-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, TvHgNKCTYU+Anwibn2mphlsA0NxCO9L/XOaX69+LWxMmpNdJ5zRixFfPZkhGegk5 GYPSJ3+6lvZJHByqWWkjkA== 0000811210-98-000022.txt : 19980814 0000811210-98-000022.hdr.sgml : 19980814 ACCESSION NUMBER: 0000811210-98-000022 CONFORMED SUBMISSION TYPE: S-4 PUBLIC DOCUMENT COUNT: 2 FILED AS OF DATE: 19980813 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: AGOURON PHARMACEUTICALS INC CENTRAL INDEX KEY: 0000811210 STANDARD INDUSTRIAL CLASSIFICATION: PHARMACEUTICAL PREPARATIONS [2834] IRS NUMBER: 330061928 STATE OF INCORPORATION: CA FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: S-4 SEC ACT: SEC FILE NUMBER: 333-61317 FILM NUMBER: 98684568 BUSINESS ADDRESS: STREET 1: 10350 NORTH TORREY PINES ROAD, SUITE 100 CITY: LA JOLLA STATE: CA ZIP: 92037 BUSINESS PHONE: 6196223000 MAIL ADDRESS: STREET 1: 10350 NORTH TORREY PINES ROAD CITY: LA JOLLA STATE: CA ZIP: 92037 S-4 1 REGISTRATION STATEMENT (AUGUST 1998) As filed with the Securities and Exchange Commission on August 13, 1998 Registration No. 333- SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ----------------------- FORM S-4 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 Agouron Pharmaceuticals, Inc. (Exact name of registrant as specified in its charter) California 2830 33-0061928 (State or Other (Primary Standard Industrial Classification (I.R.S.Employer Jurisdiction of Code Number) Indentification No.) incorporation or organization) 10350 North Torrey Pines Road, La Jolla, California 92037 (619) 622-8000 (Address, including zip code, and telephone number, including area code, of Registrant's principal executive offices) Peter Johnson President and Chief Executive Officer AGOURON PHARMACEUTICALS, INC. 10350 North Torrey Pines Road, La Jolla, California 92037 (619) 622-8000 (Name, address, including zip code, and telephone number, including area code, of agent for service) ----------------------- Copies to: John M. Dunn, Esq. PILLSBURY MADISON & SUTRO LLP 101 West Broadway Suite 1800 San Diego, California 92101 ----------------------- Approximate date of commencement of proposed sale to the public: As soon as practicable after approval by the shareholders. If the securities being registered on this Form are being offered in connection with the formation of a holding company and there is compliance with General Instruction G, check the following box. [ ] If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] CALCULATION OF REGISTRATION FEE
Title of each Proposed maximum Proposed maximum Amount of class of securities Amount to be offering per share maximum aggregate registration to be registered registered(1)(2) price per share offering price(2)(3) fee(2)(3) share(2)(3) Agouron Pharmaceuticals Common -- N/A N/A -- Stock, no par value Rights to Purchase Series B N/A N/A N/A -- Participating Preferred Stock, no par value Agouron Oncology Division -- N/A N/A -- Common Stock, no par value Rights to Purchase Series C N/A N/A N/A -- Participating Preferred Stock, no par value
(1) If the Divisional Stock Proposal described herein is approved by the shareholders, each share of the Registrant's existing Common Stock, no par value (the "Existing Common Stock") will be converted into and reclassified as one share of Agouron Pharmaceuticals Common Stock, no par value ("Agouron Pharmaceuticals Stock"), and a number of shares (the "Oncology Division Ratio") of Agouron Oncology Division Common Stock, no par value ("Oncology Division Stock") to be determined prior to the date of mailing to the Registrant's shareholders of the Proxy Statement/Prospectus included as part of this Registration Statement. The amount of Agouron Pharmaceuticals Stock being registered is equal to the number of shares of Existing Common Stock outstanding at the effectiveness of the Divisional Stock Proposal and the number of shares of Oncology Division Stock being registered is equal to the Oncology Division Ratio times the number of shares of Existing Common Stock outstanding at the effectiveness of the Divisional Stock Proposal. In accordance with Rule 457(o) under the Securities Act of 1933, as amended (the "Securities Act"), the number of shares being registered is not included in the table. (2) Prior to the occurrence of certain events, the rights to purchase Series B Participating Preferred Stock, no par value, and the rights to purchase Series C Participating Preferred Stock, no par value (collectively, the "Rights"), will not be evidenced separately from the related Agouron Pharmaceuticals Stock or Oncology Division Stock. Value, if any, of the Rights is reflected in the market price of the related Agouron Pharmaceuticals Stock or Oncology Division Stock. Accordingly, no separate fee is paid. (3) The shares will be distributed to shareholders without consideration. Accordingly, pursuant to Section 6(b) of the Securities Act, there is no registration fee. ----------------------- The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine. [Agouron Pharmaceuticals Letterhead appears here] September ___, 1998 Dear Shareholder: You are cordially invited to attend the Annual Meeting of Shareholders of Agouron Pharmaceuticals, Inc. which will be held on Wednesday, October 28, 1998, at 10:00 a.m., San Diego time, at the Sheraton Grande Torrey Pines, 10950 North Torrey Pines Road, La Jolla, California 92037. At the Annual Meeting, shareholders will be asked to consider and approve a proposal (the "Divisional Stock Proposal"), which is being recommended by your Board of Directors (the "Board"), to increase the number of shares of authorized Common Stock to 150,000,000 shares and to create two series of Common Stock that are intended to reflect separately the performances of Agouron's oncology division (the "Oncology Division") and its other businesses ("Agouron Pharmaceuticals") and to authorize the issuance of one or more additional series of Common Stock by the Board from undesignated shares of Common Stock; 75,000,000 shares will be initially designated as Agouron Pharmaceuticals Stock and 25,000,000 will be initially designated as Oncology Division Stock. Undesignated shares of Common Stock may be used to issue new series of Common Stock or to increase or decrease shares of an existing series of Common Stock. If the Divisional Stock Proposal is approved by the shareholders, the Board will have the authorization to create a new series of Common Stock intended to reflect the performance of the Oncology Division (the "Oncology Division Stock"). Each outstanding share of Agouron's existing Common Stock (the "Existing Common Stock") will be converted into one share of a series of Common Stock intended to reflect the performance of the Agouron Pharmaceuticals Division ("the Agouron Pharmaceuticals Stock"), and ______ share of Oncology Division Stock, intended to reflect the performance of the Oncology Division. The transactions contemplated by the Divisional Stock Proposal are expected to be tax free for both the Company and its shareholders. The Divisional Stock Proposal is designed to separate the business, cash flows and reported operating results of the Oncology Division from the rest of the Company's business, enable better capital allocation decisions, charge the managers of each Division with the responsibility of maximizing the returns from their businesses, and provide the opportunity to structure more focused incentives to management teams and employees. In addition, this new equity structure should increase the Company's flexibility in raising capital and responding to acquisitions and other strategic opportunities by enabling the Company to issue Agouron Pharmaceuticals Stock or Oncology Division Stock as appropriate under the particular circumstances. By providing investors with separate classes of Common Stock intended to reflect the respective performances of Agouron Pharmaceuticals and the Oncology Division, we believe the Divisional Stock Proposal should allow investors and analysts to gain a better understanding of each business and enable investors to invest in either or both securities depending upon their individual investment objectives. The Board believes that the Divisional Stock Proposal should result in greater market recognition of the value of each of these businesses, while at the same time enabling the Company to preserve the operational and financial benefits it currently enjoys as a single company. The Divisional Stock Proposal will not result in a distribution or spin-off to shareholders of any assets or liabilities of Agouron Pharmaceuticals, Inc. or its subsidiaries. Holders of Agouron Pharmaceuticals Stock and the Oncology Division Stock will be common shareholders of the Company and, as such, will be subject to all risks associated with an investment in Agouron Pharmaceuticals, Inc. and all of its businesses, assets and liabilities. Following implementation of the Divisional Stock Proposal, there can be no assurance as to whether or to what extent the market values of the Agouron Pharmaceuticals Stock and the Oncology Division Stock will reflect the separate performance of Agouron Pharmaceuticals and the Oncology Division, or that the combined market values of the Agouron Pharmaceuticals Stock and the Oncology Division Stock will equal or exceed the market value of the Existing Common Stock. In addition, implementation of the Divisional Stock Proposal will, to an extent, make the capital structure of the Company more complex and may give rise to occasions when the interests of the holders of Agouron Pharmaceuticals Stock and the holders of the Oncology Division Stock may diverge or conflict. At the Annual Meeting, shareholders will also be asked to consider and approve proposals to increase the number of shares available for issuance under the Company's 1996 Stock Option Plan and to increase the number of shares available for purchase under the Company's Employee Stock Purchase Plan. Additionally, the shareholders will be asked to elect nine directors all of whom shall serve until the 1999 Annual Meeting of Shareholders and until the election and qualification of their successors and to ratify the selection of independent accountants. The Board has carefully considered the Divisional Stock Proposal and each of the other proposals and believes that the approval of each of the proposals by the shareholders is in the best interests of the Company and the shareholders. Accordingly, the Board unanimously recommends that the shareholders approve the Divisional Stock Proposal and each of the other proposals set forth in the Notice of Annual Meeting of Shareholders which are described in more detail in the attached Proxy Statement/Prospectus. The Board also recommends that shareholders vote for the nine nominees for director listed in the attached Proxy Statement/Prospectus. To expedite the admissions process for the Annual Meeting, please indicate if you will be attending by marking the appropriate box on the enclosed proxy card and returning it to our transfer agent, ChaseMellon Shareholder Services. Please also detach the enclosed admission card and bring it with you to the Annual Meeting. Regardless of whether you plan to be present at the Annual Meeting, your shares should be represented and voted. Therefore, please complete, sign and return the enclosed Proxy Card in the envelope provided at your earliest convenience, whether or not you plan to attend. Sincerely, /s/ Peter Johnson Peter Johnson President and Chief Executive Officer AGOURON PHARMACEUTICALS, INC. 10350 North Torrey Pines Road La Jolla, California 92037-1020 NOTICE OF ANNUAL MEETING OF SHAREHOLDERS TO BE HELD ON OCTOBER 28, 1998 The Annual Meeting of Shareholders ("Meeting") of Agouron Pharmaceuticals, Inc., a California corporation (the "Company") will be held at the Sheraton Grande Torrey Pines, 10950 North Torrey Pines Road, La Jolla, California 92037, on Wednesday, October 28, 1998, at 10:00 a.m., San Diego time, for the following purposes: 1. To elect nine directors of the Company, all of whom shall serve until the 1999 Annual Meeting of Shareholders (and until the election and qualification of their successors). 2. To consider and vote upon a proposal (the "Divisional Stock Proposal") to amend and restate the Company's Articles of Incorporation to increase the number of shares of authorized Common Stock to 150,000,000 shares, of which 75,000,000 shares would initially be designated as Agouron Pharmaceuticals Stock and 25,000,000 shares would initially be designated as Oncology Division Common Stock, to provide authorization to the Board to designate and issue any undesignated shares in one or more additional series of Common Stock and to determine the number of shares, rights, preferences, privileges and restrictions of any such series, to increase or decrease the number of shares of any existing series, and to convert each share of the Company's existing Common Stock into one share of Agouron Pharmaceuticals Stock and ___ share of Oncology Division Stock all as described in the attached Proxy Statement/Prospectus. 3. To consider and vote upon a proposal to amend to the Company's 1996 Stock Option Plan to increase the number of shares available for issuance under such plan by 1,000,000 shares. 4. To consider and vote upon a proposal to amend the Company's Employee Stock Purchase Plan to increase the number of shares available for purchase under such plan by 200,000 shares. 5. To ratify the selection of independent accountants. 6. To consider and act upon such other business as may properly be presented to the Meeting or any adjournments or postponements thereof. Only shareholders of record as of the close of business on September 14, 1998 will be entitled to notice of and to vote at the Meeting or any adjournments or postponements thereof. A list of shareholders entitled to vote at the Meeting will be available for inspection at the offices of the Company for 10 days before the Meeting. All shareholders are cordially invited to attend the Meeting in person. Regardless of whether you plan to attend the Meeting, please complete, sign and date the enclosed Proxy and return it promptly in the accompanying envelope, postage for which has been provided if mailed in the United States. The prompt return of Proxies will ensure a quorum and save the Company the expense of further solicitation. Any shareholder returning the enclosed Proxy may revoke it prior to its exercise by voting in person at the Meeting or by filing with the Secretary of the Company a written revocation or a duly executed Proxy bearing a later date. By Order of the Board of Directors /s/ Gary E. Friedman, Secretary La Jolla, California September __, 1998 TABLE OF CONTENTS Page Proxy Statement/Prospectus...................................................... Available Information........................................................... Information Incorporated by Reference........................................... Safe Harbor Statement........................................................... Questions and Answers........................................................... Proxy Statement Summary......................................................... The Annual Meeting..................................................... The Divisional Stock Proposal.......................................... Comparison of Existing Common Stock with Agouron Pharmaceuticals Stock and Oncology Division Stock................................ Agouron Pharmaceuticals, Inc. - Selected Consolidated Financial Data... Agouron Pharmaceuticals - Selected Financial Data...................... Agouron Oncology Division - Selected Financial Data.................... Price Range of Common Stock and Dividend Policy........................ Risk Factors.................................................................... General......................................................................... Proposal 1 - Election of Directors.............................................. Proposal 2 - The Divisional Stock Proposal...................................... General................................................................ Background of and Reasons for the Divisional Stock Proposal............ Vote Required.......................................................... Recommendation of the Board............................................ Management and Allocation Policies..................................... Description of Capital Stock........................................... Oncology Division Designated Shares.................................... Increase in Authorized Common Stock.................................... Determinations by the Board............................................ Dividend Policy........................................................ Nasdaq National Market Listing......................................... Exchange Procedures.................................................... Stock Transfer Agent and Registrar..................................... Financial Advisor...................................................... No Dissenters' Rights.................................................. Certain Federal Income Tax Considerations.............................. Amendment of Stock Plans............................................... Restatement of Rights Agreement........................................ Anti-Takeover Considerations........................................... TABLE OF CONTENTS (cont'd) Proposal 3 - Amendment of the 1996 Stock Option Plan............................ Proposal 4 - Amendment of the Employee Stock Purchase Plan...................... Proposal 5 - Ratification of Selection of Independent Accountants............... Security Ownership of Certain Beneficial Owners and Management.................. Executive Compensation.......................................................... Certain Transactions............................................................ Submission of Shareholder Proposals............................................. Legal Matters................................................................... Experts......................................................................... Other Matters................................................................... Annex I - Index of Defined Terms................................................ Annex II - Proposed Restated Articles of Incorporation (To be filed by amendment)............................................................ Annex III - Agouron Pharmaceuticals, Inc. ..................................... Management's Discussion and Analysis................................... Consolidated Financial Statements...................................... Annex IV - Agouron Pharmaceuticals ............................................. Description of Business................................................ Management's Discussion and Analysis................................... Combined Financial Statements of Agouron Pharmaceuticals............... Annex V - Agouron Oncology Division............................................. Description of Business................................................ Management's Discussion and Analysis................................... Combined Financial Statements of Agouron Oncology Division............. Annex VI - - Amended and Restated 1996 Stock Option Plan........................ Annex VII - Amended and Restated Employee Stock Purchase Plan................... SUBJECT TO COMPLETION, DATED AUGUST 13, 1998 AGOURON PHARMACEUTICALS, INC. PROXY STATEMENT/PROSPECTUS ANNUAL MEETING OF SHAREHOLDERS TO BE HELD ON OCTOBER 28, 1998 This Proxy Statement/Prospectus ("Proxy Statement") is furnished in connection with the solicitation of Proxies by and on behalf of the Board of Directors ("Board") of Agouron Pharmaceuticals, Inc., a California corporation ("Agouron" or the "Company"), for use at the Company's Annual Meeting of Shareholders for the fiscal year ended June 30, 1998 (the "Meeting") to be held at the Sheraton Grande Torrey Pines, 10950 North Torrey Pines Road, La Jolla, California 92037, on Wednesday, October 28, 1998 at 10:00Ea.m., San Diego time, and at any adjournments or postponements thereof. At the Meeting, shareholders will be asked (i) to elect nine directors of the Company to hold office until the 1999 Annual Meeting of Shareholders and until their successors are elected and qualified, (ii) to increase the number of shares of authorized Common Stock to 150,000,000 shares, of which 75,000,000 shares would initially be designated as Agouron Pharmaceuticals Common Stock ("Agouron Pharmaceuticals Stock") and 25,000,000 shares would initially be designated as Agouron Oncology Division Common Stock ("Oncology Division Stock"), to provide authorization to the Board to designate and issue any undesignated shares in one or more additional series of Common Stock and to determine the number of shares, rights, preferences, privileges and restrictions of any such series, to increase or decrease the number of shares of any existing series, and to convert each share of the Company's existing Common Stock ("Existing Common Stock") into one share of Agouron Pharmaceuticals Stock and ___ share of Oncology Division Stock (the Divisional Stock Proposal"), (iii) to increase the number of shares available for issuance under the Company's 1996 Stock Option Plan by 1,000,000 shares, (iv) to increase the number of shares available for purchase under the Company's Employee Stock Purchase Plan by 200,000 shares, (v) to ratify the selection of the Company's independent accountants, and (vi) to transact such other business as may properly be presented to the Meeting or any adjournments or postponements thereof. This Proxy Statement also constitutes the Prospectus of the Company with respect to the shares of Agouron Pharmaceuticals Stock and Oncology Division Stock to be issued pursuant to the Divisional Stock Proposal. It is anticipated that this Proxy Statement and the accompanying Proxy will be mailed to the Company's shareholders on or about September __, 1998. An Index of Defined Terms showing the pages on which certain terms used in this Proxy Statement are defined is included as Annex I. See "Risk Factors" beginning on page __ for certain information that should be considered in connection with an evaluation of the Divisional Stock Proposal. The Existing Common Stock is traded on the Nasdaq National Market under the symbol AGPH. There has been no prior market for the Agouron Pharmaceuticals Stock or the Oncology Division Stock. Application has been made to The Nasdaq Stock Market, Inc. to redesignate the Existing Common Stock as Agouron Pharmaceuticals Stock, to be quoted on the Nasdaq National Market under the symbol AGPH, and for the quotation of the Oncology Division Stock on the Nasdaq National Market under the symbol ____. Shareholders should note that if the Divisional Stock Proposal is approved, holders will not have to send in their certificates representing shares of Existing Common Stock to be exchanged for certificates representing shares of Agouron Pharmaceuticals Stock. DO NOT MAIL YOUR EXISTING COMMON STOCK CERTIFICATES TO EITHER THE COMPANY OR ITS TRANSFER AGENT IN CONNECTION WITH THESE TRANSACTIONS. The Board has carefully considered the Divisional Stock Proposal and each of the other proposals set forth in the Notice of Annual Meeting of Shareholders and believes that the approval of these proposals by the shareholders is in the best interests of the Company and the shareholders. Accordingly, the Board unanimously recommends that the shareholders approve the Divisional Stock Proposal and each of the other proposals which are described in more detail in this Proxy Statement. THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROXY STATEMENT. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. Dated September ____, 1998 Information contained herein is subject to completion or amendment. A registration statement relating to these securities has been filed with the Securities and Exchange Commission. These securities may not be sold nor may offers to buy be accepted prior to the time the registration statement becomes effective. This Proxy Statement/Prospectus shall not constitute an offer to sell or the solicitation of any offer to buy nor shall there be any sale of these securities in any State in which such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of any such State. AVAILABLE INFORMATION The Company is subject to the informational requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and, in accordance therewith, files reports, proxy statements and other information with the Securities and Exchange Commission (the "Commission"). Such reports, proxy statements, and other information filed by the Company can be inspected and copied at the public reference facilities maintained by the Commission at 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549, and at the Commission's Regional Offices at Seven World Trade Center, 13th Floor, New York, New York 10048, and Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such material can be obtained from the Public Reference Section of the Commission at 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549, at prescribed rates or by accessing the Commission's World Wide Web site at http://www.sec.gov. The Company has filed a registration statement on Form S-4 (referred to herein, together with all amendments and exhibits, as the "Registration Statement") with the Commission under the Securities Act of 1933, as amended (the "Securities Act"), covering the shares of Agouron Pharmaceuticals Stock and Oncology Division Stock issuable in connection with the Divisional Stock Proposal. This Proxy Statement, which also constitutes the Prospectus of the Company filed as part of the Registration Statement, does not contain all of the information set forth in the Registration Statement and the exhibits thereto, certain parts of which are omitted in accordance with the rules and regulations of the Commission. For further information, reference is hereby made to the Registration Statement, which is available for inspection and copying as set forth above. Statements contained in this Proxy Statement as to the contents of any contract or other document which is filed as an exhibit to the Registration Statement are necessarily summaries thereof, and each such statement is qualified in its entirety by reference to the full text of such contract or document. INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE The following document which has been filed by the Company with the Commission (File No 0-15609) is incorporated herein by reference: Annual Report on Form 10-K for the fiscal year ended June 30, 1998. All documents filed by the Company pursuant to Section 13(a), 13(c), 14 or 15(d) of the Exchange Act subsequent to the date of this Proxy Statement and prior to the date of the Meeting shall be deemed to be incorporated by reference into this Proxy Statement and to be a part hereof from the date any such document is filed. Any statement contained in a document incorporated or deemed to be incorporated by reference herein shall be deemed to be modified or superseded for purposes of this Proxy Statement to the extent that a statement contained herein (or in any other subsequently filed document which also is or is deemed to be incorporated by reference herein) modifies or supersedes such statement. Any such statement so modified or superseded shall not be deemed, except as so modified or superseded, to constitute a part of this Proxy Statement. This Proxy Statement incorporates documents by reference that are not presented herein or delivered herewith. A copy of such documents (excluding exhibits unless such exhibits are specifically incorporated by reference into the information incorporated herein) will be provided without charge to each person, including any beneficial owner, to whom a Proxy Statement is delivered, upon oral or written request of any such person. Requests should be directed to Agouron Corporate Communications, 10350 North Torrey Pines Road, La Jolla, California 92037; telephone (619) 622-8000. In order to ensure timely delivery of the documents, any request should be made by October 21, 1998. PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 SAFE HARBOR CAUTIONARY STATEMENT This Proxy Statement contains forward-looking statements. Such statements, including but not limited to those regarding anticipated expenses of the Oncology Division, sales and revenues attributable to Agouron Pharmaceuticals, timing and initiation of clinical trials, development and marketing of future products and the like, are subject to certain risks and uncertainties which could cause actual results to differ materially from those projected. See "Important Factors Regarding Forward-Looking Statements" attached as Exhibit 99 to the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1998 and "Risk Factors." Important factors which may affect these projections or expectations include, but are not limited to: the impact of competitive products, regulatory approvals, changes in the overall economy, availability of future financing, and other unanticipated events. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. The Company undertakes no obligation to publicly release the result of any revisions to these forward-looking statements which may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. QUESTIONS AND ANSWERS RELATING TO THE DIVISIONAL STOCK PROPOSAL AND RELATED TRANSACTIONS Q: WHY AM I RECEIVING THIS PROXY STATEMENT? A: In addition to the standard Annual Meeting business of electing directors and ratifying accountants, the Board is distributing this Proxy Statement to shareholders of the Company in connection with a proposal that would, among other things, create two new series of Common Stock intended to separately reflect the performance of (i) the Company's Oncology Division and (ii) the Company's antiviral business and all of the other businesses of the Company that are not attributed to the Oncology Division. The Divisional Stock Proposal also authorizes the Board to establish additional series of Common Stock. The Board of Directors is seeking your proxy to vote in favor of the Divisional Stock Proposal at its annual meeting of shareholders ("Meeting"). Q. WHEN AND WHERE WILL THE ANNUAL MEETING BE HELD? A. The Meeting will be held on Wednesday, October 28, 1998, at 10:00 a.m., San Diego time, at the Sheraton Grande Torrey Pines, 10950 North Torrey Pines Road, La Jolla, California 92037. Q. WHAT DO I NEED TO DO NOW? A. Just mail in your completed and signed proxy card in the enclosed return envelope as soon as possible so that your shares may be represented at the Meeting. Q. WHAT DOES THE BOARD OF DIRECTORS RECOMMEND? A. The Board of Directors has unanimously approved each proposal, believes that the adoption of each proposal is in the best interests of the Company and its shareholders and unanimously recommends that you vote "FOR" the election of the nine nominees for director listed in the Proxy Statement and "FOR" each of proposals 2 through 5. Q. WHAT VOTE IS REQUIRED TO APPROVE THE DIVISIONAL STOCK PROPOSAL AND THE OTHER PROPOSALS? A. The approval of the Divisional Stock Proposal requires the affirmative vote of the holders of a majority of the outstanding shares of the Existing Common Stock. The approval of each of the other proposals requires the affirmative vote of the holders of a majority of the shares represented in person or by proxy, provided that those affirmatively voted shares also constitute at least a majority of the required quorum. Q. WILL THE DIVISIONAL STOCK PROPOSAL RESULT IN A CHANGE IN CONTROL OF AGOURON? A. There will be no change in control of the Company if the Divisional Stock Proposal is approved. Q. WILL THE DIVISIONAL STOCK PROPOSAL RESULT IN A SPIN-OFF? A. No. The Divisional Stock Proposal will not result in a distribution or spin-off of any assets or liabilities of the Company or its subsidiaries. Holders of Agouron Pharmaceuticals Stock and Oncology Division Stock will continue to be common shareholders of the Company and, as such, will be subject to all risks associated with an investment in the Company and all of its businesses, assets and liabilities. Q. SHOULD I SEND IN MY STOCK CERTIFICATES? A. No. If the Divisional Stock Proposal is approved, then upon amendment and restatement of the Company's Articles of Incorporation, each of your shares of Existing Common Stock will be automatically converted into one share of Agouron Pharmaceuticals Stock and ___ share of Oncology Division Stock. In connection with this conversion, the stock certificate representing your shares of Existing Common Stock will represent ownership of the same number of shares of Agouron Pharmaceuticals Stock. The Company will send to you your certificates for Oncology Division Stock. Q. WHAT IS A DIVISIONAL STOCK? A. Divisional stock, which is also referred to as "tracking stock" or "letter stock," represents shares of common stock of a corporation, in this case the Company, which are intended to "track" the performance of a group of assets or a division of the Company. The Restated Articles of Incorporation of the Company would, among other things, authorize two new series of divisional stock, to be designated as Agouron Pharmaceuticals Stock and Oncology Division Stock. - The Oncology Division Stock, when issued, is intended to reflect the separate performance of the Oncology Division of the Company, which is engaged in research and development of pharmaceuticals for the treatment of cancer. - The Agouron Pharmaceuticals Stock, when issued, is intended to reflect the separate performance of the Company's anti-viral business and all of the other remaining businesses of the Company that are not attributed to the Oncology Division. Q. WHEN WILL ALL OF THIS TAKE PLACE? A. If the Divisional Stock Proposal is approved, the Company intends to file its Restated Articles of Incorporation with the Secretary of State of California shortly after the Meeting. If all of these events occur as planned, this event (the "Effective Date") would take place in November. However, the Board of Directors could choose to effect the Divisional Stock Proposal at a later time, or not to effect the Divisional Stock Proposal, depending on the circumstances at the time. Q. WHAT DO I NEED TO DO TO RECEIVE MY CERTIFICATES FOR THE ONCOLOGY DIVISION STOCK? A. You do not need to do anything to receive your certificates for the Oncology Division Stock. If all of the events take place as planned, certificates representing whole shares of Oncology Division Stock (and cash in lieu of fractional shares) will be mailed to all shareholders after the Effective Date as directed by the Board. Q. WHAT ARE THE TAX CONSEQUENCES TO ME? A. The implementation of the Divisional Stock Proposal for federal income tax purposes is intended to be tax-free to shareholders (except with respect to any cash received in lieu of fractional shares) based upon the facts and law at the time of this Proxy Statement. For federal income tax purposes, cash received for fractional shares will likely result in recognition of gain or loss. You should consult a tax advisor. . Q. WHAT WILL MY EXISTING COMMON STOCK REPRESENT IF EVERYTHING TAKES PLACE AS PROPOSED? A. Upon the completion of all the events as planned, the equity interest in the Company represented by all the Existing Common Stock will equal the equity interest of the total of the Agouron Pharmaceuticals Stock and the Oncology Division Stock. Each share of Existing Common Stock will be converted into one share of Agouron Pharmaceuticals Stock and ___ share of Oncology Division Stock. Q. WILL THE AGOURON PHARMACEUTICALS STOCK AND THE ONCOLOGY DIVISION STOCK BE LISTED ON THE NASDAQ NATIONAL MARKET? A. The Company has filed an application to list the Agouron Pharmaceuticals Stock and the Oncology Division Stock on the Nasdaq National Market. The Agouron Pharmaceuticals Stock will be traded under the symbol AGPH and the Oncology Division Stock will be traded under the symbol _______________. Q. WHAT VOTING RIGHTS WILL I HAVE? A. After the Effective Date, each share of Agouron Pharmaceuticals Stock would be entitled to one vote and each share of Oncology Division Stock will have ___ vote until June 30, 2000. The number of votes per share of Oncology Division Stock has been determined by the Board, based on advice from PaineWebber Incorporated ("PaineWebber") as to the estimated relative market value of the Oncology Division as of the Effective Date. On July 1, 2000, and on July 1 every two (2) years thereafter, the number of votes to which holders of Oncology Division Stock are entitled will be adjusted to reflect the relative market value of such series as compared to the market value of Agouron Pharmaceuticals Stock. The Agouron Pharmaceuticals Stock and the Oncology Division Stock will vote together as a single class except in certain limited circumstances, under which the holders of Agouron Pharmaceuticals Stock or Oncology Division Stock will have rights to vote as a separate class. Q. DOES THE COMPANY INTEND TO PAY DIVIDENDS? A. The Company has never paid cash dividends on shares of its Common Stock. The Board currently intends to retain future earnings, if any, for the development of the businesses of Agouron Pharmaceuticals and the Oncology Division and does not anticipate paying dividends on the Agouron Pharmaceuticals Stock or the Oncology Division Stock in the foreseeable future. Q. WHAT DO I DO IF I HAVE ADDITIONAL QUESTIONS? A. If you have any questions prior to the Meeting, please call Agouron Investor Relations at --------------------------. PROXY STATEMENT SUMMARY The following is a summary of certain information contained elsewhere in this Proxy Statement and the Annexes hereto. Reference is made to, and this Summary is qualified in its entirety by, the more detailed information contained or incorporated by reference in this Proxy Statement and the Annexes hereto. Unless otherwise defined herein, capitalized terms used in this Summary have the respective meanings ascribed to them elsewhere in this Proxy Statement. See Annex I, "Index of Defined Terms." Shareholders are urged to read carefully this Proxy Statement and the Annexes hereto in their entirety. Agouron Pharmaceuticals and the Oncology Division (and any additional divisions created by the issuance of additional series by the Board) are sometimes referred to herein collectively as the "Divisions" and individually as a "Division." THE ANNUAL MEETING DATE, TIME AND PLACE OF MEETING The Annual Meeting will be held on October 28, 1998, at 10:00 a.m., San Diego time, at the Sheraton Grande Torrey Pines, 10950 North Torrey Pines Road, La Jolla, California 92037. RECORD DATE September 14, 1998 PROPOSALS TO BE CONSIDERED The following proposals AT THE MEETING will be considered and voted upon at the Annual Meeting: PROPOSAL 1 - Election of Directors. To elect nine directors of the Company, all of whom shall serve until the 1999 Annual Meeting of Shareholders and until the election and qualification of their successors. PROPOSAL 2 - The Divisional Stock Proposal. To consider and vote upon the amendment and restatement of the Company's Articles of Incorporation to increase the number of shares of authorized Common Stock to 150,000,000 shares, of which 75,000,000 shares would initially be designated as Agouron Pharmaceuticals Stock and 25,000,000 shares would initially be designated as Oncology Division Common Stock, to provide authorization to the Board to designate and issue any undesignated shares in one or more additional series of Common Stock and to determine the number of shares, rights, preferences, privileges and restrictions of any such series, to increase or decrease the number of shares of any existing series, including Agouron Pharmaceuticals Stock and Oncology Division Stock, and to convert each share of the Company's Existing Common Stock into one share of Agouron Pharmaceuticals Stock and ___ share of Oncology Division Stock all as described in this Proxy Statement. PROPOSAL 3 - Amendment to the Company's 1996 Stock Option Plan. To consider and vote upon an amendment to the Company's 1996 Stock Option Plan to increase by 1,000,000 shares the number of shares available for issuance under such plan. PROPOSAL 4 - Amendment to the Company's Employee Stock Purchase Plan. To consider and vote upon an amendment to increase by 200,000 shares the number of shares available for purchase under such plan. PROPOSAL 5 - Selection of Independent Accountants. To ratify the selection of PricewaterhouseCoopers LLP as the Company's independent accountants for the fiscal year ending June 30, 1999. IF THE DIVISIONAL STOCK PROPOSAL IS NOT APPROVED BY THE SHAREHOLDERS, THE AGOURON PHARMACEUTICALS STOCK AND THE ONCOLOGY DIVISION STOCK WILL NOT BE CREATED AND THE EXISTING COMMON STOCK WILL NOT BE RECLASSIFIED AND CONVERTED INTO AGOURON PHARMACEUTICALS STOCK AND ONCOLOGY DIVISION STOCK. VOTE REQUIRED Holders of Existing Common Stock are entitled to one vote per share on all matters brought before the Meeting and to cumulate votes for the election of the nine directors. Therefore, in voting for directors, each outstanding share of Existing Common Stock is entitled to nine votes which may be cast for one candidate or distributed in any manner among the nominees for director. However, the right to cumulate votes in favor of one or more candidates may not be exercised until the candidate or candidates have been nominated and the shareholder has given notice at the Meeting of the intention to cumulate votes. Assuming that a quorum is present at the Meeting, the nine persons receiving the highest number of votes will be elected to the Board. The required quorum for the Meeting shall consist of a majority of the outstanding shares of Existing Common Stock which are entitled to vote in person or by proxy at the Meeting Proposal 2. The affirmative vote by the holders of a majority of the outstanding shares of the Existing Common Stock. Proposals 3, 4 and 5. The affirmative vote by the holders of a majority of the shares of the Existing Common Stock represented and voting at the Meeting (which shares constitute at least a majority of the required quorum for the Meeting). RECOMMENDATION OF THE BOARD The Board has carefully considered each Proposal and believes that the approval of each of these Proposals by the shareholders is in the best interest of the Company and the shareholders. Accordingly, the Board unanimously recommends that the shareholders vote "FOR" each of the Proposals and "FOR" the election of the nine nominees for director listed herein. THE COMPANY The principal executive offices of the Company are located at 10350 North Torrey Pines Road, La Jolla, California 92037 and its telephone number is (619) 622-8000. Agouron Pharmaceuticals Agouron Pharmaceuticals encompasses all of the activities of the Company except for those activities related to the research, development and commercialization of oncology products being pursued by the Oncology Division. Agouron Pharmaceuticals, through its own sales and marketing organization, is currently marketing in the United States the first drug developed by the Company, VIRACEPT (nelfinavir mesylate), for treatment of HIV infection. In addition, Agouron Pharmaceuticals is expected to initiate a phase II/III pivotal clinical trial of REMUNE, an immune-based therapeutic agent for treatment of HIV infection and AIDS being co-developed by Agouron Pharmaceuticals and The Immune Response Corporation. Further, Agouron Pharmaceuticals has a number of programs in progress for discovery or development of other new drugs in the fields of viral disease, inflammatory disease and other serious diseases. Agouron Pharmaceuticals utilizes the proprietary core drug discovery technology of Alanex Corporation, a wholly-owned subsidiary of the Company, to accelerate the steps necessary to discover small molecule drug candidates. Such steps include the initial identification of compounds that exhibit activity against selected biological targets to the progression of these compounds to drug candidates for human clinical trials. Agouron Pharmaceuticals' long-term goal is increasing profitability from the sale of drugs generated from its own drug discovery and development efforts, and from development and commercialization of drugs licensed by Agouron Pharmaceuticals. To augment its technical capabilities, to enhance the likelihood of successful commercialization of its products and to offset some of its operating costs, Agouron Pharmaceuticals has entered into collaborative research and development arrangements with other companies. Agouron Pharmaceuticals has generally retained significant commercial rights in drugs developed in its collaborative research and development programs funded in whole or in part by other companies. Agouron Pharmaceuticals anticipates that its successfully developed products will be commercialized both through its own direct sales and marketing activities in certain pharmaceutical markets and through manufacturing and marketing relationships with other pharmaceutical companies. Agouron Oncology Division The Oncology Division will be organized as a distinct operating division of the Company and will continue its commitment to the discovery, development and marketing of small-molecule drugs engineered to inactivate proteins which play key roles in cancer. Approximately 25% of the Company's total anticipated research and development expenditures during the Company's 1999 fiscal year are expected to be incurred by the Oncology Division in connection with four clinical development programs and four preclinical research programs. Included are AG3340, an inhibitor of matrix metalloprotease ("MMP") currently in pivotal phase II/III clinical trials for treatment of lung and prostate cancer, programs that pursue other inhibitors of MMPs and inhibitors or antagonists of the following: glycinamide ribonucleotide formyltransferase ("GART"); cyclin dependent kinases ("cdk"); gonadotropin releasing hormone ("GnRH"); poly (ADP ribose) polymerase ("PARP"); and a receptor for vascular endothelial growth factor ("VEGF"). The Oncology Division is presently pursing these programs on an independent basis. See Annex V - "Agouron Oncology Division" for a more complete description of the programs initially allocated to the Oncology Division. THE DIVISIONAL STOCK PROPOSAL General If the Divisional Stock Proposal is approved by the shareholders and implemented by the Board of Directors, the Company's existing Articles of Incorporation will be amended to increase the number of shares of Common Stock to 150,000,000 and to designate two new series of Common Stock - 75,000,000 shares of Agouron Pharmaceuticals Common Stock ("Agouron Pharmaceuticals Stock") and 25,000,000 shares of Agouron Oncology Division Common Stock ("Oncology Division Stock") and convert each share of the Company's Existing Common Stock into one share of Agouron Pharmaceuticals Stock and ___ share of Oncology Division Stock. The amendment would also authorize the Board to establish from time to time one or more additional series with the number of shares, rights, preferences, privileges and restrictions as determined by the Board. Undesignated shares of Common Stock could also be used to increase the authorized shares of any existing series of Common Stock. The rights, preferences, privileges and restrictions of the Agouron Pharmaceuticals Stock and the Oncology Division Stock are described in more detail elsewhere in this Proxy Statement. See "Proposal 2--The Divisional Stock Proposal--Description of Capital Stock" and the proposed Restated Articles of Incorporation included as Annex II. The ratio of ___ share of Oncology Division Stock for each share of Existing Common Stock was determined by the Board in consultation with PaineWebber Incorporated ("PaineWebber"), the Company's financial advisor in connection with the Divisional Stock Proposal, and is based upon the relative market value of the Oncology Division, as determined by PaineWebber and the Board, and the desired initial trading range of the Oncology Division Stock. The market value of the Oncology Division was based on financial and operating information of the Oncology Division, prevailing market conditions, the market prices of securities and certain financial and operating information of companies engaged in activities similar to those of the Oncology Division. The Divisional Stock Proposal is designed to separate the Company's research and development activities in oncology from the balance of the Company's business by establishing two separate operating divisions, Agouron Pharmaceuticals and the Oncology Division. The Oncology Division Stock is intended to reflect the value and track the performance of the Oncology Division, whereas the Agouron Pharmaceuticals Stock is intended to reflect the value and track the performance of the Company's anti-viral and other businesses. See Annex IV - "Agouron Pharmaceuticals" and Annex V - "Agouron Oncology Division" for a more complete description of each Division. The Company has established policies designed to separate the business and operations of Agouron Pharmaceuticals and the Oncology Division, to operate each on a stand-alone basis, to allocate debt, corporate overhead, interest, taxes and other charges between the two Divisions on an objective basis and to ensure that terms of inter-division transactions approximate the terms that could be obtained from unaffiliated third parties. In addition, these policies set forth certain allocations in connection with the commercialization of the Oncology Division's potential products. See "Proposal 2 - The Divisional Stock Proposal - Management and Allocation Policies." Risk Factors When evaluating the Divisional Stock Proposal, shareholders should be aware of certain risk factors relating thereto. Such risk factors include: (i) the risks associated with an investment in the Company and all of its businesses, assets and liabilities; (ii) limited separate shareholder rights with respect to the two series of Common Stock; (iii) limited separate voting rights with respect to the two series; (iv) the lack of legal precedent with respect to the fiduciary duties of the board of directors of a company with two series of common stock, the rights of which are defined by reference to specified businesses of the company; (v) the ability of the Board to change certain management and allocation policies without shareholder approval; (vi) the potential diverging interests of each series of Common Stock; (vii) the ability of the Board to transfer funds, services and assets between the Divisions; (viii) the Company's ability to issue authorized but unissued shares of Agouron Pharmaceuticals Stock, Oncology Division Stock or other classes of stock without shareholder approval; (ix) no assurances as to the market price of the Agouron Pharmaceuticals Stock or the Oncology Division Stock following effectiveness of the Divisional Stock Proposal; (x) the risk that liquidating distributions to a Division's Common Stock may not correspond to the value of that Division's assets at the time of a dissolution of the Company; (xi) the utilization of tax benefits by the Divisions; (xii) limitations on potential unsolicited acquisitions of either Division; and (xiii) certain anti-takeover considerations. Shareholders should also be aware of certain risks with respect to each Division's operations, which include (i) the early stage of product development, the uncertainty of product development and market acceptance and technological uncertainty; (ii) uncertainty associated with clinical testing; (iii) a limited history of profitability and uncertainty of continued profitability of Agouron Pharmaceuticals; (iv) a history of operating losses and lack of revenues of the Oncology Division; (v) additional financing requirements and access to capital; (vi) dependence on others; (vii) limited manufacturing capability; (viii) limited sales and marketing capabilities; (ix) patents and proprietary technology; (x) technological change and intense competition; (xi) government regulation; (xii) uncertainty of third-party reimbursement and product pricing; (xiii) product liability and limited insurance coverage; (xiv) use of hazardous materials; (xv) attraction and retention of personnel; and (xvi) volatility of stock prices. For additional information with respect to the foregoing considerations, see "Risk Factors." Reasons for the Divisional Stock Proposal The Divisional Stock Proposal was adopted by the Board following its review of various alternatives to enhance shareholder value over the long term. Creating separate series of Common Stock intended to reflect separately the performance of Agouron Pharmaceuticals and the Oncology Division could enable investors to gain a better understanding of the businesses of Agouron Pharmaceuticals and the Oncology Division, while preserving for the Company the financial, strategic and operational benefits it currently enjoys as a single company. The separate reporting of each Division's results would create a framework for increased and more focused equity research coverage by the investment community and would separate the Oncology Division's current operating losses from the results of operations of Agouron Pharmaceuticals. The Divisional Stock Proposal is intended to increase the Company's ability to focus the management of the respective Divisions on maximizing the returns from such businesses and provide the opportunity to structure incentives for employees of each Division that are tied directly to the operating results and share price performance of that Division. The Divisional Stock Proposal is also intended to provide the Company greater flexibility with regard to raising capital and the choice of stock consideration for acquisitions and investments, including strategic partnering transactions. In particular, development, clinical testing and commercialization of the Oncology Division's products will require substantial funds. A separate equity security for the Oncology Division is expected to allow the Oncology Division to be self funding without diluting the interests of holders of Agouron Pharmaceuticals Stock. See "Proposal 2 Divisional Stock Proposal - Background of and Reasons for the Divisional Stock Proposal." Increase in Authorized Stock The Divisional Stock Proposal increases the number of shares of Common Stock the Company is authorized to issue from 75,000,000 to 150,000,000 in the aggregate. If the Divisional Stock Proposal is approved, 75,000,000 shares will be initially designated Agouron Pharmaceuticals Stock, 25,000,000 shares will be initially designated Oncology Division Stock and 50,000,000 shares will initially be undesignated shares of Common Stock. The Board would be authorized to designate and issue shares in one or more additional series of Common Stock or to increase the number of designated shares of Agouron Pharmaceuticals Stock or Oncology Division Stock. The authorized but unissued shares of Agouron Pharmaceuticals Stock and the Oncology Division Stock would be available for issuance from time to time by the Company at the discretion of the Board for any proper corporate purpose. The issuance of such additional shares would not be subject to approval by the shareholders of the Company unless deemed advisable by the Board or required by applicable law, regulation or stock market listing requirements. See "Proposal 2 - Divisional Stock Proposal - Description of Capital Stock." The Board believes that an increase in the number of authorized shares of the Common Stock at this time is in the best interest of the Company in order to have available the number of shares needed to implement aspects of the Divisional Stock Proposal and provide for share dividends, stock splits or acquisitions and other strategic opportunities if such transactions are determined to be in the best interest of the Company. Other than the issuance of shares to the holders of Existing Common Stock pursuant to the Divisional Stock Proposal and the issuance of shares pursuant to the Company's employee stock option and purchase plans, as amended in connection with the Divisional Stock Proposal, the Company has no present intention or agreement with respect to issuance of any of the shares of Agouron Pharmaceuticals Stock, the Oncology Division Stock or any of the undesignated shares of Common Stock. However, the Board may in the future consider the creation of additional series of common stock that track the performance of other lines of the Company's business. Certain Federal Income Tax Considerations The Company has received an opinion from its tax counsel, as more specifically set forth in "Proposal 2--Divisional Stock Proposal --Certain Federal Income Tax Considerations," that for United States federal income tax purposes (i) the Agouron Pharmaceuticals Stock and the Oncology Division Stock will be treated for federal income tax purposes as common stock of the Company and (ii) except with respect to cash paid in lieu of fractional shares, holders of the Agouron Pharmaceuticals Stock and the Oncology Division Stock will not recognize income, gain or loss in and as a result of the reclassification and conversion of the Existing Common Stock. However, there are no court decisions or other authorities bearing directly on transactions similar to the Divisional Stock Proposal. Further, the Internal Revenue Service ("IRS") has announced that it will not issue advance rulings on the federal income tax consequences of transactions similar to the Divisional Stock Proposal. It is possible, therefore, that the IRS could assert that the Oncology Division Stock or the Agouron Pharmaceuticals Stock or both represent property other than stock of the Company. Any such determination could have a material adverse effect on the Company and result in adverse tax consequences for shareholders of the Company. See "Proposal 2 -- Divisional Stock Proposal -- Certain Federal Income Tax Considerations." Shareholders are urged to consult their own tax advisors as to the particular tax consequences of the classification to them under federal, state, local or foreign law. Dissenters' Rights Under the California Corporations Code, holders of the Existing Common Stock have no dissenters' rights in connection with the Divisional Stock Proposal. Fractional Shares Fractional shares of Oncology Division Stock will not be issued. If the number of shares of Oncology Division Stock to be issued to any holder of Existing Common Stock includes a fraction of a whole share, the Company will pay to such holder, within 60 trading days after the Effective Date, the cash value of such fractional share based on the average of the daily average of the high and low sale prices of the Oncology Division Stock reported on the Nasdaq National Market during the first ten trading days following the Effective Date. COMPARISON OF EXISTING COMMON STOCK WITH AGOURON PHARMACEUTICALS STOCK AND ONCOLOGY DIVISION STOCK The following is a comparison of the Existing Common Stock and the proposed Agouron Pharmaceuticals Stock and Oncology Division Stock. This summary is qualified in its entirety by the more detailed information contained in this Proxy Statement and the Annexes hereto. See "Risk Factors," "Proposal 2--The Divisional Stock Proposal-- Description of Capital Stock;" and the Restated Articles of Incorporation (the "Restated Articles") included in Annex II to this Proxy Statement.
THE DIVISIONAL STOCK PROPOSAL Existing Common Stock Agouron Pharmaceuticals Oncology Division Stock Stock SHAREHOLDERS OF ONE Holders of Existing Common Holders of Agouron Holders of Oncology COMPANY: Stock will continue to be Pharmaceuticals Stock will Division Stock will subject to the risks continue to be subject to continue to be subject to associated with an the risks associated with the risks associated with investment in the Company an investment in the an investment in the and all of its businesses, Company and all of its Company and all of its assets and liabilities. businesses, assets and businesses, assets and liabilities. Financial liabilities. Financial effects arising from the effects arising from Oncology Division that Agouron Pharmaceuticals effect the Company's that affect the Company's results of operations or results of operations or financial condition could, financial condition could, if significant, affect the if significant, affect the results of operations or results of operations or financial condition of financial condition of Agouron Pharmaceuticals or the Oncology Division or the market price of the the market price of the Agouron Pharmaceuticals Oncology Division Stock. Stock. Any net losses of either Any net losses of either Division, and dividends or Division, and dividends or distributions on, or distributions on, or repurchases of, either repurchases of, either series of Common Stock or series of Common Stock or any Preferred Stock, will any Preferred Stock, will reduce the assets of the reduce the assets of the Company legally available Company legally available for payment of future for payment of future dividends on the other dividends on the other series of Common Stock. series of Common Stock. NUMBER OF SHARES 31,053,380 31,053,380 _________ OUTSTANDING (Based upon number of shares of Existing Common Stock outstanding as of July 28, 1998.)
THE DIVISIONAL STOCK PROPOSAL
Existing Common Stock Agouron Pharmaceuticals Oncology Division Stock Stock INCLUSION IN NASDAQ Nasdaq National Market Application has been made Application has been made NATIONAL MARKET: under the symbol AGPH. to The Nasdaq Stock to The Nasdaq Stock Market, Inc. for the Market, Inc. for the redesignation of Existing listing of Oncology Common Stock as Agouron Division Stock under the Pharmaceuticals Stock, symbol __________. which will trade under the symbol AGPH. DIVIDENDS: The Company has never paid The Company intends to The Company intends to any cash dividends on retain earnings to finance retain earnings to finance shares of its capital stock. future growth and, future growth and, therefore, does not therefore, does not anticipate paying any cash anticipate paying any cash dividends on the Agouron dividends on the Oncology Pharmaceuticals Stock in Division Stock in the the foreseeable future. foreseeable future. Dividends on the Existing Dividends on the Agouron Dividends on the Oncology Common Stock are limited to Pharmaceuticals Stock will Division Stock will be assets of the Company be paid at the discretion paid at the discretion of legally available for the of the Board based the Board based primarily payment of dividends under primarily upon the upon the financial the California Corporations financial condition, condition, results of Code and are payable at the results of operations and operations and business discretion of the Board business requirements of requirements of the based primarily upon the Agouron Pharmaceuticals Oncology Division and the financial condition, and the Company as a Company as a whole. results of operations and whole. Dividends will be Dividends will be payable business requirements of payable out of the lesser out of the lesser of (i) the Company. of (i) the assets of the the assets of the Company Company legally available legally available for the for the payment of payment of dividends and dividends and (ii) the (ii) the Oncology Division Agouron Pharmaceuticals Available Dividend Available Dividend Amount. See "Proposal 2 - Amount. See "Proposal 2 - The Divisional Stock The Divisional Stock Proposal - Description of Proposal - Description of Capital Stock - Dividend Capital Stock - Dividend Rights." Rights."
THE DIVISIONAL STOCK PROPOSAL
Existing Common Stock Agouron Pharmaceuticals Oncology Division Stock Stock The Board, subject to the The Board, subject to the limitations set forth limitations set forth above, may, in its sole above, may, in its sole discretion, declare and discretion, declare and pay dividends exclusively pay dividends exclusively on the Agouron on the Oncology Division Pharmaceuticals Stock, Stock, exclusively on the exclusively on the Agouron Pharmaceuticals Oncology Division Stock, Stock, or on any or on any combination combination thereof, in thereof, in equal or equal or unequal amounts, unequal amounts, notwithstanding the amount notwithstanding the amount of dividends previously of dividends previously declared on either series, declared on either series, the respective voting or the respective voting or liquidation rights of liquidation rights of either series or any other either series or any other factor. factor. VOTING RIGHTS: One vote per share. One vote per share. Each share of Oncology Division Stock will have ____ vote until June 30, 2000, and on July 1, 2000 and on each July 1 every two years thereafter, the number of votes to which each share of Oncology Division Stock is entitled will be adjusted to reflect the ratio of the weighted average market capitalization of the Oncology Division Stock and the Agouron Pharmaceuticals Stock on such date. The market capitalization of each series of stock shall be determined by multiplying the number of outstanding shares of each series by the Fair Market Value of such shares. Fair Market Value means the average of the daily average of high and low per share sales prices as reported by the Nasdaq National Market (or the appropriate exchange or stock market on which such shares are traded) for the 20 consecutive trading days commencing on the 30th trading day prior to such date. In the event such selling prices are unavailable, Fair Market Value will be determined by the Board.
THE DIVISIONAL STOCK PROPOSAL
Existing Common Stock Agouron Pharmaceuticals Oncology Division Stock Stock Except as otherwise Except as otherwise described herein or as described herein, or as provided under the provided under the California Corporations California Corporations Code, the holders of Code, the holders of Agouron Pharmaceuticals Oncology Division Stock Stock and the holders of and the holders of Agouron Oncology Division Stock Pharmaceuticals Stock will will vote together as a vote together as a single single voting class. voting class. CONVERSION AT OPTION OF None. None. The Company may, at any COMPANY: time, convert each share of Oncology Division Stock into cash or a number of shares of Agouron Pharmaceuticals Stock at its Fair Market Value equal to 125% of the Fair Market Value of one share of Oncology Division Stock. The ratio of the of the Fair Market Value of one share of Oncology Division ratio of the Fair Market Value of one share of Oncology Division Stock to one share of Agouron Pharmaceuticals Stock could be affected by many factors, including the results of operations and financial condition of the Company and each Division, trading volume, share issuances and repurchases and general economic and market conditions.
RIGHTS ON DISPOSITION OF None. None. If the Company disposes of ASSETS OF A DIVISION: all or substantially all of the properties and assets allocated to the Oncology Division (i.e., 80% or more on a fair value basis), the Company is required to exchange each outstanding share of the Oncology Division Stock for any combination of cash and/or Agouron Pharmaceuticals Stock at its Fair Market Value equal to 125% of the Fair Market Value of one share of Oncology Division Stock.
THE DIVISIONAL STOCK PROPOSAL
Existing Common Stock Agouron Pharmaceuticals Oncology Division Stock Stock The proceeds from any disposition of properties and assets that do not comprise all or substantially all of the properties and assets allocated to the Oncology Division will be assets of the Oncology Division and will be used for its benefit, subject to the policies described under "Proposal 2 The Divisional Stock Proposal Management and Allocation Policies." LIQUIDATION: Holders of Existing Common Holders of Agouron Holders of Oncology Stock are entitled to Pharmaceuticals Stock will Division Stock will be receive the net assets of be entitled to a portion entitled to a portion of the Company, if any, of the assets remaining the assets remaining for remaining for distribution for distribution to distribution to holders of to holders of Existing holders of Common Stock in Common in proportion to the Common Stock. proportion to the aggregate aggregate Liquidation Units Liquidation Units of of Oncology Division Stock. Agouron Pharmaceuticals Each share of Oncology Stock. Each share of Division Stock will have Agouron Pharmaceuticals ________ Liquidation Units. Stock will have 100 The number of Liquidation Liquidation Units. Units to which the Oncology Division Stock is entitled is subject to adjustment if shares of either series are subdivided, combined or distributed as a dividend to the shareholders of such series.
AGOURON PHARMACEUTICALS, INC. SELECTED CONSOLIDATED FINANCIAL DATA The following table summarizes certain selected consolidated financial data of the Company for each of the five years in the period ended June 30, 1998. The information presented should be read in conjunction with the consolidated financial statements included in Annex III to this Proxy Statement.
(In thousands, except per share amounts) 1998 1997 1996 1995 1994 - ---------------------------------------------------------------------------------------------------------------- Statement of Income (Loss) Data: Years ended June 30, Total revenues $ 466,505 $ 132,063 $ 55,955 $ 26,722 $ 16,301 Product sales 409,298 56,969 0 0 0 Research and development expenses(1) 150,657 108,137 71,010 36,317 23,957 Net income (loss) (1) and (2) 13,154 (42,806) (19,523) (12,939) (9,462) Net income (loss) per share $ .40 $ (1.59) $ (.99) $ (.89) $ (.66) Shares used in computing net income (loss) per share 33,214 26,946 19,688 14,592 14,482 Balance Sheet Data: At June 30, Working capital $ 127,728 $ 115,786 $ 70,381 $ 8,837 $ 21,039 Total assets 363,337 266,914 102,577 27,097 37,178 Long-term liabilities 6,915 7,217 1,734 1,884 2,285 Stockholders' equity(3) 236,169 191,282 75,583 12,591 24,852
(1) In 1998, includes in-licensing expenses of $26,000,000 ($15,600,000 net of tax) for commercial rights to three development stage anti-HIV products. (2) In 1997, includes the write-off of $57,500,000 of in-process technology associated with the acquisition of Alanex Corporation, partially offset by the realization of $43,800,000 of deferred tax assets associated with the Company's expectation of future taxable income. (3) The Company has never declared or paid cash dividends on its common stock. AGOURON PHARMACEUTICALS SELECTED FINANCIAL DATA The following table summarizes certain selected financial data of Agouron Pharmaceuticals for each of the five years in the period ended June 30, 1998. The information presented should be read in conjunction with the financial statements and notes thereto and related Management's Discussion and Analysis of Financial Condition and Results of Operations of Agouron Pharmaceuticals, a division of Agouron Pharmaceuticals, Inc., included in Annex IV to this Proxy Statement.
(In thousands, except per share amounts) 1998 1997 1996 1995 1994 - ---------------------------------------------------------------------------------------------------------------- Statement of Income (Loss) Data: Years ended June 30, Total revenues $ 451,077 $ 116,793 $ 37,942 $ 23,679 $ 12,100 Product sales 409,298 56,969 0 0 0 Research and development expenses(1) 113,132 81,293 53,763 24,394 10,681 Net income (loss) (1) and (2) 29,364 (34,234) (18,349) (2,664) 1,241 Tax benefit allocated from Oncology Division 8,023 4,290 0 0 0 Net income (loss) attributable to Agouron Pharmaceuticals stock 37,387 (29,944) (18,349) (2,664) 1,241 Net income (loss) per share(3) $ 1.1 $ (1.11) $ (.93) $ (.18) $ .08 Equivalent shares used in computing net income (loss) per share(3) 33,214 26,946 19,688 14,592 14,721 Balance Sheet Data: At June 30, Working capital $ 125,933 $ 114,368 $ 71,607 $ 10,640 $ 21,543 Total assets 360,654 262,246 102,577 27,097 37,178 Long-term liabilities 6,915 7,217 1,734 1,884 2,285 Division equity(4) 234,374 189,864 76,809 14,394 25,356
(1) In 1998, includes in-licensing expenses of $26,000,000 ($15,600,000 net of tax) for commercial rights to three development stage anti-HIV products. (2) In 1997, includes the write-off of $57,500,000 of in-process technology associated with the acquisition of Alanex Corporation, partially offset by the realization of $43,800,000 of deferred tax assets associated with Agouron Pharmaceuticals' expectation of future taxable income. (3) Historical Agouron Pharmaceuticals per share information as of June 30, 1998 and earnings (loss) per share data for the five years ended June 30, 1998 have been presented in the same capital structure as the Company although Agouron Pharmaceuticals Stock was not part of the capital structure of the Company for any of these periods. (4) Agouron Pharmaceuticals has never declared or paid cash dividends on its equivalent common stock. ONCOLOGY DIVISION SELECTED FINANCIAL DATA The following table summarizes certain selected financial data of the Oncology Division for each of the five years in the period ended June 30, 1998. The information presented should be read in conjunction with the financial statements and notes thereto and related Management's Discussion and Analysis of Financial Condition and Results of Operations of Oncology Division, a division of Agouron Pharmaceuticals, Inc. included in Annex V to this Proxy Statement.
(In thousands, except per share amounts) 1998 1997 1996 1995 1994 - ---------------------------------------------------------------------------------------------------------------- Statement of Income (Loss) Data: Years ended June 30, Revenues: Contract and license $ 15,428 $ 15,270 $ 18,013 $ 3,043 $ 4,201 Operating expenses: Research and development 37,525 26,844 17,247 11,923 13,276 General and administrative 2,136 1,288 1,940 1,394 1,628 Net income (loss) $ (24,233) $ (12,862) $ (1,174) $ (10,274) $ (10,703) Net income (loss) per share(1) $ (3.17) $ (1.91) $ (.24) $ (2.82) $ (2.91) Equivalent shares used in computing net income (loss) per share(1) 7,643 6,737 4,922 3,648 3,680 Balance Sheet Data: At June 30, Working capital $ 1,795 $ 1,418 $ (1,226) $ (1,803) $ (504) Total assets 2,683 4,668 0 0 0 Division equity(2) 1,795 1,418 (1,226) (1,803) (504)
(1) Historical Oncology Division per share information as of June 30, 1998 and earnings (loss) per share data for the five years ended June 30, 1998 have been presented at one-quarter of the Company's capital structure although Oncology Division Stock was not part of the capital structure of the Company for any of these periods. (2) Oncology Division has never declared or paid cash dividends on its equivalent common stock. PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY The Existing Common Stock trades on the Nasdaq National Market under the symbol AGPH. The following table sets forth the high and low sales prices for the Existing Common Stock, as reported by Nasdaq, for the fiscal periods indicated. All prices have been adjusted to reflect a 2-for-1 stock split effected in the form of a 100% stock dividend in August 1997. High Low Fiscal 1997 Quarter ended September 30 $ 23.125 $ 14.500 Quarter ended December 31 35.750 21.125 Quarter ended March 31 50.500 33.500 Quarter ended June 30 45.500 29.187 Fiscal 1998 Quarter ended September 30 $ 56.500 $ 39.250 Quarter ended December 31 56.500 26.750 Quarter ended March 31 40.000 29.250 Quarter ended June 30 40.250 28.750 Fiscal 1999 Quarter ending September 30 (through September ____) On July 20, 1998, the trading day prior to the Company's announcement of its proposal to create a separate operating division, the last reported sale price for Existing Common Stock on the Nasdaq National Market was $29.50 per share. On August 12, 1998, the trading day prior to the Company's announcement of the Divisional Stock Proposal, the last reported sale price for Existing Common Stock on the Nasdaq National Market was $23.50 per share. On _______, 1998, the last reported sale price for the Existing Common Stock on the Nasdaq National Market was $___ per share. As of July 28, 1998, there were approximately 30,000 shareholders of the Existing Common Stock. The Company has never declared or paid dividends on its capital stock and does not anticipate paying any dividends in the foreseeable future. The Company currently intends to retain its earnings, if any, for the development of its businesses. RISK FACTORS You should consider the following factors, in addition to the other information contained elsewhere in this Proxy Statement and the Exhibits and Annexes hereto, in connection with the Divisional Stock Proposal. For definitions of certain defined terms, see "Annex I - Index of Defined Terms." Risks Related to the Divisional Stock Proposal Shareholders of One Company; Financial Effects of One Division Could Adversely Affect the Other Divisions. Notwithstanding the attribution of assets and liabilities (including contingent liabilities) and shareholders' equity among the Divisions for the purpose of preparing their respective financial statements, the change in the capital structure of the Company contemplated by the Divisional Stock Proposal will not affect legal title to such assets or responsibility for such liabilities of the Company or any of its subsidiaries. Financial effects arising from a Division that affect the consolidated results of operations or financial position of the Company could affect the results of operations or financial position of the other Division(s) and the market price of the series of Common Stock related to the other Division(s). Moreover, any net losses of Agouron Pharmaceuticals or the Oncology Division and any distributions on, or repurchases of, any shares of capital stock will reduce the funds of the Company legally available for the payment of dividends on all classes and series of common stock of the Company. Accordingly, Agouron Pharmaceuticals and the Oncology Division financial information should be read in conjunction with the Company's consolidated financial information. The Company will continue to prepare consolidated financial statements and also provide such consolidated financial statements to the shareholders of each of Agouron Pharmaceuticals and the Oncology Division. If the Divisional Stock Proposal is approved, the Company will provide to shareholders of each of Agouron Pharmaceuticals and the Oncology Division separate financial statements, management's discussion and analysis of financial condition and results of operations, descriptions of businesses and other relevant information for the respective Division, together with the Company's consolidated financial statements. Upon request, the Company will provide to any shareholder of a Division a copy of the separate financial statements related to the other Divisions. Limited Separate Shareholder Rights. Under the Divisional Stock Proposal, holders of the Agouron Pharmaceuticals Stock would not have any legal rights specifically related to the assets attributed to the Oncology Division, and the shareholders of the Oncology Division would not have any legal rights specifically related to the assets attributed to Agouron Pharmaceuticals, except (i) as set forth in the provisions relating to dividend and liquidation rights and requirements for a mandatory exchange of the Oncology Division Stock upon the disposition of all or substantially all of the properties and assets allocated to the Oncology Division, as described under "Divisional Stock Proposal--Description of Capital Stock--General Redemption and Conversion Provisions" and (ii) separate voting rights in limited circumstances as required by the California Corporations Code, as discussed below under "--Limited Separate Voting Rights; Variable Voting Rights." Separate meetings for the holders of Agouron Pharmaceuticals Stock and Oncology Division Stock will not be held. Holders of Agouron Pharmaceuticals Stock and Oncology Division Stock will be common shareholders of the Company, and will continue to be subject to all the risks associated with an investment in the Company and all of its businesses and liabilities. The Company and its subsidiaries will continue to be responsible for each of their respective liabilities. Limited Separate Voting Rights; Variable Voting Rights. Under the Divisional Stock Proposal, holders of both the Agouron Pharmaceuticals Stock and of the Oncology Division Stock will vote together as a single voting group, except in certain limited circumstances provided under the California Corporations Code. Accordingly, except in limited circumstances, holders of shares of one series of Common Stock could not bring a proposal to a vote of the holders of that series of Common Stock only, but would be required to bring any proposal to a vote of all common shareholders. If a separate vote on a matter by the holders of either the Agouron Pharmaceuticals Stock or the Oncology Division Stock is not required under the California Corporations Code, and if the Board does not require a separate vote, either class of Common Stock that is entitled to more than the number of votes required to approve such matter will be in a position to control the outcome of such vote even if the matter involves a divergence or conflict of the interests of the holders of the Agouron Pharmaceuticals Stock and the Oncology Division Stock. See "--Potential Divergence of Interests; No Specific Procedures for Resolution and "-- Allocation of Proceeds of Mergers or Consolidations." Conversely, if a separate vote on a matter by the holders of either the Agouron Pharmaceuticals Stock or the Oncology Division Stock is required under the California Corporations Code, by stock market rules or by the Board, such holders of either Agouron Pharmaceuticals Stock or Oncology Division Stock could prevent approval of such matter, even if the holders of a majority of the total number of votes cast or entitled to be cast with respect to both the Agouron Pharmaceuticals Stock and the Oncology Division Stock voting together as a group were to vote in favor of it. See "Proposal 2 -- The Divisional Stock Proposal--Description of Capital Stock--Voting Rights"." Each share of Agouron Pharmaceuticals Stock will have one vote. Each share of Oncology Division Stock will have ____ vote until June 30, 2000, and on July 1, 2000 and on each July 1 every two years thereafter, the number of votes to which each share of Oncology Division Stock is entitled will be adjusted to reflect the ratio of the weighted average market capitalization of the Oncology Division Stock and the Agouron Pharmaceuticals Stock as of such date. The relative market capitalization of each series of Oncology Division Stock and Agouron Pharmaceuticals Stock shall be determined by multiplying the number of outstanding shares of each series by the Fair Market Value of one share of such series. The formula is intended to equate the proportionate per share voting rights of each series of Common Stock to their respective market capitalization from time to time. Accordingly, the relative voting power per share of Agouron Pharmaceuticals Stock and Oncology Division Stock will fluctuate based on the respective Fair Market Values of the two series of Common Stock. "Fair Market Value" as of any date means the average of the daily average of high and low per share sales prices as reported by the Nasdaq National Market (or the appropriate exchange or stock market on which such shares are traded) for the 20 consecutive trading days commencing on the 30th trading day prior to such date. In the event such sales prices are unavailable, Fair Market Value will be determined by the Board. Fair Market Value could be affected by many factors, including the results of operations of the Company and each of the Divisions, trading volume, share issuances and repurchases, and general economic and market conditions. See "Proposal 2 -- The Divisional Stock Proposal--Description of Capital Stock - --Voting Rights." Changes in the aggregate votes or relative voting power of Agouron Pharmaceuticals Stock or the Oncology Division Stock could result from the market's reaction to a decision by the Company's management or Board that is perceived to affect differently one series of Common Stock in comparison to the other or the issuance or repurchase of shares of Common Stock of either series. Upon the approval by shareholders and the filing of the Restated Articles with the California Secretary of State, holders of Agouron Pharmaceuticals Stock and Oncology Division Stock will have approximately __% and __%, respectively, of the total voting power of the Company. As a result, on matters submitted to a vote of the common shareholders as a group, the preferences of the holders of Agouron Pharmaceuticals Stock are likely to dominate and determine the outcome of such vote unless and until the relative number of shares outstanding and/or the market value of each series of the Company's Common Stock materially changes. Fiduciary Duties of the Board; No Definitive Precedent Under California Law. Under the California Corporations Code, each member of the Board must discharge his or her duties in a manner he or she believes in good faith to be in the best interests of the corporation and its shareholders with the care, including reasonable inquiry, an ordinarily prudent person in a like position would exercise under similar circumstances. Although the Company is not aware of any precedent concerning the manner in which principles of California law would be applied in the context of the capital structure contemplated by the Divisional Stock Proposal, California courts generally apply the statutory standard described above to determine if a board of directors has satisfied its fiduciary duties. Courts interpreting California law have held that directors satisfy their fiduciary duties if they make a good faith business determination in an informed and deliberate manner with a careful consideration of the action to be taken. If the Board acts in accordance with the standards described above with respect to any matter having a disparate impact upon the holders of Agouron Pharmaceuticals Stock or the holders of Oncology Division Stock, it should have a defense to any challenge made by or on behalf of either group of holders. Nevertheless, a California court hearing a case involving such a challenge may decide to apply principles of California law other than those discussed above, or, because such a case could be a case of first impression, may fashion new principles of California law to decide such a case. There may arise circumstances involving a divergence or conflict of the interests of the holders of Agouron Pharmaceuticals Stock and holders of Oncology Division Stock in which the Board is held to have properly discharged its duty to act in accordance with its good faith business judgment of the best interests of the Company but in which holders of Agouron Pharmaceuticals Stock or Oncology Division Stock consider themselves to be disadvantaged relative to the other series. In such a case, such holders might not have any remedy under California law with respect to the circumstances giving rise to the divergence or conflict of interests. Disproportionate ownership interests of members of the Board in Agouron Pharmaceuticals Stock or Oncology Division Stock or disparity in the respective market values of the Agouron Pharmaceuticals Stock and the Oncology Division Stock held by such directors could create potential conflicts of interest when directors are faced with decisions that could have different implications for the different series. See "--Potential Divergence of Interests; No Specific Procedures for Resolution" and "Proposal 2--The Divisional Stock Proposal--Certain Management and Allocation Policies--Fiduciary and Management Responsibilities." Management and Allocation Policies Subject to Change. The Board has adopted certain management and allocation policies described herein with respect to cash management, the allocation of corporate expenses, rights to commercialize products, inter-Division transactions and other matters, any and all of which could be modified or rescinded by the Board, in its sole discretion, without the approval of shareholders, although there is no present intention to do so. The Board could also adopt additional policies depending upon the circumstances. The Board could decide to modify or rescind such policies, or to adopt additional polices, and any such decision could have disparate effects upon holders of shares of any series of Common Stock. Any determination of the Board to modify or rescind such policies, or to adopt additional policies, including any such decision that would have disparate impacts upon holders of Agouron Pharmaceuticals Stock and holders of Oncology Division Stock, would be made in accordance with the Board's good faith business judgment of the best interests of the Company, taking into consideration the interests of all common shareholders. See "Proposal 2 -- Divisional Stock Proposal--Management and Allocation Policies." Potential Divergence of Interests; No Specific Procedures for Resolution. Occasions may arise when the interest of the holders of Agouron Pharmaceuticals Stock and the holders of Oncology Division Stock may diverge or appear to diverge. Examples include, among others, determinations by the Board to: (i) allocate resources and financial support to or pursue business opportunities or operational strategies through one Division instead of one or more of the other Divisions; (ii) exchange each outstanding share of Oncology Division Stock for cash or shares of Agouron Pharmaceuticals Stock, (iii) approve the disposition of all or substantially all of the properties and assets of the Oncology Division, (iv) allocate consideration to be received by holders of Common Stock in connection with a merger or consolidation involving the Company among holders of different series of Common Stock, (v) if and to the extent there are Designated Shares, allocate the proceeds of future issuances of the Oncology Division Stock either to Agouron Pharmaceuticals as a reduction in the number of Oncology Division Designated Shares or to the equity of the Oncology Division, (vi) pay or omit dividends on any series of Common Stock or (vii) approve transactions involving the transfer of funds or assets from one Division to the other or make other operational or financial decisions with respect to one Division that could be considered to be detrimental to the other Division. Other than as described under "Proposal 2 - The Divisional Stock Proposal - Management and Allocation Policies," no specific procedures have been adopted for consideration of matters involving a divergence of interests among the holders of the Company's Common Stock. The policies that have been adopted could be modified or rescinded by the Board, in its sole discretion, without the approval of shareholders, although there is no present intention to do so. The Board could also adopt additional policies. The Board intends to exercise its judgment from time to time, depending on the circumstances, as to how best to obtain information regarding the divergence (or potential divergence) of interests, under what circumstances to seek the assistance of outside advisors, whether a committee of the Board should be appointed to address the matter, and how to assess which available alternative is in the best interests of the Company and all of its shareholders. The Board believes the advantages of retaining flexibility in determining how best to fulfill its responsibilities in such circumstances as they may arise outweigh any perceived advantages from attempting to adopt specific procedures in advance to cover all conceivable circumstances. Each of the foregoing potential diverging or conflicting interests is discussed below: Operational and Financial Decisions. The Board could, in its sole discretion, from time to time, make operational and financial decisions or implement policies that affect disproportionately the businesses of Agouron Pharmaceuticals and the Oncology Division, such as transfers of services, funds or assets between Divisions and other inter-Division transactions, the allocation of financing opportunities in the public markets and the allocation of business opportunities, resources and personnel that may be suitable for both Divisions. Any such decision may favor one Division at the expense of the other. For example, the decision to obtain funds for one Division may adversely affect the ability of the other Division to obtain funds sufficient to implement its growth strategies. All such decisions will be made by the Board in its good faith business judgment or in accordance with procedures and policies adopted by the Board from time to time, including the policies described under "Proposal 2--The Divisional Stock Proposal--Management and Allocation Policies," to ensure that such decisions will be made in a manner consistent with the best interests of the Company, taking into consideration the interests of all common shareholders. For further discussion of potential divergence of interests, see "--Fiduciary Duties of the Board; No Definitive Precedent Under California Law," "--Transfers of Funds Between Divisions; Equity Contributions," and "Proposal 2--The Divisional Stock Proposal--Management and Allocation Policies." Optional Exchange of Oncology Division Stock. The Board could, in its sole discretion and without shareholder approval, determine to exchange shares of Oncology Division Stock for cash or shares of Agouron Pharmaceuticals Stock (or any combination thereof) at a 25% premium over Fair Market Value of the Oncology Division Stock at any time. Any such determination could be made at a time when either or both of the Oncology Division Stock and the Agouron Pharmaceuticals Stock may be considered to be overvalued or undervalued. In addition, any such conversion at any premium would dilute the interests in the Company of the holders of the Agouron Pharmaceuticals Stock and would preclude holders of the Oncology Division Stock from retaining their investment in a security that is intended to reflect separately the performance of that Division. If such exchange is perceived as dilutive to the Agouron Pharmaceuticals Stock, the market price of such stock may be adversely affected. The Company cannot predict the impact on the market prices of the Agouron Pharmaceuticals Stock or the Oncology Division Stock of its ability to effect any such exchange or the effect, if any, that the exercise by the Company of this exchange right would have on the market price of the Agouron Pharmaceuticals Stock or the Oncology Division Stock prevailing at such time. In determining whether to convert the Oncology Division Stock into the Agouron Pharmaceuticals Stock, the Board will act in accordance with its good faith business judgment that any such conversion is in the best interests of the Company as a whole, but not necessarily in the best interests of either Division individually. See "Proposal 2--The Divisional Stock Proposal--Description of Capital Stock--General Redemption and Conversion Provisions." Fair Value Upon Disposition of Division Assets. As long as the assets attributed to a Division continue to represent less than substantially all of the properties and assets of the Company, the Board may approve sales and other dispositions of any amount of the properties and assets of such Division without shareholder approval. The proceeds from any such sale would be assets attributed to such Division and used for its benefit, subject to the management and allocation policies described under "Proposal 2--The Divisional Stock Proposal--Management and Allocation Policies." The Restated Articles would contain provisions that, following a disposition of all or substantially all of the assets of the Oncology Division, the shares of Oncology Division Stock are subject to mandatory exchange by the Company for cash or shares of Agouron Pharmaceuticals Stock (or any combination thereof) at a 25% premium over the Fair Market Value of the Oncology Division Stock as determined by the trading prices during a specified period prior to consummation of the disposition. Consequently, holders of Oncology Division Stock may receive a greater or lesser premium for their shares than any premium that might be paid by a third-party buyer of all or substantially all of the assets of the Oncology Division. In addition, any such exchange could be made at a time when the Oncology Division Stock or the Agouron Pharmaceuticals Stock may be considered to be overvalued or undervalued. See "--Optional Exchange of Oncology Division Stock." The terms of the Oncology Division Stock and the Agouron Pharmaceuticals Stock do not require the Board to select the option that would result in the distribution with the highest value to the holders of the Oncology Division Stock or with the smallest effect on the Agouron Pharmaceuticals Stock. The Board would select an option based upon its good faith business judgment that such option is in the best interests of the Company, taking into consideration the interests of all common shareholders. See "--Fiduciary Duties of the Board; No Definitive Precedent under California Law." Allocation of Proceeds upon Issuance of Oncology Division Stock. If and to the extent there are Oncology Division Designated Shares at the time of any sale of shares of Oncology Division Stock, the Board would determine the allocation of the proceeds of such sale between Agouron Pharmaceuticals and the Oncology Division. In such case, the Board could (assuming there are sufficient Oncology Division Designated Shares) allocate 100% of the net proceeds of the sale of Oncology Division Stock to Agouron Pharmaceuticals or allocate all such proceeds to the Oncology Division, and such net proceeds would be reflected entirely on the financial statements of the Division to which such proceeds were allocated. Any such allocation of net proceeds to Agouron Pharmaceuticals would reduce the number of Oncology Division Designated Shares. No Assurance of Payment of Dividends. The Company has not paid dividends in the past and does not anticipate paying any dividends in the foreseeable future. Any dividends on the Agouron Pharmaceuticals Stock or the Oncology Division Stock that may be declared by the Board will be payable out of the lesser of: (i) the funds of the Company legally available for such purpose, which are determined on the basis of the entire Company, and (ii) the Available Dividend Amount with respect to the relevant Division, which in general is equal to the amount legally available for such purpose determined in accordance with California law applied as if such Division were a separate corporation. Such dividends are further subject to the prior payment of dividends on outstanding shares of any class or series of capital stock of the Company with preferential dividend provisions. Any net losses of the Company (without regard to whether such losses arose from any specific Dividends), and any dividends or distributions on, or repurchases of, the Agouron Pharmaceuticals Stock or the Oncology Division Stock, and dividends on, and certain repurchases of, preferred stock, will reduce the funds of the Company legally available for payment of dividends on both the Agouron Pharmaceuticals Stock and the Oncology Division Stock. Subject to limitations of the California Corporations Code and the Restated Articles, the Board may declare and pay dividends on Agouron Pharmaceuticals Stock and Oncology Division Stock in equal or unequal amounts, or may decide not to declare and pay such dividends, notwithstanding the relationship between the Available Dividend Amounts for the respective Divisions, the respective amounts of prior dividends paid on, or liquidation rights of, the Agouron Pharmaceuticals Stock or the Oncology Division Stock or any other factor. See "Proposal 2--The Divisional Stock Proposal --Description of Capital Stock --Dividend Policy and--Dividend Rights." Allocation of Proceeds of Mergers or Consolidations. The Restated Articles do not contain any provisions governing how consideration to be received by the Company's shareholders in connection with a merger or consolidation involving the Company (in which the Common Stock is to be converted into other securities, cash or other property) is to be allocated among holders of the Oncology Division Stock and the Agouron Pharmaceuticals Stock. In any such merger or consolidation, the allocation of consideration would be determined by the Board and would be subject to approval by a majority of the voting power of all shares of Common Stock of the Company, voting together as one group. Transfer of Funds Among Divisions; Equity Contributions. If the Divisional Stock Proposal is approved by shareholders, all debt incurred or stock issued by the Company and its subsidiaries following the issuance by the Company of the Agouron Pharmaceuticals Stock and the Oncology Division Stock would be (unless the Board otherwise provides) specifically attributed to and reflected in the financial statements of the Division that includes the entity which incurred the debt or issued the stock or, in the case of debt or stock that is not specifically attributed to one of the Divisions, Agouron Pharmaceuticals. The Board could, however, determine from time to time that debt incurred or stock issued by entities included in a Division should be specifically attributed to and reflected in the financial statements of one of the other Divisions to the extent that the debt is incurred or the preferred stock is issued for the benefit of such other Division. To the extent cash needs of one Division exceed cash provided by such Division, one of the other Divisions may transfer funds to such other Division. The Company has provided and will continue to provide centralized cash management functions under which cash receipts of certain entities included in the Divisions are remitted to Agouron Pharmaceuticals and certain cash disbursements of the other Divisions will be funded by Agouron Pharmaceuticals on a daily basis. Such transfers of funds between the Divisions will be reflected as borrowings or as the creation of, or at the option of the Board an increase or reduction in the number of Designated Shares of the relevant Division. In addition, the Board has approved an allocation of up to $25 million in cash from Agouron Pharmaceuticals to the Oncology Division (the "Equity Line"). Amounts drawn on the Equity Line will be exchanged automatically for Oncology Division Designated Shares based on the Fair Market Value of the Oncology Division Stock on the date of exchange. See "Proposal 2--The Divisional Stock Proposal--Management and Allocation Policies." There are no specific criteria for determining when a transfer will be reflected as a borrowing or as the creation of, or an increase or reduction in the number of, Oncology Division Designated Shares. The Board expects to make such determinations, either in specific instances or by setting generally applicable policies from time to time, after consideration of such factors as it deems relevant, including, without limitation, the needs of the Company, the financing needs and objectives of the Divisions, the investment objectives of the Divisions, the availability, cost and time associated with alternative financing sources, prevailing interest rates and general economic conditions. Loans from one Division to another Division will bear interest at such rates and have such repayment schedules and other terms as are established from time to time by, or pursuant to procedures established by, the Board. The Board expects to make such determinations, either in specific instances or by setting generally applicable policies from time to time, after consideration of such factors as it deems relevant, including, without limitation, the needs of the Company, the use of proceeds by and creditworthiness of the recipient Division, the capital expenditure plans and investment opportunities available to each Division and the availability, cost and time associated with alternative financing sources. Although the creation of or any increase in the number of Oncology Division Designated Shares resulting from an equity contribution by Agouron Pharmaceuticals to the Oncology Division or an exchange of amounts outstanding under the Equity Line (or any decrease in such number of Oncology Division Designated Shares) would be determined by reference to the Fair Market Value of the Oncology Division Stock as of the date of such event, an increase (or decrease) could occur at a time when the Oncology Division's stock could be considered undervalued or overvalued. In addition, the creation of or an increase in the number of Oncology Division Designated Shares may result in dilution in net tangible book value per share to the existing holders of the Oncology Division Stock. Absence of Approval Rights with Respect to Future Issuances of Authorized Shares. The approval of the shareholders of the Company will not be sought by the Company for the issuance of authorized but unissued shares of Agouron Pharmaceuticals Stock, Oncology Division Stock or additional series established by the Board or securities of the Company that are convertible into or exchangeable for such shares, unless deemed advisable by the Board or required by applicable law, regulation or stock market requirements. In addition, the Board may, without soliciting the vote of shareholders, designate and issue shares of a new series of Common Stock intended to reflect the performance of new or additional divisions as otherwise described herein. No Assurances as to Market Price. Because there has been no prior market for the Agouron Pharmaceuticals Stock and the Oncology Division Stock, there can be no assurance as to their market prices following issuance thereof. There can be no assurance that the combined market values of the Agouron Pharmaceuticals Stock and the Oncology Division Stock held by a shareholder immediately following the effectiveness of the Divisional Stock Proposal will equal or exceed the market value of the Existing Common Stock held by such shareholder prior to the announcement or effectiveness of the Company's Divisional Stock Proposal, and the combined market value could be less than such market value of the Existing Common Stock. Until an orderly market develops for the Agouron Pharmaceuticals Stock and the Oncology Division Stock, their respective trading prices may fluctuate significantly. If an active trading market does develop, there can be no assurance that it will be maintained. The prices at which the shares of Agouron Pharmaceuticals Stock or Oncology Division Stock will trade will be determined in the trading markets and may be influenced by many factors, including the consolidated results of the Company, as well as the respective performance of Agouron Pharmaceuticals and the Oncology Division, investors' expectations for the Company and each Division, trading volume and general economic and market conditions. There is no assurance that investors will assign value to the Agouron Pharmaceuticals Stock or the Oncology Division Stock based on the reported financial results and fundamental operating prospects of the related Division. Financial results of the Divisions that impact the Company's consolidated results of operations or financial condition could affect the market prices of the Agouron Pharmaceuticals Stock and the Oncology Division Stock. In addition, the Company cannot predict the impact on the market values of the Agouron Pharmaceuticals Stock or the Oncology Division Stock, or certain terms of the securities, such as the ability of the Company to convert shares of the Oncology Division Stock, the discretion of the Board to make various determinations, or the impact on the market value of each series of Common Stock of its voting power. See also "--Risks Related to Agouron Pharmaceuticals and the Oncology Division - Volatility of Stock Price." No Adjustment to Liquidating Distributions. In the event of a voluntary or involuntary dissolution, liquidation or winding up of the affairs of the Company (other than pursuant to a merger, business combination or sale of substantially all assets), holders of outstanding shares of each series of Common Stock would receive the assets, if any, remaining for distribution to common shareholders on a per share basis in proportion to the respective per share liquidation units of such series. The Restated Articles provide that each share of Agouron Pharmaceuticals Stock has 100 liquidation units and each share of Oncology Division Stock has ___ liquidation units. Because the liquidation units will not be adjusted to reflect changes in the relative market value or performance of each of the Divisions, the per share liquidating distribution to a holder of Agouron Pharmaceuticals Stock or Oncology Division Stock is not likely to correspond to the value of the assets of Agouron Pharmaceuticals or the Oncology Division, respectively, at the time of a dissolution, liquidation or winding up of the Company. See "Proposal 2--The Divisional Stock Proposal--Description of Capital Stock--Liquidation Rights." Use of Tax Benefits by Other Division. The Company's management and allocation policies provide that, to the extent any Division is unable to utilize its operating losses or other projected tax benefits to reduce its current or deferred income tax expense, such losses or benefits may be reallocated to the other Division on a quarterly basis for financial reporting purposes. Accordingly, although the actual payment of taxes is a corporate liability of the Company as a whole, separate financial statements are prepared for each Division and any losses that cannot be utilized by a Division will be allocated to the profitable Division rather than carried forward to reduce the future tax liability of the Division generating such losses. Since Agouron Pharmaceuticals is currently profitable and the Oncology Division is expected to incur losses for at least the next several years, this could result in the Oncology Division being charged a greater portion of the total corporate tax liability and reporting lower earnings after taxes in the future than would have been the case if such Division had retained its losses or other benefits in the form of a net operating loss carry forward. See "Proposal 2--The Divisional Stock Proposal--Management and Allocation Policies." Limitations on Potential Unsolicited Acquisitions. If Agouron Pharmaceuticals or the Oncology Division were stand-alone corporations, any person interested in acquiring either of such corporations without negotiation with management could seek control of the outstanding stock of such corporation by means of a tender offer or proxy contest. Although the Divisional Stock Proposal would create two series of Common Stock that are intended to reflect the separate performance of the Divisions, a person interested in acquiring only one Division without negotiation with the Company's management would still be required to seek control of the voting power represented by all of the outstanding capital stock of the Company entitled to vote on such acquisition, including the series of Common Stock related to the other Division. See "--Limited Separate Shareholder Rights," "--Limited Separate Voting Rights; Variable Voting Rights," and "Proposal 2--The Divisional Stock Proposal--Description of Capital Stock--Voting Rights." Anti-Takeover Considerations. The Company has adopted a Shareholder Rights Plan pursuant to which each share of Common Stock (including, after implementation of the Divisional Stock Proposal, if approved, shares of Agouron Pharmaceuticals Stock and Oncology Division Stock) is accompanied by a preferred stock purchase right. These rights will cause a substantial dilution to a person or group that attempts to acquire the Company on terms not approved by the Board and may have the effect of deterring hostile takeover attempts. In addition, the existence of two series of Common Stock could present complexities and could in certain circumstances pose obstacles, financial and otherwise, to an acquiring person. The Shareholder Rights Plan and the existence of the two series of Common Stock could, under certain circumstances, prevent shareholders from profiting from an increase in the market value of their shares as a result of a change in control of the Company by delaying or preventing such change in control. Although the Board has no present intention of doing so, it could issue shares of Preferred Stock or of a new or existing series of Common Stock that could be used to create voting or other impediments or to discourage persons seeking to gain control of the Company and could also be privately placed with purchasers favorable to the Board in opposing such action. Risks Related to Agouron Pharmaceuticals and the Oncology Division Early Stage of Product Development; Uncertainty of Product Development and Market Acceptance; Technological Uncertainty. The Company has completed the development and commercialization of only one Agouron Pharmaceuticals product and no Oncology Division products and does not expect to have any additional products commercially available until calendar 2000, if at all. While the Company has received regulatory approval to begin human clinical testing for certain of its compounds (see Annex IV and Annex V), these and other compounds currently being developed by the Company will require further research and development, including extensive additional preclinical and human clinical testing, prior to submission of any regulatory application for commercial sale of such compounds. There can be no assurance that further research and development will be successful or will result in drugs that will qualify for approval by regulatory authorities for commercial sale or be accepted and successful in the marketplace. In addition, clinical testing of a pharmaceutical product is itself subject to approvals by various governmental regulatory authorities. No assurance can be given that the Company will be permitted by regulatory authorities to conduct planned additional clinical testing of the Company's compounds in any particular country of the world, including the United States, or that, if permitted, such additional clinical testing will prove that such drugs are safe and efficacious to the extent necessary to permit the Company to obtain marketing approvals for them from regulatory authorities. The Company may encounter problems or delays relating to research and development, regulatory approval and manufacturing and the failure to address such problems or delays could have a material adverse effect on the Company's business and prospects. Even if FDA and foreign regulatory approvals for the marketing of any products being developed by the Company are obtained, there can be no assurance that such products will be accepted and successful in the marketplace. While the Company believes it has demonstrated the utility of certain of its potential products in preclinical testing and in phase I and phase II human clinical trials, extensive further clinical testing of these potential products is required before the Company can seek marketing approval from regulatory authorities. Furthermore, results obtained in preclinical studies or in phase I and phase II human clinical trials are not necessarily indicative of results that will be obtained in subsequent or more extensive preclinical or clinical testing. Uncertainty Associated with Clinical Testing. Before seeking regulatory approvals for the commercial sale of any of its products, the Company must undertake extensive preclinical and clinical testing to demonstrate their safety and efficacy in humans. Historical results of clinical testing of VIRACEPT and the Company's other clinical programs are not necessarily predictive of future results. There can be no assurance that clinical studies of products under development will demonstrate the safety and efficacy of such products. The failure to adequately demonstrate the safety and efficacy of a therapeutic product could delay or prevent regulatory approval of the product. There can be no assurance that unacceptable toxicities or side effects will not occur at any time in the course of human clinical trials or commercial use of the Company's drugs. The appearance of any such unacceptable toxicities or side effects could interrupt, limit, delay or abort the development of any of the Company's drugs or, if previously approved, necessitate their withdrawal from the market. Furthermore, there can be no assurance that disease resistance will not limit the efficacy of VIRACEPT or other of the Company's drugs, if any. Even after being approved by FDA or foreign regulatory authorities, products may later exhibit adverse effects that prevent their widespread use or necessitate their withdrawal from the market. Additionally, the Company has made and may in the future make changes to the formulation of its drugs and/or the processes for manufacturing its drugs. Any such changes in formulation or manufacturing processes could result in delays in conducting further preclinical and clinical testing. There can be no assurance that any products under development by the Company will be safe when administered to patients. Delays in planned patient enrollment in the Company's current clinical trials or future clinical trials may result in increased costs, program delays or both. There can be no assurance that if clinical trials are completed the Company will be able to submit a New Drug Application and/or Product License Application as scheduled or that any such application will be reviewed and approved by FDA in a timely manner, or at all. Even after being approved by FDA or foreign regulatory authorities, products may later exhibit adverse effects that prevent their widespread use or necessitate their withdrawal from the market. There can be no assurance that any products under development by the Company will be safe when administered to humans. History of Operating Losses and Uncertainty of Continued Profitability of Agouron Pharmaceuticals; Dependence on VIRACEPT. Agouron Pharmaceuticals has had product sales only since fiscal 1997 and reported net income only for fiscal 1998. Continued profitability of Agouron Pharmaceuticals will be dependent in the foreseeable future upon the sales of VIRACEPT. There can be no assurance that commercial sales of VIRACEPT alone will be able to maintain Agouron Pharmaceuticals' substantial rate of growth in revenues or to either generate or maintain profitable operating results on a consistent basis. Any disruption in the supply or manufacturing process for VIRACEPT may have a material adverse effect on revenues. Operating results will also be impacted by the timing and amount of Agouron Pharmaceuticals' research, development and clinical trial programs, the level of its selling and marketing efforts, the efficiency and cost of its manufacturing activities, the nature of its business development activities and on the timing and receipt of fees from existing and future collaborative relationships. History of Operating Losses; Lack of Revenues of the Oncology Division. The Oncology Division has recorded operating losses since inception. The Oncology Division has no product sales and the only source of revenues in the past has been from payments by collaborative partners. The collaborative agreements with Hoffmann-LaRoche Inc, and F. Hoffmann-La Roche Ltd that accounted for substantially all of Oncology Division's contract and license revenues for fiscal 1998, 1997 and 1996 have been terminated, and the Company anticipates no contract and license revenues for the Oncology Division for fiscal 1999. Because all of the Oncology Division's potential therapeutic products will require substantial additional research, development and preclinical and clinical testing prior to commercialization, it may be several years, if ever, before the Oncology Division recognizes revenue from sales and royalties on these potential products. Accordingly, the Oncology Division is expected to experience significant operating losses for at least the next several years. The Oncology Division may never achieve a profitable level of operations and that profitability, if achieved, may not be sustained on an ongoing basis. For the immediate future, the Oncology Division intends to rely entirely on the funding capabilities of Agouron Pharmaceuticals. There can be no assurance that Agouron Pharmaceuticals will be capable of continuing to fund the Oncology Division as currently anticipated. Additional Financing Requirements and Access to Capital. The Company has expended approximately $449,000,000 on research and development activities since its inception. Both Agouron Pharmaceuticals and the Oncology Division intend in the future to expend substantial additional funds to continue research and development activities, conduct preclinical studies and tests, conduct human clinical trials, establish manufacturing, sales and marketing capabilities and market any approved products. Additional funds may be required in connection with collaborative arrangements with others and for working capital and other general corporate needs. The Company believes that its current capital resources and existing contractual commitments will enable it to maintain its current and planned operations through at least fiscal 1999. No assurance can be given that there will be no change in the Company's operations that would consume available resources more rapidly than anticipated. Additional funding may be required by either or both Agouron Pharmaceuticals or the Oncology Division before the commercialization of any additional products. The future capital requirements of both Agouron Pharmaceuticals and the Oncology Division will depend on many factors, including the product contribution to Agouron Pharmaceuticals from commercial sale of VIRACEPT, the progress of research and development, the scope and results of preclinical studies and clinical trials, the cost, timing and outcome of regulatory reviews, the rate of technological advances, the market acceptance of any approved Company products, administrative and legal expenses and competitive factors. To the extent the capital resources of Agouron Pharmaceuticals are insufficient to meet current or planned operating requirements of both Agouron Pharmaceuticals and the Oncology Division, Agouron Pharmaceuticals or the Oncology Division may seek to obtain additional funds through equity or debt financing, collaborative or other arrangements with corporate partners, licensees and others, and from other sources, which may have the effect of diluting the holdings of existing shareholders. No assurance can be given that additional financing will be available when needed or on terms acceptable to Agouron Pharmaceuticals or the Oncology Division. If adequate funds are not available, Agouron Pharmaceuticals or the Oncology Division may be required to delay or eliminate expenditures for certain programs, cancel licenses from third parties or to license third parties to commercialize products or technologies that either Agouron Pharmaceuticals or the Oncology Division would otherwise seek to develop and commercialize itself, any of which could have a material adverse effect on Agouron Pharmaceuticals, the Oncology Division or the Company. Dependence on Others. The Company's strategy for development and commercialization of certain of its products entails entering into various arrangements with corporate partners, licensees and others, and upon the subsequent success of these partners, licensors, licensees and others in performing preclinical and clinical testing, obtaining regulatory approvals, manufacturing and marketing. These arrangements may require the Company to transfer certain material rights to such corporate partners, licensees and others. In the event the Company determines to license or sublicense certain of its commercial rights, there can be no assurance such arrangements will not result in reduced product revenue to the Company. While the Company believes its partners, licensees and others will have an economic motivation to succeed in performing their contractual responsibilities, the amount and timing of resources to be devoted to these activities will be controlled by others. Consequently, there can be no assurance that any revenues or profits will be derived from such arrangements, that any of the Company's current strategic arrangements will be continued or not terminated early or that the Company will be able to enter into future collaborations. Manufacturing Capabilities. The Company is dependent on a number of contract manufacturers for the commercial manufacture of VIRACEPT under current Good Manufacturing Practices ("GMP"). Failure to meet GMP standards would have an adverse impact on the Company's business. No assurance can be given that such manufacturers can be retained or that such manufacturers will continue to timely deliver sufficient product quantities at acceptable costs. Although the Company is producing clinical quantities of certain chemical compounds in certain of its laboratory facilities that have undergone GMP inspections and been approved by the State of California, and has business relationships with its collaborators and with manufacturers to supply significant portions of its clinical trial material requirements, the current facilities and existing manufacturing relationships of the Company may not be adequate to meet anticipated commercial production needs. Therefore, the Company will be dependent upon its collaborators and licensees or upon contract manufacturers for the commercial manufacture of products it may develop. The Company has limited experience in such commercial manufacturing and related matters and no assurance can be given that the Company will be able to continue to arrange for contract manufacturing or that adequate supplies of raw materials will be available. In the event the Company is unable to obtain contract manufacturing on acceptable terms, its ability to commercialize or timely deliver its products at acceptable cost may be adversely affected. Sales and Marketing Capabilities. While the Company has established its capabilities in the sales, marketing and distribution of pharmaceutical products in the United States and Canada, there can be no assurance that such capabilities will be sufficient or successfully maintained in the United States or other markets outside of the United States and Canada. Further, there can be no assurance that any products, if approved, will gain market acceptance. The Company's results of operations and cash flows for the next several years will be highly dependent upon the timing and extent of VIRACEPT sales. Patents and Proprietary Technology. The Company has been granted certain patents relating to its inventions in the United States and certain other countries. The Company also has various pending patent applications claiming inventions in various fields. The Company expects to continue to attempt to secure patent protection for its potential products, and that any such patents will be owned by the Company and licensed or be made available to the applicable Division. The Company believes that its current and future patent portfolio is important to its future operations. Patent protection is recognized as being important to the pharmaceutical industry in general, e.g., as providing a period of exclusivity against generic competition, which serves as a return for the great expenditure of resources incurred in discovering and developing a drug and for advancing the state of the art. The commercial success of the products of both Agouron Pharmaceuticals and the Oncology Division may depend, in part, on the Company's ability to enforce its patents against infringing competitors. Although the Company's issued patents, pending patent applications, and future patents may be of importance to the Divisions, there can be no assurance that additional patents will be granted or that any patents now or hereafter granted will be of commercial benefit. The granting of a patent is not conclusive as to the validity or enforceability of the claims therein, which define the scope of the Company's exclusive rights. The validity and enforceability of a United States patent, as well as of a patent from certain other countries, may be challenged by a third party in a litigation or proceeding before a court or patent office. If the validity or enforceability of a patent claim is successfully challenged in such a litigation or proceeding, then third parties may be free to use a claimed invention, in some cases without payment to the Company. Moreover, there can be no assurance that patent claims covering a Division's products will not be infringed or that infringement will be avoided by successfully designing around a claimed invention. There also can be no assurance that the technology or products of the Divisions, whether patented or not, will not infringe third parties' patents. The Company is aware of certain patent applications or patents of third parties, and there may be other patents or patent applications, covering subject matter related to Agouron Pharmaceuticals or the Oncology Division's technology and potential products. Research, development or commercialization of the Company's products may require that the Company obtain licenses under such patent applications, if granted, or patents of third parties. However, there can be no assurance that the Company will be able to obtain such licenses on commercially reasonable terms or at all. If a third party obtains a patent covering a product of a Division, the Company could be required to defend against an infringement action, which could be costly and time-consuming. Furthermore, any fees or royalties required to be paid under a patent license, settlement agreement, or litigation judgment could be significant. The Company seeks to protect certain unpatented proprietary technology and know-how through the maintenance of trade secrets or confidential information. Certain technology and know-how of importance to the Company's drug-discovery and manufacturing operations depend on the skills, knowledge, and experience of its scientific and technical personnel, for which patent protection may not be available. To help protect its rights, the Company generally requires all employees, relevant consultants and advisors, and collaborators to enter into confidentiality agreements. There can be no assurance, however, that these agreements will provide adequate protection for the Company's trade secrets, know-how, or other proprietary information in the event of its unauthorized use or disclosure. Competitors may independently develop substantially equivalent technology, undermining the value of the Company's trade secrets. Third parties may even obtain patents covering the Company's proprietary technology or know-how, which may adversely affect a Division's ability to use such technology or know-how. The costs of obtaining and enforcing patents and of protecting proprietary technology may involve a substantial commitment of either or both Division's resources. Any such commitment may divert resources from other operations of the impacted Division. Technological Change and Intense Competition. The pharmaceutical and biotechnology industries are subject to intense competition and rapid technological change. The Company believes that industry-wide interest in the application of protein structure-based drug design and related technology will continue and may accelerate as the technology becomes more widely understood. Competitors of the Company in the United States and abroad are numerous and include, among others, pharmaceutical, biotechnology and chemical companies, universities and other research organizations. For example, HIV protease inhibitors developed by Abbott Laboratories, Inc., Merck & Co., Inc. and Roche are currently being marketed. There can be no assurance that these and other competitors will not have products or succeed in developing technologies and products that are more effective than any which have been or are being developed by the Company or which would render the Company's technology and products obsolete and noncompetitive. Many of the Company's competitors have substantially greater financial and technical resources and production and marketing capabilities and experience than the Company. In addition, many of the Company's competitors have significantly greater experience than the Company in conducting preclinical testing and human clinical trials of new pharmaceutical products and in obtaining FDA and other regulatory approvals of products. Accordingly, certain of the Company's competitors may succeed in obtaining regulatory approval for products more rapidly or effectively than the Company. The Company also competes with respect to manufacturing efficiency and sales and marketing capabilities, areas in which the Company has limited experience. Government Regulation. Preclinical studies, clinical trials and the production and marketing of the Company's products and its ongoing research and development activities are subject to regulation by numerous governmental authorities in the United States and other countries. Rigorous preclinical and clinical testing and obtaining regulatory approvals can take many years and require the expenditure of substantial resources. Failures or delays by the Company or its collaborators, licensors or licensees in obtaining regulatory approvals would adversely affect the marketing of products developed by the Company and the Company's ability to receive product revenues or royalties. Further, there can be no assurance that the Company or its collaborators, licensors or licensees will be able to obtain necessary regulatory approvals. There can be no assurance that clinical data will be accepted by regulatory agencies or that any approvals will be granted on a timely basis, if at all. Any significant delays or requests to provide additional data in the approval process could have a material adverse effect on the Company. If regulatory approval of a drug is obtained, such approval may involve limitations and restrictions on the drug's use. In addition, any marketed drug and its manufacturer are subject to continual governmental review and any subsequent discovery of previously unrecognized problems could result in restrictions on the product or manufacturer, including, without limitation, withdrawal of the product from the market. Failure of the Company to comply with applicable regulatory requirements can, among other things, result in fines, suspension of regulatory approvals, product recalls, seizure of products, operating restrictions or criminal prosecution. Additionally, the Company is or may become subject to various federal, state and local laws, regulations and recommendations relating to safe working conditions, laboratory and manufacturing practices, the experimental use of animals and the use and disposal of hazardous or potentially hazardous substances, including radioactive compounds and infectious disease agents, used in connection with Agouron's research and development work. The Company is unable to predict the extent of restrictions that might arise from any governmental or administrative action. Volatility of Stock Price. The market price of the Existing Common Stock, like that of the common stock of other biopharmaceutical companies, has in recent years fluctuated significantly, and it is likely that should the Divisional Stock Proposal be approved and implemented the market prices of Agouron Pharmaceuticals Stock and Oncology Division Stock will fluctuate significantly in the future. Factors such as announcements of technological innovations or new commercial products by a Division or its competitors, progress with clinical trials, governmental regulation, changes in reimbursement policies, developments in patent or other proprietary rights of a Division or its competitors, including litigation, developments in a Division's relationships with current or future collaborators and licensees, if any, public concern as to the safety and efficacy of drugs developed by a Division and its competitors, changes in estimates of a Division's performance by securities analysts, and general market conditions may have a significant effect on the market price of the Agouron Pharmaceuticals Stock and Oncology Division Stock. Fluctuations in financial performance of the respective Divisions from period to period also may have a significant impact on the market price of the Agouron Pharmaceuticals Stock and Oncology Division Stock. Uncertainty of Third-Party Reimbursement and Product Pricing. The Company's ability to commercialize products successfully will depend in part on the availability of reimbursement of the costs of such products and related treatments at acceptable levels from government authorities, private health insurers and other organizations, such as health maintenance organizations ("HMOs"). There can be no assurance that reimbursement in the United States or foreign countries will be available for any products the Company may develop or, if available, will not be decreased in the future, or that reimbursement amounts will not reduce the demand for, or the price of, the Company's products, thereby adversely affecting the Company's business. Third-party payors are increasingly challenging the prices charged for medical products and services. Also, the trend toward managed health care in the United States and the concurrent growth of organizations, such as HMOs, which can control or significantly influence the purchase of health care services and products, as well as legislative proposals to reform health care or reduce government insurance programs, may result in lower prices for pharmaceutical products. The cost containment measures that health care providers are instituting and the effect of any health care reform could materially adversely affect the Company's ability to sell its products if successfully developed and approved. Moreover, the Company is unable to predict what additional legislation or regulation, if any, relating to the health care industry or third-party coverage and reimbursement may be enacted in the future or what effect such legislation or regulation would have on the Company's business. Product Liability; Limited Insurance Coverage. The testing, marketing and sale of human health care products entail an inherent risk of allegations of product liability and there can be no assurance that product liability claims will not be asserted against the Company, its collaborators or its licensees. The Company currently has only limited amounts of product liability insurance for clinical trials and for commercial sales. There can be no assurance that the Company will be able to maintain product liability insurance on acceptable terms or that such insurance will provide adequate coverage against any potential claims. Furthermore, there can be no assurance that any collaborators and licensees of Agouron will agree to indemnify the Company, be sufficiently insured or have a sufficient net worth to protect the Company from any product liability claims. Use of Hazardous Materials. The Company's research and development activities involve the controlled use of hazardous materials, chemicals, viruses and various radioactive compounds. Although the Company believes that its safety procedures for handling and disposing of such materials comply with the standards prescribed by state and federal regulations, the risk of accidental contamination or injury from these materials cannot be completely eliminated. In the event of such an accident, the Company could be held liable for any damages that result and any liability could have a material adverse effect on the Company. Attraction and Retention of Personnel. The future success of the Company will depend in large part on its ability to continue to attract and retain highly qualified scientific, technical, sales and marketing and managerial personnel. Competition for such personnel is intense and there can be no assurance that the Company will be able to attract and retain the personnel necessary for the development of its business. In addition, much of the know-how developed by the Company resides in its scientific and technical personnel and such know-how is not readily transferable to other scientific and technical personnel. The loss of or failure to recruit scientific, technical, sales, marketing, manufacturing and managerial personnel could have a material adverse effect on the Company. GENERAL This Proxy Statement and the enclosed form of Proxy are furnished in connection with the solicitation of Proxies by and on behalf of the Board for use at the Meeting to be held at the Sheraton Grande Torrey Pines, 10950 North Torrey Pines Road, La Jolla, California 92037, on Wednesday, October 28, 1998 at 10:00 a.m., San Diego time, and at any adjournments or postponements thereof. Any shareholder returning the enclosed Proxy may revoke it prior to its exercise by voting in person at the Meeting or by filing with the Secretary of the Company a written revocation or a duly executed Proxy bearing a later date. All shares represented by valid Proxies will be voted in accordance with the directions specified thereon and otherwise in accordance with the judgment of the proxyholders. Any duly executed Proxy on which no direction is specified will be voted FOR the election of the nominees named herein to the Board and FOR Proposals 2, 3, 4 and 5 described in the Notice of Meeting and this Proxy Statement. Only shareholders of record as of the close of business on September 14, 1998 (the "Record Date") will be entitled to vote at the Meeting. As of September 14, 1998, there were outstanding _______ shares of Existing Common Stock. Holders of Existing Common Stock are entitled to one vote per share on all matters brought before the Meeting and to cumulate votes for the election of the nine directors. Therefore, in voting for directors, each outstanding share of Existing Common Stock is entitled to nine votes which may be cast for one candidate or distributed in any manner among the nominees for director. However, the right to cumulate votes in favor of one or more candidates may not be exercised until the candidate or candidates have been nominated and the shareholder has given notice at the Meeting of the intention to cumulate votes. The persons authorized to vote shares represented by executed Proxies for Existing Common Stock in the enclosed form (if authority to vote for the election of directors is not withheld) will have full discretion and authority to vote cumulatively and to allocate votes among any or all of the nominees as they may determine or, if authority to vote for a specified candidate or candidates had been withheld, among those candidates for whom authority to vote has not been withheld. The required quorum for the Meeting shall consist of a majority of the outstanding shares of Existing Common Stock which are entitled to vote in person or by proxy at the Meeting. Assuming that a quorum is present at the Meeting, the nine persons receiving the highest number of votes will be elected to the Board. The approval of Proposal 2 will require the affirmative vote of a majority of the outstanding shares of Existing Common Stock. Each of Proposals 3, 4 and 5 requires the affirmative vote of a majority of the shares present in person or represented by proxy at the Meeting, provided that those affirmatively voted shares also constitute at least a majority of the required quorum. Abstentions with respect to any matter are treated as shares present or represented and thus have the same effect as negative votes. If a broker which is the record holder of certain shares indicates on a proxy that it does not have discretionary authority to vote on a particular matter as to such shares, or if shares are not voted in other circumstances in which proxy authority is defective or has been withheld with respect to a particular matter, these non-voted shares will be counted for quorum purposes but are not deemed to be present or represented for purposes of determining whether shareholder approval of that matter has been obtained (however, they will have the same effect as negative votes with respect to Proposal 2 and may, depending upon the number of shares voted, have the same effect as negative votes with respect to Proposals 3, 4 and 5). The expense of printing and mailing Proxy material will be borne by the Company. In addition to the solicitation of Proxies by mail, solicitation may be made by certain directors, officers or other employees of the Company by telephone, telegraph, facsimile or in person. No additional compensation will be paid to such persons for such solicitation. However, the Company will request brokers, nominees, fiduciaries, custodians and others to forward Proxy materials to the beneficial owners of the Company's shares and the Company will reimburse such brokers or other persons for their reasonable out-of-pocket expenses incurred in connection with forwarding such materials. The Company has retained D.F. King & Co., Inc. to perform various proxy advisory, distribution and solicitation services at a cost of approximately $_____ plus reimbursement of out-of-pocket expenses. PROPOSAL 1 - ELECTION OF DIRECTORS Under the bylaws of the Company, the number of directors is to be not less than six nor more than eleven, with the actual number to be fixed from time to time by resolution of the Board. The Board has fixed at nine the number of directors to be elected at the 1998 Annual Meeting of Shareholders. Nine directors are to be elected at the Meeting, each to serve until the next Annual Meeting of Shareholders and until their respective successors are elected or appointed. Unless authority to vote for all directors is withheld, it is intended that the shares represented by the enclosed Proxy will be voted for the election of the nominees named. In the event any of them shall become unable or unwilling to accept nomination or election, the shares represented by the enclosed Proxy will be voted for the election of such other person as the Board may recommend in his or her place. The Board has no reason to believe that any such nominee will be unable or unwilling to serve. The nine nominees for election as directors, all of whom are members of the present Board, are Peter Johnson, Gary E. Friedman, John N. Abelson, Patricia M. Cloherty, A.E. Cohen, Michael E. Herman, Irving S. Johnson, Antonie T. Knoppers and Melvin I. Simon. Their terms will last until the 1999 Annual Meeting of Shareholders. Certain information concerning the nominees for directors is set forth below. The Board recommends that you vote FOR the nominees for directors, as set forth in Item 1 on the Proxy Card. Nominees for Election as Directors Name Age Position Peter Johnson 53 President, Chief Executive Officer and Director Gary E. Friedman 51 Corporate Vice President, General Counsel, Secretary and Director John N. Abelson, Ph.D.(1) 59 Director Patricia M. Cloherty(2) 56 Director A.E. Cohen(1) 62 Director Michael E. Herman(1) 57 Director Irving S. Johnson, Ph.D. 73 Director Antonie T. Knoppers, M.D.,Ph.D.(2) 83 Director Melvin I. Simon, Ph.D.(2) 61 Director (1) Member of Directors Compensation Committee (2) Member of Audit Committee Peter Johnson, a founder of the Company, has served as a director and as president and chief executive officer of the Company since its inception in 1984. Through 1989, Mr. Johnson held various positions with The Agouron Institute, including executive director. Mr. Johnson received a M.A. from the University of California, San Diego. Gary E. Friedman, a founder of the Company, has served as a director since its inception, as the secretary of the Company since May 1986 and as vice president and general counsel since December 1991. In June 1997, Mr. Friedman was promoted to corporate vice president. Previously, from 1982 until December 1991, Mr. Friedman was a principal of the law firm of Friedman, Jay & Cramer, a Professional Corporation. Mr. Friedman is a California Certified Specialist in Taxation. Mr. Friedman received a J.D. and a M.B.A. from the University of California, Berkeley and a L.L.M. in taxation from the University of San Diego. John N. Abelson, a founder of the Company, has served as a director since its inception. Dr. Abelson, a molecular biologist, is a member of the National Academy of Sciences. Since 1982, Dr. Abelson has been a member of the faculty of the Division of Biology at the California Institute of Technology where, from October 1989 until June 1995, he served as chairman. Previously, Dr. Abelson was a member of the faculty in the Department of Chemistry at the University of California, San Diego. Dr. Abelson received a Ph.D. in biophysics from The Johns Hopkins University and was a postdoctoral fellow at the Laboratory of Molecular Biology in Cambridge, England. Dr. Abelson also serves as a director of The Agouron Institute. Patricia M. Cloherty joined the Board in December 1988. Since 1970, Ms. Cloherty has been associated with Patricof & Co. Ventures, Inc. (formerly Alan Patricof Associates, Inc.), a New York venture capital firm ("Patricof"), and has been a general partner of its funds since 1973. From 1993 until 1997 she was president of Patricof. From 1997 to the present, Ms. Cloherty has been executive co-chairman as well as a general partner of Patricof. Ms. Cloherty also served as deputy administrator for the U.S. Small Business Administration in 1977 and 1978. Ms. Cloherty also serves on the board of directors of several private companies. A. E. Cohen joined the Board in March 1992. Mr. Cohen is an independent management consultant. From 1957 until his retirement in January 1992, Mr. Cohen held various positions at Merck & Co., Inc., including senior vice president and president of the Merck Sharp & Dohme International Division. Currently, Mr. Cohen is the chairman of the board of Neurobiological Technologies, Inc. and Vasomedical, Inc., and is a member of the board of directors of Akzo Nobel N.v., Teva Pharmaceutical Industries Ltd., Smith Barney (Mutual Funds), and Pharmaceutical Product Development, Inc., all of which are public companies. Mr. Cohen also serves as trustee to The Population Council and is a consultant to Chugai Pharmaceutical Co. Ltd., Tokyo ("Chugai"), and serves as chairman of the board of Chugai's U.S. subsidiary companies. Mr. Cohen also is a member of the board of directors of Lung Check, Inc. Michael E. Herman joined the Board in October 1992. Mr. Herman is a private investor, as well as president and chief operating officer of the Kansas City Royals Baseball Team. From October 1974 until his retirement in 1990, Mr. Herman held various positions at Marion Laboratories, Inc. (now Hoechst Marion Roussel), including executive vice president and chief financial officer. Currently, Mr. Herman serves as chairman of the finance committee of the Ewing Marion Kauffman Foundation, a private foundation located in Kansas City where, from 1985 through 1990, he was the president and chief operating officer. Mr. Herman is also a member of the board of directors of Cerner Corporation, a public company, and serves on the board of directors of several private companies. Irving S. Johnson joined the Board in May 1989. Dr. Johnson is an independent consultant in biomedical research working with numerous private companies. From 1953 until his retirement in November 1988, Dr. Johnson held various positions at Eli Lilly and Company, including vice president of research from 1973 until 1988. Dr. Johnson also served on several committees of the National Academy of Sciences, the Office of Technology Assessment and the National Institutes of Health. Currently, he is a member of the board of directors of Allelix Biopharmaceuticals Inc. and Ligand Pharmaceuticals Incorporated, and is on the scientific advisory board of ELAN Corporation, all of which are public companies. Dr. Johnson received a Ph.D. in developmental biology from the University of Kansas. Antonie T. Knoppers joined the Board in July 1991. Dr. Knoppers is an independent management consultant. From 1952 until his retirement in 1975, Dr. Knoppers held various positions at Merck & Co., Inc., including vice chairman of the board and president and chief operating officer. Dr. Knoppers is a member of the board of directors of Centocor, Inc., a public biotechnology company. In addition, he is a former chairman of the U.S. Council of the International Chamber of Commerce and a member of the advisory board of PaineWebber Development Corporation, an affiliate of PaineWebber Incorporated. Dr. Knoppers received a M.D. from the University of Amsterdam and a Ph.D. from the University of Leiden, The Netherlands. Melvin I. Simon, a founder of the Company, has served as a director since its inception. Dr. Simon, a molecular geneticist, is a member of the National Academy of Sciences. Currently, Dr. Simon is chairman of the Division of Biology at the California Institute of Technology where he has been a member of the faculty since 1982. Previously, Dr. Simon was a member of the faculty in the Department of Biology at the University of California, San Diego. Dr. Simon received a Ph.D. in biochemistry from Brandeis University. Dr. Simon also serves as a director of The Agouron Institute. Committees and Meetings of the Board The Company has a Directors Compensation Committee and an Audit Committee. The Company does not have a Nominating Committee. During the fiscal year ended June 30, 1998, the Board held six meetings. During the fiscal year ended June 30, 1998, members of the Audit Committee consisted of Ms. Cloherty, Chairperson, Dr. Knoppers and Dr. Simon. The Audit Committee oversees the Company's accounting and financial reporting policies, makes recommendations to the Board regarding the appointment of independent accountants, reviews with the independent accountants the accounting principles and practices followed by the Company and the adequacy thereof, approves the Company's annual audit and financial results and any material change in accounting principles, policies and procedures and makes recommendations to the Board with regard to any of the preceding. The Audit Committee held two meetings in the fiscal year ended June 30, 1998. During the fiscal year ended June 30, 1998, members of the Directors Compensation Committee consisted of Mr.EHerman, Chairman, Dr. Abelson, and Mr. Cohen. The Directors Compensation Committee recommends to the Board the Company's overall compensation and the individual compensation elements for the Company's executive officers and directors. The Directors Compensation Committee does not approve grants of stock options to executive officers and directors under the Company's stock option plans. The Directors Compensation Committee held two meetings in the fiscal year ended June 30, 1998. During fiscal 1998, the full Board was responsible for approving grants of options to executive officers and directors. No incumbent director attended fewer than 75% of the aggregate of the Board and Committee meetings in which such director was entitled to participate. PROPOSAL 2 - THE DIVISIONAL STOCK PROPOSAL General The shareholders of the Company are being asked to consider and approve the Divisional Stock Proposal which, if approved, will amend and restate the Company's Articles of Incorporation to increase the number of shares of authorized Common Stock to 150,000,000 shares, of which 75,000,000 shares would initially be designated as Agouron Pharmaceuticals Stock and 25,000,000 shares would initially be designated as Oncology Division Common Stock, to provide authorization to the Board to designate and issue any undesignated shares in one or more additional series of Common Stock and to determine the number of shares, rights, preferences, privileges and restrictions of any such series, to increase or decrease the number of shares of any existing series including the Agouron Pharmaceuticals Stock and the Oncology Division Stock, and to convert each share of the Company's existing Common Stock into one share of Agouron Pharmaceuticals Stock and ___ share of Oncology Division Stock. The reclassification and conversion of the Existing Common Stock into Agouron Pharmaceuticals Stock and Oncology Division Stock (the "Reclassification") are intended for United States federal income tax purposes to be tax free to both the Company and its shareholders except with respect to cash paid in lieu of fractional shares. See "--Certain Federal Income Tax Considerations." The ratio of ___ share of Oncology Division Stock for each share of Existing Common Stock was determined by the Board in consultation with PaineWebber, the Company's financial advisor in connection with the Divisional Stock Proposal, and is based upon the estimated relative market value of the Oncology Division, as determined by PaineWebber and the Board, and the desired initial trading range of the Oncology Division Stock. The market value of the Oncology Division was based on prevailing market conditions, financial and operating information of the Oncology Division, and the market prices of securities and certain financial and operating information of companies engaged in activities similar to those of the Oncology Division. IF THE DIVISIONAL STOCK PROPOSAL IS NOT APPROVED BY THE SHAREHOLDERS, THE ONCOLOGY DIVISION STOCK WILL NOT BE CREATED, AND THE EXISTING COMMON STOCK WILL NOT BE RECLASSIFIED AND CONVERTED INTO AGOURON PHARMACEUTICALS STOCK AND ONCOLOGY DIVISION STOCK. If the Divisional Stock Proposal is approved by the shareholders at the Annual Meeting, the Company anticipates that the Restated Articles (see Annex II) will be filed with the California Secretary of State shortly thereafter. However, the Board could choose to effect the Divisional Stock Proposal at any time thereafter, or not to effect the Divisional Stock Proposal depending on the circumstances at the time. The Restated Articles will become effective upon filing with the California Secretary of State (the "Effective Date"). Certificates formerly representing shares of Existing Common Stock that are held by shareholders will be deemed to represent an equal number of shares of Agouron Pharmaceuticals Stock. New certificates representing shares of Agouron Pharmaceuticals Stock will be issued in replacement of certificates formerly representing shares of Existing Common Stock as such certificates are received and canceled by the transfer agent. Shareholders should not mail in their stock certificates evidencing Existing Common Stock to either the Company or its transfer agent in connection with the Divisional Stock Proposal. Certificates representing Oncology Division Stock will be distributed as promptly as practicable thereafter. At any time prior to filing the Restated Articles with the California Secretary of State, including after adoption by the shareholders of the Company, the Board may abandon the Divisional Stock Proposal, or any part thereof, without further action by the shareholders. Fractional shares of Oncology Division Stock will not be issued in connection with the Reclassification. If more than one share of Existing Common Stock is held by the same holder of record, the Company will aggregate the number of shares of Oncology Division Stock issuable to such holder upon such distribution (including any fractions of shares). If the number of shares of Oncology Division Stock calculated to be issued to any holder of record of Existing Common Stock includes a fraction of a whole share, the Company will pay to such record holder the cash value of such fractional share within 60 trading days of the Effective Date, based upon the average of the daily average of high and low prices of the Oncology Division Stock on the Nasdaq National Market for each of the first ten trading days following the Effective Date. Shareholders who own their stock beneficially through brokers or other nominees listed as holders of record will have their fractional shares handled according to the practices of such broker or nominee, which may result in such shareholders receiving a price that is higher or lower than the price paid by the Company to holders of record. If the necessary trading of Oncology Division Stock does not occur within 20 trading days after the Effective Date, the Board will determine the cash value of a share of Oncology Division Stock and the amount to be paid in lieu of fractional shares. The authorized but unissued shares of the two new series of the Company's Common Stock and the undesignated shares of Common Stock will be available for issuance from time to time by the Company at the discretion of the Board for any proper corporate purpose, which could include raising capital, payment of stock dividends, providing compensation or benefits to employees or acquiring companies or businesses. Such Common Stock would provide the Board with a means to complete acquisitions or to further divide the Company into additional divisions, through the creation of separate series of Common Stock. In addition, the Board could use undesignated shares of Common Stock to increase or decrease the number of shares of an existing series of Common Stock, including Agouron Pharmaceuticals Stock and Oncology Division Stock, but not below the number of outstanding shares of that series. The issuance of such additional shares or series would not be subject to approval by the shareholders of the Company unless deemed advisable by the Board or required by applicable law, regulation or the listing requirements of the stock market or stock exchange upon which the Company's shares are listed. Background Of And Reasons For The Divisional Stock Proposal The Divisional Stock Proposal has been approved by the Board with the goal of creating flexibility for the future growth of the Company, and to advance the Company's financial and strategic objectives, all in an effort to enhance the overall return to the holders of Existing Common Stock. If Agouron shareholders approve the Divisional Stock Proposal, the resulting amendments to the Company's Articles of Incorporation will create two series of Common Stock of the Company, namely the Agouron Pharmaceuticals Stock and the Oncology Division Stock, each having the rights and privileges described elsewhere in this Proxy Statement. The Divisional Stock Proposal will also authorize the Board to issue in one or more additional or existing series of Common Stock with each new series having the rights, preferences, privileges and restrictions determined by the Board before the issuances of any shares of such series. See "- Description of Capital Stock" and Annex II. The Oncology Division Stock is intended to reflect the value and track the performance of the Oncology Division. Through the Oncology Division, the Company seeks to create a focused, integrated oncology business which will develop and commercialize novel products for the diagnosis, treatment and prevention of cancer. The Oncology Division will, on its own and in combination with partners and with Agouron Pharmaceuticals (when appropriate) develop, manufacture and market those oncology related products. The Board reviewed in detail the financial performance of the Company since the FDA approved the sale of VIRACEPT in March 1997. Since that date, revenues from VIRACEPT sales have grown steadily, allowing the Company to continue its vigorous investment in research and development ("R&D") for new products. Such R&D expenditures in non-VIRACEPT related programs, however, have impacted and are expected to continue to impact the overall financial performance of the Company and overall shareholder return. Approximately 25% of the Company's total anticipated R&D expenditures during the Company's 1999 fiscal year are expected to be incurred in oncology related programs. Currently the Company has four clinical development programs and four preclinical research and development programs in the oncology field. The Board believes that tracking the oncology operations separately from the rest of the Company will help the Company realize what it believes to be the unappreciated value of the Company's R&D pipeline of products for oncology while at the same time reducing the impact of those R&D expenditures on the financial results of the Company's VIRACEPT-driven non-oncology business. In addition to its review of the financial performance of the Company, the Board considered the Company's present organizational structure, which does not completely recognize and resolve the inherent conflict between a profitable business and a business division still in the development stage. For these and other reasons, management engaged PaineWebber to discuss with the Company various alternatives designed to achieve greater overall value in these respective businesses. PaineWebber advised that the separation of the development stage oncology division from the VIRACEPT driven non-oncology business, and the creation of two classes or series of Common Stock to track those divisions, should result in the market separately evaluating the performances of Agouron Pharmaceuticals and the Oncology Division. At meetings held on February 12, 1998 and August 6, 1998, the Board considered a variety of structural proposals to increase the overall value of the Existing Common Stock to its shareholders. The Board evaluated alternatives available to the Company in view of its strategic objectives, capital requirements, past financial results and other factors. They had extensive discussions with senior financial and legal officers of the Company as well as representatives of PaineWebber. Among the alternatives which the Board considered were (i) the preservation of the Company's current equity and operating structure; (ii) the separation of various of the Company's businesses through a distribution (for example, in a spin-off) of certain programs to the Company's shareholders or the creation of special purpose financing entities; (iii) the license to third parties of certain of the Company's technology; and (iv) the creating of two classes or series of Common Stock to reflect separately the results of the Company's profitable anti-viral related business and its development stage oncology division. The Board determined that the license to third parties of the oncology assets or other technology would not realize the full value of those development stage programs. The Board also determined that a spin-off to shareholders of a separate company owning the Company's other technologies could create significant tax, credit and control issues. Following deliberation over and consideration of the advantages and disadvantages of the various alternatives, the Board concluded that the Divisional Stock Proposal was the best alternative for the Company and its shareholders. The Board's adoption of the Divisional Stock Proposal is part of its ongoing effort to increase the long-term value of the Company. In reaching its conclusion, the Board identified the following as the advantages of the Divisional Stock Proposal: o The creation of two series of Common Stock intended to reflect separately the performance of Agouron Pharmaceuticals and the Oncology Division offers the opportunity to increase shareholder value by more specifically tracking the financial performance of each Division. Separate equity securities could enable investors to gain a better understanding of the businesses of Agouron Pharmaceuticals and the Oncology Division and allow shareholders to invest in either or both securities depending on their investment objectives. The separate reporting of each Division's results would create a framework for increased and more focused equity research coverage by the investment community and would separate the Oncology Division operating results from the results of operations of Agouron Pharmaceuticals. o The Divisional Stock Proposal will provide financial and strategic flexibility for Agouron Pharmaceuticals and the Oncology Division to raise capital and to engage in acquisitions, strategic investments, and other transactions affecting either Agouron Pharmaceuticals or the Oncology Division as a result of the availability of two different equity securities for issuance. In particular, development, clinical testing and commercialization of the Oncology Division's products will require substantial funds. A separate equity security for the Oncology Division is expected to allow the Company to raise capital through offerings of Oncology Division Stock without diluting the interests of holders of Agouron Pharmaceuticals Stock. o Creating separate series of Common Stock, each of which is designed to reflect the operating results of a distinct division, increases the Company's ability to focus the management of the respective Divisions on maximizing the returns from such businesses and provides the opportunity to structure incentives for employees that are tied directly to the business results and share price performance of that Division. o The Divisional Stock Proposal will retain for the Company the advantages of doing business as a single company. Specifically, the Company will retain ownership of all of its technologies, which the Board considers to be a significant long-term strategic benefit given what it believes to be the potential of the products under development. Further, as part of one company, each Division will be in a position to benefit from cost savings and synergies with the other compared to the costs each Division would incur if it operated separately. These include management and administrative synergys, a lower overall borrowing cost as a result of the credit rating of the combined Company and potential federal, state and local tax benefits that may be greater for the combined Company than for the two Divisions operating separately. o The ability of the Board to create one or more additional series of Common Stock or to increase or decrease the number of shares in existing series without the need to obtain shareholder approval at the time of creation of each additional series would provide the Board with a means to act quickly and definitively in future acquisitions or to further divide the Common Stock of the Company into additional series. o Implementation of the Divisional Stock Proposal is intended to be tax free for United States federal income tax purposes to the Company and its shareholders except with respect to cash paid in lieu of fractional shares. See "--Certain Federal Income Tax Considerations." o By permitting the Board to redeem the Oncology Division Stock under certain conditions, the Board retains the flexibility to consider possible future restructuring options. The Board also considered the following potential disadvantages of the Divisional Stock Proposal: o The Divisional Stock Proposal requires a complex capital structure which may not be well-understood by investors and thus could inhibit the efficient valuation of either or both series of Common Stock. o There is limited experience with the use of divisional stock in companies having a business unit with an established history of earnings and another business unit in the development stage. o There are potential diverging or conflicting interests of the two Divisions and issues that could arise in resolving any conflicts. See "--Management and Allocation Policies" and "Risk Factors--Potential Divergence of Interests; No Specific Procedures for Resolution." o Investors in the Oncology Division Stock or Agouron Pharmaceuticals Stock will be exposed to the risks of the Company's consolidated businesses and liabilities such as tort or product liability claims and shareholder lawsuits because both Divisions remain legally a part of the Company. See "Risk Factors--Risks Related to the Divisional Stock Proposal -- Shareholders of One Company; Financial Effects of One Division Could Adversely Affect the Other Division" and "--Management and Allocation Policies." o Divisional Stock will create a possible inability to use the pooling method of accounting in connection with future acquisitions using Agouron Pharmaceuticals Stock or Oncology Division Stock, and the possible inability or increased difficulty of receiving a ruling from the Internal Revenue Service in connection with a proposed acquisition to be effected using either Oncology Division Stock or Agouron Pharmaceuticals Stock. o The costs associated with implementing the Divisional Stock Proposal and the ongoing cost of operating separate Divisions will exceed the costs associated with operating the Company as it currently exists. The Board determined that on balance the potential advantages of the Divisional Stock Proposal outweigh the potential disadvantages and concluded that the Divisional Stock Proposal is in the best interests of the Company and its shareholders. Vote Required The Divisional Stock Proposal requires the affirmative vote of the holders of a majority of the outstanding shares of Existing Common Stock. Recommendation Of The Board THE BOARD HAS CAREFULLY CONSIDERED THE DIVISIONAL STOCK PROPOSAL AND BELIEVES THAT ITS APPROVAL BY THE SHAREHOLDERS IS IN THE BEST INTERESTS OF THE COMPANY AND THE SHAREHOLDERS. ACCORDINGLY, THE BOARD UNANIMOUSLY RECOMMENDS THAT THE SHAREHOLDERS APPROVE THE DIVISIONAL STOCK PROPOSAL. Management and Allocation Policies Because Agouron Pharmaceuticals and the Oncology Division will each be a part of a single company, the Board and management have carefully considered a number of issues with respect to intracompany business transactions, the financing of Agouron Pharmaceuticals and the Oncology Division, and the allocation of debt, corporate overhead, interest, taxes and other charges between the two Divisions. The Board and management have established policies to accomplish the fundamental objective of the Divisional Stock Proposal, which is to separate the business and operations of the Oncology Division from those of Agouron Pharmaceuticals, to operate the Oncology Division on a stand-alone basis, and to allocate costs and charges between the two Divisions on an objective basis. Except as otherwise provided in the policies, the Board may further modify or rescind the policies in its sole discretion without approval of the shareholders, subject only to the Board's fiduciary duty to the Company's shareholders. The Board has no present plans to change any of such policies. The Board may also adopt additional policies depending upon the circumstances. Any determination of the Board to modify or rescind the policies, or to adopt additional policies, including any such decision that would have disparate impacts upon holders of the Common Stock representing the two Divisions, would be governed by the principles of California law discussed under "Risk Factors Risks Related to the Divisional Stock Proposal -- Management and Allocation Policies Subject to Change." However, the Board will make any such decision in accordance with its good faith business judgment of the best interests of the Company. In addition, generally accepted accounting principles require that any change in policy be preferable (in accordance with such principles) to the previous policy. Financial Statements, Allocation Matters. The Company will prepare financial statements in accordance with generally accepted accounting principles for Agouron Pharmaceuticals and the Oncology Division, and these financial statements, taken together, will comprise all of the accounts included in the corresponding consolidated financial statements of the Company. The financial statements of each of Agouron Pharmaceuticals and the Oncology Division will reflect the financial condition, results of operations and cash flows of the businesses included therein. The financial statements of Agouron Pharmaceuticals will also include any accounts or assets of the Company not specifically allocated to the Oncology Division. Division financial statements may include allocated portions of the Company's debt, interest, corporate overhead and taxes. Notwithstanding such allocations, for the purpose of preparing each Division's financial statements, holders of Agouron Pharmaceuticals Stock and Oncology Division Stock will continue to be subject to all of the risks associated with an investment in the Company and all of its businesses, assets and liabilities. See Annex IV--"Agouron Pharmaceuticals -- Financial Statements," Annex V--"Oncology Division--Financial Statements" and "Risk Factors - Risks Related to the Divisional Stock Proposal -- Shareholders of One Company; Financial Effects on One Division Could Affect the Other." Debt Financing. Each Division's debt will increase or decrease by the amount of any net cash generated by, or required to fund, the Division's operating activities, dividend payments, share repurchases and other financing activities. Interest will be charged to each Division based on the amount of such Division's debt. Changes in the cost of the Company's debt will be reflected in adjustments in the weighted average interest cost of such debt. Funding for the Oncology Division. The development of the Oncology Division's products will require substantial funds. See "Risk Factors -- Risks Related to Agouron Pharmaceuticals and the Oncology Division Additional Financing Requirements and Access to Capital." Agouron Pharmaceuticals intends to fund the operations of the Oncology Division as necessary. Agouron Pharmaceuticals may raise funds for the Oncology Division through a public offering of shares of the Oncology Division Stock as market conditions permit. The Board has approved the allocation of up to $25 million in cash from Agouron Pharmaceuticals to the Oncology Division (the "Equity Line"). Amounts drawn on the Equity Line will be exchanged automatically for Oncology Division Designated Shares at such time as the maximum amount of the Equity Line is reached or as the Board otherwise determines. The Equity Line will be reviewed annually for extension or termination on or before June 30 of each calendar year. If terminated, all amounts drawn under the Equity Line as of such termination date will be repaid in cash or, at the option of the Board, will be exchanged for Oncology Division Designated Shares in the manner described below. Upon exchange for Oncology Division Designated Shares, the Equity Line will be re-established. The number of Oncology Division Designated Shares to be exchanged for amounts drawn under the Equity Line will be determined by dividing the amount of the accumulated Equity Line advances on the date of exchange by the Fair Market Value of the Oncology Division Common Stock. The Fair Market Value of the Oncology Division Stock will equal the average of the daily average of high and low prices of the Oncology Division Stock of the 20 trading days commencing on the 30th trading day immediately prior to the exchange date. Any amounts advanced under the Equity Line (or the general inter-division advances) may be repaid in total or in part at any time prior to their conversion to the Equity Line or their exchange for Oncology Division Designated Shares. Revenue Allocation. Other than revenues received in connection with transactions subject to the policy regarding Interdivision Transactions, revenues from the sale of a Division's products and services shall be credited to that Division. Expense Allocation. Other than expenses incurred in connection with transactions subject to the policy regarding Interdivision Transactions, all direct expenses shall be charged to the Division for the benefit of which they are incurred. Indirect costs will be allocated to each Division in a reasonable and consistent manner based on utilization by the Division of the services to which such costs relate. Corporate Overhead. A portion of the Company's shared general and administrative expenses (such as executive management, human resources, legal, accounting and auditing, tax, treasury, strategic planning, information systems support, and environmental services) will be allocated to Agouron Pharmaceuticals and the Oncology Division based upon specific identification of such services used by such Division. Where determinations based on use alone are impracticable, other methods and criteria will be used that management believes are equitable and provide a reasonable estimate of the cost attributable to the Divisions. Tax Allocations. Income taxes shall be allocated to each Division based upon the financial statement income, taxable income, credits and other amounts properly allocable to such Division under generally accepted accounting principles as if each Division were a separate taxpayer; provided, however, that as of the end of any fiscal quarter of the Company, any tax benefit attributable to any Division that cannot be utilized by such Division to offset or reduce its current or deferred income tax expense may be allocated to the Divisions in proportion to their taxable income without any compensating payment or allocation. The federal income taxes of the Company and the subsidiaries which own assets allocated between the Divisions are determined on a consolidated basis. Consolidated federal income tax provisions and related tax payments or refunds will be allocated between the Divisions based principally on the taxable income and tax credits directly attributable to each Division. Such allocations will reflect each Division's contribution (positive or negative) to the Company's consolidated federal taxable income and the consolidated federal tax liability and tax credit position. Had the Divisions filed separate tax returns, the provision for income taxes and net income for each Division (prior to tax allocations from other divisions) would not have differed from the amounts reported in the Divisions' statements of income for the years ended June 30, 1998, 1997 and 1996. However, the amounts of current and deferred taxes and taxes payable or refundable allocated to each Division in these historical financial statements may differ from those that would have been allocated to each Division had they filed separate income tax returns. Depending on the tax laws of the respective jurisdictions, state and local income taxes are calculated on either a consolidated or combined basis or on a separate corporation basis. State income tax provisions and related tax payments or refunds determined on a consolidated or combined basis will be allocated between the Divisions based on their respective contributions to such consolidated or combined state taxable incomes. State and local income tax provisions and related tax payments which are determined on a separate corporation basis will be allocated between the Divisions in a manner designed to reflect the respective contributions of the Divisions to the corporation's separate state or local taxable income. Acquisition of Programs, Products or Assets. Upon the acquisition by the Company from a third party of any programs, products or assets (whether by acquisition of assets or stock, merger, consolidation or otherwise), the aggregate cost of the acquisition and the programs, products or assets acquired shall be allocated among the Divisions of the Company. In the case of material acquisitions, such allocation shall be made in a manner determined by the Board to be fair and reasonable to each Division and to holders of the Common Stock representing each Division, taking into account such matters as the Board and its financial advisors, if any, deem relevant. Any such determination by the Board will be final and binding on all holders of Common Stock. Disposition of Programs, Products or Assets. Upon any sale, transfer, assignment or other disposition by the Company of any product, program or asset not consisting of all or substantially all of the assets of a division, all proceeds from such disposition shall be allocated to the Division to which the program, product or asset had been allocated. If the program, product or asset was allocated to more than one Division, the proceeds of the disposition shall be allocated among such Divisions based on their respective interests in such program, product or asset. Such allocation shall be made in a manner determined by the Board to be fair and reasonable to such Division and to holders of the Common Stock representing such Division, taking into account such matters as the Board and its financial advisors, if any, deem relevant. Any such determination by the Board will be final and binding on the holders of Common Stock. Interdivision Asset Transfers. The Board may at any time and from time to time reallocate any program, product or other asset from one Division to any other Division. All such reallocations shall be done at fair market value as determined by the Board. Such determination shall take into account, in the case of a program under development, the commercial potential and the phase of the clinical development of such program, the expenses associated with realizing any income from such program (and the likelihood and timing of any such realization) and other matters that the Board and its financial advisors, if any, deem relevant. The consideration for such reallocation may be paid by one Division to another in cash or other consideration with a value equal to the fair market value of the assets being reallocated or, in the case of a reallocation of assets from Agouron Pharmaceuticals to the Oncology Division, the Board may elect to account for such reallocation as an increase in the Oncology Division Designated Shares. Notwithstanding the foregoing, no Key Oncology Division Program, as defined below, will be transferred out of the Oncology Division. A "Key Oncology Division Program" is any of the following: (i) AG3340; or (ii) any additional oncology program or product being developed from time to time in the Oncology Division which (a) constituted 20% or more of the research and development budget of the Oncology Division in any one of the three most recently completed fiscal years, or (b) has had a cumulative investment of $8 million or more in research and development expenses by the Oncology Division. Commercialization of Oncology Products. The Board has determined certain allocations of rights concerning development-stage oncology products for which development and registration will be completed by the Oncology Division. Agouron Pharmaceuticals shall have the world-wide right to commercialize oncology indications of AG3340, AG3433 (or a substituted product), AG2034 and AG2037 if successfully developed and registered by the Oncology Division. The Oncology Division shall have the exclusive, worldwide, royalty-free right to develop and commercialize for oncology indications any other products discovered, acquired and/or developed by the Oncology Division or Agouron Pharmaceuticals. Agouron Pharmaceuticals shall have the exclusive, worldwide, royalty-free right to develop and commercialize for non-oncology indications any product discovered, acquired and/or developed by the Oncology Division. The Oncology Division may elect to co-promote AG3340, AG3433 (or a substituted product), AG2034 and/or AG2037 in the United States and Canada through a specialty oncology sales and marketing organization by agreeing to provide up to fifty percent of the total sales and marketing effort with respect to the applicable product in the United States and Canada. If the Oncology Division elects to co-promote a product, it shall be entitled to share in that percentage of profits from the sale of such product in the United States and Canada which corresponds to the percentage of the total sales and marketing efforts for such product contributed by the Oncology Division. Profits in the United States and Canada shall be computed by deducting from net sales of a product amounts representing the applicable cost of goods sold, and other allowable expenses. Notwithstanding the Oncology Division's election to co-promote a product and to share in profits from such product and in order to provide the Oncology Division with an adequate minimum return for its development and registration efforts for a product, the Oncology Division shall be entitled to receive the greater of: (i) the Oncology Division's share of profits from the net sales of such product in the United States and Canada plus royalties based upon Agouron Pharmaceuticals' net sales of such product outside of the United States and Canada according to the schedule below or (ii) royalties based upon Agouron Pharmaceuticals' worldwide net sales of such product according to the schedule below: AG3340: 16% of first $150 million of net sales; 18% of net sales above $150 million AG3433 (or a substituted product): 18% of first $150 million of net sales; 0% of net sales above $150 million AG2034: 17% of first $150 million of net sales; 19% of net sales above $150 million AG2037: 18% of first $150 million of net sales; 20% of net sales above $150 million Agouron Pharmaceuticals and the Oncology Division shall also share equitably in any license fees and/or royalties received from any third party licensees of AG3340, AG3433 (or a substituted product), AG2034 or AG2037. If Agouron Pharmaceuticals is obligated to pay royalties or other payments to a third party to settle any infringement claim or action arising out of the development and commercialization of a product, then, fifty percent of the royalties and other payments paid by Agouron Pharmaceuticals to such third parties to settle such infringement claim or action shall be creditable against royalty or other payment obligations payable to the Oncology Division on such product; provided, however, that in no case shall the royalties and other payments due to the Oncology Division in a quarterly period be reduced by more than fifty percent of the amounts otherwise due in such quarterly period. Any remaining creditable amount may be used in subsequent quarterly periods to offset royalties and other payments due the Oncology Division. Additionally, the royalty rates that would otherwise apply for a quarterly period in a country shall be reduced by fifty percent in such country if no valid Agouron patent claims exist, or if the parties mutually agree that it is not commercially reasonable to pursue third-party infringers; royalty rates that would otherwise apply for a quarterly period may also be adjusted in certain other circumstances as determined by the Board. Other Interdivision Transactions. This policy shall cover Interdivision transactions other than asset transfers, which shall be subject to the policy regarding Interdivision Asset Transfers. From time to time, a Division may engage in transactions directly with the other Divisions or jointly with the other Divisions and one or more third parties. Such transactions may include agreements by one Division to provide products and services for use by the other Division and joint ventures or other collaborative arrangements involving more than one Division to develop new products and services jointly and with third parties. Such transactions shall be subject to the following conditions: (i) Research and/or development performed by one Division for the benefit of another Division will be charged to the Division for which work is performed on a cost basis. Such costs shall be allocated in the manner described above under "Expense Allocation", and the Division performing the research will not recognize revenue as a result of performing such research. (ii) Corporate and general and administrative services will be provided by each Division to the other Division(s) requesting such services on a cost basis and such costs shall be allocated in the manner described above under "Expense Allocation." (iii)Other than research, corporate and general and administrative services, Interdivision transactions shall be on terms and conditions that would be obtainable in transactions negotiated at arm's length with unaffiliated third parties. (iv) Any Interdivision transaction (a) to be performed on terms and conditions that deviate from the policies set forth in subparagraphs (i), (ii) or (iii) above and (b) that is material to the other participating Divisions will require approval by the Board, which approval shall include a determination by the Board that the transaction is fair and reasonable to such participating Division and to holders of the Common Stock representing such Division. (v) If a Division (the "Purchasing Division") requires any product or service from which another Division (the "Selling Division") derives revenues from sales to third parties (a "Commercial Product or Service"), the Purchasing Division may solicit from the Selling Division a bid to provide such Commercial Product or Service in addition to any bids solicited by the Purchasing Division from third parties. Unless the Board determines that the bid of the Selling Division is fair and reasonable to the Selling and Purchasing Divisions and to holders of Common Stock representing the Selling and Purchasing Divisions and that the Purchasing Division must accept the Selling Division's bid, the Purchasing Division may accept any bid deemed to offer the most favorable terms and conditions for providing the Commercial Product or Service sought by the Purchasing Division. (vi) Loans may be made from time to time between the Divisions. Any such loan of $1 million or less will mature within 18 months and interest will accrue at the best borrowing rate available to the Company for a loan of like type and duration. Amounts borrowed in excess of $1 million will require approval of the Board, which approval shall include a determination by the Board that the material terms of such loan, including the interest rate and maturity date, are fair and reasonable to each participating Division and to holders of the Common Stock representing each such Division. Any such loans made by Agouron Pharmaceuticals to the Oncology Division may be in addition to or in lieu of amounts available under the Equity Line. Access to Technology and Know-How Each Division will have free access to all technology and know-how of the Company that may be useful in such Division's business, subject to any obligations or limitations applicable to the Company. Disposition of Oncology Division Designated Shares. The Oncology Division Designated Shares may be (a) issued upon the exercise or conversion of outstanding stock options, warrants or convertible securities allocated to Agouron Pharmaceuticals, (b) subject to the restrictions set forth below under "Issuance and Sale of Additional Shares of Common Stock," sold for any valid business purpose or (c) distributed as a dividend to the holders of shares of the Agouron Pharmaceuticals Stock, all as determined from time to time by the Board. Any Oncology Division Designated Shares on June 30 of each year will be distributed to the Agouron Pharmaceuticals shareholders of record on such date on or before the immediately following August 15. However, in the event that the number of Oncology Division Designated Shares exceeds more that 15% of the total outstanding shares of Oncology Division Common Stock, such Oncology Division Designated Shares will be distributed as soon as practicable to the holders of the Agouron Pharmaceuticals Stock. See "--Oncology Division Designated Shares." Issuance and Sale of Additional Shares of Common Stock. When additional shares of Common Stock are issued and sold by the Company, the Company will identify (i) the number of such shares issued and sold for the account of the Division to which they relate, the proceeds of which will be allocated to and reflected in the financial statements of such Division and (ii) the number of such shares issued and sold that shall reduce the number of Oncology Division Designated Shares of such Division. Notwithstanding the foregoing, the Company will not sell any Oncology Division Designated Shares (except upon exercise or conversion of options, warrants or convertible securities issued by Agouron Pharmaceuticals that were adjusted as a result of a dividend of the Oncology Division Stock paid to holders of the Agouron Pharmaceuticals Stock) unless (i) the Board determines that the Oncology Division has cash sufficient to fund its operations for at least the next 12 months or (ii) shares of the Oncology Division Stock are concurrently being sold for the account of the Oncology Division in an amount that will produce proceeds sufficient to fund such Division's cash needs for the next 12 months. Open Market Purchases of Shares of Common Stock. Agouron Pharmaceuticals may make open market purchases of any series of its Common Stock in accordance with applicable securities law requirements; provided, however, that in no event shall any such purchases be made if as an immediate result thereof the number of Oncology Division Designated Shares will exceed 60% of the number of shares of the Oncology Division outstanding plus such number of Oncology Division Designated Shares. Notwithstanding the foregoing, within 90 days of any open market purchase of the Common Stock representing the Oncology Division, Agouron Pharmaceuticals may not exercise the right provided under the Restated Articles to exchange shares representing such Division for cash and/or shares of the Agouron Pharmaceuticals Stock. Capital Spending. It is anticipated that the Oncology Division will be in the development stage for at least several years and therefore will not have annual cash flows sufficient to finance its normal annual capital spending program. Any decision by the Board to fund capital expenditures or capital investments in excess of the cash flows of the respective Divisions would be made by the Board in the exercise of its good faith business judgment based on all relevant circumstances, including the financing and investing needs and objectives of each Division, the availability and cost of alternative financing, the existence of alternative investment opportunities for Agouron Pharmaceuticals and the Oncology Division, and the Board's analysis of the desirability of making such investment or acquisition. Fiduciary and Management Responsibilities. Because Agouron Pharmaceuticals and the Oncology Division will continue to be part of a single company, the Board and management will have the same fiduciary duties to holders of the Agouron Pharmaceuticals Stock and the Oncology Division Stock that they currently have to the holders of the Existing Common Stock. Under California law, a director or a member of management will be deemed to have satisfied his or her fiduciary duties to the Company and its shareholders if he or she acts in a manner which he or she believes in good faith to be in the best interests of the Company and with the care, including reasonable inquiry, that an ordinarily prudent person in a like position would exercise under similar circumstances. The Board and the Chief Executive Officer of the Company, in establishing policies with regard to intracompany matters such as allocations of assets, liabilities, debt, corporate overhead, taxes, interest and other matters, will consider various factors and information which could benefit or cause detriment to the shareholders of the respective Divisions and will make determinations in the best interests of the Company. Because the Divisional Stock Proposal will result in no change in the corporate structure of the Company, Peter Johnson, the Company's President and Chief Executive Officer, will have the same duties and responsibilities for the management of the Company's assets and businesses which comprise Agouron Pharmaceuticals and the Oncology Division following the Distribution as he did prior thereto. The Company's senior staff officers will continue to be responsible for the same designated functions in both Agouron Pharmaceuticals and the Oncology Division as they were prior to the Effective Date. The costs attributable to their functions will be allocated as discussed above under "-- Corporate Overhead." While it is the intent of directors to remain impartial notwithstanding their equity ownership interests in Agouron Pharmaceuticals and the Oncology Division, because of the anticipated differences in trading values between the two securities, the actual value of the shares of Agouron Pharmaceuticals Stock and Oncology Division Stock held by directors initially will vary significantly. See "Risk Factors - Risks Related to the Divisional Stock Proposal--Fiduciary Duties of the Board; No Definitive Precedent Under California Law." Board Review of Corporate Opportunities and Other Matters. The Board will also review any matter which involves the allocation of a corporate opportunity of the Company to either Agouron Pharmaceuticals or the Oncology Division. In accordance with California law, the Board will make its determination with regard to the allocation of any such opportunity in accordance with their good faith business judgment of the best interests of the Company. Among the factors that the Board may consider in making such allocation is whether a particular corporate opportunity is principally related to the business of Agouron Pharmaceuticals or the Oncology Division, whether one Division, because of its managerial or operational expertise, would be better positioned to undertake the corporate opportunity, existing contractual agreements and restrictions, and other matters. The Board will also review allocations between the Divisions of significant tax benefits or charges, the write-off of significant assets, the allocation of significant liabilities, and any actions which would significantly affect the Divisions' access to the Company's credit. Competition Between Divisions. Agouron Pharmaceuticals and the Oncology Division will not compete in each other's principal business. It is currently contemplated that certain products developed by the Oncology Division will be marketed by Agouron Pharmaceuticals and co-marketed by the Oncology Division. The Oncology Division will receive a royalty on the net sales of such product in certain countries and profits from the sale of such products in the U.S. and Canada will be shared in proportion to each Divisions co-promotion efforts. Other products, at the sole discretion of the Oncology Division, may be marketed exclusively by the Oncology Division or in collaboration with Agouron Pharmaceuticals or a non-affiliated third party collaborator. See "--Commercialization of Products" and "--Revenue Allocation." Alternatively, certain products may be marketed by collaborators of the Company. Description Of Capital Stock The following description is qualified in its entirety by reference to Annex II to this Proxy Statement, which contains the full text of the Restated Articles. General The Company's Articles currently provide that the Company is authorized to issue two classes of shares, designated common and preferred, respectively. 75,000,000 shares of Common Stock are authorized for issuance, and 2,000,000 shares of Preferred Stock are currently authorized for issuance, of which 2,000 shares have been designated Series B Participating Preferred Stock. As of July 28, 1998, 31,053,380 shares of Existing Common Stock were issued and outstanding and no shares of Preferred Stock were issued and outstanding. If the Divisional Stock Proposal is approved by the Company's shareholders, the authorized Common Stock will consist of 150,000,000 shares of which 75,000,000 will initially be designated Agouron Pharmaceuticals Stock, 25,000,000 will initially be designated Oncology Division Stock and 50,000,000 will initially be undesignated Common Stock. In the aggregate, the number of authorized shares of Common Stock would increase from 75,000,00 to 150,000,000. The Agouron Pharmaceuticals Stock and the Oncology Division Stock will have the voting powers, qualifications and rights described below. The number of shares, rights, preferences, privileges and restrictions of any future designated series of Common Stock will be determined by the Board at the time of their designation. The Board will also be able to increase or decrease (but not below the number of shares then outstanding) the number of shares of an existing series of Common Stock without the approval of shareholders. In addition to the amendments to the Articles in connection with the Divisional Stock Proposal, the Articles will be further amended to designate a new Series C Participating Preferred Stock as "Series C Participating Preferred Stock," no par value, consisting of 2,000 shares (the "Series C Participating Preferred Stock") and to amend certain provisions of the already designated Series B Participating Preferred Stock. The Series C Participating Preferred Stock will have substantially the same rights, preferences, privileges and restrictions as the Series B Participating Preferred Stock. These amendments relating to the Participating Preferred Stock will be necessary as a result of the Divisional Stock Proposal and its effect on the Company's Rights Agreement. See "Proposal 2 - Divisional Stock Proposal -- Restated Rights Agreement." Voting Rights Currently, holders of Existing Common Stock have one vote per share on all matters submitted to shareholders. In addition, holders of any series of Preferred Stock would have the right to vote as a separate voting group under the California Corporations Code in certain circumstances. The Restated Articles will provide that the holders of all series of Common Stock and any series of Preferred Stock outstanding at the time of such vote and entitled to vote together with the holders of Common Stock will vote together as a single voting group on all matters as to which common shareholders generally are entitled to vote other than a matter with respect to which the Common Stock or a series thereof or any series of Preferred Stock would be entitled to vote as a separate voting group. On all matters as to which all series of Common Stock will vote together as a single voting group: (i) each outstanding share of Agouron Pharmaceuticals Stock will have one vote, and (ii) each share of Oncology Division Stock will have ____ vote until June 30, 2000, and on July 1, 2000 and on each July 1 every two years thereafter, the number of votes to which each share of Oncology Division Stock is entitled will be adjusted to reflect the ratio of the weighted average market capitalization of the Oncology Division Stock and the Agouron Pharmaceuticals Stock, so that the resulting voting percentage of each Division will be proportionate to its market value. If no shares of Agouron Pharmaceuticals Stock are outstanding on such date, then all other series of the Company's Common Stock outstanding on such date will have a number of votes such that each share of the series of Common Stock that has the highest market capitalization on such date (the "Base Series") will have one vote, and each share of each other series of outstanding Common Stock will have the number of votes determined according to the immediately preceding sentence, treating, for such purposes the Base Series as the Agouron Pharmaceuticals Stock in such sentence. The voting rights of the Oncology Division Stock will be appropriately adjusted so as to avoid dilution in the aggregate voting rights of any series of Common Stock in the event the outstanding shares of any series are subdivided (by stock split, reclassification or otherwise) or combined (by reverse stock split, reclassification or otherwise), or in the event of the issuance of shares of any series as a dividend or a distribution to holders of shares of such series. If shares of only one series of Common Stock are outstanding, or if shares of any series of Common Stock are entitled to vote separately as a class, each share of that series would have one vote. If the Divisional Stock Proposal is approved by the shareholders and implemented thereafter, the Company will set forth the number of outstanding shares of each series of Common Stock in its Annual and Quarterly Reports filed pursuant to the Exchange Act, and will disclose in any proxy statement for a shareholder meeting the number of outstanding shares and per share voting rights of each such series of Common Stock. The relative voting rights of each series of Common Stock are adjusted from time to time as described above so that a holder's voting rights will more closely reflect the market value of such holder's equity investment in the Company. Adjustments in the relative voting rights of each series of Common Stock could (i) influence an investor interested in acquiring and maintaining a fixed percentage of the voting power of the Company to acquire such percentage of all series of Common Stock, and would (ii) limit the ability of investors in one series to acquire for the same consideration relatively more or less votes per share than investors in the other series. To the extent the relative market values of each series of Common Stock change in between any adjustments, an investor in one series of Common Stock may acquire relatively more or less voting power for the same consideration when compared with investors in another series of Common Stock. Following implementation of the Divisional Stock Proposal, under the current California Corporations Code, the holders of Agouron Pharmaceuticals Stock and Oncology Division Stock will vote together as a single class, except as to certain amendments to the Restated Articles that adversely affect a particular series in a different manner than other shares of the same class, certain mergers and statutory share exchanges, and certain statutory dissolutions, in which case a separate vote by the holders of the particular class affected would also be required. Accordingly, if a separate vote on a matter by the holders of either Agouron Pharmaceuticals Stock or Oncology Division Stock is not required under the California Corporations Code or by stock market rules, and if the Board does not require a separate vote, the series, if any, that is entitled to more than the number of votes required to approve such matter will be in a position to control the outcome of such vote even if the matter involves a divergence or conflict of the interests of the holders of the Agouron Pharmaceuticals Stock and the Oncology Division Stock. Under the California Corporations Code, approval of actions requiring a separate series vote will require the approval of the holders of a majority of the outstanding shares of each series, voting separately. Most other matters (other than the election of directors whereby directors who receive the highest number of votes are elected) will be approved if the affirmative votes constitute a majority of the votes cast by the holders of the Agouron Pharmaceuticals Stock and the Oncology Division Stock, voting together as a single class, provided that the affirmatively voted shares also constitute at least a majority of the required quorum. Because the holders of Agouron Pharmaceuticals Stock will initially have more than the number of votes required to approve any such matters requiring only the approval of a majority of the votes cast, such holders would be in a position to control the outcome of the vote on such a matter. See "Risk Factors - Risks Related to the Divisional Stock Proposal--Limited Separate Voting Rights; Variable Voting Rights." Liquidation Rights In the event of a voluntary or involuntary dissolution, liquidation or winding up of the affairs of the Company, after the Company has satisfied or made provision for its debts and obligations and for payment to the holders of shares of any series or class of capital stock having preferential rights to receive distributions of the net assets of the Company, the holders of the Common Stock are entitled to receive the net assets, if any, remaining for distribution to common shareholders on a per share basis in proportion to the respective per share liquidation units of such class. Shareholders will have no direct claim against any particular assets of the Company or any of its subsidiaries. Each share of Agouron Pharmaceuticals Stock has 100 liquidation units and each share of Oncology Division Stock will have _____ liquidation units. The liquidation units of the Oncology Division Stock will be appropriately adjusted so as to avoid dilution in the aggregate liquidation rights of any series in the event the outstanding shares of any series are subdivided (by stock split, reclassification or otherwise) or combined (by reverse stock split, reclassification or otherwise), or in the event of the issuance of shares of any series as a dividend or a distribution to holders of shares of that series, but will not otherwise be adjusted. A merger or business combination involving the Company or a sale of all or substantially all of the assets of the Company will not be treated as a liquidation. Dividend Rights The Company has never paid any cash dividends on shares of its capital stock. The Company currently intends to retain its earnings to finance future growth and, therefore, does not anticipate paying any cash dividend on any class of Common Stock in the foreseeable future. Dividends or other distributions on the Agouron Pharmaceuticals Stock and the Oncology Division Stock will be subject to the same limitations as dividends or other distributions on the Existing Common Stock. Under the California Corporations Code, no dividends or other distributions may be made to shareholders, unless made from retained earnings or, if after giving effect to such dividends or other distributions, the Company's assets would be at least equal to 1 1/4 times its liabilities; and, subject to certain exceptions, the current assets of the Company would be at least equal to its current liabilities. Dividends or other distributions on the Agouron Pharmaceuticals Stock and the Oncology Division Stock will be further limited by the Restated Articles to an amount not in excess of Agouron Pharmaceuticals Available Dividend Amount and the Oncology Division Available Dividend Amount, respectively. The "Agouron Pharmaceuticals Available Dividend Amount" or the "Oncology Division Available Dividend Amount," on any date, means any amount in excess of the amount legally available for payment of dividends determined in accordance with California law applied if such Division were a separate corporation (such amount with respect to a Division is referred to as an "Available Dividend Amount"). In addition, the amount legally available for payment of dividends will be determined on the basis of the entire Company, and not just the respective Divisions. Consequently, dividend or other distribution payments on the Agouron Pharmaceuticals Stock and the Oncology Division Stock could be precluded because of the available limits under the California Corporations Code, even though there may exist an Available Dividend Amount with respect to the relevant Division. There can be no assurance that an Available Dividend Amount will exist with respect to either Division. See "Risk Factors - Risks Related to the Divisional Stock Proposal - Potential Divergence of Interests; No Specific Procedures for Resolution - No Assurance of Payment of Dividends." Subject to the prior payment of distributions on any outstanding shares of Preferred Stock and the foregoing limitations, the Board will be able, in its sole discretion, to declare and pay dividends or other distributions exclusively on the Agouron Pharmaceuticals Stock, exclusively on the Oncology Division Stock or on both, in equal or unequal amounts, notwithstanding the amount of dividends or other distributions previously declared on each series, the respective voting or liquidation rights of each series or any other factor. General Redemption and Conversion Provisions The Company's Articles currently do not provide, and the Divisional Stock Proposal does not provide, for either mandatory or optional conversion or redemption of the Agouron Pharmaceuticals Stock. If the Divisional Stock Proposal is approved the Restated Articles will provide that the Oncology Division Stock may be exchanged for any combination of cash and/or Agouron Pharmaceuticals Stock upon the terms described below. The Company cannot predict the impact on the market prices for each series of Common Stock of its ability to effect such exchanges. Optional Redemption and/or Conversion. The Board may at any time determine to exchange all or part of the outstanding shares of Oncology Division Stock for any combination of cash and/or Agouron Pharmaceuticals Stock having a Fair Market Value equal to 125% of the Fair Market Value of the Oncology Division Stock, such Fair Market Value being determined by the trading prices during a specified period prior to the first public announcement by the Company of such exchange. The foregoing provision allows the Company the flexibility to redeem all outstanding shares of the Oncology Division Stock and leave outstanding classes of Common Stock that would, collectively, represent the residual equity interest in the Company. The optional exchange could be exercised at any future time if the Board determined that, under the facts and circumstances then existing, a particular series of Common Stock was no longer in the best interests of all of the Company's shareholders. Such exchange may be completed, however, at a time that is disadvantageous to the holders of the Oncology Division Stock. The right of the Board to exchange all outstanding shares of Oncology Division Stock for any combination of cash and/or Agouron Pharmaceuticals Stock having a Fair Market Value equal to 125% of the Fair Market Value of the Oncology Division Stock does not preclude the Board from making an offer to exchange such shares on terms other than those provided in the Restated Articles. Although any alternative offer would be subject to acceptance by holders of the shares to be exchanged, such offer could be made on terms less favorable than those provided in the Restated Articles. See "Risk Factors Risks Related to the Divisional Stock Proposal -- Potential Divergence of Interests; No Specific Procedures for Resolution -- Optional Exchange of Oncology Division Stock." In the event Agouron Pharmaceuticals Stock is not publicly traded at the time of a conversion of the Oncology Division Stock, the Board may convert the Oncology Division Stock into fully paid and nonassessable shares of such other publicly traded class or series of common stock as has the largest market capitalization at the time of the conversion. Mandatory Conversion and/or Redemption. In the event of the disposition, in one transaction or a series of related transactions, by the Company of all or substantially all of the properties and assets allocated to the Oncology Division (other than in connection with the sale by the Company of all or substantially all of its properties and assets) to any person, entity or group, other than (i) a wholly owned subsidiary of the Company or (ii) any entity formed at the direction of the Company in connection with obtaining financing for the programs or products of the Oncology Division, as the case may be, the Company on or prior to the first business day following the 90th day following consummation of such disposition will be required to exchange each outstanding share of the Oncology Division Stock for any combination of cash and/or Agouron Pharmaceuticals Stock having a Fair Market Value equal to 125% of the Fair Market Value of the Oncology Division Stock as determined by the trading prices during a specified period prior to the consummation of such disposition. Consequently, holders of Oncology Division Stock may receive a greater or lesser premium for their shares than any premium paid by a third party buyer of the assets of the Oncology Division. In addition, any such exchange for shares of Agouron Pharmaceuticals Stock could be made at a time when the Oncology Division Stock may be considered to be undervalued and the Agouron Pharmaceuticals Stock is considered to be overvalued. See "Risk Factors - Risks Related to the Divisional Stock Proposal - -- Potential Divergence of Interests; No Specific Procedures for Resolution Disposition of Division Assets." Oncology Division Designated Shares Oncology Division Designated Shares are authorized shares of Oncology Division Stock, which are not issued and outstanding, but which the Board, pursuant to the Company's management and allocation policies, may from time to time issue, sell or otherwise distribute without allocating the proceeds or other benefits of such issuance, sale or distribution to the Oncology Division. The shares of Oncology Division Stock that are issuable with respect to the Oncology Division Designated Shares are not outstanding shares of the Oncology Division Stock, are not eligible to receive dividends and cannot be voted by the Company. The number of Oncology Division Designated Shares will initially be zero but from time to time will be: (a) increased by (i) the number of any outstanding shares of Oncology Division Stock repurchased by the Company, the consideration for which was allocated to Agouron Pharmaceuticals; (ii) the number of shares of Oncology Division Stock (rounded, if necessary, to the nearest whole number) equal to the fair value (as determined by the Board) of assets or properties (including cash) allocated to Agouron Pharmaceuticals that are reallocated to the Oncology Division (other than reallocations that represent sales at fair value between such Divisions) divided by the Fair Market Value of one share of Oncology Division Stock as of the date of such reallocation; (iii) a number equal to the quotient obtained by dividing (a) the aggregate amount of all advances made under the Equity Line by (b) the Fair Market Value of the Oncology Division Stock on the date of each exchange; (b) decreased (but to not less than zero) by (i) the number of any shares of Oncology Division Stock issued by the Company, the proceeds of which are allocated to Agouron Pharmaceuticals, (ii) the number of any shares of Oncology Division Stock issued upon the conversion, exercise or exchange of Convertible Securities (other than Pre-Effectiveness Convertible Securities) the proceeds of which are attributed to Agouron Pharmaceuticals (iii) the number of any shares of Oncology Division Stock issued by the Company as a dividend or distribution or by reclassification, exchange or otherwise to holders of Agouron Pharmaceuticals Stock; (iv) the number of any shares of Oncology Division Stock issued upon the conversion, exercise or exchange of any Convertible Securities (other than Pre-Effectiveness Convertible Securities) issued by the Company as a dividend or other distribution (including in connection with any reclassification or exchange of shares) to holders of Agouron Pharmaceuticals Stock, and (v) the number of shares of Oncology Division Stock (rounded, if necessary, to the nearest whole number) equal to the fair value (as determined by the Board) of assets or properties (including cash) allocated to the Oncology Division that are reallocated to Agouron Pharmaceuticals in consideration for a reduction in the number of Oncology Division Designated Shares divided by the Fair Market Value of one share of Oncology Division Stock as of the date of such reallocation; and (c) adjusted as appropriate to reflect subdivisions (by stock split or otherwise) and combinations (by reverse stock split or otherwise) of the Oncology Division Stock and dividends or distributions of shares of Oncology Division Stock to holders of Oncology Division Stock and other reclassifications of Oncology Division Stock. "Convertible Securities" means any securities of the Company, including preferred stock, warrants, options and other rights (other than Common Stock), that are convertible into, exchangeable for or evidence the right to purchase any shares of any series of Common Stock, whether upon conversion, exercise or exchange, pursuant to anti-dilution provisions of such securities or otherwise. "Pre-Effectiveness Convertible Securities" means Convertible Securities of the Company that are outstanding on the Effective Date and are, prior to such date, convertible into or exercisable or exchangeable for Existing Common Stock. Increase In Authorized Common Stock The Articles currently authorize the issuance of 75,000,000 shares of Existing Common Stock. In connection with the Divisional Stock Proposal, the Articles will be amended to designate Agouron Pharmaceuticals Stock initially consisting of 75,000,000 authorized shares and Oncology Division Stock initially consisting of 25,000,000 authorized shares. In addition, the Board from time to time can issue one or more additional series or additional shares of Agouron Pharmaceuticals Stock or Oncology Division Stock. In the aggregate, if the Divisional Stock Proposal is implemented, the number of shares of Common Stock authorized for issuance will increase from 75,000,000 to 150,000,000. Additionally, the Board would be authorized to determine the number of shares of each new series and all rights and privileges of each new series, including dividend rights, conversion or redemption provisions, rights upon liquidation or merger, and voting rights and to increase or decrease the number of shares in any existing series. Under the existing Articles, the issuance of a new class or series of common stock, such as the Oncology Division Stock would require shareholder approval. The increase in authorized shares provides the Board with a means to act quickly and definitively to complete strategic transactions such as acquisitions or to further divide the business of the Company into additional divisions without the need to obtain shareholder approval unless deemed advisable by the Board or required by applicable law, regulation or stock market requirements. The increase in authorized shares of Common Stock will be used in part to implement the various aspects of the Divisional Stock Proposal. Further, as described under "--Description of Capital Stock--General Redemption and Conversion Provisions," the Board has the right to convert the Oncology Division Stock into the Agouron Pharmaceuticals Stock at a 25% premium to the Fair Market Value of the Oncology Division Stock at any time, or in connection with a disposition of all or substantially all properties and assets of the Oncology Division. The Board may also pay a share dividend in one series of Common Stock on such series of Common Stock, or declare a stock split. The number of shares issuable in a conversion will, therefore, vary based on the relative market values of the two series of Common Stock and the number of outstanding shares of the Oncology Division Stock to be converted. The Board believes that an increase in the number of authorized shares of Common Stock at this time is in the best interests of the Company in order to have available the number of shares needed for a future conversion, share dividend or stock split if such a transaction is determined to be in the best interests of the Company. Other than the Reclassification of the Existing Common Stock pursuant to the Divisional Stock Proposal and the issuance of shares of Common Stock pursuant to the Company's employee benefit plans, the Company has no present intention or agreement with respect to the issuance for any purpose of any of the shares of Common Stock that will be authorized for issuance if the Divisional Stock Proposal is approved by the shareholders. The Board, however, has considered and may in the future consider the creation of additional series of stock that would track the performance of the other lines of the Company's business. Determinations by the Board If the Divisional Stock Proposal is approved by the shareholders and implemented by the Board, any determinations made in good faith by the Board under any provision described under "-- Description of Capital Stock," and any determinations with respect to any Division or the rights of holders of shares of any series of Common Stock, will be final and binding on all shareholders of the Company. Dividend Policy Agouron has never paid any cash dividends on shares of its capital stock. Agouron currently intends to retain its earnings to finance future growth and, therefore, does not anticipate paying any cash dividend on any series of Common Stock in the foreseeable future. The Board does not currently intend to change the above-described dividend policy but reserves the right to do so at any time, or from time to time, based on its review of the financial performance of the respective Division and of the Company as a whole. Future dividends on the Agouron Pharmaceuticals Stock and Oncology Division Stock will be payable when, as and if declared by the Board out of all funds of the Company legally available therefor. See "--Description of Capital Stock--Dividends." Nasdaq National Market Listing The Existing Common Stock is traded on the Nasdaq National Market under the symbol AGPH. There has been no prior market for the Agouron Pharmaceuticals Stock or the Oncology Division Stock. Application has been made to The Nasdaq Stock Market, Inc. to redesignate the Existing Common Stock as Agouron Pharmaceuticals Stock, to be quoted on the Nasdaq National Market under the symbol AGPH, and for the quotation of the Oncology Division Stock on the Nasdaq National Market under the symbol ____. The Company is unable to predict to what extent a public market will develop for shares of Oncology Division Stock or the prices at which the shares of Agouron Pharmaceuticals Stock or Oncology Division Stock will trade in such market or otherwise. Exchange Procedures Upon the implementation of the Divisional Stock Proposal, the Existing Common Stock share certificates (the "Existing Certificates") will be deemed to represent shares of Agouron Pharmaceuticals Stock. Following the Effective Date, at such time as is reasonably determined by the Board, holders of Existing Common Stock as of the Effective Date will be mailed certificates representing shares of Oncology Division Stock. Shareholders should not mail their Existing Certificates to either the Company or its transfer agent in connection with the Divisional Stock Proposal. New certificates representing shares of Agouron Pharmaceuticals Stock will be issued in replacement of Existing Certificates as such certificates are received and canceled by the transfer agent. Stock Transfer Agent And Registrar ChaseMellon Shareholder Services, L.L.C. ("ChaseMellon") is the transfer agent and registrar for the Existing Common Stock. If the Divisional Stock Proposal is approved by the shareholders and implemented by the Board, ChaseMellon will be selected as the transfer agent and registrar for the Agouron Pharmaceuticals Stock and the Oncology Division Stock. Financial Advisor PaineWebber is acting as financial advisor to the Company in connection with the Divisional Stock Proposal. The Company has agreed to pay PaineWebber a fee for its services. The Company also has agreed to reimburse PaineWebber for certain of its reasonable out-of-pocket expenses and has agreed to indemnify PaineWebber against certain liabilities, including liabilities under the Securities Act. No Dissenters' Rights Under the California Corporations Code, holders of Existing Common Stock do not have dissenters' rights with regard to the Divisional Stock Proposal. Certain Federal Income Tax Considerations The following discussion summarizes the principal United States federal income tax consequences of the Divisional Stock Proposal. The discussion is based on the Internal Revenue Code of 1986, as amended (the "Code"), Treasury Department regulations, published positions of the IRS, and court decisions, all of which are subject to change. In particular, Congress could enact legislation affecting the treatment of stock with characteristics similar to the Agouron Pharmaceuticals Stock and Oncology Division Stock or the Treasury Department could issue regulations, including regulations issued pursuant to its broad authority under Section 337(d) of the Code which could change current law or adversely effect existing interpretations of current law. Any such change, which may or may not be retroactive, could alter the tax consequences to the Company or the shareholders of the Company discussed herein. Tax Implications to Shareholders This discussion is based on certain assumptions regarding the factual circumstances that will exist at the time of the Reclassification, including certain representations made to or to be made by the Company. This discussion addresses only those shareholders who hold their Existing Common Stock as a capital asset within the meaning of Section 1221 of the Code, and is included for general information only. It does not discuss all aspects of United States federal income taxation that may be relevant to a particular shareholder in light of such shareholder's personal tax circumstances and may not apply to certain types of shareholders who may be subject to special treatment under the federal income tax laws, such as insurance companies, corporations subject to the alternative minimum tax, banks, dealers in securities or tax-exempt organizations, persons that hold Existing Common Stock as part of a straddle, hedging or conversion transaction, persons whose functional currency is not the U.S. dollar, shareholders who for United States federal income tax purposes are foreign corporations, foreign partnerships, nonresident alien individuals, foreign estates or foreign trusts or to shareholders who acquired their stocks pursuant to the exercise of employee stock options or otherwise as compensation. In addition, this discussion does not address the effect of any applicable state, local or foreign laws or any federal tax laws other than those pertaining to the income tax. EACH SHAREHOLDER OF THE COMPANY SHOULD CONSULT SUCH SHAREHOLDER'S OWN TAX ADVISOR AS TO THE APPLICATION OF THE FEDERAL INCOME TAX LAWS TO SUCH SHAREHOLDER'S PARTICULAR SITUATION, AS WELL AS TO THE APPLICABILITY AND EFFECT OF ANY STATE, LOCAL, OR FOREIGN TAX LAWS TO WHICH THEY MAY BE SUBJECT. In the opinion of Pillsbury Madison & Sutro LLP, tax counsel to the Company, for United States federal income tax purposes: (i) the Reclassification will constitute a recapitalization within the meaning of Section 368(a)(1)(E) of the Code, (ii) the Agouron Pharmaceuticals Stock and the Oncology Division Stock will be treated for federal income tax purposes as Common Stock of the Company, (iii) except with respect to cash paid in lieu of fractional shares, if any, the holders of the Divisional Stocks will not recognize income, gain or loss in and as a result of the Reclassification, (iv) the Divisional Stocks received in the Reclassification will not constitute Section 306 stock within the meaning of Section 306(c) of the Code, (v) the Divisional Stocks received in the Reclassification will not constitute nonqualified preferred stock within the meaning of Section 351(g) of the Code and (vi) the amendment and restatement of the Rights Agreement will not result in income, gain or loss to the shareholders. As a result of such treatment, holders of Existing Common Stock will take a tax basis in the Agouron Pharmaceuticals Stock and Oncology Division Stock equal to their tax basis prior to the Reclassification in the Existing Common Stock (reduced by the amount allocable to any fractional share interest for which cash is received), with such tax basis being allocated among the Agouron Pharmaceuticals Stock and Oncology Division Stock in proportion to their relative fair market values at the time of the Reclassification. Cash received in lieu of fractional shares will result in the recognition of gain or loss equal to the difference, if any, between the shareholder's basis in the fractional shares and the amount of cash received. A shareholder's holding period for shares of Agouron Pharmaceuticals Stock and Oncology Division Stock received in the Reclassification will include such shareholder's holding period for the shares of Existing Common Stock surrendered therefor. The IRS announced in 1987 that it was studying and would not issue advance rulings on the classification of stock that has certain voting and liquidation rights in an issuing corporation but the dividend rights of which are determined by reference to the earnings of a segregated portion of the issuing corporation's assets. Although in 1995 the IRS withdrew such stock from its list of matters under consideration, the IRS has reiterated that it will not issue advance rulings regarding such stock. There are no court decisions or other authorities that bear directly on transactions similar to the Reclassification. It is possible, therefore, that the IRS could assert that the Oncology Division Stock or the Agouron Pharmaceuticals Stock or both represent property other than stock of Agouron ("Other Property"). If such stocks were treated as Other Property, the Company would recognize a significant taxable gain on the Reclassification in an amount equal to the excess of the fair market value of such Other Property over its federal income tax basis to the Company or its subsidiaries allocable to such Other Property. In addition, the Company could lose the ability to file its federal income tax returns on a consolidated basis. As a result, the tax losses expected to be incurred by the Oncology Division could not offset the taxable income expected to be earned by Agouron Pharmaceuticals and any amounts paid or deemed paid to the Company by the Oncology Division or Agouron Pharmaceuticals could be taxable to the Company. Furthermore, the receipt of Oncology Division Stock or the Agouron Pharmaceuticals Stock by a shareholder of the Company might be treated as a fully taxable dividend to such shareholder in an amount equal to the fair market value of such stock (subject, in the case of shareholders of the Company that are corporations, to any applicable dividends received deduction) or might be treated as a distribution in complete liquidation of the Company, in which case shareholders of the Company would have gain or loss with respect to the shares held in the Company immediately before the Reclassification. As indicated above, however, the Company has received an opinion from tax counsel that the Agouron Pharmaceuticals Stock and the Oncology Division Stock will be treated for federal income tax purposes as common stock of the Company. It is also possible that the IRS could assert, in the alternative, that the Oncology Division Stock or the Agouron Pharmaceuticals Stock or both represent preferred stock (rather than Common Stock) of the Company for federal income tax purposes. In order to support such an assertion the IRS would generally have to conclude that such stock is limited and preferred as to dividends and does not participate significantly in corporate growth. As a result of such a conclusion, the IRS could further assert that the Oncology Division Stock or the Agouron Pharmaceuticals Stock or both should be characterized as "nonqualified preferred stock" or Section 306 stock. Nonqualified preferred stock that is received by a shareholder in connection with transactions intended to qualify as tax-free reorganizations, such as the Reclassification, will be treated as taxable Other Property rather than as tax-free stock consideration and accordingly, gain, but not loss, would be recognized by the shareholder. If the Divisional Stocks were instead, or in addition, treated as Section 306 stock, a shareholder could recognize ordinary income on the taxable sale or exchange of such stock and dividend income on the redemption of such stock. As mentioned above, the Company has received an opinion from tax counsel that the Agouron Pharmaceuticals Stock and the Oncology Division Stock will not constitute nonqualified preferred stock or Section 306 stock. Certain non-corporate holders of Oncology Division Stock or Agouron Pharmaceuticals Stock might be subject to backup withholding at a rate of 31% on the payment of dividends on such stock. Backup withholding will apply only if the shareholder (i) fails to furnish his, her or its Taxpayer Identification Number ("TIN"), (ii) furnishes an incorrect TIN, (iii) is notified by the IRS that he, she or it has failed properly to report payments of interest or dividends, or (iv) under certain circumstances, fails to certify, under penalties of perjury, that he, she or it has furnished a correct TIN and has not been notified by the IRS that he, she or it is subject to backup withholding for failure to report payments of interest or dividends. Shareholders should consult their tax advisors regarding their qualifications for a tax exemption from backup withholding and the procedure for obtaining such an exemption if applicable. The amount of any backup withholding from a payment to a holder of Oncology Division Stock or Agouron Pharmaceuticals Stock will be allowed as a credit against such shareholder's federal income tax liability and may entitle such shareholder to a refund, provided that the required information is furnished to the IRS. The foregoing is for general information only. Shareholders should consult their own tax advisors as to the federal, state, local and foreign tax consequences of the Reclassification and of the holding of Oncology Division Stock and Agouron Pharmaceuticals Stock. United States Tax Consequences To Non-U.S. Shareholders Each Non-U.S. Holder should consult a tax advisor with respect to the United States federal tax consequences of acquiring, holding and disposing of Oncology Division Stock, as well as any tax consequences that may arise under the laws of any foreign, state, local or other taxing jurisdiction. Amendment of Stock Plans If the Divisional Stock Proposal is approved and implemented, the Board or its delegates, pursuant to applicable provisions of the Company's existing stock option plans and Employee Stock Purchase Plan (collectively the "Stock Plans") will determine appropriate adjustments to outstanding options granted under the provisions of such Stock Plans to take into account the implementation of the Division Stock Proposal. Under these adjustments each outstanding option to purchase Existing Common Stock will automatically be converted into an option to purchase the number of shares of Agouron Pharmaceuticals Stock equal to the number of Existing Common Stock previously covered by the outstanding option plus an option to purchase the number of shares of Oncology Division Stock equal to ______ of the number of shares of Existing Common Stock previously covered by the outstanding option. The aggregate exercise price of the outstanding option to purchase Existing Common Stock will be allocated between the option covering Agouron Pharmaceuticals Stock and the option covering Oncology Division Stock in a ratio to be determined by the Board or its delegates. In the event the Divisional Stock Proposal is approved and implemented, the Stock Plans will be amended as of the Effective Date to clarify that grants made after the Effective Date may be made with respect to either Agouron Pharmaceuticals Stock or Oncology Division Stock or both (and/or any other series of outstanding Common Stock of the Company), in the same manner and to the same extent as permitted with respect to the Existing Common Stock. Although the Stock Plan language authorizing adjustments to shares reserved and outstanding awards and stock purchase rights implicitly permits the use of more than one series of Common Stock for awards and stock purchase rights under the Stock Plans, the Board believes that it is desirable to amend the Stock Plans to explicitly provide that shares of any series of Common Stock are available for awards. For the text of the 1996 Stock Option Plan and the Employee Stock Purchase Plan as proposed to be amended, see Annexes VI and VII, respectively. In determining whether awards of options or stock purchase rights to purchase Agouron Pharmaceuticals Stock or Oncology Division Stock or a combination thereof are to be made to specific employees, the Board or its delegates may consider, among other things, the Division to which the employee in question provides services. The Company also anticipates, however, that the Board or its delegates will consider that employees should be rewarded based on the success of the Company as a whole and that a policy of granting awards solely in respect of the Common Stock relating to the Division for which the employee provides services may be counter productive to the overall success of the Company. In addition, because of the complementary nature of much of the businesses of Agouron Pharmaceuticals and the Oncology Division, the Company anticipates that services performed in respect of one Division may have at least an indirect effect upon the operations of the other Division. Therefore, the Company anticipates that the Board or its delegates could decide that in order to provide the maximum incentive to employees regarding the overall success of the Company, it may be appropriate to grant awards consisting of securities in respect of both Divisions to employees performing services for one Division. If the Board or its delegates elects to grant awards to individual employees consisting of stock options to purchase both Agouron Pharmaceuticals Stock and Oncology Division Stock, the allocation between the two will be at the discretion of the Board or its delegates. Restatement Of Rights Agreement Pursuant to the Rights Agreement (the "Rights Agreement") between the Company and ChaseMellon Shareholder Services, L.L.C., as Rights Agent (the "Rights Agent"), the Company issued a dividend on November 7, 1996 of one preferred stock purchase right on each share of Common Stock (a "Common Stock Right"). If the shareholders approve the Divisional Stock Proposal and it is implemented by the Board, the Rights Agreement will be amended and restated to reflect the change in the capital structure of the Company and the Board will declare a distribution to the holders of Oncology Division Stock of a right (an "Oncology Stock Right") for each outstanding share of Oncology Division Stock. The Rights Agreement, as amended and restated (the "Restated Rights Agreement"), will provide that each Agouron Pharmaceuticals Stock Right ("Agouron Stock Right") which will replace the Common Stock Right, and each Oncology Stock Right, when it becomes exercisable, will entitle the registered holder to purchase from the Company (i) in the case of an Agouron Pharmaceuticals Stock Right, one one-ten thousandth of a share of Series B Participating Preferred Stock, no par value (the "Series B Shares"), at a purchase price of $500, subject to adjustment (including adjustment for the two-for-one split of Common Stock in August 1997), and (ii) in the case of an Oncology Stock Right, one one-ten thousandth of a share of Series C Participating Preferred Stock, no par value (the "Series C Shares"), at a purchase price of $___, subject to adjustment. The Agouron Stock Rights and Oncology Stock Rights are sometimes hereinafter referred to together as the "Rights." The Restated Rights Agreement will provide that initially, the Agouron Stock Rights and Oncology Stock Rights will be evidenced by the certificates representing shares of Agouron Pharmaceuticals Stock and Oncology Division Stock, respectively, then outstanding, and no separate Rights certificates will be distributed. The Agouron Pharmaceuticals Stock and the Oncology Division Stock are sometimes hereinafter referred to together as the "Voting Stock." The Rights will separate from the Voting Stock and a Distribution Date will occur upon the earliest of (i) a public announcement that a person or group of affiliated or associated Persons (an "Acquiring Person") has acquired, or obtained the right to acquire beneficial ownership of securities having 15% or more of the voting power of all outstanding voting securities of the Company or (ii) ten days (unless such date is extended by the Board) following the commencement of (or a public announcement of an intention to make) a tender offer or exchange offer which would result in any person or group and related persons becoming an Acquiring Person. Until the Distribution Date, the Agouron Stock Rights will be transferred with and only with the Agouron Pharmaceuticals Stock, and the Oncology Stock Rights will be transferred with and only with the Oncology Division Stock. For purposes of the Restated Rights Agreement, the total voting rights of the Voting Stock will be determined based upon the voting rights of holders of outstanding shares of Agouron Pharmaceuticals Stock and Oncology Division Stock in effect at the time of any such determination. See "--Description of Capital Stock--Voting Rights." The Rights will not be exercisable until the Distribution Date. The Rights will expire on the earliest of (i) November 21, 2006, (ii) consummation of a merger transaction with a person or group who acquired Voting Stock pursuant to a Permitted Offer (as defined below), and is offering in the merger the same price per share and form of consideration paid in the Permitted Offer, or (iii) redemption or exchange of the Rights by the Company as described below. In the event that, after the first date of public announcement by the Company or an Acquiring Person that an Acquiring Person has become such, the Company is involved in a merger or other business combination transaction (whether or not the Company is the surviving corporation) or 50% or more of the Company's assets or earning power are sold (in one transaction or a series of transactions), proper provision will be made so that each holder of a Right (other than an Acquiring Person) will thereafter have the right to receive, upon the exercise thereof at the then current exercise price of the Right, that number of shares of Agouron Pharmaceuticals Stock, in the case of a Agouron Stock Right, and Oncology Division Stock, in the case of an Oncology Stock Right, in the event that the Company is the surviving corporation of a merger or consolidation, or Common Stock of the acquiring company (or, in the event there is more than one acquiring company, the acquiring company receiving the greatest portion of the assets or earning power transferred) which at the time of such transaction would have a market value of two times the exercise price of the Right (such right being called the "Merger Right"). In the event that a person becomes the beneficial owner of securities having 15% or more of the voting power of all then outstanding voting securities of the Company (unless pursuant to a tender offer or exchange offer for all outstanding shares of Voting Stock at a price and on terms determined prior to the date of the first acceptance of payment for any of such shares by at least a majority of the members of the Board who are not officers of the Company and are not Acquiring Persons or affiliates or associates thereof to be both adequate and otherwise in the best interests of the Company and its shareholders (a "Permitted Offer")), then proper provision will be made so that each holder of an Agouron Stock Right and an Oncology Stock Right will for a 60-day period (subject to extension under certain circumstances) thereafter have the right to receive upon exercise that number of shares of Agouron Pharmaceuticals Stock or Oncology Division Stock, as the case may be, having a market value of two times the exercise price of the Right, to the extent available, and then (after all authorized and unreserved shares of Voting Stock have been issued) a Common Stock equivalent (such as Preferred Stock or another equity security with at least the same economic value as the Voting Stock) having a market value of two times the exercise price of the Right, with Voting Stock to the extent available being issued first (such right being called the "Subscription Right"). The holder of a Right will continue to have the Merger Right whether or not such holder exercises the Subscription Right. Notwithstanding the foregoing, upon the occurrence of any of the events giving rise to the exercisability of the Merger Right or the Subscription Right, any Rights that are or were at any time after the Distribution Date owned by an Acquiring Person will immediately become null and void. At any time prior to the earlier to occur of a Person becoming an Acquiring Person or the expiration of the Rights, the Company may redeem the Rights in whole, but not in part, at a price of $.001 per Right (the "Redemption Price"), which redemption shall be effective upon the action of the Board. Additionally, the Company may thereafter redeem the then outstanding Rights in whole, but not in part, at the Redemption Price (a) if such redemption is incidental to a merger or other business combination transaction or series of transactions involving the Company but not involving an Acquiring Person or certain related persons or (b) following an event giving rise to, and the expiration of the exercise period for, the Subscription Right if and for as long as an Acquiring Person beneficially owns securities representing less than 15% of the voting power of the Company's voting securities. The redemption of Rights described in the preceding sentence will be effective only as of such time when the Subscription Right is not exercisable, and in any event, only after 10 Business Days prior notice. Upon the effective date of the redemption of the Rights, the right to exercise the Rights will terminate and the only right of the holders of Rights will be to receive the Redemption Price. The Restated Rights Agreement will provide that, subject to applicable law, the Board, at its option, may at any time after a person becomes an Acquiring Person (but not after the acquisition by such person of 50% or more of the outstanding Voting Stock), exchange all or part of the then outstanding and exercisable Agouron Stock Rights and Oncology Stock Rights (except for Rights which have become void) for shares of Agouron Pharmaceuticals Stock or Oncology Division Stock, as the case may be, equivalent to one share of Agouron Pharmaceuticals Stock per Agouron Stock Right and one share of Oncology Division Stock per Oncology Stock Right or, alternatively, for substitute consideration consisting of cash, securities of the Company or other assets (or any combination thereof). Prior to the Distribution Date, the terms of the Restated Rights Agreement may be amended by the Board without the consent of the holders of the Rights. After the Distribution Date, the terms of the Restated Rights Agreement may be amended by the Board in any manner which the Company may deem necessary or desirable and which will not adversely affect the interests of the Rights holders. In addition to the amendment to the Articles in connection with the Divisional Stock Proposal, the Articles will be further amended to ensure that the Rights Agreement conforms with provisions of the California Corporations Code in that the Rights may provide for different or discriminate treatment among holders of the Rights in accordance with criteria selected by the Board in connection with the creation of the Rights. Until a Right is exercised, the holder thereof, as such, will have no rights as a shareholder of the Company, including, without limitation, the right to vote or to receive dividends. A copy of the form of the Restated Rights Agreement (which includes as Exhibit B-1 the Form of Rights Certificate for Agouron Pharmaceuticals Stock Rights and as Exhibit B-2 the Form of Rights Certificate for Oncology Division Stock Rights) will be filed with the Commission as an exhibit to the Registration Statement to which this Proxy Statement relates and is incorporated herein by reference. A copy of the Rights Agreement and the amendments thereto were filed with the Commission as Exhibit to the Company's Form 8-A and Form 8-A/A on November 8, 1996 and December 20, 1996 and are incorporated herein by reference. A copy of the Restated Rights Agreement is available free of charge from the Rights Agent. The foregoing description of the Rights is a summary only and is qualified in its entirety by reference to the Restated Rights Agreement and the Rights Agreement. Anti-Takeover Considerations The following information is provided with respect to certain matters that could be viewed as having the effect of discouraging an attempt to obtain control of the Company. The Articles provide that the Board has the authority, without further action by the shareholders, to issue from time to time the Preferred Stock in one or more series and to fix the number of shares, designations, rights, preferences, privileges and restrictions thereof. The rights, preferences, privileges and restrictions of different series of Preferred Stock may differ with respect to dividend rates, amounts payable on liquidation, voting rights, conversion rights, redemption provisions, sinking fund provisions, and other matters. If the Divisional Stock Proposal is approved, the Restated Articles will provide that the Board has the authority, without further action by the shareholders, to issue from time to time shares of a new series of Common Stock and to fix the number of shares, designations, rights, preferences, privileges and restrictions thereof or to increase or decrease the number of shares of any existing series. The rights, preferences, privileges and restrictions of different series of Common Stock may differ with respect to dividend rates, amounts payable on liquidation, voting rights, conversion rights, redemption provisions, and other matters. Although the Board has no present intention of doing so, it could issue shares of Preferred Stock or of a new or existing series of Common Stock that could, depending on the terms of such stock, make more difficult or discourage an attempt to obtain control of the Company by means of a merger, tender offer, proxy contest or other means. Such shares could be used to create voting or other impediments or to discourage persons seeking to gain control of the Company and could also be privately placed with purchasers favorable to the Board in opposing such action. In addition, the Board could authorize holders of a series of Common Stock or Preferred Stock to vote either separately as a class, or with the holders of the Company's currently outstanding Common Stock, on any merger, sale or exchange of assets by the Company or any other extraordinary corporate transaction. The mere existence of the additional authorized shares could have the effect of discouraging unsolicited takeover attempts. The issuance of new shares also could have a dilutive effect on the voting power of existing holders of Common Stock and on earnings per share and could be used to dilute the stock ownership of a person or entity seeking to obtain control of the Company should the Board consider the action of such entity or person not to be in the best interests of the shareholders and the Company. To the extent that potential takeovers are thereby discouraged, shareholders may not have the opportunity to dispose of all or a part of their stock at a price that may be higher than that prevailing in the market. PROPOSAL 3 - AMENDMENT OF THE 1996 STOCK OPTION PLAN Description of the 1996 Stock Option Plan The essential features of the Restated 1996 Stock Option Plan (the "Stock Option Plan") are outlined below. For a complete understanding of the terms of the Stock Option Plan, see Annex VI, which reflects amendments that will be made if the Divisional Stock Proposal and this Proposal 3 are approved by the shareholders. The purpose of the Stock Option Plan is to encourage officers, directors, employees and consultants of the Company to acquire or increase their proprietary interest in the success of the Company and to continue their affiliation with the Company. Eligible employees may be granted either "incentive stock options" or "non-statutory stock options" to purchase Common Stock under the Stock Option Plan. Subject to certain conditions, officers, directors and consultants who are not employees may be granted "non-statutory stock options" under the Stock Option Plan. An incentive stock option is an option which qualifies for certain favorable income tax treatment under the Internal Revenue Code. A non-statutory stock option is an option which is not an incentive stock option for federal income tax purposes. As of August __, 1998, under the Stock Option Plan, there were outstanding options to purchase ______ shares of Existing Common Stock under the Stock Option Plan (of which options to purchase ________ shares were exercisable). The Company has three additional stock option plans: (1) the 1985 Stock Option Plan (the "1985 Plan") under which as of August __, 1998 there were outstanding options to purchase ______ shares of Existing Common Stock (of which options to purchase ________ shares were exercisable); (2) the 1990 Stock Option Plan (the "1990 Plan") under which as of August __, 1998 there were outstanding options to purchase ______ shares of Existing Common Stock (of which options to purchase ________ shares were exercisable); and (3) the 1998 Stock Option Plan (the "1998 Plan") under which as of August __, 1998 there were outstanding options to purchase ______ shares of Existing Common Stock (of which options to purchase __________ shares were exercisable). At August __, 1998, stock options to purchase an aggregate number of _____ shares remained available for issuance under the Stock Option Plan including 1,000,000 shares approved by its Board on August 6, 1998, stock options to purchase an aggregate of _____ shares remained available for issuance under the 1985 Plan, stock options to purchase an aggregate of _____ shares remained available for issuance under the 1990 Plan, and stock options purchase an aggregate of _____ shares remained available for issuance under the 1998 Plan. The Board believes that the Company's stock option programs have created significant incentives for its employees, officers, directors and consultants. The Board considers it important for the future success of the Company to continue to grant stock options on a basis comparable with those granted by other companies with which it competes in attracting, retaining and motivating qualified personnel. On August 6, 1998, the Board adopted an amendment to the Stock Option Plan, to increase by 1,000,000 shares the aggregate number of shares of Common Stock available for issuance under the Stock Option Plan. The Board has also approved, in connection with and subject to approval and implementation of the Divisional Stock Proposal, the amendment to the Stock Option Plan to conform the Plan to the changes in the Company's capital structure being made by the Divisional Stock Proposal. See "Proposal 2--The Divisional Stock Proposal--Amendment of Stock Plans." The total number of shares available under the Stock Option Plan, the number of shares subject to outstanding options and the exercise price per share of outstanding options will be subject to adjustment upon the occurrence of stock dividends, recapitalizations, consolidations, stock splits, combinations or exchanges of shares of stock or other increases or decreases in the number of shares of the Company's Common Stock effected without receipt of consideration by the Company, in order to preclude the dilution or enlargement of benefits under the Stock Option Plan. The Board may also make such equitable adjustments to the Stock Option Plan and outstanding options as it deems appropriate in order to preclude the dilution or enlargement of benefits under the Stock Option Plan upon exchange of all of the outstanding Common Stock of the Company for a different class or series of capital stock or the separation of assets of the Company, including a spin-off or other distribution of stock or property by the Company. If any option under the Stock Option Plan terminates or expires, the shares allocable to the unexercised portion of the option will again be available for purposes of the Stock Option Plan. In certain circumstances, where an optionee uses stock to exercise an option, only the net shares issued to the optionee are counted against the number of shares issued under the Stock Option Plan. Certain stock issuances which are later forfeited by the optionee do not count as grants under the Stock Option Plan. A dissolution or liquidation of the Company, a merger or consolidation in which the Company is not the surviving corporation, a reverse merger in which the Company is the surviving corporation but the Company's Common Stock outstanding immediately preceding the merger is converted by virtue of the merger into other property, or other capital reorganization in which more than fifty percent (50%) of the Company's Common Stock is exchanged, shall cause each outstanding option to terminate, provided that each optionee shall have the right immediately prior to the occurrence of such event to exercise his or her option in whole or in part; however, the exercise date of outstanding options shall not be accelerated by such event if and to the extent: (i) the option in connection with such event is either to be assumed by the successor corporation or parent thereof or to be replaced with a comparable option to purchase shares of the capital stock of the successor corporation or parent thereof; or (ii) the option is to be replaced by a comparable cash incentive program of the successor corporation based on the value of the option on the date of such event. Notwithstanding the preceding, if within one year from the date of such event, an employee's employment is involuntarily terminated, then the employee's outstanding stock options, if any, shall become immediately exercisable. Administration of the Stock Option Plan The Stock Option Plan is administered by the Board, except that the Board may delegate all or any part of its authority to administer the Stock Option Plan with respect to any group or groups of persons eligible to receive options to such persons or committee as the Board may determine. The Board has currently delegated to a committee, composed of certain of the Company's executive officers, the authority to administer the Stock Option Plan with respect to persons who are neither officers nor directors of the Company. Further references herein to the administration of the Stock Option Plan by the Board refer to the Board or its delegates, unless the context otherwise indicates. Whether or not the Board has delegated administrative authority, the Board has final power to determine all questions of policy or expediency that may arise in the administration of the Stock Option Plan. The Board has the power to make all determinations necessary or advisable for the administration of the Stock Option Plan. The Board also has the final power to construe and interpret the Plans and the options granted under it. The Board determines, within the limits of the Stock Option Plan, the persons to whom and the time or times at which options shall be granted, the type of options to be granted (whether incentive stock options or non-statutory stock options), the number of shares to be subject to each option, the duration of each option, the option price and the time or times within which, during the term of option, all or any portion of an option becomes exercisable ("vests"). If the Divisional Stock Proposal is approved and implemented, the Board or its delegates shall be entitled to determine as of the grant date, the series of Common Stock from which shares will be issued on exercise of a specific option. The Company's current form of stock option agreement provides that an option vests over a two, three or four year period. In the event that an employee terminates his or her employment with the Company, unless the Board otherwise elects, the then nonvested portion of his or her option is forfeited. Subject to the terms and conditions of the Stock Option Plan, the Board may modify an outstanding option (including lowering the option price or changing incentive stock options into non-statutory stock options), change the vesting schedule, extend or renew outstanding options granted under the Stock Option Plan or accept the surrender of outstanding options (to the extent not previously exercised) and authorize the granting of new options in substitution therefor. The Board may permit an option to be exercised before it is vested, subject to repurchase rights which terminate on a vesting schedule identical to the vesting schedule of the option. The Board may also establish other limitations or restrictions upon exercise of options. Grant and Exercise of Incentive Stock Options and Non-statutory Stock Options All employees of the Company are eligible to receive incentive stock options and non-statutory stock options under the Stock Option Plan. Subject to certain conditions, officers, directors and consultants of the Company who are not employees are eligible to receive non-statutory stock options but not incentive stock options. To the extent required by Section 162(m) to qualify future compensation as "performance based," options to purchase more than 750,000 shares may not be granted in a fiscal year to any individual participant in the Stock Option Plan. Incentive stock options under the Stock Option Plan may be granted by the Board at any time prior to August 6, 2008. Options shall be evidenced by agreements in such form as the Board shall from time to time determine, consistent with the terms of the Stock Option Plan. The price per share under each incentive stock option must be at least 100% of the fair market value of the Common Stock on the date the option is granted. The Board can set any price it wishes for shares granted under non-statutory stock options. The price for shares may be paid in any combination of cash, by cashier's or certified check, personal check acceptable to the Company, shares of the Company's Common Stock (including previously owned Common Stock or Common Stock issuable in connection with the exercise) or "built-in gain" in any options which are terminated as part of such exercise. The Board may take such steps it deems necessary to facilitate the payment of the option price. However, payment of the option price must be in such form as the Board determines and the Board may require satisfaction of any rules or conditions it deems necessary in connection with the payment of the option price or on account of any assistance given an optionee to facilitate such payment. The aggregate fair market value (determined as of the time the option is granted) of stock with respect to which incentive stock options are exercisable for the first time by an employee during a calendar year can not exceed $100,000. Except as otherwise provided in the option agreement between the Company and the optionee, each option expires on the date set forth in such agreement. The term of each incentive stock option cannot be more than ten years from the date on which the option is granted. To the extent required by Internal Revenue Code Section 422, options granted under the Stock Option Plan may not be transferred other than by will or the laws of descent and distribution and may be exercised during the holder's lifetime only by the holder. However, non-statutory stock options can be transferred to a trust for the benefit of the optionee, or members of his family. Amendment and Termination The Board may at any time revise, amend, suspend or terminate the Stock Option Plan. No amendment shall, without the approval of the shareholders, change the number of shares for which incentive stock options may be granted under the Stock Option Plan, reduce the price per share at which incentive stock options may be offered under the Stock Option Plan below 100% of the fair market value on the date of grant, or modify the eligibility requirements for the class of employees eligible to receive incentive stock options. Tax Withholding Optionees are required to pay the Company cash for the amount of the tax liability incurred by the optionee in connection with the exercise of his or her option. However, the Board may in its sole discretion permit an optionee to reimburse the Company for such tax liability by the actual or imputed delivery to the Company of shares of its Common Stock. Federal Income Tax Consequences The principal tax consequences of the grant and exercise of incentive stock options and non-statutory stock options under current provisions of the federal income tax laws may be summarized as follows: Incentive Stock Options. The grant of an incentive stock option does not produce taxable income for the employee or a tax deduction for the Company. Upon exercise of an incentive stock option, the excess of the fair market value of the shares acquired over the amount paid by the employee for the shares will be an item of tax preference to the employee, which may be subject to the alternative minimum tax for the taxable year of exercise. If no disposition of the stock is made within two years from the date of grant of the incentive stock option nor within one year after the transfer of the shares to the employee, the employee will not realize ordinary income as a result of the exercise and subsequent sale of the incentive stock option. Any gain or loss realized on the ultimate sale of the shares must be reported by the employee as long-term capital gain or loss. The Company is not entitled to any deduction as a result of the exercise of the incentive stock option. If the employee disposes of the shares within the two-year or one-year periods referred to above, the excess of the fair market value of the shares at the time of exercise (or the proceeds of disposition, if less) over the amount paid by the employee for the shares will at that time be taxable to the employee as ordinary income. The same amount will be deductible by the Company, subject to the general rules relating to the reasonableness of compensation. The excess (if any) of the proceeds of disposition over the fair market value of the shares on the date of exercise must be reported by the employee as a long-term capital gain if the shares have been held for more than one year, or as a short-term capital gain if the shares have been held for one year or less. If no gain is realized, there will be no ordinary income and any loss will be long-term or short-term capital loss. Non-Statutory Stock Options. The grant of a non-statutory stock option under the Stock Option Plan does not produce taxable income for the optionee or a tax deduction for the Company. Except as described below, upon exercise of a non-statutory stock option, the excess of the fair market value of the shares acquired over the amount paid by the optionee will be taxable to the optionee as ordinary income. The Company will be entitled to a deduction for income tax purposes in an amount equal to the ordinary income taxable to the optionee in the year in which such ordinary income is recognized. Any additional profit or loss realized by an optionee on disposition of the shares will not result in any additional tax deduction to the Company. Similar rules apply if the Company permits the exercise of an "unvested" option with the issued stock being subject to certain repurchase rights or other substantial risks of forfeiture. Using Stock to Exercise Options. Special rules apply if an optionee uses already owned stock of the Company to pay all or part of the exercise price of an incentive or non-statutory stock option. The use of already owned stock to pay all or part of the exercise price of a non-statutory stock option permits an optionee to defer the date when the gain on the surrendered shares which are used to pay the exercise price of the option is recognized for tax purposes. That is, using already owned shares to exercise a non-statutory stock option permits an optionee to finance the exercise of the option without paying current tax on the unrealized appreciation in value of the surrendered shares. An option exercise using already owned stock is treated as a "tax-free exchange" with respect to that number of shares received on the option exercise which equals the number of shares surrendered. The optionee's basis in these shares is the same as his or her basis in the shares surrendered, and the capital gain holding period on such shares runs without interruption from the date when the surrendered shares were acquired. Any additional shares received by the optionee on the exercise will trigger ordinary income taxation equal to the fair market value of the additional shares over the consideration paid by the optionee in connection with the exercise. The optionee's basis in the additional shares is equal to their fair market value on the date the shares were received, and the capital gain holding period on such shares commences on that date. Similarly, the use of previously owned stock to pay the exercise price of an incentive stock option permits an employee to defer tax recognition of gain on the surrendered shares. However, if an employee pays all or part of the exercise price of an incentive stock option by surrendering stock previously acquired in the exercise of any other incentive stock option and such previously acquired stock has not been held for the statutory holding period, then the surrender of such stock to exercise the incentive stock option will be treated as a disqualifying disposition of the prior incentive stock option with the tax consequences described above. Furthermore, complex tax rules apply concerning the use of shares to exercise an incentive stock option, especially with regard to an employee's basis in the shares received on the exercise. Accounting Treatment Under the present financial accounting rules, neither the grant nor the exercise of options issued to employees at fair market value will result in any charge to the Company's earnings. However, the Company will be required to calculate the fair value of all option grants at the time of grant and disclose such value on a pro-forma basis. The grant of options with exercise prices less than the fair market value of the shares at the time of grant will result in a compensation expense equal to the discount from market at the time of grant. The Company will have to report such expense pro rata as the shares underlying the option become exercisable. Accordingly, the grant of discounted options under the Stock Option Plan would result in a charge to reported earnings. In all events, the number of dilutive options outstanding under the Stock Option Plan will be a factor in determining the Company's reported earnings per share. Required Vote Approval by the holders of a majority of the shares of the Existing Common Stock represented and voting at the Meeting on this matter (which shares constitute at least a majority of the required quorum for the Meeting) is required for the adoption of this proposal. For purposes of calculating the vote necessary for approval, abstentions and non-votes are not counted. The Board recommends that you vote FOR the approval of this proposal, which is set forth as Item 3 on the Proxy Card. PROPOSAL 4 - AMENDMENT OF THE AGOURON PHARMACEUTICALS, INC. EMPLOYEE STOCK PURCHASE PLAN Description of the Employee Stock Purchase Plan The essential features of the Restated Employee Stock Purchase Plan (the "ESPP") are outlined below. For a complete understanding of the terms of the ESPP, see Annex VII, which reflects amendments that will be made if the Divisional Stock Proposal and this Proposal 4 are approved by the shareholders. As of August __, 1998, a total of ______ shares of Common Stock remain available for purchase under the ESPP. Any full-time employee is eligible to participate in the ESPP after he or she has been continuously employed by the Company for three consecutive months. Eligible employees may elect to contribute up to 15% of their total compensation during each offering period, subject to certain statutory limits. Additionally, each employee is only entitled to purchase up to a maximum of 3,000 shares of Common Stock during any one year. On the last day of the offering period or such other date(s) during the offering period which the Board has chosen prior to the commencement of the offering period (Purchase Date) the Company will apply the amount contributed by the participant to purchase whole shares of Common Stock. Shares of Common Stock are purchased for eighty-five percent (85%) of the lower of the fair market value per share of Common Stock on (i) the first day of the offering period or (ii) the Purchase Date. All expenses incurred in connection with the implementation and administration of the ESPP are paid by the Company. The ESPP is administered by the Board; provided, however, that the Board may delegate all or any part of its authority to administer the ESPP. Termination of employment for any reason shall be treated as an automatic withdrawal by the participant from the ESPP. The Board has the right to amend, suspend or terminate the ESPP at any time and without notice; provided, no participant's existing rights are adversely affected thereby and except that any amendment to increase the aggregate number of shares available under the ESPP shall be subject to approval by a vote of the shareholders of the Company. On August 6, 1998, the Board adopted an amendment to the ESPP subject to the approval of the Company's shareholders to increase by 200,000 shares the aggregate number of shares available for purchase under the ESPP. The Board has also approved, in connection with and subject to approval and implementation of the Divisional Stock Proposal, the amendment and restatement of the ESPP to conform the ESPP to the changes in the Company's capital structure being made by the Divisional Stock Proposal. See "Proposal 2--The Divisional Stock Proposal--Amendment of Stock Plans." Certain Federal Income Tax Information The ESPP, and the right of participants to make purchases thereunder, is intended to qualify under the provisions of Sections 421 and 423 of the Internal Revenue Code. Under these provisions, no income will be taxable to a participant at the time of grant of the option or purchase of shares. Upon disposition of the shares, the participant will generally be subject to tax. If the shares have been held by the participant for more than two years after the first day of the offering period and more than one year after the purchase date of the shares, the lesser of (a) the excess of the fair market value of the shares at the time of such disposition over the purchase price of the shares subject to option, or (b) the excess of the fair market value of the shares on the first day of the offering period over the deemed purchase price of the shares subject to option, will be treated as ordinary income, and any further gain upon such disposition will be treated as capital gain. If the shares are disposed of before the expiration of the holding periods described above, the excess of the fair market value of the shares on the date of purchase over the purchase price will be treated as ordinary income, and any further gain or loss on such disposition will be capital gain or loss. Different rules may apply with respect to optionee's subject to Section 16(b) of the Securities Exchange Act of 1934, as amended. The Company is not entitled to a deduction for amounts taxable to a participant, except to the extent of ordinary income reported by participants upon disposition of shares prior to the expiration of the holding periods described above. The foregoing is only a summary of the United States federal income tax consequences of the ESPP to participants and the Company and does not purport to be complete. Reference should be made to the applicable provisions of the Internal Revenue Code. In addition, the summary does not discuss the income tax consequences of a participant's death or the income tax laws of any municipality, state or foreign country in which the participant may reside. Required Vote Approval by the holders of a majority of the shares of the Company's Common Stock represented and voting at the Meeting on this matter (which shares constitute at least a majority of the required quorum for the Meeting) is required for the adoption of this proposal. For purposes of calculating the vote necessary for approval, abstentions and non-votes are not counted. The Board recommends that you vote FOR the approval of this proposal, which is set forth as Item 4 on the Proxy Card. PROPOSAL 5 RATIFICATION OF SELECTION OF INDEPENDENT ACCOUNTANTS The Board has selected the firm of PricewaterhouseCoopers LLP as independent accountants for the Company for the fiscal year ending June 30, 1999, it being intended that such selection would be proposed for ratification by the affirmative vote of a majority of the shares of the Existing Common Stock represented and voting at the Meeting on this matter (which shares constitute at least a majority of the required quorum for the Meeting). For purposes of calculating the vote necessary for ratification of the selection of independent accountants, abstentions and non-votes are not counted. One or more members of PricewaterhouseCoopers LLP are expected to be present at the Meeting and will be available to respond to questions and make a statement if they desire to do so. The Board recommends that you vote FOR the ratification of the selection of PricewaterhouseCoopers LLP, which is set forth as Item 5 on the Proxy Card. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth information as of September __, 1998 relating to the beneficial ownership of the Existing Common Stock by (i) each person known by the Company to beneficially own more than 5% of the outstanding shares of the Company's Common Stock, (ii) each director, (iii) each of the executive officers named in the Summary Compensation Table below, and (iv) all executive officers and directors as a group.
Beneficial Ownership(1) Number of Percentage of Beneficial Owner Shares(9) Total Wellington Management Co. 3,500,000 11.25% 75 State Street Boston, MA 02109 Peter Johnson(2) 706,533 2.23% Gary E. Friedman(2) Family Trust(8) 294,123 * John N. Abelson(2)(3)(6) 102,943 * Patricia M. Cloherty(2) 27,659 * A. E. Cohen(2) 73,333 * Michael E. Herman(2)(4) 83,333 * Irving S. Johnson(2) 41,933 * Antonie T. Knoppers(2) 51,533 * Melvin I. Simon(2)(3) and Linda F. Simon Living Trust(5) 122,843 * Marvin R. Brown 194,995 * Barry D. Quart 152,481 * R. Kent Snyder(7) 175,035 * All executive officers and directors as a group (19 persons) 6,206,671 18.78%
* less than 1%. (1) Unless otherwise indicated, the persons named in the above table exercise sole voting and investment powers with respect to all shares beneficially owned by them, subject to applicable community property laws. The number of shares beneficially owned includes the following number of shares issuable upon exercise of stock options exercisable within 60 days of September 22, 1998: Mr. Johnson, 596,923 shares; Mr. Friedman, 241,599 shares; Dr. Abelson, 33,333 shares; Ms. Cloherty, 13,333 shares; Mr. Cohen, 43,333 shares; Mr. Herman, 39,333 shares; Dr. Johnson, 15,833 shares; Dr. Knoppers, 43,333 shares; Dr. Simon, 33,333 shares; Dr. Brown, 23,077 shares; Dr. Quart 117,266 shares; Mr. Snyder,168,932 shares; and all executive officers and directors as a group, 1,952,280 shares. (2) Director. (3) Does not include 1,106,000 shares held by The Agouron Institute, of which Drs. Abelson and Simon are directors. As directors, they share voting and investment powers as to the shares held by The Agouron Institute. (4) Includes 20,000 shares held by the Herman Family Trading Company, a family partnership of which Mr. Herman is the general partner, 10,000 shares held by Vail Fishing Partners in which Mr. Herman has a 50% general partner interest and 2,000 shares held by Mrs. Herman, of which Mr.EHerman disclaims any beneficial ownership. (5) Shared voting and investment power. (6) Includes 2,350 shares held by Dr. Abelson as custodian for his minor children, of which Dr. Abelson disclaims any beneficial ownership. (7) Includes 800 shares held by immediate family members, of which Mr. Snyder disclaims any beneficial ownership. (8) Includes 5,408 shares held by wife as custodian for minor children of which Mr. Friedman disclaims any beneficial ownership. (9) Adjusted to reflect the two-for-one stock split in the form of a stock dividend in August 1997. EXECUTIVE COMPENSATION Compensation of Directors Non-employee members of the Board receive cash compensation in the amount of $250 per Board meeting for their services as Board members, and are eligible for reimbursement of their expenses incurred to attend each such meeting in accordance with Company policy. In addition to meeting fees, certain non-employee directors received consulting fees during fiscal 1998. For scientific consultation, Dr. Abelson received $30,040; Dr. Knoppers, $6,000; Dr. Johnson, $18,750 and Dr. Simon, $26,900. For special consultation concerning corporate development issues, Mr. Cohen received $18,250 and Mr. Herman received $750. Compensation of Executive Officers The following table sets forth the aggregate compensation paid or accrued by the Company to the Chief Executive Officer and to the four other most highly compensated executive officers whose annual compensation exceeded $100,000 for the fiscal year ended June 30, 1998 (collectively the "named executive officers") for service during the fiscal years ended June 30, 1998, 1997 and 1996: Summary Compensation Table
Long-Term Compensation Name Annual Compensation Awards(2) Principal Stock All Other Position Year Salary(1) Bonus Options Compensation(3) Peter Johnson 1998 $395,000 $230,000 40,000 $2,998 President and Chief 1997 330,000 165,000 100,000 2,250 Executive Officer 1996 285,000 100,000 180,000 1,647 Marvin R. Brown(4) 1998 230,000 65,000 10,000 2,400 Vice President, 1997 23,523 0 0 President of Alanex 1996 -- -- -- Gary E. Friedman 1998 212,500 100,000 17,000 11,232 Corporate Vice President, 1997 195,000 70,000 26,000 2,250 General Counsel 1996 175,500 50,000 50,000 1,589 Barry D. Quart(5) 1998 230,000 125,000 21,000 2,713 Senior Vice President, 1997 180,000 115,500(5) 44,000 2,953 Regulatory Affairs 1996 165,000 70,500(5) 72,000 16,587 R. Kent Snyder(5) 1998 230,000 150,000 21,000 3,050 Senior Vice President, 1997 200,000 102,000(5) 44,000 2,250 Commercial Affairs 1996 178,500 62,200(5) 64,000 1,777
(1) Includes amounts deferred out of compensation under the Company's 401(k) Plan otherwise payable in cash during each fiscal year. (2) The Company has made no restricted stock awards, has not granted any stock appreciation rights and has no other long-term incentive plans. (3) (a) During 1998, the Company made matching contributions to the Company's 401(k) Plan in the following amounts: Mr. Johnson, $2,998; Dr. Brown, $2,400; Mr. Friedman, $3,063; Dr. Quart, $2,713; and Mr. Snyder $3,050. (b) During 1997, the Company made matching contributions to the Company's 401(k) Plan in the following amounts: Mr. Johnson, $2,250; Mr. Friedman $2,250; Dr. Quart, $2,953; and Mr. Snyder, $2,250. (c) During 1996, the Company made matching contributions to the Company's 401(k) Plan in the following amounts: Mr. Johnson, $1,647; Mr. Friedman, $1,589; Dr. Quart, $1,959; and Mr. Snyder, $1,777. (d) During 1996, the Company reimbursed Dr. Quart for relocation costs in the amount of $14,628. (e) During 1998, Mr. Friedman sold accrued but unused vacation back to the Company in the amount of $8,169. (4) Dr. Brown joined the Company as of 5/24/97 with the acquisition of Alanex Corporation. (5) For Dr. Quart and Mr. Snyder, a portion of the bonus amount was subsequently used to partially repay their outstanding relocation loans. These loans were paid in full on June 30, 1997. The following table sets forth certain information with respect to individual grants of stock options made during the fiscal year ended June 30, 1998, to each of the named executive officers: Option Grants in Fiscal 1998
Potential Realizable Value at Assumed Annual Rates of Stock Price Appreciation Individual Grants for Option Term(2)_ % of Total Options Granted to Employees Options in Fiscal Exercise Expiration Name Granted(1) Year Price Date 5% 10% - ------------ ------------------------ --------- ----------- ----------- --------- Peter Johnson 30,145# 2.70% $30.4375 6/29/08 $577,035 $1,462,320 9,855* 0.88 30.4375 6/29/08 188,644 478,061 Marvin R. Brown 145# 0.01 30.4375 6/29/08 2,776 7,034 9,855* 0.88 30.4375 6/29/08 188,644 478,061 Gary E. Friedman 7,145# 0.64 30.4375 6/29/08 136,769 346,601 9,855* 0.88 30.4375 6/29/08 188,644 478,061 Barry D. Quart 11,145# 1.00 30.4375 6/29/08 213,337 540,639 9,855* 0.88 30.4375 6/29/08 188,644 478,061 R. Kent Snyder 11,145# 1.00 30.4375 6/29/08 213,337 540,639 9,855* 0.88 30.4375 6/29/08 188,644 478,061
(1) During fiscal 1998, the Agouron Stock Option Plan ("Plan") for executive officers and directors was administered by the Board. The Board, based upon the recommendation of the Directors Compensation Committee, determines the number of shares to be granted and the term of such grants to each executive officer and director. The options granted in fiscal 1998 were either incentive stock options(*) or non-statutory stock options(#), have exercise prices equal to the fair market values on the date of grant, vest over a period of three years and have a term of ten years. Upon certain corporate events as defined in the Plan which result in a change of control, the exercise date of all outstanding options for all employees, including executive officers, may be accelerated. The Plan also permits the Company to assist an employee in using a so-called "cashless" exercise procedure to pay the option exercise price. (2) Potential realizable value is based on an assumption that the stock price of the Common Stock appreciates at the annual rate shown (compounded annually) from the date of grant until the end of the ten year option term. These numbers are calculated based on the requirements promulgated by the Securities and Exchange Commission and do not reflect the Company's estimate of future stock price growth. Any such growth would benefit all shareholders. The following table sets forth certain information with respect to each exercise of stock options during the fiscal year ended June 30, 1998, by each of the named executive officers and the number and value of unexercised options held by such named executive officers as of June 30, 1998: Option Exercises in Fiscal 1998 And Value of Options at June 30, 1998
Number of Unexercised Value of Unexercised Options at In-the-Money Options at Shares June 30, 1998(2) June 30, 1998(1) -------------------------- --------------------- Acquired on Value Name Exercise Realized Exercisable Unexercisable Exercisable Unexercisable Peter Johnson 125,000 $5,692,095 596,923 205,767 $ 11,290,804 $ 1,312,900 Marvin R. Brown 2,500 85,744 17,845 17,325 538,428 221,014 Gary E. Friedman 1,000 24,188 241,599 61,001 4,988,364 348,337 Barry D. Quart 32,000(2) 1,233,037 133,266 89,334 1,982,900 513,000 R. Kent Snyder 12,500 406,045 168,932 81,668 2,983,727 392,673
(1) Value calculated as market value of Company stock on June 30, 1998, minus exercise price multiplied by the number of shares (2) Adjusted to reflect the two-for-one stock split in the form of a stock dividend in August 1997. Compensation Committee Report on Executive Compensation(1) Overview and Philosophy The Directors Compensation Committee (the "Committee") is composed entirely of outside directors and is responsible for developing and making recommendations to the Board with respect to the Company's executive compensation policies and practices, including the establishment of the annual total compensation for the chief executive officer (the "CEO") and all executive officers. The Committee has available to it an outside compensation consultant and access to independent compensation data. The Board is responsible for approving and implementing the compensation recommendations of the Committee. The recommendations made by the Committee to the Board have generally been approved without any significant modification. The objectives of the Company's executive compensation program are to attract, retain and motivate highly qualified executive personnel. These objectives are satisfied through the use of three principal compensation elements: base salary, cash bonus payments and stock options. Base Salary Base salary levels for the Company's executive officers are based on the concept of pay for performance and are competitively set relative to the compensation of other executives in the biotechnology industry. Extensive salary survey data is available on the industry (notably, the annual "Biotechnology Compensation and Benefits Survey" conducted by Radford Associates and Alexander & Alexander Consulting Group) and is utilized by the Committee in establishing annual base salaries. In determining base salaries, the Committee also considers corporate performance and progress in the immediately preceding fiscal year, individual experience and performance, specific issues which are relevant to the Company and general economic conditions. The base salary of the CEO and all other executive officers is reviewed annually. During fiscal year 1998, the base salaries paid to the executive officers other than the CEO approximated the 75th percentile of the above-noted industry survey data. Bonus Payments Annual cash bonus payments are discretionary. Bonus payments, if any, to executive officers, including the CEO, are based on two principal factors: corporate performance as compared to the Company's annual goals and objectives and individual performance relative to corporate performance and individual goals and objectives. Bonus payments in 1998 were generally in recognition of the satisfaction of several significant corporate objectives during the year, including the establishment of the Company's first product, VIRACEPT(R) (nelfinavir mesylate) as the market leader among all HIV protease inhibitors, the in-licensing of three development stage compounds to supplement the Company's internal R&D pipeline, the continued preclinical and clinical development of the Company's cancer and anti-viral agents and the satisfaction of all significant financial targets for fiscal 1998. Bonus payment recommendations for executive officers other than the CEO are initiated by the CEO and submitted to the Committee for review and subsequent submission to the Board. Bonus payment recommendations for the CEO are initiated by the Committee and submitted to the Board. Total base salary and any bonus payments are compared to "total compensation" of peers as reported by the previously noted industry survey. Such total compensation for the executive officers of the Company is at or above the averages of such data, which reflects the Committee's belief that the relative levels of corporate performance during the period were also above average. (1) The material in this report is not soliciting material, is not deemed filed with the SEC, and is not incorporated by reference in any filing of the Company under the Securities Act of 1933 (the "Securities Act"), as amended, or the Securities Exchange Act of 1934 (the "Exchange Act"), as amended, whether made before or after the date of this Proxy Statement and irrespective of any general incorporation language in such filing. Stock Options To conserve its cash resources, the Company places special emphasis on equity-based incentives to attract, retain and motivate executive officers as well as other employees. Under the Company's stock option plans, grants are generally priced at the fair market value on the date of grant, vest over a period of three or four years and have a term of ten years. Grants are made to all employees on their date of hire based on salary level and position. All employees, including executive officers, are eligible for subsequent, discretionary grants which are generally based on either individual or corporate performance. It is the Committee's intent that the interests of the Company's shareholders and the executive officers be closely aligned through the use of stock options. Option grants recommended by the Committee are submitted to the Board for approval. Based on recent peer-company proxy data compiled by the Company, the level of option grants to each executive officer in 1998 remains competitive, and the resultant total option position as a percent of total shares outstanding represents approximately the 70th to 90th percentile of such positions. Chief Executive Officer Compensation During 1998, Mr. Johnson's base salary of $395,000 was based on individual and corporate performance, and approximated the average of the updated industry data for base salaries of CEOs. During 1998, Mr. Johnson was awarded a bonus of $230,000 in recognition of the satisfaction of several significant corporate objectives, including the establishment of VIRACEPT(R) as the number one HIV protease inhibitor in the United States with product sales in the United States of $358 million for fiscal 1998. The Committee believes that Mr. Johnson has made a significant contribution during 1998 in enhancing shareholder value and establishing a sound base for the continued enhancement of shareholder value through his managerial and entrepreneurial efforts. The stock options awarded to Mr. Johnson during fiscal 1998 are competitive and consistent with the purpose of the stock option plans. The resultant total option position as a percent of total shares outstanding represents approximately the 75th percentile for peer CEO positions. Executive Compensation Deduction Limitations In 1993, Section 162(m) of the Internal Revenue Code ("Section 162(m)") was enacted which disallows the deductibility by the Company of any compensation over $1 million per year paid to each of the chief executive officer and the four other most highly compensated executive officers, unless certain performance-based compensation criteria are satisfied. While it is the Committee's firm belief and intent that compensation from base salary and cash bonus payments will not approach the annual Section 162(m) limitation in the foreseeable future, additional "compensation" from the exercise of option grants pursuant to the Company's stock option plans could result in the annual limitation being exceeded. Accordingly, the Company's 1990 and 1996 Stock Option Plans contain certain provisions which exempt compensation resulting from such option exercises from the $1 million limitation. The Committee will continue to monitor all forms of compensation to its executive officers to ensure that the Company may maximize the tax benefits of such compensation. Directors Compensation Committee Michael E. Herman, Chairman John N. Abelson, Ph.D. A. E. Cohen Directors Compensation Committee Interlocks and Insider Participation The Directors Compensation Committee is composed exclusively of three outside directors: Mr. Herman, Mr. Cohen and Dr. Abelson. The Company is not aware of any Committee interlocks. Performance Measurement Comparison(1) The chart set forth below shows the value of an investment of $100 on June 30, 1993 in the Existing Common Stock, The Nasdaq Stock Market Index (U.S. Companies) ("Nasdaq Market (US)") and the Nasdaq Pharmaceuticals Index ("Nasdaq Pharmaceuticals"). The total returns assume the reinvestment of dividends, although cash dividends have not been declared on the Existing Common Stock. The Existing Common Stock is traded on The Nasdaq Stock Market and is a component of both the Nasdaq Market (US) and the Nasdaq Pharmaceuticals Index. The comparisons in the chart are required by the Securities and Exchange Commission and are not intended to forecast or be an indicator of possible future performance of the Company's Common Stock. [OBJECT OMITTED] - ------------- (1) This section is not "soliciting material," is not deemed filed with the Securities and Exchange Commission and is not to be incorporated by reference in any filing of the Company under the Securities Act or the Exchange Act. CERTAIN TRANSACTIONS All transactions with affiliates have been and will continue to be on terms no less favorable to the Company than could be obtained from unaffiliated parties. Furthermore, all transactions with affiliates and any loans to Company officers, affiliates or shareholders must be approved by a majority of the disinterested directors. As permitted by California law, the articles of incorporation and bylaws of the Company currently provide for the limitation of director liability for monetary damages for breach of duty to the Company and for indemnification of agents (including officers and directors) to the full extent permitted under the California General Corporations Law. The Company has entered into Indemnification Agreements with all of its directors and officers. Additionally, the Company has in effect a directors and officers liability insurance policy which insures directors and officers of the Company against loss arising from claims made against them due to wrongful acts while acting in their individual and collective capacities as directors and officers. SUBMISSION OF SHAREHOLDER PROPOSALS To be considered for inclusion in the Company's proxy statement and form of proxy for its 1999 Annual Meeting of Shareholders, a shareholder proposal must be received at the principal executive offices of the Company not later than _______. In order for business, other than a shareholder proposal included in the Company's proxy statement and form of proxy, to be properly brought before the 1999 Annual Meeting by a shareholder, the shareholder must notify the Secretary of the Company in writing at the principal executive offices of the Company no later than ________. It is recommended that shareholders submitting proposals direct them to the Secretary of the Company and utilize Certified Mail-Return Receipt Requested. LEGAL MATTERS Certain legal matters with respect to the validity of the Agouron Pharmaceuticals Stock and the Oncology Division Stock and with respect to the matters set forth under "Proposal 2--The Divisional Stock Proposal--Certain Federal Income Tax Considerations" will be passed upon for the Company by Pillsbury Madison & Sutro LLP, San Diego, California. EXPERTS The financial statements as of June 30, 1998 and 1997 and for each of the three years in the period ended June 30, 1998 included in this Proxy Statement/Prospectus and the financial statements incorporated in this Prospectus and Proxy by reference to the Annual Report on Form 10-K for the year ended June 30, 1998 have been so included and incorporated in reliance on the report of PricewaterhouseCoopers LLP, independent accountants, given on the authority of said firm as experts in auditing and accounting. OTHER MATTERS The Company's Annual Report to Shareholders for the fiscal year ended June 30, 1998 accompanies this Proxy Statement. Section 16(a) of the Securities Exchange Act of 1934 requires the Company's executive officers and directors, and persons who own more than 10% of a registered class of the Company's equity securities, to file reports of ownership and changes in ownership with the Securities and Exchange Commission and The Nasdaq Stock Market. Executive officers, directors and greater than 10% shareholders are required by Securities and Exchange Commission regulation to furnish the Company with copies of all Section 16(a) forms they file. Based solely on review of the copies of such forms furnished to the Company, or written representations that no Forms 5 were required, the Company believes that, during the applicable reporting period ending June 30, 1998, all Section 16(a) filing requirements applicable to its executive officers, directors and greater than 10% beneficial owners were satisfied. The Company's Board does not know of any other matters to be presented at the Meeting. However, if any other business is properly presented at the Meeting for action, the persons named in the enclosed form of Proxy will vote such Proxy according to their best judgment on such matters. BY ORDER OF THE BOARD OF DIRECTORS Gary E. Friedman, Secretary September __, 1998 ANNEX INDEX Annex I - Index of Defined Terms............................................... Annex II - Proposed Restated Articles of Incorporation......................... (To be filed by amendment) Annex III - Agouron Pharmaceuticals, Inc....................................... Management's Discussion and Analysis............................... Consolidated Financial Statements.................................. Annex IV - Agouron Pharmaceuticals Description of Business............................................. Management's Discussion and Analysis................................ Financial Statements of Agouron Pharmaceuticals Annex V - Agouron Oncology Division............................................ Description of Business.............................................. Management's Discussion and Analysis................................. Financial Statements of Agouron Oncology Division.................... Annex VI - Amended and Restated 1996 Stock Option Plan......................... Annex VII - Amended and Restated Employee Stock Purchase Plan.................. ANNEX I Index of Defined Terms 1985 Plan...................................................................... 1990 Plan...................................................................... 1998 Plan...................................................................... Acquiring Person............................................................... Agouron Pharmaceuticals Stock.................................................. Agouron Pharmaceuticals........................................................ Agouron Pharmaceuticals Available Dividend Amount.............................. Agouron Stock Right............................................................ Articles of Incorporation...................................................... Available Dividend Amount...................................................... Board.......................................................................... California Corporations Code................................................... ChaseMellon.................................................................... Code........................................................................... Commercial Product or Service.................................................. Commission..................................................................... Common Stock................................................................... Common Stock Right............................................................. Company........................................................................ Convertible Securities......................................................... Designated Shares.............................................................. Distribution Date.............................................................. Division....................................................................... Divisional Stock Proposal...................................................... Effective Date................................................................. Equity Line.................................................................... ESPP........................................................................... Exchange Act................................................................... Existing Certificates.......................................................... Existing Common Stock.......................................................... Fair Market Value.............................................................. FDA............................................................................ GART........................................................................... GMP............................................................................ GnRH........................................................................... HMOs........................................................................... Interdivision Transactions..................................................... IRS............................................................................ Key Oncology Division Program.................................................. Meeting........................................................................ Merger Right................................................................... MMPs........................................................................... Nasdaq Market (US)............................................................. Nasdaq National Market......................................................... Nasdaq Pharmaceuticals......................................................... Oncology Division Stock........................................................ Oncology Division Designated Shares............................................ Oncology Division Available Dividend Amount.................................... Oncology Stock Right........................................................... Other Property................................................................. PaineWebber.................................................................... PARP........................................................................... Participating Preferred Stock.................................................. Permitted Offer................................................................ Plan........................................................................... Pre-Effectiveness Convertible Securities....................................... Preferred Stock................................................................ PricewaterhouseCoopers LLP..................................................... Proxy Statement................................................................ Purchase Date.................................................................. Purchasing Division............................................................ Reclassification............................................................... Record Date.................................................................... Redemption Price............................................................... Registration Statement......................................................... Restated Articles of Incorporation............................................. Restated Rights Agreement...................................................... Rights......................................................................... Rights Agent................................................................... Rights Agreement............................................................... Securities Act................................................................. Selling Division............................................................... Series B Shares................................................................ Series C Shares................................................................ Series B Participating Preferred Stock......................................... Series C Participating Preferred Stock......................................... Shareholder Rights Plan........................................................ Stock Option Plan.............................................................. Stock Plans.................................................................... Subscription Right............................................................. TIN............................................................................ VEGF........................................................................... Voting Stock................................................................... ANNEX III MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Overview This discussion contains forward-looking statements. Such statements are subject to certain risks and uncertainties which could cause actual results to differ materially from those projected. See "Risk Factors - Risks related to Agouron Pharmaceuticals Division and Oncology Division" in the Proxy Statement/Prospectus to which this Annex III is attached. Readers are cautioned not to place undue reliance on these forward-looking statements which speak only as of the date hereof. The Company undertakes no obligation to publicly release the result of any revisions to these forward-looking statements which may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. Agouron Pharmaceuticals, Inc. (the "Company") is committed to the discovery, development, manufacturing and marketing of human pharmaceuticals targeting cancer, AIDS, and other serious diseases. Operations to date have been principally funded from the Company's equity-derived working capital, various collaborative arrangements and, most recently, from the gross margin contribution of its first product, VIRACEPT(R) (nelfinavir mesylate). The net income reported in fiscal 1998 is principally due to the commercialization of VIRACEPT while the Company's prior net operating losses reflect primarily the result of its independent research and substantial investment in the clinical and commercial development of VIRACEPT and certain anti-cancer compounds. In March 1997, the Company received clearance from the United States Food and Drug Administration ("FDA") to market VIRACEPT in the United States. For the fiscal year ended June 30, 1998, due principally to the increasing product contribution from VIRACEPT sales, license fees and royalties, the Company realized a net income of $13,154,000. Results of Operations Product sales Product sales for the fiscal years ended June 30, 1997 and 1998 were approximately $57,000,000 and $409,300,000 which included sales in the United States of $55,559,000 and $358,321,000, respectively. The Company anticipates that VIRACEPT sales in the United States will approximate $430,000,000 to $440,000,000 for fiscal 1999. Contract revenues Collaborative research and development agreements with Japan Tobacco Inc. ("JT"), Hoffmann-La Roche Inc. and F. Hoffmann-La Roche Ltd (collectively "HLR") accounted for substantially all of the Company's contract revenues for 1998, 1997 and 1996. Total contract revenues for 1998 decreased approximately 40% from 1997 due principally to decreased VIRACEPT program spending by Agouron, which was partially funded by JT. Additionally, the amortization to revenue over a 24 month period of JT's $24,000,000 milestone payment, which was received in August 1995, was completed in June 1997. The increase in contract revenues from 1996 to 1997 of approximately 59% was due principally to increased program activity and spending on the JT collaborations. In December 1997, the Company agreed to end its collaboration with HLR in the field of cancer. As a result of the termination agreement, Agouron has regained all rights to its anti-cancer drugs previously within the scope of the HLR collaboration. The Company anticipates that contract revenues for fiscal 1999 will approximate $35,000,000 to $40,000,000. License fees and royalties The Company's license fees and royalties for 1998 and 1997 were principally derived from F. Hoffmann-La Roche Ltd ("Roche"); license fees in 1996 were earned from HLR. Total revenues for 1998 increased approximately 83% from 1997 due to European marketing approval for VIRACEPT. The 33% decrease from 1996 to 1997 is principally due to $9,000,000 for initial European marketing rights for VIRACEPT in 1997 versus $15,000,000 for initial world-wide development rights for two anti-cancer drugs in 1996. In January and March 1998, VIRACEPT was approved for marketing in Europe and Japan, respectively. Upon such approvals, the Company realized as revenue license fees totaling $12,000,000. In July 1997, the Company and JT granted Roche certain exclusive rights to VIRACEPT in several Asian countries. For such rights, the Company received a license fee of $2,000,000. Royalty revenues of approximately $3,852,000 have been recognized in 1998 based on estimated and actual Roche sales of VIRACEPT in its licensed territory. The Company anticipates that license fees and royalties for fiscal 1999 will range from $30,000,000 to $35,000,000. Cost of product sales The aggregate cost of product sales as a percentage of product sales was approximately 43% and 42% for 1997 and 1998, respectively. Gross margins on United States commercial sales were approximately 57% and 65% during 1997 and 1998, respectively. The Company anticipates that gross margins on United States commercial sales will improve as product sales volumes increase and certain manufacturing process and scale efficiencies are realized, and will approximate 71% in 1999. Aggregate gross margins will also be impacted by the size of the Company's patient assistance program (which provides free goods to indigent individuals), the Company's manufacturing supply arrangement with Roche (whereby Roche has the right to either purchase product at Agouron's cost plus contractually determined mark-ups or manufacture drug product for its own use, subject to contractually determined fees to be paid to Agouron) and the level of sales subject to Medicaid and other discounts or rebates in the United States. Research and development Research and development ("R&D") spending increased by approximately 39% from 1997 to 1998 due to license fees for three development stage HIV products, increasing average R&D staff levels (approximately 28%) and staff-related spending (including occupancy and the addition of Alanex since late 1997) and increased expenditures for human clinical trial activities associated with the clinical development of certain of the Company's anti-cancer compounds. R&D spending increased by approximately 52% from 1996 to 1997 due generally to increasing average R&D staff levels (approximately 39%) and staff-related expenditures (including occupancy), increased expenditures in support of human clinical trials, an expanded access program associated with VIRACEPT and increased expenditures for clinical trial activities associated with AG3340 and other anti-cancer compounds. The Company anticipates that total R&D expenses in fiscal 1999, excluding the impact of any license fees or milestone expenses in either 1998 or 1999, will exceed fiscal 1998 expenses by approximately 40%. Selling, general and administrative Selling, general and administrative ("SG&A") expenses represented approximately 28% of total operating expenses (excluding the cost of product sales, royalties and write-off of in-process technology purchased) in 1998, 23% in 1997 and 10% in 1996. SG&A increased by approximately 76% from 1997 to 1998 due principally to a full year of expenses associated with the sales force and other marketing personnel. Spending increases from 1996 to 1997 were due chiefly to increasing staff levels (approximately 214%) and staff-related expenditures, certain premarketing and advertising and promotion costs associated with the launch of VIRACEPT in March 1997 and other costs associated with a growing sales and marketing infrastructure. The Company anticipates that total SG&A expenses will increase by approximately 40% in fiscal 1999 due to increasing sales and marketing activities and the support of VIRACEPT phase IV marketing studies. Royalties The Company's obligation to share VIRACEPT profits with JT is reflected in royalty expense for 1998 and represents approximately 19% of United States product sales. Royalties in fiscal 1997 were not significant. It is anticipated that royalty expense for fiscal 1999 will approximate 24% to 25% of United States product sales. Write-off of in-process technology purchased In 1997, the Company acquired Alanex, a research company engaged in the discovery of drug leads through the high-speed screening of diverse chemical libraries designed by computational methods and generated by combinatorial chemistry. Alanex was acquired in a purchase transaction through the issuance of approximately 1,992,000 equivalent shares (including 548,000 for options and warrants) of the Company's common stock valued at approximately $61,000,000, plus $1,300,000 of related acquisition costs. The purchase price was allocated to various tangible and intangible assets and either capitalized (approximately $4,800,000) or expensed (approximately $57,500,000) as in-process technology based on an independent valuation of the Alanex assets, technology and research programs at the date of acquisition. Interest and other income Interest income increased by 1% from 1997 to 1998. Interest income increased by approximately 23% from 1996 to 1997 due principally to a higher average investment portfolio balance resulting from the July 1996 public offering, receipt of $15,000,000 and $9,000,000, respectively, in license fees from HLR (June 1996) and Roche (January 1997), significantly increased contract funding from JT and HLR and the exercise of employee stock options. The Company anticipates that, absent additional revenue sources or a significant change in interest rates, fiscal 1999 interest income will be less than that of fiscal 1998. Interest expense Interest expense increased in 1998 from 1997 due to borrowings under a line of credit which was used to partially fund quarterly royalties paid to JT throughout the year. Interest expense decreased in 1997 from 1996 by approximately 38% due to a decreasing level of debt and capital lease obligations from year to year. Income tax provision (benefit) The income tax provision in 1998 has been computed using an effective, combined federal and state rate of 40%. The cash obligation of such 1998 provision has been mostly offset by the utilization of its deferred tax assets. Based on its 1998 pre-tax profit and its estimates for future taxable income, the Company believes it is more likely than not that its deferred tax assets (comprised mostly of net operating loss carryforwards, deductions generated by the exercise of stock options, and research credits) will be realized and has, therefore, recorded the full tax benefit of its deferred tax assets. The Company's accumulated net deferred tax assets totaled approximately $55,900,000 and $64,100,000 at June 30, 1997 and 1998. The Company anticipates that its effective income tax rate for fiscal 1999 will range from 10% to 15%. Such decrease from fiscal 1998 is attributed to greater expected availability of R&D tax credits due to the anticipated increase in R&D spending and the anticipated reduction in R&D contract revenues. Year 2000 The Year 2000 issue results from computer programs and systems that were created to accept only two digit dates. Such systems may not be able to distinguish 20th century dates from 21st century dates. This could result in miscalculations and system failures. The Company has established a Year 2000 project team that is currently reviewing computer systems and computer controlled equipment that could be affected by this issue. In this process, the Company expects to both replace and upgrade certain systems and equipment. Additionally, the Company is in the process of contacting all of its significant external business partners to determine the extent to which the Company is vulnerable to their failure to obtain Year 2000 compliance. While the total cost of obtaining Year 2000 compliance is not known at this time, the Company believes such cost will not have a material effect on the Company's business, financial position, or results of operation. However, even though the Company plans to have obtained Year 2000 compliance prior to the year 2000, the inability of the Company or its business partners to adequately address year 2000 issues could have a significant impact on the Company's business. Liquidity and Capital Resources Prior to fiscal 1998, the Company relied principally on equity financings and corporate collaborations to fund its operations and capital expenditures. In fiscal 1998, due primarily to the successful commercialization of VIRACEPT, operating activities have provided $827,000 of cash compared with using $73,467,000 in fiscal 1997. Commercial sales of VIRACEPT for 1997 and 1998 resulted in gross margins of approximately $32,370,000 and $236,654,000. At June 30, 1998, the Company had net working capital of approximately $127,728,000, an increase of $11,942,000 over June 30, 1997 levels due principally to the Company's pre-tax profit of $21,924,000. Individual working capital components significantly impacted by the commercialization of VIRACEPT include trade accounts receivable (an increase of $18,416,000), inventories (an increase of $44,906,000), accounts payable (an increase of $15,560,000) and accrued liabilities (an increase of $26,467,000, primarily due to accrued royalties payable to JT). It is anticipated that these working capital components and cash and short-term investments will continue to be significantly impacted as VIRACEPT sales increase. At June 30, 1998, the Company had cash, cash equivalents and short-term investments of approximately $87,123,000. The Company believes that its current capital resources, existing contractual commitments and anticipated VIRACEPT product sales contribution are sufficient to maintain its current operations through fiscal 1999. This belief is based on current research and clinical development plans, anticipated working capital requirements associated with the expanding commercialization of VIRACEPT, the current regulatory environment, historical industry experience in the development of therapeutic drugs and general economic conditions. The Company believes that additional financing may be required to meet the planned operating needs after fiscal 1999 if significant and increasing positive cash flows are not generated from commercial activities. Such needs would include the expenditure of substantial funds to continue and expand research and development activities, conduct existing and planned preclinical studies and human clinical trials and to support the increasing working capital requirements of a growing commercial infrastructure including manufacturing, sales and marketing capabilities. As a result, the Company anticipates pursuing various financing alternatives such as collaborative arrangements and additional public offerings or private placements of securities. If such alternatives are not available, the Company may be required to defer or restrict certain commercial activities, delay or eliminate expenditures for certain of its potential products under development, cancel licenses from third parties or to license third parties to commercialize products or technologies that the Company would otherwise seek to develop or commercialize itself. During fiscal 1998, capital expenditures totaled $33,086,000 compared with $14,727,000 and $3,710,000 during 1997 and 1996, of which $1,579,000, $2,355,000 and $457,000 were financed through capital lease obligations. Of the total capital expenditures during 1998, 1997 and 1996, approximately $14,331,000, $4,728,000 and $318,000 represented leasehold improvement costs associated with certain of the Company's facilities. With the exception of the leasehold improvement costs, virtually all of the capital expenditures during 1998, 1997 and 1996 represented laboratory and office equipment and scientific instrumentation necessary to support an expanding research, development, and commercial infrastructure. Capital expenditures during 1999 are expected to be approximately $18,000,000 to support continued product commercialization, development and research activities. Of the total expected capital expenditures during 1999, approximately $4,000,000 is associated with the leasehold improvement of existing and anticipated new administrative and laboratory facilities. The Company may utilize lease or debt financing for certain expenditures if available on acceptable terms. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDEX TO FINANCIAL STATEMENTS AND SCHEDULES Report of Independent Accountants Consolidated Balance Sheet as of June 30, 1998 and 1997 Consolidated Statement of Income (Loss) for the years ended June 30, 1998, 1997 and 1996 Consolidated Statement of Stockholders' Equity for the years ended June 30, 1998, 1997 and 1996 Consolidated Statement of Cash Flows for the years ended June 30, 1998, 1997 and 1996 Notes to Consolidated Financial Statements NOTE: All schedules are omitted because they are not applicable, or not required, or because the required information is included in the consolidated financial statements or notes thereto. REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders of Agouron Pharmaceuticals, Inc. In our opinion, the accompanying consolidated balance sheet and the related consolidated statements of income (loss), of stockholders' equity and of cash flows present fairly, in all material respects, the financial position of Agouron Pharmaceuticals, Inc. and its subsidiaries at June 30, 1998 and 1997, and the results of their operations and their cash flows for each of the three years in the period ended June 30, 1998, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform an audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. /s/ PricewaterhouseCoopers, LLP San Diego, California July 16, 1998 AGOURON PHARMACEUTICALS, INC. CONSOLIDATED BALANCE SHEET (Dollars in thousands)
June 30, 1998 1997 ASSETS Current assets: Cash and cash equivalents $ 19,098 $ 52,484 Short-term investments 68,025 38,833 Accounts receivable, net 51,341 31,375 Inventories 103,706 58,800 Current deferred tax assets 564 500 Other current assets 5,247 2,209 ---------- ----------- Total current assets 247,981 184,201 Property and equipment, net 47,212 22,613 Deferred tax assets 64,644 56,000 Purchased intangibles 3,500 4,100 ---------- ----------- $ 363,337 $ 266,914 ========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 44,393 $ 28,833 Accrued liabilities 35,356 8,889 Deferred revenue and advances 23,563 27,567 Current deferred tax liabilities 1,139 600 Loan payable and current portion of long-term debt 15,802 2,526 ---------- ----------- Total current liabilities 120,253 68,415 ---------- ----------- Long-term liabilities: Long-term debt, less current portion 5,892 5,940 Accrued rent 1,023 1,277 ---------- ----------- Total long-term liabilities 6,915 7,217 ---------- ----------- Stockholders' equity: Common stock, no par value, 75,000,000 shares authorized, 31,053,380 and 29,429,920 shares issued and outstanding 348,482 317,133 Unrealized gains (losses) on short-term investments 384 0 Accumulated deficit (112,697) (125,851) ---------- ----------- Total stockholders' equity 236,169 191,282 ---------- ----------- Commitments $ 363,337 $ 266,914 ========== ===========
See accompanying notes to consolidated financial statements. AGOURON PHARMACEUTICALS, INC. CONSOLIDATED STATEMENT OF INCOME (LOSS) (In thousands, except per share amounts)
Years ended June 30, 1998 1997 1996 Revenues: Product sales $ 409,298 $ 56,969 $ 0 Contracts 38,855 65,094 40,955 License fees and royalties 18,352 10,000 15,000 ------------- ------------- ------------- 466,505 132,063 55,955 ------------- ------------- ------------- Operating expenses: Cost of product sales 172,644 24,599 0 Research and development 150,657 108,137 71,010 Selling, general and administrative 58,012 32,941 8,082 Royalties 68,423 0 0 Write-off of in-process technology purchased 0 57,500 0 ------------- ------------- ------------- 449,736 223,177 79,092 ------------- ------------- ------------- Operating income (loss) 16,769 (91,114) (23,137) ------------- ------------- ------------- Other income (expenses): Interest and other income 5,907 5,873 4,776 Interest expense (752) (142) (228) ------------- ------------- ------------- 5,155 5,731 4,548 ------------- ------------- ------------- Income (loss) before income taxes 21,924 (85,383) (18,589) Income tax provision (benefit) 8,770 (42,577) 934 ------------- ------------- ------------- Net income (loss) $ 13,154 $ (42,806) $ (19,523) ============= ============= ============= Earnings per share: Basic $ .43 $ (1.59) $ (.99) ============= ============= ============= Diluted $ .40 $ (1.59) $ (.99) ============= ============== ============= Shares used in calculation of: Basic 30,571 26,946 19,688 Diluted 33,214 26,946 19,688
See accompanying notes to consolidated financial statements. AGOURON PHARMACEUTICALS, INC. CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (Dollars in thousands)
Unrealized gains (losses) on Common Stock short-term Accumulated Shares Amount investments Deficit Total Balance at June 30, 1995 14,718,564 $ 76,113 $ 0 $ (63,522) $ 12,591 Stock issuances: Public sale 6,000,000 78,579 -- 78,579 Exercise of stock options 586,412 2,990 -- 2,990 Exercise of stock warrants 90,000 283 -- 283 Employee stock purchase plan 68,398 663 -- 663 Net loss -- -- (19,523) (19,523) ----------- ----------- ----------- ----------- ----------- Balance at June 30, 1996 21,463,374 158,628 0 (83,045) 75,583 Stock issuances: Public sale 5,470,000 77,245 -- 77,245 Acquisition of Alanex 1,444,236 61,051 -- 61,051 Exercise of stock options 980,472 6,720 -- 6,720 Employee stock purchase plan 71,838 1,389 -- 1,389 Tax benefit of stock options exercised -- 12,100 -- 12,100 Net loss -- -- (42,806) (42,806) ----------- ----------- ----------- ----------- ----------- Balance at June 30, 1997 29,429,920 317,133 0 (125,851) 191,282 Stock issuances: Exercise of stock options 1,344,104 11,031 -- 11,031 Exercise of stock warrants 169,522 680 -- 680 Employee stock purchase plan 109,834 2,742 -- 2,742 Tax benefit of stock options exercised -- 16,896 -- 16,896 Change in unrealized gains (losses) on short-term investments 384 384 Net income -- -- 13,154 13,154 ----------- ----------- ----------- ----------- ----------- Balance at June 30, 1998 31,053,380 $ 348,482 $ 384 $ (112,697) $ 236,169 =========== =========== =========== =========== ===========
See accompanying notes to consolidated financial statements. AGOURON PHARMACEUTICALS, INC. CONSOLIDATED STATEMENT OF CASH FLOWS (In thousands)
Years ended June 30, 1998 1997 1996 Cash flows from operating activities: Cash received from product sales, contracts and licenses $ 442,484 $ 116,692 $ 61,376 Cash paid to suppliers, employees and service providers (446,863) (195,890) (73,738) Interest received 5,958 5,873 4,776 Interest paid (752) (142) (228) ----------- ----------- ----------- Net cash provided (used) by operating activities 827 (73,467) (7,814) ----------- ----------- ----------- Cash flows from investing activities: Proceeds from maturities/sales of short-term investments 147,292 127,501 59,686 Purchases of short-term investments (176,100) (91,227) (118,224) Purchase of property and equipment (31,507) (12,372) (3,252) Cost to acquire Alanex, net of cash acquired 0 608 0 ----------- ----------- ----------- Net cash provided (used) by investing activities (60,315) 24,510 (61,790) ----------- ----------- ----------- Cash flows from financing activities: Net proceeds from issuance of common stock 14,453 85,354 82,515 Proceeds from credit line 53,600 0 0 Principal payments on credit line, long-term debt, and capital leases (41,951) (364) (818) ----------- ----------- ----------- Net cash provided (used) by financing activities 26,102 84,990 81,697 ----------- ----------- ----------- Net increase (decrease) in cash and cash equivalents (33,386) 36,033 12,093 Cash and cash equivalents at beginning of year 52,484 16,451 4,358 ----------- ----------- ----------- Cash and cash equivalents at end of year $ 19,098 $ 52,484 $ 16,451 =========== =========== =========== Reconciliation of net income (loss) to net cash provided (used) by operating activities: Net income (loss) $ 13,154 $ (42,806) $ (19,523) Depreciation and amortization 9,087 3,910 2,411 Write-off of in-process technology purchased 0 57,500 0 Provision (benefit) for deferred income taxes 8,727 (43,800) 0 Net (increase) decrease in inventories (44,906) (58,547) 0 Net (increase) decrease in accounts receivable and other current assets (23,004) (28,209) (1,198) Net increase (decrease) in accounts payable, accrued liabilities, deferred revenue and advances, and other liabilities 37,769 38,485 10,496 ---------- ---------- ----------- Net cash provided (used) by operating activities $ 827 $ (73,467) $ (7,814) =========== =========== ===========
See accompanying notes to consolidated financial statements. AGOURON PHARMACEUTICALS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1 - The Company and its significant accounting policies The Company Agouron Pharmaceuticals, Inc. ("Agouron" or the "Company") was organized and incorporated in California in June 1984. Agouron is an integrated pharmaceutical company committed to the discovery, development, manufacturing and marketing of innovative therapeutic products engineered to inactivate proteins which play key roles in cancer, AIDS and other serious diseases. The Company, through its own sales and marketing organization, is currently marketing in the United States its first drug, VIRACEPT(R) (nelfinavir mesylate) for treatment of HIV infection. The Company is also conducting pivotal phase II/III clinical trials for AG3340 for treatment of lung and prostate cancer. In addition, Agouron is expected to initiate a phase II/III pivotal clinical trial of REMUNE(TM) (AG1661), an immune-based therapeutic agent for treatment of HIV infection and AIDS being co-developed by Agouron and The Immune Response Corporation ("IRC"). Further, the Company has a number of programs in progress for discovery or development of other new drugs in the fields of cancer, viral disease and other serious diseases. The Company is also using the proprietary core drug discovery technology of Alanex Corporation ("Alanex"), a wholly-owned subsidiary of the Company, to accelerate the steps necessary to discover small-molecule drug candidates, from the initial identification of compounds that exhibit activity against selected biological targets to the progression of these compounds to drug candidates for human clinical trials. Principles of consolidation The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated. Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosures as of the date of the financial statements. Actual results could differ from such estimates. Cash and cash equivalents The Company considers cash equivalents to be only those investments which are highly liquid, readily convertible to cash and which mature within 90 days from date of purchase. Short-term investments Short-term investments consist principally of government or government agency securities, corporate notes and bonds, commercial paper and certificates of deposit with original maturities of three to thirty-six months, and corporate equity securities. The Company has classified its short-term investments as available-for-sale. Included in short-term investments at June 30, 1998 and 1997 is $1,262,000 and $588,000 of accrued interest receivable. Inventories Inventories are stated at the lower of cost or market. Cost is determined using the first-in, first-out method. Concentration of credit and market risk The Company invests its excess cash principally in marketable securities from a diversified portfolio of institutions with strong credit ratings and, by policy, limits the amount of credit exposure at any one institution. These investments are generally not collateralized and primarily mature within one year. The Company has not realized any material losses from such investments in 1998, 1997 or 1996. Financial instruments and risk management The Company has contract manufacturing operations in Europe and Asia. Accordingly, the Company from time-to-time enters into forward contracts to manage its exposure to fluctuations in foreign currency exchange rates. At June 30, 1998, the Company had several forward contracts with maturities of less than six months to purchase Japanese Yen for approximately $9,426,000. These contracts are designated and effective as hedges and, accordingly, gains and losses are recognized in the same period the offsetting gains and losses of hedged transactions are realized and recognized. Property and equipment Property and equipment is recorded at cost. Depreciation is computed using principally the straight-line method over estimated useful lives of three to five years. Leasehold improvements are amortized over the life of the lease. Purchased intangibles In conjunction with the 1997 acquisition of Alanex, the Company has recorded purchased intangibles (primarily drug discovery technology and chemical compound libraries) which are being amortized on a straight-line basis over their estimated useful lives of seven years. Deferred revenue and advances Approximately $22,414,000 of cash received from JT has been classified as deferred contract revenue and advances. Approximately $21,452,000 of the cash received from JT represents JT's advance of the Company's VIRACEPT development funding obligation which was completed in March 1998. Such amounts are to be repaid by the Company out of future profits, if any, generated by sales of VIRACEPT in the United States. The balance of the payments from JT are non-refundable and are being recognized as contract revenue on a prospective basis generally as collaborative program expenses are incurred. Product sales The Company ships VIRACEPT to wholesalers throughout the United States and recognizes sales revenue upon shipment. Sales are reported net of discounts, rebates, chargebacks and product returns. Also included in product sales for 1998 and 1997 are approximately $50,979,000 and $1,441,000 of sales (at cost plus contractually determined mark-ups) to Roche of clinical and commercial drug supplies to be used by Roche in its licensed territory. The Company receives a royalty on Roche's subsequent commercial sales of such drug supplies. Contract revenues Contract revenues are earned and recognized generally as contract research costs are incurred according to the provisions of each underlying agreement. Amounts received in advance of performance are recorded as deferred revenue. Contract milestone payments are recognized as revenues upon the completion of the milestone event or requirement. License fees and royalties License fees are recognized as revenue when earned as generally evidenced by certain factors including: receipt of such fees, satisfaction of any performance obligations and the non-refundable nature of such fees. Royalty revenues are recognized based on estimated and actual sales of licensed products in licensed territories. Research and development costs Research and development costs are expensed in the period incurred. Income tax provision (benefit) The Company records a provision (benefit) for income taxes using the liability method. Current income tax expense (benefit) generally is the amount of income taxes expected to be payable for the current year. Deferred taxes are recorded by applying applicable tax rates to cumulative temporary differences based on when and how they are expected to affect the tax return. Earnings (loss) per share The Company computes earnings per share in accordance with Statement of Financial Accounting Standards No. 128 "Earnings Per Share". Basic earnings (loss) per share is based upon the weighted average number of common shares outstanding during a period. Diluted earnings (loss) per share is based upon the weighted average number of common shares outstanding and dilutive common stock equivalents during a period. Common stock equivalents are options under the Company's stock option plans which are included in the earnings per share computation under the treasury stock method and common shares expected to be issued under the Company's employee stock purchase plan. Common stock equivalents of approximately 2,643,000 shares for 1998 were used to calculate diluted earnings per share. For 1997 and 1996, common stock equivalents of approximately 3,168,000 and 2,014,000 shares were not used to calculate diluted earnings (loss) per share because of their anti-dilutive effect. There are no reconciling items in calculating the numerator for basic and diluted earnings (loss) per share for any of the periods presented. Stock-based compensation plans The Company measures compensation expense for its stock-based compensation plans using the intrinsic method and provides pro-forma disclosures of net income and earnings (loss) per share as if the fair value-based method had been applied in measuring compensation expense. Statement of cash flows For purposes of the Statement of Cash Flows, cash equivalents are highly liquid investments purchased with an original maturity of ninety days or less. Non-cash financing and investing activities are comprised primarily of capital lease obligations of $1,579,000, $2,355,000 and $457,000 for 1998, 1997 and 1996 and the acquisition of Alanex in 1997. New accounting standards In June 1997, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 130 ("FAS 130") "Reporting Comprehensive Income," which requires additional disclosures to be adopted beginning with the quarter ending September 30, 1998. Under FAS 130, the Company will be required to display comprehensive income and its components as part of the Company's complete set of financial statements. In June 1997, the FASB also issued FAS 131, "Disclosures about Segments of an Enterprise and Related Information," which requires additional disclosures to be adopted on June 30, 1999. FAS 131 requires that the Company report financial and descriptive information about its reportable operating segments. The Company is evaluating the impact on its disclosures, if any. Note 2 - Short-term investments The cost of the Company's investment portfolio by type of security and contractual maturity in the balance sheet is as follows:
June 30, 1998 1997 (Dollars in thousands) Type of security: Corporate debt $ 46,023 $ 24,401 U.S. Treasury and agencies 10,766 11,994 Other interest-bearing 9,462 2,438 Corporate equity 1,774 0 ------------- -------------- $ 68,025 $ 38,833 ============= ============== Contractual maturity: Maturing in less than twelve months $ 41,389 $ 35,827 Maturing between twelve and thirty-two months 26,636 3,006 ------------- -------------- $ 68,025 $ 38,833 ============= ==============
The cost of securities sold, if any, is based upon the specific identification method. The net unrealized holding gain on available-for-sale securities included as a separate component of stockholders' equity at June 30, 1998 totaled $384,000. There were no material unrealized gains or losses nor any material differences between the estimated fair values and costs of securities in the investment portfolio at June 30, 1997. Realized gains and losses on the disposal of available-for-sale securities during 1998 totaled $20,000 and $2,000, respectively. During 1997 such gains and losses totaled $12,000 and $4,000, respectively. During 1996, such gains totaled $22,000. Note 3 - Composition of certain financial statement captions
June 30, 1998 1997 (Dollars in thousands) Accounts receivable, net: Trade $ 44,471 $ 26,055 Contract 2,451 4,668 Royalties 2,339 0 Employee 252 269 Other 1,828 383 ---------- ----------- $ 51,341 $ 31,375 ========== =========== Inventories: Raw materials and work in process $ 95,517 $ 57,883 Finished goods 8,189 917 ---------- ----------- $ 103,706 $ 58,800 ========== =========== Property and equipment, net: Scientific instrumentation $ 26,869 $ 16,614 Leasehold improvements 25,135 10,804 Computer equipment 15,619 8,892 Furniture and fixtures 3,910 2,464 ---------- ----------- 71,533 38,774 Less accumulated depreciation and amortization (24,321) (16,161) ---------- ----------- $ 47,212 $ 22,613 ========== =========== Accrued liabilities: Royalties $ 21,410 $ 0 License fees 6,000 0 Vacation 2,955 1,932 Clinical studies 2,731 3,578 Other 2,260 3,379 ---------- ----------- $ 35,356 $ 8,889 ========== ===========
Note 4 - Significant contract arrangements Japan Tobacco Inc. In February 1994, the Company entered into a strategic alliance with JT in the field of anti-viral drugs for the treatment of infections caused by hepatitis C and the herpes family of viruses. In December 1994, the Company added its anti-HIV drug, VIRACEPT, to the JT collaboration with the execution of a world-wide development and licensing agreement. Agouron and JT share equally the costs of further development of VIRACEPT. Currently, Agouron has exclusive commercial rights to VIRACEPT (with the right to sublicense) in North America and JT has exclusive commercial rights to VIRACEPT (with the right to sublicense) in parts of Japan. The Company and JT share profits and/or royalties equally from the world-wide commercialization of VIRACEPT. Under the combined terms of the JT agreements, the Company has incurred costs of $51,898,000, $71,825,000 and $46,969,000 and recognized corresponding contract revenues of $17,359,000, $48,886,000 and $37,197,000 for the years ended June 30, 1998, 1997 and 1996. Roche The Company and JT have granted Roche certain exclusive royalty bearing marketing rights to VIRACEPT outside of North America and parts of Japan. For such rights, the Company has received (and recognized as revenue) initial license fees and additional product approval license fees. The Company also receives royalties based either on Roche's sales of VIRACEPT or, in certain circumstances, Invirase(R) and Fortavase(R) (saquinavir), Roche's HIV protease inhibitors. VIRACEPT license fees and royalties from Roche totaled $17,852,000 and $9,000,000 for the years ended June 30, 1998 and 1997. HLR In June 1996, Agouron granted HLR world-wide development rights in two anti-cancer drugs and agreed to collaborate with HLR on an additional early-stage anti-cancer drug discovery program. In return for such rights, HLR paid $15,000,000 in initial license fees and agreed to bear 80% of certain future development costs and to provide annual research support to the Company of $3,000,000. In December 1997, Agouron and HLR agreed to end this anti-cancer research and development collaboration. The Company has regained all commercial rights to the anti-cancer drugs previously within the scope of the collaboration. Under the terms of the anti-cancer agreements with HLR which have been terminated, the Company incurred costs of $23,486,000 and $17,854,000 and recognized corresponding contract revenues of $15,428,000 and $14,270,000 for the years ended June 30, 1998 and 1997. The Immune Response Corporation In June 1998, the Company entered into a binding letter of intent with IRC to collaborate on final development and commercialization of REMUNE, an immune-based therapeutic agent discovered by IRC and currently the subject of several clinical studies including a large phase III clinical trial. The two companies intend to enter promptly into a definitive agreement and will endeavor to complete development and registration of REMUNE in 1999. IRC will manufacture commercial supplies of REMUNE, and Agouron will have exclusive rights to market REMUNE in North America, Europe and certain other countries. The two companies will share equally all profits from the commercialization of REMUNE in the licensed territory. Agouron paid an initial $10,000,000 license fee to IRC in June 1998 and also purchased 118,256 newly issued common shares of IRC for $2,000,000. The Company's development funding obligation commences October 15, 1998 and, assuming ongoing successful development, registration and approval of REMUNE, the Company may pay to IRC up to $53,000,000 in additional development and milestone payments and $12,000,000 in purchases of additional IRC common stock. Shionogi & Co., Ltd. In June 1998, the Company entered into a binding letter of intent with Shionogi & Co., Ltd. ("Shionogi") to develop and commercialize AG1549, a second-generation non-nucleoside reverse transcriptase inhibitor ("NNRTI") for the treatment of HIV infection. Discovered by Shionogi, AG1549 is currently the subject of several clinical trials evaluating its dose and its concomitant use with other antiretroviral treatments. Agouron has exclusive world-wide rights to the development and commercialization of AG1549 except in Japan, South Korea and Taiwan. Agouron paid an initial $10,000,000 license fee in June 1998. Agouron may pay, assuming ongoing successful development, registration and approval of AG1549, additional license fees of up to $30,000,000. In addition, Agouron will pay Shionogi royalties based on sales, if any, of AG1549. Japan Energy Corporation In June 1998, the Company entered into an agreement with Japan Energy Corporation ("JE") to develop and commercialize AG1776, a novel protease inhibitor for the treatment of HIV infection. Agouron has exclusive world-wide rights to the development and commercialization of AG1776 except in Japan, South Korea, North Korea and Taiwan; JE will manufacture bulk compound for use in final drug product. Agouron incurred an initial $6,000,000 license fee in June 1998. Agouron may pay, assuming ongoing successful development, registration and approval of AG1776, additional license fees of up to $20,000,000. In addition, Agouron will pay JE royalties based on sales, if any, of AG1776. Note 5 - Long-term debt Long-term debt and capital lease obligations are as follows:
June 30, 1998 1997 (Dollars in thousands) Notes payable, secured with personal property and a certificate of deposit; interest at CD rate plus 1.5%, paid off in June 1998. $ 0 $ 142 Capital leases with interest rates between 5.86% and 16.5%, maturing at various dates through June 2003. 3,214 2,462 Line of credit, $20,000,000 secured; interest at bank reference rate or LIBOR plus 1.5%, expiring September 30, 1998. 15,000 0 Unsecured, non-interest bearing, term obligation; face value of $4,500,000; discounted to an 8.95% effective rate, includes imputed interest of $548,000 due June 28, 2001. 3,480 3,194 Term obligation for tenant improvements, interest at 11% per annum, payable in monthly installments, paid off in October 1997. 0 2,668 ------------- -------------- Total long-term debt and capital lease obligations 21,694 8,466 Current portion (15,802) (2,526) ------------- -------------- $ 5,892 $ 5,940 ============= ==============
Maturities of long-term debt, excluding capital leases, are as follows: 1999 - $15,000,000; 2000- $0; and 2001 - $4,500,000, less imputed interest of $1,020,000. Note 6 - Income taxes (Dollars in thousands) The components of the provision (benefit) for income taxes are as follows:
1998 1997 1996 --------- --------- -------- Year ended June 30, Current: Federal $ 0 $ 0 $ 0 State 43 1 1 Foreign 0 1,222 933 --------- --------- -------- 43 1,223 934 --------- --------- -------- Deferred: Federal 8,495 (37,800) 0 State 232 (6,000) 0 Foreign 0 0 0 --------- --------- -------- 8,727 (43,800) 0 --------- --------- -------- $ 8,770 $ (42,577) $ 934 ========= ========= ========
The income tax reconciliation from income (loss) before income taxes computed at the federal statutory rate (34%) to the Company's actual income tax provision is as follows:
Year ended June 30, 1998 1997 1996 --------- --------- -------- Tax at U.S. federal statutory rate $ 7,454 $ (29,030) $ (6,320) State taxes, net of federal benefit 181 1 1 Foreign taxes 0 1,222 933 Purchase accounting book/ tax basis differences 0 19,781 0 Change in valuation allowance 0 (42,449) 6,245 Other 1,135 415 75 Adjustments to carryover amounts 0 7,483 0 --------- --------- -------- $ 8,770 $ (42,577) $ 934 ========= ========= ========
The Company's deferred tax assets and liabilities are as follows:
June 30 1998 1997 -------- --------- Book and tax depreciation/amortization differences $ 5,891 $ 831 Accrued liabilities 1,951 1,363 Net operating loss carryforwards 51,281 49,348 Tax credits 6,956 5,676 Other (2,010) (1,318) --------- --------- 64,069 55,900 Valuation allowance 0 0 --------- --------- Deferred taxes, net $ 64,069 $ 55,900 ========= =========
The Company has not recorded current provisions for United States federal income taxes due to net operating losses for tax reporting purposes. At June 30, 1998, the Company had net operating loss carryforwards for federal tax reporting purposes of approximately $150,000,000 expiring from 2000 to 2013. The net operating loss includes the tax benefit related to the exercise of stock options, which benefit was recorded to common stock. The Company also has federal research and development credit carryforwards of approximately $4,800,000 at June 30, 1998. The future utilization of net operating loss carryforwards for federal income tax purposes may be impacted by the issuance of additional equity securities. Due to California's partial conformity with federal provisions regarding net operating loss and research and development credit carryforwards, and as a result of the Company's use of certain state tax planning strategies, for state tax reporting purposes at June 30, 1998, the Company has no net operating loss carryforwards and has research and development credit carryforwards of approximately $2,200,000. Such credits do not expire. Based on its 1998 operating results and its estimates of future taxable income, the Company believes that it is more likely than not that its deferred tax assets (comprised mostly of net operating loss carryforwards and research credits) will be realized and has therefore recorded the full tax benefit of its deferred tax assets as of June 30, 1998. Foreign tax expense represents certain withholding taxes associated with collaboration payments from JT. Note 7 - Stockholders' equity Stock Options The Company's stock option plans, as amended, are administered by the Board of Directors or its designees and provide generally that, for incentive stock options, the exercise price shall not be less than the fair market value of the shares at the date of grant and, for certain non-qualified stock options, the price shall not be less than 85% of the fair market value of the shares at the date of grant and others may be at any price determined by the Board of Directors. The options expire not later than ten years from the date of the grant and generally become exercisable ratably over a three or four year period beginning one year from the grant date. In February 1998, the Board of Directors adopted the most recent plan and reserved 1,000,000 shares for issuance thereunder. At June 30, 1998, the Company had 1,898,556 shares of common stock available for future grant under its stock option plans. The following table summarizes stock option activity for 1996 through 1998:
Shares Prices Outstanding June 30, 1995 5,171,384 $ .24- $12.25 Options granted 2,324,950 11.78- 23.00 Options exercised (586,412) 2.70- 9.19 Options canceled (81,208) 3.94- 19.57 ------------- Outstanding June 30, 1996 6,828,714 2.70- 23.00 Alanex options assumed 378,084 .27- 3.98 Options granted 2,798,500 15.19- 47.13 Options exercised (980,472) .27- 22.19 Options canceled (205,536) 4.32- 36.35 ------------- Outstanding June 30, 1997 8,819,290 .27- 47.13 Options granted 1,115,394 28.00- 55.13 Options exercised (1,344,104) .27- 34.82 Options canceled (169,312) .27- 55.13 ------------- Outstanding June 30, 1998 8,421,268 $ .27- $55.13 =============
The following table summarizes information concerning outstanding and exercisable options as of June 30, 1998:
Options Outstanding Options Exercisable Number Weighted Weighted Number Weighted Outstanding Average Average Exercisable Average Ranges of Exercise as of Remaining Exercise as of Exercise Prices June 30, 1998 Life (years) Price June 30, 1998 Price ------------- -------------- --------------- ------------- ---------- Less than $20.00 3,601,287 6.14 $ 8.70 2,810,426 $ 7.47 $20.00 to $40.00 3,276,381 8.25 27.18 1,149,617 23.74 Greater than $40.00 1,543,600 8.99 42.56 370,058 41.26 ------------- -------------- -------------- ------------- ------------- 8,421,268 7.48 $ 22.10 4,330,101 $ 14.68 ============= ============== ============== ============= =============
The Company applies APB Opinion No. 25 and related Interpretations in accounting for its plans. Accordingly, no compensation expense has been recognized for its stock option plans. Had compensation expense for the Company's stock option plans been determined based upon the fair value method prescribed under FAS 123, the Company's reported results would have been impacted as follows:
(In thousands, except per share amounts) 1998 1997 1996 --------- -------- --------- Net income (loss) As reported $ 13,154 $(42,806) $(19,523) Compensation expense: Stock options (19,891) (9,496) (1,133) Employee stock purchase plan (1,441) (394) (204) -------- ------- -------- Pro-forma $ (8,178) $(52,696) $(20,860) ======== ======== ======== Pro-forma earnings (loss) per share: Basic $ (.27) $ (1.96) $ (1.06) Diluted $ (.27) $ (1.96) $ (1.06)
The weighted-average fair value of each option grant is estimated on the date of grant using the Black Scholes option-pricing model with the following weighted-average assumptions used for 1998, 1997 and 1996, respectively: expected volatility of 50% each year; risk-free interest rate of 5.7%, 6.1% and 6.1%; an average expected life of 3 years, 4 years and 4 years; and no dividends. The weighted average fair value of stock option grants was $16.57 in 1998, $15.25 per share in 1997 and $8.97 per share in 1996. In connection with its 1997 acquisition of Alanex, the Company assumed all of the issued and outstanding options of Alanex which resulted in options to purchase an aggregate of 378,084 shares of the Company's common stock at exercise prices ranging from $.27 to $3.98 per share. Employee Stock Purchase Plan The Company has a stock purchase plan in which eligible employees may purchase shares of the Company's common stock through payroll deductions. A total of 500,000 shares of common stock have been reserved for issuance under the plan, of which 131,156 shares remain available for purchase at June 30, 1998. Funds deducted from participating employees' salaries are used to purchase common stock at prices equal to 85% of the fair market value of the common stock on either the first or last day of a purchase period. During 1998, 109,834 shares were issued at a price of $24.97 per share. During 1997, 9,730 shares were issued at a price of $14.29 per share, 47,036 shares were issued at a price of $17.37 per share and 15,072 shares were issued at a price of $28.69 per share. During 1996, 12,262 shares were issued at a price of $4.94 per share, 46,480 shares were issued at a price of $9.99 per share and 9,656 shares were issued at a price of $14.29 per share. Under FAS 123, pro-forma compensation expense equal to the fair value of the purchase rights granted under the employee stock purchase plan was estimated using the Black-Scholes model with the following assumptions for 1998, 1997 and 1996: an expected life of one year; expected volatility of 50 percent; a risk-free interest rate of 5.6 percent; and no dividends. The weighted-average fair value of purchase rights granted was $13.12 per share in 1998, $5.96 per share in 1997 and $3.47 per share in 1996. Warrants In connection with its 1997 acquisition of Alanex, the Company assumed an issued and outstanding warrant to purchase Alanex common stock. Accordingly, at June 30, 1997, a warrant to purchase an aggregate of 169,522 shares of the Company's common stock at an exercise price of $4.01 per share was outstanding. In July 1997, the warrant was exercised in its entirety generating net proceeds to the Company of approximately $679,800. Stockholder Rights Plan In November 1996, the Company's Board of Directors declared a dividend of one preferred stock purchase right ("Right") for each outstanding share of the Company's common stock held on the date (this dividend now amounts to one half of a Right per share of common stock now outstanding as a result of the two-for-one split of common stock in August 1997). The Rights will expire 10 years after issuance, and will be exercisable only if a person or group becomes the beneficial owner of 15% or more of the common stock (such person or group, a "15% holder") or commences a tender or exchange offer which would result in the offeror beneficially owning 15% or more of the common stock. Each Right will entitle stockholders to buy one one-ten thousandth of a share of Series B Participating Preferred Stock of the Company at an exercise price of $500.00 per share subject to certain anti-dilution adjustments. If a person or group accumulates 15% or more of the common stock, each Right (other than Rights held by a 15% holder and certain related parties, which will be voided) will be adjusted so that upon exercise the holder will have the right to receive that number of shares of common stock (or in certain circumstances, a combination of securities and/or assets) having a value of twice the exercise price of the Right. In addition, if following the public announcement of the existence of a 15% holder, the Company is involved in a merger or business combination or a sale of 50% or more of the Company's assets or earning power, each Right (other than Rights held by a 15% holder and certain related parties, which will be voided) will represent the right to purchase, at the exercise price, common stock of the acquiring entity having a value of twice the exercise price at the time. The Board of Directors will also have the right, following the public announcement of the existence of a 15% holder, to cause Rights (other than Rights held by the 15% holder and certain related parties, which will be voided) to be exchanged for one share of common stock (presently at an exchange ratio of two shares of common stock for each Right). Note 8 - Commitments Certain scientific instrumentation, computers and other equipment are subject to leases which are classified as capital leases. At June 30, 1998 and 1997, $4,331,000 ($3,408,000, net) and $2,895,000 ($2,629,000, net) of such leased equipment are included in property and equipment. Rental expenses (principally for leased facilities under long-term operating lease commitments) were $5,031,000, $3,509,000 and $2,548,000 for 1998, 1997 and 1996. Future minimum payments for capital and operating leases at June 30, 1998 are as follows:
Capital Leases Operating Leases (Dollars in thousands) 1999 $ 819 $ 7,472 2000 812 5,507 2001 818 5,314 2002 578 3,943 2003 243 2,630 Thereafter 0 2,047 ------------ -------------- Total minimum lease payments 3,270 $ 26,913 ============== Less amount representing interest (56) ------------- Obligations under capital leases $ 3,214 ============
The Company is involved in certain legal proceedings generally incidental to its normal business activities. While the outcome of any such proceedings cannot be accurately predicted, the Company does not believe the ultimate resolution of any such existing matters should have a material adverse effect on its financial position or results of operations. Note 9 - Alanex acquisition In April 1997, the Company executed a merger agreement with Alanex, which now operates as a wholly-owned subsidiary of Agouron. For all outstanding shares of Alanex common stock and related options and warrants, approximately 2,000,000 shares of Agouron common stock were issued, subject to certain restrictions. Such shares had an aggregate fair market value on the measurement date of approximately $61,000,000 and transaction costs were approximately $1,300,000. Of the total purchase price (including transaction costs), $57,500,000 was allocated (as more fully described below) to certain intangible assets and expensed as in-process technology and approximately $4,800,000 was allocated to certain tangible and intangible assets and capitalized. The identifiable intangibles of Alanex include several drug research and discovery programs, a proprietary drug discovery technology, a chemical compound library and an assembled work force. These intangibles were valued using either a replacement cost approach (work force, library and proprietary technology) or an income approach (research programs). Values assigned to the chemical compound library and proprietary drug discovery technology have been capitalized, as such intangibles are of a general nature and may have a number of alternative future uses. Values assigned to the drug discovery programs have been expensed, as such programs are pursuing specific drug targets or chemical compounds, the technological feasibility of which having not been demonstrated, and there may be no alternative future uses for such targets or chemical compounds if the programs are ultimately less than successful. The Company's statement of income (loss) includes the results of operations related to the acquisition since April 1997. The following are unaudited pro-forma results of operations as if the transaction had been consummated on July 1, 1995: (In thousands except for per share amounts.)
Year ended June 30, 1997 1996 (unaudited) (unaudited) Revenues $ 138,872 $ 62,392 ============= ============= Net income (loss) $ 14,276 $ (19,421) ============= ============= Earnings (loss) per share $ .51 $ (.92) ============= =============
Note 10 - Quarterly financial data (unaudited) (In thousands, except for per share amounts)
Quarter Ended September 30 December 31 March 31 June 30 ------------- ------------- ------------- ---------- > 1997 Product sales $ 0 $ 0 $ 13,401 $ 43,568 Gross margin from product sales 0 0 7,378 24,992 Net loss (14,447) (12,556) (4,999) (10,804) Earnings (loss) per share: Basic (.57) (.46) (.18) (.38)(1) Diluted (.57) (.46) (.18) (.38)(1) 1998 Product sales $ 79,502 $ 91,800 $ 111,950 $ 126,046 Gross margin from product sales 45,429 53,858 62,730 74,637 Net income (loss) 3,630 4,922 13,525 (8,923) Earnings (loss) per share: Basic .12 .16 .44 (.29)(2) Diluted .11 .15 .41 (.29)(2)
(1) During the fourth quarter of 1997, the Company recorded a write-off of $57,500,000 ($2.03 per share) of in-process technology associated with the acquisition of Alanex, partially offset by the realization of $43,800,000 ($1.54 per share) of deferred tax assets associated with the Company's expectation of future taxable income. (2) During the fourth quarter of 1998, the Company incurred in-licensing costs of $26,000,000 (tax-effected $.50 per share) for commercial rights to three development stage anti-HIV products. ANNEX IV AGOURON PHARMACEUTICALS DIVISION DESCRIPTION OF BUSINESS General Agouron Pharmaceuticals ("Agouron Pharmaceuticals") is a division of Agouron Pharmaceuticals, Inc. ("Agouron" or the "Company"). Agouron Pharmaceuticals encompasses all of the activities of Agouron except for those activities related to the research, development and commercialization of oncology products. Such products are being pursued by the Oncology Division. Agouron Pharmaceuticals, through its own sales and marketing organization, is currently marketing in the United States the first drug developed by Agouron, VIRACEPT(R) (nelfinavir mesylate) for treatment of HIV infection. In addition, Agouron Pharmaceuticals is expected to initiate a phase II/III pivotal clinical trial of REMUNE(TM)(AG1661), an immune-based therapeutic agent for treatment of HIV infection and AIDS being co-developed by Agouron Pharmaceuticals and The Immune Response Corporation ("IRC"). Further, Agouron Pharmaceuticals has a number of programs in progress for discovery or development of other new drugs in the fields of viral disease, inflammatory disease and other serious diseases. Agouron Pharmaceuticals utilizes the proprietary core drug discovery technology of Alanex Corporation ("Alanex"), a wholly-owned subsidiary of Agouron, to accelerate the steps necessary to discover small molecule drug candidates. Such steps include the initial identification of compounds that exhibit activity against selected biological targets to the progression of these compounds to drug candidates for human clinical trials. Agouron Pharmaceuticals' long-term goal is increasing profitability from the sale of drugs generated from its own drug discovery and development efforts, and from development and commercialization of drugs originated outside of Agouron Pharmaceuticals. To augment its technical capabilities, to enhance the likelihood of successful commercialization of its products and to offset some of its operating costs, Agouron Pharmaceuticals has entered into collaborative research and development arrangements with other companies. Agouron Pharmaceuticals has generally retained significant commercial rights in drugs developed in its collaborative research and development programs funded in whole or in part by other companies. Agouron Pharmaceuticals anticipates that its successfully developed products will be commercialized both through its own direct sales and marketing activities in certain pharmaceutical markets and through manufacturing and marketing relationships with other pharmaceutical companies. Narrative Description of Business Agouron Pharmaceuticals is developing innovative drugs for treatment of HIV infection and other serious diseases and has expended approximately $449,000,000 on research and development since its inception, excluding a $57,500,000 write-off for in-process technology purchased in 1997 in the acquisition of Alanex. VIRACEPT In March 1997, Agouron Pharmaceuticals received clearance from the Food and Drug Administration ("FDA") to market its first drug, VIRACEPT, a potent HIV protease inhibitor that substantially decreases viral load and increases CD4+T cell counts when used in combination antiretroviral drug therapy. An orally administered product, VIRACEPT is available in adult and pediatric formulations. VIRACEPT sales in the United States totaled $358,321,000 in fiscal 1998. Agouron Pharmaceuticals estimated that 85,000 patients in the United States (over 125,000 in the world) were taking VIRACEPT at the end of June 1998. It is anticipated that continued increasing VIRACEPT sales will make a substantial contribution toward profitable financial results in the future. Agouron Pharmaceuticals developed VIRACEPT in collaboration with the pharmaceutical division of Japan Tobacco Inc. ("JT"). Agouron Pharmaceuticals and JT granted exclusive commercial rights in Europe, Asia and certain other countries in the world to Hoffmann-La Roche Inc. and F. Hoffmann-La Roche Ltd ("Roche"). Agouron Pharmaceuticals and JT share profits and/or royalties equally from the worldwide commercialization of VIRACEPT. In January and March 1998, VIRACEPT was approved for marketing in Europe and Japan, respectively. VIRACEPT license fees and royalties from Roche totaled $17,852,000 in 1998. Research and Development Programs Agouron Pharmaceuticals' research and development programs focus on the areas of AIDS and other serious diseases. Agouron Pharmaceuticals' drug discovery programs apply Agouron's core technologies of three-dimensional structure based drug design and high-throughput screening of chemical libraries generated by computation-directed combinatorial chemistry. The following table outlines the status of various programs in Agouron Pharmaceuticals' research and development portfolio. Agouron Pharmaceuticals is pursuing some of these programs independently, while others are being undertaken in collaboration with other companies. Research and Development Program Indication Stage Viral Disease VIRACEPT(1) HIV Infection Approved REMUNE (AG1661)(2) HIV Infection Phase II/III AG1549 (S-1153)(3) HIV Infection Phase I AG1776 (JE-2147)(4) HIV Infection Preclinical AG7088 Common Cold Preclinical Hepatitis C agents(5) Viral Disease Research HIV Integrase Inhibitors HIV Infection Research Ophthalmology AG3340 Macular Degeneration Phase II Other MMP Inhibitors Macular Degeneration Preclinical VEGF Inhibitors Macular Degeneration Research (1) In collaboration with Japan Tobacco Inc. and F. Hoffman-La Roche Ltd. (2) In collaboration with The Immune Response Corporation. (3) In collaboration with Shionogi & Co., Ltd. (4) In collaboration with Japan Energy Corporation. (5) In collaboration with Japan Tobacco Inc. Viral Disease Overview The development of new drugs for the treatment of certain viral diseases is an important scientific and commercial focus of Agouron Pharmaceuticals. Agouron Pharmaceuticals is presently conducting programs aimed at discovery and/or development of several classes of anti-viral drugs that block viral proteases, enzymes required by several families of pathogenic viruses to carry out replication and infection. Agouron Pharmaceuticals ' anti-viral drug programs include HIV protease inhibitors (VIRACEPT and AG1776), an immune-based therapeutic (REMUNE), a non-nucleoside reverse transcriptase inhibitor (AG1549), rhinovirus 3C protease inhibitors, and hepatitis C protease enzymes. Agouron Pharmaceuticals is developing certain of its anti-viral drugs through collaboration(s) with JT, Roche, IRC, Shionogi & Co., Ltd. and Japan Energy Corporation. HIV Protease Inhibitor: VIRACEPT HIV protease is an enzyme that performs an essential role in the infectious cycle of HIV, and clinical research has demonstrated that inhibition of the protease enzyme renders HIV unable to form new infectious virus. Today, five FDA-approved HIV protease inhibitors (including VIRACEPT) are making a significant contribution in the management of HIV disease. VIRACEPT was cleared by the FDA for marketing in the United States in March 1997 pursuant to the FDA's guidelines for accelerated approval. VIRACEPT development activities now include certain additional phase II/III studies to facilitate the full approval of the drug and certain phase IV studies designed to expand the utilization of the product. Immune-based therapeutic agent: REMUNE (AG1661) An important recent goal in treatment of HIV infection is to combine such highly active drugs as HIV protease inhibitors, capable of halting replication of HIV, with agents capable of directly enhancing recovery of the immune system. REMUNE is an immune-based therapeutic agent, derived from HIV itself, which has been shown to stimulate the immune system to respond specifically to HIV infection and to produce the increases in substances such as chemokines that may provide protection to uninfected cells. Discovered by IRC, REMUNE is administered as an intramuscular injection every three months, and has been well-tolerated in clinical trials to date. In May 1997, enrollment was completed at 74 centers in the United States for a pivotal phase III, clinical end-point trial in which approximately 2,500 patients were randomized to receive conventional anti-retroviral drug therapy with or without REMUNE. This study is expected to be completed in March 1999. More than 250 patients have been enrolled in two other clinical studies which are evaluating the effect of REMUNE in combination with anti-retroviral drugs on virologic and immunologic markers in adults. A smaller study of REMUNE for treatment of HIV infection in children is in progress at the National Institutes of Health. In June 1998, Agouron and IRC began a collaboration on the final development and commercialization of REMUNE. Agouron has exclusive rights to market REMUNE in North America, Europe and certain other countries; IRC will manufacture commercial supplies of REMUNE. Agouron and IRC will share equally all profits from the commercialization of REMUNE in the licensed territory. Non-nucleoside reverse transcriptase inhibitor (NNRTI): AG1549 (S-1153) AG1549 is a second-generation NNRTI for the treatment of HIV infection. Discovered by Shionogi & Co., Ltd. ("Shionogi"), AG1549 is currently the subject of several clinical trials evaluating its dose and its concomitant use with other antiretroviral treatments. AG1549 is of high clinical interest because it is ten times more potent in vitro than currently approved NNRTIs and because AG1549 is fully active in vitro against HIV containing the most common genetic mutation (at position 103) associated with resistance to other NNRTIs. Agouron Pharmaceuticals has exclusive rights to the development and commercialization of AG1549, except in Japan, South Korea and Taiwan, subject to the payment of royalties to Shionogi. HIV Protease Inhibitor: AG1776 (JE-2147) AG1776 is a protease inhibitor for the treatment of HIV infection. Preclinical data indicate that AG1776, discovered by Japan Energy Corporation ("JE"), works synergistically in vitro with other protease inhibitors. The compound has also exhibited activity against HIV mutations commonly associated with resistance to other protease inhibitors. Agouron Pharmaceuticals has exclusive world-wide rights to the development and commercialization of AG1776 except in Japan, South Korea, North Korea and Taiwan, subject to the payment of royalties to JE; JE will manufacture bulk compound for use in final drug product. Rhinovirus 3C Protease Inhibitor: AG7088 Rhinoviruses are believed to be the single most frequent cause of the common cold. While rhinovirus infections are a periodic annoyance to most individuals, they may produce more severe and prolonged symptoms in people with chronic obstructive pulmonary disease, such as asthma and emphysema. All known strains of rhinoviruses depend on a critical enzyme, the 3C protease, at several stages of their life cycle for production of new infectious viruses. Agouron has designed potent, selective rhinovirus 3C protease inhibitors, including AG7088, that are currently being evaluated in preclinical pharmacological studies. Agouron Pharmaceuticals retains all commercial rights in compounds resulting from this program. HIV Integrase Inhibitors The drugs currently approved in the United States for treatment of HIV infection consist of reverse transcriptase inhibitors and protease inhibitors (including VIRACEPT). Another mechanism of action is inhibition of HIV-1 integrase, a key enzyme in catalyzing the integration of HIV into human cells. Agouron scientists believe that blocking HIV integrase is a viable therapeutic strategy that will abort completion of the viral life cycle, preventing infection of new, uninfected target cells. Scientists also believe that HIV integrase is an attractive target, because it is extremely unlikely that an HIV integrase-specific inhibitor will nonspecifically inhibit other eukaryotic enzymes. This fact may possibly reduce the incidence of side effects of an integrase inhibitor used to treat HIV infection. Agouron Pharmaceuticals retains all commercial rights in compounds resulting from this program. Anti Hepatitis C Drugs The hepatitis C virus ("HCV") is a virus that causes illnesses ranging from a mild flu-like disease to progressive liver disease, cirrhosis and primary liver cancer. The ability to treat infection by HCV represents a significant unmet clinical need, particularly in Asian countries. HCV depends upon several key protease enzyme for the production of new infectious virus. Agouron Pharmaceuticals scientists have initiated programs to design new classes of anti-viral drugs that block such enzymes and disrupt the HIV life cycle. Agouron Pharmaceuticals is pursuing this research program in collaboration with JT. Ophthalmology Overview A hallmark of many serious retinal disorders, such as age-related macular degeneration, macular edema, retinopathy of prematurity, and proliferative diabetic retinopathy, is an extensive proliferation of new blood vessels in the retina and underlying choroid. This process, known as angiogenesis or neovascularization, often leads to retinal hemorrhage that results in the loss of ganglion cells, degeneration of the central optic nerve, and eventually loss of central and/or peripheral vision. The most common neovascular retinal disorder, namely age-related macular degeneration, has recently become a leading cause of blindness in the elderly population in the industrialized world. In common with other tissues, the growth of new blood vessels is mediated by many factors including various members of the family of MMPs, VEGF and Fibroblast Growth Factors ("FGF") and their respective receptors and some members of the integrin family of receptors involved in cell-cell and cell-matrix interactions. In ocular tissues, the production of these factors, receptors and MMPs is increased by local hypoxia, the most notable condition believed to stimulate retinal and subretinal neovascularization. Most significantly, in the ocular tissue of patients with any of the above mentioned diseases, elevated levels of growth factors, integrins and MMPs (in particular MMP-2 and MT-MMP-1) were consistently identified. Key mediators of angiogenesis have been associated with ophthalmic disorders. VEGF and basic FGF are strongly implicated as causative angiogenic agents in a variety of studies. In ocular tissues, the production of these growth factors is increased by hypoxia, the most notable condition believed to stimulate retinal angiogenesis. Most significantly, in patients undergoing surgery, high levels of VEGF in ocular fluid were found associated with macular degeneration, active diabetic retinopathy, central vein occlusion and other disorders. Current studies in the area of ophthalmology involve an assessment of the impact that inhibitors of MMPs might have on therapeutic practice and in meeting medical needs in these areas. Agouron Pharmaceuticals is conducting in animal models a series of proof-of-principle pre-clinical studies of ocular diseases with the MMP inhibitor AG3340 in preparation for the commencement of human clinical studies. Agouron Pharmaceuticals has recently demonstrated significant accumulation of AG3340 in the vitreous humor of rats and monkeys following oral dosing. Likewise, it is anticipated that when suitable inhibitors of VEGF become available, they will be tested in the existing ocular angiogenesis models prior to selection of a lead compound for clinical development. Agouron Pharmaceuticals retains all commercial rights in compounds resulting from this program. Business Relationships/Research and Development Agreements Agouron Pharmaceuticals has funded its research and development primarily from working capital generated from both private and public sales of Agouron Pharmaceuticals equity, collaborative arrangements and the financial contribution resulting from product sales. Agouron Pharmaceuticals has an ongoing program of business development which may, from time to time, lead to the establishment of corporate collaborations in addition to those noted below. Japan Tobacco Inc. In February 1994, Agouron Pharmaceuticals entered into a strategic alliance with JT in the field of anti-viral drugs for the treatment of infections caused by hepatitis C and the herpes family of viruses. In December 1994, the Company added its anti-HIV drug, VIRACEPT, to the JT collaboration with the execution of a world-wide development and licensing agreement. Agouron Pharmaceuticals and JT share equally the costs of further development of VIRACEPT. Currently, Agouron Pharmaceuticals has exclusive commercial rights to VIRACEPT (with the right to sublicense) in North America and JT has exclusive commercial rights to VIRACEPT (with the right to sublicense) in certain parts of Japan. Agouron Pharmaceuticals and JT share profits and/or royalties equally from the world-wide commercialization of VIRACEPT. Roche Agouron Pharmaceuticals and JT have granted Roche certain exclusive royalty bearing marketing rights to VIRACEPT outside of North America and parts of Japan. Further, Agouron Pharmaceuticals receives royalties based either on Roche's sales of VIRACEPT or, in certain circumstances, Invirase(R) and Fortavase(R) (saquinavir), Roche's HIV protease inhibitors. Roche has the right to manufacture VIRACEPT for its own use and is expected to commence such manufacturing in calendar 1999. Immune Response In June 1998, Agouron Pharmaceuticals entered into a binding letter of intent with IRC to collaborate on final development and commercialization of REMUNE, an immune-based therapeutic agent discovered by IRC and currently the subject of several clinical studies including a large phase III clinical trial. The two companies intend to enter promptly into a definitive agreement and will endeavor to complete development and registration of REMUNE in 1999. IRC will manufacture commercial supplies of REMUNE, and Agouron Pharmaceuticals will have exclusive rights to market REMUNE in North America, Europe and certain other countries. The two companies will share equally all profits from commercialization of REMUNE in the licensed territory. Agouron Pharmaceuticals paid an initial $10,000,000 license fee to IRC in June 1998 and also purchased 118,256 newly issued common shares of IRC for $2,000,000. Agouron Pharmaceuticals may pay, assuming ongoing successful development, registration and approval of REMUNUE, to IRC up to $53,000,000 in additional development and milestone payments and $12,000,000 in purchases of additional IRC common stock. Shionogi & Co., Ltd. In June 1998, Agouron Pharmaceuticals entered into a binding letter of intent with Shionogi to develop and commercialize AG1549, a second-generation NNRTI for the treatment of HIV infection. Discovered by Shionogi, AG1549 is currently the subject of several clinical trials evaluating its dose and its concomitant use with other antiretroviral treatments. AG1549 is of high clinical interest because it is ten times more potent in vitro than such other NNRTIs as nevirapine (Viramune(R)) and delavirdine (Rescriptor(R)) and because AG1549 is fully active in vitro against HIV containing the most common genetic mutation (at position 103) associated with resistance to other NNRTIs, including efavirenz (Sustiva(TM)). Agouron Pharmaceuticals has exclusive rights to the development and commercialization of AG1549 except in Japan, South Korea and Taiwan. Agouron Pharmaceuticals paid an initial $10,000,000 license fee to Shionogi in June 1998. Agouron Pharmaceuticals may pay, assuming ongoing successful development, registration and approval of AG1549, additional license fees of up to $30,000,000. In addition, Agouron Pharmaceuticals will pay Shionogi royalties based on sales, if any, of AG1549. Japan Energy Corporation In June 1998, Agouron Pharmaceuticals entered into a license agreement with JE to develop and commercialize AG1776, a novel protease inhibitor for the treatment of HIV infection. Preclinical data indicate that AG1776, discovered by JE, works synergistically in vitro with other protease inhibitors. The compound has also exhibited activity against mutations commonly associated with resistance to other protease inhibitors. Agouron Pharmaceuticals has exclusive world-wide rights to the development and commercialization of AG1776 except in Japan, South Korea, North Korea and Taiwan; JE will manufacture bulk compound for use in final drug product. Agouron Pharmaceuticals incurred an initial $6,000,000 license fee in June 1998. Agouron Pharmaceuticals may incur, assuming ongoing successful development, registration and approval of AG1776, additional license fees of up to $20,000,000. In addition, Agouron Pharmaceuticals will pay JE royalties based on sales, if any, of AG1776. Manufacturing Agouron Pharmaceuticals utilizes worldwide contract manufacturing to produce VIRACEPT. Agouron Pharmaceuticals procures and transfers raw materials to contracted bulk drug producers, sends the converted bulk drug to finishing facilities and moves finished goods into a distribution center. Product supply and associated raw materials have been available in sufficient quantities to meet business needs. In order to accommodate anticipated sales volume growth, capacity expansion efforts are being pursued. Agouron Pharmaceuticals will be dependent upon its contract manufacturers to comply with good manufacturing practices and to meet its production requirements. There can be no assurance that Agouron Pharmaceuticals' contract manufacturers will timely deliver sufficient quantities of Agouron Pharmaceuticals' products or that Agouron Pharmaceuticals would be able to find substitute manufacturers, if necessary. Marketing Agouron Pharmaceuticals distributes VIRACEPT in the United States through wholesalers. Sales volumes in the United States are influenced by underlying demand and wholesale inventory management practices. VIRACEPT is covered by Medicaid programs in all states and is covered by virtually all state AIDS Drug Assistance Programs ("ADAPs"). Currently, VIRACEPT is paid for predominately by Medicaid, private insurance and ADAPs. The Company offers a patient assistance program based upon medical need for patients who have no other means of coverage. Outside of North America and parts of Japan, VIRACEPT is marketed on behalf of Agouron Pharmaceuticals and JT by Roche. Agouron Pharmaceuticals receives a royalty on Roche's worldwide sales of VIRACEPT. Agouron Pharmaceuticals' sales and marketing efforts utilize a field sales organization which focuses primarily on office- and hospital-based physicians, including key medical thought leaders. Additionally, Agouron Pharmaceuticals has obtained market access and availability for its products in part by establishing relationships within key market segments, including health maintenance organizations, third-party payers and governmental agencies. Human Resources As of July 28, 1998, Agouron Pharmaceuticals had 991 employees. Of these it is anticipated that approximately 800 of these will be directly engaged in the conduct of the Agouron Pharmaceuticals business. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Overview This discussion contains forward-looking statements. Such statements are subject to certain risks and uncertainties which could cause actual results to differ materially from those projected. See "Important Factors Regarding Forward-Looking Statements" attached as Exhibit 99 to the Company's annual report on Form 10-K for the period ended June 30, 1998 and incorporated herein by reference. Readers are cautioned not to place undue reliance on these forward-looking statements which speak only as of the date hereof. The Company undertakes no obligation to publicly release the result of any revisions to these forward-looking statements which may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. Agouron Pharmaceuticals ("Agouron Pharmaceuticals" or "AP"), a division of Agouron Pharmaceuticals, Inc. (the "Company") is committed to the discovery, development, manufacturing and marketing of human pharmaceuticals targeting AIDS and other serious diseases. Operations to date have been principally funded from the Company's equity-derived working capital, various collaborative arrangements and, most recently, from the gross margin contribution of Agouron Pharmaceuticals' first product, VIRACEPT(R) (nelfinavir mesylate). The net income reported in fiscal 1998 is principally due to the commercialization of VIRACEPT while Agouron Pharmaceuticals' prior net operating losses reflect primarily the result of its independent research and substantial investment in the clinical and commercial development of VIRACEPT. In March 1997, Agouron Pharmaceuticals received clearance from the United States Food and Drug Administration ("FDA") to market VIRACEPT in the United States. For the fiscal year ended June 30, 1998, due principally to the increasing product contribution from VIRACEPT sales, license fees and royalties, Agouron Pharmaceuticals realized a net income of $37,387,000. Results of Operations Product sales Product sales for the fiscal years ended June 30, 1997 and 1998 were approximately $57,000,000 and $409,300,000 which included sales in the United States of $55,559,000 and $358,321,000, respectively. Agouron Pharmaceuticals anticipates that VIRACEPT sales in the United States will approximate $430,000,000 to $440,000,000 for fiscal 1999. Contract revenues Collaborative research and development agreements with Japan Tobacco Inc. ("JT") accounted for substantially all of Agouron Pharmaceuticals' contract revenues for 1998, 1997 and 1996. Total contract revenues for 1998 decreased approximately 53% from 1997 due principally to decreased VIRACEPT program spending by Agouron Pharmaceuticals, which was partially funded by JT. Additionally, the amortization to revenue over a 24 month period of JT's $24,000,000 milestone payment, which was received in August 1995, was completed in June 1997. The increase in contract revenues from 1996 to 1997 of approximately 31% was due principally to increased program activity and spending on the JT collaborations. Agouron Pharmaceuticals anticipates that contract revenues for fiscal 1999 will approximate $35,000,000 to $40,000,000. License fees and royalties Agouron Pharmaceuticals' license fees and royalties for 1998 and 1997 were principally derived from F. Hoffmann-La Roche Ltd ("Roche"). Total revenues for 1998 increased approximately 84% from 1997 due to European marketing approval for VIRACEPT. The increase from 1996 to 1997 is principally due to the receipt of $9,000,000 in 1997 for initial European marketing rights for VIRACEPT. In January and March 1998, VIRACEPT was approved for marketing in Europe and Japan, respectively. Upon such approvals, Agouron Pharmaceuticals realized as revenue license fees totaling $12,000,000. In July 1997, Agouron Pharmaceuticals and JT granted Roche certain exclusive rights to VIRACEPT in several Asian countries. For such rights, Agouron Pharmaceuticals received a license fee of $2,000,000. Royalty revenues of approximately $3,852,000 have been recognized in 1998 based on estimated and actual Roche sales of VIRACEPT in its licensed territory. Agouron Pharmaceuticals anticipates that license fees and royalties for fiscal 1999 will range from $30,000,000 to $35,000,000. Cost of product sales The aggregate cost of product sales as a percentage of product sales was approximately 43% and 42% for 1997 and 1998, respectively. Gross margins on United States commercial sales were approximately 57% and 65% during 1997 and 1998, respectively. Agouron Pharmaceuticals anticipates that gross margins on United States commercial sales will improve as product sales volumes increase and certain manufacturing process and scale efficiencies are realized, and will approximate 71% in 1999. Aggregate gross margins will also be impacted by the size of Agouron Pharmaceuticals' patient assistance program (which provides free goods to indigent individuals), Agouron Pharmaceuticals' manufacturing supply agreement with Roche (whereby Roche has the right to either purchase product at Agouron Pharmaceuticals' cost plus contractually determined mark-ups or manufacture drug product for its own use, subject to contractually determined fees to be paid to Agouron Pharmaceuticals) and the level of sales subject to Medicaid and other discounts or rebates in the United States. Research and development Research and development ("R&D") spending increased by approximately 39% from 1997 to 1998 due to license fees for three development stage HIV products and the addition of Alanex since late 1997. R&D spending increased by approximately 51% from 1996 to 1997 due principally to increased expenditures in support of human clinical trials and an expanded access program associated with VIRACEPT. Agouron Pharmaceuticals anticipates that total R&D expenses in fiscal 1999, excluding the impact of any license fees or milestone expenses in either 1998 or 1999, will exceed fiscal 1998 expenses by approximately 25%. Selling, general and administrative Selling, general and administrative ("SG&A") expenses represented approximately 24% of total operating expenses (excluding the cost of product sales, royalties and write-off of in-process technology purchased) in 1998, 28% in 1997 and 10% in 1996. SG&A increased by approximately 77% from 1997 to 1998 due principally to a full year of expenses associated with the sales force and other marketing personnel. Spending increases from 1996 to 1997 were due chiefly to increasing staff levels (approximately 214%) and staff-related expenditures, certain premarketing and advertising and promotion costs associated with the launch of VIRACEPT in March 1997 and other costs associated with a growing sales and marketing infrastructure. Agouron Pharmaceuticals anticipates that total SG&A expenses will increase by approximately 40% in fiscal 1999 due to increasing sales and marketing activities and the support of VIRACEPT phase IV marketing studies. Royalties Agouron Pharmaceuticals' obligation to share VIRACEPT profits with JT is reflected in royalty expense for 1998 and represents approximately 19% of United States product sales. Royalties in fiscal 1997 were not significant. It is anticipated that royalty expense for fiscal 1999 will approximate 24% to 25% of United States product sales. Write-off of in-process technology purchased In 1997, the Company acquired Alanex, a research company engaged in the discovery of drug leads through the high-speed screening of diverse chemical libraries designed by computational methods and generated by combinatorial chemistry. Alanex was acquired in a purchase transaction through the issuance of approximately 1,992,000 equivalent shares (including 548,000 for options and warrants) of the Company's common stock valued at approximately $61,000,000, plus $1,300,000 of related acquisition costs. The purchase price was allocated to various tangible and intangible assets and either capitalized (approximately $4,800,000) or expensed (approximately $57,500,000) as in-process technology based on an independent valuation of the Alanex assets, technology and research programs at the date of acquisition. Interest and other income Interest income increased by 1% from 1997 to 1998. Interest income increased by approximately 23% from 1996 to 1997 due principally to a higher average investment portfolio balance resulting from the July 1996 public offering, receipt of $9,000,000 in license fees from Roche (January 1997), significantly increased contract funding from JT and the exercise of employee stock options. Agouron Pharmaceuticals anticipates that, absent additional revenue sources or a significant change in interest rates, fiscal 1999 interest income will be less than that of fiscal 1998. Interest expense Interest expense increased in 1998 from 1997 due to borrowings under a line of credit which was used to partially fund quarterly royalties paid to JT throughout the year. Interest expense decreased in 1997 from 1996 by approximately 38% due to a decreasing level of debt and capital lease obligations from year to year. Income tax provision (benefit) The income tax provision in 1998 has been computed using an effective, combined federal and state rate of 36%. The cash obligation of such 1998 provision has been mostly offset by the utilization of deferred tax assets. Based on its 1998 pre-tax profit and its estimates for future taxable income, Agouron Pharmaceuticals believes it is more likely than not that its deferred tax assets (comprised mostly of net operating loss carryforwards, deductions generated by the exercise of stock options, and research credits) will be realized and has, therefore, recorded the full tax benefit of its deferred tax assets. Agouron Pharmaceuticals' accumulated net deferred tax assets totaled approximately $55,900,000 and $64,100,000 at June 30, 1997 and 1998. Agouron Pharmaceuticals anticipates that its effective income tax rate for fiscal 1999 will be less than 10%. Such decrease from fiscal 1998 is attributed to greater expected availability of R&D tax credits due to the anticipated increase in R&D spending plus the anticipated reduction in R&D contract revenues and the utilization of tax losses from Oncology Division ("Oncology Division" or "OD"), a division of the Company. Year 2000 The Year 2000 issue results from computer programs and systems that were created to accept only two digit dates. Such systems may not be able to distinguish 20th century dates from 21st century dates. This could result in miscalculations and system failures. The Company has established a Year 2000 project team that is currently reviewing computer systems and computer controlled equipment that could be affected by this issue. Additionally, the Company has made initial contact with all of its significant external business partners to determine the extent to which the Company is vulnerable to their failures and to ascertain Year 2000 compliance and risk. The Company estimates that the inventory and assessment of internal systems and material third parties will be completed by the end of calendar 1998. The Company is in the process of upgrading its enterprise business system. Once upgraded, the system will be Year 2000 compliant. The estimated completion date of this upgrade is by the end of calendar 1998. The Company also expects to both replace and upgrade other equipment and systems. The Company expects to complete such changes by the end of fiscal 1999, and to complete validation by the end of calendar 1999. While the total cost to upgrade or replace such systems is not known at this time, the Company believes such cost will not have a material effect on the Company's business, financial position, or results of operation. At this time the Company has not initiated the formulation of contingency plans. The determination of the necessity for contingency plans will be made by the end of calendar 1998. Liquidity and Capital Resources Prior to fiscal 1998, Agouron Pharmaceuticals relied principally on the Company's equity financings and corporate collaborations to fund its operations and capital expenditures. In fiscal 1998, due primarily to the successful commercialization of VIRACEPT, operating activities have provided $25,437,000 of cash compared with using $57,961,000 in fiscal 1997. Commercial sales of VIRACEPT for 1997 and 1998 resulted in gross margins of approximately $32,370,000 and $236,654,000. At June 30, 1998, Agouron Pharmaceuticals had net working capital of approximately $125,933,000, an increase of $11,565,000 over June 30, 1997 levels due principally to Agouron Pharmaceuticals' pre-tax profit of $46,157,000, partially offset by $24,610,000 of funding for Oncology Division. Individual working capital components significantly impacted by the commercialization of VIRACEPT include trade accounts receivable (an increase of $18,416,000), inventories (an increase of $44,906,000), accounts payable (an increase of $15,560,000) and accrued liabilities (an increase of $25,829,000, primarily due to accrued royalties payable to JT and accrued license fees). It is anticipated that these working capital components and cash and short-term investments will continue to be significantly impacted as VIRACEPT sales increase. At June 30, 1998, Agouron Pharmaceuticals had cash, cash equivalents and short-term investments of approximately $87,123,000. Agouron Pharmaceuticals believes that its current capital resources, existing contractual commitments and anticipated VIRACEPT product sales contribution are sufficient to maintain its current operations and to provide for the operating requirements of Oncology Division through fiscal 1999. This belief is based on current research and clinical development plans of Agouron Pharmaceuticals and Oncology Division, anticipated working capital requirements associated with the expanding commercialization of VIRACEPT, the current regulatory environment, historical industry experience in the development of therapeutic drugs and general economic conditions. AGOURON PHARMACEUTICALS, a division of Agouron Pharmaceuticals, Inc. INDEX TO FINANCIAL STATEMENTS Report of Independent Accountants Combined Balance Sheet as of June 30, 1998 and 1997 Combined Statement of Income (Loss) for the years ended June 30, 1998, 1997 and 1996 Combined Statement of Division Equity for the years ended June 30, 1998, 1997 and 1996 Combined Statement of Cash Flows for the years ended June 30, 1998, 1997 and 1996 Notes to Combined Financial Statements NOTE: All schedules are omitted because they are not applicable, or not required, or because the required information is included in the combined financial statements or notes thereto. REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders of Agouron Pharmaceuticals, Inc. In our opinion, the accompanying combined balance sheet and the related combined statements of income (loss), of division equity and of cash flows present fairly, in all material respects, the financial position of Agouron Pharmaceuticals (a division of Agouron Pharmaceuticals, Inc.) at June 30, 1998 and 1997, and the results of its operations and its cash flows for each of the three years in the period ended June 30, 1998, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the management of Agouron Pharmaceuticals, Inc.; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. As described above and more fully described in Note 1 to these financial statements, Agouron Pharmaceuticals is a division of Agouron Pharmaceuticals, Inc.; accordingly, the combined financial statements of Agouron Pharmaceuticals should be read in conjunction with the audited consolidated financial statements of Agouron Pharmaceuticals, Inc. /s/ PricewaterhouseCoopers LLP San Diego, California August 10, 1998 AGOURON PHARMACEUTICALS, a division of Agouron Pharmaceuticals, Inc. COMBINED BALANCE SHEET (Dollars in thousands)
June 30, 1998 1997 ASSETS Current assets: Cash and cash equivalents $ 19,098 $ 52,484 Short-term investments 68,025 38,833 Accounts receivable, net 49,703 26,707 Inventories 103,706 58,800 Current deferred tax assets 564 500 Other current assets 4,202 2,209 ---------- ----------- Total current assets 245,298 179,533 Property and equipment, net 47,212 22,613 Deferred tax assets 64,644 56,000 Purchased intangibles 3,500 4,100 ---------- ----------- $ 360,654 $ 262,246 ========== =========== LIABILITIES AND DIVISION EQUITY Current liabilities: Accounts payable $ 44,393 $ 28,833 Accrued liabilities 34,468 8,639 Deferred revenue and advances 23,563 24,567 Current deferred tax liabilities 1,139 600 Loan payable and current portion of long-term debt 15,802 2,526 ---------- ----------- Total current liabilities 119,365 65,165 ---------- ----------- Long-term liabilities: Long-term debt, less current portion 5,892 5,940 Accrued rent 1,023 1,277 ---------- ----------- Total long-term liabilities 6,915 7,217 ---------- ----------- Division equity 234,374 189,864 ---------- ----------- Commitments $ 360,654 $ 262,246 ========== ===========
See accompanying notes to combined financial statements. AGOURON PHARMACEUTICALS, a division of Agouron Pharmaceuticals, Inc. COMBINED STATEMENT OF INCOME (LOSS) (In thousands, except per share amounts)
Years ended June 30, 1998 1997 1996 Revenues: Product sales $ 409,298 $ 56,969 $ 0 Contracts 23,427 49,824 37,942 License fees and royalties 18,352 10,000 0 ------------- ------------- ------------- 451,077 116,793 37,942 ------------- ------------- ------------- Operating expenses: Cost of product sales 172,644 24,599 0 Research and development 113,132 81,293 53,763 Selling, general and administrative 55,876 31,653 6,142 Royalties 68,423 0 0 Write-off of in-process technology purchased 0 57,500 0 ------------- ------------- ------------- 410,075 195,045 59,905 ------------- ------------- ------------- Operating income (loss) 41,002 (78,252) (21,963) ------------- ------------- ------------- Other income (expenses): Interest and other income 5,907 5,873 4,776 Interest expense (752) (142) (228) ------------- ------------- ------------- 5,155 5,731 4,548 ------------- ------------- ------------- Income (loss) before income taxes 46,157 (72,521) (17,415) Income tax provision (benefit) 16,793 (38,287) 934 ------------- ------------- ------------- Net income (loss) 29,364 (34,234) (18,349) Tax benefit allocated from Oncology Division 8,023 4,290 0 ------------- ------------- ------------- Net income (loss) attributable to AP stock $ 37,387 $ (29,944) $ (18,349) ============= ============= ============= Earnings per share: Basic $ 1.22 $ (1.11) $ (.93) ============= ============= ============= Diluted $ 1.13 $ (1.11) $ (.93) ============= ============== ============= Equivalent shares used in calculation of: Basic 30,571 26,946 19,688 Diluted 33,214 26,946 19,688
See accompanying notes to combined financial statements. AGOURON PHARMACEUTICALS, a division of Agouron Pharmaceuticals, Inc. COMBINED STATEMENT OF DIVISION EQUITY (Dollars in thousands)
Unrealized Gains (Losses) On Short-term Accumulated Other Investments Deficit Total Balance at June 30, 1995 $ 16,203 $ -- $ ( 1,809) $ 14,394 Equity contribution from Agouron Pharmaceuticals, Inc. 82,515 -- -- 82,515 Equity contribution to Oncology Division (1,751) -- -- (1,751) Net loss -- (18,349) (18,349) ----------- ---------- ----------- ---------- Balance at June 30, 1996 96,967 -- (20,158) 76,809 Equity contribution from Agouron Pharmaceuticals, Inc. 146,405 -- -- 146,405 Tax benefit of stock options exercised 12,100 -- -- 12,100 Equity contribution to Oncology Division (15,506) -- -- (15,506) Net loss -- -- (34,234) (34,234) Tax benefit allocated from Oncology Division -- -- 4,290 4,290 ----------- ---------- ------------ ---------- Balance at June 30, 1997 239,966 -- (50,102) 189,864 Equity contribution from Agouron Pharmaceuticals, Inc. 14,453 -- -- 14,453 Tax benefit of stock options exercised 16,896 -- -- 16,896 Change in unrealized gains (losses) on short-term investments -- 384 -- 384 Equity contribution to Oncology Division (24,610) -- -- (24,610) Net income 29,364 -- -- 29,364 Tax benefit allocated from Oncology Division 8,023 8,023 ------------ ---------- --------- --------- Balance at June 30, 1998 $ 246,705 $ 384 $ (12,715) $ 234,374 =========== ========= =========== =========
See accompanying notes to combined financial statements. AGOURON PHARMACEUTICALS, a division of Agouron Pharmaceuticals, Inc. COMBINED STATEMENT OF CASH FLOWS (In thousands)
Years ended June 30, 1998 1997 1996 Cash flows from operating activities: Cash received from product sales, contracts and licenses $ 427,026 $ 103,090 $ 43,911 Cash paid to suppliers, employees and service providers (406,795) (166,782) (54,522) Interest received 5,958 5,873 4,776 Interest paid (752) (142) (228) ----------- ----------- ----------- Net cash provided (used) by operating activities 25,437 (57,961) (6,063) ----------- ----------- ----------- Cash flows from investing activities: Proceeds from maturities/sales of short-term investments 147,292 127,501 59,686 Purchases of short-term investments (176,100) (91,227) (118,224) Purchase of property and equipment (31,507) (12,372) (3,252) Cost to acquire Alanex, net of cash acquired 0 608 0 ----------- ----------- ----------- Net cash provided (used) by investing activities (60,315) 24,510 (61,790) ----------- ----------- ----------- Cash flows from financing activities: Net proceeds from issuance of common stock 14,453 85,354 82,515 Proceeds from credit line 53,600 0 0 Principal payments on credit line, long-term debt, and capital leases (41,951) (364) (818) Equity contribution to Oncology Division (24,610) (15,506) (1,751) ----------- ----------- ----------- Net cash provided (used) by financing activities 1,492 69,484 79,946 ----------- ----------- ----------- Net increase (decrease) in cash and cash equivalents (33,386) 36,033 12,093 Cash and cash equivalents at beginning of year 52,484 16,451 4,358 ----------- ----------- ----------- Cash and cash equivalents at end of year $ 19,098 $ 52,484 $ 16,451 =========== =========== =========== Reconciliation of net income (loss) to net cash provided (used) by operating activities: Net income (loss) attributable to AP stock $ 37,387 $ (28,944) $ (18,349) Depreciation and amortization 9,087 3,910 2,411 Write-off of in-process technology purchased 0 57,500 0 Provision (benefit) for deferred income taxes 16,750 (40,510) 0 Tax benefit allocated from Oncology Division (8,023) (4,290) 0 Net (increase) decrease in inventories (44,906) (58,547) 0 Net (increase) decrease in accounts receivable and other current assets (24,989) (23,541) (1,198) Net increase (decrease) in accounts payable, accrued liabilities, deferred revenue and advances, and other liabilities 40,131 36,461 11,073 ---------- ---------- ----------- Net cash provided (used) by operating activities $ 25,437 $ (57,961) $ (6,063) =========== =========== ===========
See accompanying notes to combined financial statements. AGOURON PHARMACEUTICALS, a division of Agouron Pharmaceuticals, Inc. NOTES TO COMBINED FINANCIAL STATEMENTS Note 1 - The Division and its significant accounting policies The Division Agouron Pharmaceuticals ("Agouron Pharmaceuticals" or "AP") is a division of Agouron Pharmaceuticals, Inc. (the "Company") which was organized and incorporated in California in June 1984. Agouron Pharmaceuticals is an integrated pharmaceutical company committed to the discovery, development, manufacturing and marketing of innovative therapeutic products engineered to inactivate proteins which play key roles in AIDS and other serious diseases. Agouron Pharmaceuticals, through its own sales and marketing organization, is currently marketing in the United States its first drug, VIRACEPT(R) (nelfinavir mesylate) for treatment of HIV infection. In addition, Agouron Pharmaceuticals is expected to initiate a phase II/III pivotal clinical trial of REMUNE(TM) (AG1661), an immune-based therapeutic agent for treatment of HIV infection and AIDS being co-developed by Agouron Pharmaceuticals and The Immune Response Corporation ("IRC"). Further, Agouron Pharmaceuticals has a number of programs in progress for discovery or development of other new drugs in the fields of viral disease and other serious diseases. Agouron Pharmaceuticals is also using the proprietary core drug discovery technology of Alanex Corporation ("Alanex"), a wholly-owned subsidiary of the Company, to accelerate the steps necessary to discover small molecule drug candidates, from the initial identification of compounds that exhibit activity against selected biological targets to the progression of these compounds to drug candidates for human clinical trials. Financial statements and allocation matters As a matter of policy, the Company manages the financial activities of its divisions on a centralized basis. These financial activities include the investment of surplus cash, the issuance, repayment and repurchase of short-term and long-term debt and the issuance and repurchase of common stock. During the three years ended June 30, 1998, the Company attributed all of its short-term and long-term debt to AP based upon the specific purpose for which the debt was incurred and the cash flow requirements of AP. Accordingly, all of the Company's interest expense has been allocated to AP. The Company believes this method of allocation to be equitable and reasonable. Agouron Pharmaceuticals' financial statements have been prepared in accordance with generally accepted accounting principles and, taken together with the Company's other division, comprise all of the accounts included in the corresponding consolidated financial statements of the Company. The financial statements of each division reflect the financial condition, results of operations and cash flows of the businesses included therein. The combined financial statements of Agouron Pharmaceuticals also include any accounts or assets of the Company not specifically allocated to the Oncology Division ("Oncology Division" or "OD"), a division of the Company. Principles of combination The combined financial statements of AP include the accounts of the Company and its wholly-owned subsidiaries except for its programs in the area of oncology, which are reflected separately in Oncology Division's financial statements. All significant intercompany accounts and transactions have been eliminated. Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosures as of the date of the financial statements. Actual results could differ from such estimates. Cash and cash equivalents Agouron Pharmaceuticals considers cash equivalents to be only those investments which are highly liquid, readily convertible to cash and which mature within 90 days from date of purchase. Short-term investments Short-term investments consist principally of government or government agency securities, corporate notes and bonds, commercial paper and certificates of deposit with original maturities of three to thirty-six months, and corporate equity securities. Agouron Pharmaceuticals has classified its short-term investments as available-for-sale. Included in short-term investments at June 30, 1998 and 1997 is $1,262,000 and $588,000 of accrued interest receivable. Inventories Inventories are stated at the lower of cost or market. Cost is determined using the first-in, first-out method. Concentration of credit and market risk Agouron Pharmaceuticals invests its excess cash principally in marketable securities from a diversified portfolio of institutions with strong credit ratings and, by policy, limits the amount of credit exposure at any one institution. These investments are generally not collateralized and primarily mature within one year. Agouron Pharmaceuticals has not realized any material losses from such investments in 1998, 1997 or 1996. Financial instruments and risk management Agouron Pharmaceuticals has contract manufacturing operations in Europe and Asia. Accordingly, Agouron Pharmaceuticals from time-to-time enters into forward contracts to manage its exposure to fluctuations in foreign currency exchange rates. At June 30, 1998, Agouron Pharmaceuticals had several forward contracts with maturities of less than six months to purchase Japanese Yen for approximately $9,426,000. These contracts are designated and effective as hedges and, accordingly, gains and losses are recognized in the same period the offsetting gains and losses of hedged transactions are realized and recognized. Property and equipment Property and equipment is recorded at cost. Depreciation is computed using principally the straight-line method over estimated useful lives of three to five years. Leasehold improvements are amortized over the life of the lease. Purchased intangibles In conjunction with the Company's 1997 acquisition of Alanex, Agouron Pharmaceuticals has recorded purchased intangibles (primarily drug discovery technology and chemical compound libraries) which are being amortized on a straight-line basis over their estimated useful lives of seven years. Deferred revenue and advances Approximately $22,414,000 of cash received from Japan Tobacco Inc. ("JT") has been classified as deferred contract revenue and advances. Approximately $21,452,000 of the cash received from JT represents JT's advance of Agouron Pharmaceuticals' VIRACEPT development funding obligation which was completed in March 1998. Such amounts are to be repaid by Agouron Pharmaceuticals out of future profits, if any, generated by sales of VIRACEPT in the United States. The balance of the payments from JT are non-refundable and are being recognized as contract revenue on a prospective basis generally as collaborative program expenses are incurred. Product sales Agouron Pharmaceuticals ships VIRACEPT to wholesalers throughout the United States and recognizes sales revenue upon shipment. Sales are reported net of discounts, rebates, chargebacks and product returns. Also included in product sales for 1998 and 1997 are approximately $50,979,000 and $1,441,000 of sales (at cost plus contractually determined mark-ups) to F. Hoffman-La Roche Ltd ("Roche") of clinical and commercial drug supplies to be used by Roche in its licensed territory. Agouron Pharmaceuticals receives a royalty on Roche's subsequent commercial sales of such drug supplies. Contract revenues Contract revenues are earned and recognized generally as contract research costs are incurred according to the provisions of each underlying agreement. Amounts received in advance of performance are recorded as deferred revenue. Contract milestone payments are recognized as revenues upon the completion of the milestone event or requirement. License fees and royalties License fees are recognized as revenue when earned as generally evidenced by certain factors including: receipt of such fees, satisfaction of any performance obligations and the non-refundable nature of such fees. Royalty revenues are recognized based on estimated and actual sales of licensed products in licensed territories. Research and development costs Research and development costs are expensed in the period incurred. Income tax provision (benefit) Agouron Pharmaceuticals records a provision (benefit) for income taxes using the liability method. Current income tax expense (benefit) generally is the amount of income taxes expected to be payable for the current year. Deferred taxes are recorded by applying applicable tax rates to cumulative temporary differences based on when and how they are expected to affect the tax return. Agouron Pharmaceuticals is included in the consolidated U.S. federal income tax return filed by the Company. Division management and allocation policies provide that, as of the end of any fiscal quarter, any projected annual tax benefit attributable to any division that cannot be utilized by such division to offset or reduce its current or deferred income tax expense may be allocated to the other division(s) without any compensating payment or allocation. Accordingly, all losses of Oncology Division have been utilized by Agouron Pharmaceuticals and no provision has been recorded by Oncology Division for any fiscal year. As it is anticipated that all deferred tax assets of the Company at present will be realized by Agouron Pharmaceuticals, all deferred tax assets of the Company are currently recorded on the books of Agouron Pharmaceuticals. The realizability of deferred tax assets is determined at the level of the Company. Earnings (loss) per share Historical per share information is presented in the combined statement of income (loss) based on the anticipated ratio of AP equivalent shares to the Company's shares although AP Stock was not part of the capital structure of the Company for the periods presented. Agouron Pharmaceuticals computes per share data in accordance with Statement of Financial Accounting Standards No. 128 "Earnings Per Share." Basic per share data is based upon the weighted average number of the Company's common shares outstanding during a period as a result of the expected conversion of each outstanding share of the Company's common stock into one share of AP Stock. Diluted per share data is based upon the weighted average number of the Company's common shares outstanding and dilutive common stock equivalents during a period. Common stock equivalents are options under the Company's stock option plans which are included in the earnings per share computation under the treasury stock method and common shares expected to be issued under the Company's employee stock purchase plan. Common stock equivalents of approximately 2,643,000 shares for 1998 were used to calculate diluted earnings per share. For 1997 and 1996, common stock equivalents of approximately 3,168,000 and 2,014,000 shares were not used to calculate diluted earnings (loss) per share because of their anti-dilutive effect. There are no reconciling items in calculating the numerator for basic and diluted earnings (loss) per share for any of the periods presented. Earnings (loss) attributable to Agouron Pharmaceuticals would generally equal Agouron Pharmaceuticals' net income or (loss) for the relevant period determined in accordance with generally accepted accounting principles in effect at such time, adjusted by the amount of tax benefits allocated to or from Oncology Division or other divisions pursuant to the management and accounting policies adopted by the Company's Board. Statement of cash flows For purposes of the Statement of Cash Flows, cash equivalents are highly liquid investments purchased with an original maturity of ninety days or less. Non-cash financing and investing activities are comprised primarily of capital lease obligations of $1,579,000, $2,355,000 and $457,000 for 1998, 1997 and 1996 and the Company's acquisition of Alanex in 1997. Note 2 - Short-term investments The cost of Agouron Pharmaceuticals' investment portfolio by type of security and contractual maturity in the balance sheet is as follows:
June 30, 1998 1997 (Dollars in thousands) Type of security: Corporate debt $ 46,023 $ 24,401 U.S. Treasury and agencies 10,766 11,994 Other interest-bearing 9,462 2,438 Corporate equity 1,774 0 ------------- -------------- $ 68,025 $ 38,833 ============= ============== Contractual maturity: Maturing in less than twelve months $ 41,389 $ 35,827 Maturing between twelve and thirty-two months 26,636 3,006 ------------- -------------- $ 68,025 $ 38,833 ============= ==============
The cost of securities sold, if any, is based upon the specific identification method. The net unrealized holding gain on available-for-sale securities included as a separate component of stockholders' equity at June 30, 1998 totaled $384,000. There were no material unrealized gains or losses nor any material differences between the estimated fair values and costs of securities in the investment portfolio at June 30, 1997. Realized gains and losses on the disposal of available-for-sale securities during 1998 totaled $20,000 and $2,000, respectively. During 1997 such gains and losses totaled $12,000 and $4,000, respectively. During 1996, such gains totaled $22,000. Note 3 - Composition of certain financial statement captions
June 30, 1998 1997 (Dollars in thousands) Accounts receivable, net: Trade $ 44,471 $ 26,055 Contract 813 0 Royalties 2,339 0 Employee 252 269 Other 1,828 383 ---------- ----------- $ 49,703 $ 26,707 ========== =========== Inventories: Raw materials and work in process $ 95,517 $ 57,883 Finished goods 8,189 917 ---------- ----------- $ 103,706 $ 58,800 ========== =========== Property and equipment, net: Scientific instrumentation $ 26,869 $ 16,614 Leasehold improvements 25,135 10,804 Computer equipment 15,619 8,892 Furniture and fixtures 3,910 2,464 ---------- ----------- 71,533 38,774 Less accumulated depreciation and amortization (24,321) (16,161) ---------- ----------- $ 47,212 $ 22,613 ========== =========== Accrued liabilities: Royalties $ 21,410 $ 0 License fees 6,000 0 Vacation 2,955 1,932 Clinical studies 1,843 3,328 Other 2,260 3,379 ---------- ----------- $ 34,468 $ 8,639 ========== ===========
Note 4 - Significant contract arrangements Japan Tobacco Inc. In February 1994, Agouron Pharmaceuticals entered into a strategic alliance with JT in the field of anti-viral drugs for the treatment of infections caused by hepatitis C and the herpes family of viruses. In December 1994, Agouron Pharmaceuticals added its anti-HIV drug, VIRACEPT, to the JT collaboration with the execution of a world-wide development and licensing agreement. Agouron Pharmaceuticals and JT share equally the costs of further development of VIRACEPT. Currently, Agouron Pharmaceuticals has exclusive commercial rights to VIRACEPT (with the right to sublicense) in North America and JT has exclusive commercial rights to VIRACEPT (with the right to sublicense) in parts of Japan. Agouron Pharmaceuticals and JT share profits and/or royalties equally from the world-wide commercialization of VIRACEPT. Under the combined terms of the JT agreements, Agouron Pharmaceuticals has incurred costs of $51,898,000, $71,825,000 and $46,969,000 and recognized corresponding contract revenues of $17,359,000, $48,886,000 and $37,197,000 for the years ended June 30, 1998, 1997 and 1996. Roche Agouron Pharmaceuticals and JT have granted Roche certain exclusive royalty bearing marketing rights to VIRACEPT outside of North America and parts of Japan. For such rights, Agouron Pharmaceuticals has received (and recognized as revenue) initial license fees and additional product approval license fees. Agouron Pharmaceuticals also receives royalties based either on Roche's sales of VIRACEPT or, in certain circumstances, Invirase(R) and Fortavase(R) (saquinavir), Roche's HIV protease inhibitors. VIRACEPT license fees and royalties from Roche totaled $17,852,000 and $9,000,000 for the years ended June 30, 1998 and 1997. The Immune Response Corporation In June 1998, Agouron Pharmaceuticals entered into a binding letter of intent with The Immune Response Corporation ("IRC") to collaborate on final development and commercialization of REMUNE, an immune-based therapeutic agent discovered by IRC and currently the subject of several clinical studies including a large phase III clinical trial. The two companies intend to enter promptly into a definitive agreement and will endeavor to complete development and registration of REMUNE in 1999. IRC will manufacture commercial supplies of REMUNE, and Agouron Pharmaceuticals will have exclusive rights to market REMUNE in North America, Europe and certain other countries. The two companies will share equally all profits from the commercialization of REMUNE in the licensed territory. Agouron Pharmaceuticals paid an initial $10,000,000 license fee to IRC in June 1998 and also purchased 118,256 newly issued common shares of IRC for $2,000,000. Agouron Pharmaceuticals' development funding obligation commences October 15, 1998 and, assuming ongoing successful development, registration and approval of REMUNE, Agouron Pharmaceuticals may pay to IRC up to $53,000,000 in additional development and milestone payments and $12,000,000 in purchases of additional IRC common stock. Shionogi & Co., Ltd. In June 1998, Agouron Pharmaceuticals entered into a binding letter of intent with Shionogi & Co., Ltd. ("Shionogi") to develop and commercialize AG1549, a second-generation non-nucleoside reverse transcriptase inhibitor ("NNRTI") for the treatment of HIV infection. Discovered by Shionogi, AG1549 is currently the subject of several clinical trials evaluating its dose and its concomitant use with other antiretroviral treatments. Agouron Pharmaceuticals has exclusive world-wide rights to the development and commercialization of AG1549 except in Japan, South Korea and Taiwan. Agouron Pharmaceuticals paid an initial $10,000,000 license fee in June 1998. Agouron Pharmaceuticals may pay, assuming ongoing successful development, registration and approval of AG1776, additional license fees of up to $30,000,000. In addition, Agouron Pharmaceuticals will pay Shionogi royalties based on sales, if any, of AG1549. Japan Energy Corporation In June 1998, Agouron Pharmaceuticals entered into an agreement with Japan Energy Corporation ("JE") to develop and commercialize AG1776, a novel protease inhibitor for the treatment of HIV infection. Agouron Pharmaceuticals has exclusive world-wide rights to the development and commercialization of AG1776 except in Japan, South Korea, North Korea and Taiwan; JE will manufacture bulk compound for use in final drug product. Agouron Pharmaceuticals incurred an initial $6,000,000 license fee in June 1998. Agouron Pharmaceuticals may pay, assuming ongoing successful development, registration and approval of AG1776, additional license fees of up to $20,000,000. In addition, Agouron Pharmaceuticals will pay JE royalties based on sales, if any, of AG1776. Note 5 - Long-term debt Long-term debt and capital lease obligations are as follows:
June 30, 1998 1997 (Dollars in thousands) Notes payable, secured with personal property and a certificate of deposit; interest at CD rate plus 1.5%, paid off in June 1998. $ 0 $ 142 Capital leases with interest rates between 5.86% and 16.5%, maturing at various dates through June 2003. 3,214 2,462 Line of credit, $20,000,000 secured; interest at bank reference rate or LIBOR plus 1.5%, expiring September 30, 1998. 15,000 0 Unsecured, non-interest bearing, term obligation; face value of $4,500,000; discounted to an 8.95% effective rate, includes imputed interest of $548,000 due June 28, 2001. 3,480 3,194 Term obligation for tenant improvements, interest at 11% per annum, payable in monthly installments, paid off in October 1997. 0 2,668 ------------- -------------- Total long-term debt and capital lease obligations 21,694 8,466 Current portion (15,802) (2,526) ------------- -------------- $ 5,892 $ 5,940 ============= ==============
Maturities of long-term debt, excluding capital leases, are as follows: 1999 - $15,000,000; 2000- $0; and 2001 - $4,500,000, less imputed interest of $1,020,000. Note 6 - Income taxes (Dollars in thousands) The components of the provision (benefit) for income taxes are as follows:
1998 1997 1996 --------- --------- -------- Year ended June 30, Current: Federal $ 0 $ 0 $ 0 State 43 1 1 Foreign 0 1,222 933 --------- --------- -------- 43 1,223 934 --------- --------- -------- Deferred: Federal 16,518 (33,510) 0 State 232 (6,000) 0 Foreign 0 0 0 --------- --------- -------- 16,750 (39,510) 0 --------- --------- -------- $ 16,793 $ (38,287) $ 934 ========= ========= ========
The income tax reconciliation from income (loss) before income taxes computed at the federal statutory rate (34%) to Agouron's actual income tax provision is as follows:
Year ended June 30, 1998 1997 1996 --------- --------- -------- Tax at U.S. federal statutory rate $ 15,693 $ (24,657) $ (5,921) State taxes, net of federal benefit 181 1 1 Foreign taxes 0 1,222 933 Purchase accounting book/tax basis differences 0 19,781 0 Change in valuation allowance 0 (42,449) 5,864 Other 919 332 57 Adjustments to carryover amounts 0 7,483 0 --------- --------- -------- Subtotal 16,793 (38,287) 934 Tax benefits to/from other division (8,023) (4,290) 0 --------- --------- -------- $ 8,770 $ (42,577) $ 934 ========= ========= ========
Agouron Pharmaceuticals' deferred tax assets and liabilities are as follows:
June 30 1998 1997 Book and tax depreciation/amortization differences $ 5,743 $ 710 Accrued liabilities 1,607 1,097 Net operating loss carryforwards 17,494 26,081 Tax credits 3,859 4,113 Allocated tax benefits to/from other divisions 39,062 25,798 Other (3,696) (1,899) --------- --------- 64,069 55,900 Valuation allowance 0 0 --------- --------- Deferred taxes, net $ 64,069 $ 55,900 ========= =========
Agouron Pharmaceuticals has not recorded current provisions for United States federal income taxes due to net operating losses for tax reporting purposes. At June 30, 1998, Agouron Pharmaceuticals had allocated net operating loss carryforwards for federal tax reporting purposes of approximately $150,000,000 expiring from 2000 to 2013. The net operating loss includes the tax benefit related to the exercise of stock options, which benefit was recorded to common stock. Agouron Pharmaceuticals has federal research and development credit carryforwards of approximately $4,800,000 at June 30, 1998. The future utilization of net operating loss carryforwards for federal income tax purposes may be impacted by the issuance of additional equity securities. Due to California's partial conformity with federal provisions regarding net operating loss and research and development credit carryforwards, and as a result of Agouron Pharmaceuticals' use of certain state tax planning strategies, for state tax reporting purposes at June 30, 1998, Agouron Pharmaceuticals has no net operating loss carryforwards and has research and development credit carryforwards of approximately $2,200,000. Such credits do not expire. Based on its 1998 operating results and its estimates of future taxable income, Agouron Pharmaceuticals believes that it is more likely than not that its deferred tax assets (comprised mostly of net operating loss carryforwards and research credits) will be realized and has therefore recorded the full tax benefit of its deferred tax assets as of June 30, 1998. Foreign tax expense represents certain withholding taxes associated with collaboration payments from JT. Note 7 - Division equity AP Stock AP Stock will represent a separate series of the Company Common Stock if the Company's Divisional Stock Proposal is approved and such series is designated by the Board. Additional AP Stock may be issued from time to time upon exercise of stock options or at the discretion of the Company's Board. Oncology Equity Line The Company Board has approved a cash equity line from Agouron Pharmaceuticals to Oncology Division. Amounts drawn under the equity line automatically convert to Oncology Division Stock on a periodic basis. Such stock will be distributed to holders of AP Stock on an annual basis. All cash allocated from Agouron Pharmaceuticals to Oncology Division has been recorded as an equity contribution. Note 8 - Commitments Certain scientific instrumentation, computers and other equipment are subject to leases which are classified as capital leases. At June 30, 1998 and 1997, $4,331,000 ($3,408,000, net) and $2,895,000 ($2,629,000, net) of such leased equipment are included in property and equipment. Rental expenses (principally for leased facilities under long-term operating lease commitments) were $5,031,000, $3,509,000 and $2,548,000 for 1998, 1997 and 1996. Future minimum payments for capital and operating leases at June 30, 1998 are as follows:
Capital Leases Operating Leases (Dollars in thousands) 1999 $ 819 $ 7,472 2000 812 5,507 2001 818 5,314 2002 578 3,943 2003 243 2,630 Thereafter 0 2,047 ------------ -------------- Total minimum lease payments 3,270 $ 26,913 ============== Less amount representing interest (56) ------------ Obligations under capital leases $ 3,214 ============
Funding for the Oncology Division The development of Oncology Division products will require substantial funds. Agouron Pharmaceuticals intends to fund the operations of Oncology Division for the foreseeable future. The Company's Board has approved the allocation of up to $25,000,000 in cash from Agouron Pharmaceuticals to Oncology Division under an equity line which is expected to be exchanged for OD shares. Other The Company is involved in certain legal proceedings generally incidental to its normal business activities. While the outcome of any such proceedings cannot be accurately predicted, the Company does not believe the ultimate resolution of any such existing matters should have a material adverse effect on its financial position or results of operations. Note 9 - Alanex acquisition In April 1997, the Company executed a merger agreement with Alanex, which now operates as a wholly-owned subsidiary of the Company. For all outstanding shares of Alanex common stock and related options and warrants, approximately 2,000,000 shares of the Company's common stock were issued, subject to certain restrictions. Such shares had an aggregate fair market value on the measurement date of approximately $61,000,000 and transaction costs were approximately $1,300,000. Of the total purchase price (including transaction costs), $57,500,000 was allocated (as more fully described below) to certain intangible assets and expensed as in-process technology and approximately $4,800,000 was allocated to certain tangible and intangible assets and capitalized. The identifiable intangibles of Alanex include several drug research and discovery programs, a proprietary drug discovery technology, a chemical compound library and an assembled work force. These intangibles were valued using either a replacement cost approach (work force, library and proprietary technology) or an income approach (research programs). Values assigned to the chemical compound library and proprietary drug discovery technology have been capitalized, as such intangibles are of a general nature and may have a number of alternative future uses. Values assigned to the drug discovery programs have been expensed, as such programs are pursuing specific drug targets or chemical compounds, the technological feasibility of which having not been demonstrated, and there may be no alternative future uses for such targets or chemical compounds if the programs are ultimately less than successful. Agouron Pharmaceuticals' statement of income (loss) includes the results of operations related to the acquisition since April 1997. The following are unaudited pro-forma results of operations as if the transaction had been consummated on July 1, 1995:
(In thousands except for per share amounts.) Year ended June 30, 1997 1996 (unaudited) (unaudited) Revenues $ 123,602 $ 44,379 ============= ============= Net income (loss) attributable to AP stock $ 27,138 $ (18,247) ============= ============= Earnings (loss) per share $ 1.01 $ (.93) ============= =============
Note 10 - Quarterly financial data (unaudited) (In thousands, except for per share amounts)
Quarter Ended September 30 December 31 March 31 June 30 ------------- ------------- ------------- ---------- 1997 Product sales $ 0 $ 0 $ 13,401 $ 43,568 Gross margin from product sales 0 0 7,378 24,992 Net loss attributable to AP stock (12,021) (9,883) (987) (7,053) Earnings (loss) per share: Basic(3) (.48) (.37) (.04) (.25)(1) Diluted(3) (.48) (.37) (.04) (.25)(1) 1998 Product sales $ 79,502 $ 91,800 $ 111,950 $ 126,046 Gross margin from product sales 45,429 53,858 62,730 74,637 Net income attributable to AP stock 8,649 7,758 19,758 1,222 Earnings (loss) per share: Basic(3) .29 .25 .64 .04(2) Diluted(3) .26 .23 .60 .04(2)
(1) During the fourth quarter of 1997, Agouron Pharmaceuticals recorded a write-off of $57,500,000 ($2.03 per share) of in-process technology associated with the acquisition of Alanex, partially offset by the realization of $43,800,000 ($1.54 per share) of deferred tax assets associated with Agouron Pharmaceuticals' expectation of future taxable income. (2) During the fourth quarter of 1998, Agouron Pharmaceuticals incurred in-licensing costs of $26,000,000 (tax-effected $.50 per share) for commercial rights to three development stage anti-HIV products. (3) Historical Agouron Pharmaceuticals per share information is presented as the same capital structure as the Company although Agouron Pharmaceuticals' Stock was not part of the Company's capital structure for any of these periods. Note 11 - Related party transactions Overview The Company allocates corporate general and administrative and research and development expenses and income taxes in accordance with certain policies adopted by the Company's Board of Directors. Such policies may be further modified or rescinded by action of the Company's Board of Directors who may adopt additional policies, without approval of the Agouron Pharmaceuticals' stockholders, subject only to their fiduciary duty to such stockholders. Shared Services Agouron Pharmaceuticals operates as a division of the Company with access to the Company's personnel, financial resources, facilities and extensive capabilities in research and development, manufacturing, clinical development and administrative, the costs of which are allocated to each division in a reasonable and consistent manner based on utilization by the division of the services to which such costs relate. Management believes that such allocation is a reasonable estimate of such expenses. Access to Technology and Know-How Agouron Pharmaceuticals has free access to all technology and know-how of the Company that may be useful, subject to any obligations or limitations applicable to the Company. The costs of developing this technology remain in the business unit responsible for its development. ANNEX V ONCOLOGY DIVISION DESCRIPTION OF BUSINESS General Since the incorporation of the Company in June 1984, the oncology department within Agouron, now formed as the Oncology Division, has committed itself to the discovery, development, manufacturing and marketing of small-molecule drugs engineered to inactivate proteins which play key roles in cancer. Oncology Division is currently conducting pivotal phase II/III clinical trials for AG3340 for treatment of lung and prostate cancer. Further, Oncology Division has a number of programs in progress for discovery or development of other new drugs in the field of cancer. Research and Development Programs Oncology Division's research and development programs focusing on the area of cancer applies the Company's core technologies of three-dimensional structure based drug design and high-throughput screening of chemical libraries generated by computation-directed combinatorial chemistry. The following table outlines the status of various programs in the Company's Oncology Division research and development portfolio. Oncology Division is pursuing some of these programs independently, while others are being undertaken in collaboration with other companies. Research and Development Program Indication Stage Cancer AG3340 Solid Tumors Phase II/III AG3433 Solid Tumors Preclinical AG2034 Solid Tumors Phase I AG2037 Solid Tumors Preclinical cdk Inhibitors Solid Tumors Research PARP(1) Inhibitors Solid Tumors Research VEGF Inhibitors Solid Tumors Research GnRH Antagonist Hormone-Dependent Solid Tumors Research (1) In collaboration with Cancer Research Campaign Technology Ltd. Overview The development of new drugs for treatment of cancer is a key scientific and commercial focus of the Company. Cancer is the second leading cause of death in the United States and most developed nations. While much progress has been made in the treatment of certain forms of cancer, most existing anti-cancer drugs display limited efficacy and significant toxicities that restrict their clinical usefulness. As a result, there remains a critical need for anti-cancer drugs which are less toxic and more efficacious either as tumoricidal (tumor-killing) or tumoristatic (tumor-controlling) agents. The Company's Oncology Division drug discovery and development programs pursue inhibitors of the following enzymes: matrix metalloproteases ("MMPs"); glycinamide ribonucleotide formyltransferase ("GART"); cyclin dependent kinases ("cdk"); gonadotropin releasing hormone ("GnRH"); poly (ADP ribose) polymerase ("PARP"); and vascular endothelial growth factor ("VEGF") kinase. MMP Inhibitors: AG3340 AG3340 is an orally delivered antiangiogenesis drug designed to inhibit the growth, invasion and metastasis of solid tumors by inactivating certain members of a family of enzymes known as MMPs. AG3340 selectively inhibits those MMPs believed to be involved in tumor progression. A primary goal of clinical studies of AG3340 is to determine whether this distinctive selectivity results in a favorable clinical profile of safety and efficacy. In fiscal 1998, Oncology Division completed two phase I studies of AG3340. In one phase I study, AG3340 was administered orally twice daily (BID) in patients with advanced cancer, including lung, prostate, kidney, and colorectal cancers as well as sarcoma and melanoma. A separate phase I study found that AG3340 in combination with chemotherapy was generally well tolerated among patients with advanced prostate cancer whose disease was resistant to hormonal therapies. In preclinical studies, AG3340 has been shown to inhibit angiogenesis. AG3340 was also found to be a potent inhibitor of the growth of chemotherapy-resistant human non-small cell lung cancer tumors in mice. Here, administration of AG3340 resulted in a dose-dependent decrease in tumor growth by up to 65% as compared to controls. In May 1998, Oncology Division initiated phase II/III clinical trials in patients with advanced lung or prostate cancer. Oncology Division presently retains all rights to AG3340 in the fields of cancer and ophthalmology. Oncology Division is also conducting preclinical research on a stable of third-generation MMP inhibitors, including AG3433, which has even greater selectivity than AG3340 for those MMPs related to cancer. GART Inhibitors: AG2034 and AG2037 AG2034 is a potent, selective inhibitor of GART believed to be a key enzyme in the biochemical pathway through which tumor cells synthesize purines, essential components of DNA. With the exception of liver cells, all normal human tissues obtain purines through an alternative pathway (the purine salvage pathway). Oncology Division believes that inhibitors of GART will show a high degree of selectivity for tumor cells and less significant bone marrow toxicity than other chemotherapeutic agents. Oncology Division is completing dose-ranging phase I clinical trials that will establish an appropriate dose for AG2034. AG2037 was designed to have markedly reduced binding to the membrane folate binding protein ("mFBP") because tight binding to this receptor is one likely source of the toxicity observed with lometrexol, the first molecule in this class to be tested clinically by Eli Lilly and Company (assays of mFBP binding have been routine for compounds generated in this program). AG2037 shows potent inhibition of GART as a monoglutamate and can be polyglutamylated. Because of its potent weaker binding to mFBP, AG2037 access is restricted to only those cells with reduced folate carrier. Preclinical studies have shown that GART inhibitors are potentially cytotoxic (kills cells) to at least certain cancer cell types with mutan p53 genes, a common genetic abnormality in human cancer. Oncology Division retains all commercial rights to any compounds resulting from its GART inhibitor programs. cdk4/cdk2 Inhibitors Cdks are enzymes that play key roles in regulating the cell cycle. Certain members of this family of enzymes, such as cdk4 and cdk2, have been implicated as drivers of cells from a normally quiescent state to a highly proliferative characteristic of human cancer. Oncology Division is engaged in a drug discovery program aimed at the design of selective small-molecule drugs with the potential to inhibit the activity of such cdks and therefore block the transition of cancer cells into their proliferative phase. Oncology Division retains all commercial rights to compounds resulting from this program. PARP PARP is an enzyme which is activated by DNA-strand breaks and is important in the immediate cellular response to DNA damage. The activity of PARP is involved in recruiting repair enzymes to the site of DNA damage so that cell division can proceed faithfully. Inhibition of PARP has profound effects on the survival of cells following exposure to DNA-damaging agents; thus, PARP inhibitors may be useful in conjunction with chemo- and radio- therapy to treat tumors. PARP inhibitors discovered at Oncology Division have been confirmed as chemopotentiating agents in cells and preliminary testing in tumors in animals is underway. Oncology Division has exclusive commercial rights in compounds resulting from this program, which are being pursued in collaboration with Cancer Research Campaign Technology, Ltd. VEGF Inhibitors The process known as angiogenesis (the formation of new blood vessels) is a key factor in the maintenance and progression of several disease states, including the metastasis of malignant tumors. The ability of cancer cells to carry out angiogenesis depends in part upon the activity of a protein known as VEGF, which, by binding to a receptor (known as kdr) on the cell surface, triggers the development of growth factor of endothelial cells. Oncology Division is engaged in a program to design drugs that block the kdr receptor for VEGF and, therefore, compromise the ability of tumors to carry out a key process in angiogenesis. Oncology Division retains all commercial rights to compounds resulting from this program. GnRH Antagonist Program GnRH is a decapeptide that is synthesized in the brain and controls the pituitary and gonadal hormones that regulate fertility. (In women, this peptide is required for successful ovulation and, in men, it is necessary for spermatogenesis.) Oncology Division, through the Company's Alanex subsidiary, is currently pursuing a program to discover certain orally active small-molecule drugs to treat two areas of human disease that depend on GnRH action: endometriosis and sex-hormone dependent tumors. Oncology Division retains all commercial rights to compounds resulting from this program. Business Relationships/Research and Development Agreements Oncology Division has funded its research and development primarily from working capital generated from both private and public sales of Agouron equity, collaborative arrangements and the financial contribution resulting from product sales. Oncology Division has an ongoing program of business development which may, from time to time, lead to the establishment of the Oncology Division related corporate collaborations in addition to those noted below. HLR In June 1996, Oncology Division granted Hoffman-La Roche Inc. and F. Hoffman-La Roche Ltd (collectively "HLR") development rights in two anti-cancer drugs and agreed to collaborate with HLR on an additional early-stage anti-cancer drug discovery program. In return for such rights, HLR paid $15,000,000 in initial license fees and agreed to bear 80% of certain future development costs and to provide annual research support to the Company of $3,000,000. In December 1997, Oncology Division and HLR agreed to end this anti-cancer research and development collaboration. Oncology Division has regained all rights to the anti-cancer drugs previously within the scope of the collaboration. Human Resources As of July 28, 1998, the Company had 991 employees. It is anticipated that approximately 200 of these will be directly engaged in the conduct of the Oncology Division business. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Overview This discussion contains forward-looking statements. Such statements are subject to certain risks and uncertainties which could cause actual results to differ materially from those projected. See "Important Factors Regarding Forward-Looking Statements" attached as Exhibit 99 to the Company's annual report on Form 10-K for the period ended June 30, 1998 and incorporated herein by reference. Readers are cautioned not to place undue reliance on these forward-looking statements which speak only as of the date hereof. The Company undertakes no obligation to publicly release the result of any revisions to these forward-looking statements which may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. Oncology Division ("Oncology Division" or "OD"), a division of Agouron Pharmaceuticals, Inc. (the "Company") is committed to the discovery and development of human pharmaceuticals targeting cancer. Operations to date have been principally funded from the Company's working capital and OD's various collaborative arrangements. Net losses for the fiscal years ended June 30, 1998, 1997 and 1996 were $24,233,000, $12,862,000 and $1,174,000. It is anticipated that net operating losses will continue and will possibly increase through at least the next two years. Results of Operations Contract and license revenues Collaborative research and development agreements with Hoffman-La Roche Inc. and F. Hoffman-La Roche Ltd (collectively "HLR") accounted for substantially all of Oncology Division's contract and license revenues for 1998, 1997 and 1996. Total contract and license revenues for 1998 increased approximately 1% from 1997. Total contracts and license revenues decreased from 1996 to 1997 approximately 15% due principally to the receipt of $15,000,000 in 1996 for initial development rights for two anti-cancer drugs. In December 1997, the Company agreed to end its collaboration with HLR in the field of cancer. As a result of termination, Oncology Division has regained all rights to its anti-cancer drugs within the scope of the HLR collaboration. Oncology Division anticipates no contract revenues for fiscal 1999. Research and development expenses Research and development ("R&D") spending increased by approximately 40% from 1997 to 1998 and 56% from 1996 to 1997 due generally to increasing average R&D staff levels and staff-related expenditures and increased expenditures for human clinical trial development activities for certain anti-cancer compounds. Oncology Division anticipates that total R&D expenses in fiscal 1999 will exceed fiscal 1998 expenses by approximately 21%. General and administrative expenses General and administrative ("G&A") expenses represented approximately 5% of total operating expenses in 1998, 5% in 1997 and 10% in 1996. G&A increased by approximately 66% from 1997 to 1998 due principally to increasing development efforts. Spending decreases from 1996 to 1997 were due chiefly to concentrated Company efforts to complete development of a major non-oncology program. Oncology Division anticipates that total G&A expenses for fiscal 1999 will approximate the amounts recorded in fiscal 1998. Year 2000 The Year 2000 issue results from computer programs and systems that were created to accept only two digit dates. Such systems may not be able to distinguish 20th century dates from 21st century dates. This could result in miscalculations and system failures. The Company has established a Year 2000 project team that is currently reviewing computer systems and computer controlled equipment that could be affected by this issue. Additionally, the Company has made initial contact with all of its significant external business partners to determine the extent to which the Company is vulnerable to their failures and to ascertain Year 2000 compliance and risk. The Company estimates that the inventory and assessment of internal systems and material third parties will be completed by the end of calendar 1998. The Company is in the process of upgrading its enterprise business system. Once upgraded, the system will be Year 2000 compliant. The estimated completion date of this upgrade is by the end of calendar 1998. The Company also expects to both replace and upgrade other equipment and systems. The Company expects to complete such changes by the end of fiscal 1999, and to complete validation by the end of calendar 1999. While the total cost to upgrade or replace such systems is not known at this time, the Company believes such cost will not have a material effect on the Company's business, financial position, or results of operation. At this time the Company has not initiated the formulation of contingency plans. The determination of the necessity for contingency plans will be made by the end of calendar 1998. Liquidity and Capital Resources Historically, Oncology Division has relied principally on the Company to fund its operations and capital expenditures. At June 30, 1998, Oncology Divison had net working capital of approximately $1,795,000, an increase of $377,000 over June 30, 1997 levels. The development of Oncology Division products will require substantial funds. Agouron Pharmaceuticals ("Agouron Pharmaceuticals" or "AP"), a division of the Company, intends to fund the operations of Oncology Division for the foreseeable future. The Company's Board has approved the allocation of up to $25,000,000 in cash from Agouron Pharmaceuticals to Oncology Division under an equity line which is expected to be exchanged for Oncology Division Stock. The Company believes that its current capital resources, existing contractual commitments and anticipated product sales contribution from Agouron Pharmaceuticals are sufficient to maintain its current operations and to provide for the operating requirements of Oncology Division through fiscal 1999. This belief is based on current research and clinical development plans of Oncology Division and Agouron Pharmaceuticals, anticipated working capital requirements associated with expanding product commercialization, the current regulatory environment, historical industry experience in the development of therapeutic drugs and general economic conditions. ONCOLOGY DIVISION, a division of Agouron Pharmaceuticals, Inc. INDEX TO FINANCIAL STATEMENTS Report of Independent Accountants Combined Balance Sheet as of June 30, 1998 and 1997 Combined Statement of Operations for the years ended June 30, 1998, 1997 and 1996 Combined Statement of Division Equity for the years ended June 30, 1998, 1997 and 1996 Combined Statement of Cash Flows for the years ended June 30, 1998, 1997 and 1996 Notes to Combined Financial Statements NOTE: All schedules are omitted because they are not applicable, or not required, or because the required information is included in the combined financial statements or notes thereto. REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders of Agouron Pharmaceuticals, Inc. In our opinion, the accompanying combined balance sheet and the related combined statements of operations, of division equity and of cash flows present fairly, in all material respects, the financial position of Oncology Division (a division of Agouron Pharmaceuticals, Inc.) at June 30, 1998 and 1997, and the results of its operations and its cash flows for each of the three years in the period ended June 30, 1998, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the management of Agouron Pharmaceuticals, Inc.; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. As described above and more fully described in Note 1 to these financial statements, Oncology Division is a division of Agouron Pharmaceuticals, Inc.; accordingly, the combined financial statements of Oncology Division should be read in conjunction with the audited consolidated financial statements of Agouron Pharmaceuticals, Inc. /s/ PricewaterhouseCoopers LLP San Diego, California August 10, 1998 ONCOLOGY DIVISION, a division of Agouron Pharmaceuticals, Inc. COMBINED BALANCE SHEET (Dollars in thousands)
June 30, 1998 1997 ASSETS Current assets: Accounts receivable $ 1,638 $ 4,668 Other current assets 1,045 0 ---------- ----------- $ 2,683 $ 4,668 ========== =========== LIABILITIES AND DIVISION EQUITY Current liabilities: Accrued liabilities $ 888 $ 250 Deferred revenue 0 3,000 ---------- ----------- Total current liabilities 888 3,250 Division equity 1,795 1,418 ---------- ----------- Commitments $ 2,683 $ 4,668 ========== ===========
See accompanying notes to combined financial statements. ONCOLOGY DIVISION, a division of Agouron Pharmaceuticals, Inc. COMBINED STATEMENT OF OPERATIONS (In thousands, except per share amounts)
Years ended June 30, 1998 1997 1996 Revenues: Contract and license $ 15,428 $ 15,270 $ 18,013 Operating expenses: Research and development 37,525 26,844 17,247 General and administrative 2,136 1,288 1,940 ------------- ------------- ------------- 39,661 28,132 19,187 ------------- ------------- ------------- Net loss $ (24,233) $ (12,862) $ (1,174) ============= ============= ============= Net loss per share: Basic and Diluted $ (3.17) $ (1.91) $ (.24) ============= ============= ============= Equivalent shares used in calculation of: Basic and Diluted 7,643 6,737 4,922
See accompanying notes to combined financial statements. ONCOLOGY DIVISION, a division of Agouron Pharmaceuticals, Inc. COMBINED STATEMENT OF DIVISION EQUITY (Dollars in thousands)
Accumulated Other Deficit Total Balance at June 30, 1995 $ 59,910 $ (61,713) $ (1,803) Equity contribution from Agouron Pharmaceuticals 1,751 1,751 Net loss -- (1,174) (1,174) ----------- ----------- ----------- Balance at June 30, 1996 61,661 (62,887) (1,226) Equity contribution from Agouron Pharmaceuticals 15,506 15,506 Net loss -- (12,862) (12,862) ----------- ----------- ----------- Balance at June 30, 1997 77,167 (75,749) 1,418 Equity contribution from Agouron Pharmaceuticals 24,610 24,610 Net loss -- (24,233) (24,233) ----------- ----------- ----------- Balance at June 30, 1998 $ 101,777 $ (99,982) $ 1,795 =========== =========== ===========
See accompanying notes to combined financial statements. ONCOLOGY DIVISION, a division of Agouron Pharmaceuticals, Inc. COMBINED STATEMENT OF CASH FLOWS (In thousands)
Years ended June 30, 1998 1997 1996 Cash flows from operating activities: Cash received from contracts and licenses $ 15,458 $ 13,602 $ 17,465 Cash paid to suppliers and service providers (40,068) (29,108) (19,216) ----------- ------------ ----------- Net cash provided (used) by operating activities (24,610) (15,506) (1,751) ----------- ----------- ----------- Cash flows from investing activities: Net cash provided (used) by investing activities 0 0 0 ----------- ----------- ----------- Cash flows from financing activities: Equity contribution from Agouron Pharmaceuticals 24,610 15,506 1,751 ----------- ----------- ----------- Net cash provided (used) by financing activities 24,610 15,506 1,751 ----------- ----------- ----------- Net increase (decrease) in cash and cash equivalents 0 0 0 Cash and cash equivalents at beginning of year 0 0 0 ----------- ----------- ----------- Cash and cash equivalents at end of year $ 0 $ 0 $ 0 =========== =========== =========== Reconciliation of net loss to net cash provided (used) by operating activities: Net loss $ (24,233) $ (12,862) $ (1,174) Net (increase) decrease in accounts receivable and other current assets 1,985 (4,668) 0 Net increase (decrease) in accrued liabilities and deferred revenue (2,362) 2,024 (577) ----------- ----------- ----------- Net cash provided (used) by operating activities $ (24,610) $ (15,506) $ (1,751) =========== =========== ===========
See accompanying notes to combined financial statements. ONCOLOGY DIVISION, a division of Agouron Pharmaceuticals, Inc. NOTES TO COMBINED FINANCIAL STATEMENTS Note 1 - The Division and its significant accounting policies The Division Oncology Division ("Oncology Division" or "OD") is a division of Agouron Pharmaceuticals, Inc. (the "Company") which was organized and incorporated in California in June 1984. Oncology Division is engaged in the discovery and development of innovative therapeutic products engineered to inactivate proteins which play key roles in cancer. Financial statements and allocation matters As a matter of policy, the Company manages the financial activities of its divisions on a centralized basis. These financial activities include the investment of surplus cash, the issuance, repayment and repurchase of short-term and long-term debt and the issuance and repurchase of common stock. During the three years ended June 30, 1998, the Company attributed none of its short-term and long-term debt to OD based upon the specific purpose for which the debt was incurred and the cash flow requirements of OD. Accordingly, none of the Company's interest expense has been allocated to OD. The Company believes this method of allocation to be equitable and reasonable. Oncology Division's financial statements have been prepared in accordance with generally accepted accounting principles and, taken together with the Company's other division, comprise all of the accounts included in the corresponding consolidated financial statements of the Company. The financial statements of each division reflect the financial condition, results of operations and cash flows of the businesses included therein. Principles of combination The combined financial statements of Oncology Division include the accounts for all of the Company's programs in the area of oncology. Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosures as of the date of the financial statements. Actual results could differ from such estimates. Contract and license revenues Contract revenues are earned and recognized generally as contract research costs are incurred according to the provisions of each underlying agreement. Amounts received in advance of performance are recorded as deferred revenue. Contract milestone payments are recognized as revenues upon the completion of the milestone event or requirement. License fees are recognized as revenue when earned as generally evidenced by certain factors including: receipt of such fees, satisfaction of any performance obligations and the non-refundable nature of such fees. Research and development costs Research and development costs are expensed in the period incurred. Income tax provision (benefit) Oncology Division records a provision (benefit) for income taxes using the liability method. Current income tax expense (benefit) generally is the amount of income taxes expected to be payable for the current year. Deferred taxes are recorded by applying applicable tax rates to cumulative temporary differences based on when and how they are expected to affect the tax return. Oncology Division is included in the consolidated U.S. federal income tax return filed by the Company. Division management and allocation policies provide that, as of the end of any fiscal quarter, any projected annual tax benefit attributable to any division that cannot be utilized by such division to offset or reduce its current or deferred income tax expense may be allocated to the other division(s) without any compensating payment or allocation. Accordingly, all losses of Oncology Division have been utilized by Agouron Pharmaceuticals and no provision has been recorded by Oncology Division for any fiscal year. As it is anticipated that all deferred tax assets of the Company at present will be realized by Agouron Pharmaceuticals, all deferred tax assets of the Company are currently recorded on the books of Agouron Pharmaceuticals and none on the books of Oncology Division. The realizability of deferred tax assets is determined at the level of the Company. Net loss per share Historical net loss per share information is presented in the combined statement of operations based on the anticipated ratio of OD equivalent shares to the Company's shares although OD Stock was not part of the capital structure of the Company for the periods presented. Oncology Division computes per share data in accordance with Statement of Financial Accounting Standards No. 128 "Earnings Per Share." Basic per share data is based upon one-quarter of the weighted average number of the Company's common shares outstanding during a period as a result of the expected conversion of each outstanding share of the Company's common stock into approximately one-quarter share of OD Stock. Diluted per share data is based upon one-quarter of the weighted average number of the Company's common shares outstanding and dilutive common stock equivalents during a period. Common stock equivalents are options under the Company's stock option plans which are included in the earnings per share computation under the treasury stock method and common shares expected to be issued under the Company's employee stock purchase plan. For 1998, 1997 and 1996, common stock equivalents of approximately 661,000, 792,000 and 504,000 shares were not used to calculate diluted earnings (loss) per share because of their anti-dilutive effect. There are no reconciling items in calculating the numerator for basic and diluted earnings (loss) per share for any of the periods presented. Earnings (loss) attributable to Oncology Division would generally equal Oncology Division's net income or (loss) for the relevant period determined in accordance with generally accepted accounting principles in effect at such time, adjusted by the amount of tax benefits allocated to or from Agouron Pharmaceuticals pursuant to the management and accounting policies adopted by the Company's Board. Commitments The Company is involved in certain legal proceedings generally incidental to its normal business activities. While the outcome of any such proceedings cannot be accurately predicted, the Company does not believe the ultimate resolution of any such existing matters should have a material adverse effect on its financial position or results of operations. Note 2 - Significant contract arrangements HLR In June 1996, Oncology Division granted Hoffman-La Roche Inc. and F. Hoffman-La Roche Ltd (collectively "HLR") development rights in two anti-cancer drugs and agreed to collaborate with HLR on an additional early-stage anti-cancer drug discovery program. In return for such rights, HLR paid $15,000,000 in initial license fees and agreed to bear 80% of certain future development costs and to provide annual research support to Oncology Division of $3,000,000. In December 1997, Oncology Division and HLR agreed to end this anti-cancer research and development collaboration. Oncology Division has regained all commercial rights to the anti-cancer drugs previously within the scope of the collaboration. Under the terms of the anti-cancer agreements with HLR which have been terminated, Oncology Division incurred costs of $23,486,000 and $17,854,000 and recognized corresponding contract revenues of $15,428,000 and $14,270,000 for the years ended June 30, 1998 and 1997. Note 3 - Related party transactions Overview The Company allocates corporate general and administrative and research and development expenses and income taxes in accordance with certain policies adopted by the Company's Board of Directors. Such policies may be further modified or rescinded by action of the Company's Board of Directors who may adopt additional policies, without approval of Oncology Division's stockholders, subject only to their fiduciary duty to such stockholders. Shared Services Oncology Division operates as a division of the Company with access to the Company's personnel, financial resources, facilities and extensive capabilities in research and development, manufacturing, clinical development and administration, the costs of which are allocated to each division in a reasonable and consistent manner based on utilization by the division of the services to which such costs relate. Management believes that such allocation is a reasonable estimate of such expenses. Access to Technology and Know-How Oncology Division has free access to all technology and know-how of the Company that may be useful, subject to any obligations or limitations applicable to the Company. The costs of developing this technology remain in the business unit responsible for its development. Note 4 - Division equity OD Stock OD Stock will represent a separate series of the Company's Common Stock if the Company's Divisional Stock Proposal is approved and such series is designated by the Board. Additional OD Stock may be issued from time to time upon exercise of stock options or at the discretion of the Company's Board. Exchange of OD Stock If OD Stock is issued, Agouron Pharmaceuticals will have the right, and under certain circumstances, the obligation, to exchange each outstanding share of OD Stock for cash or shares of AP Stock at a 25% premium over fair market value of OD Stock on the date of exchange. Oncology Equity Line The Company Board has approved a $25,000,000 cash equity line from Agouron Pharmaceuticals to Oncology Division. Amounts drawn under the equity line are expected to be exchanged into shares of OD Stock on a periodic basis. PART II INFORMATION NOT REQUIRED IN PROSPECTUS Item 20. Indemnification of Directors and Officers Section 317 of the California General Corporation Law generally provides indemnification to officers and directors of the Company against expenses, judgments, fines and amounts paid in settlement under certain conditions and subject to certain limitations. Article VII of the articles of incorporation of the Company provides that liability of the directors of the Company for monetary damages shall be eliminated to the fullest extent permissible under California law. Further, Article VIII of the articles of incorporation authorizes the Company to provide indemnification of agents (as defined in Section 317) for breach of duty to the Company and its shareholders through bylaw provisions or through agreements with such agents, or both, in excess of the indemnification otherwise permitted by Section 317, subject to the limits on such excess indemnification set forth in Section 317. Section 3.15 of the bylaws of the Company authorizes the Company to indemnify any person who was or is a party, or is threatened to be made a party, to any proceeding (other than actions by or in the right of the Company to procure a judgment in its favor) by reason of the fact that such person is or was an agent of the Company, against expenses, judgments, fines, settlements and other amounts actually and reasonably incurred in connection with such proceeding if such person acted in good faith and in a manner such person reasonably believed to be in the best interests of the Company. Section 3.15 also authorizes the Company to indemnify any person who was or is a party, or is threatened to be made a party, to any threatened, pending or completed action by or in the right of the Company to procure a judgment in its favor by reason of the fact that such person is or was an agent of the Company against expenses actually and reasonably incurred by such person in connection with the defense or settlement of such action if such person acted in good faith. Any indemnification under Section 3.15 is to be made by the Company only if authorized in the specific case upon determination that indemnification of the agent is proper in the circumstances because the agent has met the applicable standard of conduct required by Paragraphs 3.15.2 or 3.15.3 of the bylaws. Pursuant to authorization provided under the articles of incorporation and the bylaws, the Company has entered into indemnification agreements with each of its present directors. The Company has also entered into similar agreements with certain of the Company's officers who are not directors. Generally, the indemnification agreements attempt to provide the maximum protection permitted by California law as it may be amended from time to time. Moreover, the indemnification agreements provide for certain additional indemnification. Under such additional indemnification provisions, however, an individual will not receive indemnification for judgments, settlements or expenses if he or she is found liable to the Company (except to the extent the court determines he or she is fairly and reasonably entitled to indemnity for expenses) for settlements not approved by the Company or for settlements and expenses if the settlement is not approved by the court. The indemnification agreements provide for the Company to advance to the individual any and all reasonable expenses (including legal fees and expenses) incurred in investigating or defending any such action, suit or proceeding. In order to receive an advance of expenses, the individual must submit to the Company copies of invoices presented to him or her for such expenses. Also, the individual must repay such advances upon a final judicial decision that he or she is not entitled to indemnification. Section 3.15 of the bylaws also provides that, in the event of a determination by the Board of Directors of the Company to purchase insurance for certain of its agents, the Company shall purchase and maintain insurance on behalf of any such agent against liability asserted against or incurred by the agent in such capacity or arising out of the agent's status, whether or not the Company would have the power to indemnify the agent against such liability under the provisions of Section 3.15. The Company has in effect directors and officers liability insurance policies which insure directors and officers of the Company. The policies expire on October 13, 1998. Although the Company intends to renew the policies on or before their expiration date, there can be no assurance that the policies will be renewed on terms acceptable to the Company. Under the policies, the directors and officers of the Company are insured against loss arising from claims made against them due to wrongful acts while acting in their individual and collective capacities as directors and officers, subject to certain exclusions. In addition, the policies insure the Company against losses for which its directors and officers are entitled to indemnification, subject to a retention of $250,000 payable by the Company. The policies are "claims made" policies and provide coverage only for losses arising out of claims first made against the Company and reported to the insurer during the policy period. Item 21. Exhibits and Financial Statement Schedules (a) Exhibits Number Description 3.1 Form of Restated Articles of Incorporation (Included as Annex II to the Proxy Statement/Prospectus contained in Part I of this Registration Statement). 5.1 Opinion of Pillsbury Madison & Sutro LLP. (To be filed by amendment) 8.1 Opinion of Pillsbury Madison & Sutro LLP. (To be filed by amendment) 10.1 Amended and Restated 1996 Stock Option Plan. (Included as Annex VI to the Proxy Statement/Prospectus contained in Part I of this Registration Statement.) (To be filed by amendment) 10.2 Amended and Restated Employee Stock Purchase Plan. (Included as Annex VII to the Proxy Statement/Prospectus contained in Part I of this Registration Statement.) (To be filed by amendment) 23.1 Consent of PricewaterhouseCoopers LLP. 23.2 Consent of Pillsbury Madison & Sutro LLP. (Included in their opinions set forth as Exhibits 5.1 and 8.1) 24.1 Power of Attorney. (Contained on Signature Page of this Registration Statement.) 99.1 Form of Proxy. (To be filed by amendment) (b) Financial Statement Schedules (Included in Annex IV, Annex V and Annex VI to the Proxy Statement and Prospectus contained in Part I of this Registration Statement). Item 22. Undertakings The undersigned registrant hereby undertakes that, for purposes of determining any liability under the Securities Act of 1933 (the "Securities Act"), each filing of the registrant's annual report pursuant to Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934 (the "Exchange Act") (and, where applicable, each filing of an employee benefit plan's annual report pursuant to Section 15(d) of the Exchange Act) that is incorporated by reference in the registration statement shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. The undersigned registrant hereby undertakes to respond to requests for information that is incorporated by reference into the prospectus pursuant to Items 4, 10(b), 11 or 13 of this Form within one business day of receipt of such request, and to send the incorporated documents by first class mail or other equally prompt means. This includes information contained in documents filed subsequent to the effective date of the registration statement through the date of responding to the request. The undersigned registrant hereby undertakes to supply by means of a post-effective amendment all information concerning a transaction, and the company being acquired involved therein, that was not the subject of and included in the registration statement when it became effective. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. The registrant hereby undertakes as follows: that prior to any public reoffering of the securities registered hereunder through use of a prospectus which is a part of this registration statement, by any person or party who is deemed to be an underwriter within the meaning of Rule 145(c), the issuer undertakes that such reoffering prospectus will contain the information called for by the applicable registration form with respect to reofferings by persons who may be deemed underwriters, in addition to the information called for by the other Items of the applicable form. The registrant undertakes that every prospectus (i) that is filed pursuant to the paragraph immediately preceding, or (ii) that purports to meet the requirements of section 10(a)(3) of the Act and is used in connection with an offering of securities subject to Rule 415, will be filed as a part of an amendment to the registration statement and will not be used until such amendment is effective, and that, for purposes of determining any liability under the Securities Act, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the registrant has duly caused to this S-4 Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of San Diego, State of California, on the 12th day of August, 1998. AGOURON PHARMACEUTICALS, INC. By: /s/ Gary E. Friedman Gary E. Friedman, Esq. Vice President, General Counsel, and Secretary POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Peter Johnson, Steven S. Cowell and Gary E. Friedman, or any of them, his or her true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him or her and in his or her name, place and stead, in any and all capacities, to sign any or all amendments to this registration statement, including post-effective amendments, and to file the same, with all exhibits thereto, and other documents in connection therewith with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully and to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or their substitute or substitutes, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed below by the following persons in the capacities and on the dates indicated. Signature Title Date /s/ Peter Johnson President, Chief Executive August 13, 1998 - ----------------------------- Officer and Director Peter Johnson /s/ Steven S.Cowell Corporate Vice President, August 13, 1998 - ----------------------------- Finance and Chief Financial Officer Steven S. Cowell /s/ Gary E. Friedman Corporate Vice President, August 13, 1998 - ----------------------------- General Counsel, Secretary and Director Gary E. Friedman /s/ John N. Abelson Director August 13, 1998 - ----------------------------- John N. Abelson /s/ Patricia M. Cloherty Director August 13, 1998 - ----------------------------- Patricia M. Cloherty /s/ A.E. Cohen Director August 13, 1998 - ----------------------------- A.E. Cohen /s/ Michael E. Herman Director August 13, 1998 - ----------------------------- Michael E. Herman /s/ Irving S. Johnson Director August 13, 1998 - ----------------------------- Irving S. Johnson /s/ Antonie T. Knoppers Director August 13, 1998 - ----------------------------- Antonie T. Knoppers /s/ Melvin I. Simon Director August 13, 1998 - ----------------------------- Melvin I. Simon EXHIBIT INDEX Number Description 3.1 Form of Restated Articles of Incorporation (Included as Annex II to the Proxy Statement/ Prospectus contained in Part I of this Registration Statement.) (To be filed by amendment) 5.1 Opinion of Pillsbury Madison & Sutro LLP. (To be filed by amendment) 8.1 Opinion of Pillsbury Madison & Sutro LLP. (To be filed by amendment) 10.1 Amended and Restated 1996 Stock Option Plan. (Included as Annex VI to the Proxy Statement/Prospectus contained in Part I of this Registration Statement.) (To be filed by amendment) 10.2 Amended and Restated Employee Stock Purchase Plan. (Included as Annex VII to the Proxy Statement/Prospectus contained in Part I of this Registration Statement.) (To be filed by amendment) 23.1 Consent of PricewaterhouseCoopers LLP. 23.2 Consent of Pillsbury Madison & Sutro LLP. (Included in their opinions set forth as Exhibits 5.1 and 8.1) 24.1 Power of Attorney (Contained on Signature Page of this Registration Statement.) 99.1 Form of Proxy (To be filed by amendment) EX-23.1 2 CONSENT OF INDEPENDENT ACCOUNTANTS EXHIBIT 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the use in the Prospectus constituting part of this Registration Statement on Form S-4 of Agouron Pharmaceuticals, Inc., Agouron Pharmaceuticals and Oncology Division of our report dated July 16, 1998 relating to the financial statements of Agouron Pharmaceuticals, Inc. and our reports dated August 10, 1998 relating to the financial statements of Agouron Pharmaceuticals and Oncology Division, which appear in such Prospectus. We also consent to the reference to us under the heading "Experts" in such Prospectus. PRICEWATERHOUSECOOPERS LLP San Diego, California August 12, 1998 -----END PRIVACY-ENHANCED MESSAGE-----