate of 11,576,667 shares of common stock were
authorized for issuance under the 1991 plan. As of September 30, 1999, options
to purchase a total of 1,961,729 shares of our common stock were held by all
participants under the 1991 plan. As of September 30, 1999, a total of
2,100,000 shares of our common stock were purchased under restricted stock
awards. No shares of our common stock remained available for grant. Shares
subject to stock options that have expired or otherwise terminated without
having been exercised in full again become available for the grant of awards
under the 1991 plan. Shares issued under the 1991 plan may be previously
unissued shares or reacquired shares of common stock.
Plan Administration. Our board of directors administers the 1991 plan. Our
board of directors may delegate authority to administer the 1991 plan to a
committee of our board of directors. Subject to the terms of the plan, our
board of directors or its authorized committee determines recipients, the
numbers and types of stock awards to be granted, and the terms and conditions
of the stock awards including the period of their exercisability and vesting.
Subject to the plan limitations, our board of directors or its authorized
committee also determines the exercise price of options granted and the right
to purchase restricted stock.
Our board of directors or its designated committee may, in its sole
discretion, include additional provisions in any option or award granted or
made under the 1991 plan that are not inconsistent with the 1991 plan or
applicable law. Our board of directors or its designated committee may also, in
its sole discretion, accelerate or extend the date or dates on which all or any
particular option or options granted under the 1991 plan may be exercised. In
the event of a decline in the value of our common stock, our board of directors
or its designated committee has the authority to offer optionees the
opportunity to replace outstanding higher priced options with new lower priced
options.
1997 Equity Incentive Plan. In March 1997, we adopted our 1997 Equity
Incentive Plan. The 1997 plan will terminate in March 2007 unless our board of
directors terminates it sooner.
The 1997 plan provides for the grant of stock awards, including:
. incentive stock options, as defined in Section 422 of the Code, that may
be granted solely to employees (including officers); and
. nonstatutory stock options, restricted stock purchase awards and stock
bonuses that may be granted to employees (including officers), non-
employee directors and consultants.
61
<PAGE>
Stock Options. Stock options are granted subject to stock option agreements.
The exercise price for an incentive stock option cannot be less than 100% of
the fair market value of the common stock on the date of grant. The exercise
price for a nonstatutory stock option cannot be less than 85% of the fair
market value of the common stock on the date of grant. Options granted under
the 1997 plan vest at the rate specified in the option agreement.
In general, the term of stock options granted under the 1997 plan may not
exceed ten years. Unless the terms of an optionee's stock option agreement
provide for earlier termination, in the event an optionee's service
relationship with us, or any affiliate of ours, ceases due to disability or
death, the optionee (or his beneficiary) may exercise any vested options up to
twelve months (eighteen months in the event of death) after the date this
service relationship ends. If an optionee's relationship with us, or any
affiliate of ours, ceases for any reason other than disability or death, the
optionee may (unless the terms of the stock option agreement provide for
earlier termination) exercise any vested options up to 90 days from cessation
of service.
Acceptable consideration for the purchase of common stock issued under the
equity 1997 plan is determined by our board of directors and may include cash,
common stock previously owned by the optionee, a deferred payment arrangement
and other legal consideration approved by our board of directors.
Generally, an optionee may not transfer a stock option other than by will or
the laws of descent or distribution unless the optionee holds a nonstatutory
stock option that provides otherwise. However, an optionee may designate a
beneficiary who may exercise the option following the optionee's death.
Tax Limitations on Stock Option Grants. Under current tax laws, incentive
stock options may be granted only to our employees. The aggregate fair market
value, determined at the time of grant, of shares of our common stock with
respect to incentive stock options that are exercisable for the first time by
an optionee during any calendar year under all of our stock plans may not
exceed $100,000. No incentive stock option (and prior to our stock being
publicly traded, no nonstatutory stock option) may be granted to any person
who, at the time of the grant, owns or is deemed to own stock possessing more
than 10% of the total combined voting power of Tularik or any affiliate unless
the following conditions are satisfied:
. the option exercise price must be at least 110% of the fair market value
of the stock subject to the option on the date of grant; and
. the term of any incentive stock option award must not exceed five years
from the date of grant.
Section 162(m). When we become subject to Section 162(m) of the Code (which
generally denies a corporate tax deduction to publicly held corporations for
some compensation paid to specified employees in a taxable year to the extent
that the compensation exceeds $1,000,000 and is not paid based on performance),
no person may be granted options under the 1997 plan covering more than
1,000,000 shares of common stock in any calendar year. In the event that our
board of directors exercises its authority to reprice outstanding options or to
offer optionees the opportunity to replace outstanding options with new options
for the same or a different number of shares, then both the original and new
options will count toward the Section 162(m) limitation.
Restricted Stock and Stock Bonus Awards. Prior to our stock being publicly
traded, the purchase price for each restricted stock award granted must be at
least 85% of the fair market value of the stock on the date of the award or at
the time the purchase is consummated. For restricted stock awards made on or
after the date that our stock is publicly traded, the purchase price for these
awards must be at least 50% of the fair market value of the stock on the date
of the award or at the time the purchase is consummated. Rights to acquire
shares under a stock bonus or restricted stock bonus agreement may not be
transferred other than by will or by the laws of descent and distribution and
are exercisable during the life of the optionee only by the optionee. Some
restricted stock awards made following the completion of this offering may be
otherwise transferable if the stock bonus agreement so provides. Restricted
stock purchase awards granted under the 1997 plan may include a repurchase
option in favor of Tularik that varies according to a service vesting schedule
determined by our board of directors. Stock bonuses may be awarded in
consideration for past services without a purchase payment.
62
<PAGE>
Changes in Control. Under specified changes in control, all outstanding
options under the 1997 plan either will be assumed, continued or substituted
for by any surviving entity. If the surviving entity does not assume, continue
or substitute for these awards, the vesting provisions of these stock awards
will be accelerated and these stock awards will be terminated upon the change
in control if not previously exercised.
Authorized Shares. An aggregate of 4,618,038 shares of common stock currently
are authorized for issuance under the 1997 plan. As of September 30, 1999,
options to purchase a total of 3,824,274 shares of our common stock were held
by all participants under the 1997 plan. A total of 304,112 shares of our
common stock remain available for grant. Shares subject to stock options that
have expired or otherwise terminated without having been exercised in full
again become available for the grant of awards under the 1997 plan. The share
reserve automatically will increase on December 31 every year through 2002 by a
number equal to 3.5% of the issued and outstanding shares of our common stock.
Shares issued under the 1997 plan may be previously unissued shares or
reacquired shares bought on the market or otherwise. No more than 2,000,000
shares of our common stock may be issued on the exercise of incentive stock
options during the term of the 1997 plan.
Plan Administration. Our board of directors administers the 1997 plan. Our
board of directors may delegate authority to administer the 1997 plan to a
committee. Subject to the terms of the plan, our board of directors or its
authorized committee determines recipients, the numbers and types of stock
awards to be granted, and the terms and conditions of the stock awards
including the period of their exercisability and vesting. Subject to the plan
limitations, our board or its authorized committee also determines the exercise
price of options granted and the right to purchase restricted stock.
Our board of directors or its designated committee may, in its sole
discretion, include additional provisions in any option or award granted or
made under the 1997 plan that are not inconsistent with the 1997 plan or
applicable law. Our board of directors or its designated committee may also, in
its sole discretion, accelerate or extend the date or dates on which all or any
particular option or options granted under the 1997 plan may be exercised. In
the event of a decline in the value of our common stock, our board of directors
or its designated committee has the authority to offer optionees the
opportunity to replace outstanding higher priced options with new lower priced
options.
1997 Non-Employee Directors' Stock Option Plan. In January 1997, the
compensation committee of our board of directors adopted our 1997 Non-Employee
Directors' Stock Option Plan to provide for the automatic grant of options to
purchase shares of common stock to non-employee directors of Tularik. Our board
of directors administers the directors' plan, unless it delegates
administration to a committee. The maximum number of shares of common stock
that may be issued following exercise of options granted under the directors'
plan is 300,000.
Initial Grants. Under the terms of the directors' plan, each person serving
as a director of Tularik who is not an employee of Tularik and not already a
holder of one or more options to purchase stock of Tularik, is automatically
granted an option to purchase 25,000 shares of common stock effective on the
later of the approval of the directors' plan by the stockholders or the date
the director first becomes a member of our board.
Annual Grants. In addition, on the date of Tularik's annual meeting of
stockholders, each non-employee director who was a director on the last day of
the prior calendar year will automatically be granted an option to purchase
8,000 shares of common stock.
Vesting and Exercise Terms. Options under the directors' plan vest within
four years from the date of grant. The exercise price of options granted under
the directors' plan must equal the fair market value of the common stock on the
date of grant. No option granted under the directors' plan may be exercised
after the expiration of ten years from the date it was granted. Generally,
options granted under the directors' plan may only be transferable by will, the
laws of descent and distribution or for specified estate planning purposes. The
directors' plan will terminate at the discretion of our board of directors.
63
<PAGE>
Change In Control. Under specified changes in control, all outstanding
options under the directors' plan either will be assumed or substituted for by
any surviving entity. If the surviving entity does not assume or substitute for
these awards, the vesting provisions of the options will be accelerated and the
options will be terminated upon the change in control if not previously
exercised.
1999 Employee Stock Purchase Plan. In November 1999, we adopted our 1999
Employee Stock Purchase Plan, authorizing the issuance of common stock through
purchase rights granted to our employees or to employees of our affiliates, if
any. The purchase plan is intended to qualify as an employee stock purchase
plan within the meaning of Section 423 of the Code. As of the date hereof, no
shares of common stock had been issued or purchased under the purchase plan.
The terms of the purchase plan are set forth in the purchase plan document and
each offering under the purchase plan.
The purchase plan provides a means by which employees may purchase our common
stock through payroll deductions. The purchase plan is implemented by offerings
of rights to eligible employees. Generally, all employees of Tularik or one of
its affiliates, including executive officers, who are not part-time or seasonal
employees whose customary employment is less than 20 hours per week or whose
customary employment is less than 5 months per calendar year, may participate
in the purchase plan and may authorize payroll deductions of up to 15% of their
earnings for the purchase of common stock under the purchase plan. Under the
plan, we may specify offerings with a duration of not more than 27 months, and
may specify shorter purchase periods within each offering. The first offering
will begin on the effective date of this offering and be approximately 25 1/2
months in duration. Subsequent offering periods will begin on each February 1st
and continue for a duration of 24 months. Purchases will occur each February
1st and August 1st.
The purchase plan provides that employees may generally be required to
complete at least 90 days and not more than 2 years of employment with Tularik
or one of its affiliates in order to participate in the plan. Initially,
eligible employees may generally participate in the purchase plan only after
completing 90 days of employment with Tularik or one of its affiliates.
However, otherwise eligible employees who have not completed 90 days of
employment but are employed with Tularik or one of its affiliate as of the
effective date of the initial public offering shall be eligible to participate
on the effective date of the initial public offering provided they remain in
employment through the first purchase date under the purchase plan.
Unless otherwise determined by our board of directors, common stock is
purchased for accounts of employees participating in the purchase plan at a
price per share equal to the lower of:
. 85% of the fair market value of a share of our common stock on the date
of commencement of participation in the offering; or
. 85% of the fair market value of a share of our common stock on the date
of purchase.
On the first day of an offering period, we will grant to each eligible
employee who has elected to participate in the purchase plan an option to
purchase shares of common stock as follows: the employee may authorize an
amount (a whole percentage from 1% to 15% of the employee's regular pay) to be
deducted by Tularik from his or her pay during the offering period. On the last
day of the offering period, the employee is deemed to have exercised the
option, at the option exercise price, to the extent of accumulated payroll
deductions. For this purpose, an employee's regular pay shall include his or
her base salary, contributions to the Tularik Salary Savings Plan, overtime
pay, commissions and bonuses, but shall exclude other remuneration paid
directly to the employee, profit-sharing payments, employee benefits, imputed
income on employee benefits, employee expense reimbursements and income
received in connection with stock options.
If an employee is not a participant on the last day of the offering period,
the employee is not entitled to exercise any option, and the amount of the
employee's accumulated payroll deductions will be refunded. An employee's
rights under the purchase plan terminate upon voluntary withdrawal from the
purchase plan at any time, or when this employee ceases employment for any
reason, except that upon termination of employment because of death, the
employee's beneficiary has specified rights to elect to exercise the option to
purchase the shares that the accumulated payroll deductions in the
participant's account would purchase at the date of death.
64
<PAGE>
Limitations. Eligible employees may be granted rights only if the rights,
together with any other rights granted under any other employee stock purchase
plans, do not permit the employee to purchase our common stock at a rate which
exceeds $25,000 of the fair market value of this stock for each calendar year
in which these rights are outstanding. No employee shall be eligible for the
grant of any rights under the purchase plan if immediately after these rights
are granted, the employee has voting power over 5% or more of our outstanding
capital stock (measured by vote or value).
Authorized shares. The purchase plan authorizes the issuance of a total of
500,000 shares of common stock under the purchase plan. This reserve amount
will be increased each January 1 beginning January 1, 2001 by the lesser of
500,000 shares of common stock or 1% of the number of shares of common stock
outstanding on that date. However, our board of directors has the authority to
designate a smaller number of shares by which the authorized number of shares
of common stock will be increased on that date.
Administration. Our board of directors administers the purchase plan. Our
board of directors may delegate authority to administer the purchase plan to a
committee that shall have the authority of our board of directors to adopt
resolutions governing the purchase plan.
Tax Qualified Plans. We sponsor the Tularik Salary Savings Plan and Matching
Plan as discussed below:
Savings Plan. Our savings plan, effective October 1, 1993, is intended to be
a tax-qualified defined contribution plan under Subsections 401(a) and 401(k)
of the Code. All employees are eligible to participate and may enter the 401(k)
plan as of their date of hire and on the first day of any month thereafter.
Each participant may contribute up to 20% of his or her pre-tax compensation to
the savings plan, subject to statutorily prescribed annual limits. Each
participant's contributions, and the corresponding investment earnings, are
generally not taxable to the participants until withdrawn. Employee
contributions are held in trust and invested by the savings plan trustee as
required by law. Individual participants may direct the trustee to invest their
accounts in authorized investment alternatives.
Matching Plan. Our matching plan, effective January 1, 1998, is intended to
be a tax-qualified defined contribution plan under Subsections 401(a) and
401(m) of the Code. All employees are eligible to participate and may enter the
matching plan as of the date they become eligible to participate in the savings
plan. Each participant who makes pre-tax contributions to the savings plan is
eligible to have a matching contribution in common stock made by Tularik to his
or her matching plan account in an amount up to 50% of the participant's
savings plan contribution with a maximum employee contribution of $1,500 per
year, subject to statutorily prescribed annual limits. We may make additional
discretionary contributions for all participants to the matching plan. Each
participant's contributions, and the corresponding investment earnings, are
generally not taxable to the participants until withdrawn. Participant
contributions are held in trust as required by law. Individual participants may
direct the trustee to invest their accounts in authorized investment
alternatives.
Limitations of Liability; Indemnification of Directors and Officers
In connection with the consummation of the offerings, we will adopt and file
an amended and restated certificate of incorporation and amended and restated
bylaws. As permitted by Delaware law, our amended and restated certificate of
incorporation provides that no director will be personally liable to us or our
stockholders for monetary damages for breach of fiduciary duty as a director,
except for liability:
. for any breach of duty of loyalty to us or to our stockholders;
. for acts or omissions not in good faith or that involve intentional
misconduct or a knowing violation of law;
. for unlawful payment of dividends or unlawful stock repurchases or
redemptions under Section 174 of the Delaware General Corporation Law; or
. for any transaction from which the director derived an improper personal
benefit.
65
<PAGE>
Our certificate of incorporation further provides that we must indemnify our
directors to the fullest extent permitted by Delaware law.
In addition, our amended and restated bylaws provide that:
. we are required to indemnify our directors and officers to the fullest
extent permitted by Delaware law, subject to limited exceptions;
. we may indemnify our other employees and agents to the extent that we
indemnify our officers and directors, unless otherwise prohibited by law,
our amended and restated certificate of incorporation, our bylaws or
agreements;
. we are required to advance expenses to our directors and executive
officers as incurred in connection with legal proceedings against them
for which they may be indemnified; and
. the rights conferred in the bylaws are not exclusive.
We have entered into indemnification agreements with each of our directors
and officers. These agreements, among other things, require us to indemnify
each director and officer to the fullest extent permitted by Delaware law,
including indemnification for expenses such as attorneys' fees, judgments,
fines and settlement amounts incurred by the director or officer in any action
or proceeding, including any action by or in the right of Tularik, arising out
of the person's services as a director or officer of Tularik, any subsidiary of
ours or any other company or enterprise to which the person provides services
at our request. At present, we are not aware of any pending or threatened
litigation or proceeding involving any of our directors, officers, employees or
agents in which indemnification would be required or permitted. We believe that
our charter provisions and indemnification agreements are necessary to attract
and retain qualified persons as directors and officers.
Employment Agreements and Termination of Employment Agreements
At the time of commencement of employment, our employees generally sign offer
letters specifying basic terms and conditions of employment. In general, our
employees are not subject to written employment agreements. Each officer and
employee has entered into a standard form confidential information and
invention assignment agreement that provides that the employee will not
disclose any confidential information of Tularik received during the course of
employment and that, with some exceptions, the employee will assign to Tularik
any and all inventions conceived or developed during the course of employment.
In October 1999, we entered into an agreement with John P. McLaughlin, our
former President. Under the terms of the agreement, Mr. McLaughlin will receive
his salary and health benefits through December 31, 1999 and may receive his
salary and health benefits through June 30, 2000 if he does not secure
alternate employment prior to that date. In addition, the vesting of options to
purchase 37,500 shares of common stock was accelerated. We provided Mr.
McLaughlin with a one-year loan in the principal amount of $787,503 at an
annual interest rate of 5.54%, in exchange for a promissory note secured by a
pledge of 262,501 shares of common stock.
66
<PAGE>
RELATED PARTY TRANSACTIONS
Stock option grants to our executive officers and directors are described in
this prospectus under the heading "Management--Compensation of Directors, --
Executive Compensation and --Employment Agreements."
From January 1, 1996 through September 30, 1999, the following executive
officers, directors and holders of more than 5% of our voting securities
purchased securities in the amounts and as of the dates shown below.
<TABLE>
<CAPTION>
Series F Series G
Preferred Preferred
Purchaser Common Stock Stock Stock
- --------- ------------ --------- ---------
<S> <C> <C> <C>
Directors and Executive Officers(1)
David V. Goeddel, Ph.D. .................... 550,001 -- --
John P. McLaughlin.......................... -- -- --
Yasunori Kaneko, M.D. ...................... 200,000 -- --
Corinne H. Lyle............................. -- -- --
Andrew J. Perlman, M.D., Ph.D. ............. 100,000 -- --
William J. Rieflin.......................... 183,334 -- --
Terry J. Rosen.............................. 63,000 -- --
Pieter B.M.W.M. Timmermans, Ph.D. .......... 116,667 -- --
A. Grant Heidrich, III...................... -- -- --
Mark J. Levin............................... -- -- --
Paul A. Marks, M.D. ........................ 33,000 -- --
Edward R. McCracken......................... -- -- --
Steven L. McKnight, Ph.D. .................. -- -- --
Peter J. Sjostrand, M.D. ................... -- -- --
Entities Affiliated with Directors(1)
Mayfield Fund(2)............................ -- -- --
Pharma Vision 2000 AG(3).................... -- 3,280,000 5,000,000
Price Per Share(4).......................... $0.40 to $3.00 $ 10.00 $ 10.25
Date(s) of Purchase......................... 1/96-9/99 10/96 12/97
</TABLE>
- --------
(1) See "Principal Stockholders" for more detail on shares held by these
purchasers.
(2) The entities affiliated with Mayfield Fund are Mayfield Associates,
Mayfield Medical Partners and Mayfield VI. Mr. Heidrich, one of our
directors, is a general partner of Mayfield Associates and of Mayfield VI
Management Partners. Mayfield VI Management Partners is the general partner
of Mayfield VI. Mayfield VI is a general partner of Mayfield Medical
Partners. Mr. Levin, one of our directors, is a general partner of Mayfield
Medical Partners.
(3) Dr. Goeddel, our Chief Executive Officer and one of our directors, is a
director of Pharma Vision. Dr. Sjostrand, a member of our board of
directors, is a director of Pharma Vision.
(4) The weighted average price per share for these purchases of our common
stock as of September 30, 1999 was $1.75.
We have entered into an amended and restated registration rights agreement
with each of the purchasers of preferred stock shown above. This agreement and
additional similar agreements provide that these and other stockholders will
have registration rights with respect to their shares of common stock issuable
upon conversion of their preferred stock following the offerings.
We have entered into indemnification agreements with our directors and
certain officers for the indemnification and advancement of expenses to these
persons to the fullest extent permitted by law. We also
67
<PAGE>
intend to enter into those agreements with our future directors and officers.
See "Limitation of Liability; Indemnification of Directors and Officers."
In May 1997, we loaned Mr. Rieflin $250,000 that he used in connection with
relocating to California from another state. Mr. Rieflin has repaid the full
amount that was due on this loan. The loan was interest free and was secured by
a pledge of Mr. Rieflin's shares of our common stock.
In November 1997, we loaned Mr. Rieflin $94,132 that he used to cover housing
differential costs in his move to California from another state. We have
forgiven $23,533 of the principal of this loan and will forgive an additional
$23,533 each November if Mr. Rieflin continues as an employee of Tularik
through that date. Mr. Rieflin has not repaid any amount due on this loan. The
loan bears interest at a rate of 6.10% per year, is secured by a pledge of Mr.
Rieflin's shares of our common stock and is due on November 14, 2001.
We believe that all of the transactions discussed above were made on terms no
less favorable to us than could have been obtained from unaffiliated third
parties. All future transactions, including loans, between us and our officers,
directors, principal stockholders and their affiliates will be approved by a
majority of our board of directors, including a majority of the independent and
disinterested directors, and will be on terms no less favorable to us than
could be obtained from unaffiliated third parties.
Pharma Vision, which is our largest stockholder and owns 23.5% of our
outstanding stock, has expressed an interest in acquiring directly from us
concurrently with the offerings additional shares of common stock that would
allow it to maintain its percentage ownership. Pharma Vision would purchase
1,468,750 shares of common stock, and if the underwriters exercised the over-
allotment options in full, Pharma Vision would purchase an additional 220,313
shares of common stock. Any sales of shares by us to Pharma Vision would be
made under a separate purchase agreement between us and Pharma Vision
containing customary terms. All shares to be sold to Pharma Vision under this
agreement would be sold at the public offering price shown on the cover page of
this prospectus. These shares would be sold through the registration statement
of which this prospectus is a part and would not be subject to any lock-up
agreement with us or the underwriters. The underwriters would not receive any
discounts or commissions on the sale of these shares.
BZ Bank Limited, an affiliate of Pharma Vision, is one of the international
managers of the offering. Please see discussion under "Underwriting."
68
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table provides summary information regarding the beneficial
ownership of our outstanding common stock as of September 30, 1999 for:
. each person or group who beneficially owns more than 5% of our common
stock;
. our chief executive officer;
. each of our four other most highly compensated executive officers whose
compensation exceeded $100,000 during 1998;
. each of our directors; and
. all of our directors and executive officers as a group.
Beneficial ownership of shares is determined under the rules of the
Securities and Exchange Commission and generally includes any shares over which
a person exercises sole or shared voting or investment power. Except as
indicated by footnote, and subject to applicable community property laws, each
person identified in the table possesses sole voting and investment power with
respect to all shares of common stock held by them. Shares of common stock
subject to options currently exercisable or exercisable within 60 days of
September 30, 1999 and not subject to repurchase as of that date are deemed
outstanding for calculating the percentage of outstanding shares of the person
holding these options, but are not deemed outstanding for calculating the
percentage of any other person. Applicable percentage ownership in the
following table is based on 35,271,375 shares of common stock outstanding as of
September 30, 1999, after giving effect to the conversion of all outstanding
shares of preferred stock into common stock upon the closing of the offerings,
and 41,521,375 shares of common stock outstanding immediately following the
completion of the public offerings and the direct offering to Pharma Vision.
Unless otherwise indicated, the address of each of the named individuals is c/o
Tularik Inc., Two Corporate Drive, South San Francisco, California 94080.
<TABLE>
<CAPTION>
Amount and Nature of Shares Beneficially Owned as of September 30, 1999
-------------------------------------------------------------------------------
Percent of Total Outstanding
Shares Issuable Shares Beneficially Owned
Shares Subject to Under Options ---------------------------------
Outstanding a Right of Exercisable Before the After the
Shares of Repurchase as of within 60 Days Public Offerings Public Offerings
Common September 30, of September and the and the
Name Stock(1) 1999(2) 30, 1999 Direct Offering Direct Offering
- ---- ----------- ----------------- --------------- ---------------- ----------------
<S> <C> <C> <C> <C> <C>
Pharma Vision 2000 AG(3)........... 8,280,000 -- -- 23.5 23.5
Spielhof 3
8750 Glaris Switzerland
Entities affiliated with Mayfield
Fund(4)........................... 3,966,474 -- -- 11.2 9.6
2800 Sand Hill Road, Suite 250
Menlo Park, CA 94025
David V. Goeddel, Ph.D.(5)......... 9,658,125 171,876 549,999 29.0 28.2
John P. McLaughlin................. -- -- 225,001 * *
Yasunori Kaneko, M.D.(6)........... 395,000 -- 275,000 1.9 1.6
Andrew J. Perlman, M.D., Ph.D.(7).. 270,000 -- 205,000 1.3 1.1
Pieter B.M.W.M. Timmermans, Ph.D... 77,778 38,889 133,333 * *
A. Grant Heidrich, III(8).......... 3,966,474 -- 41,000 11.3 9.6
Mark J. Levin(9)................... 479,818 -- 99,000 1.6 1.4
Edward R. McCracken................ -- -- 89,000 * *
Steven L. McKnight, Ph.D.(10)...... 784,751 6,249 399,000 3.3 2.8
Paul A. Marks, M.D. ............... 64,313 8,687 16,000 * *
Peter J. Sjostrand, M.D.(11)....... 8,280,000 -- 49,000 23.6 23.6
All executive officers and
directors as a group (14
people)(12)....................... 15,434,649 278,827 2,689,999 48.5 41.6
</TABLE>
- --------
* Less than one percent (1%).
(1) Excludes shares of common stock subject to a right of repurchase as of
September 30, 1999.
69
<PAGE>
(2) The unvested portion of the shares of common stock is subject to a right
of repurchase by us, at the original option exercise price, in the event
the holder ceases to provide service to us and our affiliates. The option
exercise prices range from $0.025 to $3.00. See "Management--Executive
Compensation" for more detail on our right to repurchase.
(3) Pharma Vision has expressed an interest in acquiring directly from us
concurrent with the public offerings additional shares of common stock
that would allow it to maintain its percentage ownership. The percentage
of total outstanding shares beneficially owned by Pharma Vision after the
public offerings and the direct offering includes 1,468,750 shares that
may be purchased by Pharma Vision in the direct offering. See "Related
Party Transactions" for more detail on the direct offering.
(4) Includes 158,659 shares held by Mayfield Associates, 479,818 shares held
by Mayfield Medical Partners and 3,327,997 shares held by Mayfield VI.
Mayfield VI Management Partners is the general partner of Mayfield VI and
Mayfield VI is a general partner of Mayfield Medical Partners. Mr.
Heidrich is a general partner of Mayfield Associates and of Mayfield VI
Management Partners. Mr. Levin is a general partner of Mayfield Medical
Partners.
(5) Includes 8,280,000 shares held by Pharma Vision. The percentage of total
outstanding shares beneficially owned by Pharma Vision after the public
offerings and the direct offering includes 1,468,750 shares that may be
purchased by Pharma Vision in the direct offering. Dr. Goeddel is a
director of Pharma Vision and disclaims beneficial ownership of these
shares except to the extent of his pecuniary interest in these shares.
Does not include 240,000 shares held in trust for Dr. Goeddel's children,
for which Dr. Goeddel is not the trustee and disclaims beneficial
ownership.
(6) Includes 200,000 shares held in trust for the Kaneko Family Trust for
which Dr. Kaneko disclaims beneficial ownership. Does not include 40,000
shares held in trust for Dr. Kaneko's minor children, for which Dr. Kaneko
is not the trustee and disclaims beneficial ownership.
(7) Includes 195,000 shares held in trust for the Perlman/Gardner Family Trust
for which Dr. Perlman disclaims beneficial ownership. Does not include
30,000 shares held in trust for Dr. Perlman's minor children, for which
Dr. Perlman is not the trustee and disclaims beneficial ownership.
(8) Includes 158,659 shares held by Mayfield Associates, 479,818 shares held
by Mayfield Medical Partners and 3,327,997 shares held by Mayfield VI. Mr.
Heidrich is a general partner of Mayfield Associates and of Mayfield VI
Management Partners. Mayfield VI Management Partners is the general
partner of Mayfield VI and Mayfield VI is a general partner of Mayfield
Medical Partners. Mr. Heidrich disclaims beneficial ownership of these
shares except to the extent of his proportionate partnership interest in
these shares.
(9) Includes 479,818 shares held by Mayfield Medical Partners. Mr. Levin is a
general partner of Mayfield Medical Partners and disclaims beneficial
ownership of these shares except to the extent of his proportionate
partnership interest in these shares.
(10) Includes 200,000 shares held in trust for Dr. McKnight's minor children
and 206,000 shares held in trust for the Steven L. McKnight Exempt Family
Trust. Dr. McKnight disclaims beneficial ownership of these shares.
(11) Includes 8,280,000 shares held by Pharma Vision. The percentage of total
outstanding shares beneficially owned by Pharma Vision after the public
offerings and the direct offering includes 1,468,750 shares that may be
purchased by Pharma Vision in the direct offering. Dr. Sjostrand is a
director of Pharma Vision and disclaims beneficial ownership of these
shares except to the extent of his pecuniary interest in these shares.
(12) Includes shares described in the notes above, as applicable.
70
<PAGE>
DESCRIPTION OF CAPITAL STOCK
Upon the closing of the offerings and the filing of our amended and restated
certificate of incorporation, our authorized capital stock will consist of 65
million shares of common stock, $0.001 par value, and five million shares of
preferred stock, $0.001 par value.
Common Stock
As of September 30, 1999, there were 35,271,375 shares of common stock
outstanding that were held of record by approximately 374 stockholders after
giving effect to the conversion of our preferred stock into common stock at a
one-to-one ratio. There will be 41,521,375 shares of common stock outstanding
(assuming no exercise of the underwriters' over-allotment options and no
exercise of outstanding options) after giving effect to the sale of the shares
of common stock offered by this prospectus.
The holders of common stock are entitled to one vote per share on all matters
submitted to a vote of our stockholders and do not have cumulative voting
rights. Accordingly, holders of a majority of the shares of common stock
entitled to vote in any election of directors may elect all of the directors
standing for election. Subject to preferences that may be applicable to any
preferred stock outstanding at the time, the holders of outstanding shares of
common stock are entitled to receive ratably any dividends out of assets
legally available therefor as our board of directors may from time to time
determine. Upon liquidation, dissolution or winding up of Tularik, holders of
our common stock are entitled to share ratably in all assets remaining after
payment of liabilities and the liquidation preference of any then outstanding
shares of preferred stock. Holders of common stock have no preemptive or
conversion rights or other subscription rights. There are no redemption or
sinking fund provisions applicable to the common stock. All outstanding shares
of common stock are fully paid and nonassessable.
Preferred Stock
According to our amended and restated certificate of incorporation, our board
of directors will have the authority, without further action by the
stockholders, to issue up to 5,000,000 shares of preferred stock, in one or
more series. Our board shall determine the rights, preferences, privileges and
restrictions of the preferred stock, including dividend rights, conversion
rights, voting rights, terms of redemption, liquidation preferences, sinking
fund terms and the number of shares constituting any series or the designation
of any series. The issuance of preferred stock could diminish voting power of
holders of common stock, and the likelihood that holders of preferred stock
will receive dividend payments and payments upon liquidation may have the
effect of delaying, deferring or preventing a change in control of Tularik,
which could depress the market price of our common stock. We have no present
plan to issue any shares of preferred stock.
Registration Rights of Stockholders
Upon completion of the offerings, holders of an aggregate of 26,953,539
shares of common stock and warrants to purchase an aggregate of 1,015,091
shares of common stock will be entitled to rights to register these shares
under the Securities Act. These rights are provided under an Investor Rights
Agreement, dated October 31, 1997, under an Amended and Restated Registration
Rights Agreement, dated August 15, 1999, and under agreements with similar
registration rights. If we propose to register any of our securities under the
Securities Act, either for our own account or for the account of others, the
holders of these shares are entitled to notice of the registration and are
entitled to include, at our expense, their shares of common stock in the
registration and any related underwriting, provided, among other conditions,
that the underwriters may limit the number of shares to be included in the
registration and in some cases, including this offering, exclude these shares
entirely. In addition, the holders of these shares may require us, at our
expense and on not more than two occasions at any time beginning six months
from the date of the closing of the offerings, to file a registration statement
under the Securities Act with respect to their shares of common stock, and we
will be required to use our best efforts to effect the registration. Further,
the holders may require us at our expense to register their shares on Form S-3
when this form becomes available.
71
<PAGE>
Anti-Takeover Provisions of Delaware Law and Charter Provisions
Until November 2000, we are subject to Section 203 of the Delaware General
Corporation Law. In general, the statute prohibits a publicly-held Delaware
corporation from engaging in any business combination with any interested
stockholder for a period of three years following the date that the stockholder
became an interested stockholder unless:
. prior to that date, our board of directors approved either the business
combination or the transaction that resulted in the stockholder becoming
an interested stockholder;
. upon consummation of the transaction that resulted in the stockholder
becoming an interested stockholder, the interested stockholder owned at
least 85% of the voting stock of the corporation outstanding at the time
the transaction commenced, excluding those shares owned by persons who
are directors and also officers, and by employee stock plans in which
shares held subject to the plan will be tendered in a tender or exchange
offer; or
. on or subsequent to that date, the business combination is approved by
our board of directors and is authorized at an annual or special meeting
of stockholders, and not by written consent, by the affirmative vote of
at least two-thirds of the outstanding voting stock not owned by the
interested stockholder.
Section 203 defines "business combination" to include:
. any merger or consolidation involving the corporation and the interested
stockholder;
. any sale, transfer, pledge or other disposition involving the interested
stockholder of 10% or more of the assets of the corporation;
. subject to exceptions, any transaction that results in the issuance or
transfer by the corporation of any stock of the corporation to the
interested stockholder; and
. the receipt by the interested stockholder of the benefit of any loans,
advances, guarantees, pledges or other financial benefits provided by or
through the corporation.
In general, Section 203 defines an interested stockholder as any entity or
person beneficially owning 15% or more of the outstanding voting stock of the
corporation and any entity or person affiliated with or controlling or
controlled by the entity or person.
Our amended and restated certificate of incorporation requires that upon
completion of the public offerings, any action required or permitted to be
taken by our stockholders must be effected at a duly called annual or special
meeting of stockholders and may not be effected by a consent in writing.
Additionally, our certificate of incorporation:
. substantially limits the use of cumulative voting in the election of
directors;
. provides that the authorized number of directors may be changed only by
resolution of our board of directors; and
. authorizes our board of directors to issue blank check preferred stock to
increase the amount of outstanding shares.
Our amended and restated bylaws provide that candidates for director may be
nominated only by our board of directors or by a stockholder who gives written
notice to us no later than 60 days prior nor earlier than 90 days prior to the
first anniversary of the last annual meeting of stockholders. The authorized
number of directors is fixed by our amended and restated certificate of
incorporation. Our board of directors currently consists of eight members, who
will be elected at each annual meeting of our stockholders. Our board of
directors may appoint new directors to fill vacancies or newly created
directorships. Our bylaws also limit who may call a special meeting of
stockholders.
Delaware law and these charter provisions may have the effect of deterring
hostile takeovers or delaying changes in control of our management, which could
depress the market price of our common stock.
Transfer Agent and Registrar
The transfer agent and registrar for the common stock is Norwest Bank
Minnesota N.A.
72
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Prior to the offerings, there has been no public market for our common stock.
Future sales of substantial amounts of our common stock in the public market
could reduce prevailing market prices. Furthermore, since no shares will be
available for sale shortly after this offering because of contractual and legal
restrictions on resale as described below, sales of substantial amounts of our
common stock in the public market after these restrictions lapse could
adversely affect the prevailing market price and our ability to raise equity
capital in the future.
Upon completion of the public offerings and the direct offering to Pharma
Vision, we will have outstanding an aggregate of 41,521,375 shares of common
stock, assuming no exercise of the underwriters' over-allotment option and no
exercise of outstanding options or warrants after September 30, 1999. Of these
shares, all of the shares sold in the public offerings and the direct offering
will be freely tradable without restriction or further registration under the
Securities Act, unless these shares are purchased by affiliates. The remaining
35,271,375 shares of common stock held by existing stockholders are restricted
securities. Restricted securities may be sold in the public market only if
registered or if they qualify for an exemption from registration described
below under Rules 144, 144(k) or 701 promulgated under the Securities Act.
As a result of the contractual restrictions described below and the
provisions of Rules 144, 144(k) and 701, the restricted shares will be
available for sale in the public market as follows:
. 2,144,474 shares will be eligible for sale upon completion of the
offerings;
. 424,249 shares will be eligible for sale beginning 90 days after the date
of this prospectus;
. 32,704,652 shares will be eligible for sale upon the expiration of the
lock-up agreements, described below, beginning 180 days after the date of
this prospectus; and
. 3,709,202 shares will be eligible for sale upon the exercise of vested
options 180 days after the date of this prospectus.
Lock-Up Agreements. All of our officers, directors and some of our
stockholders and option holders have agreed not to transfer or dispose of,
directly or indirectly, any shares of our common stock or any securities
convertible into or exercisable or exchangeable for shares of our common stock,
for a period of at least 180 days after the date of this prospectus. Transfers
or dispositions can be made sooner only with the prior written consent of
Lehman Brothers Inc. Shares purchased by Pharma Vision in the direct offering
would not be subject to any lock-up agreement with the underwriters or us.
Rule 144. In general, under Rule 144 as currently in effect, beginning 90
days after the date of this prospectus a person or persons whose shares are
aggregated, who has beneficially owned restricted securities for at least one
year, including the holding period of any prior owner except an affiliate,
would be entitled to sell within any three-month period a number of shares that
does not exceed the greater of:
. 1% of the number of shares of our common stock then outstanding, which
will equal approximately 415,214 shares immediately after the offerings;
or
. the average weekly trading volume of our common stock on the Nasdaq
National Market during the four calendar weeks preceding the filing of a
notice on Form 144 with respect to the sale.
Sales under Rule 144 are also subject to manner of sale provisions and notice
requirements and to the availability of current public information about
Tularik.
Rule 144(k). Under Rule 144(k), a person who is not deemed to have been one
of our affiliates at any time during the 90 days preceding a sale, and who has
beneficially owned the shares proposed to be sold for at least two years,
including the holding period of any prior owner except an affiliate, is
entitled to sell these shares without complying with the manner of sale, public
information, volume limitation or notice provisions of Rule 144. 16,205,022
shares of our common stock will qualify as "144(k) shares" within 180 days
after the date of this prospectus.
Rule 701. In general, under Rule 701 of the Securities Act as currently in
effect, any of our employees, consultants or advisors, other than affiliates,
who purchases or receives shares from us in connection with a
73
<PAGE>
compensatory stock purchase plan or option plan or other written agreement will
be eligible to resell their shares beginning 90 days after the date of this
prospectus, subject only to the manner of sale provisions of Rule 144, and by
affiliates under Rule 144 without compliance with its holding period
requirements.
Registration Rights. Upon completion of this offering, the holders of
26,953,539 shares of our common stock, or their transferees, will be entitled
to rights with respect to the registration of their shares under the Securities
Act. Registration of their shares under the Securities Act would result in
these shares becoming freely tradeable without restriction under the Securities
Act, except for shares purchased by affiliates, immediately upon the
effectiveness of this registration.
Stock Options. Following the offerings, we intend to file a registration
statement on Form S-8 under the Securities Act covering the shares of common
stock reserved for issuance under our 1991 Stock Plan, 1997 Equity Incentive
Plan and 1999 Employee Stock Purchase Plan that will become effective upon
filing. Accordingly, shares registered under that registration statement will,
subject to Rule 144 volume limitations applicable to affiliates, be available
for sale in the open market after the filing, except those shares subject to
lockup agreements and unvested shares.
74
<PAGE>
UNDERWRITING
Under the U.S. underwriting agreement, which is filed as an exhibit to the
registration statement relating to this prospectus, each of the U.S.
underwriters named below, for whom Lehman Brothers Inc., Hambrecht & Quist LLC,
J.P. Morgan Securities Inc. and Warburg Dillon Read LLC are acting as U.S.
representatives, has agreed to purchase from us the number of shares of common
stock shown opposite its name below:
<TABLE>
<CAPTION>
Number
of
U.S. Underwriters Shares
----------------- ------
<S> <C>
Lehman Brothers Inc...................................................
Hambrecht & Quist LLC.................................................
J.P. Morgan Securities Inc............................................
Warburg Dillon Read LLC...............................................
----
Total...............................................................
====
</TABLE>
Under the international underwriting agreement, which is filed as an exhibit
to the registration statement relating to this prospectus, the international
managers named below, for whom Lehman Brothers Inc., Hambrecht & Quist LLC,
J.P. Morgan Securities Inc. and Warburg Dillon Read LLC are acting as lead
managers, have each agreed to purchase from us the respective number of shares
of common stock shown opposite its name below:
<TABLE>
<CAPTION>
Number
of
International Managers Shares
---------------------- ------
<S> <C>
Lehman Brothers Inc...................................................
Hambrecht & Quist LLC.................................................
J.P. Morgan Securities Inc............................................
Warburg Dillon Read LLC...............................................
BZ Bank Limited.......................................................
----
Total...............................................................
====
</TABLE>
We refer to the U.S. underwriters and international managers as the
underwriters and the U.S. representatives and international lead managers as
the representatives.
BZ Bank Limited, a licensed bank and broker-dealer in Switzerland, is one of
the international managers. BZ Bank is an affiliate of Pharma Vision 2000 AG,
which is our largest stockholder and currently owns 23.5% of our outstanding
common stock. Peter Sjostrand, a member of our Board of Directors is a member
of the Pharma Vision Board of Directors and is a partner of BZ Group, which
controls BZ Bank. David V. Goeddel, our Chief Executive Officer and a member of
our Board of Directors, is also a member of the Pharma Vision Board of
Directors. The representatives and we have agreed that BZ Bank shall purchase
from us and have the discretion to place approximately 26.5% of all shares of
common stock to be sold in the offerings, including the over-allotment options.
BZ Bank has advised us that it intends to sell these shares to investors in
Switzerland and other countries in Europe. BZ Bank will receive the selling
concession on those sales. The shares to be sold by BZ Bank will not be subject
to any lock-up agreement with the underwriters.
The U.S. and international underwriting agreements provide that the
obligations of the underwriters to purchase shares of common stock depend on
the satisfaction of the conditions contained in the U.S. and
75
<PAGE>
international underwriting agreements, respectively. The U.S. and international
underwriting agreements also provide that if any of the shares of common stock
are purchased by the underwriters, then all of the shares of common stock which
the underwriters have agreed to purchase under their respective underwriting
agreements, must be purchased. The conditions contained in each underwriting
agreement include the requirement that:
. the representations and warranties made by us to the underwriters are
true;
. there is no material change in the financial markets; and
. we deliver to the underwriters customary closing documents.
The representatives have advised us that the underwriters propose to offer
the shares of common stock directly to the public at the public offering price
shown on the cover page of this prospectus, and to dealers, who may include the
underwriters, at the public offering price less a selling concession not in
excess of $ per share. The underwriters may allow, and the dealers may
reallow, a concession not in excess of $ per share to brokers and dealers.
After the offering, the underwriters may change the offering price and other
selling terms.
We have granted the U.S. underwriters and the international managers options
to purchase up to an aggregate of 717,187 additional shares of common stock, in
each case exercisable solely to cover over-allotments, if any, at the public
offering price less the underwriting discount shown on the cover page of this
prospectus. The U.S. underwriters and international managers may exercise these
options at any time until 30 days after the date of the underwriting
agreements. If these options are exercised, each U.S. underwriter and
international manager will be committed, so long as the conditions of the
underwriting agreements are satisfied, to purchase a number of additional
shares of common stock proportionate to the U.S. underwriter's or international
manager's initial commitment as indicated in the tables above, and we will be
obligated, under the over-allotment options, to sell the shares of common stock
to the U.S. underwriters and international managers.
We have agreed that, without the prior consent of Lehman Brothers, we will
not, directly or indirectly, offer, sell or otherwise dispose of any shares of
common stock or any securities that may be converted into or exchanged for any
shares of common stock for a period of 180 days from the date of this
prospectus. All of our executive officers, directors and holders of
substantially all of our outstanding capital stock have agreed under lock-up
agreements that, without the prior written consent of Lehman Brothers, they
will not, subject to limited exceptions, directly or indirectly, offer, sell or
otherwise dispose of any shares of common stock or any securities that may be
converted into or exchanged for any shares of common stock for the period
ending 180 days from the date of this prospectus. See "Shares Eligible for
Future Sale."
The U.S. underwriters and the international managers have entered into an
agreement among U.S. underwriters and international managers. In this
agreement, each U.S. underwriter has agreed that,
. it is not purchasing any of these shares for the account of anyone other
than a U.S. Person (as defined below), and
. it has not offered or sold, will not offer, sell, resell or deliver,
directly or indirectly, any of these shares or distribute any prospectus
to anyone other than a U.S. Person.
In addition, under the agreement, each international manager has agreed
that,
. it is not purchasing any of these shares for the account of a U.S.
Person, and
. it has not offered or sold, and will not offer, sell, resell, or deliver,
directly or indirectly, any of these shares or distribute any prospectus
to any U.S. Person.
The limitations described above do not apply to stabilization transactions or
to certain other transactions specified in the underwriting agreements and the
agreement among U.S. underwriters and international managers, including
. certain purchases and sales between U.S. underwriters and the
international managers,
76
<PAGE>
. certain offers, sales, resales, deliveries or distributions to or through
investment advisors or other persons exercising investment discretion,
. purchases, offers or sales by a U.S. underwriter who is also acting as an
international manager or by an international manager who is also acting
as a U.S. underwriter and
. other transactions specifically approved by the representatives.
As used in this section, the term "U.S. Person" means any resident or
national of the United States or Canada, any corporation, partnership or other
entity created or organized in or under the laws of the United States or
Canada, or any estate or trust the income of which is subject to United States
or Canadian federal income taxation regardless of the source. The term "United
States" means the United States of America (including the District of Columbia)
and its territories, its possessions and other areas subject to its
jurisdiction, and the term "Canada" means Canada, its provinces, its
territories, its possessions and other areas subject to its jurisdiction.
According to the agreement among the U.S. underwriters and international
managers, sales may be made between the U.S. underwriters and the international
managers of the number of shares of common stock as may be mutually agreed. The
price of any shares so sold shall be the public offering price as then in
effect for the shares of common stock being sold by the U.S. underwriters and
the international managers less an amount equal to the selling concession
allocable to those shares of common stock, unless otherwise determined by
mutual agreement. To the extent that there are sales between the U.S.
underwriters and the international managers under the agreement among the U.S.
underwriters and the international managers, the number of shares of common
stock available for sale by the U.S. underwriters or by the international
managers may be more or less than the amount specified in the tables above.
Before this offering, there has been no public market for shares of our
common stock. The initial public offering price will be negotiated between the
representatives and us. In determining the initial public offering price of the
common stock, the representatives will consider, among other things and in
addition to prevailing market conditions:
. our capital structure;
. estimates of our business potential and earning prospects;
. an overall assessment of our management; and
. the consideration of the above factors in relation to market valuations
of companies in related businesses.
We have applied for quotation of our common stock on the Nasdaq National
Market under the trading symbol "TLRK."
Fidelity Capital Markets, a division of National Financial Services
Corporation, is acting as a selling group member in this offering and will be
facilitating electronic distribution of information through the Internet,
intranet and other proprietary electronic technology.
We have agreed to indemnify the underwriters against liabilities, including
liabilities under the Securities Act and liabilities arising from breaches of
the representations and warranties contained in the underwriting agreements. We
have also agreed to contribute to payments that the underwriters may be
required to make for these liabilities.
Until the distribution of the common stock is complete, rules of the
Securities and Exchange Commission may limit the ability of the underwriters
and selling group members to bid for and purchase shares of common stock. As an
exception to these rules, the representatives are permitted to engage in
transactions that stabilize the price of the common stock. These transactions
may consist of bids or purchases for the purposes of pegging, fixing or
maintaining the price of the common stock.
77
<PAGE>
The underwriters may create a short position in the common stock in
connection with the offerings. This means that they may sell more shares than
are shown on the cover page of this prospectus. If the underwriters create a
short position, then the representatives may reduce that short position by
purchasing common stock in the open market. The representatives also may elect
to reduce any short position by exercising all or part of the over-allotment
option. The underwriters have informed us that they do not intend to confirm
sales to discretionary accounts that exceed 5% of the total number of shares of
common stock offered by them.
The representatives also may impose a penalty bid on underwriters and selling
group members. This means that, if the representatives purchase shares of
common stock in the open market to reduce the underwriters' short position or
to stabilize the price of the common stock, they may reclaim the amount of the
selling concession from the underwriters and selling group members that sold
those shares as part of the offerings.
In general, purchases of a security for the purpose of stabilization or to
reduce a syndicate short position could cause the price of the security to be
higher than it might otherwise be in the absence of these purchases. The
imposition of a penalty bid might have an effect on the price of a security to
the extent that it were to discourage resales of the security by purchasers in
an offering.
Neither we nor any of the underwriters makes any representation or prediction
as to the direction or magnitude of any effect that the transactions described
above may have on the price of the common stock. In addition, neither we nor
any of the underwriters makes any representation that the representatives will
engage in these transactions or that these transactions, once commenced, will
not be discontinued without notice.
Each international manager has represented and agreed that:
. it has not offered or sold and, prior to the date six months after the
date of issue of the shares of common stock, will not offer to sell any
shares of common stock to persons in the United Kingdom except to persons
whose ordinary activities involve them in acquiring, holding, managing or
disposing of investments (as principal or agent) for the purposes of
their businesses or otherwise in circumstances which have not resulted
and will not result in an offer to the public in the United Kingdom
within the meaning of the Public Offers of Securities Regulations 1995;
. it has complied and will comply with all applicable provisions of the
Financial Services Act 1986 and the Regulation with respect to anything
done by it in relation to the shares of common stock in, from or
otherwise involving the United Kingdom; and
. it has only issued or passed on, and will only issue or pass on, to any
person in the United Kingdom any document received by it in connection
with the issue of the shares of common stock if that person is of a kind
described in Article 11(3) of the Financial Services Act 1986 (Investment
Advertisements) (Exemptions) Order 1996 or is a person to whom these
documents may otherwise be issued or passed upon.
Any offers in Canada will be made only under an exemption from the
requirements to file a prospectus in the relevant province of Canada in which
the sale is made.
Purchasers of the shares of common stock offered in this prospectus may be
required to pay stamp taxes and other charges under the laws and practices of
the country of purchase, in addition to the public offering price shown on the
cover page of this prospectus.
At our request, the underwriters have reserved up to 312,500 shares of the
common stock offered by this prospectus for sale to our officers, directors,
employees and their family members and to our business associates. These shares
will be offered at the public offering price shown on the cover page of this
prospectus. These persons must commit to purchase no later than the close of
business on the day following the date of this prospectus. The number of shares
available for sale to the general public will be reduced to the extent these
persons purchase the reserved shares.
78
<PAGE>
BZ Bank Limited, a licensed bank and broker-dealer in Switzerland and an
international manager in the offering, is an affiliate of Pharma Vision 2000
AG, which is our largest stockholder and owns 23.5% of our outstanding common
stock. Given this relationship and BZ Bank's participation in the offerings,
Lehman Brothers has assumed the responsibilities of acting as qualified
independent underwriter of the offerings. In its role as qualified independent
underwriter, Lehman Brothers has performed a due diligence investigation and
reviewed and participated in the preparation of this prospectus and the
registration statement of which this prospectus is a part. We and the other
underwriters have agreed to indemnify Lehman Brothers in its capacity as
qualified independent underwriter against certain liabilities, including
liabilities under the Securities Act.
Pharma Vision has expressed an interest in acquiring directly from us
concurrently with the offerings additional shares of common stock that would
allow it to maintain its percentage ownership in us. Please see the discussion
under the heading "Related Party Transactions."
79
<PAGE>
LEGAL MATTERS
Cooley Godward LLP, Palo Alto, California, will provide us with an opinion as
to the validity of the common stock offered under this prospectus. Latham &
Watkins, San Diego, California, will pass upon certain legal matters related to
the offerings for the underwriters. As of the date of this prospectus, certain
partners and associates of Cooley Godward LLP own an aggregate of 13,514 shares
of our common stock through investment partnerships.
EXPERTS
Ernst & Young LLP, independent auditors, have audited our consolidated
financial statements at December 31, 1997 and 1998 and for each of the three
years in the period ended December 31, 1998, and at September 30, 1999 and for
the nine months then ended as shown in their report. We have included our
financial statements in this prospectus and elsewhere in the registration
statement in reliance on Ernst & Young LLP's report, given upon their authority
as experts in accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the Securities and Exchange Commission a registration
statement on Form S-1 under the Securities Act with respect to the shares of
common stock offered under this prospectus. This prospectus does not contain
all of the information in the registration statement and the exhibits and
schedule to the registration statement. For further information with respect to
us and our common stock, we refer you to the registration statement and to the
exhibits and schedule to registration statement. Statements contained in this
prospectus as to the contents of any contract or any other document referred to
are not necessarily complete, and in each instance, we refer you to the copy of
the contract or other document filed as an exhibit to the registration
statement. Each of these statements is qualified in all respects by this
reference. You may inspect a copy of the registration statement without charge
at the SEC's principal office in Washington, D.C., and copies of all or any
part of the registration statement may be obtained from the Public Reference
Section of the SEC, 450 Fifth Street, N.W., Washington, D.C. 20549, upon
payment of fees prescribed by the SEC. The SEC maintains a World Wide Web site
that contains reports, proxy and information statements and other information
regarding registrants that file electronically with the SEC. The address of the
Web site is http://www.sec.gov. The SEC's toll free investor information
service can be reached at 1-800-SEC-0330. Information contained on our website
does not constitute part of this prospectus.
Upon completion of the offering, we will be subject to the information
reporting requirements of the Securities Exchange Act of 1934, as amended, and
we will file reports, proxy statements and other information with the SEC.
We intend to furnish our stockholders with annual reports containing
financial statements audited by our independent public accountants and
quarterly reports for the first three fiscal quarters of each fiscal year
containing unaudited interim financial information. Our telephone number is
(650) 825-7000.
80
<PAGE>
TULARIK INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Ernst & Young LLP, Independent Auditors.......................... F-2
Consolidated Balance Sheets................................................ F-3
Consolidated Statements of Operations...................................... F-4
Consolidated Statement of Stockholders' Equity............................. F-5
Consolidated Statements of Cash Flows...................................... F-6
Notes to Consolidated Financial Statements................................. F-7
</TABLE>
F-1
<PAGE>
Report of Ernst & Young LLP, Independent Auditors
The Board of Directors and Stockholders
Tularik Inc.
We have audited the accompanying consolidated balance sheets of Tularik Inc.
as of December 31, 1997 and 1998 and September 30, 1999, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the three years in the period ended December 31, 1998 and for the nine
months ended September 30, 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 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 financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Tularik Inc. at
December 31, 1997 and 1998 and September 30, 1999, and the consolidated results
of its operations and its cash flows for each of the three years in the period
ended December 31, 1998 and for the nine months ended September 30, 1999, in
conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
Palo Alto, California
October 25, 1999
F-2
<PAGE>
TULARIK INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
<TABLE>
<CAPTION>
Pro Forma
Stockholders'
December 31, Equity at
------------------ September 30, September 30,
1997 1998 1999 1999
-------- -------- ------------- -------------
(Unaudited)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents..... $ 74,545 $ 53,398 $ 17,269
Short-term investments........ 49,861 58,926 86,919
Prepaid expenses and other
current assets............... 881 1,582 2,714
-------- -------- --------
Total current assets........ 125,287 113,906 106,902
Property and equipment, net.... 6,209 11,950 15,674
Other investments.............. 1,000 9,050 2,050
Restricted investment.......... -- -- 3,997
Other assets................... 1,026 1,872 2,403
-------- -------- --------
$133,522 $136,778 $131,026
======== ======== ========
LIABILITIES AND STOCKHOLDERS'
EQUITY
Current liabilities:
Accounts payable.............. $ 1,154 $ 1,570 $ 1,671
Accrued compensation and
related liabilities.......... 1,084 1,170 1,011
Accrued liabilities........... 1,052 1,377 2,257
Accrued construction costs.... -- 2,076 --
Current portion of long-term
obligations.................. 1,222 2,330 4,402
Deferred revenue.............. 4,248 10,848 13,160
-------- -------- --------
Total current liabilities... 8,760 19,371 22,501
Long-term obligations, less
current portion............... 3,456 4,734 10,254
Other non-current liabilities.. 450 1,775 2,715
Commitments
Stockholders' equity:
Convertible preferred stock,
$0.001 par value; 33,000,000
shares authorized;
26,858,823, 26,903,885, and
26,953,539 shares issued and
outstanding in 1997, 1998 and
at September 30, 1999,
respectively, and none pro
forma, issuable in series;
aggregate liquidation
preference, $173,542 as of
September 30, 1999........... 27 27 27 $ --
Common stock, $0.001 par
value; 55,000,000 shares
authorized; 7,432,729,
7,560,603, and 8,317,836
shares issued and outstanding
in 1997, 1998 and at
September 30, 1999,
respectively, and 35,271,375
shares pro forma............. 7 8 8 35
Additional paid-in capital.... 173,000 174,035 182,356 182,356
Notes receivable from
stockholders................. (860) (636) (647) (647)
Deferred compensation......... -- (679) (5,377) (5,377)
Accumulated deficit........... (51,318) (61,857) (80,811) (80,811)
-------- -------- -------- -------
Total stockholders' equity..... 120,856 110,898 95,556 $95,556
-------- -------- -------- =======
$133,522 $136,778 $131,026
======== ======== ========
</TABLE>
See accompanying notes.
F-3
<PAGE>
TULARIK INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share and per share amounts)
<TABLE>
<CAPTION>
Nine months ended
Years ended December 31, September 30,
-------------------------------- ----------------------
1996 1997 1998 1998 1999
--------- --------- ---------- ----------- ----------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Revenue:
Collaborative research and development.. $ 15,297 $ 20,009 $ 21,362 $ 13,664 $ 17,856
Operating expenses:
Research and development................ 18,622 26,546 33,264 24,149 31,855
Acquired in-process research and
development............................ -- 18,902 -- -- 3,000
General and administrative.............. 3,630 4,020 5,002 3,650 3,903
Amortization of deferred stock
compensation........................... -- -- 31 -- 1,720
--------- --------- ---------- --------- ----------
22,252 49,468 38,297 27,799 40,478
--------- --------- ---------- --------- ----------
Loss from operations...................... (6,955) (29,459) (16,935) (14,135) (22,622)
Interest income, net...................... 1,475 4,085 6,396 4,832 3,668
--------- --------- ---------- --------- ----------
Net loss.................................. $ (5,480) $ (25,374) $ (10,539) $ (9,303) $ (18,954)
========= ========= ========== ========= ==========
Basic and diluted net loss per share...... $ (1.09) $ (4.19) $ (1.55) $ (1.40) $ (2.57)
========= ========= ========== ========= ==========
Weighted average shares used in computing
basic and diluted net loss per share..... 5,033,799 6,062,651 6,790,512 6,666,166 7,387,943
========= ========= ========== ========= ==========
Pro forma basic and diluted net loss per
share.................................... $ (0.31) $ (0.55)
========== ==========
Weighted average shares used in computing
pro forma basic and diluted net loss per
share.................................... 33,686,853 34,313,896
========== ==========
</TABLE>
See accompanying notes.
F-4
<PAGE>
TULARIK INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(In thousands, except share amounts)
<TABLE>
<CAPTION>
Convertible Notes
Preferred Stock Common Stock Additional Receivable Total
----------------- ---------------- Paid-In From Deferred Accumulated Stockholders'
Shares Amount Shares Amount Capital Stockholders Compensation Deficit Equity
---------- ------ --------- ------ ---------- ------------ ------------ ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December
31, 1995............ 13,645,132 $14 4,970,855 $ 5 $ 38,329 $(131) $ -- $(20,464) $ 17,753
Issuance of Series F
convertible
preferred stock..... 6,272,000 6 -- -- 59,851 -- -- -- 59,857
Issuance of common
stock, net of
repurchases......... -- -- 1,823,712 2 1,300 (571) -- -- 731
Repayment of notes
receivable.......... -- -- -- -- -- 44 -- -- 44
Net loss............. -- -- -- -- -- -- -- (5,480) (5,480)
---------- --- --------- --- -------- ----- ------- -------- --------
Balance at December
31, 1996............ 19,917,132 20 6,794,567 7 99,480 (658) -- (25,944) 72,905
Issuance of Series G
convertible
preferred stock..... 5,319,634 5 -- -- 54,467 -- -- -- 54,472
Issuance of Series H
convertible
preferred stock and
warrants for
Acquisition......... 1,622,057 2 -- -- 18,274 -- -- -- 18,276
Issuance of common
stock, net of
repurchases......... -- -- 638,162 -- 779 (263) -- -- 516
Repayment of notes
receivable.......... -- -- -- -- -- 61 -- -- 61
Net loss............. -- -- -- -- -- -- -- (25,374) (25,374)
---------- --- --------- --- -------- ----- ------- -------- --------
Balance at December
31, 1997............ 26,858,823 27 7,432,729 7 173,000 (860) -- (51,318) 120,856
Issuance of Series H
convertible
preferred stock upon
exercise of stock
options............. 7,802 -- -- -- 6 -- -- -- 6
Conversion of
warrant, net........ 37,260 -- -- -- -- -- -- -- --
Issuance of common
stock, net of
repurchases......... -- -- 127,874 1 319 80 -- -- 400
Repayment of notes
receivable.......... -- -- -- -- -- 144 -- -- 144
Deferred
compensation........ -- -- -- -- 710 -- (710) -- --
Amortization of
deferred
compensation........ -- -- -- -- -- -- 31 -- 31
Net loss............. -- -- -- -- -- -- -- (10,539) (10,539)
---------- --- --------- --- -------- ----- ------- -------- --------
Balance at December
31, 1998............ 26,903,885 27 7,560,603 8 174,035 (636) (679) (61,857) 110,898
Conversion of
warrant, net........ 49,654 -- -- -- -- -- -- -- --
Issuance of common
stock, net of
repurchases......... -- -- 757,233 -- 1,903 (240) -- -- 1,663
Repayment of notes
receivable.......... -- -- -- -- -- 229 -- -- 229
Deferred
compensation........ -- -- -- -- 6,418 -- (6,418) -- --
Amortization of
deferred
compensation........ -- -- -- -- -- -- 1,720 -- 1,720
Net loss............. -- -- -- -- -- -- -- (18,954) (18,954)
---------- --- --------- --- -------- ----- ------- -------- --------
Balance at September
30, 1999............ 26,953,539 $27 8,317,836 $ 8 $182,356 $(647) $(5,377) $(80,811) $ 95,556
========== === ========= === ======== ===== ======= ======== ========
</TABLE>
See accompanying notes.
F-5
<PAGE>
TULARIK INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Nine months ended
Years ended December 31, September 30,
------------------------------ --------------------
1996 1997 1998 1998 1999
-------- --------- --------- ----------- --------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Operating activities
Net loss................ $ (5,480) $ (25,374) $ (10,539) $ (9,303) $(18,954)
Adjustments to reconcile
net loss to net cash
used in operating
activities:
Depreciation and
amortization........... 2,027 1,918 2,423 1,735 2,731
Amortization of
deferred stock
compensation........... -- -- 31 -- 1,720
Noncash stock
compensation........... -- -- 188 -- 515
Write-off of in-process
research and
development............ -- 18,902 -- -- --
Changes in assets and
liabilities, net of
Acquisition:
Other assets........... (596) (240) (1,578) (1,223) (1,663)
Accounts payable and
accrued liabilities... 1,351 1,002 827 127 822
Deferred revenue....... (3,127) (340) 7,873 5,527 2,312
Other liabilities...... -- 141 52 58 940
-------- --------- --------- --------- --------
Net cash used in
operating
activities........... (5,825) (3,991) (723) (3,079) (11,577)
-------- --------- --------- --------- --------
Investing activities
Maturities of available-
for-sale securities.... 8,981 103,693 140,982 100,911 74,699
Purchases of available-
for-sale securities.... (46,374) (109,132) (157,047) (115,995) (99,689)
Capital expenditures.... (1,189) (1,970) (6,057) (3,552) (8,531)
Purchases of long-term
investments............ -- (1,000) (1,050) (1,050) --
Acquisition, net of cash
received............... -- (538) -- -- --
-------- --------- --------- --------- --------
Net cash used in
investing
activities........... (38,582) (8,947) (23,172) (19,686) (33,521)
-------- --------- --------- --------- --------
Financing activities
Proceeds from long-term
debt.................... -- 1,268 3,905 2,028 10,087
Payments of long-term
debt.................... (1,721) (1,490) (1,519) (1,067) (2,495)
Net proceeds from
issuance of preferred
stock................... 59,857 54,472 6 6 --
Proceeds from issuances
of common stock, net.... 775 577 356 241 1,377
-------- --------- --------- --------- --------
Net cash provided by
financing
activities........... 58,911 54,827 2,748 1,208 8,969
-------- --------- --------- --------- --------
Net increase (decrease)
in cash and cash
equivalents............. 14,504 41,889 (21,147) (21,557) (36,129)
Cash and cash equivalents
at beginning of period.. 18,152 32,656 74,545 74,545 53,398
-------- --------- --------- --------- --------
Cash and cash
equivalents at end of
period............... $ 32,656 $ 74,545 $ 53,398 $ 52,988 $ 17,269
======== ========= ========= ========= ========
</TABLE>
See accompanying notes.
F-6
<PAGE>
TULARIK INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information for the nine-month period ended September 30, 1998 is unaudited)
1. Basis of Presentation
Organization and Business
Tularik Inc. ("Tularik" or the "Company") was incorporated in the state of
California in November 1991 and reincorporated in the state of Delaware in June
1997 to take advantage of the Delaware General Corporation Law. Upon the
reincorporation, the Company became authorized to issue 33,000,000 shares of
$0.001 par value convertible preferred stock and 55,000,000 shares of $0.001
par value common stock. All par value, share and per share amounts included in
the accompanying financial statements have been retroactively adjusted to
reflect the Company's reincorporation in Delaware.
Since its founding, the Company has been engaged in the discovery and
development of a broad range of novel, orally available drugs, most of which
act through gene regulation. Tularik has incurred net losses since inception
and is expected to incur substantial and increasing losses for at least the
next several years as research and development activities are expanded. To
date, the Company has funded its operations primarily through the sale of
equity securities, non-equity payments from collaborators and interest income.
Future revenue, if any, for at least the next several years is expected to
consist primarily of payments under corporate collaborations and interest
income. The process of developing products will require significant additional
research and development, preclinical testing and clinical trials, as well as
regulatory approval. These activities, together with general and administrative
expenses, are expected to result in substantial operating losses for the
foreseeable future. Tularik will not receive product revenue unless the Company
or its collaborative partners completes clinical trials, obtains regulatory
approval and successfully commercializes one or more of the Company's products.
In order to accelerate product commercialization and finance research
activities, Tularik has entered into collaborations with leading pharmaceutical
companies. The Company has ongoing collaborations with Knoll AG ("Knoll")
relating to obesity (commenced in November 1998); Japan Tobacco Inc. ("Japan
Tobacco") relating to orphan nuclear receptors (commenced in September 1998);
Roche Bioscience ("Roche Bioscience") relating to inflammation (commenced in
July 1997); Japan Tobacco relating to obesity (commenced in September 1996);
Taisho Pharmaceutical Co., Ltd. ("Taisho") relating to immune disorders
(commenced in April 1995); and Sumitomo Pharmaceuticals Co., Ltd. ("Sumitomo")
relating to hypercholesterolemia (commenced in January 1995). Previously,
Tularik also had collaborations with Yamanouchi Pharmaceutical Co., Ltd.
("Yamanouchi") relating to inflammation (commenced in November 1993, ended in
November 1996) and with Merck & Co., Inc., ("Merck") relating to viral disease
(commenced in December 1993, ended in March 1999). As of September 30, 1999,
the Company has received $13.0 million in equity investments and $108.3 million
in research funding from its collaborators, including $14.0 million from
Yamanouchi and $20.4 million from Merck.
2. Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of Tularik and its
wholly owned subsidiary. All significant intercompany accounts and transactions
have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect amounts reported in the financial statements and accompanying
notes. Actual results could differ from those estimates.
F-7
<PAGE>
TULARIK INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information for the nine-month period ended September 30, 1998 is unaudited)
Cash Equivalents and Short-Term Investments
The Company considers all highly liquid investments in debt securities with a
remaining maturity from the date of purchase of 90 days or less to be cash
equivalents. Cash equivalents consist of money market funds and corporate debt
securities and exclude demand deposits. The Company's short-term investments
include obligations of governmental agencies and corporate debt securities with
original maturities ranging between three and 12 months. By policy, the Company
limits concentration of credit risk by diversifying its investments among a
variety of high credit-quality issuers.
All cash equivalents and short-term investments are classified as available-
for-sale. Available-for-sale securities are carried at amortized cost, which
approximated fair value at December 31, 1997 and 1998 and at September 30,
1999. Material unrealized gains and losses, if any, are reported in
stockholders' equity and included in other comprehensive loss. Fair value is
estimated based on available market information. The cost of securities sold is
based on the specific identification method. For the years ended December 31,
1997 and 1998 and for the nine-months ended September 30, 1999, gross realized
gains and losses on available-for-sale securities were immaterial. See Note 4
for a summary of available-for-sale securities at December 31, 1997 and 1998
and at September 30, 1999.
Property and Equipment
Property and equipment is stated at cost. Depreciation and amortization of
equipment is calculated using the straight-line method over the lesser of the
estimated useful lives of the assets, generally three to four years, or the
lease term. Leasehold improvements are amortized over the term of the related
lease, which does not exceed their estimated useful lives.
Long-lived Assets
The Company accounts for its long-lived assets under Statement of Financial
Accounting Standards No. 121, "Accounting for the Impairment of Long-lived
Assets and for Long-lived Assets to be Disposed Of" ("SFAS 121"). Consistent
with SFAS 121, the Company identifies and records impairment losses, as
circumstances dictate, on long-lived assets used in operations when events and
circumstances indicate that the assets might be impaired and the undiscounted
cash flows estimated to be generated by those assets are less than the carrying
amounts of those assets. No one of these events have occurred with respect to
the Company's long-lived assets, which consist primarily of machinery and
equipment and leasehold improvements.
Revenue Recognition
Collaborative research and development agreements provide for periodic
payments in support of the Company's research activities. Collaboration revenue
is recognized as earned based on actual costs incurred or as milestones are
achieved. Nonrefundable technology access fees are recognized immediately when
received and when all contractual obligations of the Company relating to the
fees have been fulfilled. Research support payments received in advance of work
performed are recorded as deferred revenue (see Note 3).
Research and Development
Research and development expenses, including direct and allocated expenses,
consist of independent research and development costs and costs associated with
collaborative research and development arrangements. In addition, the Company
funds research and development at other companies and research institutions
under agreements which are generally cancelable. All such costs are charged to
operations as incurred.
F-8
<PAGE>
TULARIK INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information for the nine-month period ended September 30, 1998 is unaudited)
Stock-Based Compensation
The Company accounts for grants of stock options and common stock purchase
rights according to Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees" and related Interpretations ("APB No. 25"). Pro
forma net loss information, as required by Financial Accounting Standards Board
Statement No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"), is
included in Note 9. Options granted to consultants are accounted for using the
Black-Scholes method prescribed by SFAS 123 in accordance with Emerging Issues
Task Force Consensus No. 96-18. These options are subject to periodic re-
valuation over their vesting terms. Any deferred stock compensation calculated
according to APB No. 25 is amortized over the vesting period of the individual
options, generally four years, using the graded vesting method. The graded
vesting method provides for vesting of portions of the overall award at interim
dates and results in higher vesting in earlier years than straight-line
vesting.
Comprehensive Loss
As of January 1, 1998, the Company adopted Financial Accounting Standards
Board Statement No. 130, "Reporting Comprehensive Income" ("SFAS 130"). SFAS
130 establishes new rules for the reporting and display of comprehensive income
and its components; however, the adoption of this Statement had no impact on
the Company's net loss or stockholders' equity. SFAS 130 requires unrealized
gains or losses on the Company's available-for-sale securities, which prior to
adoption were reported separately in stockholders' equity, to be included in
comprehensive income, if material. The Company's comprehensive loss was not
materially different from the net loss for the years ended December 31, 1997
and 1998 and for the nine months ended September 30, 1999.
Net Loss Per Share
Net loss per share has been computed according to the Financial Accounting
Standards Board Statement No. 128, "Earnings Per Share," which requires
disclosure of basic and diluted earnings per share. Basic earnings per share
excludes any dilutive effects of options, shares subject to repurchase,
warrants, and convertible securities. Diluted earnings per share includes the
impact of potentially dilutive securities. The Company's potentially dilutive
securities were antidilutive and therefore were not included in the computation
of weighted-average shares used in computing diluted loss per share. Following
the guidance given by the Securities and Exchange Commission Staff Accounting
Bulletin No. 98, common stock and preferred stock that has been issued or
granted for nominal consideration prior to the anticipated effective date of
the initial public offering must be included in the calculation of basic and
diluted net loss per common share as if these shares had been outstanding for
all periods presented. To date, the Company has not issued or granted shares
for nominal consideration.
F-9
<PAGE>
TULARIK INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information for the nine-month period ended September 30, 1998 is unaudited)
The following is a reconciliation of the numerator and denominator of basic
and diluted net loss per share (in thousands, except share and per share
amounts):
<TABLE>
<CAPTION>
Year ended Nine months ended
December 31, September 30,
----------------------------------- ---------------------
1996 1997 1998 1998 1999
---------- ----------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C>
Basic and diluted:
Net loss.............. $ (5,480) $ (25,374) $ (10,539) $ (9,303) $ (18,954)
========== =========== ========== ========= ==========
Weighted average
shares of common
stock outstanding.... 5,627,770 7,292,476 7,495,576 7,439,137 7,856,192
Less: weighted average
shares subject to
repurchase........... (593,971) (1,229,825) (705,064) (772,971) (468,249)
---------- ----------- ---------- --------- ----------
Weighted average
shares used in
computing basic and
diluted net loss per
share................ 5,033,799 6,062,651 6,790,512 6,666,166 7,387,943
========== =========== ========== ========= ==========
Basic and diluted net
loss per share....... $ (1.09) $ (4.19) $ (1.55) $ (1.40) $ (2.57)
========== =========== ========== ========= ==========
Pro forma basic and
diluted:
Shares used above..... 6,790,512 7,387,943
Pro forma adjustment
to reflect weighted
average effect of
assumed conversion of
preferred stock...... 26,896,341 26,925,953
---------- ----------
Total weighted average
shares of common
stock outstanding pro
forma................ 33,686,853 34,313,896
========== ==========
Basic and diluted pro
forma loss per
share................ $ (0.31) $ (0.55)
========== ==========
</TABLE>
During all periods presented, the Company had securities outstanding which
could potentially dilute basic earnings per share in the future, but were
excluded from the computation of diluted net loss per share, as their effect
would have been antidilutive. These outstanding securities consist of the
following:
<TABLE>
<CAPTION>
December 31, September 30,
-------------------------------- ---------------------
1996 1997 1998 1998 1999
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Convertible preferred
stock.................. 19,917,132 26,858,823 26,903,885 26,903,885 26,953,539
Outstanding options..... 2,972,750 3,710,872 5,351,309 5,215,407 5,955,965
Warrants................ 702,674 999,235 1,078,382 1,078,382 1,015,091
---------- ---------- ---------- ---------- ----------
Total................. 23,592,556 31,568,930 33,333,576 33,197,674 33,924,595
========== ========== ========== ========== ==========
Weighted average
exercise price of
options................ $ 0.61 $ 1.41 $ 1.99 $ 1.93 $ 2.23
========== ========== ========== ========== ==========
Weighted average
exercise price of
warrants............... $ 7.15 $ 8.88 $ 9.71 $ 9.71 $ 10.17
========== ========== ========== ========== ==========
</TABLE>
F-10
<PAGE>
TULARIK INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information for the nine-month period ended September 30, 1998 is unaudited)
Unaudited Financial Statements
The accompanying unaudited financial statements for the nine months ended
September 30, 1998 have been prepared on substantially the same basis as the
audited financial statements and include all adjustments (consisting of normal
recurring adjustments) considered necessary for a fair presentation of the
financial information set forth therein. Results for any interim period are not
necessarily indicative of results for the full fiscal period.
3. Research and Development Collaborations
The Company has entered into multi-year research and development
collaborations in six of its research programs. Tularik received aggregate
research payments, including technology access fees, of $12.5 million, $20.0
million, and $29.8 million and recognized collaboration revenue of $15.3
million, $20.0 million, and $21.4 million in 1996, 1997, and 1998,
respectively. For the nine months ended September 30, 1999, Tularik received
research funding of $21.0 million and recognized collaboration revenue of $17.9
million. Under the terms of existing collaborations at September 30, 1999, the
Company's partners have agreed to provide future research funding of up to
approximately $50.7 million over a five-year period, including $33.5 million
subject possible cancellation, as well as additional payments upon the
achievement of specific research and development milestones. Annual research
funding under these agreements ranges from $3.5 million to $6.0 million per
agreement. All research payments are non-refundable and the Company performs
research under these agreements on a "best efforts" basis. Costs incurred under
research and development collaborations approximate revenues earned and are
included in research and development expenses. In addition to providing the
research funding summarized above, certain of the Company's collaborators have
also purchased equity investments in Tularik. These equity purchases and other
significant terms of current and prior collaborations are described below.
In November 1998, Tularik and Knoll established a five-year collaboration to
discover, develop and market compounds that act on obesity-related targets.
Once a compound is selected for preclinical development, Knoll has the right to
enter into a separate license agreement granting it exclusive rights to
develop, manufacture and sell the compounds in countries other than Japan and
other specified Asian countries, subject to milestone and royalty obligations
to Tularik. The agreement grants Tularik exclusive rights to develop,
manufacture and sell these products in Japan and other specified Asian
countries, without payment obligation to Knoll. These retained rights are
subject to a collaboration agreement with Japan Tobacco in the area of obesity.
Knoll has the right to terminate the collaboration at the end of the third or
fourth years of the five-year agreement.
In September 1998, Tularik and Japan Tobacco established a five-year
collaboration to discover, develop and market compounds that act by regulating
orphan nuclear receptors. Under the terms of the collaboration, Japan Tobacco
is funding the majority of research expenses and development and
commercialization costs and profits will be shared equally by the partners.
Tularik retains exclusive marketing and sales rights in the United States and
Canada. JT retains exclusive marketing and sales rights in Japan and Korea.
Japan Tobacco has the right to terminate the collaboration at the end of the
third or fourth years of the five year collaboration.
In July 1997, Tularik and Roche Bioscience established a five-year
collaboration to discover, develop and market anti-inflammatory therapeutics.
Under the collaboration, Roche Bioscience has exclusive, worldwide
manufacturing and marketing rights to develop and commercialize drugs resulting
from the research program for specified indications, subject to benchmark and
royalty obligations to Tularik. Tularik has exclusive, worldwide manufacturing
and marketing rights to develop and commercialize other compounds resulting
from the research program, subject to royalty obligations to Roche Bioscience.
Roche Bioscience has the right to terminate the collaboration at the end of the
third year if the then current research plan does not provide opportunities for
new products or if Tularik has not discharged its obligations under the
agreement.
F-11
<PAGE>
TULARIK INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information for the nine-month period ended September 30, 1998 is unaudited)
In September 1996, the Company entered into a five-year collaboration with
Japan Tobacco to discover, develop and market compounds in the fields of
obesity and diabetes. Under a related stock purchase agreement, Japan Tobacco
purchased 600,000 shares of Tularik's Series F preferred stock for $10.00 per
share, on the same terms and conditions as other investors in the Series F
financing. In September 1998, Tularik and Japan Tobacco agreed to modify the
structure of the original collaboration. The collaboration is currently
structured as a joint venture in which both expenses and profits on a worldwide
basis will be split evenly between Tularik and Japan Tobacco. Tularik retains
exclusive marketing and sales rights in the United States and Canada. Japan
Tobacco retains exclusive marketing and sales rights in Japan and Korea. Japan
Tobacco will be required to make benchmark payments to Tularik based on
clinical progress. Japan Tobacco has the right to terminate the collaboration
at the end of the fourth year of the five year collaboration.
In April 1995, Tularik established a five-year collaboration with Taisho
focused on therapeutic modulation of the human immune function. In January
1998, Tularik and Taisho extended the collaboration for an additional year. The
agreement gives Taisho the right to manufacture and sell products resulting
from the collaboration in Japan and in certain other Asian countries, subject
to milestone and royalty payments to Tularik. The Company retains exclusive
rights to manufacture and sell these products in the rest of the world, without
any payment obligation to Taisho. Taisho has the right to terminate the
collaboration prior to the commencement of sixth year. In the event of early
termination by Taisho, Tularik would have exclusive, worldwide, royalty-free
rights to all products identified in the collaboration.
In January 1995, the Company entered into a five-year collaboration with
Sumitomo to fund research and development in the field of hypercholesterolemia.
Under a related stock purchase agreement, Sumitomo purchased 400,000 shares of
Tularik's Series E preferred stock in February 1995 for $7.50 per share, the
fair value of the preferred stock at that date. Upon the selection of a lead
compound for certain preclinical studies, Sumitomo has the right to enter into
a separate license agreement granting Sumitomo exclusive rights to develop,
manufacture and sell the compound in Japan and in certain other Asian
countries, subject to royalty obligations to the Company. The collaboration
agreement grants Tularik exclusive rights to develop, manufacture and sell
these products in the rest of the world, without payment obligation to
Sumitomo. Sumitomo has the right to terminate the collaboration at any time
after three years of the five-year term.
In December 1993, Tularik established a collaboration with Merck to fund
research and development in specified fields of human viral disease. Under a
related stock purchase agreement, Merck purchased 400,000 shares of the
Company's Series D preferred stock in January 1994 for $5.00 per share, the
fair value of the preferred stock at that date. In December 1996, the companies
amended the original agreement, extending its term to December 1999. In March
1999, utilizing early termination rights under the amended agreement, Merck
terminated the collaboration.
In November 1993, the Company entered into a five-year collaboration
agreement with Yamanouchi to fund research and development in the field of
inflammation. Under a related stock purchase agreement, Yamanouchi purchased
400,000 shares of Tularik's Series D Preferred Stock in February 1994 for $5.00
per share, the fair value of the preferred stock at that date. In November
1996, utilizing early termination rights under the agreement, Yamanouchi
terminated the collaboration after three years of the five year term.
F-12
<PAGE>
TULARIK INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information for the nine-month period ended September 30, 1998 is unaudited)
4. Investments
The following is a summary of available-for-sale securities at cost, which
approximates fair value (in thousands):
<TABLE>
<CAPTION>
December 31,
--------------- September 30,
1997 1998 1999
------- ------- -------------
<S> <C> <C> <C>
Cash equivalents:
Money market funds......................... $ 1,624 $ 2,659 $ 2,039
Corporate debt securities.................. 72,905 50,739 15,230
------- ------- -------
$74,529 $53,398 $17,269
======= ======= =======
Short-term investments:
Obligations of domestic governmental
agencies.................................. $10,000 $12,999 $12,004
Corporate debt securities.................. 39,861 45,927 74,915
------- ------- -------
$49,861 $58,926 $86,919
======= ======= =======
</TABLE>
As of December 31, 1997 and 1998 and September 30, 1999, the average
portfolio duration was approximately three, five and eight months,
respectively.
5. Property and Equipment
The following is a summary of property and equipment at (in thousands):
<TABLE>
<CAPTION>
December 31,
---------------- September 30,
1997 1998 1999
------- ------- -------------
<S> <C> <C> <C>
Laboratory and office equipment............ $10,808 $15,063 $ 18,344
Leasehold improvements..................... 1,702 5,376 8,785
Construction in progress................... 31 235 --
------- ------- --------
12,541 20,674 27,129
Less accumulated depreciation and
amortization.............................. (6,332) (8,724) (11,455)
------- ------- --------
Property and equipment, net................ $ 6,209 $11,950 $ 15,674
======= ======= ========
</TABLE>
6. Acquisition
On October 31, 1997, the Company acquired Amplicon Corporation ("Amplicon"),
a research organization engaged principally in identifying and characterizing
human genes involved in certain cancers, whereby Amplicon became a wholly owned
subsidiary of Tularik (the "Acquisition"). Under the related Agreement and Plan
of Merger and Reorganization, Tularik issued a total of 1,620,004 shares of
Tularik Series H preferred stock and warrants to acquire an additional 245,456
shares of Tularik Series H preferred stock in exchange for all of Amplicon's
outstanding capital stock. In addition, all outstanding stock options to
purchase Amplicon common stock were replaced with options to purchase 29,976
shares of Tularik Series H preferred stock and warrants to purchase 4,544
shares of Series H preferred stock. The acquisition was accounted for under the
purchase method. The purchase price was approximately $18.9 million including
the fair value of the Tularik Series H preferred stock and warrants as of the
effective date of the Acquisition, plus direct acquisition costs. The assets
and liabilities assumed by the Company were recorded based on their fair values
at the date of acquisition. The purchase price was allocated $18.9 million to
in-process research and
F-13
<PAGE>
TULARIK INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information for the nine-month period ended September 30, 1998 is unaudited)
development and $24,000 to net tangible assets. Management is responsible for
estimating the amount allocated to in-process research and development, which
was expensed at the time of acquisition. The Company's results of operations
include Amplicon's results from October 31, 1997.
At the date of the acquisition, Amplicon's sole activity was performing basic
research to identify genes that may result in the development of diagnostic and
therapeutic products for the treatment of cancer. Prior to the acquisition,
Amplicon had discovered over twenty novel genetic regions that are commonly
mutated in human cancers and was actively searching for genes within these
regions that play an important role in the development of cancer. Amplicon's
efforts to identify cancer genes relied heavily on a proprietary methodology,
Representational Difference Analysis, that is distinguished from other methods
by its ability to identify non-inherited genetic mutations. The
Representational Difference Analysis methodology is specifically applicable to
the discovery of cancer genes, acquired genetic mutations and pathogens and
does not have alternative future uses.
In order to estimate the value of the cancer gene discovery project and the
related methodology at the time of the acquisition, management considered a
wide range of estimates of the time and resources necessary to identify,
characterize, develop and obtain regulatory approval for potential cancer
diagnostics and therapeutics and the related market size and potential cash
flows from developed products. Management also considered the risks associated
with the development process, including the inherent difficulties and
uncertainties in successfully developing diagnostic and therapeutic products,
thereby achieving technological feasibility, and the risk related to changes in
target markets.
The Company's analysis, performed using the income method, assumed inception
of product revenues beginning in 2002. Given the high degree of uncertainty
inherent in the discovery and development of diagnostic and therapeutic
products, the analysis applied a risk adjusted discount rate of 40% to the
forecasted cash flows to estimate the present value of the acquired project and
related methodology. Using this approach, the Company concluded that the
estimated fair value of the acquired in-process research and development was
$21.4 million at the date of the acquisition. Management believes that this
amount did not exceed the amount a third party would have paid for the project.
Accordingly, the purchase price was allocated to the tangible and intangible
net assets acquired and $18.9 million was charged to acquired in-process
research and development. Had a lower value been assigned to the acquired in-
process research and development, the difference would have been recorded as
goodwill and amortized to operating expense over future periods.
To date, no products have been developed from this project, technological
feasibility has not been proven and no corporate collaborations have been
consummated based on the research at Amplicon. Accordingly, the future benefits
of the ongoing research remain uncertain and the value allocated to the
acquired in-process research and development was expensed at the time of
acquisition.
7. License Agreement
On September 24, 1999, the Company entered into a license agreement with Eli
Lilly under which it obtained an exclusive, worldwide, royalty-bearing license
to make, use and sell pharmaceutical products containing a compound known as
lometrexol. In connection with this agreement, the Company paid $3.0 million to
Eli Lilly as an initial license fee and agreed to pay certain milestones and
royalties upon successful commercialization of lometrexol. Under the agreement,
Eli Lilly granted the Company a license to its proprietary technology relating
to lometrexol, and also a sublicense under an exclusive license granted to Eli
Lilly by Princeton University relating to lometrexol. Eli Lilly has specified
obligations under the agreement to maintain the license from Princeton. Eli
Lilly has the right to match the material terms of any offer made by a
F-14
<PAGE>
TULARIK INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information for the nine-month period ended September 30, 1998 is unaudited)
third party to Tularik for commercialization rights relating to lometrexol
products. The Company may terminate the agreement with Eli Lilly upon written
notice and Eli Lilly may terminate our license in specified major countries if
we fail to use reasonable diligence to develop lometrexol products in these
countries, and may terminate the agreement if we fail to use appropriate
diligence to develop lometrexol products in a predetermined number of major
countries. If Eli Lilly terminates the agreement, Eli Lilly obtains a
nonexclusive, royalty-bearing, worldwide license to our technical improvements
to lometrexol.
At the date of the license agreement, lometrexol had completed the first of
three phases of clinical trials required to seek regulatory approval from the
FDA. No trials had been commenced that could have demonstrated, with
statistical significance, the effectiveness of lometrexol as a treatment for
any type of cancer. These trials, necessary to establish the technological
feasibility of lometrexol, will not be completed for at least several years. In
addition, lometrexol has no known alternative future uses. Accordingly, the
initial license payment was allocated to acquired in-process research and
development and expensed at the time of the agreement.
8. Long-Term Obligations
At September 30, 1999, the Company's aggregate commitments under long-term
debt and noncancelable lease arrangements are as follows:
<TABLE>
<CAPTION>
Year ended Long-Term Operating
September 30, Debt Capital Leases Leases
------------- --------- -------------- ---------
(In thousands)
<S> <C> <C> <C>
2000...................................... $ 3,661 $ 1,917 $ 4,614
2001...................................... 3,472 1,554 4,820
2002...................................... 2,640 764 4,762
2003...................................... 2,374 891 4,689
2004...................................... -- -- 4,776
Thereafter................................ -- -- 41,297
------- ------- -------
Total minimum payment required............ 12,147 5,126 $64,958
=======
Less amount representing interest......... (1773) (844)
-------
Present value of future payments 10,374 4,282
Less current portion...................... (2,642) (1,760)
------- -------
$ 7,732 $ 2,522
======= =======
</TABLE>
Equipment and leasehold improvements financed under these arrangements are
included in property and equipment and related amortization is included in
depreciation expense. In 1998, the Company entered into sale and leaseback
agreements covering certain laboratory equipment. No gain or loss was
recognized on these transactions. The leases are classified as capital leases.
The cost of assets under secured financing arrangements was $6.7 million, $10.2
million and $18.9 million and the related accumulated depreciation and
amortization was $3.7 million, $5.0 million and $7.8 million at December 31,
1997 and 1998 and at September 30, 1999, respectively.
Rent expense, principally for leased facilities under long-term operating
lease commitments, was $2.0 million, $2.3 million, $2.4 million and $3.5
million for 1996, 1997, 1998 and for the nine months ended September 30, 1999,
respectively. In connection with the sublease of space in the Company's
facilities, Tularik is entitled to receive minimum lease payments of $502,000
in 1999, $512,000 in 2000, and $257,000 in 2001. The Company received sublease
income of $464,000 during the nine months ended September 30, 1999. The Company
did not receive sublease income in 1996, 1997 and 1998.
F-15
<PAGE>
TULARIK INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information for the nine-month period ended September 30, 1998 is unaudited)
9. Convertible Preferred Stock
All series of preferred stock are convertible at the option of the holder at
any time into common stock on a one-for-one basis, subject to adjustment for
antidilution, and carry voting rights equivalent to common stock. Each share of
preferred stock automatically converts into one share of common stock in the
event of an initial public offering of the Company's common stock in which
gross offering proceeds exceed $10.0 million and the offering price is at least
$10.25 per share or upon the vote by holders of at least two-thirds of the
outstanding preferred stock. Holders of convertible preferred stock are
entitled to noncumulative dividends when and if declared by the board of
directors. No dividends have been declared through September 30, 1999.
In the event of a liquidation or winding up of the Company, holders of Series
A, B, C, D, E, F, G and H convertible preferred stock are entitled to a
liquidation preference of $1.00, $2.37, $3.70, $5.00, $7.50, $10.00, $10.25 and
$11.00 per share, respectively, together with any declared but unpaid
dividends. The preferred stock authorized, issued and outstanding at September
30, 1999 is as follows:
<TABLE>
<CAPTION>
Aggregate
Authorized Shares Issued and Liquidation
Shares Outstanding Preference
---------- ----------------- --------------
(In thousands)
<S> <C> <C> <C>
Series A......................... 3,900,000 3,900,000 $ 3,900
Series B......................... 3,375,531 3,361,894 7,968
Series C......................... 5,400,000 5,270,152 19,500
Series D......................... 820,000 800,000 4,000
Series E......................... 440,000 400,000 3,000
Series F......................... 8,500,000 6,272,000 62,720
Series G......................... 7,500,000 5,319,634 54,526
Series H......................... 2,050,000 1,629,859 17,928
---------- ---------- --------
31,985,531 26,953,539 $173,542
========== ========
Undesignated..................... 1,014,469
----------
33,000,000
==========
</TABLE>
A summary of warrants to purchase preferred stock at September 30, 1999 is as
follows:
<TABLE>
<CAPTION>
Term
Number of Exercise in
Description Warrants Price Years Expiration
----------- --------- ------------- ----- ----------
<S> <C> <C> <C> <C>
Lease financing arrangements...... 124,972 $3.70-$7.50 7 1999-2002
Issuance of Series F preferred
stock............................ 253,600 $10.00 10 2006
Acquisition of Amplicon........... 296,949 $10.00-$13.00 10 2007
Facility lease agreement.......... 139,570 $13.00 10 2008
-------
815,091
=======
</TABLE>
10. Common Stock
Warrant
The Company issued a warrant to purchase 200,000 shares of common stock for
$7.50 per share in connection with a facility lease that was executed in 1995.
The warrant expires on the earlier of the five-year anniversary of the
Company's initial public offering or April 20, 2005. The value of the warrant
was determined to be immaterial at issuance. As of September 30, 1999, this
warrant has not been exercised.
F-16
<PAGE>
TULARIK INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information for the nine-month period ended September 30, 1998 is unaudited)
Stock Awards
During 1997, the board of directors terminated the 1991 Stock Plan ("1991
Plan") and adopted the 1997 Equity Incentive Plan and the 1997 Non-Employee
Directors' Plan ("1997 Plans"). Termination of the 1991 Plan had no effect on
options outstanding under that plan. The 1997 Plans provide for stock options
and stock purchase rights to be granted to employees, directors and
consultants. Under the Equity Incentive Plan, shares available for grant are
increased by three and one-half percent of the total number of shares
outstanding at the end of each year from 1997 to 2002 up to a maximum of
2,000,000 shares per year. Options granted under the Equity Incentive Plan may
be incentive stock options or nonstatutory stock options. Exercise prices are
determined by the board of directors and may not be less than 100% of the fair
value of the Company's common stock (not less than 85% of fair value for
nonstatutory stock options granted under the Equity Incentive Plan) on the date
of grant. Options and purchase rights are exercisable upon grant, subject to
repurchase by the Company until vested and generally vest over four years. All
options expire no more than 10 years from the date of grant.
The Company has elected to follow APB No. 25 and related Interpretations in
accounting for its stock options and stock purchase rights because, as
discussed below, the alternative fair value accounting provided for under SFAS
123 requires use of option valuation models that were not developed for use in
valuing employee stock options and rights.
During the year ended December 31, 1998 and during the nine months ended
September 30, 1999, in connection with the grant of certain share options to
employees, the Company recorded deferred stock compensation of $710,000 and
$6.4 million, respectively, representing the difference between the exercise
price and the deemed fair value of the Company's common stock on the date these
stock options were granted. Deferred compensation is included as a reduction of
stockholders' equity and is being amortized to expense on a graded vesting
method. During the year ended December 31, 1998 and during the nine months
ended September 30, 1999, the Company recorded amortization of deferred stock
compensation expense of approximately $31,000 and $1.7 million, respectively.
At September 30, 1999, the Company had a total of approximately $5.4 million
remaining to be amortized over the corresponding vesting period of each
respective option, generally four years.
Pro forma net loss and net loss per share information is required by SFAS
123, which also requires that the information be determined as if the Company
had accounted for its employee stock options and rights granted subsequent to
December 31, 1994 under the fair value method. The fair value for these options
and the purchase rights was estimated at the date of grant using the minimum
value method with the following weighted-average assumptions for 1996, 1997,
1998 and for the nine months ended September 30, 1999, respectively: risk free
interest rates of 6.6%, 6.0%, 5.5% and 6.0%; no dividend yield; and a weighted-
average expected life of the options of 5 years. Pro forma information follows:
<TABLE>
<CAPTION>
Nine Months
Ended
Year Ended December 31, September 30,
--------------------------- -----------------
1996 1997 1998 1998 1999
------- -------- -------- ------- --------
(In thousands, except per
share amounts)
<S> <C> <C> <C> <C> <C>
Net loss:
As reported................. $(5,480) $(25,374) $(10,539) $(9,303) $(18,954)
======= ======== ======== ======= ========
Pro forma................... $(5,576) $(25,692) $(11,179) $(9,783) $(20,340)
======= ======== ======== ======= ========
Net loss per share (basic and
diluted):
As reported................. $ (1.09) $ (4.19) $ (1.55) $ (1.40) $ (2.57)
======= ======== ======== ======= ========
Pro forma................... $ (1.11) $ (4.24) $ (1.65) $ (1.47) $ (2.75)
======= ======== ======== ======= ========
</TABLE>
F-17
<PAGE>
TULARIK INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information for the nine-month period ended September 30, 1998 is unaudited)
A summary of the Company's stock option activity, and related information
follows:
<TABLE>
<CAPTION>
Number of Weighted-Average
Options Exercise Price
---------- ----------------
<S> <C> <C>
Options outstanding at December 31, 1995........ 2,928,125 $0.44
Granted....................................... 2,186,000 0.91
Exercised..................................... (1,851,877) 0.71
Forfeited..................................... (289,498) 0.51
----------
Options outstanding at December 31, 1996........ 2,972,750 0.61
Granted....................................... 1,401,300 3.00
Exercised..................................... (648,422) 1.21
Forfeited..................................... (40,520) 1.40
----------
Options outstanding at December 31, 1997........ 3,685,108 1.41
Granted....................................... 2,065,700 3.00
Exercised..................................... (273,894) 1.32
Forfeited..................................... (143,567) 2.76
----------
Options outstanding at December 31, 1998........ 5,333,347 1.99
Granted....................................... 1,501,500 3.00
Exercised..................................... (764,729) 1.95
Forfeited..................................... (132,115) 2.69
----------
Options outstanding at September 30, 1999....... 5,938,003 2.24
==========
</TABLE>
An analysis of options outstanding at September 30, 1999, is as follows:
<TABLE>
<CAPTION>
Weighted
Options Average Weighted Options Weighted
Outstanding at Remaining Average Vested at Average
Exercise September 30, Contractual Exercise September 30, Exercise
Price 1999 Life Price 1999 Price
---------- -------------- ----------- -------- ------------- --------
<S> <C> <C> <C> <C> <C>
$0.45-0.99 1,828,896 5.44 $0.54 1,662,191 $0.52
1.00-1.99 2,000 6.93 1.00 1,542 1.00
2.00-3.00 4,107,107 8.78 2.99 1,162,588 2.98
--------- ---------
5,938,003 7.75 2.24 2,826,321 1.53
========= =========
</TABLE>
The weighted-average fair value of options granted during 1996, 1997, 1998
and the nine months ended September 30, 1999 was $0.27, $0.76, $0.70 and $5.39,
respectively.
The information above does not include 13,962 options with exercise price
from $0.70 to $0.95 granted to employees in connection with the Acquisition and
4,000 options with an exercise price of $0.50 granted to a third party outside
of the Company's stock option plans.
Stock Subject to Repurchase
As of December 31, 1997 and 1998 and September 30, 1999, the Company had
462,635, 1,004,050, and 515,432 shares of common stock outstanding,
respectively, which were subject to the Company's lapsing right of repurchase
in the event the holder's association with the Company terminates. These shares
are the result of the exercise of unvested stock options by employees and
shares of common stock sold to a board member which vest over the four-year
period of the board member's term. The shares which relate to the exercise of
unvested stock options will vest over the four-year vesting period of the
underlying exercised stock options.
F-18
<PAGE>
TULARIK INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information for the nine-month period ended September 30, 1998 is unaudited)
Reserved Shares
Shares of common stock reserved for future issuance were as follows:
<TABLE>
<CAPTION>
December 31, September 30,
1998 1999
------------ -------------
<S> <C> <C>
Warrants:
Outstanding warrants............................ 1,078,382 1,015,091
Reserved for future issuance.................... 3,051 3,051
Stock option plans:
Outstanding options............................. 5,351,447 5,955,965
Reserved for future grants...................... 1,737,772 436,112
Convertible preferred stock:
Issued and outstanding.......................... 26,903,885 26,953,539
---------- ----------
35,074,537 34,363,758
========== ==========
</TABLE>
11. Related Party Transactions
During the years ended December 31, 1996, 1997 and 1998 and for the nine
months ended September 30, 1999, the Company loaned stockholders $200,000,
$194,132, $357,000 and $595,000, respectively. The loans were made in
connection with stock option exercises, relocation and housing. The loans have
interest rates which range from interest-free to 6.1% and certain of the loans
provide for forgiveness based on continued employment. The loans are full-
recourse and amounts forgiven have been recorded as compensation expense. The
loans made in connection with stock option exercises have been recorded in
stockholders' equity in the accompanying financial statements.
12. Employee Savings Plan
The Company has an employee savings plan, which permits substantially all
employees to participate and to make contributions by salary reductions as
provided in section 401(k) of the Internal Revenue Code. In 1998, the Company
began matching a percentage of employee contributions up to a specified amount
in the form of Tularik common stock. Under this plan, the Company contributed
34,235 and 39,920 shares of common stock to employee savings accounts and
recognized compensation expense of $188,000 and $309,000 in 1998 and for the
nine months ended September 30, 1999, respectively.
13. Income Taxes
As of September 30, 1999, Tularik had federal net operating loss
carryforwards of approximately $54.2 million. The net operating loss
carryforwards will expire at various dates beginning on 2007 through 2019, if
not utilized.
F-19
<PAGE>
TULARIK INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information for the nine-month period ended September 30, 1998 is unaudited)
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
and the amount used for income tax purposes. Significant components of the
Company's deferred tax assets are as follows (in thousands):
<TABLE>
<CAPTION>
December 31,
------------------ September 30
1997 1998 1999
-------- -------- ------------
<S> <C> <C> <C>
Net operating loss carryforwards.......... $ 8,400 $ 13,200 $18,900
Research credits (expiring 2007 to 2019).. 1,700 3,000 3,900
Depreciation.............................. 2,500 1,200 1,100
Capitalized research and development...... 700 3,200 2,200
Other, net................................ 200 -- 2,300
-------- -------- --------
Total deferred tax assets................. 13,500 20,600 28,400
Valuation allowance for deferred tax
assets................................... (13,500) (20,600) (28,400)
-------- -------- --------
Net deferred tax assets................... $ -- $ -- $ --
======== ======== ========
</TABLE>
Because of the Company's lack of earnings history, the deferred tax assets
have been fully offset by a valuation allowance. The valuation allowance
increased by approximately $1.7 million, $3.0 million, $7.1 million and $7.8
million during the years ended December 31, 1996, 1997 and 1998 and the nine
months ended September 30, 1999, respectively.
Utilization of the net operating losses and credits may be subject to a
substantial annual limitation due to ownership change limitations provided by
the Internal Revenue Code of 1986. The annual limitation may result in the
expiration of net operating losses and credits before utilization.
14. Supplemental Cash Flow Information
Selected cash payments and noncash activities were as follows (in thousands):
<TABLE>
<CAPTION>
Years ended December Nine months ended
31, September 30,
-------------------- -----------------
1996 1997 1998 1998 1999
------ ------- ----- -------- --------
<S> <C> <C> <C> <C> <C>
Interest paid....................... $ 556 $ 549 $ 508 $ 355 $ 670
====== ======= ===== ======== ========
Equipment and leasehold improvements
financed under capital leases...... $2,137 $ 1,185 $ -- $ -- $ --
====== ======= ===== ======== ========
Common stock issued for notes
receivable......................... $ 571 $ 263 $ 149 $ 149 $ 340
====== ======= ===== ======== ========
Issuance of preferred stock and
warrants in connection with
Acquisition........................ $ -- $18,276 $ -- $ -- $ --
====== ======= ===== ======== ========
</TABLE>
15. Subsequent Events
Initial Public Offering
In October 1999, the board of directors authorized the filing of a
registration statement with the Securities and Exchange Commission to register
shares of its common stock in connection with a proposed Initial Public
Offering. If the offering contemplated by this prospectus is consummated, the
preferred stock outstanding as of
F-20
<PAGE>
TULARIK INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information for the nine-month period ended September 30, 1998 is unaudited)
the closing date will be converted into shares of the Company's common stock.
The pro forma stockholders' equity in the accompanying consolidated balance
sheet as of September 30, 1999 reflects conversion of the outstanding preferred
stock into 26,953,539 shares of common stock. Pro forma net loss per share is
computed as if the outstanding preferred stock has been converted into common
stock on the date of issuance.
1999 Employee Stock Purchase Plan
In November 1999, the Company adopted its 1999 Employee Stock Purchase Plan,
authorizing the issuance of common stock through purchase rights granted to
employees or to employees of affiliates, if any. The purchase plan authorizes
the issuance of a total of 500,000 shares of common stock. This reserve amount
will be increased each January 1 beginning January 1, 2001, by the lesser of
500,000 shares of common stock or 1% of the number of shares of common stock
outstanding on that date. However, our board of directors has the authority to
designate a smaller number of shares by which the authorized number of shares
of common stock will be increased on that date.
F-21
<PAGE>
6,250,000 Shares
[TULARIK INC. LOGO]
Common Stock
------------
PROSPECTUS
, 1999
------------
Lehman Brothers
Hambrecht & Quist
J.P. Morgan & Co.
Warburg Dillon Read LLC
<PAGE>
Part II
Information Not Required in Prospectus
Item 13. Other Expenses of Issuance and Distribution
The following table sets forth the costs and expenses, other than the
underwriting discounts payable by us, in connection with the sale of common
stock being registered. All amounts are estimates except the SEC registration
fee, the NASD filing fee and the Nasdaq National Market listing fee.
<TABLE>
<S> <C>
SEC registration fee.............................................. $25,976
NASD filing fee................................................... 9,844
Nasdaq National Market listing fee................................ 95,000
Blue Sky Fees and Expenses........................................ 10,000
Transfer Agent and Registrar fees................................. 10,000
Accounting fees and expenses...................................... 250,000
Legal fees and expenses .......................................... 425,000
Printing and engraving costs ..................................... 150,000
Miscellaneous expenses ........................................... 24,180
----------
Total........................................................... $1,000,000
==========
</TABLE>
Item 14. Indemnification of Directors and Officers
As permitted by Delaware law, our amended and restated certificate of
incorporation provides that no director of ours will be personally liable to us
or our stockholders for monetary damages for breach of fiduciary duty as a
director, except for liability:
. for any breach of duty of loyalty to us or to our stockholders;
. for acts or omissions not in good faith or that involve intentional
misconduct or a knowing violation of law;
. for unlawful payment of dividends or unlawful stock repurchases or
redemptions under Section 174 of the Delaware General Corporation Law; or
. for any transaction from which the director derived an improper personal
benefit.
Our amended and restated certificate of incorporation further provides that
we must indemnify our directors and executive officers and may indemnify our
other officers and employees and agents to the fullest extent permitted by
Delaware law. We believe that indemnification under our amended and restated
certificate of incorporation covers negligence and gross negligence on the part
of indemnified parties.
We have entered into indemnification agreements with each of our directors
and certain officers. These agreements, among other things, require us to
indemnify each director and officer for certain expenses including attorneys'
fees, judgments, fines and settlement amounts incurred by any such person in
any action or proceeding, including any action by or in the right of Tularik,
arising out of the person's services as our director or officer, any subsidiary
of ours or any other company or enterprise to which the person provides
services at our request.
The underwriting agreement (Exhibit 1.1) will provide for indemnification by
the underwriters of Tularik, our directors, our officers who sign the
registration statement, and our controlling persons for some liabilities,
including liabilities arising under the Securities Act.
II-1
<PAGE>
Item 15. Recent Sales Of Unregistered Securities
Since September 1, 1996, Tularik has sold and issued unregistered securities
to a limited number of persons, as described below. None of these transactions
involved any underwriters, underwriting discounts or commissions, or any public
offering, and Tularik believes that each transaction was exempt from the
registration requirements of the Securities Act by virtue of Section 4(2)
thereof, Regulation D promulgated thereunder or Rule 701 pursuant to
compensatory benefit plans and contracts relating to compensation as provided
under Rule 701. The recipients of securities in each such transaction
represented their intention to acquire the securities for investment only and
not with a view to or for sale in connection with any distribution thereof, and
appropriate legends were affixed to the share certificates and instruments
issued in such transactions. We believe that all recipients had adequate access
to information about Tularik, through their relationships with Tularik.
Since September 1, 1996, Tularik has sold and issued the following
unregistered securities:
(1) From September 1996 to September 1999, we granted incentive stock options
and nonstatutory stock options to purchase an aggregate of 5,544,000 shares of
Tularik's common stock at exercise prices ranging from $1.00 to $3.00 per share
to employees, directors and consultants under the 1991 Stock Plan, 1997 Equity
Incentive Plan and 1997 Non-Employee Directors' Stock Option Plan and issued an
aggregate of 2,445,212 shares upon the exercise of these and previously granted
options. Options to purchase 384,650 shares of common stock have been canceled,
and 18,343 of these options have lapsed without being exercised.
(2) In September 1996, we issued three warrants to purchase an aggregate of
200,000 shares of common stock at an exercise price of $7.50 per share.
Warrants to purchase 20,000 shares were issued to Brittania Investments, LLC,
warrants to purchase 90,000 shares were issued to National Electrical Benefit
Fund and warrants to purchase 90,000 shares were issued to SDK Incorporated.
(3) In September 1996, we sold an aggregate of 1,308,000 shares of Series F
preferred stock to six purchasers at a purchase price of $10.00 per share.
(4) In October 1996, we sold an aggregate of 4,964,000 shares of Series F
preferred stock to 32 purchasers at a purchase price of $10.00 per share.
(5) In October 1996, we issued two warrants to purchase an aggregate of
253,600 shares of Series F preferred stock at an exercise price of $10.00 per
share. Warrants to purchase 126,800 shares were issued to The Magnum Trust and
warrants to purchase 126,800 shares were issued to Broadview Limited.
(6) In September 1997, we sold an aggregate of 32,000 shares of Series G
preferred stock to four purchasers at a purchase price of $10.25 per share.
(7) In October 1997, we issued an aggregate of 1,620,004 shares of Series H
preferred stock to 22 former stockholders of Amplicon Corp. in exchange for
outstanding shares of Amplicon stock and issued 22 warrants to purchase
245,456 shares of Series H preferred stock at an exercise price of $13.00 per
share. These shares were issued as consideration for the acquisition of
Amplicon.
(8) In October 1997, we issued a warrant to purchase 50,000 shares of Series
H preferred stock to Broadview Limited at an exercise price of $10.00 per
share.
(9) In November 1997, we sold an aggregate of 285,634 shares of Series G
preferred stock to three purchasers at a purchase price of $10.25 per share.
(10) In December 1997, we sold an aggregate of 5,002,000 shares of Series G
preferred stock to two purchasers at a purchase price of $10.25 per share.
(11) In March 1998, we issued an aggregate of 37,260 shares of Series C
preferred stock to Frazier & Company L.P. upon cashless exercise of a warrant
to purchase shares of Series C preferred stock.
II-2
<PAGE>
(12) In June 1999, we issued an aggregate of 49,654 shares of Series B
preferred stock to Comdisco, Inc. upon cashless exercise of a warrant to
purchase shares of Series B preferred stock.
(13) In August 1999, we issued three warrants to purchase an aggregate of
139,570 shares of Series H preferred stock at an exercise price of $13.00 per
share. Warrants to purchase 125,613 shares were issued to Slough Estates USA
Inc., warrants to purchase 11,166 shares were issued to Bristow Investments,
L.P. and warrants to purchase 2,791 shares were issued to Laurence Shushan and
Magdalena Shushan, Trustees of the Laurence and Magdalena Shushan Family Trust.
(14) From November 1997 to September 1999, we issued an aggregate of 9,855
shares of Series H preferred stock to six former stockholders of Amplicon Corp.
upon the exercise of outstanding Amplicon options at exercise prices ranging
from $0.70 to $0.95 per share. In connection with the issuance of these 9,855
shares of Series H preferred stock, we issued seven warrants to purchase an
aggregate of 1,493 shares of Series H preferred stock at an exercise price of
$13.00 per share.
Item 16. (a) Exhibits and Financial Statement Schedules
<TABLE>
<C> <S>
1.1* Form of U.S. Underwriting Agreement.
1.2* Form of International Underwriting Agreement.
1.3 Form of Purchase Agreement for Pharma Vision 2000 AG.
3.1+ Amended and Restated Certificate of Incorporation of Registrant to
be filed upon the closing of the offering made in connection with
this Registration Statement.
3.2+ Amended and Restated Bylaws of Registrant to be filed upon the
closing of the offering made in connection with this Registration
Statement.
4.1 Specimen Common Stock Certificate.
4.2+ Amended and Restated Registration Rights Agreement, dated August 15,
1999, between Registrant and holders of Registrant's Series A,
Series B, Series C, Series D, Series E, Series F and Series G
preferred stock and holders of warrants to purchase Registrant's
common stock or Series H preferred stock.
4.3+ Investor Rights Agreement, dated October 31, 1997, between
Registrant and holders of Registrant's Series H preferred stock.
5.1 Opinion of Cooley Godward LLP.
10.1+ Form of Indemnity Agreement.
10.2+ 1991 Stock Plan and related documents.
10.3 1997 Equity Incentive Plan and related documents.
10.4 1997 Non-Employee Directors' Stock Option Plan and related
documents.
10.5 1999 Employee Stock Purchase Plan.
10.6+++ Collaboration Agreement between Registrant and Sumitomo
Pharmaceuticals Co., Ltd., dated January 31, 1995, as amended March
13, 1997.
10.7+++ Research, Collaboration and License/Development Agreement between
Registrant and Taisho Pharmaceutical Co., Ltd., dated March 20,
1996, as amended on January 1, 1998 and January 1, 1999.
10.8+++ Amended and Restated Collaboration and License Agreement between
Registrant and Merck & Co., Inc., dated December 22, 1996.
10.9+++ Research Collaboration and License Agreement between Registrant and
the Roche Bioscience division of Syntex (U.S.A.) Inc., dated July 8,
1997, as amended on December 19, 1997.
10.10+++ Research Agreement between Registrant and Cold Spring Harbor
Laboratory, dated October 3, 1997.
</TABLE>
II-3
<PAGE>
<TABLE>
<C> <S>
10.11+++ License Agreement between Registrant and Cold Spring Harbor
Laboratory, dated October 3, 1997.
10.12+++ Collaboration Agreement between Registrant and Knoll AG, dated
November 1, 1998.
10.13+++ Preliminary Research, Development and Marketing Agreement between
Registrant and Japan Tobacco Inc., dated September 8, 1998.
10.14+++ Preliminary Research, Development and Marketing Agreement between
Registrant and Japan Tobacco Inc., dated September 20, 1998.
10.15+++ Screening Agreement between Registrant and Japan Tobacco Inc., dated
August 23, 1999.
10.16+++ Licensing Agreement between Registrant and Eli Lilly and Company,
dated September 24, 1999.
10.17+ Stock Purchase Agreement between Registrant and the 1987 Swanson
Family Trust, dated June 20, 1996, as amended August 17, 1996.
10.18+ Sublease between Registrant and AGY Therapeutics, Inc., dated January
25, 1999.
10.19+ Sublease between Registrant and Coulter Pharmaceuticals, Inc., dated
May 1, 1999.
10.20+ Sublease between Registrant and IGEN International, Inc., dated
August 20, 1999.
10.21+ Lease Agreement between Leonard Racanelli and The Rosa Racanelli 1998
Trust, dated July 23, 1998.
10.22+ Sublease between Registrant and GeneSoft Inc., dated November 16,
1998.
10.23+ Lease Agreement between Registrant and Brittania Developments, Inc.,
dated April 20, 1995.
10.24+ Lease Agreement between Registrant and Brittania Developments, Inc.,
dated February 10, 1998.
10.25+ Agreement and General Release between Registrant and John P.
McLaughlin, dated September 30, 1999.
22.1+ List of Subsidiaries.
23.1 Consent of Ernst & Young LLP, Independent Auditors.
23.2* Consent of Cooley Godward LLP (included in Exhibit 5.1).
24.1+ Power of Attorney (contained on signature page).
27.1+ Financial Data Schedule.
</TABLE>
- --------
* To be filed by amendment.
++ Confidential treatment requested as to specific portions, which portions are
omitted and filed separately with the Securities and Exchange Commission.
+ Previously filed.
(b)Financial Statement Schedules
All schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission are not required under
the related instructions or are inapplicable, and therefore have been omitted.
Item 17. Undertakings
The registrant hereby undertakes to provide to the Underwriters at the
closing specified in the Underwriting Agreement certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
II-4
<PAGE>
Insofar as indemnification by the registrant for liabilities arising under
the Securities Act may be permitted to directors, officers and controlling
persons of the registrant pursuant to the provisions referenced in Item 14 of
this Registration Statement or otherwise, the registrant has been advised that
in the opinion of the Securities and Exchange Commission such indemnification
is against public policy as expressed in the Securities Act, and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the registrant of expenses incurred or
paid by a director, officer, or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered hereunder, the registrant will, unless in the opinion of its counsel
the matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed
by the final adjudication of such issue.
The registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act, the
information omitted from the form of Prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form of
Prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of this Registration
Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act,
each post-effective amendment that contains a form of Prospectus 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.
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Amendment No. 3 to the Registration Statement
to be signed on its behalf by the undersigned, thereunto duly authorized, in
the City of South San Francisco, State of California, on the 7th day of
December, 1999.
TULARIK INC.
/s/ Corinne H. Lyle
By:__________________________________
Corinne H. Lyle
Chief Financial Officer
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Amendment No. 3 to the Registration Statement has been signed below by the
following persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
* Chief Executive Officer December 7, 1999
______________________________________ and Director (Principal
David V. Goeddel Executive Officer)
/s/ Corinne H. Lyle Chief Financial Officer December 7, 1999
______________________________________ (Principal Finance and
Corinne H. Lyle Accounting Officer)
* Director December 7, 1999
______________________________________
A. Grant Heidrich, III
* Director December 7, 1999
______________________________________
Mark J. Levin
* Director December 7, 1999
______________________________________
Paul A. Marks
* Director December 7, 1999
______________________________________
Edward R. McCracken
* Director December 7, 1999
______________________________________
Steven L. McKnight
* Director December 7, 1999
______________________________________
Peter J. Sjostrand
</TABLE>
*By /s/ Corinne H. Lyle
- --------------------------------
(Attorney-In-Fact)
II-6
<PAGE>
Exhibit Index
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
1.1* Form of U.S. Underwriting Agreement.
1.2* Form of International Underwriting Agreement.
1.3 Form of Purchase Agreement for Pharma Vision 2000 AG.
3.1+ Amended and Restated Certificate of Incorporation of Registrant to
be filed upon the closing of the offering made in connection with
this Registration Statement.
3.2+ Amended and Restated Bylaws of Registrant to be filed upon the
closing of the offering made in connection with this Registration
Statement.
4.1 Specimen Common Stock Certificate.
4.2+ Amended and Restated Registration Rights Agreement, dated August 15,
1999, between Registrant and holders of Registrant's Series A,
Series B, Series C, Series D, Series E, Series F and Series G
preferred stock and holders of warrants to purchase Registrant's
common stock or Series H preferred stock.
4.3+ Investor Rights Agreement, dated October 31, 1997, between
Registrant and holders of Registrant's Series H preferred stock.
5.1 Opinion of Cooley Godward LLP.
10.1+ Form of Indemnity Agreement.
10.2+ 1991 Stock Plan and related documents.
10.3 1997 Equity Incentive Plan and related documents.
10.4 1997 Non-Employee Directors' Stock Option Plan and related
documents.
10.5 1999 Employee Stock Purchase Plan.
10.6+++ Collaboration Agreement between Registrant and Sumitomo
Pharmaceuticals Co., Ltd., dated January 31, 1995, as amended March
13, 1997.
10.7+++ Research, Collaboration and License/Development Agreement between
Registrant and Taisho Pharmaceutical Co., Ltd., dated March 20,
1996, as amended on January 1, 1998 and January 1, 1999.
10.8+++ Amended and Restated Collaboration and License Agreement between
Registrant and Merck & Co., Inc., dated December 22, 1996.
10.9+++ Research Collaboration and License Agreement between Registrant and
the Roche Bioscience division of Syntex (U.S.A.) Inc., dated July 8,
1997, as amended on December 19, 1997.
10.10+++ Research Agreement between Registrant and Cold Spring Harbor
Laboratory, dated October 3, 1997.
10.11+++ License Agreement between Registrant and Cold Spring Harbor
Laboratory, dated October 3, 1997.
10.12+++ Collaboration Agreement between Registrant and Knoll AG, dated
November 1, 1998.
10.13+++ Preliminary Research, Development and Marketing Agreement between
Registrant and Japan Tobacco Inc., dated September 8, 1998.
10.14+++ Preliminary Research, Development and Marketing Agreement between
Registrant and Japan Tobacco Inc., dated September 20, 1998.
10.15+++ Screening Agreement between Registrant and Japan Tobacco Inc., dated
August 23, 1999.
10.16+++ Licensing Agreement between Registrant and Eli Lilly and Company,
dated September 24, 1999.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
10.17+ Stock Purchase Agreement between Registrant and the 1987 Swanson
Family Trust, dated June 20, 1996, as amended August 17, 1996.
10.18+ Sublease between Registrant and AGY Therapeutics, Inc., dated January
25, 1999.
10.19+ Sublease between Registrant and Coulter Pharmaceuticals, Inc., dated
May 1, 1999.
10.20+ Sublease between Registrant and IGEN International, Inc., dated August
20, 1999.
10.21+ Lease Agreement between Leonard Racanelli and The Rosa Racanelli 1998
Trust, dated July 23, 1998.
10.22+ Sublease between Registrant and GeneSoft Inc., dated November 16,
1998.
10.23+ Lease Agreement between Registrant and Brittania Developments, Inc.,
dated April 20, 1995.
10.24+ Lease Agreement between Registrant and Brittania Developments, Inc.,
dated February 10, 1998.
10.25+ Agreement and General Release between Registrant and John P.
McLaughlin, dated September 30, 1999.
22.1+ List of Subsidiaries.
23.1 Consent of Ernst & Young LLP, Independent Auditors.
23.2* Consent of Cooley Godward LLP (included in Exhibit 5.1).
24.1+ Power of Attorney (contained on signature page).
27.1+ Financial Data Schedule.
</TABLE>
- --------
* To be filed by amendment.
++ Confidential treatment requested as to specific portions, which portions are
omitted and filed separately with the Securities and Exchange Commission.
+ Previously filed.
<PAGE>
Exhibit 1.3
__________ Shares
TULARIK INC.
Common Stock Purchase Agreement
December ___, 1999
Pharma Vision 2000 AG
Spielhof 3
8750 Glaris Switzerland
Dear Sirs:
Tularik Inc., a Delaware corporation (the "Company"), confirms its
agreement to sell to Pharma Vision 2000 AG ("Pharma Vision") __________ shares
of the Company's Common Stock, par value $0.001 per share (the "Pharma Vision
Stock"). In addition, the Company proposes to grant to Pharma Vision an option
to purchase up to an additional __________ shares of its Common Stock on the
terms and for the purposes set forth in Section 2 (the "Option Stock"). The
Pharma Vision Stock and the Option Stock, if purchased, are hereinafter
collectively called the "Stock." This is to confirm the agreement concerning the
purchase of the Stock from the Company by Pharma Vision.
It is understood by all parties that the Company is concurrently entering
into an agreement, dated the date hereof (the "Underwriting Agreement"),
providing for the sale by the Company of ____ shares of Common Stock (including
the over-allotment option thereunder) (the "Firm Stock") through arrangements
with certain underwriters inside the United States (the "U.S. Underwriters"),
for whom Lehman Brothers Inc., Hambrecht & Quist LLC, J.P. Morgan Securities
Inc. and Warburg Dillon Read LLC, are acting as lead managers. It is further
understood by all parties that the Company is concurrently entering into an
agreement dated the date hereof (the "International Underwriting Agreement")
providing for the sale by the Company of ____ shares of Common Stock (including
the over-allotment option thereunder) (the "International Stock") through
arrangements with certain underwriters outside the United States (the
"International Managers"), for whom Lehman Brothers Inc., Hambrecht & Quist LLC,
J.P. Morgan Securities Inc. and Warburg Dillon Read LLC, are acting as lead
managers. The Firm Stock and the International Stock, are hereinafter
collectively called the "Underwriters' Stock."
1. Representations, Warranties and Agreements of the Company. The Company
represents, warrants and agrees that:
1
<PAGE>
(a) A registration statement on Form S-1 with respect to the Stock has
(i) been prepared by the Company in conformity with the requirements of the
United States Securities Act of 1933, as amended (the "Securities Act"),
and the rules and regulations (the "Rules and Regulations") of the United
States Securities and Exchange Commission (the "Commission") thereunder,
(ii) been filed with the Commission under the Securities Act and (iii)
become effective under the Securities Act. Copies of such registration
statement have been delivered by the Company to Pharma Vision and the
representatives (the "Representatives") of the U.S. Underwriters. As used
in this Agreement, "Effective Time" means the date and the time as of which
such registration statement, or the most recent post-effective amendment
thereto, if any, was declared effective by the Commission; "Effective Date"
means the date of the Effective Time; "Preliminary Prospectus" means each
prospectus included in such registration statement, or amendments thereof,
before it became effective under the Securities Act and any prospectus
filed with the Commission by the Company with the consent of the
Representatives pursuant to Rule 424(a) of the Rules and Regulations;
"Registration Statement" means such registration statement, as amended at
the Effective Time, including all information contained in the final
prospectus filed with the Commission pursuant to Rule 424(b) of the Rules
and Regulations in accordance with Section 5 hereof and deemed to be a part
of the registration statement as of the Effective Time pursuant to
paragraph (b) of Rule 430A of the Rules and Regulations; and "Prospectus"
means such final prospectus, as first filed with the Commission pursuant to
paragraph (1) or (4) of Rule 424(b) of the Rules and Regulations. The
Commission has not issued any order preventing or suspending the use of any
Preliminary Prospectus.
(b) The Registration Statement conforms, and the Prospectus and any
further amendments or supplements to the Registration Statement or the
Prospectus will, when they become effective or are filed with the
Commission, as the case may be, conform in all respects to the requirements
of the Securities Act and the Rules and Regulations and do not and will
not, as of the applicable effective date (as to the Registration Statement
and any amendment thereto) and as of the applicable filing date (as to the
Prospectus and any amendment or supplement thereto) contain an untrue
statement of a material fact or omit to state a material fact required to
be stated therein or necessary to make the statements therein not
misleading; provided that no representation or warranty is made as to
information contained in or omitted from the Registration Statement or the
Prospectus or any further amendments to the Registration Statement or
Prospectus, in reliance upon and in conformity with written information
furnished to the Company through the Representatives by or on behalf of any
U.S. Underwriter specifically for inclusion therein.
(c) The Company and Amplicon Corp., a Delaware corporation (the
"Subsidiary"), have been duly incorporated and are validly existing as
corporations in good standing under the laws of their respective
jurisdictions of incorporation, are duly qualified to do business and are
in good standing as foreign corporations in each jurisdiction in which
their respective ownership or lease of property or the
2
<PAGE>
conduct of their respective businesses requires such qualification, except
where the failure to be so qualified would not have a material adverse
effect on the business, financial condition or results of operations of the
Company, and have all power and authority necessary to own or hold their
respective properties and to conduct business as described in the
Registration Statement and Prospectus; and the Subsidiary of the Company is
not a "significant subsidiary," as such term is defined in Rule 405 of the
Rules and Regulations. The Company has no subsidiaries (as defined in
Section 15), other than the Subsidiary.
(d) The Company has an authorized capitalization as set forth in the
Prospectus, and all of the issued shares of capital stock of the Company
have been duly and validly authorized and issued, are fully paid and non-
assessable and conform to the description thereof contained in the
Prospectus; and all of the issued shares of capital stock of each
subsidiary of the Company have been duly and validly authorized and issued
and are fully paid and non-assessable and are owned directly or indirectly
by the Company, free and clear of all liens, encumbrances, equities or
claims.
(e) The unissued shares of the Stock to be issued and sold by the
Company to Pharma Vision hereunder and under the Underwriting Agreement and
the International Underwriting Agreement have been duly and validly
authorized and, when issued and delivered against payment therefor as
provided herein and therein, will be duly and validly issued, fully paid
and non-assessable; and the Stock will conform to the description thereof
contained in the Prospectus.
(f) Each of this Agreement, the Underwriting Agreement and the
International Agreement have been duly authorized, executed and delivered
by the Company.
(g) The execution, delivery and performance of this Agreement, the
Underwriting Agreement and the International Underwriting Agreement by the
Company and the consummation of the transactions contemplated hereby and
thereby will not conflict with or result in a breach or violation of any of
the terms or provisions of, or constitute a default under, any indenture,
mortgage, deed of trust, loan agreement or other agreement or instrument to
which the Company or the Subsidiary is a party or by which the Company or
the Subsidiary is bound or to which any of the property or assets of the
Company or the Subsidiary is subject, nor will such actions result in any
violation of the provisions of the charter or bylaws of the Company or the
Subsidiary or any statute or any order, rule or regulation of any court or
governmental agency or body having jurisdiction over the Company or the
Subsidiary or any of their properties or assets; and except for the
registration of the Stock under the Securities Act and such consents,
approvals, authorizations, registrations or qualifications as may be
required under the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), and applicable state or foreign securities laws in
connection with the purchase and distribution of the Stock by the U.S.
3
<PAGE>
Underwriters and the International Managers, no consent, approval,
authorization or order of, or filing or registration with, any such court
or governmental agency or body is required for the execution, delivery and
performance of this Agreement, the Underwriting Agreement or the
International Underwriting Agreement by the Company and the consummation of
the transactions contemplated hereby and thereby.
(h) There are no contracts, agreements or understandings between the
Company and any person granting such person the right (other than rights
which have been waived or satisfied), with respect to any securities of the
Company owned by such person, to require the Company to include such
securities in the securities registered pursuant to the Registration
Statement. Except as described in the Prospectus, there are no contracts,
agreements or understandings between the Company and any person granting
such person the right to require the Company to register or include
securities pursuant to any other registration statement filed by the
Company under the Securities Act.
(i) Except as described in the Prospectus, the Company has not sold or
issued any shares of Common Stock during the six-month period preceding the
date of the Prospectus, including any sales pursuant to Rule 144A under, or
Regulations D or S of, the Securities Act, other than shares issued
pursuant to employee benefit plans, qualified stock options plans or other
employee compensation plans or pursuant to outstanding options, rights or
warrants.
(j) Neither the Company nor the Subsidiary has sustained, since the
date of the latest audited financial statements included in the Prospectus,
any material loss or interference with its business from fire, explosion,
flood or other calamity, whether or not covered by insurance, or from any
labor dispute or court or governmental action, order or decree, otherwise
than as set forth or contemplated in the Prospectus; and, since such date,
there has not been any material change in the capital stock or long-term
debt of the Company and the Subsidiary, taken as a whole, or any material
adverse change in, or any development involving a prospective material
adverse change in the business, financial condition or results of
operations of the Company and the Subsidiary, taken as a whole, otherwise
than as set forth or contemplated in the Prospectus.
(k) The financial statements (including the related notes and
supporting schedules) filed as part of the Registration Statement or
included in the Prospectus present fairly the financial condition and
results of operations of the entities purported to be shown thereby, at the
dates and for the periods indicated, and have been prepared in conformity
with generally accepted accounting principles applied on a consistent basis
throughout the periods involved.
4
<PAGE>
(l) Ernst & Young LLP, who have certified certain financial statements
of the Company, whose report appears in the Prospectus, are independent
public accountants as required by the Securities Act and the Rules and
Regulations.
(m) The Company and the Subsidiary have good and marketable title to
all personal property owned by them, free and clear of all liens,
encumbrances and defects except such as are described in the Prospectus or
such as do not materially affect the value of such property and do not
materially interfere with the use made and proposed to be made of such
property by the Company and the Subsidiary; and all real property and
buildings held under lease by the Company and the Subsidiary are held by
them under valid, subsisting and enforceable leases, with such exceptions
as are not material and do not interfere with the use made and proposed to
be made of such property and buildings by the Company and the Subsidiary.
(n) The Company and the Subsidiary carry, or are covered by, insurance
in such amounts and covering such risks as is adequate for the conduct of
their respective businesses and the value of their respective properties
and as is customary for companies engaged in similar businesses in similar
industries.
(o) The Company owns or possesses adequate licenses or other rights to
use all patents, patent applications, inventions, trademarks, trade names,
applications for registration of trademarks, service marks, service mark
applications, copyrights, know-how, manufacturing processes, formulae,
trade secrets, licenses and rights in any thereof and any other intangible
property and assets (herein called the "Proprietary Rights") necessary to
conduct its business in the manner described in the Prospectus, except
where the failure to so own or possess such Proprietary Rights would not,
singularly or in the aggregate, have a material adverse effect on the
financial position, stockholders' equity, results of operations, business
or prospects of the Company. The Company takes security measures to provide
adequate trade secret protection in its non-patented technology. Except as
disclosed in the Prospectus, the Company has not received any notice of
infringement or conflict with asserted rights of others with respect to any
Proprietary Rights which could result in any material adverse effect on the
Company, and except as specifically identified and described in the
Prospectus, no action, suit, arbitration, or legal, administrative or other
proceeding, or investigation is pending, or, to the knowledge of the
Company, threatened, which involves any Proprietary Rights. Except as
disclosed in the Prospectus, the Proprietary Rights of the Company referred
to in the Prospectus do not, to the knowledge of the Company, infringe or
conflict with any right or valid and enforceable patent of any third party,
or any discovery, invention, product or process which is the subject of a
patent application filed by any third party, known to the Company which
could have a material adverse effect on the Company. The Company is not
subject to any judgment, order, writ, injunction or decree of any court or
any Federal, state, local, foreign or other governmental department,
commission, board, bureau, agency or instrumentality, domestic or foreign,
or any
5
<PAGE>
arbitrator, nor, except as described in the Prospectus, has it entered into
or is a party to any contract which restricts or impairs the use of any
such Proprietary Rights in a manner which would have a material adverse
effect on the use of any of the Proprietary Rights. The Company has
complied, in all material respects, with its respective contractual
obligations relating to the protection of the Proprietary Rights used
pursuant to licenses. To the knowledge of the Company, no person is
infringing on or violating the Proprietary Rights owned or used by the
Company.
(p) There are no legal or governmental proceedings pending to which
the Company or the Subsidiary is a party or of which any property or assets
of the Company or the Subsidiary is the subject which, if determined
adversely to the Company or the Subsidiary, are reasonably likely to have a
material adverse effect on the financial position, stockholders' equity,
results of operations, business or prospects of the Company and the
Subsidiary, taken as a whole, and to the knowledge of the Company, no such
proceedings are threatened or contemplated by governmental authorities or
threatened by others.
(q) There are no contracts or other documents which are required to be
described in the Prospectus or filed as exhibits to the Registration
Statement by the Securities Act or by the Rules and Regulations which have
not been described in the Prospectus or filed as exhibits to the
Registration Statement or incorporated therein by reference as permitted by
the Rules and Regulations.
(r) No relationship, direct or indirect, exists between or among the
Company on the one hand, and the directors, officers, stockholders,
customers or suppliers of the Company on the other hand, which is required
to be described in the Prospectus which is not so described.
(s) No labor disturbance by the employees of the Company exists or, to
the knowledge of the Company, is imminent which would reasonably be
expected to have a material adverse effect on the consolidated financial
position, stockholders' equity, results of operations, business or
prospects of the Company and the Subsidiary, taken as a whole.
(t) The Company is in compliance in all material respects with all
presently applicable provisions of the Employee Retirement Income Security
Act of 1974, as amended, including the regulations and published
interpretations thereunder ("ERISA"); no "reportable event" (as defined in
ERISA) has occurred with respect to any "pension plan" (as defined in
ERISA) for which the Company would have any liability; the Company has not
incurred and does not expect to incur liability under (i) Title IV of ERISA
with respect to termination of, or withdrawal from, any "pension plan" or
(ii) Sections 412 or 4971 of the Internal Revenue Code of 1986, as amended,
including the regulations and published interpretations thereunder (the
"Code"); and each "pension plan" for which the Company would have any
liability
6
<PAGE>
that is intended to be qualified under Section 401(a) of the Code is so
qualified in all material respects and nothing has occurred, whether by
action or by failure to act, which would cause the loss of such
qualification.
(u) The Company has filed all federal, state and local income and
franchise tax returns required to be filed through the date hereof and has
paid all taxes due thereon, and no tax deficiency has been determined
adversely to the Company or the Subsidiary which has had (nor does the
Company have any knowledge of any tax deficiency which, if determined
adversely to the Company or the Subsidiary, would reasonably be expected to
have) a material adverse effect on the financial position, stockholders'
equity, results of operations, business or prospects of the Company and the
Subsidiary, taken as a whole.
(v) Since the date as of which information is given in the Prospectus
through the date hereof, and except as may otherwise be disclosed in the
Prospectus, the Company has not (i) issued or granted any securities, (ii)
incurred any liability or obligation, direct or contingent, other than
liabilities and obligations which were incurred in the ordinary course of
business, (iii) entered into any transaction not in the ordinary course of
business or (iv) declared or paid any dividend on its capital stock.
(w) The Company (i) makes and keeps accurate books and records and
(ii) maintains internal accounting controls which provide reasonable
assurance that (A) transactions are executed in accordance with
management's authorization, (B) transactions are recorded as necessary to
permit preparation of its financial statements and to maintain
accountability for its assets, (C) access to its assets is permitted only
in accordance with management's authorization and (D) the reported
accountability for its assets is compared with existing assets at
reasonable intervals.
(x) Neither the Company nor the Subsidiary (i) is in violation of its
charter or bylaws, (ii) is in default in any material respect, and no event
has occurred which, with notice or lapse of time or both, would constitute
such a default, in the due performance or observance of any term, covenant
or condition contained in any material indenture, mortgage, deed of trust,
loan agreement or other agreement or instrument to which it is a party or
by which it is bound or to which any of its properties or assets is subject
or (iii) is in violation in any material respect of any law, ordinance,
governmental rule, regulation or court decree to which it or its property
or assets may be subject or has failed to obtain any material license,
permit, certificate, franchise or other governmental authorization or
permit necessary to the ownership of its property or to the conduct of its
business.
(y) Neither the Company nor the Subsidiary, nor any director or
officer associated with or acting on behalf of the Company or the
Subsidiary, has used any corporate funds for any unlawful contribution,
gift, entertainment or other unlawful expense relating to political
activity; made any direct or indirect unlawful payment
7
<PAGE>
to any foreign or domestic government official or employee from corporate
funds; violated or is in violation of any provision of the Foreign Corrupt
Practices Act of 1977; or made any bribe, rebate, payoff, influence
payment, kickback or other unlawful payment.
(z) There has been no storage, disposal, generation, manufacture,
refinement, transportation, handling or treatment of toxic wastes, medical
wastes, hazardous wastes or hazardous substances by the Company or the
Subsidiary (or, to the knowledge of the Company, any of their predecessors
in interest) at, upon or from any of the property now or previously owned
or leased by the Company or the Subsidiary in violation of any applicable
law, ordinance, rule, regulation, order, judgment, decree or permit or
which would require remedial action under any applicable law, ordinance,
rule, regulation, order, judgment, decree or permit, except for any
violation or remedial action which would not have, or could not be
reasonably likely to have, singularly or in the aggregate with all such
violations and remedial actions, a material adverse effect on the general
affairs, management, financial position, stockholders' equity or results of
operations of the Company and the Subsidiary, taken as a whole; there has
been no material spill, discharge, leak, emission, injection, escape,
dumping or release of any kind onto such property or into the environment
surrounding such property of any toxic wastes, medical wastes, solid
wastes, hazardous wastes or hazardous substances due to or caused by the
Company or the Subsidiary or with respect to which the Company or the
Subsidiary have knowledge, except for any such spill, discharge, leak,
emission, injection, escape, dumping or release which would not have or
would not be reasonably likely to have, singularly or in the aggregate with
all such spills, discharges, leaks, emissions, injections, escapes,
dumpings and releases, a material adverse effect on the general affairs,
management, financial position or results of operations of the Company and
the Subsidiary, taken as a whole; and the terms "hazardous wastes," "toxic
wastes," "hazardous substances" and "medical wastes" shall have the
meanings specified in any applicable local, state and federal laws or
regulations with respect to environmental protection.
(aa) Neither the Company nor the Subsidiary is an "investment company"
within the meaning of such term under the United States Investment Company
Act of 1940, as amended, and the rules and regulations of the Commission
thereunder.
(bb) The Company has reviewed, and is continuing to review, its
operations and products to evaluate the extent to which the business or
operations of the Company or the Subsidiary will be affected by the Year
2000 Problem (that is, any significant risk that computer hardware or
software applications used by the Company or the Subsidiary will not in the
case of dates or time periods occurring after December 31, 1999, function
at least as effectively as in the case of dates or time periods occurring
prior to January 1, 2000); as a result of such review, (i) the Company has
no reason to believe, and does not believe, that (A) there are any issues
related to the Company's or the Subsidiary's preparedness to address the
Year
8
<PAGE>
2000 Problem that are of a character required to be described or referred to
in the Registration Statement or Prospectus which have not been accurately
described in the Registration Statement or Prospectus and (B) the Year 2000
Problem will have a material adverse effect on the financial position,
stockholders' equity, results of operations, business or prospects of the
Company and the Subsidiary, taken as a whole, or result in any material loss
or interference with the business or operations of the Company or the
Subsidiary, taken as a whole; and (ii) to the Company's knowledge, the
suppliers, vendors, customers or other material third parties used or served
by the Company or the Subsidiary are addressing or will address the Year 2000
Problem in a timely manner, except to the extent that a failure to address the
Year 2000 Problem by any supplier, vendor, customer or material third party
would not have a material adverse effect on the financial position,
stockholders' equity, results of operations, business or prospects of the
Company and the Subsidiary, taken as a whole.
2. Purchase of the Stock by the Pharma Vision. On the basis of the
representations and warranties contained in, and subject to the terms and
conditions of, this Agreement, the Company agrees to sell __________ shares of
the Pharma Vision Stock to Pharma Vision, and Pharma Vision agrees to purchase
that number of shares of the Pharma Vision Stock. In addition, the Company
grants to Pharma Vision an option to purchase up to __________ shares of Option
Stock. Such option is exercisable as provided in Section 4 hereof. The price of
both the Pharma Vision Stock and any Option Stock shall be $_____ per share.
The Company shall not be obligated to deliver any of the Stock to be
delivered on any Delivery Date (as hereinafter defined), as the case may be,
except upon payment for all the Stock to be purchased on such Delivery Date as
provided herein.
3. [Omitted.]
4. Delivery of and Payment for the Stock. Delivery of and payment for the
Pharma Vision Stock shall be made at the office of Cooley Godward LLP, Five Palo
Alto Square, 3000 El Camino Real, Palo Alto, California 94306 at 10:00 A.M., New
York City time, on the [fourth] full business day following the date of this
Agreement or at such other date or place as shall be determined by agreement
between Pharma Vision and the Company. This date and time are sometimes
referred to as the "First Delivery Date." On the First Delivery Date, the
Company shall deliver or cause to be delivered certificates representing the
Pharma Vision Stock to Pharma Vision against payment to or upon the order of the
Company of the purchase price by wire transfer in immediately available funds.
Time shall be of the essence, and delivery at the time and place specified
pursuant to this Agreement is a further condition of the obligation of Pharma
Vision hereunder. Upon delivery, the Pharma Vision Stock shall be registered in
Pharma Vision's name and in such denominations as Pharma Vision shall request in
writing not less than two full business days prior to the First Delivery Date.
For the purpose of expediting the checking and packaging of the certificates for
the Pharma Vision Stock, the Company shall make the certificates representing
the Pharma Vision Stock available for inspection by Pharma Vision in New York,
New York, not later than 2:00 P.M., New York City time, on the business day
prior to the First Delivery Date.
9
<PAGE>
The option granted in Section 2 shall expire 30 days after the date of this
Agreement and may be exercised in whole or in part from time to time by written
notice being given to the Company by Pharma Vision. Such notice shall set forth
the aggregate number of shares of Option Stock as to which the option is being
exercised, the names in which the shares of Option Stock are to be registered,
the denominations in which the shares of Option Stock are to be issued and the
date and time, as determined by Pharma Vision, when the shares of Option Stock
are to be delivered; provided, however, that this date and time shall not be
earlier than the First Delivery Date nor earlier than the second business day
after the date on which the option shall have been exercised nor later than the
fifth business day after the date on which the option shall have been exercised.
The date and time the shares of Option Stock are delivered are sometimes
referred to as a "Second Delivery Date" and the First Delivery Date and any
Second Delivery Date are sometimes each referred to as a "Delivery Date."
Delivery of and payment for the Option Stock shall be made at the place
specified in the first sentence of the first paragraph of this Section 4 (or at
such other place as shall be determined by agreement between the Representatives
and the Company) at 10:00 A.M., New York City time, on such Second Delivery
Date. On such Second Delivery Date, the Company shall deliver or cause to be
delivered the certificates representing the Option Stock to Pharma Vision
against payment to or upon the order of the Company of the purchase price by
wire transfer in immediately available funds. Time shall be of the essence, and
delivery at the time and place specified pursuant to this Agreement is a further
condition of the obligation of Pharma Vision hereunder. Upon delivery, the
Option Stock shall be registered in Pharma Vision's name and in such
denominations as Pharma Vision shall request in the aforesaid written notice.
For the purpose of expediting the checking and packaging of the certificates for
the Option Stock, the Company shall make the certificates representing the
Option Stock available for inspection by Pharma Vision in New York, New York,
not later than 2:00 P.M., New York City time, on the business day prior to such
Second Delivery Date.
5. Further Agreements of the Company. The Company agrees:
(a) To prepare the Prospectus in a form approved by the
Representatives and to file such Prospectus pursuant to Rule 424(b)
under the Securities Act not later than the Commission's close of
business on the second business day following the execution and
delivery of this Agreement or, if applicable, such earlier time as may
be required by Rule 430A(a)(3) under the Securities Act; to make no
further amendment or any supplement to the Registration Statement or
to the Prospectus except as permitted herein; to advise the
Representatives, promptly after it receives notice thereof, of the
time when any amendment to the Registration Statement has been filed
or becomes effective or any supplement to the Prospectus or any
amended Prospectus has been filed and to furnish the Representatives
and Pharma Vision with copies thereof; to advise Pharma Vision,
promptly after it receives notice thereof, of the issuance by the
Commission of any stop order or of any order preventing or suspending
the use of any Preliminary Prospectus or the Prospectus, of the
suspension of the qualification of the Stock for offering or sale in
any
10
<PAGE>
jurisdiction, of the initiation or threatening of any proceeding for
any such purpose, or of any request by the Commission for the amending
or supplementing of the Registration Statement or the Prospectus or
for additional information; and, in the event of the issuance of any
stop order or of any order preventing or suspending the use of any
Preliminary Prospectus or the Prospectus or suspending any such
qualification, to use promptly its best efforts to obtain its
withdrawal;
(b) To furnish promptly to Pharma Vision a signed copy of the
Registration Statement as originally filed with the Commission, and
each amendment thereto filed with the Commission, including all
consents and exhibits filed therewith;
(c) To deliver promptly to Pharma Vision such number of the
following documents as Pharma Vision shall reasonably request: (i)
conformed copies of the Registration Statement as originally filed
with the Commission and each amendment thereto (in each case including
exhibits other than this Agreement and the computation of per share
earnings) and (ii) each Preliminary Prospectus, the Prospectus and any
amended or supplemented Prospectus; and, if the delivery of a
prospectus is required at any time after the Effective Time in
connection with the offering or sale of the Stock or any other
securities relating thereto and if at such time any event shall have
occurred as a result of which the Prospectus as then amended or
supplemented would include an untrue statement of a material fact or
omit to state any material fact necessary in order to make the
statements therein, in the light of the circumstances under which they
were made when such Prospectus is delivered, not misleading, or, if
for any other reason it shall be necessary to amend or supplement the
Prospectus in order to comply with the Securities Act, to notify
Pharma Vision and, upon its request, to file such amended or
supplemental prospectus and to prepare and furnish without charge to
Pharma Vision as many copies as Pharma Vision may from time to time
reasonably request of an amended or supplemented Prospectus which will
correct such statement or omission or effect such compliance;
(d) To file promptly with the Commission any amendment to the
Registration Statement or the Prospectus or any supplement to the
Prospectus that may, in the judgment of the Company, be required by
the Securities Act or requested by the Commission;
(e) [Omitted.]
(f) As soon as practicable after the Effective Date, to make
generally available and deliver to Pharma Vision an earnings statement
of the Company and the Subsidiary (which need not be audited)
complying with Section 11(a) of the Securities Act and the Rules and
Regulations (including, at the option of the Company, Rule 158); and
(g) [Omitted.]
11
<PAGE>
(h) [Omitted.]
(i) [Omitted.]
(j) Prior to the Effective Date, to apply for the inclusion of
the Stock on the National Market System and to use its best efforts to
complete that listing, subject only to official notice of issuance and
evidence of satisfactory distribution, prior to the First Delivery
Date; and
(k) To take such steps as shall be necessary to ensure that
neither the Company nor the Subsidiary shall become an "investment
company" within the meaning of such term under the United States
Investment Company Act of 1940, as amended, and the rules and
regulations of the Commission thereunder.
6. Expenses. The Company agrees to pay (a) the costs incident to the
authorization, issuance, sale and delivery of the Stock and any taxes payable in
that connection; (b) the costs incident to the preparation, printing and filing
under the Securities Act of the Registration Statement and any amendments and
exhibits thereto; (c) the costs of distributing the Registration Statement as
originally filed and each amendment thereto and any post-effective amendments
thereof (including, in each case, exhibits), any Preliminary Prospectus, the
Prospectus and any amendment or supplement to the Prospectus, all as provided in
this Agreement; (d) the costs of producing and distributing this Agreement, the
Underwriting Agreement, the Agreement Between U.S. Underwriters and
International Managers, and the Supplemental Agreement Among U.S. Underwriters
and any other related documents in connection with the offering, purchase, sale
and delivery of the Stock; (e) the costs of distributing the terms of agreement
relating to the organization of the domestic underwriting syndicate and selling
group to the members thereof by mail, telex or other means of communication; (f)
the filing fees incident to securing any required review by the National
Association of Securities Dealers, Inc. of the terms of sale of the Stock; (g)
any applicable listing or other fees; (h) the fees and expenses of qualifying
the Stock under the securities laws of the several jurisdictions as provided in
Section 5 and of preparing, printing and distributing a Blue Sky Memorandum
(including related fees and expenses of counsel to the U.S. Underwriters); and
(i) all other costs and expenses incident to the performance of the obligations
of the Company under this Agreement.
7. Conditions of Pharma Vision's Obligations. The obligations of Pharma
Vision hereunder are subject to the accuracy, when made and on each Delivery
Date, of the representations and warranties of the Company contained herein, to
the performance by the Company of its obligations hereunder, and to each of the
following additional terms and conditions:
(a) The Prospectus shall have been timely filed with the
Commission in accordance with Section 5(a); no stop order suspending
the effectiveness of the Registration Statement or any part thereof
shall have been issued and no proceeding for that purpose shall have
been initiated or threatened by the Commission; and any request of the
Commission for inclusion of additional information in the
12
<PAGE>
Registration Statement or the Prospectus or otherwise shall have been
complied with.
(b) No U.S. Underwriter or International Manager shall have
discovered and disclosed to the Company on or prior to such Delivery
Date that the Registration Statement or the Prospectus or any
amendment or supplement thereto contains any untrue statement of a
fact which, in the opinion of Latham & Watkins, counsel for the U.S.
Underwriters, is material or omits to state any fact which, in the
opinion of such counsel, is material and is required to be stated
therein or is necessary to make the statements therein not misleading.
(c) All corporate proceedings and other legal matters incident
to the authorization, form and validity of this Agreement, the
International Underwriting Agreement, the Stock, the Registration
Statement and the Prospectus, and all other legal matters relating to
this Agreement and the transactions contemplated hereby shall be
reasonably satisfactory in all material respects to counsel for the
U.S. Underwriters, and the Company shall have furnished to such
counsel all documents and information that they may reasonably request
to enable them to pass upon such matters.
(d) Cooley Godward LLP shall have furnished to Pharma Vision
its written opinion, as counsel to the Company, addressed to Pharma
Vision and dated such Delivery Date, in form and substance reasonably
satisfactory to Pharma Vision, to the effect that:
(i) The Company and the Subsidiary have been duly
incorporated and are validly existing as corporations in good
standing under the laws of their respective jurisdictions of
incorporation, and to our knowledge, are duly qualified to do
business and are in good standing as foreign corporations in
each jurisdiction in which their respective ownership or lease
of property or the conduct of their respective businesses
requires such qualification, except where the failure to be so
qualified would not have a material adverse effect on the
business, financial condition or results of operations of the
Company, and have all corporate power and authority necessary
to own or hold their respective properties and conduct the
businesses in which they are engaged; and to such counsel's
knowledge, other than the Subsidiary, the Company has no
subsidiaries;
(ii) The Company has an authorized capitalization as set
forth in the Prospectus, and all of the issued shares of
capital stock of the Company (including the shares of Stock
being delivered on such Delivery Date) have been duly and
validly authorized and issued, are fully paid and non-
assessable and conform to the description thereof contained in
the Prospectus; and all of the issued shares of capital stock
of the Subsidiary have been duly and validly authorized and
issued and are fully paid, non-
13
<PAGE>
assessable and are owned directly or indirectly by the Company,
free and clear of all liens, encumbrances, equities or claims;
(iii) There are no preemptive or other rights to
subscribe for or to purchase, nor any restriction upon the
voting or transfer of, any shares of the Stock pursuant to the
Company's Amended and Restated Certificate of Incorporation
(the "Charter"), the Company's bylaws, any agreement filed as
an exhibit to the Registration Statement and Prospectus or, to
such counsel's knowledge, any other agreement to which the
Company is a party;
(iv) To such counsel's knowledge, there are no legal or
governmental proceedings pending or overtly threatened to which
the Company or the Subsidiary is a party or of which any
property or assets of the Company or the Subsidiary is the
subject which are required to be described in the Prospectus by
the Securities Act or the Rules and Regulations;
(v) The Registration Statement was declared effective
under the Securities Act as of the date and time specified in
such opinion, the Prospectus was filed with the Commission
pursuant to the subparagraph of Rule 424(b) of the Rules and
Regulations as of the date specified in such opinion and, to
such counsel's knowledge, no stop order suspending the
effectiveness of the Registration Statement has been issued
and, to such counsel's knowledge, no proceeding for that
purpose is pending or threatened by the Commission;
(vi) The Registration Statement and the Prospectus and
any further amendments or supplements thereto made by the
Company prior to such Delivery Date (other than the financial
statements, financial data and related schedules therein, as to
which such counsel need express no opinion) comply as to form
in all material respects with the requirements of the
Securities Act and the Rules and Regulations;
(vii) To such counsel's knowledge, there are no contracts
or other documents that are required to be described in the
Prospectus or filed as exhibits to the Registration Statement
by the Securities Act or by the Rules and Regulations that have
not been described or filed as exhibits to the Registration
Statement or incorporated therein by reference as permitted by
the Rules and Regulations;
(viii) This Agreement, the Underwriting Agreement and the
International Underwriting Agreement have each been duly
authorized, executed and delivered by the Company;
14
<PAGE>
(ix) The issue and sale of the shares of Stock being
delivered on such Delivery Date by the Company and the
compliance by the Company with all of the provisions of this
Agreement, the Underwriting Agreement and the International
Underwriting Agreement and the consummation of the transactions
contemplated hereby and thereby will not conflict with or
result in a breach or violation of any of the terms or
provisions of, or constitute a default under, any indenture,
mortgage, deed of trust, loan agreement, or other agreement
material to the Company's business as described in the
Registration Statement and Prospectus, or other instrument
known to such counsel to which the Company or the Subsidiary is
a party or by which the Company or the Subsidiary is bound or
to which any of the property or assets of the Company or the
Subsidiary is subject, nor will such actions result in any
violation of the provisions of the charter or bylaws of the
Company or the Subsidiary or any statute or any order, rule or
regulation known to such counsel of any court or governmental
agency or body having jurisdiction over the Company or the
Subsidiary or any of their properties or assets (except the
securities or Blue Sky laws of the various U.S. states and the
rules of the NASD governing underwriting compensation, as to
which we express no opinion); and, except for the registration
of the Stock under the Securities Act and such consents,
approvals, authorizations, registrations or qualifications as
may be required under the Exchange Act, applicable state
securities laws and the rules of the NASD governing
underwriting compensation, no consent, approval, authorization
or order of, or filing or registration with, any such court or
governmental agency or body is required for the execution,
delivery and performance of this Agreement, the Underwriting
Agreement or the International Underwriting Agreement by the
Company and the consummation of the transactions contemplated
hereby;
(x) The Company is not an "investment company" within
the meaning of such term under the United States Investment
Company Act of 1940, as amended and the rules and regulations
of the Commission thereunder;
(xi) To such counsel's knowledge, there are no
contracts, agreements or understandings between the Company and
any person granting such person the right (other than rights
which have been waived or satisfied) to require the Company to
include securities in the securities registered pursuant to the
Registration Statement. To such counsel's knowledge, except as
described in the Prospectus, there are no contracts, agreements
or understandings between the Company and any person granting
such person the right to require the Company to register or
include securities pursuant to any other registration statement
filed by the Company under the Securities Act.
15
<PAGE>
In rendering such opinion, such counsel may state that its opinion is
limited to matters governed by the federal laws of the United States
of America, the laws of the State of California and the General
Corporation Law of the State of Delaware and that such counsel is not
admitted in the State of Delaware. Such counsel shall also have
furnished to Pharma Vision a written statement, addressed to Pharma
Vision and dated such Delivery Date, in form and substance
satisfactory to Pharma Vision, to the effect that:
"In connection with the preparation of the Registration Statement, we
have participated in conferences with officers and other
representatives of the Company, representatives of the independent
public or certified public accountants for the Company and with
representatives of the U.S. Underwriters. We have not independently
verified and accordingly are not passing upon and do not assume any
responsibility for the accuracy, completeness or fairness of the
statements contained in the Registration Statement or the Prospectus
(other than the statements made in the Prospectus under the captions
"Description of Capital Stock" and "Shares Eligible for Future Sale,"
insofar as such statements relate to the Stock and concern legal
matters), and any supplements or amendments thereto. On the basis of
the foregoing and in our capacity as counsel to the Company, nothing
has come to our attention which has caused us to believe that either
the Registration Statement or any amendments thereto (except as to the
financial statements and schedules, and other financial data and
statistical data derived therefrom), at the time the Registration
Statement or such amendments became effective, contained an 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 not misleading or that the Prospectus (except as to the
financial statements and schedules, and other financial data and
statistical data derived therefrom), as of its date or as of the date
hereof contained an untrue statement of a material fact or omitted to
state a material fact necessary in order to make the statements
therein, in light of the circumstances in which they were made, not
misleading."
(e) [OMITTED]
16
<PAGE>
(f) [Omitted.]
(g) [Omitted.]
(h) [Omitted.]
(i) The Company shall have furnished to Pharma Vision a
certificate, dated such Delivery Date, of its Chairman of the Board,
its President or a Vice President and its Chief Financial Officer
stating that:
(i) The representations, warranties and agreements of the
Company in Section 1 are true and correct as of such Delivery
Date; the Company has complied with all its agreements contained
herein; and the conditions set forth in Sections 7(a) and 7(j)
have been fulfilled; and
(ii) They have carefully examined the Registration
Statement and the Prospectus and, in their opinion (A) as of the
Effective Date, the Registration Statement and Prospectus did not
include any untrue statement of a material fact and did not omit
to state a material fact required to be stated therein or
necessary to make the statements therein not misleading, and (B)
since the Effective Date no event has occurred which should have
been set forth in a supplement or amendment to the Registration
Statement or the Prospectus.
17
<PAGE>
(j) (i) Neither the Company nor the Subsidiary shall have
sustained since the date of the latest audited financial statements
included in the Prospectus any loss or interference with its business
from fire, explosion, flood or other calamity, whether or not covered
by insurance, or from any labor dispute or court or governmental
action, order or decree, otherwise than as set forth or contemplated
in the Prospectus or (ii) since such date there shall not have been
any change in the capital stock or long-term debt of the Company or
the Subsidiary or any change, or any development involving a
prospective change, in or affecting the general affairs, management,
financial position, stockholders' equity or results of operations of
the Company and the Subsidiary, taken as a whole, otherwise than as
set forth or contemplated in the Prospectus, the effect of which, in
any such case described in clause (i) or (ii), is, in the judgment of
the Representatives, so material and adverse as to make it
impracticable or inadvisable to proceed with the public offering or
the delivery of the Stock being delivered on such Delivery Date on the
terms and in the manner contemplated in the Prospectus.
(k) Subsequent to the execution and delivery of this Agreement
there shall not have occurred any of the following: (i) trading in
securities generally on the New York Stock Exchange or the American
Stock Exchange or in the over-the-counter market shall have been
suspended or minimum prices shall have been established on any such
exchange or such market by the Commission, by such exchange or by any
other regulatory body or governmental authority having jurisdiction,
(ii) a banking moratorium shall have been declared by Federal or state
authorities, (iii) the United States shall have become engaged in
hostilities, there shall have been an escalation in hostilities
involving the United States or there shall have been a declaration of
a national emergency or war by the United States or (iv) there shall
have occurred such a material adverse change in general economic,
political or financial conditions (or the effect of international
conditions on the financial markets in the United States shall be
such) as to make it, in the judgment of a majority in interest of the
several U.S. Underwriters, impracticable or inadvisable to proceed
with the public offering or delivery of the Stock being delivered on
such Delivery Date on the terms and in the manner contemplated in the
Prospectus.
(l) The National Market System shall have approved the Stock for
inclusion, subject only to official notice of issuance and evidence of
satisfactory distribution.
(m) The closing under the International Underwriting Agreement
shall have occurred concurrently with the closing hereunder on the
First Delivery Date.
All opinions, letters, evidence and certificates mentioned above or
elsewhere in this Agreement shall be deemed to be in compliance with the
provisions hereof only if they are in form and substance reasonably satisfactory
to counsel for the U.S. Underwriters.
18
<PAGE>
8. Indemnification and Contribution.
(a) The Company shall indemnify and hold harmless Pharma Vision, its
officers and employees and each person, if any, who controls Pharma Vision
within the meaning of the Securities Act, from and against any loss, claim,
damage or liability, joint or several, or any action in respect thereof
(including, but not limited to, any loss, claim, damage, liability or action
relating to purchases and sales of Stock), to which that Pharma Vision officer,
employee or controlling person may become subject, under the Securities Act or
otherwise, insofar as such loss, claim, damage, liability or action arises out
of, or is based upon, (i) any untrue statement or alleged untrue statement of a
material fact contained in any Preliminary Prospectus, the Registration
Statement or the Prospectus or in any amendment or supplement thereto, (ii) the
omission or alleged omission to state in any Preliminary Prospectus, the
Registration Statement or the Prospectus, or in any amendment or supplement
thereto, or in any Blue Sky Application any material fact required to be stated
therein or necessary to make the statements therein not misleading or (iii) any
act or failure to act or any alleged act or failure to act by Pharma Vision in
connection with, or relating in any manner to, the Stock or the offering
contemplated hereby, and which is included as part of or referred to in any
loss, claim, damage, liability or action arising out of or based upon matters
covered by clause (i) or (ii) above (provided that the Company shall not be
liable under this clause (iii) to the extent that it is determined in a final
judgment by a court of competent jurisdiction that such loss, claim, damage,
liability or action resulted directly from any such acts or failures to act
undertaken or omitted to be taken by Pharma Vision through its gross negligence
or willful misconduct), and shall reimburse Pharma Vision and each such officer,
employee or controlling person promptly upon demand for any legal or other
expenses reasonably incurred by Pharma Vision, officer, employee or controlling
person in connection with investigating or defending or preparing to defend
against any such loss, claim, damage, liability or action as such expenses are
incurred; provided, however, that the Company shall not be liable in any such
case to the extent that any such loss, claim, damage, liability or action arises
out of, or is based upon, any untrue statement or alleged untrue statement or
omission or alleged omission made in any Preliminary Prospectus, the
Registration Statement or the Prospectus, or in any such amendment or
supplement, in reliance upon and in conformity with information concerning
Pharma Vision furnished to the Company through Pharma Vision specifically for
inclusion therein.
(b) Pharma Vision shall indemnify and hold harmless the Company, its
officers and employees, each of its directors, and each person, if any, who
controls the Company within the meaning of the Securities Act, from and against
any loss, claim, damage or liability, joint or several, or any action in respect
thereof, to which the Company or any such director, officer or controlling
person may become subject, under the Securities Act or otherwise, insofar as
such loss, claim, damage, liability or action arises out of, or is based upon,
(i) any untrue statement or alleged untrue statement of a material fact
contained (A) in any Preliminary Prospectus, the Registration Statement or the
Prospectus or in any amendment or supplement thereto, or (B) in any Blue Sky
Application or (ii) the omission or alleged omission to state in any Preliminary
Prospectus, the Registration Statement or the Prospectus, or in any amendment or
supplement thereto, or in any Blue Sky Application any material fact required to
be stated therein or necessary to make the statements therein not misleading,
but in each case only to the extent that the untrue statement or alleged untrue
statement or omission or alleged omission was made in reliance upon and in
conformity with
19
<PAGE>
written information concerning Pharma Vision furnished to the Company through
Pharma Vision specifically for inclusion therein, and shall reimburse the
Company and any such director, officer or controlling person for any legal or
other expenses reasonably incurred by the Company or any such director, officer
or controlling person in connection with investigating or defending or preparing
to defend against any such loss, claim, damage, liability or action as such
expenses are incurred. The foregoing indemnity agreement is in addition to any
liability which Pharma Vision may otherwise have to the Company or any such
director, officer, employee or controlling person.
(c) Promptly after receipt by an indemnified party under this Section 8 of
notice of any claim or the commencement of any action, the indemnified party
shall, if a claim in respect thereof is to be made against the indemnifying
party under this Section 8, notify the indemnifying party in writing of the
claim or the commencement of that action; provided, however, that the failure to
notify the indemnifying party shall not relieve it from any liability which it
may have under this Section 8 except to the extent it has been materially
prejudiced by such failure and, provided further, that the failure to notify the
indemnifying party shall not relieve it from any liability which it may have to
an indemnified party otherwise than under this Section 8. If any such claim or
action shall be brought against an indemnified party, and it shall notify the
indemnifying party thereof, the indemnifying party shall be entitled to
participate therein and, to the extent that it wishes, jointly with any other
similarly notified indemnifying party, to assume the defense thereof with
counsel reasonably satisfactory to the indemnified party. After notice from the
indemnifying party to the indemnified party of its election to assume the
defense of such claim or action, the indemnifying party shall not be liable to
the indemnified party under this Section 8 for any legal or other expenses
subsequently incurred by the indemnified party in connection with the defense
thereof other than reasonable costs of investigation. No indemnifying party
shall (i) without the prior written consent of the indemnified parties (which
consent shall not be unreasonably withheld), settle or compromise or consent to
the entry of any judgment with respect to any pending or threatened claim,
action, suit or proceeding in respect of which indemnification or contribution
may be sought hereunder (whether or not the indemnified parties are actual or
potential parties to such claim or action) unless such settlement, compromise or
consent includes an unconditional release of each indemnified party from all
liability arising out of such claim, action, suit or proceeding, or (ii) be
liable for any settlement of any such action effected without its written
consent (which consent shall not be unreasonably withheld), but if settled with
the consent of the indemnifying party or if there be a final judgment for the
plaintiff in any such action, the indemnifying party agrees to indemnify and
hold harmless any indemnified party from and against any loss or liability by
reason of such settlement or judgment.
(d) If the indemnification provided for in this Section 8 shall for any
reason be unavailable to or insufficient to hold harmless an indemnified party
under Section 8(a) or 8(b) in respect of any loss, claim, damage or liability,
or any action in respect thereof, referred to therein, then each indemnifying
party shall, in lieu of indemnifying such indemnified party, contribute to the
amount paid or payable by such indemnified party as a result of such loss,
claim, damage or liability, or action in respect thereof, (i) in such proportion
as shall be appropriate to reflect the relative benefits received by the Company
on the one hand and Pharma Vision on the other from the offering of the Stock or
(ii) if the allocation provided by clause (i) above is not permitted by
applicable law, in such proportion as is appropriate to reflect not only the
relative benefits referred
20
<PAGE>
to in clause (i) above but also the relative fault of the Company on the one
hand and Pharma Vision on the other with respect to the statements or omissions
which resulted in such loss, claim, damage or liability, or action in respect
thereof, as well as any other relevant equitable considerations. The relative
benefits received by the Company on the one hand and Pharma Vision on the other
with respect to such offering shall be deemed to be in the same proportion as
the total net proceeds from the offering of the Stock purchased under this
Agreement (before deducting expenses) received by the Company. The relative
fault shall be determined by reference to whether the untrue or alleged untrue
statement of a material fact or omission or alleged omission to state a material
fact relates to information supplied by the Company or Pharma Vision, the intent
of the parties and their relative knowledge, access to information and
opportunity to correct or prevent such statement or omission. The Company and
Pharma Vision agree that it would not be just and equitable if contributions
pursuant to this Section were to be determined by pro rata allocation or by any
other method of allocation which does not take into account the equitable
considerations referred to herein. The amount paid or payable by an indemnified
party as a result of the loss, claim, damage or liability, or action in respect
thereof, referred to above in this Section shall be deemed to include, for
purposes of this Section 8(d), any legal or other expenses reasonably incurred
by such indemnified party in connection with investigating or defending any such
action or claim. No person guilty of fraudulent misrepresentation (within the
meaning of Section 11(f) of the Securities Act) shall be entitled to
contribution from any person who was not guilty of such fraudulent
misrepresentation.
9. Default by the Company. If, on either Delivery Date, the Company
defaults in the performance of its obligations under this Agreement, then this
Agreement shall terminate without any liability on the part of Pharma Vision.
Nothing contained herein shall relieve the Company of any liability it may have
to the Company for damages caused by its default.
10. Termination. The obligations of Pharma Vision hereunder may be
terminated by Pharma Vision by notice given to and received by the Company prior
to delivery of and payment for the Stock if, prior to that time, any of the
events described in Sections 7(j) or 7(k), shall have occurred or if the U.S.
Underwriters and International Managers shall decline to purchase the Stock for
any reason permitted under this Agreement.
11. [Omitted.]
12. Notices, etc. All statements, requests, notices and agreements
hereunder shall be in writing, and:
(a) if to Pharma Vision, shall be delivered or sent by mail, telex or
facsimile transmission to Pharma Vision 2000 AG, Spielhof 3, 8750 Glaris
Switzerland, Attention: Peter Sjostrand, with a copy to Ralph Stadler,
Esq.;
(b) if to the Company, shall be delivered or sent by mail, telex or
facsimile transmission to the address of the Company set forth in the
Registration Statement, Attention: William J. Rieflin, General Counsel
(Fax: 650/825-7303).
Any such statements, requests, notices or agreements shall take effect at the
time of receipt thereof.
21
<PAGE>
13. Persons Entitled to Benefit of Agreement. This Agreement shall inure
to the benefit of and be binding upon Pharma Vision, the Company, and their
respective successors. This Agreement and the terms and provisions hereof are
for the sole benefit of only those persons. Nothing in this Agreement is
intended or shall be construed to give any person, other than the persons
referred to in this Section 13, any legal or equitable right, remedy or claim
under or in respect of this Agreement or any provision contained herein.
14. Survival. The respective indemnities, representations, warranties and
agreements of the Company and Pharma Vision contained in this Agreement or made
by or on behalf of them, respectively, pursuant to this Agreement, shall survive
the delivery of and payment for the Stock and shall remain in full force and
effect, regardless of any investigation made by or on behalf of any of them or
any person controlling any of them.
15. Definition of the Terms "Business Day" and "Subsidiary". For purposes
of this Agreement, (a) "business day" means each Monday, Tuesday, Wednesday,
Thursday or Friday which is not a day on which banking institutions in New York
are generally authorized or obligated by law or executive order to close and (b)
"subsidiary" has the meaning set forth in Rule 405 of the Rules and Regulations.
16. Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of New York.
17. Counterparts. This Agreement may be executed in one or more
counterparts and, if executed in more than one counterpart, the executed
counterparts shall each be deemed to be an original but all such counterparts
shall together constitute one and the same instrument.
18. Headings. The headings herein are inserted for convenience of
reference only and are not intended to be part of, or to affect the meaning or
interpretation of, this Agreement.
If the foregoing correctly sets forth the agreement between the Company and
Pharma Vision, please indicate your acceptance in the space provided for that
purpose below.
Very truly yours,
TULARIK INC.
By _____________________________________________
William J. Rieflin
Vice President, General Counsel and Secretary
Accepted:
22
<PAGE>
PHARMA VISION 2000 AG
By:_____________________________
Print Name:_____________________
Title:__________________________
23
<PAGE>
EXHIBIT 4.1
<TABLE>
<CAPTION>
[LOGO] [LOGO] [LOGO]
<S> <C> <C>
COMMON STOCK INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE SEE REVERSE FOR CERTAIN DEFINITIONS
CUSIP 899165 10 4
</TABLE>
THIS CERTIFIES THAT
IS THE OWNER OF
FULLY PAID AND NON-ASSESSABLE SHARES OF THE COMMON STOCK, PAR VALUE $.001 PER
SHARE, OF
TULARIK INC.
transferable on the books of the Corporation by the holder hereof in person or
by duly authorized attorney upon surrender of this Certificate properly
endorsed. This Certificate is not valid until countersigned and registered by
the Transfer Agent and Registrar.
WITNESS the facsimile seal of the Corporation and the facsimile signatures
of the duly authorized officers.
Dated
/s/ William J. Rieflin [SEAL] /s/ David V. Goeddel
Secretary Chief Executive Officer
COUNTERSIGNED AND REGISTERED:
NORWEST BANK MINNESOTA, N.A.
TRANSFER AGENT AND REGISTRAR
BY /s/ [ILLEGIBLE]
AUTHORIZED SIGNATURE
<PAGE>
TULARIK INC.
A statement of the powers, designations, preferences and relative,
participating, optional or other special rights of each class of stock or series
thereof and the qualifications, limitations or restrictions of such preferences
and/or rights as established, from time to time, by the Certificate of
incorporation of the Corporation and by any certificate of determination, the
number of shares constituting each class and series, and the designations
thereof, may be obtained by the holder hereof upon request and without charge at
the principal office of the Corporation.
The following abbreviations, when used in the inscription on the face of
this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
<TABLE>
<S> <C>
TEN COM - as tenants in common UNIF GIFT MIN ACT -- ________ Custodian___________
TEN ENT - as tenants by the entireties (Cust) (Minor)
JT TEN - as joint tenants with right of
survivorship and not as tenants under Uniform Gifts to Minors
in common Act ___________________________________________
(state)
UNIF TRF MIN ACT -- __________ Custodian (until age______________)
(cust)
______________________ under Uniform Transfers
(Minor)
to Minors Act _______________________________
(State)
</TABLE>
Additional abbreviations may also be used though not in the above list
FOR VALUE RECEIVED, ____________________________ hereby sell, assign and
transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
- ---------------------------------------
- ---------------------------------------
________________________________________________________________________________
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OR ASSIGNEE)
________________________________________________________________________________
________________________________________________________________________________
_________________________________________________________________________ Shares
of the common stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint
_______________________________________________________________________ Attorney
to transfer the said stock on the books of the within named Company with full
power of substitution in the premises.
Dated _____________________________
X ______________________________________
X ______________________________________
NOTICE: THE SIGNATURE(S) TO THIS ASSIGNMENT
MUST CORRESPOND WITH THE NAME(S) AS
WRITTEN UPON THE FACE OF THE
CERTIFICATE ON EVERY PARTICULAR,
WITHOUT ALTERATION OR ENLARGEMENT OR
ANY CHANGE WHATEVER.
Signature(s) Guaranteed
By_________________________________
THE SIGNATURE(S) MUST BE GUARANTEED
BY AN ELIGIBLE GUARANTOR INSTITUTION
(BANKS, STOCKBROKERS, SAVINGS AND LOAN
ASSOCIATIONS AND CREDIT UNIONS WITH
MEMBERSHIP IN AN APPROVED SIGNATURE
GUARANTEE MEDALION PROGRAM). PURSUANT
TO S.E.C. RULE 17Ad-15
<PAGE>
[LETTERHEAD OF COOLEY GODWARD APPEARS HERE]
December 7, 1999
Via Federal Express
Tularik Inc.
Two Corporate Drive
South San Francisco, CA 94080
Dear Ladies & Gentleman:
You have requested our opinion with respect to certain matters in connection
with the filing by Tularik Inc. (the "Company") of a Registration Statement on
Form S-1 (the "Registration Statement") with the Securities and Exchange
Commission (the "Commission"), covering an underwritten public offering of up
to 6,250,000 shares of common stock (the "Common Stock").
In connection with this opinion, we have (i) examined and relied upon the
Registration Statement and related Prospectus, the Company's Certificate of
Incorporation and Bylaws, as amended, and the originals or copies certified to
our satisfaction of such records, documents, certificates, memoranda and other
instruments as in our judgment are necessary or appropriate to enable us to
render the opinion expressed below, (ii) assumed that the Amended and Restated
Certificate of Incorporation, as set forth in Exhibit 3.1 of the Registration
Statement, shall have been duly approved and filed with the office of the
Delaware Secretary of State and (iii) assumed that the shares of Common Stock
will be sold by the underwriters at a price established by the Offering
Committee of the Board of Directors of the Company.
On the basis of the foregoing, and in reliance thereon, we are of the opinion
that the Common Stock, when sold and issued in accordance with the Registration
Statement and related Prospectus, will be validly issued, fully paid and
nonassessable.
We consent to the reference to our firm under the caption "Legal Matters" in
the Prospectus included on the Registration Statement and to the filing of this
opinion as an exhibit to the Registration Statement.
Very truly yours,
Cooley Godward LLP
/s/ Suzanne Sawochka Hooper
By: _________________________________
Suzanne Sawochka Hooper
<PAGE>
EXHIBIT 10.3
TULARIK INC.
1997 EQUITY INCENTIVE PLAN
Adopted March 3, 1997
Approved by Stockholders April 24, 1997
Amended November 1, 1999
Amendment Approved By Stockholders November 19, 1999
1. Purposes.
(a) The purpose of the Plan is to provide a means by which selected
Employees and Directors of and Consultants to the Company, and its Affiliates,
may be given an opportunity to benefit from increases in value of the stock of
the Company through the granting of (i) Incentive Stock Options, (ii)
Nonstatutory Stock Options, (iii) stock bonuses and (iv) rights to purchase
restricted stock, all as defined below.
(b) The Company, by means of the Plan, seeks to retain the services of
persons who are now Employees or Directors of or Consultants to the Company or
its Affiliates, to secure and retain the services of new Employees, Directors
and Consultants and to provide incentives for such persons to exert maximum
efforts for the success of the Company and its Affiliates.
(c) The Company intends that the Stock Awards issued under the Plan shall,
in the discretion of the Board or any Committee to which responsibility for
administration of the Plan has been delegated pursuant to subsection 3(c), be
either (i) Options granted pursuant to Section 6 hereof, including Incentive
Stock Options and Nonstatutory Stock Options or (ii) stock bonuses or rights to
purchase restricted stock granted pursuant to Section 7 hereof. All Options
shall be separately designated Incentive Stock Options or Nonstatutory Stock
Options at the time of grant, and in such form as issued pursuant to Section 6,
and a separate certificate or certificates will be issued for shares purchased
on exercise of each type of Option.
2. Definitions.
(a) "Affiliate" means any parent corporation or subsidiary corporation,
whether now or hereafter existing, as those terms are defined in Sections 424(e)
and (f) respectively, of the Code.
(b) "Board" means the Board of Directors of the Company.
(c) "Code" means the Internal Revenue Code of 1986, as amended.
(d) "Committee" means a Committee appointed by the Board in accordance
with subsection 3(c) of the Plan.
(e) "Company" means Tularik Inc., a Delaware corporation.
(f) "Consultant" means any person, including an advisor, engaged by the
Company or an Affiliate to render consulting services and who is compensated for
such services, provided that the term "Consultant" shall not include Directors
who are paid only a director's fee by the Company or who are not compensated by
the Company for their services as Directors.
<PAGE>
(g) "Continuous Status as an Employee, Director or Consultant" means that
the service of an individual to the Company, whether as an Employee, Director or
Consultant, is not interrupted or terminated. The Board or the chief executive
officer of the Company may determine, in that party's sole discretion, whether
Continuous Status as an Employee, Director or Consultant shall be considered
interrupted in the case of: (i) any leave of absence approved by the Board or
the chief executive officer of the Company, including sick leave, military
leave, or any other personal leave; or (ii) transfers between the Company,
Affiliates or their successors.
(h) "Covered Employee" means the chief executive officer and the four (4)
other highest compensated officers of the Company for whom total compensation is
required to be reported to stockholders under the Exchange Act, as determined
for purposes of Section 162(m) of the Code.
(i) "Director" means a member of the Board.
(j) "Employee" means any person, including Officers and Directors,
employed by the Company or any Affiliate of the Company. Neither service as a
Director nor payment of a director's fee by the Company shall be sufficient to
constitute "employment" by the Company.
(k) "Exchange Act" means the Securities Exchange Act of 1934, as amended.
(l) "Fair Market Value" means, as of any date, the value of the common
stock of the Company determined as follows (and in each case prior to the
Listing Date, in a manner consistent with Section 260.140.50 of Title 10 of the
California Code of Regulations).
(1) If the common stock is listed on any established stock exchange
or traded on the Nasdaq National Market or the Nasdaq SmallCap Market, the Fair
Market Value of a share of common stock shall be the closing sales price for
such stock (or the closing bid, if no sales were reported) as quoted on such
exchange or market (or the exchange or market with the greatest volume of
trading in the Company's common stock) on the last market trading day prior to
the day of determination, as reported in The Wall Street Journal or such other
source as the Board deems reliable.
(2) In the absence of such markets for the common stock, the Fair
Market Value shall be determined in good faith by the Board or any Committee to
which responsibility for administration of the Plan has been delegated pursuant
to subsection 3(c).
(m) "Incentive Stock Option" means an Option intended to qualify as an
incentive stock option within the meaning of Section 422 of the Code and the
regulations promulgated thereunder.
(n) "Listing Date" means the first date upon which any security of the
Company is listed (or approved for listing) upon notice of issuance on any
securities exchange, or designated (or approved for designation) upon notice of
issuance as a national market security on an interdealer quotation system if
such securities exchange or interdealer quotation system has been certified in
accordance with the provisions of Section 25100(o) of the California Corporate
Securities Law of 1968.
(o) "Non-Employee Director" means a Director who either (i) is not a
current Employee or Officer of the Company or its parent or subsidiary, does not
receive compensation (directly or indirectly) from the Company or its parent or
subsidiary for services rendered as a consultant or in any capacity other
<PAGE>
than as a Director (except for an amount as to which disclosure would not be
required under Item 404(a) of Regulation S-K promulgated pursuant to the
Securities Act ("Regulation S-K")), does not possess an interest in any other
transaction as to which disclosure would be required under Item 404(a) of
Regulation S-K, and is not engaged in a business relationship as to which
disclosure would be required under Item 404(b) of Regulation S-K; or (ii) is
otherwise considered a "non-employee director" for purposes of Rule 16b-3.
(p) "Nonstatutory Stock Option" means an Option not intended to qualify as
an Incentive Stock Option.
(q) "Officer" means a person who is an officer of the Company within the
meaning of Section 16 of the Exchange Act and the rules and regulations
promulgated thereunder.
(r) "Option" means a stock option granted pursuant to the Plan.
(s) "Option Agreement" means a written agreement between the Company and
an Optionee evidencing the terms and conditions of an individual Option grant.
Each Option Agreement shall be subject to the terms and conditions of the Plan.
(t) "Optionee" means a person to whom an Option is granted pursuant to the
Plan or, if applicable, such other person who holds an outstanding Option.
(u) "Outside Director" means a Director who either (i) is not a current
employee of the Company or an "affiliated corporation" (within the meaning of
the Treasury regulations promulgated under Section 162(m) of the Code), is not a
former employee of the Company or an "affiliated corporation" receiving
compensation for prior services (other than benefits under a tax qualified
pension plan), was not an officer of the Company or an "affiliated corporation"
at any time, and is not currently receiving direct or indirect remuneration from
the Company or an "affiliated corporation" for services in any capacity other
than as a Director or (ii) is otherwise considered an "outside director" for
purposes of Section 162(m) of the Code.
(v) "Plan" means this Equity Incentive Plan.
(w) "Rule 16b-3" means Rule 16b-3 of the Exchange Act or any successor to
Rule 16b-3, as in effect with respect to the Company at the time discretion is
being exercised regarding the Plan.
(x) "Securities Act" means the Securities Act of 1933, as amended.
(y) "Stock Award" means any right granted under the Plan, including any
Option, any stock bonus and any right to purchase restricted stock.
(z) "Stock Award Agreement" means a written agreement between the Company
and a holder of a Stock Award evidencing the terms and conditions of an
individual Stock Award grant. Each Stock Award Agreement shall be subject to the
terms and conditions of the Plan.
3. Administration.
(a) The Plan shall be administered by the Board unless and until the Board
delegates administration to a Committee, as provided in subsection 3(c).
<PAGE>
(b) The Board shall have the power, subject to, and within the limitations
of, the express provisions of the Plan:
(1) To determine from time to time which of the persons eligible under
the Plan shall be granted Stock Awards; when and how each Stock Award shall be
granted; whether a Stock Award will be an Incentive Stock Option, a Nonstatutory
Stock Option, a stock bonus, a right to purchase restricted stock or a
combination of the foregoing; the provisions of each Stock Award granted (which
need not be identical), including the time or times when a person shall be
permitted to receive stock pursuant to a Stock Award; and the number of shares
with respect to which a Stock Award shall be granted to each such person.
(2) To construe and interpret the Plan and Stock Awards granted under
it, and to establish, amend and revoke rules and regulations for its
administration. The Board, in the exercise of this power, may correct any
defect, omission or inconsistency in the Plan or in any Stock Award Agreement,
in a manner and to the extent it shall deem necessary or expedient to make the
Plan fully effective.
(3) To amend the Plan or a Stock Award as provided in Section 13.
(4) Generally, to exercise such powers and to perform such acts as the
Board deems necessary or expedient to promote the best interests of the Company
which are not in conflict with the provisions of the Plan.
(c) The Board may delegate administration of the Plan to a committee of
the Board composed of not fewer than two (2) members (the "Committee"), all of
the members of which Committee may be, in the discretion of the Board, Non-
Employee Directors and/or Outside Directors. If administration is delegated to a
Committee, the Committee shall have, in connection with the administration of
the Plan, the powers theretofore possessed by the Board, including the power to
delegate to a subcommittee of two (2) or more Outside Directors any of the
administrative powers the Committee is authorized to exercise (and references in
this Plan to the Board shall thereafter be to the Committee or such a
subcommittee), subject, however, to such resolutions, not inconsistent with the
provisions of the Plan, as may be adopted from time to time by the Board. The
Board may abolish the Committee at any time and revest in the Board the
administration of the Plan. Additionally, prior to the Listing Date, and
notwithstanding anything to the contrary contained herein, the Board may
delegate administration of the Plan to a committee of one or more members of the
Board and the term "Committee" shall apply to any person or persons to whom such
authority has been delegated. Notwithstanding anything in this Section 3 to the
contrary, the Board or the Committee may delegate to a committee of one or more
members of the Board the authority to grant Stock Awards to eligible persons who
(1) are not then subject to Section 16 of the Exchange Act and/or (2) are either
(i) not then Covered Employees and are not expected to be Covered Employees at
the time of recognition of income resulting from such Stock Award or (ii) not
persons with respect to whom the Company wishes to comply with Section 162(m) of
the Code.
4. Shares Subject To The Plan.
(a) Subject to the provisions of Section 12 relating to adjustments
upon changes in stock, the stock that may be issued pursuant to Stock Awards
under the Plan shall be the sum of three and one-half percent (3.5%) of the
issued shares at the end of each of the Company's fiscal years from 1997 through
the end of the term of the Plan, plus any unused carried forward shares and any
forfeited shares; provided, however, that the number of shares that may be
transferred to participants under the Plan in any one fiscal year of the Company
shall not exceed three and one-half percent (3.5%) of the issued shares
determined as of the end of the immediately preceding fiscal year plus any
unused carried forward shares and any forfeited shares. For purposes of this
Section 4, the following apply: (i) the number of "issued shares" at the end of
a
<PAGE>
fiscal year means the number of shares outstanding at that date, plus all shares
reacquired by the Company during the preceding fiscal year; (ii) "unused shares"
means any shares available from a prior Plan year, based on the percentage of
issued shares calculation, which were not transferred, plus any shares reserved
for grants which have not been covered by grants under prior shareholder-
approved plans ("Prior Plans") which will be terminated as of the effective date
of the Plan; and (iii) "forfeited shares" means any shares issued pursuant to
Stock Awards made under the Plan which are forfeited to the Company pursuant to
the Stock Award's terms and conditions, plus any shares covered by grants made
under Prior Plans which are not issued to participants or are returned to the
Company because of the cancellation, expiration or forfeiture of a grant made
under the Prior Plans; provided, however, that the term "forfeited shares" shall
not include shares as to which the original recipient received any benefits of
ownership (other than voting rights).
(b) In no event, however, except as adjusted pursuant to Section 12 of the
Plan, shall be more than two million (2,000,000) of the shares eligible for
issuance under the Plan in any calendar year be issued upon the exercise of
Incentive Stock Options under the Plan.
(c) If any Stock Award shall for any reason expire or otherwise terminate,
in whole or in part, without having been exercised in full, the stock not
acquired under such Stock Award shall revert to and again become available for
issuance under the Plan.
(d) For purposes of Section 4(a), except as to forfeited shares, the
payment of cash dividends and dividend equivalents in conjunction with
outstanding awards shall not be counted against the shares available for
issuance.
5. Eligibility.
(a) Incentive Stock Options may be granted only to Employees. Stock Awards
other than Incentive Stock Options may be granted only to Employees, Directors
or Consultants.
(b) Prior to the Listing Date no person shall be eligible for the grant of
an Option or an award to purchase restricted stock if, at the time of grant,
such person owns (or is deemed to own pursuant to Section 424(d) of the Code)
stock possessing more than ten percent (10%) of the total combined voting power
of all classes of stock of the Company or of any of its Affiliates unless the
exercise price of such Option is at least one hundred ten percent (110%) of the
Fair Market Value of such stock at the date of grant and the Option is not
exercisable after the expiration of five (5) years from the date of grant or, in
the case of a restricted stock purchase award, the purchase price is at least
one hundred percent (100%) of the Fair Market Value of such stock at the date of
grant. After the Listing Date this provision shall apply only to Incentive Stock
Options.
(c) Subject to the provisions of Section 12 relating to adjustments upon
changes in stock, no person shall be eligible to be granted Options covering
more than one million (1,000,000) shares of the Company's common stock in any
calendar year. This subsection 5(c) shall not apply prior to the Listing Date
and, following the Listing Date, shall not apply until (i) the earliest of: (A)
the first material modification of the Plan (including any increase to the
number of shares reserved for issuance under the Plan in accordance with Section
4); (B) the issuance of all of the shares of common stock reserved for issuance
under the Plan; (C) the expiration of the Plan; or (D) the first meeting of
stockholders at which directors are to be elected that occurs after the close of
the third calendar year following the calendar year in which occurred the first
registration of an equity security under section 12 of the Exchange Act or (ii)
such other date required by Section 162(m) of the Code and the rules and
regulations promulgated thereunder.
<PAGE>
6. Option Provisions.
Each Option shall be in such form and shall contain such terms and
conditions as the Board shall deem appropriate. The provisions of separate
Options need not be identical, but each Option shall include (through
incorporation of provisions hereof by reference in the Option or otherwise) the
substance of each of the following provisions:
(a) Term. No Option shall be exercisable after the expiration of ten (10)
years from the date it was granted.
(b) Price. The exercise price of each Incentive Stock Option shall be not
less than one hundred percent (100%) of the Fair Market Value of the stock
subject to the Option on the date the Option is granted; the exercise price of
each Nonstatutory Stock Option shall be not less than eighty-five percent (85%)
of the Fair Market Value of the stock subject to the Option on the date the
Option is granted. Notwithstanding the foregoing, an Option (whether an
Incentive Stock Option or a Nonstatutory Stock Option) may be granted with an
exercise price lower than that set forth in the preceding sentence if such
Option is granted pursuant to an assumption or substitution for another option
in a manner satisfying the provisions of Section 424(a) of the Code.
(c) Consideration. The purchase price of stock acquired pursuant to an
Option shall be paid, to the extent permitted by applicable statutes and
regulations, either (i) in cash at the time the Option is exercised or (ii) at
the discretion of the Board or the Committee, at the time of the grant of the
Option, (A) by delivery to the Company of other common stock of the Company, (B)
according to a deferred payment arrangement (however, in the event the Company
reincorporates in Delaware, then payment of the common stock's "par value" (as
defined in the Delaware General Corporation Law) shall not be made by deferred
payment), or other arrangement (which may include, without limiting the
generality of the foregoing, the use of other common stock of the Company) with
the person to whom the Option is granted or to whom the Option is transferred
pursuant to subsection 6(d) or (C) in any other form of legal consideration that
may be acceptable to the Board.
In the case of any deferred payment arrangement, interest shall be
compounded at least annually and shall be charged at the minimum rate of
interest necessary to avoid the treatment as interest, under any applicable
provisions of the Code, of any amounts other than amounts stated to be interest
under the deferred payment arrangement.
(d) Transferability. Prior to the Listing Date, an Option shall not be
transferable except by will or by the laws of descent and distribution and shall
be exercisable during the lifetime of the person to whom the Option is granted
only by such person. A Nonstatutory Stock Option, but not an Incentive Stock
Option, that is granted after the Listing Date may be transferable to the extent
provided in the Option Agreement. The person to whom the Option is granted may,
by delivering written notice to the Company, in a form satisfactory to the
Company, designate a third party who, in the event of the death of the Optionee,
shall thereafter be entitled to exercise the Option.
(e) Vesting. The total number of shares of stock subject to an Option may,
but need not, be allotted in periodic installments (which may, but need not, be
equal). The Option Agreement may provide that, from time to time during each of
such installment periods, the Option may become exercisable ("vest") with
respect to some or all of the shares allotted to that period and may be
exercised with respect to some or all of the shares allotted to such period
and/or any prior period as to which the Option became vested but was not fully
exercised. The Option may be subject to such other terms and conditions on the
time or times when it may be exercised (which may be based on performance or
other criteria) as the Board may deem
<PAGE>
appropriate. Prior to the Listing Date, the vesting provisions of individual
Options may vary but in each case will provide for vesting of at least twenty
percent (20%) per year of the total number of shares subject to the Option;
provided, however, that an Option granted to an officer, director or consultant
(within the meaning of Section 260.140.41 of Title 10 of the California Code of
Regulations) may become fully exercisable, subject to reasonable conditions such
as continued employment, at any time or during any period established by the
Company or of any of its Affiliates. The provisions of this subsection 6(e) are
subject to any Option provisions governing the minimum number of shares as to
which an Option may be exercised.
(f) Termination of Employment or Relationship as a Director or Consultant.
In the event an Optionee's Continuous Status as an Employee, Director or
Consultant terminates (other than upon the Optionee's death or disability), the
Optionee may exercise the Option (to the extent that the Optionee was entitled
to exercise it as of the date of termination) but only within such period of
time ending on the earlier of (i) the date three (3) months following the
termination of the Optionee's Continuous Status as an Employee, Director or
Consultant (or such longer or shorter period,which shall not be less than thirty
(30) days unless such termination is for cause, specified in the Option
Agreement) or (ii) the expiration of the term of the Option as set forth in the
Option Agreement. If, at the date of termination, the Optionee is not entitled
to exercise the entire Option, the shares covered by the unexercisable portion
of the Option shall revert to and again become available for issuance under the
Plan. If, after termination, the Optionee does not exercise the Option within
the time specified in the Option Agreement, the Option shall terminate and the
shares covered by such Option shall revert to and again become available for
issuance under the Plan.
An Optionee's Option Agreement may also provide that if the exercise of the
Option following the termination of the Optionee's Continuous Status as an
Employee, Director, or Consultant (other than upon the Optionee's death or
disability) would result in liability under Section 16(b) of the Exchange Act,
then the Option shall terminate on the earlier of (i) the expiration of the term
of the Option set forth in the Option Agreement or (ii) the tenth (10th) day
after the last date on which such exercise would result in such liability under
Section 16(b) of the Exchange Act. Finally, an Optionee's Option Agreement may
also provide that if the exercise of the Option following the termination of the
Optionee's Continuous Status as an Employee, Director or Consultant (other than
upon the Optionee's death or disability) would be prohibited at any time solely
because the issuance of shares would violate the registration requirements under
the Securities Act, then the Option shall terminate on the earlier of (i) the
expiration of the term of the Option set forth in the first paragraph of this
subsection 6(f) or (ii) the expiration of a period of three (3) months after the
termination of the Optionee's Continuous Status as an Employee, Director or
Consultant during which the exercise of the Option would not be in violation of
such registration requirements.
(g) Disability of Optionee. In the event an Optionee's Continuous Status
as an Employee, Director or Consultant terminates as a result of the Optionee's
disability, the Optionee may exercise the Option (to the extent that the
Optionee was entitled to exercise it as of the date of termination), but only
within such period of time ending on the earlier of (i) the date twelve (12)
months following such termination (or such longer or shorter period, which prior
to the Listing Date shall not be less than six (6) months, specified in the
Option Agreement) or (ii) the expiration of the term of the Option as set forth
in the Option Agreement. If, at the date of termination, the Optionee is not
entitled to exercise the entire Option, the shares covered by the unexercisable
portion of the Option shall revert to and again become available for issuance
under the Plan. If, after termination, the Optionee does not exercise the Option
within the time specified herein, the Option shall terminate, and the shares
covered by such Option shall revert to and again become available for issuance
under the Plan.
(h) Death of Optionee. In the event of the death of an Optionee during, or
within a period specified in the Option Agreement after the termination of, the
Optionee's Continuous Status as an Employee,
<PAGE>
Director or Consultant, the Option may be exercised (to the extent the Optionee
was entitled to exercise the Option as of the date of death) by the Optionee's
estate, by a person who acquired the right to exercise the Option by bequest or
inheritance or by a person designated to exercise the option upon the Optionee's
death pursuant to subsection 6(d), but only within the period ending on the
earlier of (i) the date eighteen (18) months following the date of death (or
such longer or shorter period, which prior to the Listing Date shall not be less
than six (6) months, specified in the Option Agreement) or (ii) the expiration
of the term of such Option as set forth in the Option Agreement. If, at the time
of death, the Optionee was not entitled to exercise the entire Option, the
shares covered by the unexercisable portion of the Option shall revert to and
again become available for issuance under the Plan. If, after death, the Option
is not exercised within the time specified herein, the Option shall terminate,
and the shares covered by such Option shall revert to and again become available
for issuance under the Plan.
(i) Early Exercise. The Option may, but need not, include a provision
whereby the Optionee may elect at any time while an Employee, Director or
Consultant to exercise the Option as to any part or all of the shares subject to
the Option prior to the full vesting of the Option. Any unvested shares so
purchased may be subject to a repurchase right in favor of the Company or to any
other restriction the Board determines to be appropriate. Prior to the Listing
Date, however, any unvested shares so purchased shall be subject to a repurchase
right in favor of the Company, with the repurchase price to be equal to the
original purchase price of the stock, or to any other restriction the Board
determines to be appropriate; provided, however, that (i) the right to
repurchase at the original purchase price shall lapse at a minimum rate of
twenty percent (20%) per year over five (5) years from the date the Option was
granted, (ii) such right shall be exercisable only within (A) the ninety (90)
day period following the termination of employment or the relationship as a
Director or Consultant, or (B) such longer period as may be agreed to by the
Company and the Optionee (for example, for purposes of satisfying the
requirements of Section 1202(c)(3) of the Code (regarding "qualified small
business stock")) and (iii) such right shall be exercisable only for cash or
cancellation of purchase money indebtedness for the shares. Notwithstanding the
foregoing, shares received on exercise of an Option by an officer, director or
consultant (within the meaning of Section 260.140.41 of Title 10 of the
California Code of Regulations) may be subject to additional or greater
restrictions.
(j) Right of First Refusal. The Option may, but need not, include a
provision whereby the Company may elect, prior to the Listing Date, to exercise
a right of first refusal following receipt of notice from the Optionee of the
intent to transfer all or any part of the shares exercised pursuant to the
Option. Such right of first refusal shall be exercised by the Company no more
than thirty (30) days following receipt of notice of the Optionee's intent to
transfer shares and must be exercised as to all the shares the Optionee intends
to transfer unless the Optionee consents to exercise for less than all the
shares offered. The purchase of the shares following exercise shall be completed
within thirty (30) days of the Company's receipt of notice of the Optionee's
intent to transfer shares, or such longer period of time as has been offered by
the person to whom the Optionee intends to transfer the shares, or as may be
agreed to by the Company and the Optionee (for example, for purposes of
satisfying the requirements of Section 1202(c)(3) of the Code (regarding
"qualified small business stock").
(k) Re-Load Options. Without in any way limiting the authority of the
Board or Committee to make or not to make grants of Options hereunder, the Board
or Committee shall have the authority (but not an obligation) to include as part
of any Option Agreement a provision entitling the Optionee to a further Option
(a "Re-Load Option") in the event the Optionee exercises the Option evidenced by
the Option Agreement, in whole or in part, by surrendering other shares of
common stock in accordance with this Plan and the terms and conditions of the
Option Agreement. Any such Re-Load Option: (i) shall be for a number of shares
equal to the number of shares surrendered as part or all of the exercise price
of such Option; (ii) shall have an expiration date which is the same as the
expiration date of the Option the exercise
<PAGE>
of which gave rise to such Re-Load Option; and (iii) shall have an exercise
price which is equal to one hundred percent (100%) of the Fair Market Value of
the common stock subject to the Re-Load Option on the date of exercise of the
original Option. Notwithstanding the foregoing, a Re-Load Option which is
granted to a 10% shareholder (as described in subsection 5(b)), shall have an
exercise price which is equal to one hundred ten percent (110%) of the Fair
Market Value of the stock subject to the Re-Load Option on the date of exercise
of the original Option and shall have a term which is no longer than five (5)
years.
Any such Re-Load Option may be an Incentive Stock Option or a Nonstatutory
Stock Option, as the Board or Committee may designate at the time of the grant
of the original Option; provided, however, that the designation of any Re-Load
Option as an Incentive Stock Option shall be subject to the one hundred thousand
dollar ($100,000) annual limitation on exercisability of Incentive Stock Options
described in subsection 11(e) of the Plan and in Section 422(d) of the Code.
There shall be no Re-Load Options on a Re-Load Option. Any such Re-Load Option
shall be subject to the availability of sufficient shares under subsection 4(a)
and the limits on the grants of Options under subsection 5(c) and shall be
subject to such other terms and conditions as the Board or Committee may
determine which are not inconsistent with the express provisions of the Plan
regarding the terms of Options.
7. Terms Of Stock Bonuses And Purchases Of Restricted Stock.
Each stock bonus or restricted stock purchase agreement shall be in such
form and shall contain such terms and conditions as the Board or the Committee
shall deem appropriate. The terms and conditions of stock bonus or restricted
stock purchase agreements may change from time to time, and the terms and
conditions of separate agreements need not be identical, but each stock bonus or
restricted stock purchase agreement shall include (through incorporation of
provisions hereof by reference in the agreement or otherwise) the substance of
each of the following provisions as appropriate:
(a) Purchase Price. The purchase price under each restricted stock
purchase agreement shall be such amount as the Board or Committee shall
determine and designate in such Stock Award Agreement, but prior to the Listing
Date the purchase price shall not be less than eighty-five percent (85%), and
after the Listing Date the purchase price shall not be less than fifty percent
(50%), of the stock's Fair Market Value on the date such award is made.
Notwithstanding the foregoing, the Board or the Committee may determine that
eligible participants in the Plan may be awarded stock pursuant to a stock bonus
agreement in consideration for past services actually rendered to the Company or
for its benefit.
(b) Transferability. Rights under a stock bonus or restricted stock
purchase agreement shall be transferable only by will or the laws of descent and
distribution, so long as stock awarded under such Stock Award Agreement remains
subject to the terms of the agreement.
(c) Consideration. The purchase price of stock acquired pursuant to a
stock purchase agreement shall be paid either: (i) in cash at the time of
purchase; (ii) at the discretion of the Board or the Committee, according to a
deferred payment arrangement (however, in the event the Company reincorporates
in Delaware, then payment of the common stock's "par value" (as defined in the
Delaware General Corporation Law) shall not be made by deferred payment) or
other arrangement with the person to whom the stock is sold; or (iii) in any
other form of legal consideration that may be acceptable to the Board or the
Committee in its discretion. Notwithstanding the foregoing, the Board or the
Committee to which administration of the Plan has been delegated may award stock
pursuant to a stock bonus agreement in consideration for past services actually
rendered to the Company or for its benefit.
<PAGE>
(d) Vesting. Shares of stock sold or awarded under the Plan may, but need
not, be subject to a repurchase option in favor of the Company in accordance
with a vesting schedule to be determined by the Board or the Committee. Prior to
the Listing Date, the applicable agreement shall provide (i) that the right to
repurchase at the original purchase price shall lapse at a minimum rate of
twenty percent (20%) per year over five (5) years from the date the Stock Award
was granted (except that a Stock Award granted to an officer, director or
consultant (within the meaning of Section 260.140.41 of Title 10 of the
California Code of Regulations) may become fully vested, subject to reasonable
conditions such as continued employment, at any time or during any period
established by the Company or of any of its Affiliates), (ii) such right shall
be exercisable only (A) within the ninety (90) day period following the
termination of employment or the relationship as a Director or Consultant, or
(B) such longer period as may be agreed to by the Company and the holder of the
Stock Award (for example, for purposes of satisfying the requirements of Section
1202(c)(3) of the Code (regarding "qualified small business stock")) and (iii)
such right shall be exercisable only for cash or cancellation of purchase money
indebtedness for the shares.
(e) Termination of Employment or Relationship as a Director or Consultant.
In the event a Participant's Continuous Status as an Employee, Director or
Consultant terminates, the Company may repurchase or otherwise reacquire,
subject to the limitations described in subsection 7(d), any or all of the
shares of stock held by that person which have not vested as of the date of
termination under the terms of the stock bonus or restricted stock purchase
agreement between the Company and such person.
8. Cancellation And Re-Grant Of Options.
(a) The Board or the Committee shall have the authority to effect, at any
time and from time to time, (i) the repricing of any outstanding Options under
the Plan and/or (ii) with the consent of the affected holders of Options, the
cancellation of any outstanding Options under the Plan and the grant in
substitution therefor of new Options under the Plan covering the same or
different numbers of shares of stock, but having an exercise price per share not
less than eighty-five percent (85%) of the Fair Market Value (one hundred
percent (100%) of the Fair Market Value in the case of an Incentive Stock
Option) or, in the case of a 10% shareholder (as described in subsection 5(b))
receiving a new grant of an Incentive Stock Option (or a Nonstatutory Option if
the cancellation or repricing takes place prior to the Listing Date), not less
than one hundred ten percent (110%) of the Fair Market Value) per share of stock
on the new grant date. Notwithstanding the foregoing, the Board or the Committee
may grant an Option with an exercise price lower than that set forth above if
such Option is granted as part of a transaction to which section 424(a) of the
Code applies.
(b) Shares subject to an Option canceled under this Section 8 shall
continue to be counted against the maximum award of Options permitted to be
granted pursuant to subsection 5(c) of the Plan. The repricing of an Option
under this Section 8, resulting in a reduction of the exercise price, shall be
deemed to be a cancellation of the original Option and the grant of a substitute
Option; in the event of such repricing, both the original and the substituted
Options shall be counted against the maximum awards of Options permitted to be
granted pursuant to subsection 5(c) of the Plan. The provisions of this
subsection 8(b) shall be applicable only to the extent required by Section
162(m) of the Code.
9. Covenants Of The Company.
(a) During the terms of the Stock Awards, the Company shall keep available
at all times the number of shares of stock required to satisfy such Stock
Awards.
<PAGE>
(b) The Company shall seek to obtain from each regulatory commission or
agency having jurisdiction over the Plan such authority as may be required to
issue and sell shares of stock upon exercise of the Stock Award; provided,
however, that this undertaking shall not require the Company to register under
the Securities Act either the Plan, any Stock Award or any stock issued or
issuable pursuant to any such Stock Award. If, after reasonable efforts, the
Company is unable to obtain from any such regulatory commission or agency the
authority which counsel for the Company deems necessary for the lawful issuance
and sale of stock under the Plan, the Company shall be relieved from any
liability for failure to issue and sell stock upon exercise of such Stock Awards
unless and until such authority is obtained.
10. Use Of Proceeds From Stock.
Proceeds from the sale of stock pursuant to Stock Awards shall constitute
general funds of the Company.
11. Miscellaneous.
(a) Subject to any applicable provisions of the California Corporate
Securities Law of 1968 and related regulations relied upon prior to the Listing
Date as a condition of issuing securities pursuant to the Plan, the Board shall
have the power to accelerate the time at which a Stock Award may first be
exercised or the time during which a Stock Award or any part thereof will vest
pursuant to subsection 6(e) or 7(d), notwithstanding the provisions in the Stock
Award stating the time at which it may first be exercised or the time during
which it will vest.
(b) Neither an Employee, Director or Consultant nor any person to whom a
Stock Award is transferred under subsection 6(d) or 7(b) shall be deemed to be
the holder of, or to have any of the rights of a holder with respect to, any
shares subject to such Stock Award unless and until such person has satisfied
all requirements for exercise of the Stock Award pursuant to its terms.
(c) Throughout the term of any Stock Award, the Company shall deliver to
the holder of such Stock Award, not later than one hundred twenty (120) days
after the close of each of the Company's fiscal years during the term of such
Stock Award, a balance sheet and an income statement. This subsection shall not
apply (i) after the Listing Date or (ii) when issuance is limited to key
employees whose duties in connection with the Company assure them access to
equivalent information.
(d) Nothing in the Plan or any instrument executed or Stock Award granted
pursuant thereto shall confer upon any Employee, Director, Consultant or other
holder of Stock Awards any right to continue in the employ of the Company or any
Affiliate (or to continue acting as a Director or Consultant) or shall affect
the right of the Company or any Affiliate to terminate the employment of any
Employee with or without cause the right of the Company's Board of Directors
and/or the Company's stockholders to remove any Director as provided in the
Company's Bylaws and the provisions of the applicable laws of the Company's
state of incorporation or the right to terminate the relationship of any
Consultant subject to the terms of such Consultant's agreement with the Company
or Affiliate.
(e) To the extent that the aggregate Fair Market Value (determined at the
time of grant) of stock with respect to which Incentive Stock Options are
exercisable for the first time by any Optionee during any calendar year under
all plans of the Company and its Affiliates exceeds one hundred thousand dollars
($100,000), the Options or portions thereof which exceed such limit (according
to the order in which they were granted) shall be treated as Nonstatutory Stock
Options.
(f) The Company may require any person to whom a Stock Award is granted,
or any person to
<PAGE>
whom a Stock Award is transferred pursuant to subsection 6(d) or 7(b), as a
condition of exercising or acquiring stock under any Stock Award: (1) to give
written assurances satisfactory to the Company as to such person's knowledge and
experience in financial and business matters and/or to employ a purchaser
representative reasonably satisfactory to the Company who is knowledgeable and
experienced in financial and business matters, and that he or she is capable of
evaluating, alone or together with the purchaser representative, the merits and
risks of exercising the Stock Award; and (2) to give written assurances
satisfactory to the Company stating that such person is acquiring the stock
subject to the Stock Award for such person's own account and not with any
present intention of selling or otherwise distributing the stock. The foregoing
requirements, and any assurances given pursuant to such requirements, shall be
inoperative if (i) the issuance of the shares upon the exercise or acquisition
of stock under the Stock Award has been registered under a then currently
effective registration statement under the Securities Act or (ii) as to any
particular requirement, a determination is made by counsel for the Company that
such requirement need not be met in the circumstances under the then applicable
securities laws. The Company may, upon advice of counsel to the Company, place
legends on stock certificates issued under the Plan as such counsel deems
necessary or appropriate in order to comply with applicable securities laws,
including, but not limited to, legends restricting the transfer of the stock.
(g) To the extent provided by the terms of a Stock Award Agreement, the
person to whom a Stock Award is granted may satisfy any federal, state or local
tax withholding obligation relating to the exercise or acquisition of stock
under a Stock Award by any of the following means or by a combination of such
means: (1) tendering a cash payment; (2) authorizing the Company to withhold
shares from the shares of the common stock otherwise issuable to the participant
as a result of the exercise or acquisition of stock under the Stock Award; or
(3) delivering to the Company owned and unencumbered shares of the common stock
of the Company.
12. Adjustments Upon Changes In Stock.
(a) If any change is made in the stock subject to the Plan, or subject to
any Stock Award (through merger, consolidation, reorganization,
recapitalization, reincorporation, stock dividend, dividend in property other
than cash, stock split, liquidating dividend, combination of shares, exchange of
shares, change in corporate structure or other transaction not involving the
receipt of consideration by the Company), the Plan will be appropriately
adjusted in the type(s) and maximum number of securities subject to the Plan
pursuant to subsection 4(a) and the maximum number of securities subject to
award to any person during any calendar year pursuant to subsection 5(c), and
the outstanding Stock Awards will be appropriately adjusted in the type(s) and
number of securities and price per share of stock subject to such outstanding
Stock Awards. Such adjustments shall be made by the Board or the Committee, the
determination of which shall be final, binding and conclusive. (The conversion
of any convertible securities of the Company shall not be treated as a
"transaction not involving the receipt of consideration by the Company".)
(b) In the event of: (1) a dissolution, liquidation or sale of all or
substantially all of the assets of the Company; (2) a merger or consolidation in
which the Company is not the surviving corporation; (3) a reverse merger in
which the Company is the surviving corporation but the shares of the Company's
common stock outstanding immediately preceding the merger are converted by
virtue of the merger into other property, whether in the form of securities,
cash or otherwise; (4) after the Listing Date the acquisition by any person,
entity or group within the meaning of Section 13(d) or 14(d) of the Exchange
Act, or any comparable successor provisions (excluding any employee benefit
plan, or related trust, sponsored or maintained by the Company or any Affiliate
of the Company) of the beneficial ownership (within the meaning of Rule 13d-3
promulgated under the Exchange Act, or comparable successor rule) of securities
of the Company representing at least fifty percent (50%) of the combined voting
power entitled to vote in the
<PAGE>
election of directors; or (5) at the time individuals who, as of the first date
as of which the Company has a class of equity securities which are actively
traded on any established stock exchange or a national market system (including
NASDAQ), constitute the Board (the "Incumbent Board") cease for any reason to
constitute at least a majority of the Board, provided that any person becoming a
director subsequent to such date, whose election or nomination for election by
the Company's stockholders was approved by a vote of at least a majority of the
directors comprising the Incumbent Board (other than an election or nomination
of an individual whose initial assumption of office is in connection with an
actual or threatened election contest relating to the election of Directors of
the Company, as such terms are used in Rule 14a-11 of Regulation 14A promulgated
under the Exchange Act) shall be, for purposes of the Plan, considered as though
such person were a member of the Incumbent Board, then: (i) any surviving
corporation or acquiring corporation shall assume any Stock Awards outstanding
under the Plan or shall substitute similar stock awards (including an award to
acquire the same consideration paid to the stockholders in the transaction
described in this subsection 12(b)) for those outstanding under the Plan; or
(ii) in the event any surviving corporation or acquiring corporation refuses to
assume such Stock Awards or to substitute similar stock awards for those
outstanding under the Plan, (A) with respect to Stock Awards held by persons
then performing services as Employees, Directors or Consultants and subject to
any applicable provisions of the California Corporate Securities Law of 1968 and
related regulations relied upon as a condition of issuing securities pursuant to
the Plan, the vesting of such Stock Awards (and, if applicable, the time during
which such Stock Awards may be exercised) shall be accelerated prior to such
event and the Stock Awards terminated if not exercised (if applicable) after
such acceleration and at or prior to such event, and (B) with respect to any
other Stock Awards outstanding under the Plan, such Stock Awards shall be
terminated if not exercised (if applicable) prior to such event.
13. Amendment Of The Plan and Stock Awards.
(a) The Board at any time, and from time to time, may amend the Plan.
However, except as provided in Section 12 relating to adjustments upon changes
in stock, no amendment shall be effective unless approved by the stockholders of
the Company within twelve (12) months before or after the adoption of the
amendment, where the amendment will:
(i) Increase the number of shares reserved for Stock Awards
under the Plan;
(ii) Modify the requirements as to eligibility for participation
in the Plan (to the extent such modification requires shareholder approval in
order for the Plan to satisfy the requirements of Section 422 of the Code); or
(iii) Modify the Plan in any other way if such modification
requires shareholder approval in order for the Plan to satisfy the requirements
of Section 422 of the Code or to comply with the requirements of Rule 16b-3.
(b) The Board may in its sole discretion submit any other amendment to the
Plan for shareholder approval, including, but not limited to, amendments to the
Plan intended to satisfy the requirements of Section 162(m) of the Code and the
regulations promulgated thereunder regarding the exclusion of performance-based
compensation from the limit on corporate deductibility of compensation paid to
certain executive officers.
(c) It is expressly contemplated that the Board may amend the Plan in any
respect the Board deems necessary or advisable to provide eligible Employees
with the maximum benefits provided or to be provided under the provisions of the
Code and the regulations promulgated thereunder relating to Incentive Stock
Options and/or to bring the Plan and/or Incentive Stock Options granted under it
into compliance
<PAGE>
therewith.
(d) Rights and obligations under any Stock Award granted before amendment
of the Plan shall not be impaired by any amendment of the Plan unless (i) the
Company requests the consent of the person to whom the Stock Award was granted
and (ii) such person consents in writing.
(e) The Board at any time, and from time to time, may amend the terms of
any one or more Stock Award; provided, however, that the rights and obligations
under any Stock Award shall not be impaired by any such amendment unless (i) the
Company requests the consent of the person to whom the Stock Award was granted
and (ii) such person consents in writing.
14. Termination Or Suspension Of The Plan.
(a) The Board may suspend or terminate the Plan at any time. Unless sooner
terminated, the Plan shall terminate on March 2, 2007, which is the day before
the day which is the tenth anniversary of the date the Plan was adopted by the
Board or approved by the stockholders of the Company, whichever is earlier. No
Stock Awards may be granted under the Plan while the Plan is suspended or after
it is terminated.
(b) Rights and obligations under any Stock Award granted while the Plan is
in effect shall not be impaired by suspension or termination of the Plan, except
with the written consent of the person to whom the Stock Award was granted.
15. Effective Date Of Plan.
The Plan shall become effective as determined by the Board, but no Stock
Awards granted under the Plan shall be exercised unless and until the Plan has
been approved by the stockholders of the Company, which approval shall be within
twelve (12) months before or after the date the Plan is adopted by the Board,
and, if required, an appropriate permit has been issued by the Commissioner of
Corporations of the State of California.
<PAGE>
TULARIK INC.
STOCK OPTION GRANT NOTICE
(1997 Equity Incentive Plan)
Tularik Inc. (the "Company"), pursuant to its 1997 Equity Incentive Plan (the
"Plan"), hereby grants to Optionholder an option to purchase the number of
shares of the Company's Common Stock set forth below. This option is subject to
all of the terms and conditions as set forth herein and in the Stock Option
Agreement, the Plan and the Notice of Exercise, all of which are attached hereto
and incorporated herein in their entirety.
Optionholder: ____________________________
Date of Grant: ____________________________
Vesting Commencement Date: ____________________________
Number of Shares Subject
to Option: ____________________________
Exercise Price (Per Share): ____________________________
Total Exercise Price: ____________________________
Expiration Date: ____________________________
Type of Grant: [_] Incentive Stock Option/1/ [_] Nonstatutory Stock Option
Exercise Schedule: [_] Same as Vesting Schedule [_] Early Exercise Permitted
Vesting Schedule: ((Vesting_Schedule))
Payment: By one or a combination of the following items
(described in the Stock Option Agreement):
By cash or check
Pursuant to a Regulation T Program if the Shares
are publicly traded
By delivery of already-owned shares if the Shares
are publicly traded
By deferred payment
Additional Terms/Acknowledgements: The undersigned Optionholder acknowledges
receipt of, and understands and agrees to, this Grant Notice, the Stock Option
Agreement and the Plan. Optionholder further acknowledges that as of the Date
of Grant, this Grant Notice, the Stock Option Agreement and the Plan set forth
the entire understanding between Optionholder and the Company regarding the
acquisition of stock in the Company and supersede all prior oral and written
agreements on that subject with the exception of (i) options previously granted
and delivered to Optionholder under the Plan, and (ii) the following agreements
only:
Other Agreements: ________________________________________
________________________________________
Tularik Inc. Optionholder:
By:_________________________________ ________________________________________
Signature Signature
Title:______________________________ Date:___________________________________
Date:_______________________________
Attachments: Stock Option Agreement, 1999 Equity Incentive Plan and Notice of
Exercise
______________________
/1/ If this is an incentive stock option, it (plus your other outstanding
incentive stock options) cannot be first exercisable for more than $100,000
-----------
in any calendar year. Any excess over $100,000 is a nonstatutory stock
option.
<PAGE>
TULARIK INC.
1997 EQUITY INCENTIVE PLAN
STOCK OPTION AGREEMENT
(Incentive and Nonstatutory Stock Options)
Pursuant to your Stock Option Grant Notice ("Grant Notice") and this Stock
Option Agreement, Tularik Inc. (the "Company") has granted you an option under
its 1997 Equity Incentive Plan (the "Plan") to purchase the number of shares of
the Company's Common Stock indicated in your Grant Notice at the exercise price
indicated in your Grant Notice. Defined terms not explicitly defined in this
Stock Option Agreement but defined in the Plan shall have the same definitions
as in the Plan.
The details of your option are as follows:
1. Vesting. Subject to the limitations contained herein, your option will
vest as provided in your Grant Notice, provided that vesting will cease upon the
termination of your Continuous Service.
2. Number of Shares and Exercise Price. The number of shares of Common
Stock subject to your option and your exercise price per share referenced in
your Grant Notice may be adjusted from time to time for Capitalization
Adjustments, as provided in the Plan.
3. Exercise prior to Vesting ("Early Exercise"). If permitted in your
Grant Notice (i.e., the "Exercise Schedule" indicates that "Early Exercise" of
your option is permitted) and subject to the provisions of your option, you may
elect at any time that is both (i) during the period of your Continuous Service
and (ii) during the term of your option, to exercise all or part of your option,
including the nonvested portion of your option; provided, however, that:
(a) a partial exercise of your option shall be deemed to cover
first vested shares of Common Stock and then the earliest vesting installment of
unvested shares of Common Stock;
(b) any shares of Common Stock so purchased from installments that
have not vested as of the date of exercise shall be subject to the purchase
option in favor of the Company as described in the Company's form of Early
Exercise Stock Purchase Agreement;
(c) you shall enter into the Company's form of Early Exercise Stock
Purchase Agreement with a vesting schedule that will result in the same vesting
as if no early exercise had occurred; and
(d) if your option is an incentive stock option, then, as provided
in the Plan, to the extent that the aggregate Fair Market Value (determined at
the time of grant) of the shares of Common Stock with respect to which your
option plus all other incentive stock options you hold
1
<PAGE>
are exercisable for the first time by you during any calendar year (under all
plans of the Company and its Affiliates) exceeds one hundred thousand dollars
($100,000), your option(s) or portions thereof that exceed such limit (according
to the order in which they were granted) shall be treated as nonstatutory stock
options.
4. Method of Payment. Payment of the exercise price is due in full upon
exercise of all or any part of your option. You may elect to make payment of the
exercise price in cash or by check or in any other manner permitted by your
Grant Notice, which may include one or more of the following:
(a) In the Company's sole discretion at the time your option is
exercised and provided that at the time of exercise the Common Stock is publicly
traded and quoted regularly in The Wall Street Journal, pursuant to a program
developed under Regulation T as promulgated by the Federal Reserve Board that,
prior to the issuance of Common Stock, results in either the receipt of cash (or
check) by the Company or the receipt of irrevocable instructions to pay the
aggregate exercise price to the Company from the sales proceeds.
(b) Provided that at the time of exercise the Common Stock is
publicly traded and quoted regularly in The Wall Street Journal, by delivery of
already-owned shares of Common Stock either that you have held for the period
required to avoid a charge to the Company's reported earnings (generally six
months) or that you did not acquire, directly or indirectly from the Company,
that are owned free and clear of any liens, claims, encumbrances or security
interests, and that are valued at Fair Market Value on the date of exercise.
"Delivery" for these purposes, in the sole discretion of the Company at the time
you exercise your option, shall include delivery to the Company of your
attestation of ownership of such shares of Common Stock in a form approved by
the Company. Notwithstanding the foregoing, you may not exercise your option by
tender to the Company of Common Stock to the extent such tender would violate
the provisions of any law, regulation or agreement restricting the redemption of
the Company's stock.
(c) Pursuant to the following deferred payment alternative:
(i) Not less than one hundred percent (100%) of the
aggregate exercise price, plus accrued interest, shall be due four (4) years
from date of exercise or, at the Company's election, upon termination of your
Continuous Service.
(ii) Interest shall be compounded at least annually and
shall be charged at the minimum rate of interest necessary to avoid the
treatment as interest, under any applicable provisions of the Code, of any
portion of any amounts other than amounts stated to be interest under the
deferred payment arrangement.
(iii) At any time that the Company is incorporated in
Delaware, payment of the Common Stock's "par value," as defined in the Delaware
General Corporation Law, shall be made in cash and not by deferred payment.
2
<PAGE>
(iv) In order to elect the deferred payment alternative, you
must, as a part of your written notice of exercise, give notice of the election
of this payment alternative and, in order to secure the payment of the deferred
exercise price to the Company hereunder, if the Company so requests, you must
tender to the Company a promissory note and a security agreement covering the
purchased shares of Common Stock, both in form and substance satisfactory to the
Company, or such other or additional documentation as the Company may request.
5. Whole Shares. You may exercise your option only for whole shares of
Common Stock.
6. Securities Law Compliance. Notwithstanding anything to the contrary
contained herein, you may not exercise your option unless the shares of Common
Stock issuable upon such exercise are then registered under the Securities Act
or, if such shares of Common Stock are not then so registered, the Company has
determined that such exercise and issuance would be exempt from the registration
requirements of the Securities Act. The exercise of your option must also comply
with other applicable laws and regulations governing your option, and you may
not exercise your option if the Company determines that such exercise would not
be in material compliance with such laws and regulations.
7. Term. The term of your option commences on the Date of Grant and
expires upon the earliest of the following:
(a) immediately upon termination of your Continuous Service for
Cause;
(b) three (3) months after the termination of your Continuous
Service for any reason other than your Disability, death or Cause, provided that
if during any part of such three- (3-) month period your option is not
exercisable solely because of the condition set forth in the preceding paragraph
relating to "Securities Law Compliance," your option shall not expire until the
earlier of the Expiration Date or until it shall have been exercisable for an
aggregate period of three (3) months after the termination of your Continuous
Service;
(c) twelve (12) months after the termination of your Continuous
Service due to your Disability;
(d) eighteen (18) months after your death if you die either during
your Continuous Service or within three (3) months after your Continuous Service
terminates;
(e) the Expiration Date indicated in your Grant Notice; or
(f) the tenth (10th) anniversary of the Date of Grant.
If your option is an incentive stock option, note that, to obtain the
federal income tax advantages associated with an "incentive stock option," the
Code requires that at all times beginning on the date of grant of your option
and ending on the day three (3) months before the date of your option's
exercise, you must be an employee of the Company or an Affiliate, except
3
<PAGE>
in the event of your death or Disability. The Company has provided for extended
exercisability of your option under certain circumstances for your benefit but
cannot guarantee that your option will necessarily be treated as an "incentive
stock option" if you continue to provide services to the Company or an Affiliate
as a Consultant or Director after your employment terminates or if you otherwise
exercise your option more than three (3) months after the date your employment
terminates.
8. Exercise.
(a) You may exercise the vested portion of your option (and the
unvested portion of your option if your Grant Notice so permits) during its term
by delivering a Notice of Exercise (in a form designated by the Company)
together with the exercise price to the Secretary of the Company, or to such
other person as the Company may designate, during regular business hours,
together with such additional documents as the Company may then require.
(b) By exercising your option you agree that, as a condition to any
exercise of your option, the Company may require you to enter into an
arrangement providing for the payment by you to the Company of any tax
withholding obligation of the Company arising by reason of (1) the exercise of
your option, (2) the lapse of any substantial risk of forfeiture to which the
shares of Common Stock are subject at the time of exercise, or (3) the
disposition of shares of Common Stock acquired upon such exercise.
(c) If your option is an incentive stock option, by exercising your
option you agree that you will notify the Company in writing within fifteen (15)
days after the date of any disposition of any of the shares of the Common Stock
issued upon exercise of your option that occurs within two (2) years after the
date of your option grant or within one (1) year after such shares of Common
Stock are transferred upon exercise of your option.
(d) By exercising your option you agree that the Company (or a
representative of the underwriter(s)) may, in connection with the first
underwritten registration of the offering of any securities of the Company under
the Securities Act, require that you not sell, dispose of, transfer, make any
short sale of, grant any option for the purchase of, or enter into any hedging
or similar transaction with the same economic effect as a sale, any shares of
Common Stock or other securities of the Company held by you, for a period of
time specified by the underwriter(s) (not to exceed one hundred eighty (180)
days) following the effective date of the registration statement of the Company
filed under the Securities Act. You further agree to execute and deliver such
other agreements as may be reasonably requested by the Company and/or the
underwriter(s) that are consistent with the foregoing or that are necessary to
give further effect thereto. In order to enforce the foregoing covenant, the
Company may impose stop-transfer instructions with respect to your shares of
Common Stock until the end of such period.
9. Transferability. Your option is not transferable, except by will or by
the laws of descent and distribution, and is exercisable during your life only
by you. Notwithstanding the foregoing, by delivering written notice to the
Company, in a form satisfactory to the Company, you may designate a third party
who, in the event of your death, shall thereafter be entitled to exercise your
option.
4
<PAGE>
10. Right of First Refusal. Shares of Common Stock that you acquire upon
exercise of your option are subject to any right of first refusal that may be
described in the Company's bylaws in effect at such time the Company elects to
exercise its right. The Company's right of first refusal shall expire on the
Listing Date.
11. Right of Repurchase. To the extent provided in the Company's bylaws as
amended from time to time, the Company shall have the right to repurchase all or
any part of the shares of Common Stock you acquire pursuant to the exercise of
your option.
12. Option not a Service Contract. Your option is not an employment or
service contract, and nothing in your option shall be deemed to create in any
way whatsoever any obligation on your part to continue in the employ of the
Company or an Affiliate, or of the Company or an Affiliate to continue your
employment. In addition, nothing in your option shall obligate the Company or an
Affiliate, their respective shareholders, Boards of Directors, Officers or
Employees to continue any relationship that you might have as a Director or
Consultant for the Company or an Affiliate.
13. Withholding Obligations.
(a) At the time you exercise your option, in whole or in part, or
at any time thereafter as requested by the Company, you hereby authorize
withholding from payroll and any other amounts payable to you, and otherwise
agree to make adequate provision for (including by means of a "cashless
exercise" pursuant to a program developed under Regulation T as promulgated by
the Federal Reserve Board to the extent permitted by the Company), any sums
required to satisfy the federal, state, local and foreign tax withholding
obligations of the Company or an Affiliate, if any, which arise in connection
with your option.
(b) Upon your request and subject to approval by the Company, in
its sole discretion, and compliance with any applicable conditions or
restrictions of law, the Company may withhold from fully vested shares of Common
Stock otherwise issuable to you upon the exercise of your option a number of
whole shares of Common Stock having a Fair Market Value, determined by the
Company as of the date of exercise, not in excess of the minimum amount of tax
required to be withheld by law. If the date of determination of any tax
withholding obligation is deferred to a date later than the date of exercise of
your option, share withholding pursuant to the preceding sentence shall not be
permitted unless you make a proper and timely election under Section 83(b) of
the Code, covering the aggregate number of shares of Common Stock acquired upon
such exercise with respect to which such determination is otherwise deferred, to
accelerate the determination of such tax withholding obligation to the date of
exercise of your option. Notwithstanding the filing of such election, shares of
Common Stock shall be withheld solely from fully vested shares of Common Stock
determined as of the date of exercise of your option that are otherwise issuable
to you upon such exercise. Any adverse consequences to you arising in connection
with such share withholding procedure shall be your sole responsibility.
(c) You may not exercise your option unless the tax withholding
obligations of the Company and/or any Affiliate are satisfied. Accordingly, you
may not be able to exercise
5
<PAGE>
your option when desired even though your option is vested, and the Company
shall have no obligation to issue a certificate for such shares of Common Stock
or release such shares of Common Stock from any escrow provided for herein.
14. Notices. Any notices provided for in your option or the Plan shall be
given in writing and shall be deemed effectively given upon receipt or, in the
case of notices delivered by mail by the Company to you, five (5) days after
deposit in the United States mail, postage prepaid, addressed to you at the last
address you provided to the Company.
15. Governing Plan Document. Your option is subject to all the provisions
of the Plan, the provisions of which are hereby made a part of your option, and
is further subject to all interpretations, amendments, rules and regulations
which may from time to time be promulgated and adopted pursuant to the Plan. In
the event of any conflict between the provisions of your option and those of the
Plan, the provisions of the Plan shall control.
6
<PAGE>
NOTICE OF EXERCISE
Tularik Inc.
Two Corporate Drive
South San Francisco, CA 94080 Date of Exercise: _______________
Ladies and Gentlemen:
This constitutes notice under my stock option that I elect to purchase the
number of shares for the price set forth below.
Type of option (check one): Incentive [_] Nonstatutory [_]
Stock option dated: _______________
Number of shares as
to which option is
exercised: _______________
Certificates to be
issued in name of: _______________
Total exercise price: $______________
Cash payment delivered
herewith: $______________
Promissory note delivered
herewith: $______________
Value of ________ shares of
Tularik Inc. common
stock delivered herewith/1/: $______________
By this exercise, I agree (i) to provide such additional documents as you
may require pursuant to the terms of the 1997 Equity Incentive Plan, (ii) to
provide for the payment by me to you (in the manner designated by you) of your
withholding obligation, if any, relating to the exercise of this option, and
(iii) if this exercise relates to an incentive stock option, to notify you in
writing within fifteen (15) days after the date of any disposition of any of the
shares of Common Stock issued upon exercise of this option that occurs within
two (2) years after the date
_________________________
/1/ Shares must meet the public trading requirements set forth in the option.
Shares must be valued in accordance with the terms of the option being
exercised, must have been owned for the minimum period required in the option,
and must be owned free and clear of any liens, claims, encumbrances or security
interests. Certificates must be endorsed or accompanied by an executed
assignment separate from certificate.
1.
<PAGE>
of grant of this option or within one (1) year after such shares of Common Stock
are issued upon exercise of this option.
I hereby make the following certifications and representations with respect
to the number of shares of Common Stock of the Company listed above (the
"Shares"), which are being acquired by me for my own account upon exercise of
the Option as set forth above:
I acknowledge that the Shares have not been registered under the Securities
Act of 1933, as amended (the "Securities Act"), and are deemed to constitute
"restricted securities" under Rule 701 and "control securities" under Rule 144
promulgated under the Securities Act. I warrant and represent to the Company
that I have no present intention of distributing or selling said Shares, except
as permitted under the Securities Act and any applicable state securities laws.
I further acknowledge that I will not be able to resell the Shares for at
least ninety days (90) after the stock of the Company becomes publicly traded
(i.e., subject to the reporting requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934) under Rule 701 and that more restrictive
conditions apply to affiliates of the Company under Rule 144.
I further acknowledge that all certificates representing any of the Shares
subject to the provisions of the Option shall have endorsed thereon appropriate
legends reflecting the foregoing limitations, as well as any legends reflecting
restrictions pursuant to the Company's Articles of Incorporation, Bylaws and/or
applicable securities laws.
I further agree that, if required by the Company (or a representative of
the underwriters) in connection with the first underwritten registration of the
offering of any securities of the Company under the Securities Act, I will not
sell, dispose of, transfer, make any short sale of, grant any option for the
purchase of, or enter into any hedging or similar transaction with the same
economic effect as a sale, any Shares or other securities of the Company held by
me, for a period of time specified by the underwriter(s) (not to exceed one
hundred eighty (180) days) following the effective date of the registration
statement of the Company filed under the Securities Act. I further agree to
execute and deliver such other agreements as may be reasonably requested by the
Company and/or the underwriter(s) that are consistent with the foregoing or that
are necessary to give further effect thereto. In order to enforce the foregoing
covenant, the Company may impose stop-transfer instructions with respect to my
Shares until the end of such period.
Very truly yours,
_____________________________________
2.
<PAGE>
EXHIBIT 10.4
TULARIK INC.
1997 NON-EMPLOYEE DIRECTORS' STOCK OPTION PLAN
ADOPTED ON JANUARY 30, 1997
APPROVED BY SHAREHOLDERS
ON APRIL 24, 1997
1. Purpose.
(a) The purpose of the 1997 Non-Employee Directors' Stock Option Plan (the
"Plan") is to provide a means by which each director of Tularik Inc., a
California corporation (the "Company") who is not otherwise at the time of grant
an employee of the Company or of any Affiliate of the Company (each such person
being hereafter referred to as a "Non-Employee Director") will be given an
opportunity to purchase stock of the Company.
(b) The word "Affiliate" as used in the Plan means any parent corporation
or subsidiary corporation of the Company as those terms are defined in Sections
424(e) and (f), respectively, of the Internal Revenue Code of 1986, as amended
from time to time (the "Code"). (c) The Company, by means of the Plan, seeks to
retain the services of persons now serving as Non-Employee Directors of the
Company, to secure and retain the services of persons capable of serving in such
capacity and to provide incentives for such persons to exert maximum efforts for
the success of the Company.
1.
<PAGE>
2. Administration.
(a) The Plan shall be administered by the Board of Directors of the
Company (the "Board") unless and until the Board delegates administration to a
committee, as provided in subparagraph 2(b).
(b) The Board may delegate administration of the Plan to a committee
composed of not fewer than two (2) members of the Board (the "Committee"). If
administration is delegated to a Committee, the Committee shall have, in
connection with the administration of the Plan, the powers theretofore possessed
by the Board, subject, however, to such resolutions, not inconsistent with the
provisions of the Plan, as may be adopted from time to time by the Board. The
Board may abolish the Committee at any time and revest in the Board the
administration of the Plan.
3. Shares Subject To The Plan.
(a) Subject to the provisions of Section 10 relating to adjustments upon
changes in stock, the stock that may be sold pursuant to options granted under
the Plan shall not exceed in the aggregate Three Hundred Thousand (300,000)
shares of the Company's common stock. If any option granted under the Plan
shall for any reason expire or otherwise terminate without having been exercised
in full, the stock not purchased under such option shall again become available
for option grants under the Plan.
(b) The stock subject to the Plan may be unissued shares or reacquired
shares,
2.
<PAGE>
bought on the market or otherwise.
4. Eligibility.
Options shall be granted only to Non-Employee Directors of the
Company.
5. Non-Discretionary Grants.
(a) Upon the date of the approval of the Plan by the Compensation
Committee of the Board (the "Adoption Date"), each person who is then a Non-
Employee Director, and not already a holder of one or more options granted by
the Company to purchase the Company's common stock, automatically shall be
granted an option to purchase twenty-five thousand (25,000) shares of common
stock of the Company on the terms and conditions set forth herein.
(b) Each person who is, after the Adoption Date, elected for the first
time to be a Non-Employee Director, and not already a holder of options to
purchase the Company's common stock, automatically shall, upon the date of his
or her initial election to be a Non-Employee Director by the Board or the
shareholders of the Company, be granted an option to purchase twenty-five
thousand (25,000) shares of common stock of the Company on the terms and
conditions set forth herein.
(c) On the date of the Company's annual meeting of shareholders in each
year, commencing with the Company's annual meeting of shareholders occurring in
1997, each person who is then a Non-Employee Director and was a Non-Employee
Director on the last day of the prior calendar year automatically shall be
granted an option to purchase Eight
3.
<PAGE>
Thousand (8,000) shares of common stock of the Company on the terms and
conditions set forth herein.
6. Option Provisions.
Each option shall be subject to the following terms and conditions:
(a) The term of each option commences on the date it is granted and,
unless sooner terminated as set forth herein, expires on the date ("Expiration
Date") ten (10) years from the date of grant. If the optionholder's continuous
service as a Non-Employee Director or employee of or consultant to the Company
or any Affiliate terminates for any reason or for no reason, the option shall
terminate on the earlier of the Expiration Date or the date three (3) months
following the date of termination of all such service; provided, however, that
if such termination of service is due to (i) the optionholder's death, the
option shall terminate on the earlier of the Expiration Date or six (6) months
following the date of the optionholder's death; or (ii) the optionholder's
disability, the option shall terminate on the earlier of the Expiration Date or
six (6) months following the date of the optionholder's disability (for purposes
of this subparagraph 6(a), "disability" shall mean total and permanent
disability as defined in Section 22(e)(3) of the Code). If the exercise of the
option following the termination of the optionholder's continuous service as a
Non-Employee Director or employee of or consultant to the Company or any
Affiliate (other than upon the optionholder's death or disability) would result
in liability under Section 16(b) of the Exchange Act, then the option
4.
<PAGE>
shall terminate on the earlier of (i) the expiration of the term of the option
set forth in the option agreement, or (ii) the tenth (10th) day after the last
date on which such exercise would result in such liability under Section 16(b)
of the Exchange Act. In any and all circumstances, an option may be exercised
following termination of the optionholder's continuous service as a Non-Employee
Director or employee of or consultant to the Company or any Affiliate only as to
that number of shares as to which it was exercisable as of the date of
termination of all such service under the provisions of subparagraph 6(e).
(b) The exercise price of each option shall be one hundred percent (100%)
of the fair market value of the stock subject to such option on the date such
option is granted.
(c) Payment of the exercise price is due in full upon any exercise. The
optionholder may elect to make payment of the exercise price under one of the
following alternatives:
(i) Payment of the exercise price per share in cash or by check
at the time of exercise; or
(ii) Provided that at the time of the exercise the Company's
common stock is publicly traded and quoted regularly in the Wall Street Journal,
payment by delivery of shares of common stock of the Company already owned by
the optionholder, held for the period required to avoid a charge to the
Company's reported earnings, and owned free and clear of any liens, claims,
encumbrances or security interest, which common stock shall be
5.
<PAGE>
valued at its fair market value on the date preceding the date of exercise; or
(iii) Payment by a combination of the methods of payment
specified in subparagraphs 6(c)(i) and 6(c)(ii) above.
Notwithstanding the foregoing, this option may be exercised pursuant
to a program developed under Regulation T as promulgated by the Federal Reserve
Board which results in the receipt by the Company of payment in cash or by check
either prior to the issuance of shares of the Company's common stock or pursuant
to the terms of irrevocable instructions issued by the optionholder prior to the
issuance of shares of the Company's common stock.
(d) An option shall be transferable (1) by will, (2) by the laws of
descent and distribution, (3) to the spouse, children, lineal ancestors and
lineal descendants of the optionholder (or to a trust created solely for the
benefit of the optionholder and the foregoing persons) or to an organization
exempt from taxation pursuant to Section 501(c)(3) of the Code or to which tax
deductible charitable contributions may be made under Section 170 of the Code
(excluding such organizations classified as private foundations under applicable
regulations and rulings) in order to implement the estate planning objectives of
the optionholder or (4) to such other persons as may be permitted by the Board
and expressly provided for under the terms of the optionholder's option
agreement. Nothing in this subparagraph 6(d) shall permit the transfer of some
or all of an option granted under the Plan to the spouse of an optionholder
6.
<PAGE>
upon the dissolution of such optionholder's marriage without the express written
consent of the Board, which consent may be extended or withheld in the complete
and sole discretion of the Board. The optionholder may, by delivering written
notice to the Company, in a form satisfactory to the Company, designate a third
party who, in the event of the death of the optionholder, shall thereafter be
entitled to exercise the option.
(e) The option shall become exercisable in installments over a period of
four (4) years from the date of grant at the rate of twenty-five percent (25%)
in equal annual installments commencing on the date one year after the date of
grant of the option, provided that the optionholder has, during the entire
period prior to such vesting date, continuously served as a Non-Employee
Director or employee of or consultant to the Company or any Affiliate of the
Company, whereupon such option shall become fully exercisable in accordance with
its terms with respect to that portion of the shares represented by that
installment.
(f) The Company may require any optionholder, or any person to whom an
option is transferred under subparagraph 6(d), as a condition of exercising any
such option: (i) to give written assurances satisfactory to the Company as to
the optionholder's, or the optionholder's professional advisors (who are
unaffiliated with and who are not directly or indirectly compensated by the
Company or any Affiliate), knowledge and experience in financial and business
matters; and (ii) to give written assurances satisfactory to the Company stating
that such person is acquiring the stock subject to the option for such person's
own
7.
<PAGE>
account, unaccompanied by the publication of any advertisement, and not with any
present intention of selling or otherwise distributing the stock. These
requirements, and any assurances given pursuant to such requirements, shall be
inoperative if (i) the issuance of the shares upon the exercise of the option
has been registered under a then-currently-effective registration statement
under the Securities Act of 1933, as amended (the "Securities Act") and the
shares otherwise meet the requirements for exemption under Section 25101 of the
California Corporations Code, or (ii) as to any particular requirement, a
determination is made by counsel for the Company that such requirement need not
be met in the circumstances under the then-applicable securities laws. The
Company may require any optionholder to provide such other representations,
written assurances or information which the Company shall determine is
necessary, desirable or appropriate to comply with applicable securities laws as
a condition of granting an option to the optionholder or permitting the
optionholder to exercise the option. The Company may, upon advice of counsel to
the Company, place legends on stock certificates issued under the Plan as such
counsel deems necessary or appropriate in order to comply with applicable
securities laws, including, but not limited to, legends restricting the transfer
of the stock.
(g) Notwithstanding anything to the contrary contained herein, an option
may not be exercised unless the shares issuable upon exercise of such option are
then registered under the Securities Act or, if such shares are not then so
registered, the Company has determined that
8.
<PAGE>
such exercise and issuance would be exempt from the registration requirements of
the Securities Act.
(h) The Company (or a representative of the underwriters) may, in
connection with the first underwritten registration of the offering of any
securities of the Company under the Securities Act, require that any
optionholder not sell or otherwise transfer or dispose of any shares of common
stock or other securities of the Company during such period (not to exceed one
hundred eighty (180) days) following the effective date of the registration
statement of the Company filed under the Securities Act as may be requested by
the Company or the representative of the underwriters.
(i) The option may, but need not, include a provision whereby the
optionholder may elect at any time while providing continuous service as a Non-
Employee Director or employee of or consultant to the Company or any Affiliate
to exercise the option as to any part or all of the shares subject to the option
prior to the full vesting of the option. Any unvested shares so purchased may
be subject to a repurchase right in favor of the Company or to any other
restriction the Board determines to be appropriate.
7. Covenants Of The Company.
(a) During the terms of the options granted under the Plan, the Company
shall keep available at all times the number of shares of stock required to
satisfy such options.
(b) The Company shall seek to obtain from each regulatory commission or
agency
9.
<PAGE>
having jurisdiction over the Plan such authority as may be required to issue and
sell shares of stock upon exercise of the options granted under the Plan;
provided, however, that this undertaking shall not require the Company to
register under the Securities Act, or any other applicable or available
securities laws, either the Plan, any option granted under the Plan or any stock
issued or issuable pursuant to any such option. If, after reasonable efforts,
the Company is unable to obtain from any such regulatory commission or agency
the authority which counsel for the Company deems necessary for the lawful
issuance and sale of stock under the Plan, the Company shall be relieved from
any liability for failure to issue and/or sell stock upon exercise of such
options.
8. Use Of Proceeds From Stock.
Proceeds from the sale of stock pursuant to options granted under the
Plan shall constitute general funds of the Company.
9. Miscellaneous.
(a) Neither an optionholder nor any person to whom an option is
transferred under paragraph 6(d) shall be deemed to be the holder of, or to have
any of the rights of a holder with respect to, any shares subject to such option
unless and until such person has satisfied all requirements for exercise of the
option pursuant to its terms.
(b) Throughout the term of any option granted pursuant to the Plan, the
Company shall make available to the holder of such option, not later than one
hundred twenty (120) days
10.
<PAGE>
after the close of each of the Company's fiscal years during the option term,
upon request, such financial and other information regarding the Company as
comprises the annual report to the shareholders of the Company provided for in
the bylaws of the Company and such other information regarding the Company as
the holder of such option may reasonably request. This paragraph 9(b) shall not
apply (i) after the first underwritten registration of the offering of any
securities of the Company under the Securities Act, or (ii) when issuance is
limited to key persons whose duties in connection with the Company assure them
access to equivalent information.
(c) Nothing in the Plan or in any instrument executed pursuant thereto
shall confer upon any Non-Employee Director any right to continue in the service
of the Company or any Affiliate in any capacity or shall affect any right of the
Company, its Board or stockholders or any Affiliate to remove any Non-Employee
Director pursuant to the Company's bylaws and the provisions of the California
Corporations Code (or the applicable laws of the Company's state of
incorporation if the Company's state of incorporation should change in the
future).
(d) No Non-Employee Director, individually or as a member of a group, and
no beneficiary or other person claiming under or through him, shall have any
right, title or interest in or to any option reserved for the purposes of the
Plan except as to such shares of common stock, if any, as shall have been
reserved for him pursuant to the term of an option granted to him under the
Plan.
11.
<PAGE>
(e) In connection with each option made pursuant to the Plan, it shall be
a condition precedent to the Company's obligation to issue or transfer shares to
a Non-Employee Director, or to evidence the removal of any restrictions on
transfer, that such Non-Employee Director make arrangements satisfactory to the
Company to insure that the amount of any federal or other withholding tax
required to be withheld with respect to such sale or transfer, or such removal
or lapse, is made available to the Company for timely payment of such tax.
(f) As used in this Plan, "fair market value" means, as of any date, the
value of the common stock of the Company determined as follows:
(i) If the common stock is listed on any established stock exchange
or a national market system, including without limitation the National Market
System of the National Association of Securities Dealers, Inc. Automated
Quotation ("NASDAQ") System, the Fair Market Value of a share of common stock
shall be the closing sales price for such stock (or the closing bid, if no sales
were reported) as quoted on such system or exchange (or the exchange with the
greatest volume of trading in common stock) on the last market trading day prior
to the day of determination, as reported in the Wall Street Journal or such
other source as the Board deems reliable;
(ii) If the common stock is quoted on the NASDAQ System (but not on
the National Market System thereof) or is regularly quoted by a recognized
securities dealer but selling prices are not reported, the Fair Market Value of
a share of common stock shall be the
12.
<PAGE>
mean between the bid and asked prices for the common stock on the last market
trading day prior to the day of determination, as reported in the Wall Street
Journal or such other source as the Board deems reliable;
(iii) In the absence of an established market for the common stock,
the Fair Market Value shall be determined in good faith by the Board.
10. Adjustments Upon Changes In Stock.
(a) If any change is made in the stock subject to the Plan, or subject to
any option granted under the Plan (through merger, consolidation,
reorganization, recapitalization, stock dividend, dividend in property other
than cash, stock split, liquidating dividend, combination of shares, exchange
of shares, change in corporate structure or other transaction not involving
the receipt of consideration by the Company), the Plan and outstanding options
will be appropriately adjusted in the class(es) and maximum number of shares
subject to the Plan and the class(es) and number of shares and price per share
of stock subject to outstanding options. Such adjustments shall be made by
the Board, the determination of which shall be final, binding and conclusive.
(The conversion of any convertible securities of the Company shall not be
treated as a "transaction not involving the receipt of consideration by the
Company.")
(b) In the event of: (1) a dissolution, liquidation or sale of all or
substantially all of the assets of the Company; (2) a merger or consolidation in
which the Company is not the
13.
<PAGE>
surviving corporation; (3) a reverse merger in which the Company is the
surviving corporation but the shares of the Company's common stock outstanding
immediately preceding the merger are converted by virtue of the merger into
other property, whether in the form of securities, cash or otherwise; (4) the
acquisition by any person, entity or group within the meaning of Section 13(d)
or 14(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")
or any comparable successor provisions (excluding any employee benefit plan, or
related trust, sponsored or maintained by the Company or any Affiliate of the
Company) of the beneficial ownership (within the meaning of Rule 13d-3
promulgated under the Exchange Act, or comparable successor rule) of securities
of the Company representing at least fifty percent (50%) of the combined voting
power entitled to vote in the election of directors; or (5) at the time
individuals who, as of the first date as of which the Company has a class of
equity securities which are actively traded on any established stock exchange or
a national market system (including NASDAQ), constitute the Board (the
"Incumbent Board") cease for any reason to constitute at least a majority of the
Board, provided that any person becoming a director subsequent to such date,
whose election or nomination for election by the Company's stockholders was
approved by a vote of at least a majority of the directors comprising the
Incumbent Board (other than an election or nomination of an individual whose
initial assumption of office is in connection with an actual or threatened
election contest relating to the election of Directors of the Company, as such
terms are used in Rule 14a-11 of Regulation
14.
<PAGE>
14A promulgated under the Exchange Act) shall be, for purposes of the Plan,
considered as though such person were a member of the Incumbent Board, then: (i)
any surviving corporation or acquiring corporation shall assume any options
outstanding under the Plan or shall substitute similar options (including an
option to acquire the same consideration paid to the shareholders in the
transaction described in this paragraph 10(b)) for those outstanding under the
Plan, or (ii) in the event any surviving corporation or acquiring corporation
refuses to assume such options or to substitute similar options for those
outstanding under the Plan, then the vesting of such options (and, if
applicable, the time during which such options may be exercised) shall be
accelerated prior to such event and the options terminated if not exercised (if
applicable) after such acceleration and at or prior to such event.
11. Amendment Of The Plan.
(a) The Board at any time, and from time to time, may amend the Plan
and/or some or all outstanding options granted under the Plan; provided,
however, that except as provided in Section 10 relating to adjustments upon
changes in stock, no amendment shall be effective unless approved by the
stockholders of the Company within twelve (12) months before or after the
adoption of the amendment, where the amendment will:
(i) Increase the number of shares which may be issued under the Plan;
or
(ii) Modify the Plan in any other way if such modification requires
stockholder approval in order for the Plan to comply with the requirements of
Rule 16b-3
15.
<PAGE>
promulgated under the Exchange Act.
(b) Rights and obligations under any option granted before any amendment
of the Plan or an outstanding option shall not be impaired by such amendment
unless (i) the Company requests the consent of the person to whom the option was
granted and (ii) such person consents in writing.
12. Termination Or Suspension Of The Plan.
(a) The Board may suspend or terminate the Plan at any time. Unless sooner
terminated, the Plan shall terminate at the time that all options granted
under the Plan are fully vested and either have been fully exercised or have
expired. No options may be granted under the Plan while the Plan is suspended
or after it is terminated.
(b) Rights and obligations under any option granted while the Plan is in
effect shall not be impaired by suspension or termination of the Plan, except
with the consent of the person to whom the option was granted, which consent
shall be in writing.
13. Effective Date Of Plan; Conditions Of Exercise.
(a) The Plan shall become effective upon adoption by the Board of
Directors, subject to the condition subsequent that the Plan is approved by the
shareholders of the Company.
(b) No option granted under the Plan shall be exercised or become
exercisable unless and until the condition of paragraph 13(a) above regarding
shareholder approval has
16.
<PAGE>
been met.
17.
<PAGE>
1997 NON-EMPLOYEE DIRECTORS' STOCK OPTION PLAN
NONSTATUTORY STOCK OPTION
_____________, Optionholder:
Tularik Inc. (the "Company") has this day granted to you, the optionholder
named above, an option to purchase shares of the common stock of the Company
("Common Stock"). This option is not intended to qualify as and will not be
treated as an "incentive stock option" within the meaning of Section 422 of the
Internal Revenue Code of 1986, as amended (the "Code").
The grant hereunder is in connection with and in furtherance of the
Company's compensatory benefit plan for participation of the Company's employees
(including officers, directors and consultants) and is intended to comply with
the provisions of Rule 701 promulgated by the Securities and Exchange Commission
under the Securities Act of 1933, as amended (the "Act") and to satisfy the
requirements of Section 25102(f) of the California Corporate Securities Law of
1968, as amended.
The details of your option are as follows:
1. The total number of shares of Common Stock subject to this option is
________________ (__________). Subject to the limitations contained herein,
this option shall be exercisable with respect to each installment shown below on
or after the date of vesting applicable to such installment, as follows:
Date of Earliest Exercise Number of Shares
(Vesting) (Installment)
Last day of 12th month following _______ shares (20% of total
Commencement Date
shares subject to option)
End of 13th through 59th months _______ shares (approx. 1/60 of total
following Commencement Date
shares subject to option)
End of 60th month following _______ shares (balance of shares
Commencement Date
subject to option)
<PAGE>
The Commencement Date for purposes of this option is _________________.
2. (a) The exercise price of this option is _________________
($_________) per share.
(b) Payment of the exercise price per share is due in full upon
exercise of all or any part of each installment which has accrued to you. You
may elect, to the extent permitted by applicable statutes and regulations, to
make payment of the exercise price under one of the following alternatives:
(i) Payment of the exercise price per share in cash (including
check) at the time of exercise;
(ii) Payment pursuant to a program developed under Regulation T
as promulgated by the Federal Reserve Board which results in the receipt of cash
(or check) by the Company prior to the issuance of Common Stock;
(iii) Provided that at the time of exercise the Company's Common
Stock is publicly traded and quoted regularly in the Wall Street Journal,
payment by delivery of already-owned shares of Common Stock, held for the period
required to avoid a charge to the Company's reported earnings, and owned free
and clear of any liens, claims, encumbrances or security interests, which Common
Stock shall be valued at its fair market value on the date of exercise; or
(iv) Payment by a combination of the methods of payment permitted
by subparagraph 2(b)(i) through 2(b)(iii) above.
3. (a) Subject to the provisions of this option you may elect at any
time during your continuous service as a Non-Employee Director or employee of or
consultant to the Company or an Affiliate, to exercise the option as to any part
or all of the shares subject to this option at any time during the term hereof,
including without limitation, a time prior to the date of earliest exercise
("vesting") stated in paragraph 1 hereof; provided, however, that:
(i) a partial exercise of this option shall be deemed to cover
first vested shares and then the earliest vesting installment of unvested
shares;
(ii) any shares so purchased from installments which have not
vested as of the date of exercise shall be subject to the purchase option in
favor of the Company as described in the Early Exercise Stock Purchase Agreement
attached hereto; and
(iii) you shall enter into an Early Exercise Stock Purchase
Agreement in the form attached hereto with a vesting schedule that will result
in the same vesting as if no early exercise had occurred.
(b) The election provided in this paragraph 3 to purchase shares upon
the exercise of this option prior to the vesting dates shall cease upon
termination of your employment with the Company or an affiliate thereof and may
not be exercised after the date thereof.
2
<PAGE>
4. In no event may this option be exercised for any number of shares
which would require the issuance of anything other than whole shares.
5. Notwithstanding anything to the contrary contained herein, this option
may not be exercised unless the shares issuable upon exercise of this option are
then registered under the Act or, if such shares are not then so registered, the
Company has determined that such exercise and issuance would be exempt from the
registration requirements of the Act. You represent that you are a director of
the Company or an Affiliate. You also represent that you are acquiring this
option for your own account and not with a view to or for sale in connection
with any distribution of this security. You also represent that you have
acquired this option unaccompanied by the publication of any advertisement. The
Company may, upon advice of counsel to the Company, place legends on stock
certificates issued pursuant to the exercise of this option as such counsel
deems necessary and appropriate in order to comply with applicable securities
laws, including, but not limited to, legends restricting the transfer of stock.
6. The term of this option commences on the date hereof and, unless
sooner terminated as set forth below, terminates on _________________________
(which date shall be no more than ten (10) years from the date this option is
granted). In no event may this option be exercised on or after the date on
which it terminates. This option shall terminate prior to the expiration of its
term as follows: three (3) months after the termination of your employment with
the Company or any Affiliate of the Company for any reason or for no reason
unless:
(a) such termination of employment is due to your permanent and total
disability (within the meaning of Section 22(e)(3) of the Code), in which event
the option shall terminate on the earlier of the termination date set forth
above or six (6) months following such termination of employment; or
(b) such termination of employment is due to your death, in which
event the option shall terminate on the earlier of the termination date set
forth above or six (6) months after your death; or
(c) during any part of such three (3) month period the option is not
exercisable solely because of the condition set forth in paragraph 5 above, in
which event the option shall not terminate until the earlier of the termination
date set forth above or until it shall have been exercisable for an aggregate
period of three (3) months after the termination of employment; or
(d) exercise of the option within three (3) months after termination
of your employment with the Company or with an affiliate would result in
liability under section 16(b) of the Securities Exchange Act of 1934, in which
case the option will terminate on the earlier of (i) the termination date set
forth above, (ii) the tenth (10th) day after the last date upon which exercise
would result in such liability or (iii) six (6) months and ten (10) days after
the termination of your employment with the Company or an affiliate.
However, this option may be exercised following termination of employment
only as to that number of shares as to which it was exercisable on the date of
termination of employment under the provisions of paragraph 1 of this option.
3
<PAGE>
7. (a) This option may be exercised, to the extent specified above, by
delivering a notice of exercise (in a form designated by the Company) together
with the exercise price to the Secretary of the Company, or to such other person
as the Company may designate, during regular business hours, together with such
additional documents as the Company may then reasonably require.
(b) By exercising this option you agree that:
(i) the Company may require you to enter an arrangement providing
for the cash payment by you to the Company of any tax withholding obligation of
the Company arising by reason of: (1) the exercise of this option; (2) the lapse
of any substantial risk of forfeiture to which the shares are subject at the
time of exercise; or (3) the disposition of shares acquired upon such exercise;
and
(ii) the Company (or a representative of the underwriters) may, in
connection with the first underwritten registration of the offering of any
securities of the Company under the Act, require that you not sell or otherwise
transfer or dispose of any shares of Common Stock or other securities of the
Company during such period (not to exceed one hundred eighty (180) days)
following the effective date (the "Effective Date") of the registration
statement of the Company filed under the Act as may be requested by the Company
or the representative of the underwriters. For purposes of this restriction you
will be deemed to own securities which (1) are owned directly or indirectly by
you, including securities held for your benefit by nominees, custodians, brokers
or pledgees; (2) may be acquired by you within sixty (60) days of the Effective
Date; (3) are owned directly or indirectly, by or for your brothers or sisters
(whether by whole or half blood) spouse, ancestors and lineal descendants; or
(4) are owned, directly or indirectly, by or for a corporation, partnership,
estate or trust of which you are a shareholder, partner or beneficiary, but only
to the extent of your proportionate interest therein as a shareholder, partner
or beneficiary thereof. You further agree that the Company may impose stop-
transfer instructions with respect to securities subject to the foregoing
restrictions until the end of such period.
8. During the term of this option, the Company shall keep available at
all times the number of shares of stock required to satisfy the exercise of such
option.
9. (a) If any change is made in the stock subject to this option
(through merger, consolidation, reorganization, recapitalization, stock
dividend, dividend in property other than cash, stock split, liquidating
dividend, combination of shares, exchange of shares, change in corporate
structure or otherwise), this option will be appropriately adjusted in the
class(es), number of shares and price per share of stock subject to the option.
(b) In the event of: (i) a merger or consolidation in which the
Company is not the surviving corporation; or (ii) a reverse merger in which the
Company is the surviving corporation but the shares of the Company's common
stock outstanding immediately preceding the merger are converted by virtue of
the merger into other property, whether in the form of securities, cash or
otherwise, then, to the extent permitted by applicable law: (1) any surviving
corporation shall assume this option or shall substitute a similar option (if
this option is still outstanding), or (2) this option shall continue in full
force and effect. In the event any surviving
4
<PAGE>
corporation refuses to assume or continue this option, or to substitute a
similar option for this option (if still outstanding), then this option shall be
terminated if not exercised prior to such event. In the event of a dissolution
or liquidation of the Company, this option (if still outstanding) shall
terminate if not exercised prior to such event.
10. This option is not transferable, except by will or by the laws of
descent and distribution, and is exercisable during your life only by you. By
delivering written notice to the Company, in a form satisfactory to the Company,
you may designate a third party who, in the event of your death, shall
thereafter be entitled to exercise this option.
11. This option is not an employment contract and nothing in this option
shall be deemed to create in any way whatsoever any obligation on your part to
continue in the employ of the Company, or of the Company to continue your
employment with the Company. In the event that this option is granted to you in
connection with the performance of services as a consultant or director, or in
the event that this option is granted to you in connection with the performance
of services as an employee and you subsequently performs services as a
consultant or director, references to employment, employee and similar terms
shall be deemed to include the performance of services as a consultant or a
director, as the case may be, provided, however, that no rights as an employee
shall arise by reason of the use of such terms.
12. Any notices provided for in this option shall be given in writing and
shall be deemed effectively given upon receipt or, in the case of notices
delivered by the Company to you, five (5) days after deposit in the United
States mail, postage prepaid, addressed to you at the address specified below or
at such other address as you hereafter designate by written notice to the
Company.
13. This option may be amended by the Board of Directors (the "Board") of
the Company at any time; provided, however, that any change that would adversely
affect your rights in this option must first be approved by you in writing
before becoming effective.
14. This option is subject to all interpretations, amendments, rules and
regulations which may from time to time be promulgated and adopted by the
Company. This authority shall be exercised by the Board, or by a committee of
one or more members of the Board in the event that the Board delegates its
authority to a committee. The Board, in exercise of this authority, may correct
any defect, omission or inconsistency in this option in a manner and to the
extent the Board shall deem necessary or desirable to make this option fully
effective. References to the Board shall mean the committee if a committee has
been appointed by the Board. Any interpretations, amendments, rules and
regulations promulgated by the Board shall be final and binding upon the Company
and its successors in interest as well as you and your heirs, assigns, and other
successors in interest.
15. Neither you nor any person to whom this option is transferred under
paragraph 10 of this option shall be deemed to be the holder of, or to have any
of the rights of a holder with respect to, any shares subject to this option
unless and until such person has satisfied all requirements for exercise of this
option pursuant to its terms.
Dated the ______ day of _________, ________.
5
<PAGE>
Very truly yours,
Tularik Inc.
By:_________________________________
Duly authorized on behalf
of the Board of Directors
Attachments:
Notice of Exercise
Early Exercise Stock Purchase Agreement
6
<PAGE>
The undersigned:
(a) Acknowledges receipt of the foregoing option and the attachments
referenced therein and understands that all rights and liabilities with respect
to this option are set forth in the option; and
(b) Acknowledges that as of the date of grant of this option, it sets forth
the entire understanding between the undersigned optionholder and the Company
and its affiliates regarding the acquisition of stock in the Company and
supersedes all prior oral and written agreements on that subject with the
exception of (i) the options previously granted and delivered to the undersigned
under stock option plans of the Company, and (ii) the following agreements only:
None ___________________________
(Initial)
Other ___________________________
___________________________
___________________________
_______________________________________
_______________________, Optionholder
Address: ______________________________
______________________________
7
<PAGE>
NOTICE OF EXERCISE
Tularik Inc.
Two Corporate Drive
South San Francisco, CA 94080 Date of Exercise: _______________
Ladies and Gentlemen:
This constitutes notice under my stock option that I elect to purchase the
number of shares for the price set forth below.
Type of option (check one): Incentive [_] Nonstatutory [_]
Stock option dated: _______________
Number of shares as
to which option is
exercised: _______________
Certificates to be
issued in name of: _______________
Total exercise price: $______________
Cash payment delivered
herewith: $______________
Promissory note delivered
herewith: $______________
Value of ________ shares of
Tularik Inc. common
stock delivered herewith/1/: $______________
By this exercise, I agree (i) to provide such additional documents as you
may require pursuant to the terms of the 1997 Non-Employee Directors Stock
Option Plan, (ii) to provide for the payment by me to you (in the manner
designated by you) of your withholding obligation, if any, relating to the
exercise of this option, and (iii) if this exercise relates to an incentive
stock option, to notify you in writing within fifteen (15) days after the date
of any disposition of any of the shares of Common Stock issued upon exercise of
this option that occurs within two (2) years
_____________________________
/1/ Shares must meet the public trading requirements set forth in the option.
Shares must be valued in accordance with the terms of the option being
exercised, must have been owned for the minimum period required in the option,
and must be owned free and clear of any liens, claims, encumbrances or security
interests. Certificates must be endorsed or accompanied by an executed
assignment separate from certificate.
1.
<PAGE>
after the date of grant of this option or within one (1) year after such shares
of Common Stock are issued upon exercise of this option.
I hereby make the following certifications and representations with respect
to the number of shares of Common Stock of the Company listed above (the
"Shares"), which are being acquired by me for my own account upon exercise of
the Option as set forth above:
I acknowledge that the Shares have not been registered under the Securities
Act of 1933, as amended (the "Securities Act"), and are deemed to constitute
"restricted securities" under Rule 701 and "control securities" under Rule 144
promulgated under the Securities Act. I warrant and represent to the Company
that I have no present intention of distributing or selling said Shares, except
as permitted under the Securities Act and any applicable state securities laws.
I further acknowledge that I will not be able to resell the Shares for at
least ninety days (90) after the stock of the Company becomes publicly traded
(i.e., subject to the reporting requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934) under Rule 701 and that more restrictive
conditions apply to affiliates of the Company under Rule 144.
I further acknowledge that all certificates representing any of the Shares
subject to the provisions of the Option shall have endorsed thereon appropriate
legends reflecting the foregoing limitations, as well as any legends reflecting
restrictions pursuant to the Company's Articles of Incorporation, Bylaws and/or
applicable securities laws.
I further agree that, if required by the Company (or a representative of
the underwriters) in connection with the first underwritten registration of the
offering of any securities of the Company under the Securities Act, I will not
sell, dispose of, transfer, make any short sale of, grant any option for the
purchase of, or enter into any hedging or similar transaction with the same
economic effect as a sale, any Shares or other securities of the Company held by
me, for a period of time specified by the underwriter(s) (not to exceed one
hundred eighty (180) days) following the effective date of the registration
statement of the Company filed under the Securities Act. I further agree to
execute and deliver such other agreements as may be reasonably requested by the
Company and/or the underwriter(s) that are consistent with the foregoing or that
are necessary to give further effect thereto. In order to enforce the foregoing
covenant, the Company may impose stop-transfer instructions with respect to my
Shares until the end of such period.
Very truly yours,
__________________________________
2.
<PAGE>
EXHIBIT 10.5
Tularik Inc.
1999 Employee Stock Purchase Plan
Adopted November 1, 1999
Approved by Stockholders November 19, 1999
1. Purpose.
(a) The purpose of the Plan is to provide a means by which Employees of
the Company and certain designated Affiliates may be given an opportunity to
purchase shares of the Common Stock of the Company.
(b) The Company, by means of the Plan, seeks to retain the services of
such Employees, to secure and retain the services of new Employees and to
provide incentives for such persons to exert maximum efforts for the success of
the Company and its Affiliates.
(c) The Company intends that the Rights to purchase shares of the Common
Stock granted under the Plan be considered options issued under an "employee
stock purchase plan," as that term is defined in Section 423(b) of the Code.
2. Definitions.
(a) "Affiliate" means any parent corporation or subsidiary corporation,
whether now or hereafter existing, as those terms are defined in Sections 424(e)
and (f), respectively, of the Code.
(b) "Board" means the Board of Directors of the Company.
(c) "Code" means the Internal Revenue Code of 1986, as amended.
(d) "Committee" means a Committee appointed by the Board in accordance
with subparagraph 3(c) of the Plan.
(e) "Common Stock" means the Common Stock of Tularik Inc..
(f) "Company" means Tularik Inc., a Delaware corporation.
(g) "Director" means a member of the Board.
(h) "Eligible Employee" means an Employee who meets the requirements set
forth in the Offering for eligibility to participate in the Offering.
(i) "Employee" means any person, including Officers and Directors,
employed by the Company or an Affiliate of the Company. Neither service as a
Director nor payment of a director's fee shall be sufficient to constitute
"employment" by the Company or the Affiliate.
(j) "Employee Stock Purchase Plan" means a plan that grants rights
intended to be options issued under an "employee stock purchase plan," as that
term is defined in Section 423(b) of the Code.
<PAGE>
(k) "Exchange Act" means the Securities Exchange Act of 1934, as amended.
(l) "Fair Market Value" means the value of a security, as determined in
good faith by the Board. If the security is listed on any established stock
exchange or traded on the Nasdaq National Market or the Nasdaq SmallCap Market,
then, except as otherwise provided in the Offering, the Fair Market Value of the
security shall be the closing sales price (rounded up where necessary to the
nearest whole cent) for such security (or the closing bid, if no sales were
reported) as quoted on such exchange or market (or the exchange or market with
the greatest volume of trading in the relevant security of the Company) on the
relevant determination date, as reported in The Wall Street Journal or such
other source as the Board deems reliable, or if such date is not a trading day,
then on the next preceding trading day.
(m) "Non-Employee Director" means a Director who either (i) is not a
current Employee or Officer of the Company or its parent or subsidiary, does not
receive compensation (directly or indirectly) from the Company or its parent or
subsidiary for services rendered as a consultant or in any capacity other than
as a Director (except for an amount as to which disclosure would not be required
under Item 404(a) of Regulation S-K promulgated pursuant to the Securities Act
("Regulation S-K")), does not possess an interest in any other transaction as to
which disclosure would be required under Item 404(a) of Regulation S-K, and is
not engaged in a business relationship as to which disclosure would be required
under Item 404(b) of Regulation S-K; or (ii) is otherwise considered a "non-
employee director" for purposes of Rule 16b-3.
(n) "Offering" means the grant of Rights to purchase shares of the Common
Stock under the Plan to Eligible Employees.
(o) "Offering Date" means a date selected by the Board for an Offering to
commence.
(p) "Outside Director" means a Director who either (i) is not a current
employee of the Company or an "affiliated corporation" (within the meaning of
the Treasury regulations promulgated under Section 162(m) of the Code), is not a
former employee of the Company or an "affiliated corporation" receiving
compensation for prior services (other than benefits under a tax qualified
pension plan), was not an officer of the Company or an "affiliated corporation"
at any time, and is not currently receiving direct or indirect remuneration from
the Company or an "affiliated corporation" for services in any capacity other
than as a Director, or (ii) is otherwise considered an "outside director" for
purposes of Section 162(m) of the Code.
(q) "Participant" means an Eligible Employee who holds an outstanding
Right granted pursuant to the Plan or, if applicable, such other person who
holds an outstanding Right granted under the Plan.
(r) "Plan" means this Tularik Inc. 1999 Employee Stock Purchase Plan.
(s) "Purchase Date" means one or more dates established by the Board
during an Offering on which Rights granted under the Plan shall be exercised and
purchases of shares of the Common Stock carried out in accordance with such
Offering.
(t) "Right" means an option to purchase shares of the Common Stock granted
pursuant to the Plan.
(u) "Rule 16b-3" means Rule 16b-3 of the Exchange Act or any successor to
Rule 16b-3 as in effect with respect to the Company at the time discretion is
being exercised regarding the Plan.
2.
<PAGE>
(v) "Securities Act" means the Securities Act of 1933, as amended.
3. Administration.
(a) The Board shall administer the Plan unless and until the Board
delegates administration to a Committee, as provided in subparagraph 3(c).
Whether or not the Board has delegated administration, the Board shall have the
final power to determine all questions of policy and expediency that may arise
in the administration of the Plan.
(b) The Board (or the Committee) shall have the power, subject to, and
within the limitations of, the express provisions of the Plan:
(i) To determine when and how Rights to purchase shares of the
Common Stock shall be granted and the provisions of each Offering of such Rights
(which need not be identical).
(ii) To designate from time to time which Affiliates of the Company
shall be eligible to participate in the Plan.
(iii) To construe and interpret the Plan and Rights granted under it,
and to establish, amend and revoke rules and regulations for its administration.
The Board, in the exercise of this power, may correct any defect, omission or
inconsistency in the Plan, in a manner and to the extent it shall deem necessary
or expedient to make the Plan fully effective.
(iv) To amend the Plan as provided in paragraph 14.
(v) To terminate or suspend the Plan as provided in paragraph 16.
(vi) Generally, to exercise such powers and to perform such acts as
it deems necessary or expedient to promote the best interests of the Company and
its Affiliates and to carry out the intent that the Plan be treated as an
Employee Stock Purchase Plan.
(c) The Board may delegate administration of the Plan to a Committee of
the Board composed of two (2) or more members, all of the members of which
Committee may be, in the discretion of the Board, Non-Employee Directors and/or
Outside Directors. If administration is delegated to a Committee, the Committee
shall have, in connection with the administration of the Plan, the powers
theretofore possessed by the Board, including the power to delegate to a
subcommittee of two (2) or more Outside Directors any of the administrative
powers the Committee is authorized to exercise (and references in this Plan to
the Board shall thereafter be to the Committee or such a subcommittee), subject,
however, to such resolutions, not inconsistent with the provisions of the Plan,
as may be adopted from time to time by the Board. The Board may abolish the
Committee at any time and revest in the Board the administration of the Plan.
4. Shares subject to the Plan.
(a) Subject to the provisions of paragraph 13 relating to adjustments upon
changes in securities, the shares of the Common Stock that may be sold pursuant
to Rights granted under the Plan shall not exceed in the aggregate five hundred
thousand (500,000) shares of the Common Stock (the "Reserved Shares"). As of
each January 1, beginning on January 1, 2001, and continuing through and
including January 1, 2009, the number of Reserved Shares will be increased
automatically by the lesser of five hundred thousand (500,000) shares or one
percent (1%) of the total number of shares of the Common
3.
<PAGE>
Stock outstanding on such January 1. Notwithstanding the foregoing, the Board
may designate a smaller number of shares to be added to the share reserve as of
a particular January 1. If any Right granted under the Plan shall for any reason
terminate without having been exercised, the shares of the Common Stock not
purchased under such Right shall again become available for the Plan.
(b) The shares of the Common Stock subject to the Plan may be unissued
shares of the Common Stock or shares of the Common Stock that have been bought
on the open market at prevailing market prices or otherwise.
5. Grant of Rights; Offering.
The Board may from time to time grant or provide for the grant of Rights to
purchase shares of the Common Stock under the Plan to Eligible Employees in an
Offering on an Offering Date or Dates selected by the Board. Each Offering shall
be in such form and shall contain such terms and conditions as the Board shall
deem appropriate, which shall comply with the requirements of Section 423(b)(5)
of the Code that all Employees granted Rights to purchase shares of the Common
Stock under the Plan shall have the same rights and privileges. The terms and
conditions of an Offering shall be incorporated by reference into the Plan and
treated as part of the Plan. The provisions of separate Offerings need not be
identical, but each Offering shall include (through incorporation of the
provisions of this Plan by reference in the document comprising the Offering or
otherwise) the period during which the Offering shall be effective, which period
shall not exceed twenty-seven (27) months beginning with the Offering Date, and
the substance of the provisions contained in paragraphs 6 through 9, inclusive.
6. Eligibility.
(a) Rights may be granted only to Employees of the Company or, as the
Board may designate as provided in subparagraph 3(b), to Employees of an
Affiliate. Except as provided in subparagraph 6(b), an Employee shall not be
eligible to be granted Rights under the Plan unless, on the Offering Date, such
Employee has been in the employ of the Company or the Affiliate, as the case may
be, for such continuous period preceding such grant as the Board may require,
but in no event shall the required period of continuous employment be equal to
or greater than two (2) years; provided, however, that Employees who are
employed by the Company as of the Effective Date of this Plan who would
otherwise be Eligible Employees if not for the required period of continuous
employment with the Company shall be eligible to participate in the Plan with
respect to the first Offering Period without regard to their period of prior
continuous employment with the Company provided that they remain in continuous
employment through the end of the first Offering Period.
(b) The Board may provide that each person who, during the course of an
Offering, first becomes an Eligible Employee will, on a date or dates specified
in the Offering which coincides with the day on which such person becomes an
Eligible Employee or which occurs thereafter, receive a Right under that
Offering, which Right shall thereafter be deemed to be a part of that Offering.
Such Right shall have the same characteristics as any Rights originally granted
under that Offering, as described herein, except that:
(i) the date on which such Right is granted shall be the "Offering
Date" of such Right for all purposes, including determination of the exercise
price of such Right;
(ii) the period of the Offering with respect to such Right shall begin
on its Offering Date and end coincident with the end of such Offering; and
4.
<PAGE>
(iii) the Board may provide that if such person first becomes an
Eligible Employee within a specified period of time before the end of the
Offering, he or she will not receive any Right under that Offering.
(c) No Employee shall be eligible for the grant of any Rights under the
Plan if, immediately after any such Rights are granted, such Employee owns stock
possessing five percent (5%) or more of the total combined voting power or value
of all classes of stock of the Company or of any Affiliate. For purposes of this
subparagraph 6(c), the rules of Section 424(d) of the Code shall apply in
determining the stock ownership of any Employee, and stock which such Employee
may purchase under all outstanding rights and options shall be treated as stock
owned by such Employee.
(d) An Eligible Employee may be granted Rights under the Plan only if such
Rights, together with any other Rights granted under all Employee Stock Purchase
Plans of the Company and any Affiliates, as specified by Section 423(b)(8) of
the Code, do not permit such Eligible Employee's rights to purchase shares of
the Common Stock or any Affiliate to accrue at a rate which exceeds twenty five
thousand dollars ($25,000) of the fair market value of such shares of the Common
Stock (determined at the time such Rights are granted) for each calendar year in
which such Rights are outstanding at any time.
(e) The Board may provide in an Offering that Employees who are highly
compensated Employees within the meaning of Section 423(b)(4)(D) of the Code
shall not be eligible to participate.
7. Rights; Purchase Price.
(a) On each Offering Date, each Eligible Employee, pursuant to an Offering
made under the Plan, shall be granted the Right to purchase up to the number of
shares of the Common Stock purchasable either:
(i) with a percentage designated by the Board not exceeding fifteen
percent (15%) of such Employee's Earnings (as defined by the Board in each
Offering) during the period which begins on the Offering Date (or such later
date as the Board determines for a particular Offering) and ends on the date
stated in the Offering, which date shall be no later than the end of the
Offering; or
(ii) with a maximum dollar amount designated by the Board that, as the
Board determines for a particular Offering, (1) shall be withheld, in whole or
in part, from such Employee's Earnings (as defined by the Board in each
Offering) during the period which begins on the Offering Date (or such later
date as the Board determines for a particular Offering) and ends on the date
stated in the Offering, which date shall be no later than the end of the
Offering and/or (2) shall be contributed, in whole or in part, by such Employee
during such period.
(b) The Board shall establish one or more Purchase Dates during an
Offering on which Rights granted under the Plan shall be exercised and purchases
of shares of the Common Stock carried out in accordance with such Offering.
(c) In connection with each Offering made under the Plan, the Board may
specify a maximum number of shares of the Common Stock that may be purchased by
any Participant as well as a maximum aggregate number of shares of the Common
Stock that may be purchased by all Participants pursuant to such Offering. In
addition, in connection with each Offering that contains more than one Purchase
Date, the Board may specify a maximum aggregate number of shares of the Common
Stock which may be purchased by all Participants on any given Purchase Date
under the Offering. If the aggregate purchase of shares of the Common Stock
upon exercise of Rights granted under the Offering
5.
<PAGE>
would exceed any such maximum aggregate amount, the Board shall make a pro rata
allocation of the shares of the Common Stock available in as nearly a uniform
manner as shall be practicable and as it shall deem to be equitable.
(d) The purchase price of shares of the Common Stock acquired pursuant to
Rights granted under the Plan shall be not less than the lesser of:
(i) an amount equal to eighty-five percent (85%) of the fair market
value of the shares of the Common Stock on the Offering Date; or
(ii) an amount equal to eighty-five percent (85%) of the fair market
value of the shares of the Common Stock on the Purchase Date.
8. Participation; Withdrawal; Termination.
(a) An Eligible Employee may become a Participant in the Plan pursuant to
an Offering by delivering a participation agreement to the Company within the
time specified in the Offering, in such form as the Company provides. Each such
agreement shall authorize payroll deductions of up to the maximum percentage
specified by the Board of such Employee's Earnings during the Offering (as
defined in each Offering). The payroll deductions made for each Participant
shall be credited to a bookkeeping account for such Participant under the Plan
and either may be deposited with the general funds of the Company or may be
deposited in a separate account in the name of, and for the benefit of, such
Participant with a financial institution designated by the Company. To the
extent provided in the Offering, a Participant may reduce (including to zero) or
increase such payroll deductions. To the extent provided in the Offering, a
Participant may begin such payroll deductions after the beginning of the
Offering. A Participant may make additional payments into his or her account
only if specifically provided for in the Offering and only if the Participant
has not already had the maximum permitted amount withheld during the Offering.
(b) At any time during an Offering, a Participant may terminate his or her
payroll deductions under the Plan and withdraw from the Offering by delivering
to the Company a notice of withdrawal in such form as the Company provides.
Such withdrawal may be elected at any time prior to the end of the Offering
except as provided by the Board in the Offering. Upon such withdrawal from the
Offering by a Participant, the Company shall distribute to such Participant all
of his or her accumulated payroll deductions (reduced to the extent, if any,
such deductions have been used to acquire shares of the Common Stock for the
Participant) under the Offering, without interest unless otherwise specified in
the Offering, and such Participant's interest in that Offering shall be
automatically terminated. A Participant's withdrawal from an Offering will have
no effect upon such Participant's eligibility to participate in any other
Offerings under the Plan but such Participant will be required to deliver a new
participation agreement in order to participate in subsequent Offerings under
the Plan.
(c) Rights granted pursuant to any Offering under the Plan shall terminate
immediately upon cessation of any participating Employee's employment with the
Company or a designated Affiliate for any reason (subject to any post-employment
participation period required by law) or other lack of eligibility. The Company
shall distribute to such terminated Employee all of his or her accumulated
payroll deductions (reduced to the extent, if any, such deductions have been
used to acquire shares of the Common Stock for the terminated Employee) under
the Offering, without interest unless otherwise specified in the Offering. If
the accumulated payroll deductions have been deposited with the Company's
general funds, then the distribution shall be made from the general funds of the
Company, without interest. If the accumulated payroll deductions have been
deposited in a separate account with a financial
6.
<PAGE>
institution as provided in subparagraph 8(a), then the distribution shall be
made from the separate account, without interest unless otherwise specified in
the Offering.
(d) Rights granted under the Plan shall not be transferable by a
Participant otherwise than by will or the laws of descent and distribution, or
by a beneficiary designation as provided in paragraph 15 and, otherwise during
his or her lifetime, shall be exercisable only by the person to whom such Rights
are granted.
9. Exercise.
(a) On each Purchase Date specified therefor in the relevant Offering,
each Participant's accumulated payroll deductions and other additional payments
specifically provided for in the Offering (without any increase for interest)
will be applied to the purchase of shares of the Common Stock up to the maximum
number of shares of the Common Stock permitted pursuant to the terms of the Plan
and the applicable Offering, at the purchase price specified in the Offering. No
fractional shares of the Common Stock shall be issued upon the exercise of
Rights granted under the Plan unless specifically provided for in the Offering.
(b) Unless otherwise specifically provided in the Offering, the amount, if
any, of accumulated payroll deductions remaining in any Participant's account
after the purchase of shares of the Common Stock that is equal to the amount
required to purchase one or more whole shares of the Common Stock on the final
Purchase Date of the Offering shall be distributed in full to the Participant at
the end of the Offering, without interest. If the accumulated payroll deductions
have been deposited with the Company's general funds, then the distribution
shall be made from the general funds of the Company, without interest. If the
accumulated payroll deductions have been deposited in a separate account with a
financial institution as provided in subparagraph 8(a), then the distribution
shall be made from the separate account, without interest unless otherwise
specified in the Offering. The amount of accumulated payroll deductions
remaining in any Participant's account that is less than the amount required to
purchase one whole share of Common Stock on the final Purchase Date of the
Offering shall be carried over to the next Offering or shall, if the Participant
requests or does not participate in the next Offering, be refunded.
(c) No Rights granted under the Plan may be exercised to any extent unless
the shares of the Common Stock to be issued upon such exercise under the Plan
(including Rights granted thereunder) are covered by an effective registration
statement pursuant to the Securities Act and the Plan is in material compliance
with all applicable state, foreign and other securities and other laws
applicable to the Plan. If on a Purchase Date in any Offering hereunder the Plan
is not so registered or in such compliance, no Rights granted under the Plan or
any Offering shall be exercised on such Purchase Date, and the Purchase Date
shall be delayed until the Plan is subject to such an effective registration
statement and such compliance, except that the Purchase Date shall not be
delayed more than twelve (12) months and the Purchase Date shall in no event be
more than twenty-seven (27) months from the Offering Date. If, on the Purchase
Date of any Offering hereunder, as delayed to the maximum extent permissible,
the Plan is not registered and in such compliance, no Rights granted under the
Plan or any Offering shall be exercised and all payroll deductions accumulated
during the Offering (reduced to the extent, if any, such deductions have been
used to acquire Shares) shall be distributed to the Participants, without
interest unless otherwise specified in the Offering. If the accumulated payroll
deductions have been deposited with the Company's general funds, then the
distribution shall be made from the general funds of the Company, without
interest. If the accumulated payroll deductions have been deposited in a
separate account with a financial institution as provided in subparagraph 8(a),
then the distribution shall be made from the separate account, without interest
unless otherwise specified in the Offering.
7.
<PAGE>
10. Covenants of the Company.
(a) During the terms of the Rights granted under the Plan, the Company
shall ensure that the number of shares of the Common Stock required to satisfy
such Rights are available.
(b) The Company shall seek to obtain from each federal, state, foreign or
other regulatory commission or agency having jurisdiction over the Plan such
authority as may be required to issue and sell shares of the Common Stock upon
exercise of the Rights granted under the Plan. If, after reasonable efforts,
the Company is unable to obtain from any such regulatory commission or agency
the authority which counsel for the Company deems necessary for the lawful
issuance and sale of shares of the Common Stock under the Plan, the Company
shall be relieved from any liability for failure to issue and sell shares of the
Common Stock upon exercise of such Rights unless and until such authority is
obtained.
11. Use of Proceeds from Shares.
Proceeds from the sale of shares of the Common Stock pursuant to Rights
granted under the Plan shall constitute general funds of the Company.
12. Rights as a Stockholder.
A Participant shall not be deemed to be the holder of, or to have any of
the rights of a holder with respect to, shares of the Common Stock subject to
Rights granted under the Plan unless and until the Participant's shares of the
Common Stock acquired upon exercise of Rights under the Plan are recorded in the
books of the Company.
13. Adjustments upon Changes in Securities.
(a) If any change is made in the shares of the Common Stock subject to the
Plan, or subject to any Right, without the receipt of consideration by the
Company (through merger, consolidation, reorganization, recapitalization,
reincorporation, stock dividend, dividend in property other than cash, stock
split, liquidating dividend, combination of shares, exchange of shares, change
in corporate structure or other transaction not involving the receipt of
consideration by the Company), the Plan will be appropriately adjusted in the
class(es) and maximum number of shares of the Common Stock subject to the Plan
pursuant to subparagraph 4(a), and the outstanding Rights will be appropriately
adjusted in the class(es), number of shares of the Common Stock and purchase
limits of such outstanding Rights. The Board shall make such adjustments, and
its determination shall be final, binding and conclusive. (The conversion of
any convertible securities of the Company shall not be treated as a transaction
that does not involve the receipt of consideration by the Company.)
(b) In the event of: (i) a dissolution, liquidation, or sale of all or
substantially all of the assets of the Company; (ii) a merger or consolidation
in which the Company is not the surviving corporation; or (iii) a reverse merger
in which the Company is the surviving corporation but the shares of the Common
Stock outstanding immediately preceding the merger are converted by virtue of
the merger into other property, whether in the form of securities, cash or
otherwise, then: (1) any surviving or acquiring corporation may assume Rights
outstanding under the Plan or may substitute similar rights (including a right
to acquire the same consideration paid to the Company's stockholders in the
transaction described in this subparagraph 13(b)) for those outstanding under
the Plan, or (2) in the event any surviving or acquiring corporation does not
assume such Rights or substitute similar rights for those outstanding under the
Plan, then, as determined by the Board in its sole discretion, such Rights may
continue in full force and effect or the Participants' accumulated payroll
deductions (exclusive of any accumulated interest which cannot be applied toward
the purchase of shares of the Common Stock under the terms of the
8.
<PAGE>
Offering) may be used to purchase shares of the Common Stock immediately prior
to the transaction described above under the ongoing Offering and the
Participants' Rights under the ongoing Offering thereafter terminated.
14. Amendment of the Plan.
(a) The Board at any time, and from time to time, may amend the Plan.
However, except as provided in paragraph 13 relating to adjustments upon changes
in securities and except as to minor amendments to benefit the administration of
the Plan, to take account of a change in legislation or to obtain or maintain
favorable tax, exchange control or regulatory treatment for Participants or the
Company or any Affiliate, no amendment shall be effective unless approved by the
stockholders of the Company to the extent stockholder approval is necessary for
the Plan to satisfy the requirements of Section 423 of the Code, Rule 16b-3
under the Exchange Act and any Nasdaq or other securities exchange listing
requirements. Currently under the Code, stockholder approval within twelve (12)
months before or after the adoption of the amendment is required where the
amendment will:
(i) Increase the number of shares of the Common Stock reserved for
Rights under the Plan;
(ii) Modify the provisions as to eligibility for participation in the
Plan to the extent such modification requires stockholder approval in order for
the Plan to obtain employee stock purchase plan treatment under Section 423 of
the Code or to comply with the requirements of Rule 16b-3; or
(iii) Modify the Plan in any other way if such modification requires
stockholder approval in order for the Plan to obtain employee stock purchase
plan treatment under Section 423 of the Code or to comply with the requirements
of Rule 16b-3.
(b) It is expressly contemplated that the Board may amend the Plan in any
respect the Board deems necessary or advisable to provide Employees with the
maximum benefits provided or to be provided under the provisions of the Code and
the regulations promulgated thereunder relating to Employee Stock Purchase Plans
and/or to bring the Plan and/or Rights granted under it into compliance
therewith.
(c) Rights and obligations under any Rights granted before amendment of
the Plan shall not be impaired by any amendment of the Plan, except with the
consent of the person to whom such Rights were granted, or except as necessary
to comply with any laws or governmental regulations, or except as necessary to
ensure that the Plan and/or Rights granted under the Plan comply with the
requirements of Section 423 of the Code.
15. Designation of Beneficiary.
(a) A Participant may file a written designation of a beneficiary who is
to receive any shares of the Common Stock and/or cash, if any, from the
Participant's account under the Plan in the event of such Participant's death
subsequent to the end of an Offering but prior to delivery to the Participant of
such shares of the Common Stock and cash. In addition, a Participant may file a
written designation of a beneficiary who is to receive any cash from the
Participant's account under the Plan in the event of such Participant's death
during an Offering.
(b) The Participant may change such designation of beneficiary at any time
by written notice. In the event of the death of a Participant and in the absence
of a beneficiary validly designated under the Plan who is living at the time of
such Participant's death, the Company shall deliver such shares of the
9.
<PAGE>
Common Stock and/or cash to the executor or administrator of the estate of the
Participant, or if no such executor or administrator has been appointed (to the
knowledge of the Company), the Company, in its sole discretion, may deliver such
shares of the Common Stock and/or cash to the spouse or to any one or more
dependents or relatives of the Participant, or if no spouse, dependent or
relative is known to the Company, then to such other person as the Company may
designate.
16. Termination or Suspension of the Plan.
(a) The Board in its discretion may suspend or terminate the Plan at any
time. Unless sooner terminated, the Plan shall terminate at the time that all of
the shares of the Common Stock subject to the Plan's reserve, as increased
and/or adjusted from time to time, have been issued under the terms of the Plan.
No Rights may be granted under the Plan while the Plan is suspended or after it
is terminated.
(b) Rights and obligations under any Rights granted while the Plan is in
effect shall not be impaired by suspension or termination of the Plan, except as
expressly provided in the Plan or with the consent of the person to whom such
Rights were granted, or except as necessary to comply with any laws or
governmental regulation, or except as necessary to ensure that the Plan and/or
Rights granted under the Plan comply with the requirements of Section 423 of the
Code.
17. Effective Date of Plan.
The Plan shall become effective simultaneously with the effectiveness of
the Company's registration statement under the Securities Act with respect to
the initial public offering of shares of the Company's Common Stock (the
"Effective Date"), but no Rights granted under the Plan shall be exercised
unless and until the Plan has been approved by the stockholders of the Company
within twelve (12) months before or after the date the Plan is adopted by the
Board, which date may be prior to the Effective Date.
10.
<PAGE>
Tularik Inc.
1999 Employee Stock Purchase Plan
Offering
Adopted November 1, 1999
1. Grant; Offering Date.
(a) The Board of Directors (the "Board") of Tularik Inc. (the "Company"),
pursuant to the Company's Employee Stock Purchase Plan (the "Plan"), hereby
authorizes the grant of rights to purchase shares of the common stock of the
Company ("Common Stock") to all Eligible Employees (an "Offering"). The first
Offering shall begin on the effective date of the initial public offering of the
Company's Common Stock and end on January 31, 2002 (the "Initial Offering").
Thereafter, an Offering shall begin on February 1, 2002, and on each February 1
every second year thereafter, and each such Offering shall end on the day prior
to the second anniversary of its Offering Date. The first day of an Offering is
that Offering's "Offering Date."
(b) Notwithstanding the foregoing: (i) if any Offering Date falls on a day
that is not a Trading Day (as defined herein), then such Offering Date shall
instead fall on the next subsequent Trading Day and (ii) if any Purchase Date
falls on a day that is not a Trading Day, then such Purchase Date shall instead
fall on the immediately preceding Trading Day. "Trading Day" shall mean any day
the exchange(s) or market(s) on which the Common Stock is listed, whether it be
any established stock exchange, The Nasdaq National Market, The Nasdaq SmallCap
Market or otherwise, is open for trading.
(c) Notwithstanding anything to the contrary, in the event that the Fair
Market Value (as defined herein) of a share of Common Stock on any Purchase Date
during an Offering is less than the Fair Market Value of a share of Common Stock
on the Offering Date of such Offering, then following the purchase of Common
Stock on such Purchase Date: (i) the Offering shall terminate and (ii) all
participants in the just-terminated Offering shall automatically be enrolled in
the Offering that shall commence on the next Trading Day following the Purchase
Date and continue for the remainder of the term of the immediately preceding
Offering terminated under this Section 1(c). Except as provided in paragraph 4,
"Fair Market Value" shall mean the closing sales price for the Common Stock (or
the closing bid price, if no sales were reported) as quoted on any established
stock exchange or traded on the Nasdaq National Market or the Nasdaq SmallCap
Market and as reported in The Wall Street Journal or such other source as the
Board deems reliable.
(d) Prior to the commencement of any Offering, the Board (or the Committee
described in subparagraph 2(c) of the Plan, if any) may change any or all terms
of such Offering and any subsequent Offerings. The granting of rights pursuant
to each Offering hereunder shall occur on each respective Offering Date unless,
prior to such date (a) the Board (or the Committee) determines that such
Offering shall not occur, or (b) no shares remain available for issuance under
the Plan in connection with the Offering.
(e) Notwithstanding any other provisions of an Offering, if the terms of
an Offering as previously established by the Board would, as a result of a
change to applicable accounting standards, as a result of obtaining shareholder
approval during such Offering for shares of Common Stock that would be issued
under such Offering (but for the provisions of this Section 1(e)), or otherwise,
generate a charge to earnings, such Offering shall terminate effective as of the
earlier of (1) the day prior to the date such change of accounting standards
would otherwise first apply to the Offering or (2) the day prior to the date
upon which the maximum aggregate number of shares of Common Stock available to
be purchased by all Eligible Employees under such Offering (excluding any
additional shares of Common Stock made available for issuance under the Plan by
approval of the shareholders of the Company during the
1.
<PAGE>
Offering) exceeds the aggregate number of whole shares purchasable by all
Eligible Employees based upon the aggregate of such Employees' payroll
deductions accumulated pursuant to such Offering (the "Offering Termination
Date"), and such Offering Termination Date shall be the final Purchase Date of
such Offering. A subsequent Offering shall commence on such date and on such
terms as shall be provided by the Board of Directors of the Company.
2. Eligible Employees.
(a) All employees of the Company and each of its Affiliates (as defined in
the Plan) incorporated in the United States, shall be granted rights to purchase
Common Stock under each Offering on the Offering Date of such Offering, provided
that each such employee otherwise meets the employment requirements of
subparagraph 6(a) of the Plan (an "Eligible Employee") and that each Eligible
Employee may only contribute to one Offering at any given point in time if they
have completed ninety (90) days of service with the Company, provided, however,
that otherwise eligible employees with less than ninety (90) days of service
with the Company but who are employed by the Company on the date of the
Company's initial public offering will be eligible to participate in the Plan as
of the Initial Offering if they remain in employment with the Company through
the relevant Purchase Date of the initial Offering Period.
Notwithstanding the foregoing, the following employees shall not be
---
Eligible Employees or be granted rights under an Offering: (i) part-time or
seasonal employees whose customary employment is less than twenty (20) hours per
week or five (5) months per calendar year and (ii) 5% shareholders (including
ownership through unexercised and/or unvested stock options) described in
subparagraph 6(c) of the Plan.
(b) Notwithstanding the foregoing, each person who first becomes an
Eligible Employee during any Offering and at least six (6) months prior to the
final Purchase Date (as defined in paragraph 6 hereof) of the Offering will, on
the next February 1 or August 1 during that Offering following the date that
person first becomes an Eligible Employee, receive a right under such Offering,
which right shall thereafter be deemed to be a part of the Offering. Such right
shall have the same characteristics as any rights originally granted under the
Offering except that:
(1) the date on which such right is granted shall be the "Offering
Date" of such right for all purposes, including determination of the exercise
price of such right; and
(2) the Offering for such right shall begin on its Offering Date and
end coincident with the end of the ongoing Offering.
3. Rights.
(a) Subject to the limitations contained herein and in the Plan, on each
Offering Date each Eligible Employee shall be granted the right to purchase the
number of shares of Common Stock purchasable with up to fifteen percent (15%) of
such employee's Earnings paid during the period of such Offering beginning after
such Eligible Employee first commences participation; provided, however, that no
employee may purchase Common Stock on a particular Purchase Date that would
result in more than fifteen percent (15%) of such employee's Earnings in the
period from the Offering Date to such Purchase Date having been applied to
purchase shares under all ongoing Offerings under the Plan and all other plans
of the Company intended to qualify as "employee stock purchase plans" under
Section 423 of the Internal Revenue Code of 1986, as amended (the "Code"). For
this Offering, "Earnings" means the base salary paid to an employee (including
all amounts elected to be deferred by the employee, that would otherwise have
been paid, under any cash or deferred arrangement established by the Company),
overtime
2.
<PAGE>
pay, commissions, and bonuses, but excluding other remuneration paid directly to
the employee, profit sharing, the cost of employee benefits paid for by the
Company, education or tuition reimbursements, imputed income arising under any
Company group insurance or benefit program, traveling expenses, business and
moving expense reimbursements, income received in connection with stock options,
contributions made by the Company under any employee benefit plan, and similar
items of compensation.
(b) Notwithstanding the foregoing, the maximum number of shares of Common
Stock an Eligible Employee may purchase on any Purchase Date in an Offering
shall be such number of shares as has a Fair Market Value (determined as of the
Offering Date for such Offering) equal to (x) $25,000 multiplied by the number
of calendar years in which the right under such Offering has been outstanding at
any time, minus (y) the Fair Market Value of any other shares of Common Stock
(determined as of the relevant Offering Date with respect to such shares) which,
for purposes of the limitation of Section 423(b)(8) of the Code, are attributed
to any of such calendar years in which the right is outstanding. The amount in
clause (y) of the previous sentence shall be determined in accordance with
regulations applicable under Section 423(b)(8) of the Code based on (i) the
number of shares previously purchased with respect to such calendar years
pursuant to such Offering or any other Offering under the Plan, or pursuant to
any other Company plans intended to qualify as "employee stock purchase plans"
under Section 423 of the Code, and (ii) the number of shares subject to other
rights outstanding on the Offering Date for such Offering pursuant to the Plan
or any other such Company plan.
(c) The maximum aggregate number of shares available to be purchased by
all Eligible Employees under an Offering shall be the number of shares remaining
available under the Plan on the Offering Date. If the aggregate purchase of
shares of Common Stock upon exercise of rights granted under the Offering would
exceed the maximum aggregate number of shares available, the Board shall make a
pro rata allocation of the shares available in a uniform and equitable manner.
4. Purchase Price.
The purchase price of the Common Stock under the Offering shall be the
lesser of: (i) eighty-five percent (85%) of the Fair Market Value of the Common
Stock on the Offering Date or (ii) or eighty-five percent (85%) of the Fair
Market Value of the Common Stock on the Purchase Date, in each case rounded up
to the nearest whole cent per share. For the Initial Offering, the Fair Market
Value of the Common Stock at the time when the Offering commences shall be the
price per share at which shares of Common Stock are first sold to the public in
the Company's initial public offering as specified in the final prospectus with
respect to that public offering.
5. Participation.
(a) An Eligible Employee may elect to participate in an Offering only at
the beginning of the Offering, or such later date specified in subparagraph
2(b). An Eligible Employee shall become a participant in an Offering by
delivering an enrollment form authorizing payroll deductions. Such deductions
must be either a fixed dollar amount per pay period, up to a maximum dollar
amount which is less than or equal to fifteen percent (15%) of Earnings, or in
whole percentages of Earnings, with a minimum percentage of one percent (1%) and
a maximum percentage of fifteen percent (15%). A participant may not make
additional payments into his or her account. The agreement shall be made on such
enrollment form as the Company provides, and must be delivered to the Company
prior to the date participation is to be effective, unless a later time for
filing the enrollment form is set by the Company for all Eligible Employees with
respect to a given Offering. For the Initial Offering, the time for filing an
enrollment form and commencing participation for individuals who are Eligible
Employees on the Offering Date for the Initial Offering shall be determined by
the Company and communicated to such Eligible Employees.
3.
<PAGE>
(b) A participant may decrease his or her participation level during the
course of a six (6) month purchase interval one (1) time, and only by delivering
notice to the Company at least ten (10) days in advance of the Purchase Date in
such form as the Company prescribes; provided that a participant may (i) reduce
his or her deductions to zero percent (0%) upon ten (10) days' prior notice, or
within such shorter period as determined by the Board and communicated to the
participants, by delivering a notice in such form as the Company provides, (ii)
may increase or decrease his or her participation level at any time to become
effective on the day following the next subsequent Purchase Date, or (iii) may
withdraw from an Offering and receive his or her accumulated payroll deductions
from the Offering (reduced to the extent, if any, such deductions have been used
to acquire Common Stock for the participant on any prior Purchase Dates) without
interest, at any time prior to the end of the Offering, excluding only each ten
(10) day period immediately preceding a Purchase Date, by delivering a
withdrawal notice to the Company in such form as the Company provides. A
participant who has withdrawn from an Offering shall not again participate in
such Offering, but may participate in subsequent Offerings under the Plan in
accordance with the terms thereof.
6. Purchases.
Subject to the limitations contained herein, on each Purchase Date, each
participant's accumulated payroll deductions (without any increase for interest)
shall be applied to the purchase of whole shares of Common Stock, up to the
maximum number of shares permitted under the Plan and the Offering. "Purchase
Date" shall be defined as each January 31 and July 31 within the Offering. The
Purchase Dates under the Initial Offering shall be January 31 and July 31 of the
year 2000, January 31 and July 31 of the year 2001 and January 31 of the year
2002. Notwithstanding the foregoing, if any Purchase Date falls on a day that is
not a Trading Day, then such Purchase Date shall instead fall on the immediately
preceding Trading Day.
7. Notices and Agreements.
Any notices or agreements provided for in an Offering or the Plan shall be
given in writing, in a form provided by the Company, and unless specifically
provided for in the Plan or this Offering, shall be deemed effectively given
upon receipt or, in the case of notices and agreements delivered by the Company,
five (5) days after deposit in the United States mail, postage prepaid.
8. Exercise Contingent on Shareholder Approval.
The rights granted under an Offering are subject to the approval of the
Plan by the shareholders as required for the Plan to obtain treatment as a tax-
qualified employee stock purchase plan under Section 423 of the Code and to
comply with the requirements of an available exemption from potential liability
under Section 16(b) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act") set forth in Rule 16b-3 promulgated under the Exchange Act.
9. Offering Subject to Plan.
Each Offering is subject to all the provisions of the Plan, and its
provisions are hereby made a part of the Offering, and is further subject to all
interpretations, amendments, rules and regulations which may from time to time
be promulgated and adopted pursuant to the Plan. In the event of any conflict
between the provisions of an Offering and those of the Plan (including
interpretations, amendments, rules and regulations which may from time to time
be promulgated and adopted pursuant to the Plan), the provisions of the Plan
shall control.
4.
<PAGE>
EXHIBIT 23.1
Consent of Ernst & Young LLP, Independent Auditors
We consent to the references to our firm under the captions "Experts" and
"Selected Financial Data" and to the use of our report dated October 25, 1999,
in Amendment No. 3 to the Registration Statement (Form S-1, No. 333-89177) and
related Prospectus of Tularik, Inc. for the registration of 7,187,500 shares of
its common stock.
/s/ Ernst & Young LLP
Palo Alto, California
December 6, 1999
