SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE SECURITIES
EXCHANGE ACT OF 1934 (AMENDMENT NO. )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only
(as permitted by Rule 14a-6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Section 240.14a-12
Cell Pathways, Inc.
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(Name of Registrant as Specified In Its Charter)
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(Name of Person(s) Filing Proxy Statement, if other than Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
(1) Title of each class of securities to which transaction applies:
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(2) Aggregate number of securities to which transaction applies:
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(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the
filing fee is calculated and state how it was determined):
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(4) Proposed maximum aggregate value of transaction:
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(5) Total fee paid:
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[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
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(2) Form, Schedule or Registration Statement No.:
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(4) Date Filed:
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[Cell Pathways, Inc. Logo]
PROXY STATEMENT FOR A (OSI PHARMACEUTICALS LOGO)
SPECIAL MEETING OF PROSPECTUS OF
STOCKHOLDERS OF OSI PHARMACEUTICALS, INC.
CELL PATHWAYS, INC. UP TO 4,208,486 SHARES OF
COMMON STOCK AND UP TO
43,521,051 CONTINGENT VALUE RIGHTS
MERGER PROPOSED -- YOUR VOTE IS VERY IMPORTANT
Dear Stockholder:
You are cordially invited to attend the special meeting of stockholders of
Cell Pathways, Inc. to be held on Tuesday, June 10, 2003, at 9:00 a.m., local
time, at the Philadelphia Marriott West, located at 111 Crawford Avenue, West
Conshohocken, Pennsylvania.
At the special meeting, Cell Pathways will ask you to vote on the merger of
Cell Pathways with a wholly-owned subsidiary of OSI Pharmaceuticals, Inc. In the
merger, you will receive 0.0567 shares of OSI common stock for each share of
Cell Pathways common stock that you own. In addition, you will receive a
five-year contingent value right that may entitle you to an additional 0.04
shares of OSI common stock for each share of Cell Pathways common stock that you
own in the event a new drug application is accepted for filing by the U.S. Food
and Drug Administration within five years of consummation of the merger for
either of Cell Pathways' two leading clinical candidates, Aptosyn(R) (exisulind)
or CP461. You will receive cash for any fractional shares of OSI common stock
that you would be entitled to receive in the merger.
OSI's common stock is listed on the Nasdaq National Market under the
trading symbol "OSIP," and on April 28, 2003, its closing price was $19.64 per
share.
The Cell Pathways Board of Directors has carefully reviewed and considered
the terms and conditions of the merger. Based on its review, the Cell Pathways
Board of Directors has unanimously determined that the Agreement and Plan of
Merger, dated as of February 7, 2003, among OSI, CP Merger Corporation, a
wholly-owned subsidiary of OSI, and Cell Pathways and the transactions
contemplated thereby, are fair to and in the best interests of Cell Pathways and
its stockholders. THE CELL PATHWAYS BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS
THAT YOU VOTE "FOR" THE ADOPTION OF THE MERGER AGREEMENT.
YOUR VOTE IS IMPORTANT. Cell Pathways cannot complete the merger unless the
merger agreement is adopted by the affirmative vote of a majority of the shares
of Cell Pathways common stock outstanding and entitled to vote at the special
meeting. Failure to submit a signed proxy or vote in person at the special
meeting will have the same effect as a vote against the adoption of the merger
agreement. Only stockholders who owned shares of Cell Pathways common stock at
the close of business on April 11, 2003 will be entitled to vote at the special
meeting.
PLEASE COMPLETE, SIGN, DATE AND RETURN YOUR PROXY. If you hold your shares
in "street name," you should instruct your broker how to vote in accordance with
the voting instruction form furnished by your broker.
The accompanying proxy statement/prospectus explains the merger and merger
agreement and provides specific information concerning the special meeting.
Please review this document carefully. YOU SHOULD CONSIDER THE MATTERS DISCUSSED
UNDER "RISK FACTORS" BEGINNING ON PAGE 6 OF THIS PROXY STATEMENT/PROSPECTUS
BEFORE VOTING.
Sincerely yours,
/s/ Robert J. Towarnicki
Robert J. Towarnicki
Chairman, President and
Chief Executive Officer of Cell
Pathways, Inc.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED THE MERGER DESCRIBED IN THIS PROXY
STATEMENT/PROSPECTUS OR THE OSI COMMON STOCK OR CONTINGENT VALUE RIGHTS TO BE
ISSUED IN CONNECTION WITH THE MERGER, OR DETERMINED IF THIS PROXY
STATEMENT/PROSPECTUS IS ACCURATE OR ADEQUATE. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
THIS PROXY STATEMENT/PROSPECTUS IS DATED MAY 6, 2003 AND IS FIRST BEING
MAILED TO STOCKHOLDERS OF CELL PATHWAYS ON OR ABOUT MAY 8, 2003.
[Cell Pathways, Inc. Logo]
702 Electronic Drive
Horsham, Pennsylvania 19044
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NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
To Be Held June 10, 2003
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To the Stockholders of Cell Pathways, Inc.:
Cell Pathways will hold a special meeting of stockholders of Cell Pathways,
Inc. on Tuesday, June 10, 2003, at 9:00 a.m., local time, at the Philadelphia
Marriott West, located at 111 Crawford Avenue, West Conshohocken, Pennsylvania,
for the following purposes:
1. To consider and vote upon a proposal to adopt the Agreement and
Plan of Merger among OSI Pharmaceuticals, Inc., CP Merger
Corporation, a wholly-owned subsidiary of OSI, and Cell Pathways.
2. To transact such other business as may properly be brought before
the special meeting and any adjournments thereof.
Only stockholders who owned shares of Cell Pathways common stock at the
close of business on April 11, 2003, the record date for the special meeting,
are entitled to notice of, and to vote at, the special meeting and any
adjournment or postponement of it.
The Cell Pathways Board of Directors has carefully reviewed and considered
the terms and conditions of the proposed merger. Based on its review, the Cell
Pathways Board of Directors has unanimously determined that the merger agreement
and the transactions contemplated thereby are fair to and in the best interests
of Cell Pathways and its stockholders. THE CELL PATHWAYS BOARD OF DIRECTORS
UNANIMOUSLY RECOMMENDS THAT YOU VOTE "FOR" THE ADOPTION OF THE MERGER AGREEMENT.
Cell Pathways cannot complete the merger unless the merger agreement is
adopted by the affirmative vote of a majority of the shares of Cell Pathways
common stock outstanding and entitled to vote at the special meeting. This proxy
statement/prospectus describes the proposed merger and the actions to be taken
in connection with the merger and provides additional information about the
parties involved. Please give this information your careful attention.
If the merger agreement is adopted by the Cell Pathways stockholders at the
special meeting and the merger is effected by Cell Pathways and OSI, any Cell
Pathways stockholder who does not vote in favor of the merger agreement may
elect to exercise his, her or its appraisal rights as described under "The
Merger and The Merger Agreement -- Appraisal or Dissenters' Rights" beginning on
page 50 and in Section 262 of the Delaware General Corporation Law included in
this proxy statement/prospectus as Annex D.
Whether or not you plan to attend the special meeting, please complete,
sign and date the enclosed proxy and return it promptly in the enclosed
postage-paid return envelope. You may revoke the proxy at any time prior to its
exercise in the manner described in this proxy statement/prospectus. Any
stockholder present at the special meeting, including any adjournment or
postponement of it, may revoke such stockholder's proxy and vote personally on
the merger agreement to be considered at the special meeting. Executed proxies
with no instructions indicated thereon will be voted "FOR" the adoption of the
merger agreement.
Please do not send any stock certificates at this time.
By order of the Board of Directors
May 6, 2003
Horhsam, Pennsylvania
REFERENCES TO ADDITIONAL INFORMATION
This proxy statement/prospectus incorporates important business and
financial information about OSI and Cell Pathways from other documents that are
not included in or delivered with this proxy statement/ prospectus. This
information is available to you without charge upon your written or oral
request. You can obtain those documents, which are incorporated by reference in
this proxy statement/prospectus, by requesting them in writing or by telephone
from the appropriate company at the following addresses and telephone numbers:
<Table>
CELL PATHWAYS, INC. OSI PHARMACEUTICALS, INC.
INVESTOR RELATIONS INVESTOR RELATIONS
702 ELECTRONIC DRIVE 58 SOUTH SERVICE ROAD, SUITE 110
HORSHAM, PA 19044 MELVILLE, NY 11747
(215) 706-3800 (631) 962-2000
</Table>
IF YOU WOULD LIKE TO REQUEST DOCUMENTS, PLEASE DO SO BY JUNE 3, 2003 IN
ORDER TO RECEIVE THEM BEFORE THE SPECIAL MEETING.
See "Where You Can Find More Information" on page 80.
TABLE OF CONTENTS
<Table>
<Caption>
PAGE
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QUESTIONS & ANSWERS ABOUT THE MERGER........................ iv
SUMMARY..................................................... 1
THE COMPANIES............................................. 1
THE MERGER................................................ 1
THE SPECIAL MEETING....................................... 2
OTHER SELECTED INFORMATION................................ 3
RISK FACTORS................................................ 6
RISKS RELATING TO CELL PATHWAYS IF THE MERGER IS NOT
COMPLETED.............................................. 6
RISKS RELATING TO THE MERGER.............................. 8
RISKS RELATING TO OSI..................................... 10
SELECTED HISTORICAL FINANCIAL DATA OF OSI................... 19
SELECTED HISTORICAL FINANCIAL DATA OF CELL PATHWAYS......... 21
COMPARATIVE PER SHARE FINANCIAL DATA........................ 22
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS........... 23
THE CELL PATHWAYS SPECIAL MEETING........................... 24
DATE, TIME AND PLACE...................................... 24
PURPOSE OF THE SPECIAL MEETING............................ 24
RECORD DATE; SHARES ENTITLED TO VOTE; QUORUM.............. 24
VOTE REQUIRED............................................. 24
SHARES OWNED BY CELL PATHWAYS' DIRECTORS, EXECUTIVE
OFFICERS AND AFFILIATES................................ 24
VOTING OF PROXIES......................................... 24
REVOCABILITY OF PROXIES................................... 25
SOLICITATION OF PROXIES................................... 25
APPRAISAL RIGHTS.......................................... 25
BACKGROUND AND REASONS FOR THE MERGER....................... 26
BACKGROUND................................................ 26
THE CELL PATHWAYS BOARD OF DIRECTORS' REASONS FOR THE
MERGER................................................. 29
RECOMMENDATION OF THE CELL PATHWAYS BOARD OF DIRECTORS.... 30
OPINION OF CELL PATHWAYS' FINANCIAL ADVISOR............... 30
OSI'S REASONS FOR THE MERGER.............................. 37
INTERESTS OF CELL PATHWAYS' DIRECTORS AND EXECUTIVE
OFFICERS IN THE MERGER................................. 37
THE MERGER AND THE MERGER AGREEMENT......................... 40
GENERAL DESCRIPTION OF THE MERGER......................... 40
EFFECTIVE TIME............................................ 40
MERGER CONSIDERATION FOR CELL PATHWAYS' COMMON STOCK AND
EXCHANGE RATIOS........................................ 40
NO FRACTIONAL SHARES...................................... 40
EXCHANGE OF CELL PATHWAYS' STOCK CERTIFICATES............. 40
TREATMENT OF CELL PATHWAYS' STOCK OPTIONS, EMPLOYEE STOCK
PURCHASE PLAN AND WARRANTS............................. 41
</Table>
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<Table>
<Caption>
PAGE
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TREATMENT OF CELL PATHWAYS BENEFITS AND OTHER EMPLOYEE
MATTERS................................................ 42
ACCOUNTING TREATMENT...................................... 42
MATERIAL UNITED STATES FEDERAL INCOME TAX CONSEQUENCES OF
THE MERGER............................................. 43
COVENANTS UNDER THE MERGER AGREEMENT...................... 45
CONDITIONS TO COMPLETION OF THE MERGER.................... 47
REPRESENTATIONS AND WARRANTIES............................ 48
TERMINATION OF THE MERGER AGREEMENT....................... 49
EFFECT OF TERMINATION..................................... 50
TERMINATION FEES AND EXPENSES............................. 50
AMENDMENTS AND WAIVERS.................................... 50
APPRAISAL OR DISSENTERS' RIGHTS........................... 50
NASDAQ LISTING OF OSI COMMON STOCK........................ 53
RESALES OF OSI COMMON STOCK BY CELL PATHWAYS'
AFFILIATES............................................. 53
REGULATORY MATTERS........................................ 53
BUSINESS OF OSI............................................. 54
BUSINESS OF CELL PATHWAYS................................... 58
CELL PATHWAYS' MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS............. 61
MANAGEMENT AFTER THE MERGER................................. 69
EXECUTIVE COMPENSATION, INFORMATION REGARDING DIRECTORS AND
EXECUTIVE OFFICERS AND STOCK OWNERSHIP OF DIRECTORS,
EXECUTIVE OFFICERS AND PRINCIPAL STOCKHOLDERS............. 69
COMPARATIVE STOCK PRICES AND DIVIDENDS...................... 70
COMPARISON OF RIGHTS OF THE OSI AND CELL PATHWAYS
STOCKHOLDERS.............................................. 73
LEGAL MATTERS............................................... 79
EXPERTS..................................................... 79
FUTURE CELL PATHWAYS STOCKHOLDER PROPOSALS.................. 80
OTHER MATTERS............................................... 80
WHERE YOU CAN FIND MORE INFORMATION......................... 80
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE............. 80
INDEX TO CELL PATHWAYS' CONSOLIDATED FINANCIAL STATEMENTS... F-1
</Table>
<Table>
ANNEXES
AGREEMENT AND PLAN OF MERGER................................ ANNEX A
FORM OF CONTINGENT VALUE RIGHTS AGREEMENT................... ANNEX B
OPINION OF CIBC WORLD MARKETS CORP.......................... ANNEX C
SECTION 262 OF THE DELAWARE GENERAL CORPORATION LAW......... ANNEX D
</Table>
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NOTE REGARDING TRADEMARKS
Tarceva(TM) (erlotinib HC1) is a trademark of OSI Pharmaceuticals, Inc.
Aptosyn(R) (exisulind) is a registered trademark of Cell Pathways, Inc.
Gelclair(TM) is a trademark of Sinclair Pharmaceuticals Ltd.
Nilandron(R) (nilutamide) is a registered trademark of Aventis
Pharmaceuticals, Inc.
Novantrone(R) (mitoxantrone hydrochloride) is a registered trademark of
Immunex Corporation and American Cyanamid Company.
-iii-
QUESTIONS & ANSWERS ABOUT THE MERGER
Throughout this proxy statement/prospectus, references to "we", "our" and
"us" mean OSI and Cell Pathways, collectively.
Q: WHAT WILL I RECEIVE IN THE MERGER?
A: If the merger is completed, for each share of Cell Pathways common stock you
hold, you will be entitled to receive 0.0567 of a share of OSI common stock
and a contingent value right to receive 0.04 of a share of OSI common stock
in the event a new drug application is accepted for filing with the U.S.
Food and Drug Administration within five years of consummation of the merger
for either of Cell Pathways' two clinical candidates, Aptosyn(R) (exisulind)
or CP461.
Q: WHERE WILL MY SHARES OF OSI COMMON STOCK BE LISTED?
A: The OSI common stock received by the Cell Pathways stockholders in the
merger will be listed on the Nasdaq National Market under the trading symbol
"OSIP".
Q: WHAT DO I NEED TO DO NOW?
A: Carefully read and consider the information contained in this proxy
statement/prospectus. Then, please complete, sign and date your proxy and
return it as soon as possible so that your shares may be represented at the
special meeting. If you sign and send in your proxy your shares will be
voted as you indicate in your proxy. If you sign and send in your proxy but
do not indicate how you want to vote, Cell Pathways will count your proxy as
a vote FOR adoption of the merger agreement. IF YOU ABSTAIN FROM VOTING OR
DO NOT VOTE BY NOT RETURNING YOUR PROXY CARD, IT WILL HAVE THE EFFECT OF A
VOTE AGAINST THE MERGER AGREEMENT.
Q: WHAT STOCKHOLDER APPROVALS ARE REQUIRED?
A: OSI stockholder approval is not required to adopt the merger agreement. Cell
Pathways cannot consummate the merger unless the merger agreement is adopted
by the affirmative vote of a majority of the shares of Cell Pathways common
stock outstanding and entitled to vote at a special meeting called for the
purpose of adopting the merger agreement.
Q: CAN I CHANGE MY VOTE AFTER I HAVE MAILED MY SIGNED PROXY?
A: Yes. You can change your vote at any time before your proxy is voted. You
can do this in one of three ways. First, you can send a written notice
stating that you would like to revoke your proxy. Second, you can complete
and submit a new proxy dated after the date of your original proxy. If you
choose either of these two methods, you must submit your notice of
revocation or your new proxy to the Secretary of Cell Pathways at 702
Electronic Drive, Horsham, PA 19044. Third, you can attend the special
meeting and vote in person. Simply attending the meeting, however, will not
revoke your proxy; you must also vote at the special meeting.
Q: IF MY SHARES ARE HELD IN "STREET NAME" BY MY BROKER, WILL MY BROKER VOTE MY
SHARES FOR ME?
A: Your broker will vote your shares only if you provide instructions on how to
vote. You should instruct your broker how to vote in accordance with the
voting instruction form furnished by your broker. WITHOUT YOUR INSTRUCTIONS,
YOUR BROKER WILL NOT VOTE YOUR SHARES, WHICH WILL HAVE THE EFFECT OF A VOTE
AGAINST THE ADOPTION OF THE MERGER AGREEMENT.
Q: SHOULD I SEND IN MY CELL PATHWAYS STOCK CERTIFICATES NOW?
A: No. After the merger is completed, you will receive written instructions for
exchanging your stock certificates. Please do not send in your stock
certificates with your proxy.
Q: WHAT WILL HAPPEN AS A RESULT OF THE MERGER TO OPTIONS TO PURCHASE SHARES OF
CELL PATHWAYS COMMON STOCK?
A: Each outstanding option to purchase shares of Cell Pathways common stock
that is unvested as of the date that the Cell Pathways stockholders adopt
the merger agreement will accelerate in full and be immediately vested and
exercisable. Any options that are not exercised
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prior to the effective time of the merger will, in accordance with their
terms, terminate.
Q: WHAT WILL HAPPEN AS A RESULT OF THE MERGER TO WARRANTS TO PURCHASE SHARES OF
CELL PATHWAYS COMMON STOCK?
A: At the effective time of the merger, OSI will assume each outstanding and
unexercised warrant to purchase shares of Cell Pathways common stock. Each
of the assumed warrants will continue to be governed by the same terms and
conditions as were applicable to the respective Cell Pathways warrant except
that the exercise price of the warrant and the number of shares of OSI
common stock for which the warrant is exercisable will be adjusted pursuant
to a certificate of adjustment based on the exchange ratio contained in the
merger agreement.
Q: WILL I BE PERMITTED TO EXERCISE OPTIONS OR WARRANTS TO PURCHASE SHARES OF
CELL PATHWAYS COMMON STOCK PRIOR TO THE SPECIAL MEETING?
A: Whether you can exercise any options or warrants that you hold to purchase
shares of Cell Pathways common stock prior to the special meeting depends
upon the terms of such options and warrants. The fact that Cell Pathways
entered into the merger agreement has no effect on your ability to exercise
any options or warrants that you hold, except that, as noted above, all
unvested options will become vested and exercisable as of the date the Cell
Pathways stockholders adopt the merger agreement and will terminate at the
effective time. Holders of options will be provided a period of at least one
day following adoption of the merger agreement by the Cell Pathways
stockholders to exercise options in accordance with their terms.
Q: WILL I BE PERMITTED TO VOTE THE SHARES OF CELL PATHWAYS COMMON STOCK
UNDERLYING ANY OPTIONS OR WARRANTS THAT I HOLD AT THE SPECIAL MEETING?
A: No. You will not be permitted to vote at the special meeting the shares of
Cell Pathways common stock underlying any options or warrants that you hold,
unless you have exercised the options or warrants pursuant to their terms
prior to the record date for the special meeting.
Q: WHEN DO YOU EXPECT THE MERGER TO BE COMPLETED?
A: We are working toward completing the merger as quickly as possible. If the
merger agreement is adopted by the Cell Pathways stockholders, we expect to
complete the merger in the second quarter of 2003.
Q: HOW MANY SHARES OF OSI COMMON STOCK WILL BE ISSUED TO THE CELL PATHWAYS
STOCKHOLDERS AT THE EFFECTIVE TIME OF THE MERGER?
A: It is estimated that OSI will issue 2,238,283 shares of its common stock to
the Cell Pathways stockholders in the merger (excluding shares underlying
the contingent value rights), based on the number of shares of Cell Pathways
common stock outstanding on April 28, 2003 and assuming no exercise of
options and warrants. Assuming the exercise of all outstanding options and
warrants, it is estimated that OSI would issue 2,467,644 shares of its
common stock to the Cell Pathways stockholders in the merger.
Q: WHAT PERCENTAGE OF OSI COMMON STOCK WILL THIS REPRESENT?
A: Assuming no exercise of options and warrants to purchase Cell Pathways
common stock, these shares (which do not include the shares underlying the
contingent value rights) will represent approximately 5.79% of the
outstanding OSI common stock after the merger. OSI common stock held by its
stockholders before the merger will represent approximately 94.21% of the
outstanding OSI common stock after the merger.
Q: WHO CAN HELP ANSWER MY QUESTIONS?
A: If you have any questions about the merger, please call:
Cell Pathways, Inc.
702 Electronic Drive
Horsham, Pennsylvania 19044
Attention: Investor Relations
(215) 706-3800
or
Georgeson Shareholder Communications, Inc.
17 State Street, 10th Floor
New York, New York 10004
(800) 545-1784
-v-
SUMMARY
This summary highlights what we believe is the most important information
about the merger. To more fully understand the transaction, you should read this
entire proxy statement/prospectus, including the materials attached as annexes,
as well as the other documents to which we have referred you. See "Where You Can
Find More Information" on page 80. The page references in parentheses will
direct you to a more detailed description of each topic presented in this
summary.
THE COMPANIES
OSI (SEE PAGE 54)
OSI is a leading biotechnology company focused on the discovery, development and
commercialization of high quality oncology products that both extend life and
improve the quality-of-life for cancer patients worldwide.
The executive offices of OSI, a Delaware corporation, are located at 58 South
Service Road, Suite 110, Melville, NY 11747, and its telephone number at these
offices is (631) 962-2000.
CELL PATHWAYS (SEE PAGE 58)
Cell Pathways is a development stage pharmaceutical company focused on the
research and development of products to treat and prevent cancer, and the future
commercialization of such products.
The principal offices of Cell Pathways, a Delaware corporation, are located at
702 Electronic Drive, Horsham, PA 19044, and its telephone number at these
offices is (215) 706-3800.
THE MERGER
SUMMARY OF THE TRANSACTION (SEE PAGE 40)
In the merger, CP Merger Corporation, a specially formed, wholly-owned Delaware
subsidiary of OSI, will be merged with and into Cell Pathways. Cell Pathways
will continue as the surviving corporation and a wholly-owned subsidiary of OSI.
The merger will occur following adoption of the merger agreement by the Cell
Pathways stockholders and satisfaction or waiver of the other conditions to this
proxy statement/prospectus and the merger agreement. The merger agreement is
attached to this proxy statement/prospectus as Annex A. We encourage you to read
it because it is the legal document that governs the merger.
WHAT THE HOLDERS OF CELL PATHWAYS COMMON STOCK WILL RECEIVE IN THE MERGER (SEE
PAGE 40)
In the merger, Cell Pathways common stockholders will receive OSI common stock
and contingent value rights to receive additional shares of OSI common stock.
When OSI and Cell Pathways complete the merger, each outstanding share of Cell
Pathways common stock will convert into 0.0567 of a share of OSI common stock
and into a contingent value right. OSI will not issue any fractional shares of
OSI common stock in the merger. Instead, Cell Pathways stockholders will receive
cash for fractional shares.
Each contingent value right represents the right to receive 0.04 of a share of
OSI common stock in the event a new drug application, or an NDA, is accepted for
filing by the U.S. Food and Drug Administration, or the FDA, for either of Cell
Pathways' two clinical candidates, Aptosyn(R) (exisulind) or CP461 within five
years of consummation of the merger. The contingent value rights, which are not
transferable, will be governed by the contingent value rights agreement, the
form of which is attached to this proxy statement/prospectus as Annex B. We
encourage you to read this agreement carefully because it is the legal document
that governs the contingent value rights.
MATERIAL FEDERAL INCOME TAX CONSEQUENCES (SEE PAGE 43)
We intend that the merger qualify as a reorganization within the meaning of
Section 368(a) of the Internal Revenue Code. If the merger does qualify as a
reorganization, no gain or loss will be recognized by Cell Pathways, OSI or the
merger subsidiary by reason of the merger. Except for any cash you receive
instead of fractional shares, you will not recognize gain or loss on your
receipt of OSI common stock or contingent value rights in exchange for your
shares of Cell Pathways common stock in the merger; however, a portion of any
additional shares issued pursuant to the contingent value rights agreement will
be treated as taxable interest income to the recipient at the time such
additional shares are
1
issued and will be deductible as an interest expense by OSI subject to
applicable Internal Revenue Code limitations.
BECAUSE THE TAX CONSEQUENCES OF THE MERGER MAY VARY DEPENDING UPON EACH CELL
PATHWAYS STOCKHOLDER'S PARTICULAR CIRCUMSTANCES, WE URGE YOU TO CONSULT YOUR OWN
TAX ADVISOR ABOUT THE FEDERAL, STATE, LOCAL OR FOREIGN TAX CONSEQUENCES TO YOU
OF THE MERGER.
APPRAISAL OR DISSENTERS' RIGHTS (SEE PAGE 50)
If the merger is consummated, holders of Cell Pathways common stock who do not
vote in favor of the merger will have the right under Section 262 of the
Delaware General Corporation Law to demand appraisal of their shares. Under
Section 262, stockholders who demand appraisal and comply with the applicable
statutory procedures will be entitled to receive a judicial determination of the
fair value of their shares, exclusive of any element of value arising from the
accomplishment or expectation of the merger, and to receive payment of that fair
value in cash, together with a fair rate of interest, if any. The value so
determined could be more or less than or equal to the price per share to be paid
in the merger. OSI will not be obligated to close the merger if the aggregate
number of shares held by Cell Pathways stockholders demanding appraisal rights
exceeds 7.5% of the number of shares of Cell Pathways common stock issued and
outstanding immediately prior to the effective time of the merger. Section 262
of the Delaware General Corporation Law is attached to this proxy statement/
prospectus as Annex D.
THE CELL PATHWAYS BOARD OF DIRECTORS' REASONS FOR THE MERGER (SEE PAGE 29)
In reaching its decision to approve the merger, the Cell Pathways Board of
Directors considered, among other things:
- Cell Pathways' present financial condition and difficulty in raising
additional capital to meet its ongoing commitments as well as its drug
development goals;
- Cell Pathways' inability to meet the continued listing requirements of
the Nasdaq National Market; and
- the greater ability of OSI to fund research and development of Cell
Pathways' products.
OPINION OF CELL PATHWAYS' FINANCIAL ADVISOR (SEE PAGE 30)
In connection with the merger, the Board of Directors of Cell Pathways received
a written opinion of CIBC World Markets Corp., Cell Pathways' financial advisor,
as to the fairness, from a financial point of view, of the merger consideration
to be received by the holders of Cell Pathways common stock. The full text of
the CIBC World Markets opinion, dated February 6, 2003, is attached to this
proxy statement/prospectus as Annex C. We encourage you to read this opinion
carefully in its entirety for a description of the assumptions made, procedures
followed, matters considered and limitations on the review undertaken. CIBC
WORLD MARKETS' OPINION IS ADDRESSED TO THE CELL PATHWAYS BOARD OF DIRECTORS AND
RELATES ONLY TO THE FAIRNESS OF THE MERGER CONSIDERATION FROM A FINANCIAL POINT
OF VIEW. THE OPINION DOES NOT ADDRESS ANY OTHER ASPECT OF THE MERGER AND DOES
NOT CONSTITUTE A RECOMMENDATION TO ANY STOCKHOLDER AS TO HOW ANY STOCKHOLDER
SHOULD VOTE OR ACT WITH RESPECT TO ANY MATTERS RELATING TO THE MERGER.
OSI'S REASONS FOR THE MERGER (SEE PAGE 37)
In reaching its decision to approve the merger, OSI's Board of Directors
considered, among other things:
- the quality of Cell Pathways' technology platform and the potential of
its clinical candidates, which may enhance OSI's ability to produce
effective therapies for cancer;
- the expansion of OSI's product pipeline by adding Cell Pathways' product
pipeline, which includes one product candidate in Phase III clinical
trials and one product candidate in Phase II clinical trials; and
- the addition of a marketed product in Gelclair(TM).
THE SPECIAL MEETING
DATE AND PURPOSE (SEE PAGE 24)
We will hold the special meeting at the Philadelphia Marriott West, located at
111 Crawford Avenue, West Conshohocken, Pennsylvania, at 9:00 a.m., local time,
on Tuesday, June 10, 2003.
2
RECORD DATE; VOTING RIGHTS (SEE PAGE 24)
If you owned shares of Cell Pathways common stock as of the close of business on
April 11, 2003, the record date for the special meeting, you may vote on the
adoption of the merger agreement.
On that date, there were 39,475,882 shares of Cell Pathways common stock
outstanding. Cell Pathways stockholders will have one vote at the meeting for
each share of common stock owned on the record date.
QUORUM; REQUIRED VOTES (SEE PAGES 24)
The adoption of the merger agreement requires the affirmative vote of
stockholders holding a majority of the shares of Cell Pathways common stock
outstanding and entitled to vote on the record date. Because the required vote
of Cell Pathways stockholders is based upon the number of outstanding shares of
Cell Pathways common stock, rather than upon the shares actually voted, the
failure by the holder of any such shares to submit a proxy or to vote in person
at the special meeting, including abstentions and broker non-votes, will have
the same effect as a vote against the adoption of the merger agreement.
RECOMMENDATION OF THE CELL PATHWAYS BOARD OF DIRECTORS (SEE PAGE 30)
AFTER CAREFUL CONSIDERATION, THE CELL PATHWAYS BOARD OF DIRECTORS HAS
UNANIMOUSLY DETERMINED THAT THE MERGER AGREEMENT, AND THE TRANSACTIONS
CONTEMPLATED THEREBY, ARE FAIR TO AND IN THE BEST INTERESTS OF CELL PATHWAYS AND
ITS STOCKHOLDERS. THE CELL PATHWAYS BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS
THAT YOU VOTE "FOR" THE ADOPTION OF THE MERGER AGREEMENT.
OTHER SELECTED INFORMATION
INTERESTS OF CELL PATHWAYS' DIRECTORS AND EXECUTIVE OFFICERS IN THE MERGER (SEE
PAGE 37)
The officers and directors of Cell Pathways may have interests in the merger
that are different from, or in addition to, those of Cell Pathways stockholders.
The Cell Pathways and OSI Boards of Directors were aware of these interests and
considered them in approving the merger agreement. Certain of Cell Pathways'
executive officers previously entered into change of control agreements which
entitle them to severance benefits upon their termination in certain instances
following the consummation of the merger. In addition, three of Cell Pathways'
executive officers will enter into consulting agreements with OSI upon
consummation of the merger.
TREATMENT OF STOCK OPTIONS, EMPLOYEE STOCK PURCHASE PLAN AND WARRANTS (SEE PAGE
41)
Upon stockholder adoption of the merger agreement, each outstanding option to
purchase shares of Cell Pathways common stock under its various option plans
that is unvested will accelerate in full and be immediately vested and
exercisable. Any options that are not exercised prior to the effective time of
the merger will terminate in accordance with the terms of such plans. Holders of
options will be provided a period of at least one day following adoption of the
merger agreement by Cell Pathways stockholders to exercise options in accordance
with their terms.
Before the effective time of the merger, Cell Pathways will give the required
notice of cancellation of its employee stock purchase plan to participants and
each participant will have the right to exercise his or her outstanding options
under such plan in full based on accumulated payroll deductions credited to his
or her account.
At the effective time of the merger, OSI will assume each outstanding and
unexercised warrant to purchase shares of the Cell Pathways common stock. The
number of shares for which such warrants are exercisable and the per share
exercise price for the warrants will be adjusted pursuant to a certificate of
adjustment based upon the exchange ratio used in the merger agreement.
EMPLOYEE MATTERS (SEE PAGE 42)
OSI has agreed to give the Cell Pathways employees who continue their employment
after the merger credit under OSI's employee benefits plans for services
rendered to Cell Pathways while employed by Cell Pathways. OSI has also agreed
to assume Cell Pathways' employment, severance and other compensation
agreements.
ACCOUNTING TREATMENT (SEE PAGE 42)
OSI will account for the merger under the purchase method of accounting for
business combinations under accounting principles generally accepted in the
Unites States of America.
3
REGULATORY APPROVALS (SEE PAGE 53)
We are not aware of any material governmental or regulatory requirements that
must be complied with regarding the merger, other than federal securities laws
and the filing of documents describing principal terms of the merger agreement
with the secretary of state of Delaware.
CONDITIONS TO THE MERGER (SEE PAGE 47)
The following conditions, among others must be satisfied before completing the
merger:
- Cell Pathways stockholders must adopt the merger agreement;
- the registration statement of which this proxy statement/prospectus is a
part must be declared effective and must not be the subject of any stop
order or related proceeding;
- there can be no legal restraint that would effect the consummation of the
merger, prohibit or limit the operation of OSI or Cell Pathways as a
result of the merger, or have a material adverse effect on OSI or Cell
Pathways;
- OSI's common stock issued in the merger must be authorized for listing on
the Nasdaq National Market; and
- all necessary regulatory approvals must be obtained.
"NO SOLICITATION" PROVISIONS IN THE MERGER AGREEMENT (SEE PAGE 46)
The merger agreement contains detailed provisions prohibiting Cell Pathways from
seeking an acquisition proposal. In the event of a violation of this covenant by
Cell Pathways, a termination fee will be payable to OSI.
TERMINATION OF THE MERGER AGREEMENT (SEE PAGE 49)
We can mutually terminate the merger agreement without completing the merger.
Either OSI or Cell Pathways may terminate the merger agreement if the merger is
not completed by August 6, 2003, and under other circumstances, including
failure to obtain required stockholder approval.
TERMINATION FEES AND EXPENSES (SEE PAGE 50)
Cell Pathways has agreed to pay OSI $1,250,000 if the merger agreement is
terminated in any of the following circumstances:
- OSI or Cell Pathways terminates the merger agreement because the Cell
Pathways Board of Directors withdraws, modifies or changes its
recommendation of the merger after receiving a superior proposal and the
Cell Pathways Board of Directors determines, after consultation with its
legal adviser, that failure to take such action could reasonably be
expected to constitute a breach of its fiduciary duties;
- OSI or Cell Pathways terminates the merger agreement because Cell
Pathways stockholders do not vote to adopt the merger agreement and an
acquisition proposal, which was proposed prior to such termination, is
consummated within nine months of such termination; or
- OSI terminates the merger agreement for material misrepresentations or
uncured breaches by Cell Pathways and an acquisition proposal, which was
proposed prior to such termination, is consummated within nine months of
such termination.
COMPARISON OF STOCKHOLDERS AND NUMBER OF SHARES OUTSTANDING (SEE PAGE 72)
As of April 28, 2003 there were 448 stockholders of OSI of record who held an
aggregate of 36,481,401 shares of OSI common stock.
As of April 28, 2003, there were 1,290 stockholders of Cell Pathways of record
who held an aggregate of 39,475,882 shares of Cell Pathways common stock.
COMPARATIVE STOCKHOLDER RIGHTS (SEE PAGE 73)
When OSI and Cell Pathways complete the merger, Cell Pathways stockholders will
hold shares of OSI common stock. Their rights will thus be governed by OSI's
charter and by-laws, as well as the Delaware General Corporation Law.
COMPARATIVE STOCK PRICE INFORMATION AND DIVIDEND INFORMATION (SEE PAGE 70)
OSI common stock (Nasdaq: OSIP) and Cell Pathways common stock (Nasdaq: CLPA)
are quoted on the Nasdaq National Market. The following table presents the
market value of OSI common
4
stock (on a historical basis) and the market value of Cell Pathways common stock
(on a historical and equivalent per share basis) as of February 7, 2003, the
last business day before OSI and Cell Pathways publicly announced the merger
agreement. The equivalent per share value of Cell Pathways common stock equals
the closing price of OSI common stock multiplied by 0.0567, the number of shares
of OSI common stock that each Cell Pathways stockholder will receive in the
merger for each share of Cell Pathways common stock held by such stockholder.
FEBRUARY 7, 2003
<Table>
<Caption>
OSI COMMON STOCK
- -----------------------------------------------
HIGH LOW CLOSING
- --------------------- ----------- -----------
$14.45 $13.88 $14.18
</Table>
<Table>
<Caption>
CELL PATHWAYS COMMON STOCK
- -----------------------------------------------
HIGH LOW CLOSING
- --------------------- ----------- -----------
$0.51 $0.48 $0.51
</Table>
EQUIVALENT PER SHARE VALUE OF CELL
<Table>
<Caption>
PATHWAYS COMMON STOCK
---------------------
$0.80
</Table>
We encourage you to obtain current market quotations for OSI common stock and
Cell Pathways common stock.
The market price of OSI common stock is likely to fluctuate before and after the
merger is completed. OSI cannot predict the future prices for its stock, or on
which markets it will be traded in the future.
No cash dividends have ever been paid or declared on shares of Cell Pathways
common stock or OSI common stock. OSI does not anticipate paying cash dividends
on its stock in the foreseeable future.
5
RISK FACTORS
YOU SHOULD CAREFULLY CONSIDER THE FOLLOWING FACTORS, IN ADDITION TO THE
OTHER INFORMATION INCLUDED ELSEWHERE IN THIS PROXY STATEMENT/PROSPECTUS AND THE
DOCUMENTS THAT WE HAVE FILED WITH THE SECURITIES AND EXCHANGE COMMISSION, IN
CONSIDERING WHAT ACTION TO TAKE IN CONNECTION WITH THE MERGER.
RISKS RELATING TO CELL PATHWAYS IF THE MERGER IS NOT COMPLETED
IF THE MERGER IS NOT CONSUMMATED, CELL PATHWAYS MAY LACK THE MONEY AND PERSONNEL
TO CONTINUE OPERATIONS.
In the event that the merger is not consummated, Cell Pathways will require
substantial additional funds for its operations. At December 31, 2002, Cell
Pathways had $10.9 million in cash and cash equivalents, which it believes would
be sufficient, together with expected revenues, to fund operations only through
the second quarter of 2003. Cell Pathways does not know if additional funding
will be available at all or on acceptable terms. If Cell Pathways raises funds
by issuing equity securities, current stockholders may experience substantial
dilution. In addition, Cell Pathways may grant future investors rights which are
superior to those of current stockholders. If Cell Pathways raises funds by
issuing indebtedness, Cell Pathways may be subject to significant restrictions
on its operations. In addition, Cell Pathways has recently reduced its workforce
to decrease future expenses. If the merger is not consummated, Cell Pathways may
have to further reduce its workforce which would compromise its ability to
continue operations. Cell Pathways expects to pay approximately $880,000 in
professional fees incurred in connection with the merger even if it is not
consummated.
IF THE MERGER IS NOT CONSUMMATED, CELL PATHWAYS' COMMON STOCK WILL LIKELY BE
DELISTED FROM THE NASDAQ NATIONAL MARKET.
Although Cell Pathways' common stock is presently listed on the Nasdaq
National Market, it must maintain certain minimum financial requirements to
avoid being delisted. In January 2003, Cell Pathways received notification from
Nasdaq that its common stock would be delisted from the Nasdaq National Market
because its share price fell below the minimum bid requirements and thereby
failed to comply with Nasdaq marketplace rules. Cell Pathways appealed the
delisting notification and attended a hearing with Nasdaq which was held on
February 27, 2003. On March 21, 2003, Cell Pathways was informed that its common
stock will continue to be listed on the Nasdaq National Market until June 30,
2003 in order to allow consummation of the merger, provided Cell Pathways
complies with all of the requirements for continued listing on the Nasdaq
National Market with the exception of the minimum bid requirement. If Cell
Pathways' common stock is delisted, the liquidity of Cell Pathways' common stock
would be impaired, and Cell Pathways' efforts to raise additional capital would
be negatively impacted.
CELL PATHWAYS HAS A HISTORY OF OPERATING LOSSES AND MAY NEVER BECOME PROFITABLE
WHICH MAY CAUSE THE VALUE OF ITS COMMON STOCK TO DECREASE.
Cell Pathways is a development stage pharmaceutical company that has
experienced significant operating losses since its inception in 1990. Cell
Pathways reported operating losses of $18.2 million, $33.1 million and $29.2
million in 2002, 2001 and 2000, respectively, and as of December 31, 2002, had
an accumulated deficit of $141.2 million. Cell Pathways has not received any
revenue from the sale of its own products, none of which has been approved for
marketing, and has received only immaterial revenues from marketing and selling
the products of others. Cell Pathways expects to incur additional operating
losses for at least the next several years. If Cell Pathways succeeds in
obtaining marketing approval for any of its product candidates, it will incur
significant manufacturing and marketing costs. Cell Pathways' ability to achieve
profitability, if the merger is not consummated, is dependent on its ability,
alone or with others, among other things, to:
- obtain additional financing;
6
- successfully complete the development of its product candidates;
- obtain required regulatory approvals;
- successfully manufacture and market, or have others successfully
manufacture and market, its product candidates;
- successfully market any products it may in-license from third parties;
and
- gain market acceptance for its product candidates.
THE TERMINATION FEE PROVIDED FOR IN THE MERGER AGREEMENT MAY DISCOURAGE OTHER
COMPANIES FROM TRYING TO ACQUIRE CELL PATHWAYS IF THE MERGER IS NOT CONSUMMATED.
Cell Pathways has agreed to pay a $1.25 million termination fee to OSI in
specified circumstances if the merger agreement is terminated and within nine
months thereafter Cell Pathways consummates a strategic transaction with a
company other than OSI. The termination fee could discourage other companies
from trying to acquire Cell Pathways.
7
RISKS RELATING TO THE MERGER
BECAUSE THE EXCHANGE RATIO FOR THE MERGER CONSIDERATION IS FIXED, AT THE TIME
THAT YOU VOTE ON THE MERGER, YOU WILL NOT KNOW THE MARKET VALUE OF THE OSI
COMMON STOCK YOU WILL RECEIVE IN THE MERGER.
Each share of Cell Pathways common stock will be exchanged for 0.0567
shares of OSI common stock and a contingent value right to receive 0.04 shares
of OSI common stock upon completion of the merger regardless of changes in the
market value of Cell Pathways common stock or OSI common stock. The contingent
value right represents a right to receive a fraction of a share of OSI common
stock for each share of Cell Pathways common stock in the event an NDA is
accepted for filing by the FDA for either of Cell Pathways' two clinical
candidates, Aptosyn(R) (exisulind) or CP461 within five years of consummation of
the merger. These exchange ratios are fixed numbers and the merger agreement
does not contain any provision to adjust these ratios for changes in the market
price of either Cell Pathways common stock or OSI common stock. Neither party is
permitted to terminate the merger agreement solely because of changes in the
market price of OSI common stock or Cell Pathways common stock. Consequently,
the specific dollar value of OSI common stock you will receive will depend on
the market value of OSI common stock at the time of completion of the merger and
may decrease from the date that you submit your proxy. You are urged to obtain
recent market quotations for OSI common stock and Cell Pathways common stock.
Neither OSI nor Cell Pathways can predict or give any assurances as to the
market price of OSI common stock at any time before or after the merger. The
prices of OSI common stock and Cell Pathways common stock may vary because of
factors such as:
- changes in the business, operating results or prospects of OSI or Cell
Pathways;
- actual or anticipated variations in quarterly results of operations of
OSI or Cell Pathways;
- market assessments of the likelihood that the merger will be completed;
- the timing of the completion of the merger;
- announcements or launching of technological innovations or new
therapeutic products by others;
- negative or neutral clinical trial results;
- developments concerning strategic alliance agreements;
- negative clinical or safety results from OSI's and/or Cell Pathways'
competitors' products;
- changes in government regulation including pricing controls;
- delays with the FDA in the approval process for Tarceva(TM) and other
clinical candidates;
- developments in patent or other proprietary rights;
- public concern as to the safety of OSI's and/or Cell Pathways' products
and potential products;
- future sales of substantial amounts of OSI's common stock by existing
stockholders; and
- comments by securities analysts and general market conditions.
THE CONTINGENT VALUE RIGHTS MAY NOT BE AVAILABLE TO YOU IF AN NDA FOR APTOSYN(R)
OR CP461 IS NOT ACCEPTED FOR FILING BY THE FDA WITHIN FIVE YEARS OF CONSUMMATION
OF THE MERGER.
After the merger, Aptosyn(R) and CP461 will be integrated into OSI's
product pipeline and will consequently be subject to the same development
considerations and risks that OSI's current potential oncology products face.
Aptosyn(R) and CP461 may be found to be ineffective or to cause harmful side
effects in the course of their respective clinical trials which could result in
a determination to cease development of either or both of such products.
Additionally, conducting successful clinical trials often takes a number of
years. It is possible that sufficient results from such trials needed for an NDA
filing may not be achieved within the five-year term of the contingent value
rights. (See "Risk Factors -- Risks Relating to OSI" beginning on page 10.)
8
IF OSI IS NOT SUCCESSFUL IN INTEGRATING AND ASSIMILATING THE CELL PATHWAYS
BUSINESS INTO ITS OWN BUSINESS, THEN THE BENEFITS OF THE MERGER WILL NOT BE
FULLY REALIZED AND THE MARKET PRICE OF OSI'S COMMON STOCK MAY BE NEGATIVELY
AFFECTED.
OSI and Cell Pathways entered into the merger agreement with the
expectation that the merger will result in benefits arising out of the
combination of the anti-cancer platforms of OSI and Cell Pathways. To realize
benefits from the merger, OSI will face the following post-merger challenges:
- transitioning the clinical trials for Aptosyn(R) and CP461 and continuing
development of these clinical candidates; and
- developing new products that utilize the assets and resources acquired
from Cell Pathways.
OSI anticipates that it will take between six and nine months to
effectively transition full management and oversight for Aptosyn(R) and CP461 to
the OSI development group. In order to provide for a smooth transition, OSI has
developed a detailed transition plan that includes the maintenance of temporary
employment arrangements with certain Cell Pathways employees during the
transition period. The loss of these temporary employees could cause some delay
in the programs and require a modest increase in funding paid to contract
research organizations to support the studies. These challenges, if not
successfully met by OSI, could result in diversion of OSI management and
employee attention.
THE ISSUANCE OF OSI COMMON STOCK IN CONNECTION WITH THE MERGER COULD DECREASE
THE MARKET PRICE OF OSI COMMON STOCK.
Based on the number of shares of Cell Pathways common stock outstanding as
of April 28, 2003, at the closing of the merger, OSI will issue to Cell Pathways
stockholders 2,238,283 shares of OSI common stock and 39,475,882 contingent
value rights, assuming no exercise of outstanding options or warrants to
purchase Cell Pathways common stock before the merger becomes effective, and
2,467,644 shares of OSI common stock and 43,521,051 contingent value rights,
assuming full exercise of all options and warrants outstanding to purchase Cell
Pathways common stock. The issuance of the OSI common stock may result in
substantial fluctuations in the price of OSI common stock, including a stock
price decline. The decrease may or may not be the result of the dilutive effect
of the additional shares to be issued in connection with the merger. The
issuance of these shares could also impair OSI's ability to raise capital
through sales of additional common stock.
CELL PATHWAYS' OFFICERS AND DIRECTORS HAVE INTERESTS DIFFERENT FROM YOURS THAT
MAY INFLUENCE THEM TO SUPPORT OR APPROVE THE MERGER.
In considering the recommendation of the Cell Pathways Board of Directors
to approve the merger, Cell Pathways stockholders should recognize that some of
Cell Pathways directors and officers may have interests which differ from those
of Cell Pathways stockholders because of employment arrangements, consulting
arrangements, change of control agreements, indemnification and liability
insurance and other reasons. These reasons are described under the heading "The
Merger and The Merger Agreement -- Interests of Cell Pathways' Directors and
Executive Officers in the Merger" beginning on page 37.
OSI FACES DIFFERENT MARKET RISKS FROM THOSE FACED BY CELL PATHWAYS AND THESE
RISKS MAY CAUSE THE VALUE OF THE SHARES OF OSI COMMON STOCK ISSUED TO YOU TO
DECLINE.
In the merger you will receive shares of OSI common stock. OSI common stock
has experienced fluctuations in price and volume. The business, strategy and
financial condition of OSI is different from that of Cell Pathways. OSI's
results of operations, as well as the price of OSI common stock, may be affected
by various factors different from those affecting Cell Pathways' results of
operations and its common stock price. Future events that may not have affected
the price of Cell Pathways common stock may cause the price of OSI common stock
to decline.
9
RISKS RELATING TO OSI
OSI HAS INCURRED LOSSES SINCE ITS INCEPTION, AND OSI EXPECTS TO INCUR LOSSES
OVER THE NEXT FEW YEARS, WHICH MAY CAUSE THE VALUE OF ITS COMMON STOCK TO
DECREASE.
OSI has had net operating losses since its inception in 1983. At December
31, 2002, OSI's accumulated deficit was approximately $354.3 million. OSI's net
operating losses were $218.5 million, $23.8 million and $16.3 million for fiscal
years 2002, 2001 and 2000, respectively. The net operating loss for fiscal 2002
included an in-process research and development charge of $130.2 million related
to the acquisition of certain assets from Gilead Sciences, Inc. OSI's losses
have resulted principally from costs incurred in research and development,
acquired in-process research and development and from general and administrative
costs associated with OSI's operations. These costs have exceeded its revenues,
and OSI expects them to continue to do so until OSI generates significant sales
from marketed products.
OSI expects to continue to incur operating losses over the next few years
as a result of its expenses for the development of Tarceva(TM) and its other
clinical products and its research programs. These expenses include enhancements
in its drug discovery technologies and increases in the resources OSI will
devote to its internally funded proprietary projects. OSI does not expect to
generate revenues from the sale of its potential products for the next few
years, and OSI expects to continue to incur operating losses during this period.
ALTHOUGH OSI HAS POTENTIAL ONCOLOGY PRODUCTS THAT APPEAR TO BE PROMISING AT
EARLY STAGES OF DEVELOPMENT AND IN CLINICAL TRIALS, NONE OF ITS POTENTIAL
ONCOLOGY PRODUCTS MAY REACH THE MARKET FOR A NUMBER OF REASONS.
Successful research and development of pharmaceutical products is high
risk. Most projects and development candidates fail to reach the market. OSI's
success depends on the discovery of new drugs that it can commercialize. It is
possible that none of OSI's potential oncology products, including Tarceva(TM),
may ever reach the market for a number of reasons. They may be found ineffective
or cause harmful side effects during pre-clinical testing or clinical trials or
fail to receive necessary regulatory approvals. OSI may find that certain
products cannot be manufactured on a commercial scale basis and, therefore, they
may not be economical to produce. OSI's products could also fail to achieve
market acceptance or be precluded from commercialization by proprietary rights
of third parties.
OSI has a number of oncology product candidates in various stages of
development and does not expect them to be commercially available for a number
of years, if at all. All but six of OSI's product candidates are in the
pre-clinical development phase. The six candidates that are in clinical trials
will still require significant research and development and regulatory approvals
before OSI or its collaborative partners will be able to market them.
IF OSI HAS A SETBACK IN ITS TARCEVA(TM) PROGRAM, ITS STOCK PRICE WOULD ALMOST
CERTAINLY DECLINE.
OSI is currently conducting four Phase III clinical trials for Tarceva(TM).
If it does not receive any positive results from these trials, OSI would need to
conduct additional clinical trials or abandon its Tarceva(TM) program. Since
Tarceva(TM) is OSI's most advanced product candidate, a setback of this nature
would almost certainly cause a decline in its stock price. In August 2002,
AstraZeneca PLC announced unfavorable results from its clinical trials which
were testing its drug candidate, Iressa, which is in the same class of targeted
therapies as Tarceva(TM), in combination with traditional chemotherapy agents
for the treatment of front-line non-small cell lung cancer. While there are
important differences between Iressa and Tarceva(TM) and AstraZeneca's clinical
program and OSI's clinical program, including structure, formulation,
pharmacokinetics and Phase III trial design and dosing, two of OSI's four Phase
III trials are designed to test Tarceva(TM) in combination with chemotherapy
agents for front-line non-small cell lung cancer in studies whose design share
many similarities with AstraZeneca's trials. A positive outcome from these two
trials must now be considered higher risk.
10
SET-BACKS ON THE PART OF OSI'S COMPETITORS WHO ARE DEVELOPING DRUGS IN THE
HER1/EGFR FIELD HAVE HISTORICALLY CAUSED VOLATILITY IN OSI'S STOCK PRICE AND
COULD DO SO IN THE FUTURE.
OSI's major competitors who are developing drugs in the HER1/EGFR field
which are similar to OSI's most advanced clinical candidate, Tarceva(TM), have
suffered setbacks with respect to their drug candidates during the last 18
months which have impacted OSI's stock price by raising concerns regarding the
HER1/ EGFR class of targeted therapies. Both AstraZeneca and ImClone Systems
Incorporated, which have each been developing drug candidates in the same class
of HER1/EGFR targeted therapies as Tarceva(TM), suffered setbacks in their
programs during the last 18 months. On December 28, 2001, ImClone announced that
it had received a letter from the FDA advising it that the FDA was not accepting
for filing ImClone's rolling Biologics License Application for its drug
candidate, Erbitux, a monoclonal antibody designed to target and block the
HER1/EGFR gene, which was then in Phase II trials. In August 2002, AstraZeneca
announced unfavorable results from its clinical trials that were testing its
drug candidate, Iressa, in combination with traditional chemotherapy agents for
the treatment of front-line non-small cell lung cancer. These setbacks resulted
in casting doubt amongst some investors on all drug candidates targeting the
HER1/EGFR gene, including Tarceva(TM), which led to declining stock prices for
OSI and others developing drugs in this class. Although no immediate material
impact on OSI's common stock was seen with the ImClone announcement, on the day
of AstraZeneca's announcement, OSI's stock price declined $18.73 per share, or
57%. On May 5, 2003, AstraZeneca received FDA approval for Iressa, its anti-EGFR
drug as a monotherapy for the treatment of advanced non-small cell lung cancer.
Additional set-backs, whether before or after FDA approval, on the part of OSI's
competitors could result in a further decrease in its stock price.
IF OSI IS UNABLE TO DEMONSTRATE ACCEPTABLE SAFETY AND EFFICACY OF TARCEVA(TM)
DURING CLINICAL TRIALS, IT WILL NOT BE ABLE TO OBTAIN REGULATORY APPROVAL AND
THUS WILL NOT BE ABLE TO COMMERCIALIZE AND GENERATE REVENUES FROM TARCEVA(TM).
OSI must continue to demonstrate, through pre-clinical testing and clinical
trials, that Tarceva(TM) is safe and effective. The results from pre-clinical
testing and early clinical trials may not be predictive of results obtained in
subsequent clinical trials, and OSI cannot be sure that its clinical trials will
demonstrate the safety and efficacy necessary to obtain regulatory approval for
Tarceva(TM). A number of companies in the biotechnology and pharmaceutical
industries have suffered significant setbacks in advanced clinical trials, even
after obtaining promising results in earlier trials. In addition, certain
clinical trials for oncology drugs are conducted with patients having the most
advanced stages of disease. During the course of treatment, these patients often
die or suffer other adverse medical effects for reasons that may not be related
to the pharmaceutical agent being tested. These events can complicate OSI's
analysis of clinical trial results and may lead to misinterpretation of clinical
trial results. Any significant delays in, or termination of, clinical trials for
Tarceva(TM) may hinder OSI's ability to obtain regulatory approval of
Tarceva(TM). Any delays in obtaining or failure to obtain regulatory approval
will delay or prevent, respectively, OSI from commercializing and generating
revenues from Tarceva(TM).
IF OSI DOES NOT MAINTAIN ITS CO-DEVELOPMENT AND MARKETING ALLIANCE WITH
GENENTECH INC. AND ROCHE FOR TARCEVA(TM), ITS ABILITY TO PROCEED WITH THE TIMELY
AND PROFITABLE MANUFACTURE AND SALE OF TARCEVA(TM) MAY BE COMPROMISED OR
DELAYED.
Tarceva(TM) is being developed in an alliance with Genentech Inc. and
Roche. The development program is managed by the three parties under a global
development committee. Genentech and Roche are each managing one of the Phase
III trials in non-small cell lung cancer testing Tarceva(TM) in combination with
cytotoxic chemotherapy. OSI is managing two Phase III trials in refractory
non-small cell lung cancer and pancreatic cancer. The loss of either party
during the development program could cause a delay in completion of the trials.
If Tarceva(TM) receives regulatory approval, Genentech will lead the marketing
effort in the United States and Roche will market it in the rest of the world.
OSI has entered into agreements with both Genentech and Roche with respect to
the alliance. The term of the OSI/Genentech agreement continues until the date
on which neither OSI nor Genentech is entitled to receive a share of the
operating profits or losses on any products resulting from the collaboration,
that is, until the date that OSI and Genentech mutually agree to
11
terminate their collaboration or until either party exercises its early
termination rights as described as follows. The OSI/Genentech agreement is
subject to early termination in the event of certain customary defaults, such as
material breach of the agreement and bankruptcy. In addition, beginning January
8, 2003, Genentech has the right to terminate the OSI/Genentech agreement with
six months prior written notice. The term of the OSI/Roche agreement continues
until the date on which OSI is no longer entitled to receive a royalty on
products resulting from the development of Tarceva(TM), that is, until the date
of expiration or revocation or complete rejection of the last to expire patent
covering Tarceva(TM) or, in countries where there is no valid patent covering
Tarceva(TM), on the 10(th) anniversary of the first commercial sale of
Tarceva(TM) in that country. The OSI/Roche agreement is subject to early
termination in the event of certain customary defaults, such as material breach
of the agreement and bankruptcy. In addition, after July 30, 2003, Roche may
terminate the agreement on a country-by-country basis with six months prior
written notice. After such time OSI also has the right to terminate the
agreement on a country-by-country basis if Roche has not launched or marketed a
product in such country under certain circumstances. If OSI does not maintain a
successful collaborative partnership with Genentech and Roche for the
co-development and commercialization of Tarceva(TM), it may be forced to focus
its efforts internally to commercialize Tarceva(TM) which would require a
greater expenditure of financial resources and may cause a delay in launch and
market penetration while OSI builds its own commercial operation or seeks
alternative partners. Although OSI manages the manufacturing of Tarceva(TM) for
the U.S. market through third party providers, there may be a delay in its
ability to scale up if OSI is required to replace Roche's manufacturing role in
markets outside of the United States.
IF OSI'S COMPETITORS WHO ARE DEVELOPING DRUGS IN THE HER1/EGFR FIELD RECEIVE FDA
APPROVAL FOR THEIR DRUG CANDIDATES AND COMMENCE MARKETING SUCH PRODUCTS
SIGNIFICANTLY IN ADVANCE OF OSI'S LAUNCH OF TARCEVA(TM), THEN ITS ABILITY TO
COMPETE FOR SALES IN THIS MARKET MAY BE A GREATER CHALLENGE.
If OSI's competitors, some of which have greater resources than OSI,
receive FDA approval for their drugs and begin marketing those products
significantly in advance of OSI's launch of Tarceva(TM), it may be more
difficult for OSI to penetrate the market and its sales may be less than
projected. This could negatively impact OSI's potential future profitability and
the scope of its operations including research and development of OSI's other
oncology drug candidates. On May 5, 2003, AstraZeneca received FDA approval for
Iressa, its anti-EGFR drug as a monotherapy for the treatment of advanced
non-small cell lung cancer.
IF OSI'S COMPETITORS SUCCEED IN DEVELOPING PRODUCTS AND TECHNOLOGIES THAT ARE
MORE EFFECTIVE THAN ITS OWN, OSI'S PRODUCTS AND TECHNOLOGIES MAY BE RENDERED
LESS COMPETITIVE.
OSI faces significant competition from industry participants that are
pursuing similar products and technologies as OSI is and are developing
pharmaceutical products that are competitive with OSI's potential products.
Where OSI is developing products independently, some of the organizations
competing with it have greater capital resources, larger overall research and
development staffs and facilities, and more extensive experience in drug
discovery and development, obtaining regulatory approval and pharmaceutical
product manufacturing and marketing. With these additional resources, OSI's
competitors may be able to respond to the rapid and significant technological
changes in the biotechnology and pharmaceutical industries faster than OSI can.
OSI's future success will depend in large part on its ability to maintain a
competitive position with respect to these technologies. Rapid technological
development may result in OSI's compounds, products or processes becoming
obsolete before OSI can recover any of the expenses incurred to develop them.
In particular, OSI faces significant competition from other biotechnology
and pharmaceutical companies which are currently developing drugs similar to
Tarceva(TM) that could dilute OSI's potential for sales from Tarceva(TM). OSI is
aware of at least three companies, some of which have resources substantially
greater than OSI does, which currently have drugs similar to Tarceva(TM) in
substantial clinical development programs. On May 5, 2003, AstraZeneca received
FDA approval for Iressa, its anti-EGFR drug as a monotherapy for the treatment
of advanced non-small cell lung cancer. In addition, ImClone/Bristol Myers
Squibb and Abgenix, Inc./Amgen, Inc. are developing a different kind of product,
humanized antibodies, against the HER1/EGFR target. The ImClone product is
currently in Phase III trials, and the Abgenix product is in Phase II trials. If
12
OSI's competitors succeed in developing drugs similar to Tarceva(TM) that are
more effective than OSI's, OSI's product may not gain widespread market
acceptance.
IF OSI IS UNABLE TO ESTABLISH A COMMERCIAL INFRASTRUCTURE FOR THE MARKETING FOR
NOVANTRONE(R) OR FOR ITS POTENTIAL ONCOLOGY PRODUCTS OTHER THAN TARCEVA(TM), OSI
WILL NEED TO ENTER INTO AND MAINTAIN ARRANGEMENTS WITH THIRD PARTIES FOR
COMMERCIALIZATION OF THESE PRODUCTS WHICH COULD SUBSTANTIALLY DIMINISH ITS SHARE
OF THE REVENUES FROM THE SALES OF THESE PRODUCTS.
In order to successfully commercialize OSI's other product candidates, OSI
must be able to:
- manufacture its products in commercial quantities at reasonable costs;
- obtain reimbursement coverage for its products;
- compete favorably against other products; and
- market its products successfully.
In order to continue to generate sales of Novantrone(R), OSI will need to
establish and maintain a commercial infrastructure.
OSI may not be successful in establishing a commercial infrastructure to
enable it to accomplish the above with respect to Novantrone(R) and OSI's other
potential products other than Tarceva(TM). If OSI is unsuccessful or delayed in
establishing this infrastructure, it would need to enter into and successfully
maintain additional commercialization agreements. This would result in OSI's
receipt of a decreased share of the revenues generated from the sale of these
products and would result in decreased revenues from sales of Novantrone(R) for
oncology indications.
IF OSI'S COLLABORATIVE PARTNERS OR OTHER THIRD PARTY CONTRACTORS GIVE OTHER
PRODUCTS GREATER PRIORITY THAN OSI'S PRODUCTS, OSI'S PRODUCTS MAY BE SUBJECT TO
DELAYS IN RESEARCH AND DEVELOPMENT, MANUFACTURE AND COMMERCIALIZATION THAT MAY
IMPEDE ITS ABILITY TO TAKE THEM TO MARKET BEFORE ITS COMPETITORS. THIS MAY
RENDER OSI'S PRODUCTS OBSOLETE OR MAY RESULT IN LOWER THAN ANTICIPATED REVENUES
FOR OSI.
OSI relies on some of its collaborative partners and certain third party
contractors to assist with research and development as well as the manufacture
of its potential products in their FDA-approved manufacturing facilities. Some
of its collaborative agreements allow these parties significant discretion in
electing whether or not to pursue the activities that they have agreed to pursue
for OSI. OSI cannot control the amount and timing of resources these parties
devote to its programs or potential products. OSI's potential products may be in
competition with other products for priority of access to these parties'
research and development and manufacturing facilities. If these parties do not
give significant priority to the research and development or manufacture of
OSI's potential products in an effective or timely manner, the clinical
development of OSI's product candidates or their submission for regulatory
approval could be delayed, and OSI's ability to deliver products to the market
on a timely basis could be impaired. Furthermore, OSI may not be able to enter
into any necessary third party research and development or manufacturing
arrangements on acceptable terms, if at all.
IF GOVERNMENT AGENCIES DO NOT GRANT OSI OR ITS COLLABORATIVE PARTNERS REQUIRED
APPROVALS FOR ANY OF ITS POTENTIAL PRODUCTS, OSI OR ITS COLLABORATIVE PARTNERS
WILL NOT BE ABLE TO MANUFACTURE AND SELL OSI'S PRODUCTS.
All of OSI's potential products must undergo an extensive regulatory
approval process in the United States and other countries. This regulatory
process, which includes pre-clinical testing and clinical trials of each
compound to establish its safety and efficacy, can take many years and requires
the expenditure of substantial resources. Moreover, data obtained from
pre-clinical and clinical activities are susceptible to varying interpretations
that could delay, limit or prevent regulatory approval. The FDA and the other
regulatory agencies in additional markets which are material to OSI and its
collaborative partners (i.e., the European Union Health Authorities (EMEA) and
the Japanese Ministry of Health) may delay or deny the
13
approval of OSI's proposed products. None of OSI's products has yet received
governmental approval, and none may ever do so. If OSI does not receive the
required regulatory approvals, OSI or its collaborative partners will not be
able to manufacture and sell its products.
Even if OSI obtains regulatory approval, a marketed product and its
manufacturer are subject to continuing review, including post-marketing
surveillance. OSI may be required to withdraw its product from the market if
previously unknown problems are discovered. Violations of regulatory
requirements at any stage may result in various unfavorable consequences to OSI,
including the FDA's imposition of criminal penalties against the manufacturer
and the holder of the NDA.
OSI'S RELIANCE ON THIRD PARTIES SUCH AS CLINICAL DISTRIBUTORS, MANUFACTURERS AND
CLINICAL RESEARCH ORGANIZATIONS, OR CROS, MAY RESULT IN DELAYS IN COMPLETING, OR
A FAILURE TO COMPLETE, CLINICAL TRIALS IF THEY FAIL TO PERFORM UNDER OSI'S
AGREEMENTS WITH THEM.
From time to time in the course of product development, OSI may engage
clinical distributors, manufacturers and/or CROs to manufacture and distribute
the product candidate and to conduct and manage clinical studies and to assist
OSI in guiding products through the FDA review and approval process. Because OSI
has engaged and intends to engage clinical distributors, manufacturers and CROs
to help OSI obtain market approval for its drug candidates, many important
aspects of this process have been and will be out of its direct control. If the
clinical distributors, manufacturers and CROs fail to perform their obligations
under OSI's agreements with them or fail to manufacture and distribute the
product candidate and to perform clinical trials in a satisfactory manner, OSI
may face delays in completing OSI's clinical trials, as well as
commercialization of any drug candidate. Furthermore, any loss or delay in
obtaining contracts with such entities may also delay the completion of OSI's
clinical trials and the market approval of drug candidates.
IF OSI CANNOT PROTECT ITS INTELLECTUAL PROPERTY RIGHTS, OSI'S ABILITY TO DEVELOP
AND COMMERCIALIZE ITS PRODUCTS WILL BE SEVERELY LIMITED.
As of April 28, 2003, OSI held 26 U.S. patents, 93 foreign patents, 35
pending applications for U.S. patents, four of which have been allowed, and 165
applications for foreign patents, two of which have been allowed. Moreover, OSI
jointly holds with Pfizer, Inc. rights to numerous issued U.S. and foreign
patents and pending U.S. and foreign patent applications. OSI also jointly
holds, with North Carolina State University, two issued U.S. patents and certain
U.S. and foreign pending patent applications. OSI intends to continue to
aggressively seek patent protection for all of the product candidates that it
has discovered, developed or acquired.
OSI's success depends, in part, on its ability and its collaborative
partners' ability to obtain patent protection for new product candidates,
maintain trade secret protection and operate without infringing the proprietary
rights of third parties. As with most biotechnology and pharmaceutical
companies, its patent position is highly uncertain and involves complex legal
and factual questions. Without patent and other similar protection, other
companies could offer substantially identical products for sale without
incurring the sizable discovery and development costs that OSI has incurred.
OSI's ability to recover these expenditures and realize profits upon the sale of
products could be diminished.
The process of obtaining patents can be time consuming and expensive with
no certainty of success. Even if OSI spends the necessary time and money, a
patent may not issue or it may insufficiently protect the technology it was
intended to protect. OSI can never be certain that OSI was first to develop the
technology or that OSI was the first to file a patent application for the
particular technology because most U.S. patent applications are confidential
until a patent issues, and publications in the scientific or patent literature
lag behind actual discoveries.
The degree of future protection for OSI's proprietary rights will remain
uncertain if its pending patent applications are not approved for any reason or
if OSI is unable to develop additional proprietary technologies that are
patentable. Furthermore, third parties may independently develop similar or
alternative technologies, duplicate some or all of its technologies, design
around its patented technologies or challenge its issued patents.
14
IF OTHER COMPANIES CLAIM THAT OSI INFRINGES ON THEIR INTELLECTUAL PROPERTY
RIGHTS, OSI MAY BE SUBJECT TO COSTLY AND TIME-CONSUMING LITIGATION AND DELAYS IN
PRODUCT INTRODUCTION.
OSI's processes and potential products may conflict with patents which have
been or may be granted to competitors, academic institutions or others. As the
biotechnology and pharmaceutical industries expand and more patents are filed
and issued, the risk increases that OSI's product candidates may give rise to a
declaration of interference by the U.S. Patent and Trademark Office, or to
claims of patent infringement by other companies, institutions or individuals.
These entities or persons could bring legal proceedings against OSI seeking
substantial damages or seeking to enjoin OSI from testing, manufacturing or
marketing OSI's products. If any of these actions were successful, OSI may also
be required to cease the infringing activity or obtain the requisite licenses or
rights to use the technology which may not be available to OSI on acceptable
terms, if at all. Any litigation, regardless of the outcome, could be extremely
costly to OSI.
IF OTHER BIOTECHNOLOGY AND PHARMACEUTICAL COMPANIES ARE NOT WILLING TO PAY
APPROPRIATE ROYALTIES FOR THE USE OF OSI'S PATENTED "GENE TRANSCRIPTION ESTATE,"
OSI MAY NEED TO EXPEND SUBSTANTIAL AMOUNTS OF FUNDS AND RESOURCES IF OSI CHOOSES
TO ENFORCE THE PATENTS.
OSI licenses to other companies rights to use its patented "gene
transcription estate" which consists of drug discovery assays that provide a way
to identify novel product candidates that can control the activity of genes. OSI
believes technology and practices covered by these patents are in widespread use
in the pharmaceutical and biotechnology industries. To date, OSI has granted
seven licenses to use its gene transcription patents. If other pharmaceutical
and biotechnology companies which OSI believes are using its patented technology
are not willing to negotiate license arrangements with OSI on reasonable terms,
OSI may have to choose between abandoning its licensing strategy or initiating
legal proceedings against those companies. Legal action, particularly patent
infringement litigation, is extremely costly.
IF OSI OR ITS COLLABORATIVE PARTNERS ARE REQUIRED TO OBTAIN LICENSES FROM THIRD
PARTIES, OSI'S REVENUES AND ROYALTIES ON ANY COMMERCIALIZED PRODUCTS COULD BE
REDUCED.
The development of some of OSI's products may require the use of technology
developed by third parties. The extent to which efforts by other researchers
have resulted or will result in patents and the extent to which OSI or its
collaborative partners are forced to obtain licenses from others, if available,
is currently unknown. If OSI or its collaborative partners must obtain licenses
from third parties, fees must be paid for such licenses. These fees would reduce
the revenues and royalties OSI may receive on commercialized products.
THE USE OF ANY OF OSI'S POTENTIAL PRODUCTS IN CLINICAL TRIALS AND THE SALE OF
ANY APPROVED PRODUCTS MAY EXPOSE OSI TO LIABILITY CLAIMS RESULTING FROM THE USE
OF PRODUCTS OR PRODUCT CANDIDATES.
The nature of OSI's business exposes it to potential liability risks
inherent in the testing, manufacturing and marketing of drug discovery
candidates and products. Using OSI's drug candidates in clinical trials may
expose it to product liability claims. These risks will expand with respect to
drugs, if any, that receive regulatory approval for commercial sale. While OSI
currently maintains product liability insurance that OSI believes is adequate,
such insurance may not be available at reasonable rates, if at all, in the
future. If OSI does not or cannot maintain adequate insurance coverage, OSI may
incur significant liability if a product liability claim arises.
IF OSI CANNOT OBTAIN ADEQUATE FUNDING FOR ITS RESEARCH AND DEVELOPMENT EFFORTS
OR ITS PROJECTED FUTURE SALES ARE DELAYED OR DIMINISHED, OSI MAY HAVE TO LIMIT
THE SCOPE OF ITS PROPRIETARY PRODUCT DEVELOPMENT IN FUTURE YEARS OR ENTER INTO
MORE RESTRICTIVE ARRANGEMENTS WITH COLLABORATIVE PARTNERS.
As of December 31, 2002, OSI's cash reserves, consisting of cash, cash
equivalents, restricted short and long-term investments, and unrestricted
short-term investments, aggregated $445.8 million. Following the completion and
assimilation of the Cell Pathways and Novantrone(R) transactions, OSI estimates
its cash reserves will decline to approximately $250 million as of September 30,
2003. Additionally, OSI estimates its
15
cash burn will be less than $100 million in fiscal 2004, and has established a
goal of achieving profitability and positive cash flow within 18 to 24 months of
a successful market launch of Tarceva(TM).
OSI's future capital requirements will depend on many factors, including
the size and complexity of OSI's research and development programs, the progress
of pre-clinical testing and early stage clinical trials, the time and costs
involved in obtaining regulatory approvals for OSI's product candidates, the
costs of manufacturing arrangements and the costs of commercialization
activities.
Although OSI believes its current cash reserves are sufficient for its
near-term operating needs, OSI may choose to raise additional funds through
public or private sales of its securities, including equity securities, as well
as from collaborative partners in order to further its growth. OSI may not be
able to obtain adequate funding from the sale of its securities or from
collaborative partners on reasonable or acceptable terms, if at all.
Furthermore, any additional equity financings may dilute the value of the common
stock held by its stockholders. If adequate funds are not available, OSI may be
required to significantly curtail one or more of its research and development
programs or obtain funds through arrangements with collaborative partners or
others that may require it to relinquish certain of OSI's rights to a number of
OSI's technologies or product candidates.
IF THE MARKET PRICE OF OSI'S COMMON STOCK, SIMILAR TO OTHER BIOTECHNOLOGY
COMPANIES, REMAINS HIGHLY VOLATILE, THEN OSI'S STOCKHOLDERS MAY NOT BE ABLE TO
SELL THEIR STOCK WHEN DESIRED OR AT DESIRABLE PRICES.
When the stock prices of companies in the Nasdaq Biotechnology Index fall,
OSI's stock price will most likely fall as well. The market price of the common
stock of biotechnology and pharmaceutical companies and OSI's common stock has
been volatile and may remain volatile for the foreseeable future. From October
1, 2000 through September 30, 2001, the range of OSI's stock price was between
$86.38 and $30.19, and the range of the Nasdaq Biotechnology Index was between
$1,323.41 and $608.24. From October 1, 2001 through September 30, 2002, the
range of OSI's stock price was between $50.94 and $11.50, and the range of the
Nasdaq Biotechnology Index was between $978.42 and $397.36. From October 1, 2002
through March 31, 2003, the range of OSI's stock price was between $22.74 and
$12.84, and the range of the Nasdaq Biotechnology Index was between $570.48 and
$442.09.
The following factors, among others, some of which are beyond OSI's
control, may also cause OSI's stock price to decline:
- fluctuations in operating results;
- announcements of technological innovations or new therapeutic products by
others;
- negative or neutral clinical trial results;
- developments concerning strategic alliance agreements;
- negative clinical or safety results from OSI's competitors' products;
- changes in government regulation including pricing controls;
- delays with the FDA in the approval process for Tarceva(TM) and other
clinical candidates;
- developments in patent or other proprietary rights;
- public concern as to the safety of OSI's products;
- future sales of substantial amounts of OSI's common stock by existing
stockholders; and
- comments by securities analysts and general market conditions.
If OSI's stock price falls, its stockholders may not be able to sell their
stock when desired or at desirable prices.
16
OSI'S OUTSTANDING INDEBTEDNESS HAS INCREASED SUBSTANTIALLY WITH THE ISSUANCE OF
CONVERTIBLE SENIOR SUBORDINATED NOTES IN FEBRUARY 2002, AND OSI MAY NOT BE ABLE
TO PAY THESE NOTES AND ITS OTHER OBLIGATIONS.
As a result of the sale of the Convertible Senior Subordinated Notes in
February 2002 and the subsequent repurchase of a portion of these notes in
August and September 2002, OSI's long-term debt relating to these notes was $160
million as of December 31, 2002 which has significantly increased OSI's interest
expense and related debt service costs. Interest payments of $3.2 million are
due and payable semi-annually on February 1 and August 1 of each year at the
rate of 4% per annum. Cumulative interest payments of $41.6 million are
scheduled to be paid between January 1, 2003 and February 1, 2009. The repayment
of $160 million of principal is scheduled to occur when the notes mature on
February 1, 2009. This long-term debt may:
- make it more difficult for OSI to obtain any necessary financing in the
future for working capital, capital expenditures, debt service
requirements or other purposes; and
- make OSI more vulnerable in the event of a downturn in its business.
Currently, OSI does not have any product sales and it is not generating
sufficient cash flow to satisfy the annual debt service payments that is
required as a result of the consummation of the sale of the notes. This may
require OSI to use a portion of the proceeds from the sale of the notes to pay
interest or borrow additional funds or sell additional equity to meet its debt
service obligations after the first three years when the payment of interest on
the notes is no longer secured. If OSI is unable to satisfy its debt service
requirements, or does not have the funds to repay the notes upon maturity in
2009, it will default on the notes and liquidity problems could result.
OSI'S GOVERNANCE DOCUMENTS AND STATE LAW PROVIDE CERTAIN ANTI-TAKEOVER MEASURES
WHICH WILL DISCOURAGE A THIRD PARTY FROM SEEKING TO ACQUIRE IT AND MAY IMPEDE
THE ABILITY OF STOCKHOLDERS TO REMOVE AND REPLACE OSI'S BOARD OF DIRECTORS AND,
THEREFORE, ITS MANAGEMENT.
OSI has had a shareholder rights plan, commonly referred to as a "poison
pill," since January 1999. The purpose of the shareholder rights plan is to
protect stockholders against unsolicited attempts to acquire control of OSI that
do not offer a fair price to OSI's stockholders as determined by OSI's Board of
Directors. Under the plan, the acquisition of 17.5% or more of OSI's outstanding
common stock by any person or group, unless approved by OSI's board of
directors, will trigger the right by OSI's stockholders to acquire additional
shares of OSI's common stock (and in certain cases the stock of the potential
acquiror) at a bargain purchase price, thus significantly increasing the
acquisition cost to a potential acquiror. The shareholder rights plan may have
the effect of dissuading a potential hostile acquiror from making an offer for
OSI's common stock at a price that represents a premium to the then current
trading price.
OSI's certificate of incorporation and by-laws contain certain additional
anti-takeover protective devices:
- No stockholder action may be taken without a meeting, without prior
notice and without a vote. Solicitations by consent are thus prohibited.
- Special meetings of stockholders may be called only by OSI's Board of
Directors.
- Nominations by stockholders of candidates for election to the Board of
Directors at OSI's annual meeting of stockholders must be made at least
45 days prior to the date on which OSI first mailed its proxy materials
for the prior year's annual meeting of stockholders.
- The Board of Directors has the authority, without further action by the
stockholders, to fix the rights and preferences, and issue shares of,
preferred stock. An issuance of preferred stock with dividend and
liquidation rights senior to the common stock and convertible into a
large number of shares of common stock could prevent a potential acquiror
from gaining effective economic or voting control.
Further, OSI is subject to Section 203 of the Delaware General Corporation
Law which, subject to certain exceptions, restricts certain transactions and
business combinations between a corporation and a
17
stockholder owning 15% or more of the corporation's outstanding voting stock for
a period of three years from the date the stockholder becomes a 15% stockholder.
In addition to discouraging a third party from acquiring control of OSI,
the foregoing provisions could impair the ability of existing stockholders to
remove and replace OSI's management and/or Board of Directors.
THE MARKET PRICE OF OSI'S COMMON STOCK MAY DECLINE AS A RESULT OF THE MERGER.
The market price of OSI's common stock may decline as a result of the
merger for a number of reasons, including if:
- the integration of Cell Pathways' business into OSI's existing operations
is not completed in a timely and efficient manner;
- OSI does not achieve the perceived benefits of the merger as rapidly or
to the extent anticipated by financial or industry analysts;
- the effect of the merger on OSI's financial results is not consistent
with the expectations of financial or industry analysts; or
- significant stockholders of OSI or Cell Pathways decide to dispose of
their stock following completion of the merger.
For a description of and other information about OSI and OSI common stock
and the differences between OSI common stock and Cell Pathways common stock, see
"Business of OSI" beginning on page 54; "Comparative Per Share Financial Data"
on page 22, "Comparative Stock Prices and Dividends" on page 70, and "Comparison
of Rights of the OSI and Cell Pathways Stockholders" beginning on page 73.
18
SELECTED HISTORICAL FINANCIAL DATA OF OSI
OSI is providing the following financial information to assist you in your
analysis of the financial aspects of the merger. OSI derived the annual OSI
historical information from the consolidated financial statements of OSI as of
and for each of the years in the five-year period ended September 30, 2002. The
data as of and for the three months ended December 31, 2002 and 2001 has been
derived from interim financial statements of OSI, which in the opinion of the
OSI's management, include all normal and recurring adjustments that are
considered necessary for the fair presentation of the results for the interim
period. The information is only a summary and should be read in conjunction with
the consolidated financial statements and related notes contained in the OSI
annual report on Form 10-K for the fiscal year ended September 30, 2002, as
amended, and OSI's quarterly report on Form 10-Q for the quarter ended December
31, 2002, which have been incorporated by reference herein, as well as other
information that has been filed with the SEC. See "Where You Can Find More
Information" on page 80 for information on where you can obtain copies of this
information. The historical results included below and elsewhere in this
document are not indicative of the future performance of OSI.
<Table>
<Caption>
THREE MONTHS ENDED
DECEMBER 31, YEARS ENDED SEPTEMBER 30,
-------------------- -----------------------------------------------------
2002 2001 2002(A) 2001(B) 2000(C) 1999(D) 1998(E)
-------- --------- --------- -------- -------- -------- --------
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Consolidated Statement of
Operations Data:
Revenues........................ $ 4,472 $ 5,892 $ 21,816 $ 26,022 $ 28,652 $ 22,652 $ 19,468
-------- --------- --------- -------- -------- -------- --------
Expenses:
Research and development...... 28,223 17,254 102,202 56,038 39,622 24,190 20,303
Acquired in-process research
and development............. -- 130,200 130,200 -- -- 806 --
Selling, general and
administrative.............. 7,500 5,856 28,069 15,771 10,938 8,679 8,265
Amortization of intangibles... 54 309 1,255 742 870 1,469 1,461
Production and service
costs....................... -- -- 77 262 835 1,753 813
-------- --------- --------- -------- -------- -------- --------
Loss from operations.......... $(31,305) $(147,727) $(239,987) $(46,791) $(23,613) $(14,245) $(11,374)
-------- --------- --------- -------- -------- -------- --------
Other income -- net........... 1,205 4,345 7,904 25,661 3,519 1,156 1,190
Gain on sale of Anaderm common
stock....................... -- -- -- -- -- 3,291 --
Gain on sale of diagnostic
business.................... -- 1,000 1,000 -- 3,746 -- --
Gain on early retirement of
convertible senior
subordinated notes -- net... -- -- 12,604 -- -- -- --
-------- --------- --------- -------- -------- -------- --------
Loss before cumulative effect
of accounting change........ $(30,100) $(142,382) $(218,479) $(21,130) $(16,348) $ (9,798) $(10,184)
-------- --------- --------- -------- -------- -------- --------
Cumulative effect of the
change in accounting for the
recognition of
upfront fees................ -- -- -- $ (2,625) -- -- --
-------- --------- --------- -------- -------- -------- --------
Net loss...................... $(30,100) $(142,382) $(218,479) $(23,755) $(16,348) $ (9,798) $(10,184)
======== ========= ========= ======== ======== ======== ========
Basic and diluted net loss per
common share:
Loss before cumulative effect
of change in accounting
policy...................... $ (0.83) $ (4.05) $ (6.07) $ (0.62) $ (0.67) $ (0.46) $ (0.48)
Cumulative effect of change in
accounting policy........... -- -- -- $ (0.08) -- -- --
-------- --------- --------- -------- -------- -------- --------
Net loss...................... $ (0.83) $ (4.05) $ (6.07) $ (0.70) $ (0.67) $ (0.46) $ (0.48)
======== ========= ========= ======== ======== ======== ========
Weighted average number of
shares of common stock
outstanding................. 36,414 35,140 35,978 33,852 24,531 21,451 21,373
</Table>
19
<Table>
<Caption>
AS OF DECEMBER 31, AS OF SEPTEMBER 30,
----------------------------- ---------------------------------------
2002 2001 2002(A) 2001(B) 2000(C) 1999(D) 1998(E)
------------------ -------- -------- -------- ------- ------- -------
(IN THOUSANDS)
Consolidated Balance
Sheet Data:
Cash, cash
equivalents and
investment
securities
(unrestricted and
restricted)...... $445,828 $399,447 $476,277 $551,479 $85,065 $18,862 $24,418
Receivables......... 4,953 6,862 6,981 6,633 1,049 5,194 2,411
Working capital..... 415,213 385,340 444,556 533,435 80,104 14,562 22,268
Total assets........ 545,637 486,725 579,044 591,689 99,776 47,031 50,418
Long-term
liabilities...... 167,644 11,630 168,734 14,061 2,719 3,085 2,001
Stockholders'
equity........... 349,611 450,411 379,108 549,831 89,882 33,365 43,059
</Table>
- ---------------
(a) The fiscal 2002 consolidated financial statements include the acquisition of
certain assets from Gilead Sciences, Inc. for approximately $175.7 million
in cash and common stock; the issuance of $200.0 million of convertible
senior subordinated notes for net proceeds of approximately $193.0 million;
the receipt of $4.5 million from the phase-down of OSI's collaboration with
Anaderm Research Corporation, of which $1.8 million was recognized as
revenue in accordance with SAB No. 101, and the early retirement of $40.0
million aggregate principal amount of convertible senior subordinated notes
resulting in a net gain of approximately $12.6 million. (See notes 3(a),
5(b) and 9 to the consolidated financial statements which are part of OSI's
2002 Form 10-K.)
(b) The fiscal 2001 consolidated financial statements include a cumulative
effect of the change in accounting principle of $2.6 million relating to the
adoption of SAB No. 101; the acquisition of certain assets from British
Biotech plc for $13.9 million; $25 million in upfront fees received upon the
execution of collaboration agreements with Genentech, Inc. and Roche; net
proceeds of approximately $404 million from a public offering of common
stock in November 2000; the sale of newly-issued shares of common stock to
Genentech and Roche for an aggregate purchase price of $35 million each; and
a charge to operations of $5.1 million for the estimated cost of closing
OSI's Tarrytown, New York and Birmingham, England facilities. (See notes
1(b), 3(b), 5(a), 10(f), 10(g), 16(a) and 16(b) to the consolidated
financial statements which are part of OSI's 2002 Form 10-K.)
(c) The fiscal 2000 consolidated financial statements include a charge to
operations of $700,000 representing the cost of a license to use and
practice certain of Cadus Pharmaceutical Corporation's technology and
patents; a $3.5 million technology access fee received upon the execution of
a collaborative research and license agreement with Tanabe Seiyaku Co.,
Ltd.; non-cash compensation charges of approximately $6.8 million and
deferred compensation of approximately $8.8 million associated with options
issued to an employee and consultants; net proceeds of approximately $53
million from a private placement of common stock; and a $3.7 million gain
resulting from the sale of OSI's diagnostics business, including the assets
of OSI's wholly-owned subsidiary, OSDI, Inc., to The Bayer Corporation. (See
notes 5(c), 10(a), 10(e), and 17 to the consolidated financial statements
which are part of OSI's 2002 Form 10-K.)
(d) The fiscal 1999 consolidated financial statements include the acquisition of
Cadus Pharmaceutical Corporation's research business for $2.2 million in
cash, including a $806,000 charge to operations for in-process R&D acquired;
a gain of $3.3 million on the sale of OSI's Anaderm stock to Pfizer Inc.;
and a $535,000 charge to operations for the estimated costs of closing OSI's
facilities in North Carolina. (See note 16(c) to the consolidated financial
statements which are part of OSI's 2002 Form 10-K.)
(e) The fiscal 1998 consolidated financial statements include approximately
$702,000 of license revenue received upon execution of a license agreement
with Aurora Biosciences Corporation.
20
SELECTED HISTORICAL FINANCIAL DATA OF CELL PATHWAYS
<Table>
<Caption>
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------
2002 2001 2000 1999 1998
----------- ----------- ----------- ----------- ----------
(IN THOUSANDS, EXCEPT SHARE DATA)
Consolidated Statement of Operations
Data:
Revenues:
Product sales........................ $ 537 $ -- $ -- $ -- $ --
Marketing services................... 611 942 330 -- --
----------- ----------- ----------- ----------- ----------
1,148 942 330 -- --
----------- ----------- ----------- ----------- ----------
Expenses:
Cost of product sold................. 220 -- -- -- --
Research and development............. 17,145 17,765 22,258 16,255 16,052
Selling, general and
administrative..................... 8,704 7,756 7,247 4,849 4,254
Litigation settlement and
expense(a)......................... (6,749) 8,492 -- -- --
----------- ----------- ----------- ----------- ----------
19,320 34,013 29,505 21,104 20,306
----------- ----------- ----------- ----------- ----------
Operating loss......................... (18,172) (33,071) (29,175) (21,104) (20,306)
Interest income, net................... 301 1,667 2,258 1,470 960
----------- ----------- ----------- ----------- ----------
Net loss............................... $ (17,871) $ (31,404) $ (26,917) $ (19,634) $ (19,345)
=========== =========== =========== =========== ==========
Basic and diluted net loss per common
share................................ $ (0.51) $ (1.01) $ (0.96) $ (0.79) $ (3.04)
=========== =========== =========== =========== ==========
Shares used in computing basic and
diluted net loss per common share.... 34,712,101 31,108,939 28,003,649 24,772,256 6,369,006
=========== =========== =========== =========== ==========
</Table>
<Table>
<Caption>
DECEMBER 31,
------------------------------------------------------------------
2002 2001 2000 1999 1998
----------- ----------- ----------- ----------- ----------
(IN THOUSANDS)
Consolidated Balance Sheet Data:
Cash, cash equivalents and short-term
investments........................ $ 10,920 $ 27,714 $ 49,528 $ 32,013 $ 37,232
Working capital...................... 8,596 23,318 46,192 29,106 33,804
Total assets......................... 17,470 33,621 54,082 35,279 40,233
Long-term debt....................... 37 242 458 34 160
Total stockholders' equity........... 11,703 25,534 48,629 31,463 36,132
</Table>
- ---------------
(a) See note 14 to Cell Pathways' consolidated financial statements included in
this proxy statement/ prospectus.
21
COMPARATIVE PER SHARE FINANCIAL DATA
Below is the per share data for the net loss and book value for OSI as of
and for the year ended September 30, 2002 and Cell Pathways as of and for the
year ended December 31, 2002.
<Table>
<Caption>
AS OF AND FOR THE THREE MONTHS AS OF AND FOR THE YEAR ENDED
ENDED DECEMBER 31, 2002 SEPTEMBER 30, 2002
------------------------------ ----------------------------
HISTORICAL -- OSI:
Net loss per common
share -- basic................... $(0.83) $(6.07)
Net loss per common
share -- diluted................. $(0.83) $(6.07)
Book value per common share......... $ 9.60(a) $10.42(a)
</Table>
<Table>
<Caption>
AS OF AND FOR THE YEAR ENDED DECEMBER 31, 2002
-----------------------------------------------
HISTORICAL -- CELL PATHWAYS:
Net loss per common share -- basic........... $(0.51)
Net loss per common share -- diluted......... $(0.51)
Book value per common share.................. $ 0.30(a)
</Table>
- ---------------
(a) Calculated utilizing shares outstanding on date indicated.
22
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This proxy statement/prospectus and the documents we have filed with the
SEC that are included or incorporated by reference in this proxy
statement/prospectus contain forward-looking statements about OSI's and Cell
Pathways' financial condition, results of operations, business strategies,
operating efficiencies, competitive positions, growth opportunities for existing
products, future success of development-stage products, plans and objectives of
management and other matters. These statements can often be identified by the
use of forward-looking terminology such as "estimate," "project," "plan,"
"intend," "expect," "believe," "should," "would," "could," "may," "anticipate,"
"will," or the negative of such terms or other similar terminology. These
statements include, but are not limited to, statements regarding: proposed
clinical development of product candidates; anticipated business strategies;
sufficiency of resources to fund operating and capital requirements; ability to
integrate businesses; the conditions to, and the timetable for, completing the
merger; anticipated trends in the pharmaceutical and biotechnology industries;
pending and anticipated clinical trials; intentions to introduce new product
candidates; agreements and relationships with third parties including
collaborators, manufacturers and suppliers; future capital expenditures; the
ability to conduct clinical trials and obtain regulatory approval; and operating
cash burn rates. These forward-looking statements are found at various places
throughout this proxy statement/prospectus.
Forward-looking statements necessarily involve risks and uncertainties, and
our actual results could differ materially from those anticipated in the
forward-looking statements due to a number of factors, including those set forth
under "Risk Factors." The factors set forth under "Risk Factors" and other
cautionary statements made in this proxy statement/prospectus should be read and
understood as being applicable to all related forward-looking statements
wherever they appear in this proxy statement/prospectus. Although we believe
that the expectations reflected in the forward-looking statements are
reasonable, we cannot guarantee future results, levels of accuracy, performance
or achievements. Moreover, we do not assume responsibility for the accuracy and
completeness of such statements. Except for our ongoing obligations to disclose
material information under the federal securities laws, we undertake no
obligation to update publicly any forward-looking statements for any reason,
even if new information becomes available or other events occur in the future.
You are cautioned not to place undue reliance on these forward-looking
statements, which speak only as of the date of this proxy statement/prospectus.
23
THE CELL PATHWAYS SPECIAL MEETING
This proxy statement/prospectus is being furnished to stockholders of Cell
Pathways as of the record date as part of the solicitation of proxies by the
Cell Pathways Board of Directors for use at the special meeting called to adopt
the merger agreement.
DATE, TIME AND PLACE
Cell Pathways will hold the special meeting at the Philadelphia Marriott
West, located at 111 Crawford Avenue, West Conshohocken, Pennsylvania, at 9:00
a.m., local time, on Tuesday, June 10, 2003.
PURPOSE OF THE SPECIAL MEETING
At the special meeting, Cell Pathways will ask holders of Cell Pathways
common stock to adopt the merger agreement. The Cell Pathways Board of Directors
has unanimously determined that the merger agreement and the transactions
contemplated thereby, are fair to and in the best interests of Cell Pathways and
its stockholders.
THE CELL PATHWAYS BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT YOU VOTE
"FOR" THE ADOPTION OF THE MERGER AGREEMENT.
RECORD DATE; SHARES ENTITLED TO VOTE; QUORUM
Only holders of record of Cell Pathways common stock at the close of
business on April 11, 2003, the record date, are entitled to notice of and to
vote at the special meeting. On the record date, 39,475,882 shares of Cell
Pathways common stock were issued and outstanding and held by approximately
1,300 holders of record. A quorum is present at the special meeting if a
majority of all the shares of Cell Pathways common stock issued and outstanding
on the record date and entitled to vote at the special meeting are represented
at the special meeting in person or by a properly executed proxy. In the event
that a quorum is not present at the special meeting, it is expected that the
meeting will be adjourned or postponed to solicit additional proxies. Holders of
record of Cell Pathways common stock on the record date are entitled to one vote
per share on each matter submitted to a vote at the special meeting.
VOTE REQUIRED
The adoption of the merger agreement requires the affirmative vote of
stockholders holding a majority of the shares of Cell Pathways common stock
outstanding and entitled to vote on the record date. Because the required vote
of Cell Pathways stockholders is based upon the number of outstanding shares of
Cell Pathways common stock, rather than upon the shares actually voted, the
failure by the holder of any such shares to submit a proxy or to vote in person
at the special meeting, including abstentions and broker non-votes, will have
the same effect as a vote against the adoption of the merger agreement.
SHARES OWNED BY CELL PATHWAYS' DIRECTORS, EXECUTIVE OFFICERS AND AFFILIATES
At the close of business on the record date, directors and executive
officers of Cell Pathways and their affiliates beneficially owned and were
entitled to vote 572,462 shares of Cell Pathways common stock, which represented
approximately 1.45% of the shares of Cell Pathways common stock outstanding on
that date.
VOTING OF PROXIES
All shares represented by properly executed proxies received in time for
the special meeting will be voted at the special meeting in the manner specified
by the holders. Properly executed proxies that do not contain voting
instructions will be voted "FOR" the adoption of the merger agreement.
Shares of Cell Pathways common stock represented at the special meeting but
not voting, including shares of Cell Pathways common stock for which proxies
have been received but for which holders of shares
24
have abstained, will be treated as present at the special meeting for purposes
of determining the presence or absence of a quorum for the transaction of all
business.
Brokers who hold shares of Cell Pathways common stock in "street name" for
customers who are the beneficial owners of such shares may not give a proxy to
vote those customers' shares in the absence of specific instructions from those
customers. These non-voted shares are referred to as broker non-votes and count
as votes against the adoption of the merger agreement.
In the event that a quorum is not present at the special meeting, the
persons named as proxies by a stockholder may propose and vote for one or more
adjournments of the special meeting to permit further solicitations of proxies.
No proxy voted against the proposal to adopt the merger agreement will be voted
in favor of any such adjournment or postponement.
Cell Pathways does not expect that any matter other than the proposal to
adopt the merger agreement will be brought before the special meeting. If,
however, the Cell Pathways Board of Directors properly presents other matters,
the persons named as proxies will vote in accordance with their judgment.
REVOCABILITY OF PROXIES
The grant of a proxy on the enclosed form of proxy does not preclude a
stockholder from voting in person at the special meeting. A stockholder may
revoke a proxy at any time prior to its exercise by (i) filing with the
Secretary of Cell Pathways a properly executed revocation of proxy, (ii)
submitting a properly executed proxy to the Secretary of Cell Pathways bearing a
later date or (iii) appearing at the special meeting and voting in person.
Attendance at the special meeting will not in and of itself constitute
revocation of a proxy.
SOLICITATION OF PROXIES
Cell Pathways will bear the cost of the solicitation of proxies from its
stockholders. In addition to solicitation by mail, the directors, officers and
employees of Cell Pathways may solicit proxies from stockholders by telephone or
other electronic means or in person. Cell Pathways will cause brokerage houses
and other custodians, nominees and fiduciaries to forward solicitation materials
to the beneficial owners of stock held of record by such persons. Cell Pathways
will reimburse such custodians, nominees and fiduciaries for their reasonable
out-of-pocket expenses in doing so.
Georgeson Shareholder Communications, Inc. will assist in the solicitation
of proxies by Cell Pathways. Cell Pathways will pay Georgeson a fee of
approximately $15,000, plus reimbursement of certain out-of-pocket expenses, and
will indemnify Georgeson against any losses arising out of its proxy
solicitation services on behalf of Cell Pathways.
STOCKHOLDERS SHOULD NOT SEND STOCK CERTIFICATES WITH THEIR PROXIES. A
transmittal form with instructions for the surrender of Cell Pathways common
stock certificates will be mailed to Cell Pathways stockholders shortly after
consummation of the merger.
APPRAISAL RIGHTS
If the merger is consummated, holders of Cell Pathways common stock who do
not vote in favor of the merger will have the right under Section 262 of the
Delaware General Corporation Law to demand appraisal of their shares. See "The
Merger and The Merger Agreement -- Appraisal or Dissenters' Rights" beginning on
page 50. Section 262 of the Delaware General Corporation Law is attached to this
proxy statement/ prospectus as Annex D.
25
BACKGROUND AND REASONS FOR THE MERGER
BACKGROUND
Since Cell Pathways began conducting business, its Board of Directors and
management have considered and explored the possibility of collaborating with
other companies in its industry in order to further its research and development
efforts and bring its products to market. In January 2001, Cell Pathways began
to place more emphasis on exploring strategic and financing alternatives,
including licensing the rights to one of its drug candidates, acquiring another
company in its industry or engaging in industry collaborations or strategic
alliances.
During 2001, OSI's management together with its investment bankers
conducted a review of publicly available financial statements and other business
and financial information of Cell Pathways in order to determine whether a
transaction with Cell Pathways would be beneficial to OSI. OSI's management team
constantly surveys the biotechnology and pharmaceutical industries for
acquisition and licensing opportunities that could complement its oncology
mission. Initial assessments of Cell Pathways and a number of other potential
acquisition candidates were made during 2001 and 2002. Following an internal
review of publicly available information regarding Cell Pathways which occurred
during the early part of 2002, OSI management determined that Cell Pathways was
a potentially good fit with OSI's strategic goals and decided to explore the
possibility of a transaction with Cell Pathways. OSI contacted Cell Pathways
during the summer of 2002 to discuss a potential transaction, and OSI and Cell
Pathways entered into a confidentiality agreement on August 5, 2002 to allow OSI
to explore a possible transaction with Cell Pathways and facilitate further
discussion.
During the summer and fall of 2002, Cell Pathways was in contact with
various companies, including OSI, that indicated an interest in exploring a
strategic transaction with Cell Pathways. These companies engaged in discussions
with Cell Pathways' management and conducted varying degrees of due diligence.
As a result of these discussions and diligence, a number of companies declined
to proceed with discussions, but two companies, in addition to OSI, continued to
explore potential strategic transactions with Cell Pathways. Among the meetings
held by Cell Pathways was one on December 2, 2002 in Melville, New York with
representatives of OSI. In attendance at the meeting were Mr. Robert J.
Towarnicki, the Chairman, President and Chief Executive Officer of Cell
Pathways, Dr. Rifat Pamucku, Director, Chief Scientific Officer and Executive
Vice President of Research and Development of Cell Pathways, Dr. Pedro
Santabarbara, Vice President, Clinical Research Oncology of OSI, Dr. Arthur
Bruskin, Vice President, Strategic Planning of OSI and Dr. Geoffrey Cooper, Vice
President, Corporate Development of OSI.
The Cell Pathways Board of Directors held a meeting on December 20, 2002 at
which it discussed Cell Pathways' strategic alternatives. The Cell Pathways
Board of Directors was updated on the status of discussions with companies which
had expressed interest in a possible transaction or strategic alliance with Cell
Pathways. Senior management informed the Board of Directors that one company,
Company A, submitted a non-binding indication of interest and two other
companies, OSI and Company B, were in the process of performing diligence on
Cell Pathways. The Cell Pathways Board of Directors considered and reviewed
these developments as well as the current state of financial markets and
concluded that Cell Pathways should continue its discussions with Company A and
continue to permit OSI and Company B to perform diligence on Cell Pathways. At a
further meeting on December 23, 2002, the Cell Pathways Board of Directors
continued its review and consideration of strategic alternatives and appointed a
strategy committee composed of Mr. Towarnicki, Dr. Pamucku, Mr. William A.
Boeger and Mr. Paul J. Duggan to consider all matters regarding the strategic
alternatives. The Board of Directors also authorized management to continue to
explore financing alternatives.
The strategy committee of the Cell Pathways Board of Directors held a
meeting on December 31, 2002 at which it discussed the status of discussions
with the two identified transaction candidates other than OSI. The strategy
committee was informed that Company A requested an exclusivity arrangement
whereby Cell Pathways would be required to negotiate exclusively with Company A
for a specified period regarding a strategic transaction. The strategy committee
determined that it was not advisable at that time for Cell
26
Pathways to grant exclusivity and concluded that management should continue to
pursue negotiations with Company A on a non-exclusive basis. The strategy
committee also was informed that OSI was scheduled to visit Cell Pathways on
January 6, 2003.
The Cell Pathways Board of Directors held a meeting on January 6, 2003 and
reviewed the status of discussions with Company A and Company B. Senior
management informed the Board of Directors that negotiations continued with
Company A, that Company B continued to perform diligence but was not prepared to
submit an indication of interest at that time, and that OSI was conducting due
diligence. It was the consensus of the Board of Directors that Cell Pathways
should continue to proceed with discussions with Company A, Company B and OSI.
On January 6, 2003, members of OSI's management team including Dr.
Santabarbara, Dr. Bruskin and Dr. Neil Gibson, Vice President, Research, met
with members of Cell Pathways' management and staff including Mr. Towarnicki,
Dr. Pamucku, Mr. Robert Bellet, a management employee of Cell Pathways, Mr.
Lloyd Glenn, a management employee of Cell Pathways, and Mr. Robert Stevenson,
internal counsel of Cell Pathways, in Cell Pathways' Horsham, Pennsylvania
offices, for the purpose of conducting a preliminary scientific evaluation of
Cell Pathways' products and technology. Following this meeting, OSI engaged
Lazard Freres & Co. LLC to provide OSI with financial advice in connection with
a potential transaction with Cell Pathways. On January 10, 2003, OSI's executive
management committee reviewed the potential for an acquisition of Cell Pathways
and determined that OSI should pursue the acquisition opportunity.
On January 10, 2003, Company A distributed to Cell Pathways an initial
draft of a merger agreement. Throughout January, Cell Pathways and Company A
continued to negotiate the terms of the merger agreement. The Cell Pathways
Board of Directors was kept apprised of the progress of negotiations throughout
this period.
On January 15, 2003, OSI presented Cell Pathways with a non-binding
indication of interest to acquire Cell Pathways through a merger. Mr. Towarnicki
spoke with Colin Goddard, Ph.D., OSI's Chief Executive Officer, and advised him
that Cell Pathways wished to consider a strategic collaboration rather than a
merger.
From January 22, 2003 through January 24, 2003, OSI conducted a further due
diligence review of Cell Pathways' technologies, business and operations at Cell
Pathways' offices in Horsham, Pennsylvania. This diligence meeting included a
presentation to Cell Pathways' management by Dr. Goddard. During this period,
Dr. Goddard and Mr. Towarnicki discussed possible structures for a strategic
transaction between OSI and Cell Pathways. Cell Pathways also presented a
proposed term sheet to OSI for an investment in Cell Pathways and purchase of
rights in some of its products.
On January 24, 2003, OSI withdrew its initial indication of interest and
presented Cell Pathways with a non-binding proposal to purchase specified assets
of Cell Pathways and enter into a collaboration and license agreement with Cell
Pathways. The managements of Cell Pathways and OSI began to negotiate the terms
of such a potential transaction but were unable to agree upon terms for such a
transaction.
On January 27, 2003, Dr. Goddard and Mr. Towarnicki had further discussions
regarding potential transaction structures. Dr. Goddard explained to Mr.
Towarnicki that OSI was primarily interested in acquiring Cell Pathways through
a merger. Later that evening, Mr. Towarnicki received a revised non-binding
indication of interest from OSI providing for OSI's acquisition of Cell Pathways
through a merger.
On January 28, 2003, Mr. Towarnicki contacted Dr. Goddard to inform him
that the valuation of Cell Pathways included in the indication of interest he
had received on January 27, 2003 was not satisfactory. Dr. Goddard indicated
that OSI would be willing to review the valuation, and Mr. Towarnicki received a
revised non-binding indication of interest later that evening that included a
revised valuation for Cell Pathways.
The Cell Pathways Board of Directors held a special meeting on January 29,
2003 at which it discussed the terms of the OSI proposal and also discussed
alternatives and the status of discussions with Company A and Company B. The
Cell Pathways Board of Directors was informed that, although contact with
Company A
27
continued, it had not submitted a proposal to Cell Pathways which contained
specific financial terms and that negotiations with Company B remained at a very
early stage. Senior management reviewed the terms of the OSI proposal with the
Board of Directors and explained that OSI was primarily interested in acquiring
Cell Pathways through a merger. The Board of Directors was advised that it was
not possible to structure a strategic collaboration between Cell Pathways and
OSI that both parties would find acceptable and determined that it was advisable
to continue negotiations with OSI regarding a merger.
From January 29, 2003 through February 6, 2003, Cell Pathways' and OSI's
respective managements and advisors negotiated the terms of the merger
agreement, and Cell Pathways and its legal and financial advisors conducted due
diligence on OSI, including at a meeting on January 31, 2003 at OSI's
headquarters in Melville, New York.
A telephone conference was held in the early evening on February 3, 2003,
in which representatives of Cell Pathways' and its legal and financial advisors,
Morgan, Lewis & Bockius LLP and CIBC World Markets, respectively, and OSI and
its legal and financial advisors, Mintz Levin, Cohn, Ferris, Glovsky and Popeo,
P.C., and Lazard, respectively, participated. During this telephone conference,
Cell Pathways proposed that the exchange ratio, which was to be used to
determine the number of OSI common shares to be received in exchange for each
outstanding share of Cell Pathways common stock, be based on the average closing
price of OSI common stock just prior to consummation of the merger, which would
provide for an exchange ratio that would vary with the market price of OSI
common stock prior to consummation of the merger. OSI rejected this proposal and
instead proposed a fixed exchange ratio that would not vary prior to
consummation of the merger. After negotiation among Cell Pathways, OSI and their
respective financial advisors, it was agreed that the exchange ratio would be
fixed and would be based on an OSI common stock price of $15.00 per share, which
was approximately the average of the closing price of OSI common stock for
January 31, 2003 and February 3, 2003, which were the two trading days
immediately preceding the negotiation.
On the evening of February 6, 2003, the Cell Pathways Board of Directors
held a meeting to review the proposed transaction with OSI and to discuss
alternatives with respect to Company A and Company B. Mr. Towarnicki reviewed
with the Board of Directors the status of negotiations with OSI, the terms of
the proposed merger transaction and the status of discussions with Company A and
Company B. A representative of Morgan Lewis reviewed with the Board of Directors
the terms and provisions of the proposed merger agreement and the legal duties
and responsibilities of the directors in connection with the proposed
transaction. CIBC World Markets reviewed its financial analysis of the proposed
merger consideration and rendered to the Board of Directors an oral opinion,
which was confirmed by a written opinion dated February 6, 2003, to the effect
that, as of that date and based on and subject to the matters described in its
opinion, the merger consideration to be received by the holders of Cell Pathways
common stock was fair, from a financial point of view, to such holders.
Following full consideration and discussion, a review of the principal reasons
for the merger and consideration that achieving a more favorable transaction
with Company A or Company B was unlikely, the Cell Pathways Board of Directors
unanimously approved the merger agreement determining that the merger agreement
and the transactions contemplated by the merger agreement were fair to and in
the best interests of Cell Pathways and its stockholders. The reasons for the
Cell Pathways Board of Directors' approval are summarized below.
The OSI Board of Directors held a meeting on February 7, 2003, at which
representatives from Lazard, Mintz Levin and Saul Ewing LLP, OSI's securities
counsel, participated. Several members of management including Dr. Goddard, Dr.
Bruskin, and Ms. Barbara Wood, OSI's General Counsel, made presentations as to
various aspects of Cell Pathways and the proposed transaction to the Board of
Directors of OSI. Lazard also discussed the proposed transaction with the OSI
Board of Directors. After these presentations by OSI's management and
discussion, OSI's Board of Directors unanimously approved the merger and
authorized the officers of OSI to finalize and execute the merger agreement.
Immediately following the OSI Board of Directors meeting, the Board of Directors
of CP Merger Corporation met and unanimously approved the merger and authorized
its officers to finalize and execute the merger agreement.
28
On the evening of February 7, 2003, OSI, CP Merger Corporation and Cell
Pathways executed a definitive merger agreement. On February 10, 2003, each of
Cell Pathways and OSI issued a press release announcing the merger agreement.
THE CELL PATHWAYS BOARD OF DIRECTORS' REASONS FOR THE MERGER
In the course of reaching its decision to approve the merger agreement, the
Cell Pathways Board of Directors considered and reviewed with Cell Pathways'
senior management and outside advisors a number of factors relevant to the
merger, including Cell Pathways' strategic business plans, its financial
position and potential for raising additional funds, its products and research
and development portfolio and its commercial operations.
The Cell Pathways Board of Directors also considered the following factors:
- Cell Pathways' present financial condition and difficulty in raising
additional capital to meet its ongoing commitments as well as its drug
development goals and the view of the Cell Pathways Board of Directors
that the merger will provide greater opportunities and resources for Cell
Pathways' drug development programs;
- Cell Pathways' inability to meet the continued listing requirements of
the Nasdaq National Market and the negative effect delisting would have
on the liquidity of the Cell Pathways common stock and any future efforts
by Cell Pathways to raise additional capital;
- the greater ability of OSI to fund research and development of Cell
Pathways' products as a result of OSI's cash position relative to Cell
Pathways' cash position;
- Cell Pathways' difficulties in competing against larger companies with
greater resources and the advantages of the merger in light of OSI's
greater financial resources;
- the fact that the merger will allow Cell Pathways stockholders to receive
an equity interest in OSI, and thereby participate in the potential
success of Cell Pathways' products;
- the Cell Pathways Board of Directors' view that the combination of the
businesses of Cell Pathways and OSI will result in an organization with
greater financial, technical and other resources than Cell Pathways could
provide as a stand-alone entity, and will allow for a significant
acceleration in the commercial success of Cell Pathways products and
technologies;
- the Cell Pathways Board of Directors' view that OSI will provide greater
resources and opportunities for Cell Pathways technology and product
development programs;
- the Cell Pathways Board of Directors' assessment of the strengths of OSI
and its research and development staffs and the positive effect such
strengths may have on the clinical development of Cell Pathways' drug
candidates;
- the Cell Pathways Board of Directors' assessment of Cell Pathways'
strategic alternatives and its view that the merger presented more
attractive opportunities than remaining as an independent company;
- the results of the process that had been conducted by Cell Pathways to
evaluate strategic alternatives, and in particular, the difficulties Cell
Pathways encountered in exploring financing alternatives and strategic
collaborations and the substantial additional funds required to continue
Cell Pathways' operations if it remained an independent company;
- information regarding historical market prices and other information with
respect to Cell Pathways common stock, and the financial performance and
condition, assets, liabilities, business operations and prospects of each
of OSI and Cell Pathways;
- the financial presentation of CIBC World Markets, including its opinion
dated February 6, 2003, to the Cell Pathways Board of Directors as to the
fairness, from a financial point of view and as of that date, of the
merger consideration to be received by holders of Cell Pathways common
stock, as described below under the heading "Opinion of Cell Pathways'
Financial Advisor";
29
- the Cell Pathways Board of Directors' assessment of the value of shares
of OSI common stock to be received by Cell Pathways stockholders in the
merger and the premium represented thereby over various historical prices
for Cell Pathways common stock;
- a comparison of selected recent acquisition and merger transactions in
the industry as well as the trading performance for comparable companies
in the industry;
- the likelihood that the merger will be consummated, and the terms and
conditions of the merger agreement, including that the break-up fee
payable in specific circumstances set forth in the merger agreement is
reasonable, taking into account the other terms of the transaction and
the range of commercially reasonable break-up fees for a transaction of
this size;
- the expected tax treatment of the merger; and
- reports from the Cell Pathways management and advisors as to the results
of their review of OSI's business.
The Cell Pathways Board of Directors also considered a number of
potentially negative factors in its deliberations concerning the merger,
including the following material factors:
- the risk that the benefits sought to be achieved in the merger will not
be realized due to OSI not successfully integrating or assimilating the
Cell Pathways business into its own business;
- the loss of control over the future operations and the inability of Cell
Pathways' Board of Directors, management and stockholders to direct the
future clinical development of Cell Pathways' drug candidates;
- the fixed nature of the exchange ratio and the resulting risk that,
should there be a decrease in the market value of OSI common stock, the
value of the consideration to be received by the Cell Pathways
stockholders in the merger would be reduced; and
- the fact that Cell Pathways would be foregoing other potential
opportunities by entering into the merger agreement and the possibility
that, if the merger is not completed, Cell Pathways will not have
sufficient financing or a collaboration arrangement in place.
The Cell Pathways Board of Directors believes that these potentially
negative factors are outweighed by the potential benefits of the merger.
This summary is not meant to be an exhaustive description of the
information and factors considered by the Cell Pathways Board of Directors but
includes all material factors considered. In view of the wide variety of factors
considered by the Cell Pathways Board of Directors, it was not possible to
quantify or to give relative weights to the various factors. After taking into
consideration all the factors set forth above, as well as other factors not
specifically described above, the Cell Pathways Board of Directors approved the
merger and the merger agreement because of the Cell Pathways Board of Directors'
belief that the merger is advisable to Cell Pathways and its stockholders.
RECOMMENDATION OF THE CELL PATHWAYS BOARD OF DIRECTORS
After careful consideration, the Cell Pathways Board of Directors has
unanimously determined that the merger agreement, and the transactions
contemplated thereby, are fair to and in the best interests of Cell Pathways and
its stockholders. THE CELL PATHWAYS BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS
THAT YOU VOTE "FOR" THE ADOPTION OF THE MERGER AGREEMENT.
OPINION OF CELL PATHWAYS' FINANCIAL ADVISOR
Cell Pathways engaged CIBC World Markets to act as its financial advisor in
connection with the merger. In connection with this engagement, the Board of
Directors of Cell Pathways requested that CIBC World Markets evaluate the
fairness, from a financial point of view, to the holders of Cell Pathways common
stock of the merger consideration. On February 6, 2003, at a meeting of the
Board of Directors held to
30
evaluate the merger, CIBC World Markets rendered an oral opinion, which was
confirmed by delivery of a written opinion to the Cell Pathways Board of
Directors dated the same date, to the effect that, as of that date and based on
and subject to the matters described in the opinion, the merger consideration
was fair, from a financial point of view, to the holders of Cell Pathways common
stock.
The full text of CIBC World Markets' written opinion, dated February 6,
2003, which describes the assumptions made, procedures followed, matters
considered and limitations on the review undertaken, is attached to this proxy
statement/prospectus as Annex C. CIBC WORLD MARKETS' OPINION IS ADDRESSED TO THE
CELL PATHWAYS BOARD OF DIRECTORS AND RELATES ONLY TO THE FAIRNESS OF THE MERGER
CONSIDERATION FROM A FINANCIAL POINT OF VIEW. THE OPINION DOES NOT ADDRESS ANY
OTHER ASPECT OF THE MERGER AND DOES NOT CONSTITUTE A RECOMMENDATION AS TO HOW
ANY STOCKHOLDER SHOULD VOTE OR ACT WITH RESPECT TO ANY MATTERS RELATING TO THE
MERGER. THE SUMMARY OF CIBC WORLD MARKETS' OPINION DESCRIBED BELOW IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO THE FULL TEXT OF ITS OPINION. HOLDERS OF CELL
PATHWAYS COMMON STOCK ARE ENCOURAGED TO READ THE OPINION CAREFULLY IN ITS
ENTIRETY.
In arriving at its opinion, CIBC World Markets:
- reviewed a draft dated February 6, 2003 of the merger agreement and form
of contingent value rights agreement attached as an exhibit to the merger
agreement;
- reviewed audited financial statements of Cell Pathways for the fiscal
years ended December 31, 1999, December 31, 2000 and December 31, 2001
and audited financial statements of OSI for the fiscal years ended
September 30, 2000, September 30, 2001 and September 30, 2002;
- reviewed unaudited financial statements of Cell Pathways for the fiscal
year ended December 31, 2002 and discussed with OSI's management
estimated financial results for OSI for the three-month period from
September 30, 2002 through December 31, 2002;
- reviewed financial forecasts relating to Cell Pathways and OSI prepared
by Cell Pathways' management and discussed with CIBC World Markets by the
managements of Cell Pathways and OSI;
- reviewed historical market prices and trading volume for Cell Pathways
common stock and OSI common stock;
- held discussions with senior managements of Cell Pathways and OSI with
respect to the businesses and prospects of Cell Pathways and OSI,
including, in the case of Cell Pathways, the liquidity needs of, and
capital resources available to, Cell Pathways and the potential strategic
and operational benefits to Cell Pathways of the merger;
- contacted, at Cell Pathways' direction, selected third parties to solicit
indications of interest in a possible acquisition of or investment in
Cell Pathways and held discussions with Cell Pathways' management as to
the results of its solicitation of third parties regarding a possible
acquisition of or investment in Cell Pathways and exploration of other
strategic and financial alternatives (for more information regarding Cell
Pathways' consideration of third-party indications of interest and
strategic and financial alternatives, see "Background and Reasons for the
Merger -- Background" beginning on page 26);
- reviewed and analyzed publicly available financial data for selected
companies that CIBC World Markets deemed comparable to Cell Pathways and
OSI;
- reviewed the premiums paid, based on publicly available information, in
transactions with transaction values comparable to the merger;
- analyzed Cell Pathways' estimated liquidation value using assumptions and
estimates provided to or discussed with CIBC World Markets by Cell
Pathways' management as to the current market value of Cell Pathways'
assets and the amount of Cell Pathways' liabilities;
- analyzed the estimated present value of the unlevered, after-tax free
cash flows and estimated present value of the future trading price of OSI
common stock using financial forecasts, including assumptions
31
of future performance contained in those forecasts, prepared by Cell
Pathways' management and discussed with CIBC World Markets by the
managements of Cell Pathways and OSI;
- reviewed potential pro forma financial effects of the merger on OSI based
on financial forecasts prepared by Cell Pathways' management and
discussed with CIBC World Markets by the managements of Cell Pathways and
OSI;
- reviewed public information concerning Cell Pathways and OSI; and
- performed other analyses and reviewed other information as CIBC World
Markets deemed appropriate.
In rendering its opinion, CIBC World Markets relied on and assumed, without
independent verification or investigation, the accuracy and completeness of all
of the financial and other information provided to or discussed with it by Cell
Pathways, OSI and their respective employees, representatives and affiliates.
With respect to financial forecasts relating to Cell Pathways and OSI which were
prepared by Cell Pathways' management and discussed with CIBC World Markets by
the managements of Cell Pathways and OSI, CIBC World Markets assumed, at the
direction of Cell Pathways' management, without independent verification or
investigation, that the financial forecasts were reasonably prepared on bases
reflecting the best available information, estimates and judgments of Cell
Pathways' management as to the future financial condition and operating results
of Cell Pathways and OSI and the other matters covered by those forecasts. CIBC
World Markets relied, at the direction of the managements of Cell Pathways and
OSI, without independent verification or investigation, upon the assessments of
the managements of Cell Pathways and OSI as to the existing and future
technology and product candidates of Cell Pathways and OSI and the risks
associated with such technology and product candidates. CIBC World Markets also
relied, at the direction of Cell Pathways' management, without independent
verification or investigation, upon the assessments of Cell Pathways' management
as to the probability that the future financial results reflected in the
financial forecasts prepared by Cell Pathways' management relating to Cell
Pathways and OSI, including the estimated revenue expected to be generated from
product candidates of Cell Pathways and OSI, will be realized as well as to the
amount and timing of those future financial results if realized. CIBC World
Markets assumed, with Cell Pathways' consent, that the merger would be treated
as a reorganization for federal income tax purposes. CIBC World Markets also
assumed, with Cell Pathways' consent, that the merger would be consummated in
accordance with its terms, without waiver, modification or amendment of any
material term, condition or agreement and that, in the course of obtaining the
necessary regulatory or third party consents and approvals for the merger, no
limitations, restrictions or conditions will be imposed that would have an
adverse effect on Cell Pathways, OSI or the contemplated benefits of the merger.
In addition, representatives of Cell Pathways advised CIBC World Markets, and
CIBC World Markets therefore assumed, that the final terms of the merger
agreement and the contingent value rights agreement attached as an exhibit to
the merger agreement will not vary materially from those set forth in the draft
of those documents reviewed by CIBC World Markets.
CIBC World Markets did not make or obtain any independent evaluations or
appraisals of the assets or liabilities, contingent or otherwise, of Cell
Pathways or OSI. CIBC World Markets expressed no opinion as to Cell Pathways' or
OSI's underlying valuation, future performance or long-term viability, or the
prices at which Cell Pathways common stock, OSI common stock or the contingent
value rights would trade or otherwise be transferable at any time. CIBC World
Markets expressed no view as to, and its opinion does not address, Cell
Pathways' underlying business decision to effect the merger, and its opinion
also does not address the relative merits of the merger as compared to any
alternative business strategies that might exist for Cell Pathways or the effect
of any other transaction in which Cell Pathways might engage. CIBC World
Markets' opinion was necessarily based on the information available to CIBC
World Markets and general economic, financial and stock market conditions and
circumstances as they existed and could be evaluated by CIBC World Markets as of
the date of its opinion. Although subsequent developments may affect its
opinion, CIBC World Markets does not have any obligation to update, revise or
reaffirm its opinion. Except as described above, Cell Pathways imposed no other
instructions or limitations on CIBC World Markets with respect to the
investigations made or the procedures followed by it in rendering its opinion.
32
This summary is not a complete description of CIBC World Markets' opinion
or the financial analyses performed and factors considered by CIBC World Markets
in connection with its opinion. The preparation of a financial opinion is a
complex analytical process involving various determinations as to the most
appropriate and relevant methods of financial analysis and the application of
those methods to the particular circumstances and, therefore, a financial
opinion is not readily susceptible to summary description. CIBC World Markets
believes that its analyses and this summary must be considered as a whole and
that selecting portions of its analyses and factors or focusing on information
presented in tabular format, without considering all analyses and factors or the
narrative description of the analyses, could create a misleading or incomplete
view of the processes underlying CIBC World Markets' analyses and opinion.
In performing its analyses, CIBC World Markets considered industry
performance, general business, economic, market and financial conditions and
other matters existing as of the date of its opinion, many of which are beyond
Cell Pathways' and OSI's control. No company, transaction or business used in
the analyses as a comparison is identical to Cell Pathways, OSI or the merger,
and an evaluation of the results of those analyses is not entirely mathematical.
Rather, the analyses involve complex considerations and judgments concerning
financial and operating characteristics and other factors that could affect the
acquisition, public trading or other values of the companies, business segments
or transactions analyzed.
The estimates contained in CIBC World Markets' analyses and the ranges of
valuations resulting from any particular analysis are not necessarily indicative
of actual values or future results, which may be significantly more or less
favorable than those suggested by its analyses. In addition, analyses relating
to the value of businesses or securities do not purport to be appraisals or to
reflect the prices at which businesses or securities actually may be sold.
Accordingly, CIBC World Markets' analyses and estimates are inherently subject
to substantial uncertainty.
The type and amount of consideration payable in the merger was determined
through negotiation between Cell Pathways and OSI and the decision to enter into
the merger was solely that of the Cell Pathways Board of Directors. CIBC World
Markets' opinion was only one of many factors considered by the Cell Pathways
Board of Directors in its evaluation of the merger and should not be viewed as
determinative of the views of the Cell Pathways Board of Directors or management
with respect to the merger or the merger consideration.
The following is a summary of the material financial analyses underlying
CIBC World Markets' opinion delivered to the Cell Pathways Board of Directors in
connection with the merger. THE FINANCIAL ANALYSES SUMMARIZED BELOW INCLUDE
INFORMATION PRESENTED IN TABULAR FORMAT. IN ORDER TO FULLY UNDERSTAND CIBC WORLD
MARKETS' FINANCIAL ANALYSES, THE TABLES MUST BE READ TOGETHER WITH THE TEXT OF
EACH SUMMARY. THE TABLES ALONE DO NOT CONSTITUTE A COMPLETE DESCRIPTION OF THE
FINANCIAL ANALYSES. CONSIDERING THE DATA IN THE TABLES BELOW WITHOUT CONSIDERING
THE FULL NARRATIVE DESCRIPTION OF THE FINANCIAL ANALYSES, INCLUDING THE
METHODOLOGIES AND ASSUMPTIONS UNDERLYING THE ANALYSES, COULD CREATE A MISLEADING
OR INCOMPLETE VIEW OF CIBC WORLD MARKETS' FINANCIAL ANALYSES. For purposes of
the summary of CIBC World Markets' analyses, the term "implied per share merger
consideration range" refers to the estimated implied per share value range of
the merger consideration based on the per share price of OSI common stock on
February 5, 2003, the upper end of which assumes the occurrence of either of the
milestones which would result in the conversion of each contingent value right
into an additional 0.04 of a share of OSI common stock and the lower end of
which is based solely on the exchange ratio assuming that neither of those
milestones occurs.
CELL PATHWAYS ANALYSES
Selected Companies Analysis. CIBC World Markets compared financial and
stock market information for Cell Pathways and the 10 selected publicly held
companies listed below. These selected companies were chosen for comparison with
Cell Pathways because, as is the case with Cell Pathways, these companies
operate in the biotechnology industry and have one or more of the following
characteristics: (i) a therapeutic focus generally comparable to that of Cell
Pathways, (ii) compounds which received adverse results in clinical trials, were
the subject of negative announcements from development and commercialization
partners or were
33
denied approval by the FDA, and/or (iii) market and financial characteristics
generally comparable to those of Cell Pathways.
- EntreMed, Inc.
- Genzyme Molecular Oncology
- ImmunoGen, Inc.
- Maxim Pharmaceuticals, Inc.
- NeoPharm, Inc.
- Praecis Pharmaceuticals Incorporated
- Seattle Genetics, Inc.
- SuperGen, Inc.
- Titan Pharmaceuticals, Inc.
- Vion Pharmaceuticals, Inc.
CIBC World Markets reviewed technology values, calculated as equity value
plus debt, minority interests, preferred stock and out-of-the-money convertible
securities, less cash and investments in unconsolidated affiliates. CIBC World
Markets then utilized a range of selected technology values derived from the
selected companies in order to derive an implied per share equity reference
range for Cell Pathways. Technology values were based on closing stock prices on
February 5, 2003. Estimated financial data for Cell Pathways were based on
internal estimates of Cell Pathways' management. This analysis indicated the
following implied per share equity reference range for Cell Pathways, as
compared to the implied per share merger consideration range:
<Table>
<Caption>
IMPLIED PER SHARE EQUITY IMPLIED PER SHARE
REFERENCE RANGE FOR CELL PATHWAYS MERGER CONSIDERATION RANGE
--------------------------------- --------------------------
$0.39-$0.44 $0.82-$1.39
</Table>
Premiums Paid Analysis. CIBC World Markets reviewed the premiums paid in
32 selected merger or acquisition transactions announced since February 5, 2001
having transaction values ranging from $20 million to $50 million. These
selected transactions were chosen for comparison with the proposed merger
because the transaction value range of the selected transactions is comparable
to the transaction value of the merger based on the closing price of OSI common
stock on February 5, 2003. CIBC World Markets also reviewed the premiums paid in
28 selected merger or acquisition transactions announced since February 5, 1999
in the biotechnology industry, which is the industry in which Cell Pathways and
OSI operate. CIBC World Markets then applied a range of selected premiums
derived from these transactions based on the average closing stock prices of the
target company for the one day, one week and four week periods prior to public
announcement of the transaction to the average closing price of Cell Pathways
common stock for the one day, one week and four week periods ended February 5,
2003. This analysis indicated the following implied per share equity reference
range for Cell Pathways, as compared to the implied per share merger
consideration range:
<Table>
<Caption>
IMPLIED PER SHARE EQUITY IMPLIED PER SHARE
REFERENCE RANGE FOR CELL PATHWAYS MERGER CONSIDERATION RANGE
--------------------------------- --------------------------
$0.56-$0.76 $0.82-$1.39
</Table>
Liquidation Analysis. CIBC World Markets performed a liquidation analysis
of Cell Pathways to estimate the potential range of proceeds available for
distribution upon a liquidation of Cell Pathways. Financial data for this
analysis were based on internal estimates of Cell Pathways' management as to the
estimated market value of Cell Pathways' assets as of December 31, 2002, the
percentages of estimated market value of those assets which Cell Pathways'
management believed could be realized in a liquidation and the amount of Cell
Pathways' liabilities as of December 31, 2002 without giving effect to potential
incremental expenditures incurred pending a liquidation and severance, legal and
other expenses associated with a
34
liquidation. This analysis indicated the following implied per share equity
reference range for Cell Pathways, as compared to the implied per share merger
consideration range:
<Table>
<Caption>
IMPLIED PER SHARE EQUITY IMPLIED PER SHARE
REFERENCE RANGE FOR CELL PATHWAYS MERGER CONSIDERATION RANGE
--------------------------------- --------------------------
$0.23-$0.27 $0.82-$1.39
</Table>
OSI ANALYSES
Selected Companies Analysis. CIBC World Markets compared financial and
stock market information for OSI and the seven selected publicly held companies
listed below. These selected companies were chosen for comparison with OSI
because, as is the case with OSI, these companies operate in the biotechnology
industry and have one or more of the following characteristics: (i) a
therapeutic focus generally comparable to that of OSI, (ii) marketed compounds
or late stage compounds generally in Phase III trials, and/or (iii) market and
financial characteristics generally comparable to those of OSI.
- Allos Therapeutics, Inc.
- Celgene Corporation
- Cell Therapeutics, Inc.
- Enzon, Inc.
- ILEX Oncology, Inc.
- Immunomedics, Inc.
- Ligand Pharmaceuticals Incorporated
CIBC World Markets reviewed technology values and technology values as a
multiple of estimated calendar year 2003 and 2004 revenue. CIBC World Markets
then utilized a range of selected technology values derived from the selected
companies and applied selected multiples of estimated calendar year 2003 and
2004 revenue derived from the selected companies to corresponding financial data
of OSI in order to derive an implied per share equity reference range for OSI.
Technology values were based on closing stock prices on February 5, 2003.
Estimated financial data for the selected companies were based on publicly
available research analysts' estimates, and estimated financial data for OSI
were based on internal estimates prepared by Cell Pathways' management after
discussion with OSI's management. This analysis indicated the following implied
per share equity reference range for OSI, as compared to the per share price of
OSI common stock on February 5, 2003:
<Table>
<Caption>
IMPLIED PER SHARE EQUITY PER SHARE PRICE OF OSI COMMON STOCK
REFERENCE RANGE FOR OSI ON FEBRUARY 5, 2003
------------------------ -----------------------------------
$12.05-$13.78 $14.40
</Table>
Discounted Cash Flow Analysis. CIBC World Markets performed a discounted
cash flow analysis of OSI to calculate the estimated present value of the
unlevered, after-tax free cash flows that OSI could generate for fiscal years
2004 through 2007. Estimated financial data for OSI were based on internal
estimates prepared by Cell Pathways' management after discussion with OSI's
management, which estimates took into account, among other things, the
probability that particular product candidates being developed by OSI would be
commercialized. CIBC World Markets calculated a range of estimated terminal
values by applying terminal value revenue multiples ranging from 4.0x to 5.0x to
OSI's projected fiscal year 2007 revenue. The present value of the cash flows
and terminal values were calculated using a discount rate of 20.0%. This
analysis indicated the following implied per share equity reference range for
OSI, as compared to the per share price of OSI common stock on February 5, 2003:
<Table>
<Caption>
IMPLIED PER SHARE EQUITY PER SHARE PRICE OF OSI COMMON STOCK
REFERENCE RANGE FOR OSI ON FEBRUARY 5, 2003
------------------------ -----------------------------------
$17.10-$19.88 $14.40
</Table>
35
Discounted Trading Price Analysis. CIBC World Markets performed a
discounted trading price analysis of OSI to calculate the estimated present
value of hypothetical prices at which OSI common stock could trade in calendar
year 2007. Estimated financial data for OSI were based on internal estimates
prepared by Cell Pathways' management after discussion with OSI's management,
which estimates took into account, among other things, the probability that
particular product candidates being developed by OSI would be commercialized.
CIBC World Markets calculated a range of implied hypothetical future trading
prices for OSI common stock by applying one-year forward earnings per share
multiples of 25.0x to 30.0x to OSI's projected calendar year 2007 earnings per
share. The present value of the implied hypothetical future trading prices was
calculated using a discount rate of 20.0%. This analysis indicated the following
implied per share equity reference range for OSI, as compared to the per share
price of OSI common stock on February 5, 2003:
<Table>
<Caption>
IMPLIED PER SHARE EQUITY PER SHARE PRICE OF OSI COMMON STOCK
REFERENCE RANGE FOR OSI ON FEBRUARY 5, 2003
------------------------ -----------------------------------
$24.39-$29.26 $14.40
</Table>
OTHER FACTORS
In rendering its opinion, CIBC World Markets also reviewed and considered
other factors, including the following:
- trading volumes of Cell Pathways common stock and OSI common stock at
various historical price ranges, as a percentage of public float, defined
as total outstanding shares of common stock excluding shares owned by
directors, officers and 5% institutional holders;
- the relationship between movements in Cell Pathways common stock and OSI
common stock, movements in the AMEX Biotechnology Index and movements in
the Standard and Poor's MidCap 400 Stock Price Index;
- trading multiples of selected publicly traded companies in the specialty
pharmaceuticals industry and selected publicly traded companies having
market capitalizations in excess of $1.8 billion in the biotechnology
industry;
- the ratio of the per share closing prices of Cell Pathways common stock
and OSI common stock on February 5, 2003 and the average of this ratio
calculated over various periods ended February 5, 2003;
- the potential pro forma effect of the merger on OSI's estimated earnings
per share in fiscal years 2004 through 2008; and
- selected research analysts' reports for OSI, including stock price and
earnings per share estimates reflected in those reports.
MISCELLANEOUS
Cell Pathways has agreed to pay CIBC World Markets for its financial
advisory services in connection with the merger an aggregate fee of
approximately $1.1 million, approximately $800,000 of which is contingent upon
completion of the merger. In addition, Cell Pathways has agreed to reimburse
CIBC World Markets for its reasonable out-of-pocket expenses, including
reasonable fees and expenses of its legal counsel, and to indemnify CIBC World
Markets and related parties against liabilities, including liabilities under the
federal securities laws, relating to, or arising out of, its engagement. In the
ordinary course of business, CIBC World Markets and its affiliates may actively
trade securities of Cell Pathways and OSI for their own account and for the
accounts of customers and, accordingly, may at any time hold a long or short
position in those securities.
Cell Pathways selected CIBC World Markets as its financial advisor based on
CIBC World Markets' reputation, experience and familiarity with Cell Pathways.
CIBC World Markets is an internationally recognized investment banking firm and,
as a customary part of its investment banking business, is regularly engaged in
valuations of businesses and securities in connection with acquisitions and
mergers, underwritings, secondary distributions of securities, private
placements and valuations for other purposes.
36
OSI'S REASONS FOR THE MERGER
In evaluating the merger, the OSI Board of Directors reviewed presentations
from management and held discussions with its financial advisor, Lazard. In
reaching its determination to approve the merger agreement and the merger, the
OSI Board of Directors considered the following factors in favor of the merger:
- the quality of Cell Pathways' technology platform and the potential for
its clinical candidates, which may enhance OSI's ability to produce
effective therapies for cancer;
- the expansion of OSI's product pipeline by adding Cell Pathways' product
pipeline, which includes one product candidate in Phase III clinical
trials and one product candidate in Phase II clinical trials; and
- the addition of a marketed product in Gelclair(TM).
The OSI Board of Directors weighed these advantages against potential risks
of the merger. The following summarizes potentially negative factors considered
by the OSI Board of Directors:
- As with most mergers, there is a risk that anticipated benefits will not
be realized; for example, OSI may encounter difficulties integrating Cell
Pathways' business.
- There is inherent uncertainty in developing and commercializing
pharmaceutical products.
The OSI Board of Directors believes these potentially negative factors are
outweighed by the potential benefits of the merger.
After considering the potential positive and negative factors of the
merger, the OSI Board of Directors did not attempt to quantify or prioritize
particular considerations. Ultimately, the OSI Board of Directors unanimously
concluded that the merger should provide significant long-term benefits to OSI's
stockholders; consequently, the Board of Directors approved the merger
agreement.
INTERESTS OF CELL PATHWAYS' DIRECTORS AND EXECUTIVE OFFICERS IN THE MERGER
When considering the recommendation of the Cell Pathways Board of Directors
with respect to adopting the merger agreement, you should be aware that the
directors and officers of Cell Pathways have interests in the merger and
participate in arrangements that are different from, or are in addition to,
those of Cell Pathways stockholders generally. The Cell Pathways Board of
Directors was aware of these interests and considered them, among other matters,
in approving the merger agreement. These include:
CONSULTING ARRANGEMENTS
Robert J. Towarnicki, Chairman, President and Chief Executive Officer of
Cell Pathways, Brian J. Hayden, Chief Financial Officer of Cell Pathways, and
Rifat Pamucku, M.D., Director, Chief Scientific Officer and Executive Vice
President of Research and Development of Cell Pathways, will each enter into a
consulting agreement with OSI upon consummation of the merger.
Mr. Towarnicki and Mr. Hayden will receive consulting agreements with OSI
to facilitate the interim management of Cell Pathways' operations and the
transition, integration, and transfer of Cell Pathways' assets to OSI. The term
of each consulting agreement will be 18 months beginning on the effective date
of the merger. In consideration for this commitment, OSI has agreed to pay Mr.
Towarnicki $200,000 and Mr. Hayden $150,000. In addition, and following the
successful transition of assets to OSI, due consideration will be given to the
forgiveness of loans from Cell Pathways to Mr. Towarnicki and Mr. Hayden that as
of April 30, 2003 had principal and interest outstanding in the amounts of
approximately $558,695 for Mr. Towarnicki and $514,033 for Mr. Hayden.
Dr. Pamukcu will receive a consulting agreement for a term of three years
beginning on the effective date of the merger. In consideration of this
commitment, OSI has agreed to pay Dr. Pamukcu $20,000 per month for the first
8-10 months (i.e., the period through completion of the Phase II trial of CP461
in the inflammatory bowel disorder), $10,000 per month for the next 2-4 months
(i.e., the period through the end of the first year of the term) of the
consulting agreement and $5,000 per month for the second and third years of
37
the term of the consulting agreement. In connection with his execution and
delivery of the consulting agreement, OSI will also pay to Dr. Pamukcu either
(i) 8,000 shares of OSI common stock plus a cash payment equal to all taxes
payable by Dr. Pamukcu with respect to the issuance of such common stock or (ii)
the cash equivalent of the current value of 8,000 shares of OSI common stock
plus an additional cash payment equal to all taxes payable by Dr. Pamukcu with
respect to the cash payment.
ACCELERATED VESTING OF OPTIONS
All outstanding options to purchase Cell Pathways' stock held by a
director, officer or employee of Cell Pathways that are unvested as of the date
that the stockholders adopt the merger agreement will accelerate in full and be
immediately vested and exercisable. On April 28, 2003, options to purchase
1,832,573 shares of Cell Pathways stock were held by directors and officers of
Cell Pathways with an weighted average exercise price per share of $7.81.
CHANGE OF CONTROL AGREEMENTS
Robert J. Towarnicki, Brian J. Hayden, Rifat Pamukcu, M.D., Lloyd Glenn and
Robert Bellet, M.D., each an executive officer of Cell Pathways, have entered
into change of control agreements with Cell Pathways that provide for the
benefits below in the event they are terminated by OSI without cause or they
terminate their employment for good reason following a change of control.
Mr. Towarnicki is entitled to:
- a cash payment equal to his unpaid annual base salary earned through his
date of termination and a pro-rated amount of the annual incentive bonus
that he would have received for the year of his termination;
- a cash payment equal to three times the sum of his annual base salary in
effect prior to the change of control and his annual incentive bonus;
- a cash payment equal to the after-tax cost of continued medical and
dental coverage for Mr. Towarnicki and his spouse and dependents for the
three-year period following Mr. Towarnicki's termination of employment;
and
- outplacement assistance services for a period of twelve months following
Mr. Towarnicki's termination of employment at a cost not to exceed
$10,000.
Messrs. Hayden and Glenn and Drs. Pamukcu and Bellet are each entitled to:
- a cash payment equal to such executive's unpaid annual base salary earned
through such executive's date of termination and a pro-rated amount of
the annual incentive bonus that such executive would have received for
the year of such executive's termination;
- a cash payment equal to two times the sum of such executive's annual base
salary in effect prior to the change of control and such executive's
annual incentive bonus;
- a cash payment equal to the after-tax cost of continued medical and
dental coverage for such executive and his spouse and dependents for the
two-year period following such executive's termination of employment; and
- outplacement assistance services for a period of twelve months following
such executive's termination of employment at a cost not to exceed
$10,000.
If any of the payments described above would constitute an "excess
parachute payment" within the meaning of Section 280G of the Internal Revenue
Code, as amended, the executive shall also receive an additional cash payment
equal to the amount of any taxes levied pursuant to Section 280G plus an
additional cash payment equal to all taxes payable by the executive with respect
to the cash payment.
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INDEMNIFICATION
The merger agreement provides that all rights to indemnification and
exculpation from liabilities for acts or omissions occurring at or prior to the
effective time of the merger existing in favor of present and former officers,
directors and employees of Cell Pathways under Cell Pathways' certificate of
incorporation, by-laws or any applicable contract or agreement in effect on the
date of the merger agreement, will be assumed by OSI for a period of six years
after the date of the merger agreement. In addition, a "tail" policy under Cell
Pathways' existing directors' and officers' insurance policies will be purchased
that (i) has an effective term of six years from the effective time of the
merger, (ii) covers those persons who are currently covered, or will be covered
on or prior to the effective time of the merger, by Cell Pathways' directors'
and officers' insurance policies in effect on the date of the merger agreement
with respect to matters occurring on or prior to the effective time of the
merger and (iii) contains terms and conditions (including, without limitation,
coverage amounts) that are not materially less favorable in the aggregate as the
terms and conditions of Cell Pathways' directors' and officers' insurance
policies in effect on the date of the merger agreement. The term of the coverage
of the "tail" policy may be reduced, if necessary, to a term of coverage that
can be obtained for a premium equal to $1,562,500 plus any unearned premium
actually refunded or credited to Cell Pathways with respect to Cell Pathways'
existing directors' and officers' insurance policies.
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THE MERGER AND THE MERGER AGREEMENT
The following is a summary of significant provisions of the merger
agreement. For a more complete understanding of the merger agreement, you should
read the agreement. The agreement is attached hereto as Annex A and is
incorporated into this proxy statement/prospectus by reference.
GENERAL DESCRIPTION OF THE MERGER
In the merger, CP Merger Corporation, a specially formed, wholly-owned
subsidiary of OSI, will merge with and into Cell Pathways. Cell Pathways will be
the surviving corporation and will continue to exist under Delaware law as a
wholly-owned subsidiary of OSI. The by-laws of the specially formed,
wholly-owned subsidiary, as in effect immediately before the merger, will be the
by-laws of the surviving company. At the effective time of the merger, the
certificate of incorporation of the surviving corporation will be amended so as
to contain the provisions, and only the provisions, of the certificate of
incorporation of the specially formed, wholly-owned subsidiary as in effect
immediately before the merger, and accordingly, the name of the surviving
corporation will be CP Merger Corporation.
EFFECTIVE TIME
The merger will close as promptly as practicable after the satisfaction or
waiver of the conditions set forth in the merger agreement. The merger will be
effective upon the filing of a certificate of merger with the Delaware Secretary
of State. The closing date is expected to be on or about June 11, 2003.
MERGER CONSIDERATION FOR CELL PATHWAYS' COMMON STOCK AND EXCHANGE RATIOS
At the effective time of the merger, each outstanding share of Cell
Pathways common stock will be converted into the right to receive 0.0567 of a
share of OSI common stock.
Each holder of Cell Pathways common stock will also receive one contingent
value right for each share of Cell Pathways stock he, she or it holds. Each
contingent value right represents the right to receive 0.04 shares of OSI common
stock upon the earlier to occur of (i) the filing of an NDA (i.e., accepted for
filing) with the FDA for marketing in the United States of Aptosyn(R)
(exisulind) for the treatment of advanced non-small cell lung cancer in
combination with Taxotere(R) on the basis of the registration trial currently
underway, (ii) the filing of an NDA (i.e., accepted for filing) with the FDA for
marketing of CP461 in the United States for the treatment of any indication or
(iii) a determination by OSI, in its sole discretion, that the contingent value
rights should convert into OSI common stock, provided such milestone event
occurs on or prior to the date that is five years after consummation of the
merger. If none of these milestone events has occurred prior to such date, the
contingent value rights will terminate. The contingent value rights are not
transferable.
NO FRACTIONAL SHARES
OSI will not issue fractional shares in the merger. Instead, OSI will pay
cash to each Cell Pathways stockholder who otherwise would be entitled to
receive a fractional share of OSI common stock. The cash amount for the shares
of OSI common stock to be issued at the closing of the merger will equal the
fractional share number multiplied by $15.00.
The cash amount for the shares of OSI common stock to be issued pursuant to
the contingent value right, if any, will equal the fractional share number
multiplied by the per share closing price of OSI common stock as reported by the
Nasdaq National Market on the trading day on which the milestone event occurs.
EXCHANGE OF CELL PATHWAYS' STOCK CERTIFICATES
Promptly after the effective time, OSI will cause the exchange agent
designated by OSI to mail transmittal forms to each person who held shares of
Cell Pathways common stock as of the effective time for use in exchanging Cell
Pathways stock certificates for OSI common stock certificates, cash for
fractional shares, and contingent value right certificates. The transmittal
forms will include instructions specifying details of the exchange.
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If a milestone is achieved, OSI or the rights agent, Bank of New York, will
promptly mail transmittal forms to each person who held contingent value right
certificates as of the date such milestone is achieved for use in exchanging the
contingent value right certificates for OSI common stock certificates and any
cash for fractional shares. The transmittal forms will include instructions
specifying details of the exchange.
DO NOT SEND IN YOUR CELL PATHWAYS STOCK CERTIFICATES UNTIL YOU RECEIVE A
TRANSMITTAL FORM.
If certificates for any shares of Cell Pathways common stock have been
lost, stolen or destroyed, the holder must submit appropriate evidence regarding
the ownership, loss, theft or destruction of the certificate, an affidavit to
that effect and a customary indemnification agreement to the exchange agent.
OSI will honor a request from a person surrendering a Cell Pathways common
stock certificate that the OSI common stock being given in exchange be issued to
a person other than the registered holder of the certificate on the exchange
agent's books, so long as the requesting person:
- submits all documents necessary to evidence and effect the transfer to
the new holder; and
- pays any transfer or other taxes for issuing shares of OSI common stock
to a person other than the registered holder of the certificate, unless
the requesting person satisfactorily establishes to OSI that any tax has
been paid or is inapplicable.
Holders of Cell Pathways common stock exchanged for OSI common stock in the
merger will be entitled to receive dividends and other distributions on OSI
common stock (without interest) that are declared or made with a record date
after the effective time. Dividends or other distributions will not be paid to
any former holder of Cell Pathways common stock, however, until that holder
surrenders its shares of Cell Pathways stock to the exchange agent.
TREATMENT OF CELL PATHWAYS' STOCK OPTIONS, EMPLOYEE STOCK PURCHASE PLAN AND
WARRANTS
OPTIONS
Each outstanding option to purchase shares of Cell Pathways common stock
under the Cell Pathways 1997 Equity Incentive Plan, 1997 Non-Employee Directors'
Stock Option Plan and 1995 Stock Award Plan that is unvested as of the date that
the Cell Pathways stockholders adopt the merger agreement will accelerate in
full and be immediately vested and exercisable. Any options that are not
exercised prior to the effective time of the merger, will terminate in
accordance with the terms of the various Cell Pathways option plans. Prior to
the effective time of the merger, the participants under each of the plans will
be given any required notice regarding the accelerated vesting and the
cancellation of such plan.
EMPLOYEE STOCK PURCHASE PLAN
Before the effective time of the merger, Cell Pathways will give the
required notice of the cancellation of the Cell Pathways Employee Stock Purchase
Plan to participants and each such participant will have the right to exercise
his or her outstanding option under such plan in full based on accumulated
payroll deductions credited to his or her account. After the effective time of
the merger, no new payroll contributions will be accepted and any cash remaining
in a participant's account will be distributed to such participant without
interest.
WARRANTS
At the effective time of the merger, OSI will assume each outstanding and
unexercised warrant to purchase shares of Cell Pathways stock, which in the
aggregate are exercisable for 778,249 shares of Cell Pathways common stock with
a weighted average exercise price per share of $3.85. Each assumed warrant will
continue to be governed by the same terms and conditions as were applicable to
the respective Cell Pathways warrant, except that:
- each warrant will be exercisable for (i) a number of shares of OSI common
stock equal to the number of shares of Cell Pathways stock that were
issuable upon exercise of the warrant immediately before
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the effective time multiplied by 0.0567, and (ii) either (A) if exercised prior
to the date a milestone is achieved (but not after the date occurring five years
after consummation of the merger), that number of contingent value rights equal
to the number of shares of Cell Pathways common stock subject to the
warrant or (B) if exercised after a milestone is achieved (provided such
milestone was achieved prior to the date occurring five years after the
effective time of the merger), that number of shares of OSI common stock
that would have been issued, if any, had the holder of the warrant had
contingent value rights on the date the milestone was achieved; and
- the per share exercise price for the OSI common stock issuable upon
exercise of an assumed warrant will be equal to the price per share of
Cell Pathways stock at which the warrant was exercisable immediately
before the effective time divided by 0.0567.
TREATMENT OF CELL PATHWAYS BENEFITS AND OTHER EMPLOYEE MATTERS
For a period of nine months after the effective time, OSI will give Cell
Pathways' employees who continue their employment after the merger,
compensation, employee benefits and terms and conditions of employment that are
substantially similar, in the aggregate, to those provided to similarly situated
employees of OSI or to those provided by Cell Pathways prior to the effective
time, or a combination of both, such that the compensation, employee benefits
and terms and conditions of employment are substantially similar to those of
Cell Pathways as in effect immediately prior to the effective time of the
merger. In addition, such employees will receive service credit for eligibility
and vesting (but not benefit accrual) for employment, compensation and employee
benefit purposes, except as would result in duplication of benefits or payments.
OSI has also agreed to waive limitations for preexisting condition exclusions
and waiting periods under any OSI welfare benefit plans that a continuing Cell
Pathways employee is eligible to participate in after the merger. This waiver
would not include, however, limitations and waiting periods that have not been
satisfied by an employee under any Cell Pathways welfare plan prior to the
merger. Continuing Cell Pathways employees will also receive credit for their
accrued and unpaid vacation and/or paid leave balance as of the effective time
of the merger.
All Cell Pathways' employment, change of control and other compensation
agreements existing prior to execution of the merger agreement will be assumed
and honored by OSI.
After consummation of the merger, OSI shall determine whether to continue,
terminate, merge, modify or amend any employee benefit plan or arrangement
sponsored, maintained or contributed to by Cell Pathways including, without
limitation, the Cell Pathways Retirement Savings Plan, and any such action shall
be carried out in accordance with applicable law and in accordance with the
terms of any such plan.
Prior to the effective time, Cell Pathways will distribute an aggregate
amount of $250,000 to its employees, other than employees who have entered into
a change of control agreement with Cell Pathways. The $250,000 will be allocated
between all such employees in amounts to be determined by the Chief Executive
Officer of Cell Pathways, in consultation with the Chief Executive Officer of
OSI.
ACCOUNTING TREATMENT
The merger will be accounted for as a purchase by OSI under accounting
principles generally accepted in the United States of America. Under the
purchase method of accounting, the assets and liabilities of Cell Pathways will
be recorded, as of completion of the merger, at their respective fair values and
added to those of OSI. Reported financial condition and results of operations of
OSI issued after completion of the merger will reflect Cell Pathways' balances
and results after completion of the merger, but will not be restated
retroactively to reflect the historical financial position or results of
operations of Cell Pathways. Following the completion of the merger, the
earnings of OSI will reflect purchase accounting adjustments, including in-
process research and development write-offs and increased amortization and
depreciation expense for acquired assets.
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MATERIAL UNITED STATES FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER
The following discussion summarizes the material U.S. federal income tax
consequences of the merger. The discussion is based on the Internal Revenue
Code, related regulations, existing administrative interpretations and court
decisions, all of which may change, possibly with retroactive effect. This
discussion assumes that Cell Pathways' stockholders hold their shares of Cell
Pathways stock as capital assets within the meaning of Section 1221 of the Code.
This discussion does not address all aspects of U.S. federal income taxation
that may be important to Cell Pathways' stockholders either in light of your
particular circumstances or if a Cell Pathways' stockholder is subject to
special rules. These special rules include those relating to:
- stockholders who are not U.S. citizens or residents or that are foreign
corporations, partnerships, estates or trusts;
- financial institutions;
- tax-exempt organizations;
- insurance companies;
- dealers in securities;
- stockholders who acquired their Cell Pathways stock by exercising options
or similar derivative securities or otherwise as compensation; and
- stockholders who hold their Cell Pathways stock as part of a hedge,
straddle, appreciated financial position or conversion transaction.
This section, as it relates to matters of U.S. federal income tax law,
constitutes the opinions of Morgan Lewis and Mintz Levin. These opinions are
based on a number of assumptions, representations and covenants, including the
assumption that the merger will be completed as described in this document and
that the representations contained in letters delivered to counsel by Cell
Pathways, OSI and the merger subsidiary in connection with the delivery of the
opinions will be accurate through the closing. The opinions neither bind the IRS
nor preclude the IRS from adopting a position contrary to that expressed in the
opinions. Cell Pathways and OSI cannot assure you that contrary positions will
not be successfully asserted by the IRS or adopted by a court if the issues are
litigated. Neither Cell Pathways nor OSI intends to obtain a ruling from the IRS
with respect to the tax consequences of the merger.
Based upon and subject to the assumptions and limitations stated above, it
is the opinion of Morgan Lewis and Mintz Levin that the merger will constitute a
reorganization within the meaning of Section 368(a) of the Code and OSI, Cell
Pathways and the merger subsidiary will each be a party to that reorganization.
As a result of the qualification of the merger as a reorganization, the material
federal income tax consequences will be as described below.
TAX CONSEQUENCES TO CELL PATHWAYS STOCKHOLDERS
Except as discussed below with respect to the receipt of cash in lieu of
fractional shares and any portion of additional shares of OSI common stock
received pursuant to the contingent value rights agreement that is treated as
imputed interest, Cell Pathways' stockholders will not recognize gain or loss
for U.S. federal income tax purposes on their receipt of OSI common stock or the
contingent value rights in exchange for their Cell Pathways' common stock in the
merger.
The aggregate tax basis of the OSI common stock received by Cell Pathways'
stockholders in exchange for their Cell Pathways' common stock (including
fractional shares of OSI common stock that are converted to cash and any
additional shares of OSI common stock that are distributed pursuant to the
contingent value rights agreement) will be the same as the aggregate tax basis
of the Cell Pathways common stock surrendered in exchange therefor and, in the
case of additional shares of OSI common stock received pursuant to the
contingent rights agreement, such tax basis will be increased by any amount
treated as imputed interest.
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Until additional shares are distributed pursuant to the contingent value
rights agreement or such agreement terminates without distributions, the interim
basis of the OSI common stock received by each Cell Pathways stockholder in
exchange for such stockholder's Cell Pathways common stock will be determined by
assuming that such stockholder will receive the maximum number of additional
shares of OSI common stock that could be issued pursuant to the contingent value
rights agreement. Upon final determination of the number of shares to be issued
pursuant to the contingent value rights agreement, the aggregate tax basis will
be reallocated by the exchanging Cell Pathways' stockholder among the shares of
OSI common stock actually received.
The holding period of the OSI common stock received by Cell Pathways
stockholders in exchange for their Cell Pathways common stock (including
fractional shares of OSI common stock that are converted to cash and any
additional shares of OSI common stock that are distributed pursuant to the
contingent value rights agreement) will include the holding period of the Cell
Pathways common stock surrendered in exchange therefor, except that the portion
of additional shares of OSI common stock received pursuant to the contingent
value rights agreement which represent the receipt of imputed interest income,
as described below, will begin a new holding period upon receipt.
Stockholders who receive cash in lieu of fractional shares of OSI common
stock will be treated as having received the fractional shares and then as
having exchanged the fractional shares for cash in a redemption by OSI. A
stockholder will recognize gain or loss as a result of this deemed redemption in
an amount equal to the difference between the amount of cash received and the
portion of the tax basis of the stockholder's Cell Pathways common stock
surrendered in the merger that is allocable to the fractional share.
Stockholders who demand appraisal of their shares under Delaware General
Corporation Law and receive a cash payment with respect to their shares
generally will recognize a gain or loss equal to the difference between the
amount of cash received and the stockholder's basis in such shares. The gain or
loss generally will constitute capital gain or loss.
IMPUTED INTEREST ON ADDITIONAL SHARES RECEIVED PURSUANT TO THE CONTINGENT VALUE
RIGHTS AGREEMENT
Under current law the deferred receipt of additional shares in a
reorganization, such as those to be received pursuant to the contingent value
rights agreement, requires that a portion of the additional shares be treated as
interest income. Where there is no express provision for interest, as is the
case here, under the current regulations interest will be imputed under Section
483 of the Code. Thus, if the additional shares become payable more than one
year after the merger, a portion of such shares will constitute ordinary
interest income. The amount of such interest income will be calculated by taking
the fair market value of any additional shares issued and discounting such
amount from the date of issuance back to the time of the merger using the
imputed interest rate under the Code. The imputed interest rate will be the
"applicable federal rate" provided under Section 1274(d) of the Code as of the
time of the merger. Thus, the longer the period of time until the additional
shares are received, the greater the proportion of such shares that will be
treated as ordinary interest income. Each additional share received will be
deemed to represent its pro rata share of the interest income. Upon the issuance
of any additional shares, OSI will report to the recipient and to the IRS the
amount of such interest income, as required by the Code.
TAX CONSEQUENCES TO OSI AND CELL PATHWAYS
OSI, including its merger subsidiary, and Cell Pathways will not recognize
gain or loss for U.S. federal income tax purposes by reason of the merger,
except that a portion of additional shares issued pursuant to the contingent
value rights agreement will be treated as interest paid at such time and will be
deductible subject to applicable Internal Revenue Code limitations.
BACKUP WITHHOLDING
Unless a stockholder complies with reporting and/or certification
procedures or is an exempt recipient under the backup withholding and
information reporting provisions of the Internal Revenue Code and Treasury
regulations, the stockholder may be subject to a backup withholding tax, the
current rate of which is
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30%, on any cash payments received in the merger and on the portion of any
additional shares of OSI common stock received pursuant to the contingent value
rights agreement that are treated as imputed interest. Any amounts withheld
under the backup withholding rules may be allowed as a refund or a credit
against the stockholder's federal income tax liability, provided the required
information is furnished to the IRS.
THIS DISCUSSION IS ONLY INTENDED TO PROVIDE YOU WITH A GENERAL SUMMARY OF THE
MATERIAL U.S. FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER. THIS DISCUSSION IS
NOT A COMPLETE ANALYSIS OR DESCRIPTION OF EVERY POTENTIAL U.S. FEDERAL INCOME
TAX CONSEQUENCE OR ANY OTHER CONSEQUENCE OF THE MERGER. IN ADDITION, THE
DISCUSSION DOES NOT ADDRESS TAX CONSEQUENCES THAT MAY VARY WITH, OR ARE
CONTINGENT ON, YOUR INDIVIDUAL CIRCUMSTANCES. MOREOVER, THIS DISCUSSION DOES NOT
ADDRESS ANY NON-INCOME TAX OR ANY FOREIGN, STATE OR LOCAL TAX CONSEQUENCES OF
THE MERGER. ACCORDINGLY, OSI AND CELL PATHWAYS STRONGLY URGE YOU TO CONSULT WITH
YOUR TAX ADVISOR TO DETERMINE THE PARTICULAR U.S. FEDERAL, STATE, LOCAL OR
FOREIGN TAX CONSEQUENCES TO YOU OF THE MERGER.
COVENANTS UNDER THE MERGER AGREEMENT
CONDUCT OF BUSINESS PENDING THE MERGER
Until the closing of the merger, Cell Pathways has agreed to operate its
business solely in the ordinary course consistent with its past practices. Cell
Pathways also has agreed to use commercially reasonable efforts to preserve
substantially intact its business, to keep available the services of its
officers, employees and consultants and to preserve its relationships with
customers, suppliers and other persons with which it has significant business
relations.
In addition to these agreements regarding the general conduct of its
business, Cell Pathways has agreed to refrain from taking any of the following
actions without the prior written consent of OSI, which OSI may not unreasonably
withhold, condition or delay:
- issue or sell any shares of capital stock, or any options, warrants,
convertible securities or other rights of any kind to acquire any shares
of capital stock of Cell Pathways, except in connection with the exercise
of outstanding options or pursuant to the terms of the Employee Stock
Purchase Plan;
- amend the terms of any stock option or stock purchase plan or any
outstanding security, option or warrant;
- redeem or repurchase its capital stock, except for the acquisition of
shares from the holders of options in full or partial payment of the
exercise price payable with respect to such options;
- declare or pay dividends or distributions with respect to its capital
stock;
- amend its certificate of incorporation or by-laws or the charter
documents of any of its subsidiaries;
- enter into any material contracts;
- incur or guarantee any material indebtedness or any other liabilities
outside of the ordinary course of business;
- adopt or amend any employee benefit plan;
- enter into any employment contract;
- settle any employment dispute;
- pay any severance, special bonus or special remuneration to any director
or employee, except as required to comply with applicable laws or
pursuant to existing plans or policies;
- increase salaries, wage rates or compensation of directors or, other than
in the ordinary course of business, employees;
- enter into material agreements with respect to any intellectual property
rights;
- make or change a material tax election, settle or compromise tax
liabilities or agreements to extend statute of limitations, or enter into
any tax allocation, tax sharing, tax indemnity or closing agreement;
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- acquire any equity interest in any entity;
- authorize or make any capital expenditures in excess of $50,000 in the
aggregate;
- make any loans to any third party;
- initiate or participate in any new clinical trials;
- make any material changes to personnel or other business policies; and
- hire any employees, other than in the ordinary course of business.
Until the closing of the merger, OSI has agreed not to take any action that
would make any of its representations and warranties contained in the merger
agreement untrue in any material respect or that would be reasonably likely to
materially delay the consummation of the merger.
NO SOLICITATION OF OTHER PROPOSALS BY CELL PATHWAYS
The merger agreement contains detailed provisions prohibiting Cell Pathways
from seeking an alternative transaction. Under these "no solicitation"
provisions, Cell Pathways has agreed that until the merger agreement is
terminated, it will not, nor will it permit any of its subsidiaries or
representatives acting on its behalf or on behalf of its subsidiaries to,
directly or indirectly:
- solicit, initiate, facilitate, induce or encourage or take any action
that could reasonably be expected to lead to the making, submission or
announcement of, an Acquisition Proposal, as defined below;
- participate in discussions or negotiations regarding, or furnish any
information or otherwise co-operate in any way with respect to any
Acquisition Proposal;
- approve, endorse or recommend any Acquisition Proposal;
- enter into any letter of intent or similar document or contract
contemplating or otherwise relating to an Acquisition Transaction; or
- withdraw or modify, in a manner adverse to OSI, its approval or
recommendation of the merger.
However, the merger agreement does not prevent Cell Pathways from
participating in discussions or negotiations regarding, or furnishing
information or otherwise cooperating in any way in response to an Acquisition
Proposal if:
- the Cell Pathways Board of Directors concludes in good faith, after
consultation with independent legal counsel, that the failure to do so
could reasonably be expected to constitute a breach of its fiduciary
duties to Cell Pathways' stockholders;
- the Cell Pathways Board of Directors determines in good faith that the
Acquisition Proposal could reasonably be expected to result in a Superior
Proposal, as defined below;
- after giving prior written notice to OSI, Cell Pathways enters into a
confidentiality agreement; and
- there has been no previous violation of the "no solicitation" provisions
with regard to such Acquisition Proposal.
The merger agreement also prohibits the Cell Pathways Board of Directors
from withdrawing or modifying, or proposing to withdraw or modify, in a manner
adverse to OSI, its approval or recommendation of the merger. However,
notwithstanding the foregoing, if, in connection with an Acquisition Proposal,
the Cell Pathways Board of Directors determines in good faith (i) after
consultation with independent legal counsel, that the failure to take such
action could reasonably be expected to constitute a breach of its fiduciary
duties to Cell Pathways' stockholders and (ii) that such Acquisition Proposal
constitutes a Superior Proposal, the Cell Pathways Board of Directors may
withdraw or modify its approval or recommendation of the merger.
"Acquisition Proposal" means:
- any bona fide written offer or proposal to acquire (i) all or at least
20% of the consolidated assets of Cell Pathways and its subsidiaries, or
(ii) any equity securities of Cell Pathways or its subsidiaries;
- any tender or exchange offer for any class of equity securities of Cell
Pathways;
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- any merger, consolidation, business combination, sale of at least 20% of
the consolidated assets, recapitalization, liquidation, dissolution or
similar transaction involving Cell Pathways or its subsidiaries; or
- any other transaction which, if consummated, would impede, interfere
with, prevent or materially delay the merger or materially dilute the
benefits to OSI of the merger.
"Superior Proposal" means any unsolicited, bona fide written offer made by
a third party to purchase all of the outstanding Cell Pathways voting stock or
all or substantially all of the consolidated assets of Cell Pathways and its
subsidiaries without any financing condition that the Cell Pathways Board of
Directors determines, in its reasonable judgment, after consultation with
independent legal counsel and its financial advisor:
- is more favorable to the Cell Pathways stockholders than the merger; and
- is capable of being consummated.
INDEMNIFICATION AND INSURANCE FOR CELL PATHWAYS OFFICERS AND DIRECTORS
OSI and CP Merger Corporation will honor Cell Pathways' indemnification
obligations under agreements with its directors and officers and its certificate
of incorporation and by-laws in effect before the effective time of the merger
for a period of six years after the effective time of the merger. The merger
agreement also provides that OSI will purchase a six year "tail" policy that
will have the effect of maintaining the directors' and officers' existing
liability insurance policies with respect to acts or omissions occurring on or
prior to the completion of the merger. The term of the coverage of the "tail"
policy may be reduced, if necessary, to a term of coverage that can be obtained
for a premium equal to $1,562,500 plus any unearned premium actually refunded or
credited to Cell Pathways with respect to Cell Pathways' existing directors' and
officers' insurance policies.
OTHER COVENANTS
The merger agreement contains covenants of both parties relating to, among
other things, public announcements, notifications, regulatory filings, reporting
of the transaction for federal income tax purposes, further assurances and
cooperation in obtaining consents approvals and affiliates' agreements.
Cell Pathways has also agreed, among other things, to grant OSI access to
company information, employees and facilities, as is reasonably necessary.
CONDITIONS TO COMPLETION OF THE MERGER
Each of OSI's, CP Merger Corporation's and Cell Pathways' obligations to
complete the merger are subject to the satisfaction or waiver of specified
conditions before completion of the merger, including the following:
- the approval and adoption of the merger agreement at the Cell Pathways
special stockholder meeting by at least a majority of the outstanding
shares of Cell Pathways common stock;
- the declaration of and continued effectiveness of OSI's registration
statement on Form S-4, of which this proxy statement/prospectus forms a
part, with no stop order initiated, pending or threatened;
- the absence of any law, order, injunction or proceeding prohibiting or
preventing completion of the merger, prohibiting or limiting the
ownership or operation, or compelling the disposition or separate holding
by OSI or Cell Pathways of any material portion of the business or assets
of OSI or Cell Pathways or their respective subsidiaries as a result of
the merger, or which is otherwise likely to have a material adverse
effect on the business, condition or results of OSI or Cell Pathways;
- the approval for listing on the Nasdaq National Market of the shares of
OSI common stock to be issued, or to be reserved for issuance, in
connection with the merger, subject to official notice of issuance;
- the receipt of all licenses, permits, consents or approvals of or from
any governmental authority or other third party necessary for completion
of the merger, including any expiration or termination of the applicable
waiting periods under the Hart-Scott-Rodino Antitrust Improvements Act of
1976;
- the representations and warranties of the other party that are qualified
as to materiality being true and correct as of the date of the merger
agreement and the date the merger is completed;
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- the representations and warranties of the other party that are not
qualified as to materiality being true and correct in all material
respects as of the date of the merger agreement and the date the merger
is completed;
- the performance, in all material respects, by the other party of its
respective obligations under the merger agreement;
- the receipt of a certificate signed by an executive officer of the other
party certifying to the accuracy of such party's representations and
warranties and the performance by such party of its obligations, in each
case as described above;
- there having been no material adverse affect on the business, condition
or results of the other party after the date of the merger agreement; and
- the receipt of a tax opinion from counsel.
In addition, OSI's and CP Merger Corporation's obligations to complete the
merger are subject to the satisfaction or waiver of each of the following
additional conditions before completion of the merger:
- there must not be pending any action or proceeding having a reasonable
likelihood of success by or before any governmental authority or court,
nor must there be any judgment, decree or order of any governmental
authority or court, seeking to make the merger materially more costly, to
obtain material damages in connection with the merger, or to prohibit or
limit the ownership or operation by OSI or Cell Pathways of their, or
their subsidiaries', respective business or assets, or compelling OSI,
Cell Pathways or their respective subsidiaries to dispose of or hold
separately any material portion of their business or assets, as a result
of the merger;
- appraisal rights must not have been exercised by holders of more than
7.5% of the outstanding voting shares of Cell Pathways;
- Robert J. Towarnicki, Brian J. Hayden and Rifat Pamukcu must have entered
into a consulting agreement in form and substance satisfactory to OSI.
See the "Background and Reasons for the Merger -- Interests of Cell
Pathways' Directors and Executive Officers in the Merger -- Consulting
Arrangements" on page 37.
REPRESENTATIONS AND WARRANTIES
In the merger agreement, OSI, CP Merger Corporation and Cell Pathways make
representations and warranties to each other about their respective companies
related to, among other things:
- corporate organization and qualification to do business;
- capitalization;
- subsidiaries and their corporate organization, qualifications to do
business and capitalization;
- corporate authority to enter into, and carry out the obligations under,
the merger agreement and the enforceability of the merger agreement;
- absence of a breach of organizational documents, laws or material
agreements as a result of the merger agreement and the merger;
- required governmental consents, approvals and filings;
- governmental licenses, permits and authorizations;
- reports and financial statements filed with the SEC and the accuracy of
the information contained in those documents;
- absence of any undisclosed liabilities and material adverse events since
September 30, 2002;
- absence of litigation;
48
- title to assets;
- the filing of tax returns and payment of taxes;
- payment of fees to finders, brokers or investment bankers in connection
with the merger;
- absence of unlawful business practices;
- compliance with corporate governance requirements of the Nasdaq National
Market; and
- absence of certain related party transactions.
Cell Pathways also made additional representations and warranties to OSI
and CP Merger Corporation related to, among other things:
- employee benefit plans;
- compliance with governmental regulations concerning employees and
relations with employees;
- labor and employment matters;
- owned and leased real property;
- ownership, use and non-infringement of intellectual property rights;
- compliance with environmental laws and other environmental matters;
- material contracts and the absence of defaults with respect to material
contracts;
- insurance coverage;
- compliance with state takeover laws;
- amendments to Cell Pathways' rights agreement;
- receipt of an opinion from Cell Pathways' financial advisor; and
- regulatory filings and approvals and regulatory compliance.
TERMINATION OF THE MERGER AGREEMENT
The merger agreement may be terminated at any time before the effective
time, whether before or after its adoption by Cell Pathways stockholders:
- by written consent of OSI, CP Merger Corporation and Cell Pathways;
- by OSI, CP Merger Corporation or Cell Pathways:
- if the effective time of the merger has not occurred before August 6,
2003, unless that party's own breach of the agreement is the reason that
the merger has not been consummated;
- if there is a non-appealable government action prohibiting the
consummation of the merger, or a court of competent jurisdiction shall
have issued an order or other action enjoining or otherwise prohibiting
the merger or there is a law making consummation of the merger illegal
or otherwise prohibited; or
- if Cell Pathways stockholders do not vote to adopt the merger agreement.
- by OSI or CP Merger Corporation:
- if the Cell Pathways Board of Directors receives a Superior Proposal (as
defined above) and withdraws, modifies or changes its recommendation of
the merger after determining in good faith, after consultation with
independent legal counsel, that the failure to take such action could
reasonably be expected to constitute a breach of its fiduciary duties;
or
- for a material misrepresentation or an uncured breach by Cell Pathways.
49
- by Cell Pathways:
- if the Cell Pathways Board of Directors receives a Superior Proposal (as
described above) and, withdraws, modifies or changes its recommendation
of the merger after determining in good faith, after consultation with
independent legal counsel, that the failure to take such action could
reasonably be expected to constitute a breach of its fiduciary duties,
unless Cell Pathways is in breach of the "no solicitation" provisions or
has not paid the termination fee (as described below); or
- for a material misrepresentation or an uncured breach by OSI.
EFFECT OF TERMINATION
If the merger agreement is terminated pursuant to the conditions set forth
above, unless the termination results from the willful failure of either party
to fulfill a condition to the performance of the obligations of the other party,
or the willful failure by either party to perform a covenant, all further
obligations of the parties under the merger agreement will terminate, except
that any obligations with respect to payment of the termination fee described
below will survive.
TERMINATION FEES AND EXPENSES
PAYMENT OF TERMINATION FEE
Cell Pathways has agreed to pay OSI $1,250,000 if the merger agreement is
terminated in any of the following circumstances:
- OSI or Cell Pathways terminates the merger agreement because the Cell
Pathways Board of Directors receives a Superior Proposal (as described
above) and withdraws, modifies or changes its recommendation of the
merger;
- OSI or Cell Pathways terminates the merger agreement because Cell
Pathways stockholders fail to adopt the merger agreement and an
Acquisition Proposal (as described above), which was proposed prior to
such termination, is consummated within nine months of such termination.
- OSI terminates the merger agreement for a material misrepresentation or
an uncured breach by Cell Pathways and an Acquisition Proposal (as
described above), which was proposed prior to such termination, is
consummated within nine months of such termination.
EXPENSE REIMBURSEMENT AND INTEREST
If Cell Pathways fails to pay the termination fee when due, in addition to
the termination fee Cell Pathways will be required to pay OSI's costs of
collection and interest on the unpaid fee at the prime rate.
PAYMENT OF EXPENSES
OSI and Cell Pathways will share equally the fees and expenses of printing
and filing this proxy statement/prospectus and the registration statement, and
each will each pay its own other merger-related fees and expenses.
AMENDMENTS AND WAIVERS
OSI and Cell Pathways may amend or waive any provision of the merger
agreement in writing before the effective time of the merger, except that after
the Cell Pathways stockholders have approved the merger, the further approval of
the Cell Pathways stockholders would be required to reduce the amount or change
the type of consideration that they will receive in the merger.
APPRAISAL OR DISSENTERS' RIGHTS
If the merger is consummated, holders of Cell Pathways common stock who do
not vote in favor of adopting the merger agreement will have the right to seek
an appraisal of, and to be paid the "fair value" for, their shares of Cell
Pathways common stock, instead of receiving the OSI common stock and contingent
value right that such stockholders would otherwise be entitled to under the
merger agreement. In order to assert
50
these rights such stockholders must follow the procedures set forth in Section
262 of the Delaware General Corporation Law.
These rights are commonly referred to as "appraisal rights" or "dissenters'
rights." The following summary of appraisal rights is qualified in its entirety
by the text of Section 262 of the Delaware General Corporation Law, which is
reproduced in Annex D to this proxy statement/prospectus.
This summary does not constitute a recommendation that stockholders
exercise their appraisal rights, or otherwise constitute any legal or other
advice. If a stockholder wishes to exercise his or her appraisal rights, such
stockholder is urged to contact his or her legal counsel or advisors. Failure to
follow strictly the procedures set forth in Section 262 will result in a loss of
appraisal rights. If a stockholder loses his or her appraisal rights, such
stockholder will be entitled to receive OSI common stock and the contingent
value right as determined under the merger agreement.
Appraisal rights are available only to the record holder of shares.
References in Section 262 to "stockholders" are to record holders. References in
the summary below to "you" and "your" assume that you are a record holder. If
you wish to exercise appraisal rights but have a beneficial interest in shares
which are held of record by or in the name of another person, such as a broker
or nominee, you should act promptly to cause the record holder to follow the
procedures set forth in Section 262 to perfect your appraisal rights.
Section 262 requires Cell Pathways to notify you, at least 20 days prior to
the special meeting, as to the availability of appraisal rights and to provide
you with a copy of the text of Section 262. This proxy statement/prospectus,
including Annex D, serves as the required notice and text.
To claim your appraisal rights, you must do each of the following:
- deliver to Cell Pathways prior to the vote on the merger a written demand
for an appraisal of your shares;
- continuously hold your shares from the date you deliver a written demand
for an appraisal through the completion of the merger;
- not vote in favor of the merger agreement; and
- file within 120 days after the effective time of the merger, if Cell
Pathways does not file within that time, a petition in the Delaware Court
of Chancery demanding a determination of the fair value of your shares.
Cell Pathways is under no obligation and has no intent to file any
petition.
If you sell or otherwise transfer or dispose of your shares before the
merger is completed, you will lose your appraisal rights with respect to those
shares. If neither any stockholder who has demanded appraisal rights nor Cell
Pathways has filed a petition in the Delaware Court of Chancery within 120 days
after the effective time of the merger, then all stockholders' appraisal rights
will be lost.
Voting against the adoption of the merger agreement or otherwise failing to
vote for the adoption of the merger agreement will not by itself constitute a
demand for an appraisal or sufficient notice of an election to exercise
appraisal rights. Any demand for an appraisal must be in writing, signed and
mailed or delivered to:
Cell Pathways, Inc.
702 Electronic Drive
Horsham, Pennsylvania 19044
Attention: Brian Hayden, Chief Financial Officer
A written demand must reasonably inform Cell Pathways of the identity of
the stockholder and of the stockholder's intent to demand appraisal of his, her
or its shares of Cell Pathways common stock.
A demand for appraisal should be signed by or on behalf of the stockholder
exactly as the stockholder's name appears on the stockholder's stock
certificates. If the shares are owned of record in a fiduciary capacity, such as
by a trustee, guardian or custodian, the demand should be executed in that
capacity, and if the shares are owned of record by more than one person, as in a
joint tenancy or tenancy in common, the demand should be executed by or on
behalf of all joint owners. An authorized agent, including one or more joint
owners, may
51
execute a demand for appraisal on behalf of a record holder; however, in the
demand the agent must identify the record owner or owners and expressly disclose
that the agent is executing the demand as an agent for the record owner or
owners. A record holder such as a broker who holds shares as nominee for several
beneficial owners may exercise appraisal rights for the shares held for one or
more beneficial owners and not exercise rights for the shares held for other
beneficial owners. In this case, the written demand should state the number of
shares for which appraisal rights are being demanded. When no number of shares
is stated, the demand will be presumed to cover all shares held of record by the
broker or nominee.
Cell Pathways will send notice of the effective time of the merger to each
stockholder who has properly demanded appraisal rights under Section 262 and has
not voted in favor of the merger agreement. Cell Pathways will send this notice
within 10 days after the effective time of the merger.
If you have complied with the requirements for claiming your appraisal
rights, then during the 120 days following the effective time of the merger, you
may request from Cell Pathways a statement as to the aggregate number of shares
not voted in favor of the merger agreement and with respect to which demands for
appraisal have been received and the number of holders of those shares. Upon any
request, which must be made in writing, Cell Pathways will mail a statement of
that information to you within 10 days.
If a petition for an appraisal is filed timely, the Delaware Court of
Chancery will hold a hearing on the petition to determine the stockholders
entitled to appraisal rights and the "fair value" of their shares. The
determination of fair value will not include any element of value arising from
the accomplishment or expectation of the merger. The court will also determine a
fair rate of interest, if any, to be paid upon the amount determined to be the
fair value of the shares. The court may determine that the fair value of the
shares is more than, the same as or less than the value of the OSI common stock
and contingent value right you would have received under the merger agreement.
An investment banking opinion as to fairness from a financial point of view is
not necessarily an opinion as to fair value under Section 262. The Delaware
Supreme Court has stated that "proof of value by any techniques or methods that
are generally considered acceptable in the financial community and otherwise
admissible in court" should be considered in the appraisal proceedings.
The costs of the action may be determined by the Delaware Court of Chancery
and taxed upon the parties as the court deems equitable in the circumstances.
Upon application of a stockholder, the court may order that all or a portion of
the expenses incurred by any stockholder in an appraisal proceeding, including,
without limitation, reasonable attorneys' fees and the fees and expenses of
experts utilized in the appraisal proceeding, be charged pro rata against the
value of all of the shares entitled to appraisal.
If you have duly demanded an appraisal of your shares, you will not, after
the effective time of the merger, be entitled to vote those shares for any
purpose, nor will you be entitled to the payment of dividends or other
distributions on those shares, except for dividends or other distributions
payable to stockholders as of a record date prior to the effective time of the
merger.
You may withdraw your demand for appraisal of your shares within 60 days
after the effective time of the merger. Any attempt to withdraw your demand more
than 60 days after the effective time of the merger will require the written
approval of Cell Pathways. Once a petition for appraisal is filed with the
Delaware Court of Chancery, the appraisal proceeding may not be dismissed
without court approval.
If you properly demand appraisal of your shares, but fail to perfect your
appraisal rights, otherwise lose your appraisal rights or effectively withdraw
your demand for an appraisal, your shares will be converted into the right to
receive OSI common stock and a contingent value right as determined under the
merger agreement, without interest.
OSI will not be obligated to close the merger if the aggregate number of
shares held by Cell Pathways stockholders demanding appraisal rights exceeds
7.5% of the number of shares of Cell Pathways common stock issued and
outstanding immediately prior to the effective time of the merger. The legal
opinions as to the tax-free nature of the merger will be based in part on the
assumption that this 7.5% threshold will not be exceeded. See the discussion
under "The Merger and the Merger Agreement -- Material United States Federal
Income Tax Consequences of the Merger" beginning on page 43.
52
NASDAQ LISTING OF OSI COMMON STOCK
OSI has agreed to file a listing notification with the Nasdaq National
Market concerning the OSI common stock to be issued to Cell Pathways
stockholders in the merger, including shares of OSI common stock issuable upon
conversion of the contingent value rights. The contingent value rights are
nontransferable and they will not be listed with the Nasdaq National Market or
any other exchange.
RESALES OF OSI COMMON STOCK BY CELL PATHWAYS' AFFILIATES
Cell Pathways stockholders may freely transfer the shares of OSI common
stock received in the merger, unless they are individuals and entities who are
deemed to be "affiliates" of Cell Pathways before the merger or deemed to be
"affiliates" of OSI after the merger. Persons who may be deemed to be affiliates
of Cell Pathways or OSI include individuals or entities that control, are
controlled by, or are under common control with, Cell Pathways or OSI and may
include executive officers and directors as well as principal stockholders.
These affiliates or their brokers risk being characterized as "underwriters"
when they sell shares of OSI common stock received in the merger. The U.S.
securities laws require registration of shares sold by underwriters. An
affiliate and its broker can avoid being characterized as an underwriter and,
therefore, avoid the Securities Act registration requirements by selling shares
in compliance with Rule 145 or Rule 144 under the Securities Act. Rule 145
covers sales by Cell Pathways affiliates, and Rule 144 covers sales by OSI
affiliates. Each rule limits the number of shares an affiliate can sell in a
particular period of time. The merger agreement requires Cell Pathways to use
its reasonable best efforts to cause each of its affiliates to execute and
deliver to OSI a written agreement to the effect that the affiliate will not
offer or sell or otherwise dispose of OSI common stock issued to the affiliate
in the merger, including shares issued pursuant to the contingent value rights,
if any, in violation of the Securities Act or the related rules and regulations
adopted by the SEC.
This proxy statement/prospectus does not cover resales of OSI common stock
received by any person who may be deemed to be an affiliate of Cell Pathways
and/or OSI.
REGULATORY MATTERS
OSI and Cell Pathways are not aware of any material governmental or
regulatory requirements that must be complied with regarding the merger, other
than federal securities laws and the filing of documents describing principal
terms of the merger agreement with the secretary of state of Delaware. At this
time we do not expect the merger to be subject to the requirements of the
Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and the rules
promulgated under that Act by the Federal Trade Commission, which prevent some
transactions from being completed until required information and materials are
furnished to the Antitrust Division of the U.S. Department of Justice and the
U.S. Federal Trade Commission and the applicable waiting periods are terminated
or expire. However, if the market price of OSI common stock rises sufficiently
to cause the total value of the merger consideration to exceed $50 million, then
OSI and Cell Pathways may be required to make filings under the
Hart-Scott-Rodino Antitrust Improvements Act of 1976.
53
BUSINESS OF OSI
OSI is a leading biotechnology company focused on the discovery,
development and commercialization of high-quality oncology products that both
extend life and improve the quality-of-life for cancer patients worldwide. OSI
has established a balanced pipeline of oncology drug candidates that includes
both next-generation cytotoxic chemotherapy agents and novel mechanism-based,
gene-targeted therapies.
OSI's most advanced drug candidate, Tarceva(TM) (erlotinib HC1), is a small
molecule inhibitor of the epidermal growth factor receptor, or HER1/EGFR. The
protein product of the HER1/EGFR gene is a receptor tyrosine kinase that is
over-expressed or mutated in many major solid tumors. OSI believes HER1/EGFR
inhibitors represent an exciting new class of relatively safe and well tolerated
anti-cancer agents that may have utility in treating a wide range of cancer
patients. Tarceva(TM) is an oral once-a-day small molecule drug designed to
specifically block the activity of the HER1/EGFR protein. Currently, Tarceva(TM)
is being developed in an alliance with Genentech and Roche. If the drug receives
regulatory approval, Genentech will lead the marketing effort in the United
States and Roche will market it in the rest of the world. OSI will receive
milestone payments from both Genentech and Roche, an equal profit share from
U.S. sales, and royalties on sales outside of the United States. Tarceva(TM) has
demonstrated encouraging indications of anti-cancer activity in single-agent,
open label Phase II trials in non-small cell lung cancer, head and neck cancer
and ovarian cancer. Tarceva(TM) is currently in Phase III clinical trials for
non-small cell lung cancer and pancreatic cancer.
Behind Tarceva(TM) OSI has five additional drug candidates in earlier
stages of clinical development. Three of these (OSI-211, OSI-7904L and OSI-7836)
are next generation cytotoxic chemotherapy agents which are being developed by
OSI and the other two (CP-547,632 and CP-724,714) are gene-targeted therapies
currently being developed by Pfizer Inc. OSI owns commercial rights to the first
three and will receive royalty payments on the latter two if they are
successfully commercialized.
OSI's next generation cytotoxic chemotherapy candidates are designed to
improve upon currently marketed products in the same drug class. OSI-211 is a
liposomal formulation of lurtotecan, a topoisomerase-1 inhibitor, that is being
developed to compete with topotecan (Hycamtin(R)). OSI-7904L is a liposomal
formulation of a thymidylate synthase inhibitor, GW1843, that is being developed
as a potential competitor to 5-Fluorouracil (5-FU) and capecitabine (Xeloda(R)),
and OSI-7836 is a nucleoside analog being developed to compete with gemcitabine
(Gemzar(R)). OSI-211 is in Phase II clinical trials, and OSI-7904L and OSI-7836
are in Phase I clinical trials. Like Tarceva(TM), the two gene-targeted
therapies are receptor tyrosine kinase inhibitors. CP-547,632 is a small
molecule targeting the vascular endothelial growth factor receptor, or VEGFR,
and CP-724,714 is a small molecule targeting HER2/erbB2. Both agents are
currently in Phase I clinical trials.
In order to support its clinical pipeline, OSI has established (through
acquisition and internal investment) a high quality oncology clinical
development and regulatory affairs capability comprised of a fully developed
infrastructure and over 140 professionals. OSI has also acquired a pilot scale
chemical manufacturing and process chemistry group. Behind its clinical pipeline
OSI has an extensive, fully integrated small molecule drug discovery
organization designed to generate a pipeline of high quality oncology drug
candidates to move into clinical development. This research operation has been
built upon OSI's historical strengths in high throughput screening, chemical
libraries, medicinal and combinatorial chemistry, and automated drug profiling
technology platforms.
54
The following table summarizes the status of OSI's more advanced oncology
product candidates as of and identifies any related collaborator.
<Table>
<Caption>
- -------------------------------------------------------------------------------------------------------
PRODUCT/INDICATION STATUS* DRUG TYPE COLLABORATOR(S)
- ------------------ ------- --------- ---------------
- -------------------------------------------------------------------------------------------------------
Tarceva(TM)/Non-Small Cell Lung Cancer Phase III Epidermal Growth OSI-owned/
Tarceva(TM)/Pancreatic Cancer Phase III Factor Receptor Inhibitor Genentech
Tarceva(TM)/Ovarian, Head and Phase II (HER1/EGFR) and Roche
Neck, Metastatic Breast and Glioblastoma
Multiforme
Tarceva(TM)/various-exploratory Phase I
- -------------------------------------------------------------------------------------------------------
OSI-211/Ovarian Cancer Phase II Liposomal Topoisomerase-1 OSI-Owned
OSI-211/Small Cell Lung Cancer Phase II Inhibitor
- -------------------------------------------------------------------------------------------------------
OSI-7904L/various-exploratory Phase I Liposomal Thymidylate OSI-Owned
Synthase Inhibitor
- -------------------------------------------------------------------------------------------------------
OSI-7836/various-exploratory Phase I Nucleoside Analog OSI-Owned
- -------------------------------------------------------------------------------------------------------
CP-547,632/various-exploratory Phase I Vascular Endothelial Growth Pfizer
Factor Receptor (VEGFR)
Inhibitor
- -------------------------------------------------------------------------------------------------------
CP-724,714/various-exploratory Phase I HER2/erbB2 Receptor Pfizer
Inhibitor
- -------------------------------------------------------------------------------------------------------
</Table>
(*) Denotes clinical safety and efficacy tests as follows:
Phase I-Evaluation of safety in humans.
Phase II-Evaluation of safety, dosing, and initial efficacy in humans.
Phase III-Evaluation of safety and efficacy in humans.
On March 12, 2003, OSI announced that it had entered into an agreement with
an affiliate of Serono S.A., Ares Trading, S.A., under which OSI has the
exclusive right to market and promote the drug Novantrone(R) (mitoxantrone
hydrochloride) for all approved oncology indications in the United States. In
consideration for these exclusive rights, OSI will pay Serono initial fees
totaling $55 million plus quarterly maintenance fees in return for commissions
on net sales in oncology. To support Novantrone(R), OSI intends to build
commercial operations to include a sales force and an associated marketing and
sales management infrastructure. OSI estimates that the fiscal year 2004
commission revenues on Novantrone(R) oncology sales will be between
approximately $20 million and $30 million.
Novantrone(R) is approved by the FDA for the treatment of acute
nonlymphocytic leukemia, which includes myelogenous, promyelocytic, monocytic
and erythroid acute leukemias, and the relief of pain associated with advanced
hormone-refractory prostate cancer. The drug is also approved for certain
advanced forms of multiple sclerosis. Serono will continue to be responsible for
the marketing of the multiple sclerosis indication for Novantrone(R) and book
all U.S. sales in all indications. Total sales in 2002 of Novantrone(R) were
approximately $80 million.
OSI'S STRATEGY
OSI believes that Tarceva(TM) has established a corporate presence for OSI
in the oncology field. OSI's strategy over the last several years has been
designed to capitalize upon this presence and to re-orient its
55
business towards becoming a world class oncology organization. To this end, OSI
has raised capital, formed alliances and engaged in merger and acquisition
activity with the strategic intent to:
- maximize OSI's prospects for successful development and commercialization
of Tarceva(TM);
- enhance OSI's skill sets and improve the quality of its organization,
allowing OSI to establish a comprehensive array of research, development
and business skills necessary for its cancer mission;
- divest or exit from its current non-oncology research activities and
alliances;
- engage in active in-licensing and partnering efforts to add to OSI's
cancer pipeline and complement its internal cancer research programs; and
- continue to invest in opportunities that will lead to successful growth
while aggressively managing the risks inherent in the industry in order
to sustain a strong balance sheet through to profitability.
As OSI moves forward, it intends to follow through on the following core
elements of its strategy:
Execution on Tarceva(TM). Together with its partners, Genentech and Roche,
OSI has formulated a comprehensive, global development program for Tarceva(TM).
Since the beginning of the alliance, OSI, with its partners, has collectively
initiated numerous clinical trials, four of which are Phase III
registration-oriented trials in lung and pancreatic cancers. This registration
strategy focuses on the execution of adequate, controlled and well-designed
studies to support a worldwide registration program. All four Phase III trials
are designed as large-scale, placebo controlled, double-blinded trials with a
primary endpoint of survival and several secondary endpoints which include,
among others, tumor response, time to progression, symptom relief and quality of
life. The alliance has now completed targeted enrollment in all four Phase III
trials which involve a total of approximately 3,500 patients. Should these
studies prove successful, OSI has established a goal of achieving profitability
within 18 to 24 months of market launch of Tarceva(TM).
Focus on Oncology. OSI intends to focus its business entirely on oncology
and continue to build upon its extensive pipeline of oncology product
candidates, its strong core of discovery research, and its top-tier oncology
clinical development and regulatory affairs group. As its pipeline reaches the
commercialization stage, OSI also intends to establish a full commercial
operation, initially in the U.S. market. Although OSI intends to commercialize
selected products independently, OSI will also continue to engage in marketing
partnerships where its believes this will add value to OSI's ability to
effectively and competitively commercialize its products.
OSI also intends to complete the divestiture of all remaining non-oncology
research programs. In July 2002, OSI agreed to accelerate the conclusion of the
phase-down period of its funded research alliance with Anaderm Research
Corporation, a wholly-owned subsidiary of Pfizer, focused on the development of
novel treatments for skin and hair conditions. OSI completed the transfer of all
research related to the collaboration in February 2003. OSI is in the process of
divesting its diabetes program and certain of its adenosine receptor assets into
an entity with the intent that this entity subsequently will be funded by third
party investors and will be one in which OSI will maintain a minority interest.
This planned divestiture coupled with steps OSI took in October 2002 to re-size
and re-focus the skill sets of its organization has positioned OSI with
approximately 425 research, development and business personnel focused entirely
on oncology.
These steps will allow OSI to maintain the level of resource commitment OSI
believes is required to achieve its primary goal of building a first-class
oncology franchise with a pipeline of clinical and research opportunities
anchored around Tarceva(TM).
Licensing and Acquiring Oncology Products and Clinical Candidates. In
order to effectively manage the risks inherent in pharmaceutical research and
development and to complement its internal research efforts, OSI believes it is
essential that it continue to explore licensing and acquisition initiatives
designed to add oncology products and clinical candidates to its pipeline in
order to further strengthen OSI's growing position in oncology. In December
2001, OSI acquired Gilead Sciences, Inc.'s entire pipeline of clinical
candidates in oncology and certain related intellectual property, as well as
Gilead's Boulder, Colorado operations, including clinical research, regulatory
affairs and drug development personnel, infrastructure, and facilities. This
56
transaction accelerated OSI's development and commercialization capabilities
with the addition of an outstanding and complementary drug development and
oncology group comprised of approximately 120 professionals, and augmented OSI's
pipeline of gene-targeted small molecule therapeutics with several promising
next-generation cytotoxic chemotherapy agents currently in clinical development.
Under the terms of the transaction, OSI received exclusive worldwide development
and commercialization rights to Gilead's three clinical development candidates
in oncology. With a full array of cancer drug discovery and development
capabilities and a strong balance sheet, OSI expects to be well positioned to
compete for premier in-licensing and acquisition opportunities.
Establishing commercial operations. A key corporate goal for OSI has been
to secure rights to an in-the-market therapeutic product as a vehicle to enable
it to establish a sales and marketing organization and continue its mission of
building a first class oncology franchise. OSI believes that with the
Novantrone(R) transaction described above it has taken a significant step toward
accomplishing this goal.
Accessing a quality product that will allow OSI to generate a credible
revenue flow and build a high quality sales and marketing organization has
proven to be a challenge as a result of tremendous competition for the
in-licensing or acquisition of an in-the-market therapeutic product. OSI
believes the opportunity to acquire the rights to Novantrone(R) presented itself
at the right time and is the right size financially. The transaction, in OSI's
view, allows it to meet its strategic goal and will provide a modest annual
cash-flow positive outcome by fiscal year 2004 and for succeeding fiscal years.
OSI further believes the following tangible and intangible benefits of this
transaction, among others, warranted the decision to secure an agreement with
Serono:
- the enhancement of the possibility for future in-licensing and regional
co-promote deals for other marketed oncology products;
- the ability to directly market in the United States its future pipeline
products, thereby leading to an improved economic share of product
revenues; and
- the further validation of OSI as a quality development and
commercialization partner for oncology development candidates.
In order to rapidly establish a core capability in the commercial area, OSI
intends to secure a short-term transitional arrangement with a contract sales
organization to provide a core of sales representatives, sales and marketing
operations support personnel and core infrastructure needs. Additionally, OSI
intends to recruit a corporate executive level candidate to lead the
establishment of a core commercial operation.
OSI believes that, through the Serono and Gilead transactions, through the
proposed merger with Cell Pathways (if approved by the Cell Pathways
stockholders) and through its research and development investments, it has
created a top quality oncology organization around Tarceva(TM). Upon the
establishment of a commercial organization, OSI believes that it will have
completed the assembly of a fully integrated oncology organization from
discovery through to commercialization. Assuming Cell Pathways stockholder
approval of the proposed merger, OSI will have a portfolio consisting of two
marketed products, Novantrone(R) and Gelclair(TM), two phase III programs,
Tarceva(TM) and Aptosyn(R), and six earlier stage clinical programs, two of
which, OSI-211 and CP461, are in phase II trials. This clinical pipeline is
diversified into three areas of investment: (i) novel anti-oncogene, receptor
tyrosine kinase inhibitors; (ii) novel apoptotic molecules; and (iii)
next-generation cytotoxic agents. Supporting this pipeline is a highly competent
development organization of approximately 140 professionals as well as a
170-person research organization focused on next-generation small molecule
cancer drugs.
You can find additional information regarding OSI in its filings with the
SEC. For more details about how you can obtain this information, you should read
the section of this proxy statement/prospectus entitled "Where You Can Find More
Information" on page 80.
57
BUSINESS OF CELL PATHWAYS
GENERAL
Cell Pathways is a development stage pharmaceutical company focused on the
research and development of products to treat and prevent cancer, and the future
commercialization of such products. Cell Pathways' technology may prove to have
applicability beyond the treatment and prevention of cancer, including, for
example, treatment of autoimmune diseases such as inflammatory bowel disease.
Cell Pathways also imports, promotes through licensees and sells Gelclair(TM)
Concentrated Oral Gel to oncology, dental and other markets. Cell Pathways will
likely be considered to be in the development stage until, if ever, Cell
Pathways receives approval for, and generates significant revenues from, the
marketing and selling of one or more of its pharmaceutical drug candidates, or
generates significant revenues from its marketing and selling of products made
by others, such as Gelclair(TM).
Cell Pathways' technology is based upon a mechanism which it believes,
based on its research, can be targeted to induce selective apoptosis, or
programmed cell death, in precancerous and cancerous cells without affecting
apoptosis in normal cells. Cell Pathways has created a new class of selective
apoptotic anti-neoplastic drugs, or SAANDs, and has synthesized many new
chemical compounds in this new class. Published data indicate that some of these
compounds have anti-proliferative activity in addition to pro-apoptotic
activity.
Cell Pathways' product development program focused initially on compounds
likely to be helpful in treating precancerous lesions such as colonic polyps and
cervical dysplasia. Attention next turned to the prevention of the recurrence of
prostate cancer and breast cancer. Clinical trials subsequently expanded into
the direct treatment of prostate and lung cancer. Cell Pathways has also made
arrangements for clinical trials of its first compound, Aptosyn(R) (exisulind),
in combination with leading cancer chemotherapeutic agents of major
pharmaceutical companies in trials in lung, prostate and breast cancers; many of
these trials are supported by major pharmaceutical companies, by clinical
oncology cooperative groups affiliated with the National Cancer Institute or by
investigator obtained grants. In 1999 Cell Pathways commenced clinical
development of a second compound, CP461, as a single agent in cancer
indications. Cell Pathways has also commenced clinical testing of CP461 in a
non-cancerous autoimmune indication, inflammatory bowel disease.
BUSINESS STRATEGY
Cell Pathways' primary objectives have been to be a leader in the
development of pharmaceutical products to treat and prevent cancer. Recognizing
that its technology may have applicability beyond the fields of cancer and
precancer, Cell Pathways also commenced a clinical trial of CP461 in the
autoimmune indication of Crohn's Disease and correspondingly enlarged its
objectives. Cell Pathways' intentions have been to:
- Pursue clinical development of Aptosyn(R), with emphasis on cancer
indications.
- Pursue clinical development of CP461 in cancer indications.
- Develop Aptosyn(R), CP461 and other SAANDs as part of combination therapy
with leading chemotherapeutic agents.
- Clinically test SAANDs technology in non-cancer indications where
pro-apoptotic activity (whether or not accompanied by anti-proliferative
activity) may hold promise, commencing with the clinical testing of CP461
in Crohn's Disease.
- Use its proprietary technology to develop additional SAANDs for cancer
therapy and for cancer chemoprevention.
- Develop strategic pharmaceutical industry collaborations, alliances and
combinations for research, development and/or commercialization.
- Selectively and opportunistically acquire or in-license technologies,
products and/or companies devoted to the treatment, prevention,
palliation and/or diagnosis of cancer.
58
The difficult financing markets for companies at Cell Pathways' stage of
development, together with recent cutbacks in Cell Pathways' personnel and
programs, have placed constraints on the rate at which Cell Pathways is able to
pursue its objectives.
PRODUCTS IN CLINICAL DEVELOPMENT
Cell Pathways is currently pursuing the clinical development of two SAANDs
product candidates, targeted at the treatment and management of cancer and
precancerous lesions. Its first compound, Aptosyn(R), is a sulfone derivative of
the nonsteroidal anti-inflammatory drug, or NSAID, sulindac. Aptosyn(R) is not
an NSAID and lacks the COX 1 and COX 2 inhibitory activity that is associated
with the serious upper gastrointestinal ulceration and bleeding and kidney
injury observed with NSAID use. Its second compound, CP461, is a new chemical
entity that has composition of matter patents issued or filed in the major world
markets. CP461 is a more potent SAAND than Aptosyn(R) but retains the
characteristics of not being an NSAID and not inhibiting COX 1 and COX 2.
Clinical trials of Aptosyn(R) commenced in 1994. By 1997, clinical
development of Aptosyn(R) had expanded to include several cancer and precancer
indications. In August 1999, Cell Pathways submitted to the FDA an NDA seeking
marketing approval for Aptosyn(R) for the precancerous orphan drug indication of
familial adenomatous polyposis, or FAP. In September 2000, the FDA issued a "not
approvable" letter with respect to the NDA for FAP. The future of the FAP
program is uncertain.
The focus of Cell Pathways' continuing development of Aptosyn(R) is in
cancer rather than in precancerous conditions. In 2001, Cell Pathways began
enrolling patients in a 600-patient Phase III trial comparing the combination of
Aptosyn(R) and Taxotere(R) (docetaxel) against Taxotere(R) plus placebo in
non-small cell lung cancer patients who have failed a prior platinum-containing
regimen. This trial completed enrollment of patients in March 2003.
Cell Pathways began the clinical trial program of its second compound,
CP461, in 1999. By the end of 2001, CP461 was in pilot Phase IIa trials to
investigate its safety and efficacy in three cancer indications -- chronic
lymphocytic leukemia, renal cell carcinoma and hormone refractory prostate
cancer. These studies continue, as well as studies to determine a maximum
tolerated dose for CP461. In July 2002, Cell Pathways commenced a small Phase II
trial of CP461 in the non-cancerous indication of Crohn's Disease, a form of
inflammatory bowel disease.
Aptosyn(R) and CP461 are the only Cell Pathways' product candidates which
Cell Pathways has been studying in clinical trials. No pharmaceutical product
may be marketed in the United States without FDA approval. There can be no
assurance that the FDA will approve any of Cell Pathways' product candidates for
marketing for any indication or as to when, if ever, any such approval would
occur.
AGREEMENTS TO MARKET GELCLAIR(TM)
In January 2002 Cell Pathways signed an agreement with Sinclair
Pharmaceuticals, Ltd. of the United Kingdom to become the exclusive distributor
of Gelclair(TM) in North America. The FDA granted 510(k) clearance to market
Gelclair(TM) in December 2001 for use in the management of pain and relief of
pain by adhering to the mucosal surface of the mouth, soothing oral lesions of
various etiologies. These applications include oral mucositis/stomatitis (which
may be caused by chemotherapy or radiation therapy), irritation due to oral
surgery and traumatic ulcers caused by braces or ill-fitting dentures or
disease. Gelclair(TM) is also indicated for treatment of diffuse aphthous
ulcers. The product, which is a clear viscous gel, is applied by rinsing in the
mouth for a short period of time, forming a coating over the mucosal surface of
the mouth and thereby soothing the pain and discomfort from oral lesions.
In October 2002 Cell Pathways signed a three-year agreement with Celgene
Corporation to co-promote Gelclair(TM) in oncology markets and markets other
than the dental market in the United States. Celgene has an oncology field sales
force in excess of 90 representatives. Celgene commenced field sales promotional
efforts in mid-November 2002. Cell Pathways terminated its own sales force in
the fourth quarter of 2002. Celgene will receive a fee based on a fixed
percentage of net sales of Gelclair(TM) in the oncology and other markets.
59
In August, 2002 Cell Pathways signed a four-year exclusive agreement with
the John O. Butler Company to market and, to a limited extent, distribute
Gelclair(TM) to the dental market in the United States and, if and when approved
for sale, in Canada. Butler is a leading international supplier of oral health
care products. Butler commenced its launch of Gelclair(TM) in the dental market
in the United States in the fourth quarter of 2002. Butler will receive a
marketing fee based on the amount of Gelclair(TM) sold in the dental market.
PATENTS AND PROPRIETARY TECHNOLOGY
Cell Pathways holds title or exclusive licenses to several issued U.S.
patents and pending patent applications relating to the therapeutic uses of
Aptosyn(R) in the treatment of neoplasia, precancerous lesions and/or other
indications. A composition of matter patent on this compound is not available to
Cell Pathways (or anyone else) because the sulfone derivative of sulindac, now
named exisulind, was described in the scientific and patent literature over 20
years ago. Thus, Cell Pathways' current patent rights relating to Aptosyn(R) are
limited to a series of patents and patent applications pertaining to various
specific uses of Aptosyn(R). Cell Pathways has also been issued or holds
exclusive licenses to various foreign patents (including patents in various
European countries, Australia, Canada, Korea and Japan) and pending applications
relating to the use of Aptosyn(R) in pharmaceutical compositions for the
treatment of neoplasia, precancerous lesions and/or other indications. In
Europe, Cell Pathways' patent rights relating to Aptosyn(R) are directed to the
use of Aptosyn(R) in the manufacture of pharmaceutical compositions for the
treatment of precancerous lesions. Cell Pathways also holds title or exclusive
licenses to several pending U.S. and international patent applications relating
to uses of exisulind in combination with certain existing conventional
chemotherapeutics.
Cell Pathways also holds title or exclusive licenses to patents and pending
applications relating to CP461, its composition of matter and various of its
therapeutic uses.
In addition, Cell Pathways holds title or exclusive licenses to many
patents and patent applications on other compounds, or therapeutic methods
involving such compounds, for the treatment of colonic polyps, precancerous
lesions and/or neoplasia. Cell Pathways also has patents and patent applications
on methods for screening compounds for their usefulness in selectively inducing
apoptosis. Cell Pathways has also filed patent applications relating to
diagnostic methodologies, and patent applications relating to certain business
methods and packaged pharmaceuticals with descriptive material describing and
relating to the mechanisms of action.
Cell Pathways also relies on trade secrets to protect technology,
especially where patent protection is not believed to be appropriate or
obtainable or where patents have not been issued. Cell Pathways attempts to
protect its proprietary technology and processes, in part, by confidentiality
agreements and assignment of invention agreements with its employees and with
its consultants and certain contractors.
You can find additional information regarding Cell Pathways in its filings
with the SEC. For more details about how you can obtain this information, you
should read the section of this proxy statement/prospectus entitled "Where You
Can Find More Information" on page 80.
60
CELL PATHWAYS' MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Cell Pathways was incorporated in Delaware in July 1998 as a subsidiary of,
and as of November 3, 1998 successor to, a Delaware corporation of the same
name. As the context requires, "Cell Pathways" is used below to signify the
successor and/or the predecessor corporation and their subsidiaries.
OVERVIEW
Cell Pathways is a development stage pharmaceutical company focused on the
research and development of products to treat and prevent cancer, and the future
commercialization of such products. Cell Pathways also markets and sells
Gelclair(TM) manufactured by Sinclair. Cell Pathways has not generated any
revenues from the sale of its own products to date, nor is there any assurance
of any future product revenues from the development of its products. Cell
Pathways' intended products are subject to long development cycles and there is
no assurance Cell Pathways will be able to successfully develop, manufacture,
obtain regulatory approval for or market its products. During the period
required to develop its products, Cell Pathways had planned to continue to
finance operations through debt and equity financings, profits from the sale of
Gelclair(TM) and corporate alliances. Management believes that Cell Pathways'
existing cash and cash equivalents of $10.9 million as of December 31, 2002 will
be adequate to sustain operations through the second quarter of 2003, based on
projected revenue and expenditures. As discussed, in February 2003, Cell
Pathways entered into the merger agreement with OSI whereby, if adopted by the
Cell Pathways stockholders, Cell Pathways will be acquired by OSI. The merger is
subject to approval by the Cell Pathways stockholders and certain other
customary conditions. There is no assurance that the merger will be approved by
the Cell Pathways stockholders or that other conditions will be satisfied. If
the merger should not occur, there is no assurance that additional funding will
be available on terms acceptable to Cell Pathways, if at all, or that profits
will be generated from the sale of Gelclair(TM). Cell Pathways will likely be
considered to be in the development stage until, if ever, Cell Pathways receives
approval for, and generates revenues from, the marketing and selling of one or
more of its pharmaceutical drug candidates, or generates significant revenues
from its marketing and selling of products made by others, such as Gelclair(TM).
On November 3, 1998, Cell Pathways completed a financing through the
acquisition of Tseng Labs, Inc. (a publicly held company with no continuing
operations) in which Cell Pathways issued to the Tseng stockholders
approximately 5.5 million shares of the Cell Pathways common stock and received
net proceeds of approximately $26.4 million (See Note 4 to the consolidated
financial statements of Cell Pathways included in this proxy
statement/prospectus). The consolidated financial statements of Cell Pathways
included in this proxy statement/prospectus include the accounts of Cell
Pathways from inception (August 10, 1990) and the accounts of Tseng after
November 3, 1998.
In July 2000, Cell Pathways entered into an exclusive marketing and
promotion agreement with Aventis to market Nilandron(R) (nilutamide) to
urologists in the United States and Puerto Rico for use in patients who suffer
from prostate cancer. Cell Pathways began to market and promote Nilandron(R) in
September 2000 through the use of a dedicated third party sales force. Under the
terms of the Nilandron(R) agreement, Cell Pathways was responsible for its
marketing and promotion expenses and received from Aventis a percentage of the
gross margin on Aventis' sales in excess of a pre-established gross margin
threshold, if any. The Nilandron(R) agreement with Aventis terminated in October
2002. For the year ended December 31, 2002, Cell Pathways recognized revenue
under the Nilandron(R) agreement of $611,264 related to the results of the
marketing efforts.
In January 2002, Cell Pathways entered into a ten-year exclusive
distribution agreement with Sinclair to promote and distribute Gelclair(TM) in
North America (the United States, Canada and Mexico). Gelclair(TM) is an oral
gel care formulation for the management and relief of pain associated with
inflammation and ulceration of the mouth caused by chemotherapy or radiotherapy
treatments and other causes. In June 2002, Cell Pathways began to promote
Gelclair(TM) in the oncology market. Cell Pathways purchases Gelclair(TM) from
Sinclair and resells to wholesale customers in the United States.
61
In October 2002, Cell Pathways signed a three-year agreement with Celgene
to co-promote Gelclair(TM) in oncology markets and markets other than the dental
market in the United States. Celgene has an oncology field sales force in excess
of 90 representatives. Celgene commenced field sales promotional efforts in mid-
November 2002. Cell Pathways terminated its own sales force in the fourth
quarter of 2002. Celgene will receive a fixed percentage of net sales of
Gelclair(TM) in the oncology and other markets.
In August 2002, Cell Pathways signed a four-year exclusive agreement with
Butler to market and, to a limited extent, distribute Gelclair(TM) to the dental
market in the United States and, if and when approved for sale, in Canada.
Butler is a leading international supplier of oral health care products. Butler
commenced its launch of Gelclair(TM) in the dental market in the United States
in the fourth quarter of 2002.
In October 2002, Cell Pathways implemented a restructuring of its work
force eliminating 20% of its staff and reducing its efforts in research,
discovery and pre-clinical development of earlier-stage compounds, and upon
signing the agreement with Celgene to promote Gelclair(TM) in the U.S. oncology
market, eliminated its 16 person sales force and terminated its agreement with
Aventis to promote Nilandron(R). A further reduction of approximately 15% of the
Cell Pathways work-force occurred in late February 2003. Both the work force
reductions and elimination of the sales force were for the purpose of decreasing
future expenses by approximately $2.6 million annually. If the merger with OSI
does not occur, Cell Pathways will need to take appropriate steps to further
reduce the workforce, reduce, eliminate or delay research and development
programs and reduce overall expenditures until appropriate sources of funding
are available, if ever, on terms acceptable to Cell Pathways. As of December 31,
2002, Cell Pathways had a deficit accumulated during the development stage of
$141,155,959.
In January 2003, Cell Pathways received notification from Nasdaq that its
stock would be delisted from the Nasdaq National Market because Cell Pathways'
stock price fell below the minimum bid requirements and thereby failed to comply
with Nasdaq marketplace rules. Cell Pathways appealed the delisting notification
and has attended a hearing with Nasdaq on February 27, 2003.
In February 2003, Cell Pathways entered into the merger agreement with OSI
whereby OSI would acquire Cell Pathways in a stock-for-stock transaction. Under
the terms of the merger agreement, Cell Pathways will merge with a subsidiary of
OSI and become a wholly-owned subsidiary of OSI. OSI will exchange 0.0567 shares
of OSI common stock for each outstanding share of Cell Pathways common stock.
OSI will also provide additional consideration in the form of a five-year
contingent value right through which each outstanding share of Cell Pathways
common stock will be eligible for an additional 0.04 share of OSI common stock
in the event an NDA for either Aptosyn(R) or CP461 is accepted for filing by the
FDA. If the merger agreement is adopted by the Cell Pathways stockholders and
the other conditions are satisfied, it is anticipated that the merger will be
closed in the second quarter of 2003.
RESULTS OF OPERATIONS
Year Ended December 31, 2002 Compared with Year Ended December 31,
2001. Total revenues for the years ended December 31, 2002 and 2001 were
$1,148,137 and $942,231, respectively, which represented an increase of $205,906
in 2002 due to the recognition of revenue from sales of Gelclair(TM) of
$536,873, offset by a decrease of $330,967 in Nilandron(R) revenues in 2002.
Product sales of Gelclair(TM) to Cell Pathways' wholesale customers were
initiated in the United States in June 2002. Cell Pathways defers the
recognition of revenue on product shipments of Gelclair(TM) to wholesale
customers until such time that the product is prescribed to the end user. At
each reporting period, Cell Pathways monitors shipments from wholesale customers
to pharmacies and hospitals, wholesale customer reorder history and
prescriptions filled by pharmacies based on prescription data from external,
independent sources. When this data indicates a flow of product through the
supply chain, which indicates that returns are less likely to occur, product
revenue is recognized. For the year ended December 31, 2002, shipments to
wholesale customers were $2,029,219, of which $536,873 has been recognized as
product revenues with the balance recorded as deferred revenue in Cell Pathways'
consolidated balance sheet included in this proxy statement/prospectus. For the
years ended December 31, 2002 and 2001, marketing service revenues from the
promotion of Nilandron(R) were $611,264 and $942,231, respectively. In October
2002, the agreement with Aventis related to Cell Pathways' marketing and
promotion of Nilandron(R)
62
was terminated which resulted in no revenue related to the Nilandron(R)
agreement in the fourth quarter of 2002.
Total operating expenses, including cost of products sold, for the years
ended December 31, 2002 and 2001 were $19,320,196 and $34,013,371, respectively,
a decrease of $14,693,175. The decrease in 2002 resulted primarily from the
recognition of a non-cash reduction of litigation settlement expense of
$6,749,000 in 2002 as compared to litigation expense of $8,492,000 in 2001,
related to Cell Pathways' settlement of the securities class action litigation,
which was approved by the court in September 2002. The 2002 adjustment to the
litigation expense of $6,749,000, represents the change in the fair value of 1.7
million shares of Cell Pathways common stock issued as part of the settlement
and previously recorded by Cell Pathways in 2001. Excluding both the litigation
settlement expense of $8,492,000 in 2001 and the non-cash reduction of
litigation settlement expense of $6,749,000 in 2002, total operating expenses
for the years ended December 31, 2002 and 2001 would have been $26,069,196 and
$25,521,371, respectively, representing an increase in 2002 of $547,825 or 2.1%
from the same period in 2001.
Cost of products sold, related to the sales of Gelclair(TM), for the year
ended December 31, 2002 was $219,706 or 40.9% of product revenues. There was no
cost of products sold in 2001 since Cell Pathways began selling Gelclair(TM) in
June 2002.
Research and development, or R&D, expenses for the year ended December 31,
2002 were $17,145,109, a decrease of $620,134 or 3.5% from the same period in
2001. This decrease was primarily due to a reduction in pre-clinical study
expenses of approximately $1,230,000 for CP461, as most of the pre-clinical
studies related to CP461 were completed in 2001, and a reduction in personnel
related expenses of approximately $765,000 including stock option expense for
certain scientific advisory board members due to a decline in Cell Pathways'
stock price in 2002. Partially offsetting these decreases in R&D expenses was an
increase in clinical trial expenses of approximately $1,390,000 associated with
Cell Pathways' Phase III clinical trial of Aptosyn(R) in combination with
Taxotere(R) in patients with non-small cell lung cancer and the advancement of
CP461 in pilot clinical trials in various cancer indications.
Selling, general and administrative, or SG&A, expenses for the year ended
December 31, 2002 were $8,704,381, an increase of $948,253, or 12.2%, from the
same period in 2001. This increase was primarily due to an increase in promotion
and distribution expenses for Gelclair(TM) of approximately $685,000 and an
increase in consulting expenses of approximately $544,000 to assist Cell
Pathways in its strategic and financing activities. These increases were
partially offset by a reduction in personnel expenses of approximately $335,000
due in part to reductions in staff and the non-payment of bonuses in 2002.
Interest income, net of interest expense of $63,664, was $300,837 for the
year ended December 31, 2002, a decrease of $1,365,868 from the same period of
2001, due to lower average cash balances and lower average interest rates on
investments.
Year Ended December 31, 2001 Compared with Year Ended December 31,
2000. Revenues for the years ended December 31, 2001 and December 31, 2000
related to the Nilandron(R) agreement were $942,231 and $329,694, respectively.
Cell Pathways began promoting Nilandron(R) to urologists in September 2000.
Total operating expenses for the year ended December 31, 2001, including a
litigation charge of $8,492,000, were $34,013,371, an increase of $4,508,984 or
15.3% from the same period in 2000.
R&D expenses for the year ended December 31, 2001 were $17,765,243, a
decrease of $4,492,562 or 20.2% from the same period in 2000. This decrease was
primarily due to reductions in 2001 of purchases of research materials for
Aptosyn(R) of approximately $5,556,000 offset partially by increases in clinical
development expenses of approximately $1,020,000 .
SG&A expenses for the year ended December 31, 2001 were $7,756,128, an
increase of $509,546 or 7.0% from the same period in 2000. This increase was
primarily due to higher personnel expenses of approximately $982,000 and a full
year's marketing expenses for Nilandron(R) in 2001 versus four months of
activity for the year ended December 31, 2000 representing an increase of
approximately $890,000 as a result of the launch of
63
Nilandron(R) in September 2000, offset partially by a reduction in
pre-commercialization expenses for Aptosyn(R) in 2001 of approximately
$1,330,000.
In February 2002, Cell Pathways reached an agreement in principle to settle
its class action litigation. The December 31, 2001 financial statements include
a charge of $8,492,000 for the settlement of this litigation and related
expenses. The agreement required Cell Pathways to issue 1.7 million shares of
its common stock and to pay $2.0 million in cash. In connection with the
settlement, Cell Pathways' insurance company agreed to pay $2.0 million to Cell
Pathways. The litigation charge recorded in the fourth quarter of 2001
represented the fair value of the 1.7 million shares to be issued and estimated
legal costs of $655,000. Until such time as the settlement was approved by the
court, Cell Pathways adjusted the value of the 1.7 million shares based on the
then current fair value of the shares. Such adjustments resulted in a non-cash
reduction in litigation expense in subsequent interim periods and for the year
ended December 31, 2002.
Interest income, net of interest expense of $103,883, for the year ended
December 31, 2001, was $1,666,705, a decrease of $591,180 or 26.2% from the same
period in 2000, primarily due to lower average cash balances and lower interest
rates.
LIQUIDITY AND CAPITAL RESOURCES
Cell Pathways has financed its operations since inception primarily with
the net proceeds received from the sale of equity securities, including the
transaction with Tseng. Financing activities have generated net proceeds of
$151.0 million from inception through December 31, 2002.
As of December 31, 2002, Cell Pathways had cash and cash equivalents of
$10,920,335, a decrease of $16,793,580 from the balances of cash, cash
equivalents and short-term investments at December 31, 2001. This decrease was
primarily the result of cash used to fund operations for the year ended December
31, 2002, $2.4 million in inventory purchases and a $1.0 million payment to
Sinclair for the licensing rights to market Gelclair(TM). Partially offsetting
the cash used in 2002 was a total of $10.6 million of cash received from a
private placement of approximately 2.4 million shares of Cell Pathways' common
stock and a registered direct offering of approximately 4.0 million shares of
Cell Pathways' common stock. Cell Pathways invests its excess cash primarily in
low risk, highly liquid money market funds and U.S. government securities with
original maturities of less than three months. As of December 31, 2002, Cell
Pathways had $468,233 in a restricted cash account pledged for a security
deposit under the lease of its Horsham, Pennsylvania facility.
In September 2002, Cell Pathways sold 4,036,001 shares of its common stock
in a registered direct offering at the price of $0.70 per share, resulting in
the net proceeds of approximately $2.6 million. In addition to a placement fee,
the placement agent received warrants to purchase 80,720 shares of Cell
Pathways' common stock at a price of $0.84 per share. The warrants are
exercisable until September 2008.
In March 2002, Cell Pathways sold 2,390,107 shares of its common stock in a
private placement, primarily to institutional investors, at a price of $3.70 per
share, resulting in net proceeds of approximately $8.0 million. With each four
shares of Cell Pathways' common stock purchased, Cell Pathways issued a warrant
to purchase one share of Cell Pathways' common stock at $4.74 per share. The
warrants are exercisable until March 2006.
During the years ended December 31, 2002, 2001 and 2000, Cell Pathways made
loans of $54,000, $256,000 and $632,954, respectively, to two of its officers
that were outstanding as of December 31, 2002. The loans, including accrued
interest, are repayable five years from the date of issuance. During 2002, Cell
Pathways recorded an allowance of $114,742 against one of the officer's loans.
In 2002, Cell Pathways purchased $231,877 in laboratory, computer and
office equipment, office furniture and leasehold improvements for its research
laboratories and offices in its Horsham facility.
Cell Pathways leases approximately 40,000 square feet of laboratory and
office space in Horsham, Pennsylvania under a ten-year lease which expires in
2008 and which contains two, five-year renewal options. Cell Pathways believes
its facilities will be adequate for the foreseeable future.
64
In March, April and May 2001, eleven stockholder class actions were filed
in the United States District Court for the Eastern District of Pennsylvania
against Cell Pathways and certain of its officers and directors seeking
unspecified damages. The lawsuits alleged that Cell Pathways and its officers
made false and misleading statements about Cell Pathways' drug candidate,
Aptosyn(R), which caused artificial inflation of Cell Pathways' stock price
during the class period of October 27, 1999 to September 22, 2000, when Cell
Pathways announced that the FDA had informed Cell Pathways that it would be
receiving a "not approvable" letter for its NDA for Aptosyn(R). In February
2002, the parties agreed upon a stipulation of settlement. Pursuant to this
stipulation of settlement, and following a preliminary order by the court, Cell
Pathways' insurance carrier paid $2.0 million into escrow and Cell Pathways
issued 1.7 million shares of common stock into escrow. On September 23, 2002,
following a hearing, the court entered a final order approving the settlement
and dismissing the action at which time the $2.0 million and 1.7 million shares
of common stock were released from escrow. The time to appeal has expired. As of
December 31, 2001, Cell Pathways recorded the fair value of the 1.7 million
shares of Cell Pathways' common stock of $7,837,000, as an increase to
additional paid-in capital and recorded a charge to litigation settlement
expense for the then fair value of Cell Pathways' common stock. As of September
23, 2002, the fair value of the 1.7 million shares was adjusted to $1,088,000
based on the final fair value of the shares as of September 23, 2002, which
resulted in a $6,749,000 total reduction to the litigation settlement expense
and a decrease to additional paid-in capital for the year ended December 31,
2002.
Under the Gelclair(TM) agreement, in the first quarter ended March 31,
2002, Cell Pathways paid Sinclair $1.0 million for the exclusive right to market
and distribute Gelclair(TM) in North America and $2.0 million for inventory
purchases. Cell Pathways committed to additional inventory purchases, as amended
in October 2002 of $4.7 million and $5.0 million in 2003 and 2004, respectively,
and annual marketing expenditures of $750,000, $500,000 and $250,000 for 2003
through 2006, 2007 through 2008 and 2009 through 2011, respectively. In
addition, Cell Pathways is obligated to spend $1.3 million annually for direct
sales force efforts. Cell Pathways has agreements with Celgene and Butler that
satisfy this obligation through 2006. Cell Pathways could be responsible for
milestone payments totaling $3.0 million related to the achievement of certain
sales, patent and clinical trial milestones.
In January 2003, Cell Pathways received notification from Nasdaq that its
common stock would be delisted from the Nasdaq National Market because its share
price fell below the minimum bid requirements and thereby failed to comply with
Nasdaq marketplace rules. Cell Pathways appealed the delisting notification and
attended a hearing with Nasdaq on February 27, 2003. On March 21, 2003, Cell
Pathways was informed that its common stock will continue to be listed on the
Nasdaq National Market until June 30, 2003 in order to allow consummation of the
merger, provided Cell Pathways complies with all of the requirements for
continued listing on the Nasdaq National Market with the exception of the
minimum bid requirement. If Cell Pathways' common stock is delisted, the
liquidity of Cell Pathways' common stock could be impaired, and Cell Pathways'
efforts to raise additional capital could be adversely impacted.
Cell Pathways believes, based on its current operating plan, that its
existing cash and cash equivalents balance of $10.9 million as of December 31,
2002, together with interest earned on these balances, will be adequate to
sustain operations through the second quarter of 2003. If the merger with OSI
does not occur, Cell Pathways would take appropriate steps to further reduce
expenses and eliminate or delay research and development programs until
appropriate sources of funding are available, if ever, on terms acceptable to
Cell Pathways. There is no assurance that the transaction with OSI will be
approved by the Cell Pathways stockholders. Should the transaction not be
approved by the Cell Pathways stockholders, there is no assurance that
additional funding will be available on terms acceptable to Cell Pathways, if at
all. These factors raise substantial doubt about Cell Pathways' ability to
continue as a going concern. The Cell Pathways consolidated financial statements
included in this proxy statement/prospectus do not include any adjustments that
might result from the outcome of this uncertainty.
INFLATION
Cell Pathways does not believe that inflation has had any significant
impact on its business to date.
65
INCOME TAXES
As of December 31, 2002, Cell Pathways had net operating loss
carryforwards, or NOLs, for income tax purposes available to offset future
federal income tax, subject to limitations for alternative minimum tax. In
addition, Cell Pathways has other significant deferred tax assets that will also
offset future income tax. As Cell Pathways has not yet achieved profitable
operations, management believes the tax assets do not satisfy the realization
criteria of Statement of Financial Accounting Standards No. 109 "Accounting for
Income Taxes" and therefore Cell Pathways has recorded a valuation allowance for
the entire amount of its net tax asset as of December 31, 2002.
The Tax Reform Act of 1986 contains provisions that may limit the NOLs
available to be used in any given year upon the occurrence of certain events,
including significant changes in ownership interest. A change in ownership of a
company greater than 50% within a three-year period results in an annual
limitation on Cell Pathways' ability to utilize its NOLs from tax periods prior
to the ownership change. Cell Pathways believes that the transaction with Tseng
triggered such limitation. In addition, the merger of Cell Pathways by OSI would
trigger an additional limitation. The annual limitation triggered by the
proposed OSI transaction could result in a significant portion of Cell Pathways'
NOLs expiring.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 143, "Accounting for Asset Retirement
Obligations". SFAS No. 143 requires Cell Pathways to record the fair value of an
asset retirement obligation as a liability in the period in which it incurs a
legal obligation associated with the retirement of tangible long-lived assets
that result from the acquisition, construction, development, and/or normal use
of the assets. Cell Pathways also records a corresponding asset that is
depreciated over the life of the asset. Subsequent to the initial measurement of
the asset retirement obligation, the obligation will be adjusted at the end of
each period to reflect the passage of time and changes in the estimated future
cash flows underlying the obligation. Cell Pathways was required to adopt SFAS
No. 143 on January 1, 2003. The adoption of SFAS No. 143 is not expected to have
a material effect on Cell Pathways' financial statements.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements
No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical
Corrections." SFAS No. 145 amends existing guidance on reporting gains and
losses on the extinguishment of debt to prohibit the classification of the gain
or loss as extraordinary, as the use of such extinguishments have become part of
the risk management strategy of many companies. SFAS No. 145 also amends SFAS
No. 13 to require sale-leaseback accounting for certain lease modifications that
have economic effects similar to sale-leaseback transactions. The adoption of
SFAS No. 145 is not expected to have a material effect on Cell Pathways'
financial statements.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." SFAS No. 146 addresses financial
accounting and reporting for costs associated with exit or disposal activities
and nullifies EITF Issue 94-3, "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity." The provisions of
SFAS No. 146 are effective for exit or disposal activities that are initiated
after December 31, 2002, with early application encouraged. The adoption of SFAS
No. 146 is not expected to have a material effect on the Cell Pathways'
financial statements.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness to Others, an interpretation of SFAS No. 5, 57 and
107 and a rescission of FASB Interpretation No. 34." This Interpretation
elaborates on the disclosures to be made by a guarantor in its interim and
annual financial statements about its obligations under guarantees issued. The
Interpretation also clarifies that a guarantor is required to recognize, at
inception of a guarantee, a liability for the fair value of the obligation
undertaken. The initial recognition and measurement provisions of the
Interpretation are applicable to guarantees issued or modified after December
31, 2002 and are not expected to have a material effect on Cell Pathways'
financial statements.
66
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation -- Transition and Disclosure, an amendment of FASB Statement No.
123." SFAS No. 148 amends SFAS No. 123, "Accounting for Stock-Based
Compensation", to provide alternative methods of transition for a voluntary
change to the fair value method of accounting for stock-based employee
compensation. In addition, SFAS No. 123 amends the disclosure requirements of
SFAS No. 123 to require prominent disclosures in both annual and interim
financial statements. Certain of the disclosure modifications are required for
fiscal years ending after December 15, 2002 and are included in the notes to the
consolidated financial statements of Cell Pathways included in this proxy
statement/prospectus.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities, an interpretation of ARB No. 51." This
Interpretation addresses the consolidation by business enterprises of variable
interest entities as defined in the Interpretation. The Interpretation applies
immediately to variable interests in variable interest entities created after
January 31, 2003, and to variable interests in variable interest entities
obtained after January 31, 2003. The application of this Interpretation is not
expected to have a material effect on Cell Pathways' financial statements.
CRITICAL ACCOUNTING POLICIES
Financial Reporting Release No. 60, which was released by the SEC, requires
all companies to include a discussion of critical accounting policies or methods
used in the preparation of financial statements. Note 3 of the notes to the
consolidated financial statements of Cell Pathways included in this proxy
statement/ prospectus includes a summary of its significant accounting policies
and methods used in the preparation of its consolidated financial statements.
While the preparation of Cell Pathways' consolidated financial statements
requires it to make estimates and assumptions that affect the reported amounts
of assets and liabilities and the reported amounts of revenues and expenses
during the reporting period, Cell Pathways does not believe its financial
statements are significantly affected by complex accounting policies and
methods, given its stage of development.
Revenue Recognition
Product sales of Gelclair(TM) to Cell Pathways' wholesale customers were
initiated in the United States in June 2002. In accordance with SFAS No. 48,
"Revenue Recognition When Right of Return Exists", Cell Pathways defers the
recognition of revenue on product shipments of Gelclair(TM) to wholesale
customers until such time that the product is prescribed to the end user. At
each reporting period, Cell Pathways monitors shipments from wholesale customers
to pharmacies and hospitals, wholesale customer reorder history and
prescriptions filled by pharmacies based on prescription data from external,
independent sources. When this data indicates a flow of product through the
supply chain, which indicates that returns are less likely to occur, product
revenue is recognized.
Valuation of Long-Lived Assets
Cell Pathways evaluates its long-lived assets for impairment whenever
indicators of impairment exist. Cell Pathways' history of negative operating
cash flows are an indicator of impairment. Accounting standards require that if
the sum of the future cash flows expected to result from a company's long-lived
asset, undiscounted and without interest charges, is less than the reported
value of the asset, an asset impairment must be recognized in the financial
statements. The amount of impairment Cell Pathways would be required to
recognize would be calculated by subtracting the fair value of the asset from
the reported value of the asset.
As of December 31, 2002, Cell Pathways' long-lived assets consist of
product distribution rights related to Gelclair(TM) with a carrying value of
$908,333 and equipment, furniture and leasehold improvements with a carrying
value of $785,766. Cell Pathways' assumptions underlying the estimate of cash
flows require significant judgment because Cell Pathways has limited experience
with product sales of Gelclair(TM) and a history of negative operating cash
flows. As of December 31, 2002, Cell Pathways estimates that its future cash
flows on an undiscounted basis, related to product sales of Gelclair(TM) are
greater than the current carrying value of the product distribution rights. Any
decreases in estimated future cash flows could have an impact on
67
the carrying value of the product distribution rights. Cell Pathways' equipment,
furniture and leasehold improvements have been recorded at cost and are being
amortized on a straight-line basis over the estimated useful lives of those
assets. Cell Pathways believes the remaining carrying value of equipment,
furniture and leasehold improvements does not exceed its estimated fair value.
Going Concern Assumption
Cell Pathways has incurred negative cash flows from operations since
inception and, as of December 31, 2002 had a deficit accumulated during the
development stage of $141,155,959. Management believes Cell Pathways' cash and
cash equivalents as of December 31, 2002 of $10,920,335 will be adequate to
sustain operations through the second quarter of 2003. These factors raise
substantial doubt about Cell Pathways' ability to continue as a going concern.
Cell Pathways' consolidated financial statements do not include any adjustments
that might result from the outcome of this uncertainty. Should Cell Pathways be
unable to continue as a going concern, the amounts to be realized from Cell
Pathways' assets and liabilities that would be incurred could differ from the
amounts reported.
COMMITMENTS
As outlined in Note 14 of the notes to the consolidated financial
statements of Cell Pathways included in this proxy statement/prospectus, Cell
Pathways has entered into various contractual obligations and commercial
commitments. The following table summarizes these contractual obligations as of
December 31, 2002:
<Table>
<Caption>
LESS THAN 1 TO 3 4 TO 5 AFTER 5
CONTRACTUAL OBLIGATION 1 YEAR YEARS YEARS YEARS TOTAL
- ---------------------- ---------- ----------- ---------- ---------- -----------
Long-term debt......... $ 180,000 $ -- $ -- $ -- $ 180,000
Capital lease
obligations.......... 64,000 38,000 -- -- 102,000
Operating leases....... 972,000 1,973,000 2,075,000 535,000 5,555,000
Purchase commitments
for Gelclair(TM)..... 4,650,000 5,000,000 -- -- 9,650,000
Marketing commitments
for Gelclair(TM)..... 1,000,000 4,000,000 1,250,000 1,250,000 7,500,000
---------- ----------- ---------- ---------- -----------
$6,866,000 $11,011,000 $3,325,000 $1,785,000 $22,987,000
========== =========== ========== ========== ===========
</Table>
In addition to the above purchase commitments for Gelclair(TM), Cell
Pathways is obligated to spend $1.3 million annually for direct sales force
efforts. This obligation is satisfied by Cell Pathways' agreements with Celgene
and Butler through 2006. Cell Pathways could also be responsible for milestone
payments totalling $3 million related to the achievement of certain sales,
patent and clinical trial milestones.
Under certain circumstances, including if the Cell Pathways Board of
Directors withdraws, modifies or changes its recommendation to the Cell Pathways
stockholders to adopt the merger agreement, Cell Pathways will be required to
pay to OSI a termination fee of $1,250,000.
OFF-BALANCE SHEET ARRANGEMENTS
Cell Pathways does not have any off-balance-sheet arrangements.
68
MANAGEMENT AFTER THE MERGER
Upon approval of the merger and the merger agreement, the existing
management of OSI will serve as management of the surviving corporation, and no
Cell Pathways affiliates will serve as a director or executive officer of the
surviving corporation.
EXECUTIVE COMPENSATION, INFORMATION REGARDING
DIRECTORS AND EXECUTIVE OFFICERS
AND STOCK OWNERSHIP OF DIRECTORS,
EXECUTIVE OFFICERS AND PRINCIPAL STOCKHOLDERS
OSI
Information concerning the current directors and officers of OSI, executive
compensation and ownership of OSI capital stock by its directors, executive
officers and principal stockholders is contained in OSI's proxy statement for
the 2003 annual meeting of shareholders filed with the SEC on January 28, 2003
and is incorporated by reference into this proxy statements/prospectus. See
"Where You Can Find More Information" on page 80.
CELL PATHWAYS
Information concerning current directors and officers of Cell Pathways,
executive compensation and ownership of Cell Pathways capital stock by its
directors, executive officers and principal stockholders is contained in Cell
Pathways Annual Report on Form 10-K for the fiscal year ended December 31, 2002
filed with the SEC on March 27, 2003 and is incorporated by reference into this
proxy statement/prospectus. See "Where You Can Find More Information" on page
80.
69
COMPARATIVE STOCK PRICES AND DIVIDENDS
OSI common stock is traded in the over-the-counter market and is included
for quotation on the Nasdaq National Market under the trading symbol "OSIP."
Cell Pathways stock is traded in the over-the-counter market and is included for
quotation on the Nasdaq National Market under the trading symbol "CLPA." The
following table sets forth, for the periods indicated, the high and low sales
prices per share of OSI common stock and Cell Pathways common stock as reported
on the Nasdaq National Market.
CELL PATHWAYS COMMON STOCK
<Table>
<Caption>
FISCAL YEAR ENDED DECEMBER 31, 2000: HIGH LOW
- ------------------------------------ ------ ------
First Quarter............................................. $66.00 $ 9.00
Second Quarter............................................ $38.63 $17.63
Third Quarter............................................. $37.63 $ 7.02
Fourth Quarter............................................ $10.75 $ 3.25
</Table>
<Table>
<Caption>
FISCAL YEAR ENDED DECEMBER 31, 2001: HIGH LOW
- ------------------------------------ ------ ------
First Quarter............................................. $ 7.88 $ 3.28
Second Quarter............................................ $ 8.74 $ 3.47
Third Quarter............................................. $ 7.15 $ 3.16
Fourth Quarter............................................ $ 8.61 $ 2.68
</Table>
<Table>
<Caption>
FISCAL YEAR ENDED DECEMBER 31, 2002: HIGH LOW
- ------------------------------------ ------ ------
First Quarter............................................. $ 7.23 $ 3.93
Second Quarter............................................ $ 4.15 $ 1.34
Third Quarter............................................. $ 1.78 $ 0.50
Fourth Quarter............................................ $ 0.73 $ 0.34
</Table>
OSI COMMON STOCK
<Table>
<Caption>
FISCAL YEAR ENDED SEPTEMBER 30, 2000: HIGH LOW
------------------------------------- ------ ------
First Quarter............................................. $ 8.42 $ 4.06
Second Quarter............................................ $30.75 $ 7.00
Third Quarter............................................. $29.00 $ 8.38
Fourth Quarter............................................ $73.94 $27.06
</Table>
<Table>
<Caption>
FISCAL YEAR ENDED SEPTEMBER 30, 2001: HIGH LOW
- ------------------------------------- ------ ------
First Quarter............................................. $86.38 $54.00
Second Quarter............................................ $79.19 $30.19
Third Quarter............................................. $57.46 $32.38
Fourth Quarter............................................ $55.17 $31.60
</Table>
<Table>
<Caption>
FISCAL YEAR ENDED SEPTEMBER 30, 2002: HIGH LOW
- ------------------------------------- ------ ------
First Quarter............................................. $50.94 $31.91
Second Quarter............................................ $49.05 $35.11
Third Quarter............................................. $39.45 $20.52
Fourth Quarter............................................ $33.81 $11.50
</Table>
70
RECENT CLOSING PRICES
The following table sets forth the high, low and closing sales prices per
share of OSI common stock and Cell Pathways common stock as reported on the
Nasdaq National Market on Friday, February 7, 2003, the last trading day before
the public announcement of the merger agreement, and on April 28, 2003, the last
practicable trading day before the date of this document.
<Table>
<Caption>
CELL PATHWAYS
COMMON STOCK OSI COMMON STOCK
----------------------- -------------------------
HIGH LOW CLOSING HIGH LOW CLOSING
----- ----- ------- ------ ------ -------
February 7, 2003.................... $0.51 $0.48 $0.51 $14.45 $13.88 $14.18
April 28, 2003...................... $1.12 $1.08 $1.10 $19.69 $19.20 $19.64
</Table>
The market price of OSI common stock is likely to fluctuate prior to the
merger. You should obtain current market quotations. OSI cannot predict the
future prices for OSI common stock, or on which markets it will be traded in the
future.
DIVIDEND POLICY
OSI has never declared or paid any cash dividends on its capital stock. OSI
currently intends to retain earnings, if any, to support the development of its
business and does not anticipate paying cash dividends for the foreseeable
future. Payment of future dividends, if any, will be at the discretion of the
OSI Board of Directors after taking into account various factors, including its
financial condition, operating results and current and anticipated cash needs.
Cell Pathways has never paid cash dividends on its common stock and does
not expect to pay cash dividends on its common stock for the foreseeable future.
SHAREHOLDER RIGHTS PLAN
OSI
On September 27, 2000, the Board of Directors of OSI adopted a shareholder
rights plan, declared a dividend distribution of one Series SRPA Junior
Participating Preferred Stock Purchase Right on each outstanding share of its
common stock, and authorized the redemption of the rights issued pursuant to
OSI's then current shareholder rights plan. OSI distributed rights to all
shareholders of record at the close of business on September 27, 2000, the
record date. These rights entitle the holder to buy one one-thousandth of a
share of Series SRP Junior Participating Preferred Stock upon a triggering event
as discussed below.
Upon the actual acquisition of 17.5% or more of the outstanding common
stock of OSI by a person or group, the rights held by all holders other than the
acquiring person or group will be modified automatically to be rights to
purchase shares of common stock (instead of rights to purchase preferred stock)
at 50% of the then market value of such common stock. Furthermore, the
rightholders will have the further right to purchase shares of common stock at
the same discount if OSI merges with, or sells 50% or more of its assets or
earning power to, the acquiring person or group or any person acting for or with
the acquiring person or group. If the transaction takes the form of a merger of
OSI into another corporation, these rightholders will have the right to acquire
at the same percentage discount shares of common stock of the acquiring person
or other ultimate parent of such merger party.
OSI can redeem the rights at any time before (but not after) a person has
acquired 17.5% or more of the OSI common stock, with certain exceptions. The
rights will expire on August 31, 2010 if not redeemed prior to such date.
Cell Pathways
On December 3, 1998, the Board of Directors of Cell Pathways adopted a
stockholder rights plan. Under the plan, rights to purchase stock, at a rate of
one right for each outstanding share of Cell Pathways common stock, were
distributed to holders of record on December 15, 1998 and automatically attach
to shares issued
71
thereafter. Under the plan, the rights attach to Cell Pathways common stock and
are not represented by separate rights certificates until, and generally become
exercisable only after, a person or group (i) acquires 15% or more of Cell
Pathways outstanding common stock or (ii) commences a tender offer that would
result in such a person or group owning 15% or more of Cell Pathways outstanding
common stock. When the rights first become exercisable, a holder will be
entitled to buy from Cell Pathways a unit consisting of one one-hundredth of a
share of Series A Junior Participating Preferred Stock of Cell Pathways at a
purchase price of $90. However, if any person acquires 15% or more of Cell
Pathways outstanding common stock other than pursuant to a qualified offer, each
right not owned by a 15% or more stockholder would become exercisable for Cell
Pathways common stock (or in certain circumstances, other consideration) having
a market value equal to twice the exercise price of the right. The rights expire
on December 14, 2008, except as otherwise provided in the plan. The stockholder
rights plan was amended in February 2003 to make it inapplicable to OSI in
connection with the merger. There are currently no shares of Series A Junior
Participating Preferred Stock outstanding.
NUMBER OF STOCKHOLDERS AND NUMBER OF SHARES OUTSTANDING
As of April 28, 2003 there were 448 stockholders of OSI of record who held
an aggregate of 36,481,401 shares of OSI common stock.
As of April 28, 2003, there were 1,290 stockholders of Cell Pathways of
record who held an aggregate of 39,475,882 shares of Cell Pathways common stock.
72
COMPARISON OF RIGHTS OF THE OSI AND CELL PATHWAYS STOCKHOLDERS
Both OSI and Cell Pathways are incorporated under the laws of in the State
of Delaware. If the merger is completed, holders of Cell Pathways common stock
will become holders of OSI common stock and the rights of former Cell Pathways
stockholders will be governed by Delaware law and OSI's certificate of
incorporation and by-laws. The rights of Cell Pathways stockholders under Cell
Pathways' certificate of incorporation, as amended, and by-laws differ in
limited respects from the rights of OSI's stockholders under OSI's certificate
of incorporation, as amended, and the amended and restated by-laws. The material
differences are summarized in the table below. The summary does not purport to
be a complete discussion of, and is qualified in its entirety by reference to,
the Delaware General Corporation Law as well as to the OSI certificate of
incorporation, as amended, the OSI second amended and restated by-laws, the Cell
Pathways certificate of incorporation, as amended, and the Cell Pathways
by-laws, copies of which are on file with the SEC.
<Table>
<Caption>
OSI CELL PATHWAYS
STOCKHOLDER RIGHTS STOCKHOLDER RIGHTS
------------------ ------------------
Corporate Governance: The rights of OSI common The rights of Cell Pathways
stockholders are currently stockholders are currently
governed by Delaware law governed by Delaware law
and the certificate of and the certificate of
incorporation, as amended, incorporation, as amended,
and the amended and and the by-laws of Cell
restated by-laws of OSI. Pathways. Upon consummation
Upon consummation of the of the merger, the rights
merger, the rights of OSI of Cell Pathways
common stockholders will stockholders will be
remain governed by Delaware governed by Delaware law
law and the certificate of and the certificate of
incorporation, as amended, incorporation, as amended,
and the amended and and the amended and
restated by-laws of OSI restated by-laws of OSI.
Authorized Capital Stock: The authorized capital The authorized capital
stock of OSI consists of stock of Cell Pathways
200 million shares of consists of 150 million
common stock and five shares of common stock and
million shares of preferred ten million shares of
stock, of which 60,000 preferred stock of which
shares are designated as 600,000 shares are
"Series SRP Junior designated "Series A Junior
Participating Preferred Participating Preferred
Stock." Stock."
Number of Directors: OSI's amended and restated Cell Pathways' certificate
by-laws provide that the of incorporation, as
number of directors is amended, and by-laws
seven, however the Board of provide that the number of
Directors, by resolution directors will be
adopted by vote of a determined by the Board of
majority of the then Directors. The Cell
authorized directors, may Pathways Board of Directors
increase the number of currently consists of five
directors. The OSI Board of directors.
Directors currently
consists of ten directors.
Stockholder Nomination of Directors: OSI's amended and restated Cell Pathways' by-laws
by-laws provide that a provide that a
stockholder's written stockholder's written
notice to OSI's Secretary notice to Cell Pathways'
nominating a person for Secretary nominating a
election as a director must person for election as a
be received at least 45 director must be received
days prior to the date on not later than the close of
which OSI first mailed its business on the 60th day,
proxy materials for the nor earlier than the close
prior year's annual meeting of business on the 90th
of day, prior to the first
anniversary of
</Table>
73
<Table>
<Caption>
OSI CELL PATHWAYS
STOCKHOLDER RIGHTS STOCKHOLDER RIGHTS
------------------ ------------------
stockholders, or if OSI did the preceding year's annual
not have an annual meeting meeting. If no annual
of stockholders in the meeting was held in the
prior year, 90 days prior previous year or the date
to the date of the annual of the annual meeting has
meeting for the current been changed by more than
year. 30 days from the date
contemplated at the time of
the previous year's proxy
statement, such notice by
the stockholder to Cell
Pathways must be received
not earlier than the 90th
day prior to such annual
meeting and not later than
the 60th day prior to such
annual meeting or, in the
event public announcement
of the date of such annual
meeting is first made by
Cell Pathways fewer than 70
days prior to the date of
such annual meeting, by the
close of business on the
10th day following the day
on which public
announcement of the date of
such meeting is first made
by Cell Pathways.
Election of Directors: Under OSI's certificate of Under Cell Pathways'
incorporation, as amended, certificate of
holders of OSI common stock incorporation, as amended,
and Series SRP Junior holders of Cell Pathways
Preferred Stock vote common stock and Series A
together as one class on Junior Participating
the election of directors Preferred Stock vote
with respect to the together as one class in
election of directors, and the election of a class of
as a consequence, minority directors. Each class of
stockholders are not able directors is elected for a
to elect directors on the three year term. The
basis of their votes alone. holders of common stock are
not entitled to cumulative
voting rights.
Classification of Board of Directors: OSI's certificate of Cell Pathways' certificate
incorporation, as amended, of incorporation, as
does not provide for the amended, provides that the
division of the Board of Board of Directors shall be
Directors. divided into three classes
with each class serving a
staggered three-year term.
Removal of Directors: Under OSI's amended and Under Cell Pathways'
restated by-laws, a certificate of
director may be removed incorporation, as amended,
with or without cause by a and by-laws, a director may
vote of the holders of a be removed only for cause
majority of shares entitled and only by the affirmative
to vote for the election of vote of the holders of a
directors. majority of the voting
power of all
then-outstanding shares of
voting stock of Cell
Pathways entitled to vote
at an election of
directors.
</Table>
74
<Table>
<Caption>
OSI CELL PATHWAYS
STOCKHOLDER RIGHTS STOCKHOLDER RIGHTS
------------------ ------------------
Stockholder Action by Written Consent: According to OSI's According to Cell Pathways'
certificate of certificate of
incorporation, as amended, incorporation, as amended,
no stockholder action may the stockholders may act by
be taken without a meeting, unanimous written consent.
without prior notice and
without a vote.
Notice of Business at Annual Meeting: Under OSI's amended and Under Cell Pathways'
restated by-laws, written by-laws, written notice of
notice of the annual the annual meeting must be
meeting must include the provided not less than ten
date, time and place of nor more than 60 days
such meeting. before the date of the
annual meeting to each
stockholder entitled to
vote at such meeting and
must include the date,
time, place and purpose of
such meeting.
Special Meetings of Stockholders: OSI's amended and restated Cell Pathways' certificate
by-laws provide that a of incorporation, as
special meeting of amended, and its by-laws
stockholders may be called provide that a special
by the Board of Directors. meeting of stockholders may
Stockholders are not be called for any purpose
entitled to call special or purposes by (1) the
meetings of stockholders. chairman of the Board of
Written notice of special Directors, (2) the Chief
meetings must include the Executive Officer or (3) a
date, time, place and majority of the Board of
purpose and must be given Directors by resolution.
not less than 10 nor more Cell Pathways' by-laws
than 60 days prior to the provide specific procedures
special meeting. and notice requirements for
special meetings of
stockholders to be called
by person(s) other than the
Board of Directors.
Amendment of Certificate of Incorporation Generally, OSI's Provisions in Cell
and By-Laws: certificate of Pathways' certificate of
incorporation, as amended, incorporation, as amended,
provides the right to generally may be amended,
amend, alter, change or altered, changed or
repeal any provisions repealed as prescribed by
contained in its statute. However,
certificate of notwithstanding any other
incorporation. However, it provisions of the
may not be amended in any certificate of
manner which would incorporation or any
materially alter the rights provisions of law that
of the holders of Series might otherwise permit a
SRP Preferred Stock so as lesser vote or no vote, and
to affect them adversely in addition to any
without the affirmative affirmative vote of the
vote of the holders of the holders of any particular
majority of the outstanding class or series of the
shares of Series SRP voting stock required by
Preferred Stock, voting law, the certificate of
separately, as a class. incorporation, as amended,
or any preferred stock
According to OSI's designation, the
certificate of affirmative vote of the
incorporation, as amended, holders of at least 66 2/3%
OSI's by-laws may be of the voting power of all
amended by (1) a majority of the then-outstanding
of the Board of Directors shares of the voting stock,
or (2) an affirmative vote
of a
</Table>
75
<Table>
<Caption>
OSI CELL PATHWAYS
STOCKHOLDER RIGHTS STOCKHOLDER RIGHTS
------------------ ------------------
majority of stockholders voting together as a single
entitled to vote for the class, shall be required to
election of director. alter, amend or repeal
provisions of the
certificate of
incorporation, as amended,
with respect to Articles V,
VI and VII of the
certificate of
incorporation, as amended,
which refer to the
management of the company,
indemnification of
directors and officers and
the right to amend the
certificate of
incorporation.
If any shares of Series A
Junior Participating
Preferred Stock are
outstanding, the
certificate of
incorporation, as amended,
may not be amended in any
manner which would
materially alter or change
the powers, preferences or
special rights of the
Series A Junior
Participating Preferred
Stock so as to affect them
adversely without the
affirmative vote of the
majority or more of the
outstanding shares of such
stock, voting separately as
a class.
The certificate of
incorporation, as amended,
and the by-laws provide
that the by-laws may be
altered or amended or new
by-laws adopted by the
affirmative vote of at
least 66 2/3% of the voting
power of all of the
then-outstanding shares of
Cell Pathways' voting
stock. Cell Pathways'
certificate of
incorporation, as amended
does not permit
stockholders to pass
by-laws which would
interfere with the powers
of the Board of Directors
to manage the business of
Cell Pathways. The Board of
Directors also has the
power to adopt, amend, or
repeal the by-laws.
Voting Stock: The outstanding voting The outstanding voting
securities of OSI are the securities of Cell Pathways
shares of OSI common stock. are the shares of Cell
Holders of OSI common stock Pathways common stock.
Holders of
</Table>
76
<Table>
<Caption>
OSI CELL PATHWAYS
STOCKHOLDER RIGHTS STOCKHOLDER RIGHTS
------------------ ------------------
have one vote per share Cell Pathways common stock
held by them. have one vote per share
held by them.
Shareholder Rights Plan: OSI has a shareholder Cell Pathways has a
rights plan. Please see stockholder rights plan.
"Comparative Stock Prices Please see "Comparative
and Dividends -- Stock Prices and
Shareholder Rights Plan" Dividends -- Shareholder
beginning on page 71 for a Rights Plan" beginning on
description of the rights page 71 for a description
plan. of the rights plan.
Liquidation and Dividend Rights: Subject to preferences that Subject to the rights of
may be applicable to any any preferred stock then
shares of preferred stock outstanding, holders of
issued in the future, Cell Pathways common stock
holders of common stock are are entitled to ratably
entitled to receive ratably receive such dividends as
such dividends as may be may be declared by the
declared by the Board of Board of Directors out of
Directors out of funds funds legally available
legally available therefor. therefor, and such holders
In the event of a are entitled to share
liquidation, dissolution or ratably in all assets
winding up of OSI, holders available for distribution
of the common stock are in the event of any
entitled to share ratably liquidation, dissolution or
in all assets remaining winding up of Cell
after payment of Pathways.
liabilities and the
liquidation preference of Under Cell Pathways'
any then outstanding certificate of
preferred stock. Under incorporation, as amended,
OSI's certificate of the holders of the Series A
incorporation, as amended, Junior Participating
the holders of Series SRP Preferred Stock, if any,
Junior Preferred Stock receive preferential
receive preferential treatment over common
treatment over common stockholders with respect
stockholders with respect to liquidation, dissolution
to liquidation rights, and or winding up.
rank junior to all other
series of preferred stock
with respect to dividends
unless otherwise provided.
Conversion and Redemption Rights: Holders of common stock Neither Cell Pathways'
have no preemptive rights certificate of
and no right to convert incorporation, as amended,
their common stock into any nor its by-laws provide the
other securities. There are holders of Cell Pathways
no redemption or sinking common stock with
fund provisions applicable preemptive rights or with
to the common stock. If OSI any right to convert their
enters into any common stock into any other
consolidation, merger, securities. There are no
combination or other redemption or sinking fund
transaction in which the provisions applicable to
shares of common stock are the common stock. If Cell
exchanged for or changed Pathways enters into any
into other stock or consolidation, merger,
securities, cash or other combination or other
property, then in any such transaction in which shares
case the shares of Series of its common stock are
SRP Preferred Stock exchanged for or changed
into
</Table>
77
<Table>
<Caption>
OSI CELL PATHWAYS
STOCKHOLDER RIGHTS STOCKHOLDER RIGHTS
------------------ ------------------
will at the same time be other stock or securities,
similarly exchanged or cash or other property,
changed in an amount per then in any such case, the
share equal to 1,000 times shares of Series A Junior
the aggregate amount of Participating Preferred
stock, securities, cash or Stock outstanding, if any,
other property (payable in shall be at the same time
kind) into which or for similarly exchanged or
which each share of common changed into an amount
stock is changed or equal to 100 times the
exchanged. Holders of OSI aggregate amount of stock,
common stock and Series SRP securities, cash and/or any
Preferred have no other property (payable in
redemption rights under the kind) into which or for
OSI certificates of which each share of common
incorporation, as amended. stock is changed or
exchanged. Holders of Cell
Pathways Series A Junior
Participating Preferred
Stock have no redemption
rights under Cell Pathways'
certificate of
incorporation, as amended.
Appraisal Rights: OSI is incorporated under Cell Pathways is
Delaware law and the incorporated under Delaware
Delaware General law and the Delaware
Corporation Law governs the General Corporation Law
availability of appraisal governs the availability of
rights with respect to appraisal rights with
mergers involving OSI. respect to mergers
Because approval by OSI's involving Cell Pathways. If
stockholders is not the merger agreement is
required to complete the adopted by the Cell
merger, they are not Pathways stockholders at
entitled to appraisal the special meeting and the
rights under the Delaware merger is consummated by
General Corporation law in Cell Pathways and OSI, any
connection with the merger. Cell Pathways stockholder
who does not vote in favor
of the merger agreement may
elect to exercise his, her
or its appraisal rights as
described under "The Merger
and the Merger Agreement --
Appraisal or Dissenters'
Rights" beginning on page
50 and in Section 262 of
the Delaware General
Corporation Law attached to
this proxy
statement/prospectus as
Annex D.
</Table>
78
LEGAL MATTERS
Saul Ewing LLP, Philadelphia, Pennsylvania will pass upon the validity of
the OSI common stock offered by this proxy statement/prospectus. Mintz, Levin,
Cohn, Ferris, Glovsky and Popeo, P.C. has passed upon the tax treatment of the
merger for OSI.
Morgan, Lewis & Bockius LLP, Philadelphia, Pennsylvania has passed upon the
tax treatment of the merger for Cell Pathways.
EXPERTS
The consolidated financial statements of OSI and subsidiaries as of
September 30, 2002 and 2001 and for each of the years in the three-year period
ended September 30, 2002, have been incorporated by reference herein and in the
registration statement on Form S-4 of which this proxy statement/prospectus
forms a part, in reliance upon the report of KPMG LLP, independent accountants,
incorporated by reference herein, and upon the authority of said firm as experts
in accounting and auditing. The report covering the September 30, 2002
consolidated financial statements refers to a change in the method of revenue
recognition for certain upfront, non-refundable fees in 2001; the adoption of
the provisions of Statement of Financial Accounting Standards No. 141, "Business
Combinations" and No. 142, "Goodwill and Other Intangible Assets", for
acquisitions consummated on or after July 1, 2001; and the adoption of the
provisions of Statement of Financial Accounting Standards No. 145 "Rescission of
FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and
Technical Corrections" relating to the classification of the effect of early
debt extinguishments in 2002.
The financial statements of the Oncology Related Assets, Liabilities and
Activities of Gilead Sciences, Inc. appearing in OSI Pharmaceuticals, Inc.'s
Current Report on Form 8-K/A filed with the Securities and Exchange Commission
on March 6, 2002, have been audited by Ernst & Young LLP, independent auditors,
as set forth in their report thereon included therein and incorporated herein by
reference in this proxy statement/ prospectus and elsewhere in the registration
statement. Such financial statements are incorporated herein by reference in
reliance upon such report given on the authority of such firm as experts in
accounting and auditing.
The consolidated financial statements of Cell Pathways as of December 31,
2002 and for the year then ended and for the period from August 10, 1990
(inception) through December 31, 2002, have been included and incorporated by
reference herein and elsewhere in the registration statement on Form S-4 of
which this proxy statement/prospectus forms a part, in reliance upon the report
of KPMG LLP, independent accountants, appearing elsewhere and incorporated by
reference herein, and upon the authority of said firm as experts in accounting
and auditing. The audit report covering Cell Pathways' December 31, 2002
consolidated financial statements contains an explanatory paragraph that states
that Cell Pathways' recurring losses from operations, accumulated deficit and
limited liquid resources raise substantial doubt about Cell Pathways' ability to
continue as a going concern. Cell Pathways' consolidated financial statements do
not include any adjustment that might result from the outcome of that
uncertainty.
The consolidated financial statements of Cell Pathways as of December 31,
2001 and each of the years in the two-year period ended December 31, 2001 and
for the period from August 10, 1990 (inception) through December 31, 2001
included and incorporated by reference in this proxy statement/prospectus and
elsewhere in the registration statement have been audited by Arthur Andersen
LLP, independent auditors. Because Arthur Andersen LLP has ceased conducting
business, a consent to use their report on such financial statements in this
proxy statement/prospectus cannot be obtained. Accordingly, Arthur Andersen's
consent has been omitted in reliance upon SEC rules, which permit OSI and Cell
Pathways to dispense with the requirement to file the written consent of Arthur
Andersen LLP under the circumstances. Since Arthur Andersen LLP has not
consented to the use of their report in this proxy statement/prospectus, you
will not be able to recover against Arthur Andersen LLP under Section 11 of the
Securities Act of 1933, as amended, for any untrue statements of a material fact
contained in the financial statements of Cell Pathways audited by Arthur
Andersen LLP or for any omission to state a material fact required to be stated
in those financial statements.
79
FUTURE CELL PATHWAYS STOCKHOLDER PROPOSALS
The 2003 annual meeting of the stockholders of Cell Pathways will be held
only if the merger agreement is not adopted. The deadline for submission of
stockholder proposals for inclusion in Cell Pathways' proxy materials for the
2003 annual meeting was December 23, 2002.
In accordance with Cell Pathways' by-laws, notice relating to nominations
for director or proposed business to be considered at the 2003 annual meeting of
the stockholders of Cell Pathways must be given no earlier than February 28,
2003 and no later than March 30, 2003. The notice must meet certain other
requirements set forth in Cell Pathways' by-laws. These requirements do not
affect the procedures for submitting stockholder proposals for inclusion in the
proxy statement, nor do they apply to questions a stockholder may wish to ask at
the meeting.
OTHER MATTERS
Neither OSI nor Cell Pathways presently intends to bring before the Cell
Pathways special meeting any matters other than those specified in the notice
accompanying this proxy statement/prospectus, and neither OSI nor Cell Pathways
has any knowledge of any other matters which may be brought up by other persons.
However, if any other matters come before the Cell Pathways special meeting or
any adjournments of the meeting, the persons named in the enclosed form of
proxy, including any substitutes, will use their best judgment to vote the
proxies.
WHERE YOU CAN FIND MORE INFORMATION
OSI and Cell Pathways file annual, quarterly and special reports, proxy
statements and other information with the Securities and Exchange Commission.
You may read and copy any reports, statements or other information that OSI and
Cell Pathways file with the SEC, without charge, at the Public Reference Section
of the SEC, 450 Fifth Street, N.W. Room 1024, Washington, D.C. 20549.
Please call the SEC at 1-800-SEC-0330 or (202) 942-8090 for further
information on its public reference room. These SEC filings are also available
to the public from commercial document retrieval services and at the Internet
world wide web site maintained by the SEC at http://www.sec.gov.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
OSI filed a registration statement on Form S-4 to register with the SEC the
OSI common stock, the contingent value rights and the OSI common stock
underlying the contingent value rights to be issued to Cell Pathways'
stockholders in the merger. This proxy statement/prospectus is a part of that
registration statement and constitutes a prospectus of OSI in addition to being
a proxy statement of Cell Pathways. As allowed by SEC rules, this proxy
statement/prospectus does not contain all the information you can find in OSI's
registration statement or the exhibits to the registration statement.
The SEC allows OSI and Cell Pathways to incorporate by reference
information into this proxy statement/prospectus, which means that the companies
can disclose important information to you by referring you to other documents
filed separately with the SEC. The information incorporated by reference is
considered part of this proxy statement/prospectus, except for any information
superseded by information contained directly in this proxy statement/prospectus
or in later-filed documents incorporated by reference in this proxy
statement/prospectus.
This proxy statement/prospectus incorporates by reference the documents set
forth below that OSI and Cell Pathways have previously filed with the SEC. These
documents contain important business and financial information about OSI and
Cell Pathways that is not included in or delivered with this proxy
statement/prospectus.
80
OSI FILINGS (FILE NO. 000-15190)
- Quarterly Report on Form 10-Q for the quarter ended December 31, 2002,
filed on February 10, 2003;
- Annual Report on Form 10-K for the fiscal year ended September 30, 2002,
filed on December 12, 2002, amended on January 23, 2003 and on April 29,
2003;
- Current Reports on Forms 8-K, filed on January 7, 2002 and amended on
March 6, 2002, October 1, 2002, February 11, 2003 and March 12, 2003,
amended on March 17, 2003 and on May 6, 2003;
- Definitive Proxy Statement on Schedule 14A, filed on January 28, 2003;
and
- The description of OSI common stock contained in OSI's Registration
Statement on Form 8-A, registering the common stock under Section 12 of
the Securities Exchange Act of 1934, including any amendments or reports
filed for the purpose of updating such description.
CELL PATHWAYS FILINGS (FILE NO. 000-24889)
- Annual Report on Form 10-K for the fiscal year ended December 31, 2002,
filed on March 27, 2003; and
- The description of Cell Pathways common stock contained in Cell Pathways'
Registration Statement on Form 8-A, registering the common stock under
Section 12 of the Securities Exchange Act of 1934, including any
amendments or reports filed for the purpose of updating such description.
OSI also incorporates by reference additional documents that may be filed
with the SEC under Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act
between the date of this proxy statement/prospectus and the date of the Cell
Pathways special meeting including any adjournments or postponements. These
include periodic reports, such as annual reports on Form 10-K, quarterly reports
on Form 10-Q and current reports on Form 8-K, as well as proxy statements.
To receive a free copy of any of the documents incorporated by reference in
this proxy statement/prospectus call or write:
<Table>
Robert L. Van Nostrand Brian Hayden
Vice President and Chief Financial Chief Financial Officer
Officer Cell Pathways, Inc.
OSI Pharmaceuticals, Inc. 702 Electronic Drive
58 South Service Road, Suite 110 Horsham, Pennsylvania 19044
Melville, New York 11747 (215) 706-3800
(631) 962-2000
</Table>
We will not send exhibits to the documents unless those exhibits have been
specifically incorporated by reference in this proxy statement/prospectus.
OSI has supplied all information contained or incorporated by reference in
this proxy statement/prospectus relating to OSI, and Cell Pathways has supplied
all information contained or incorporated by reference in this proxy
statement/prospectus relating to Cell Pathways.
You should rely only on the information contained or incorporated by
reference in this proxy statement/prospectus. OSI and Cell Pathways has not
authorized anyone to provide you with information that is different from what is
contained in this proxy statement/prospectus. This proxy statement/prospectus is
dated May 6, 2003. You should not assume that the information contained in this
proxy statement/prospectus is accurate as of any date other than that date.
Neither the mailing of this proxy statement/prospectus to stockholders nor the
issuance of OSI common stock in the merger creates any implication to the
contrary.
81
CELL PATHWAYS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<Table>
<Caption>
Page
----
Independent Auditors' Report................................ F-2
Report of Independent Public Accountants.................... F-3
Consolidated Balance Sheets as of December 31, 2002 and
2001...................................................... F-4
Consolidated Statements of Operations for the years ended
December 31, 2002, 2001 and 2000 and for the period from
inception (August 10, 1990) to December 31, 2002.......... F-5
Consolidated Statement of Stockholders' Equity (Deficit) and
Partners' Investment for the period from inception (August
10, 1990) to December 31, 2002............................ F-6 to F-12
Consolidated Statements of Cash Flows for the years ended
December 31, 2002, 2001 and 2000 and for the period from
inception (August 10, 1990) to December 31, 2002.......... F-13
Notes to Consolidated Financial Statements.................. F-14 to F-29
</Table>
F-1
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Cell Pathways, Inc.:
We have audited the accompanying consolidated balance sheet of Cell
Pathways, Inc. (a development stage company) and subsidiaries as of December 31,
2002, and the related consolidated statements of operations, stockholders'
equity (deficit) and partners' investment and cash flows for the year then
ended, and for the period from August 10, 1990 (inception) through December 31,
2002. 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 audit. The consolidated financial statements of Cell
Pathways, Inc. and subsidiaries as of December 31, 2001 and for each of the
years in the two-year period ended December 31, 2001 and for the period from
August 10, 1990 (inception) through December 31, 2002, to the extent related to
the period from August 10, 1990 (inception) through December 31, 2001, were
audited by other auditors who have ceased operations. Those auditors expressed
an unqualified opinion on those financial statements in their report dated
February 25, 2002. Our opinion on the consolidated statements of operations,
stockholders' equity (deficit) and partners' investment and cash flows, insofar
as it relates to the amounts included for the period from August 10, 1990
(inception) through December 31, 2001, is based solely on the report of the
other auditors.
We conducted our audit in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, based on our audit and the report of other auditors, the
2002 consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Cell Pathways, Inc. (a development
stage company) and subsidiaries as of December 31, 2002, and the results of
their operations and their cash flows for the year then ended, and for the
period from August 10, 1990 (inception) through December 31, 2002, in conformity
with accounting principles generally accepted in the United States of America.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed in Note
2 to the consolidated financial statements, the Company has suffered recurring
losses from operations, has an accumulated deficit and has limited liquid
resources that raise substantial doubt about its ability to continue as a going
concern. Management's plans in regard to these matters are also described in
Note 2. The consolidated financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
/s/ KPMG LLP
Philadelphia, Pennsylvania
February 14, 2003
F-2
THE FOLLOWING IS A COPY OF A REPORT ISSUED BY ARTHUR ANDERSEN LLP AND INCLUDED
IN THE 2001 FORM 10-K REPORT FILED ON MARCH 22, 2002. THIS REPORT HAS NOT BEEN
REISSUED BY ARTHUR ANDERSEN LLP, AND ARTHUR ANDERSEN LLP HAS NOT CONSENTED TO
ITS USE IN THIS PROXY STATEMENT/PROSPECTUS.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
The Board of Directors and Stockholders
Cell Pathways, Inc.:
We have audited the accompanying consolidated balance sheets of Cell
Pathways, Inc. (a Delaware corporation in the development stage) and
subsidiaries as of December 31, 2001 and 2000, and the related consolidated
statements of operations, stockholders' equity (deficit) and partners'
investment, and cash flows for each of the three years in the period ended
December 31, 2001 and for the period from inception (August 10, 1990) to
December 31, 2001. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Cell Pathways, Inc. and
subsidiaries as of December 31, 2001 and 2000 and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2001 and for the period from inception (August 10, 1990) to
December 31, 2001, in conformity with accounting principles generally accepted
in the United States.
/s/ ARTHUR ANDERSEN LLP
Philadelphia, Pennsylvania
February 25, 2002
F-3
CELL PATHWAYS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED BALANCE SHEETS
<Table>
<Caption>
DECEMBER 31,
-----------------------------
2002 2001
------------- -------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 10,920,335 $ 2,905,767
Short-term investments.................................... -- 24,808,148
Accounts receivable....................................... 472,012 318,450
Inventory................................................. 2,140,615 --
Prepaid expenses and other................................ 792,610 1,130,971
Due from insurance company (Note 14)...................... -- 2,000,000
------------- -------------
Total current assets................................... 14,325,572 31,163,336
EQUIPMENT, FURNITURE AND LEASEHOLD IMPROVEMENTS, net........ 785,766 992,856
RESTRICTED CASH............................................. 468,233 463,499
NOTES RECEIVABLE FROM OFFICERS.............................. 938,972 944,397
PRODUCT DISTRIBUTION RIGHTS................................. 908,333 --
OTHER ASSETS................................................ 42,808 57,400
------------- -------------
$ 17,469,684 $ 33,621,488
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of note payable........................... $ 180,330 $ 277,473
Current installments of obligation under capital lease.... 57,086 40,493
Accounts payable.......................................... 718,023 847,552
Accrued compensation...................................... 198,842 764,843
Other accrued liabilities................................. 3,082,995 3,272,314
Deferred revenue.......................................... 1,492,346 --
Accrued litigation settlement and expense................. -- 2,642,822
------------- -------------
Total current liabilities.............................. 5,729,622 7,845,497
------------- -------------
NOTE PAYABLE................................................ -- 180,330
------------- -------------
OBLIGATION UNDER CAPITAL LEASE.............................. 36,668 62,020
------------- -------------
COMMITMENTS AND CONTINGENCIES (NOTE 14)
STOCKHOLDERS' EQUITY:
Preferred Stock, $.01 par value, 10,000,000 shares
authorized; none issued and outstanding................... -- --
Common Stock $.01 par value, 150,000,000 shares authorized;
39,363,698 and 31,148,255 shares issued and outstanding... 393,637 311,482
Additional paid-in capital.................................. 152,524,388 148,631,231
Stock subscription receivable from issuance of Common
Stock..................................................... -- (50,683)
Deferred compensation....................................... (58,672) (73,652)
Deficit accumulated during the development stage............ (141,155,959) (123,284,737)
------------- -------------
Total stockholders' equity............................. 11,703,394 25,533,641
------------- -------------
$ 17,469,684 $ 33,621,488
============= =============
</Table>
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
F-4
CELL PATHWAYS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF OPERATIONS
<Table>
<Caption>
PERIOD FROM
YEAR ENDED DECEMBER 31, INCEPTION
------------------------------------------ (AUGUST 10, 1990) TO
2002 2001 2000 DECEMBER 31, 2002
------------ ------------ ------------ --------------------
REVENUES:
Product sales................... $ 536,873 $ -- $ -- $ 536,873
Marketing services.............. 611,264 942,231 329,694 1,883,189
------------ ------------ ------------ -------------
1,148,137 942,231 329,694 2,420,062
------------ ------------ ------------ -------------
EXPENSES:
Cost of products sold........... 219,706 -- -- 219,706
Research and development........ 17,145,109 17,765,243 22,257,805 110,551,345
Selling, general and
administrative............... 8,704,381 7,756,128 7,246,582 38,382,298
Litigation settlement and
expense (Note 14)............ (6,749,000) 8,492,000 -- 1,743,000
------------ ------------ ------------ -------------
19,320,196 34,013,371 29,504,387 150,896,349
------------ ------------ ------------ -------------
Operating loss............... (18,172,059) (33,071,140) (29,174,693) (148,476,287)
INTEREST INCOME, net.............. 300,837 1,666,705 2,257,885 7,320,328
------------ ------------ ------------ -------------
NET LOSS.......................... $(17,871,222) $(31,404,435) $(26,916,808) $(141,155,959)
============ ============ ============ =============
Basic and diluted net loss per
Common share.................... $ (0.51) $ (1.01) $ (0.96)
============ ============ ============
Shares used in computing basic and
diluted net loss per Common
share........................... 34,712,101 31,108,939 28,003,649
============ ============ ============
</Table>
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
F-5
CELL PATHWAYS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT) AND PARTNERS'
INVESTMENT
FOR THE PERIOD FROM INCEPTION (AUGUST 10, 1990) TO DECEMBER 31, 2002
<Table>
<Caption>
REDEEMABLE CONVERTIBLE
PREFERRED STOCK PREFERRED STOCK COMMON STOCK
PARTNERS' --------------------- ---------------------------- ------------------------
INVESTMENT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
----------- ------- ----------- ------------- ------------ ---------- -----------
BALANCE, Inception (August 10,
1990)......................... $ -- -- $ -- -- $ -- -- $ --
Partner cash contributions in
September 1990 for Class A
Partnership Units........... 406,000 -- -- -- -- -- --
Partner contribution of
interest in research grant
in September 1990 for Class
A Partnership Units, at
historical cost............. 48,638 -- -- -- -- -- --
Net loss...................... -- -- -- -- -- -- --
----------- ------- ----------- ------------- ------------ ---------- -----------
BALANCE, December 31, 1990..... 454,638 -- -- -- -- -- --
Partner cash contributions in
March 1991 for Class A
Partnership Units........... 406,000 -- -- -- -- -- --
Partner cash contributions in
December 1991 for Class B
Partnership Units........... 896,563 -- -- -- -- -- --
Net loss...................... -- -- -- -- -- -- --
----------- ------- ----------- ------------- ------------ ---------- -----------
BALANCE, December 31, 1991..... 1,757,201 -- -- -- -- -- --
Partner cash contributions in
January and April 1992 for
Class B Partnership Units... 21,812 -- -- -- -- -- --
Partner cash contributions in
December 1992 for Class B
Partnership Units........... 133,300 -- -- -- -- -- --
Partner cash contributions in
December 1992 for Class C
Partnership Units........... 1,540,000 -- -- -- -- -- --
Partner cash contributions in
December 1992 for Class D
Partnership Units........... 1,475,027 -- -- -- -- -- --
Net loss...................... -- -- -- -- -- -- --
----------- ------- ----------- ------------- ------------ ---------- -----------
BALANCE, December 31, 1992..... 4,927,340 -- -- -- -- -- --
Partner cash contributions in
January 1993 to March 1993
for Class D Partnership
Units....................... 385,015 -- -- -- -- -- --
Exchange of interests in the
Partnership in September
1993 for 872,000 shares of
Series A
Convertible Preferred Stock... $ (812,000) -- $ -- 872,400 $ 812,000 -- $ --
<Caption>
STOCK
STOCK SUBSCRIPTION
SUBSCRIPTION RECEIVABLE DEFICIT
RECEIVABLE FROM ACCUMULATED
ADDITIONAL FROM ISSUANCE ISSUANCE OF DURING THE
PAID-IN OF CONVERTIBLE COMMON DEFERRED DEVELOPMENT
CAPITAL PREFERRED STOCK STOCK COMPENSATION STAGE
------------ --------------- ------------ ------------ -------------
BALANCE, Inception (August 10,
1990)......................... $ -- $ -- $ -- $ -- $ --
Partner cash contributions in
September 1990 for Class A
Partnership Units........... -- -- -- -- --
Partner contribution of
interest in research grant
in September 1990 for Class
A Partnership Units, at
historical cost............. -- -- -- -- --
Net loss...................... -- -- -- -- (252,116)
------------ ----------- -------- -------- -------------
BALANCE, December 31, 1990..... -- -- -- -- (252,116)
Partner cash contributions in
March 1991 for Class A
Partnership Units........... -- -- -- -- --
Partner cash contributions in
December 1991 for Class B
Partnership Units........... -- -- -- -- --
Net loss...................... -- -- -- -- (738,204)
------------ ----------- -------- -------- -------------
BALANCE, December 31, 1991..... -- -- -- -- (990,320)
Partner cash contributions in
January and April 1992 for
Class B Partnership Units... -- -- -- -- --
Partner cash contributions in
December 1992 for Class B
Partnership Units........... -- -- -- -- --
Partner cash contributions in
December 1992 for Class C
Partnership Units........... -- -- -- -- --
Partner cash contributions in
December 1992 for Class D
Partnership Units........... -- -- -- -- --
Net loss...................... -- -- -- -- (1,391,531)
------------ ----------- -------- -------- -------------
BALANCE, December 31, 1992..... -- -- -- -- (2,381,851)
Partner cash contributions in
January 1993 to March 1993
for Class D Partnership
Units....................... -- -- -- -- --
Exchange of interests in the
Partnership in September
1993 for 872,000 shares of
Series A
Convertible Preferred Stock... $ -- $ -- $ -- $ -- $ --
</Table>
(continued)
The accompanying Notes to Consolidated Financial Statements are an integral part
of this statement.
F-6
CELL PATHWAYS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT) AND PARTNERS'
INVESTMENT
FOR THE PERIOD FROM INCEPTION (AUGUST 10, 1990) TO DECEMBER 31, 2002
<Table>
<Caption>
REDEEMABLE CONVERTIBLE
PREFERRED STOCK PREFERRED STOCK COMMON STOCK
PARTNERS' --------------------- ---------------------------- ------------------------
INVESTMENT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
----------- ------- ----------- ------------- ------------ ---------- -----------
Exchange of interests in the
Partnership in September 1993
for 848,100 shares of Series B
Convertible Preferred Stock... $ (868,000) -- $ -- 848,100 $ 868,000 -- $ --
Exchange of interests in the
Partnership in September
1993 for 700,000 shares of
Series C Convertible
Preferred Stock............. (1,540,000) -- -- 700,000 1,540,000 -- --
Exchange of interests in the
Partnership in September
1993 for 616,808 shares of
Series D Convertible
Preferred Stock............. (1,860,042) -- -- 616,808 1,860,042 -- --
Exchange of interests in the
Partnership in September
1993 for 61,250 shares of
Redeemable Preferred Stock.. (613) 61,250 613 -- -- -- --
Exchange of interests in the
Partnership in September
1993 for 2,279,500 shares of
Common Stock................ (231,700) -- -- -- -- 2,279,500 22,795
Net loss...................... -- -- -- -- -- -- --
----------- ------- ----------- ------------- ------------ ---------- -----------
BALANCE, December 31, 1993..... -- 61,250 613 3,037,308 5,080,042 2,279,500 22,795
Issuance of Common Stock for
services valued at $0.41 per
share....................... -- -- -- -- -- 16,667 167
Issuance of 542,761 shares of
Series E
Convertible Preferred Stock
for cash at $4.10 per
share....................... -- -- -- 542,761 2,225,320 -- --
Net loss...................... $ -- $ -- -- $ -- -- $ --
----------- ------- ----------- ------------- ------------ ---------- -----------
<Caption>
STOCK
STOCK SUBSCRIPTION
SUBSCRIPTION RECEIVABLE DEFICIT
RECEIVABLE FROM ACCUMULATED
ADDITIONAL FROM ISSUANCE ISSUANCE OF DURING THE
PAID-IN OF CONVERTIBLE COMMON DEFERRED DEVELOPMENT
CAPITAL PREFERRED STOCK STOCK COMPENSATION STAGE
------------ --------------- ------------ ------------ -------------
Exchange of interests in the
Partnership in September 1993
for 848,100 shares of Series B
Convertible Preferred Stock... $ -- $ -- $ -- $ -- $ --
Exchange of interests in the
Partnership in September
1993 for 700,000 shares of
Series C Convertible
Preferred Stock............. -- -- -- -- --
Exchange of interests in the
Partnership in September
1993 for 616,808 shares of
Series D Convertible
Preferred Stock............. -- -- -- -- --
Exchange of interests in the
Partnership in September
1993 for 61,250 shares of
Redeemable Preferred Stock.. -- -- -- -- --
Exchange of interests in the
Partnership in September
1993 for 2,279,500 shares of
Common Stock................ 208,905 -- -- -- --
Net loss...................... -- -- -- -- (2,269,099)
------------ ----------- -------- -------- -------------
BALANCE, December 31, 1993..... 208,905 -- -- -- (4,650,950)
Issuance of Common Stock for
services valued at $0.41 per
share....................... 6,667 -- -- -- --
Issuance of 542,761 shares of
Series E
Convertible Preferred Stock
for cash at $4.10 per
share....................... -- (23,501) -- -- --
Net loss...................... $ -- $ -- $ -- $ -- $ (3,110,446)
------------ ----------- -------- -------- -------------
</Table>
(continued)
The accompanying Notes to Consolidated Financial Statements are an integral part
of this statement.
F-7
CELL PATHWAYS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT) AND PARTNERS'
INVESTMENT
FOR THE PERIOD FROM INCEPTION (AUGUST 10, 1990) TO DECEMBER 31, 2002
<Table>
<Caption>
REDEEMABLE CONVERTIBLE
PREFERRED STOCK PREFERRED STOCK COMMON STOCK
PARTNERS' --------------------- ---------------------------- ------------------------
INVESTMENT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
----------- ------- ----------- ------------- ------------ ---------- -----------
BALANCE, December 31, 1994..... $ -- 61,250 $ 613 3,580,069 $ 7,305,362 2,296,167 $ 22,962
Issuance of 1,121,800 shares
of Series E
Convertible Preferred Stock
for cash at $3.15 per
share....................... -- -- -- 1,121,800 3,533,670 -- --
Issuance of 163,701 shares of
Series E
Convertible Preferred Stock to
effect the price change from
$4.10 to $3.15.............. -- -- -- 163,701 -- -- --
Conversion of bridge notes
payable plus interest to
253,633 shares of Series E
Convertible Preferred Stock at
a price of $3.15 per
share....................... -- -- -- 253,633 800,199 -- --
Net loss...................... -- -- -- -- -- -- --
----------- ------- ----------- ------------- ------------ ---------- -----------
BALANCE, December 31, 1995..... -- 61,250 613 5,119,203 11,639,231 2,296,167 22,962
Issuance of 887,661 shares of
Series E
Convertible Preferred Stock
for cash at $3.15 per share,
net of offering costs of
$298,313.................... -- -- -- 887,661 2,497,819 -- --
Collection of Series E
Convertible Preferred Stock
subscription receivable..... -- -- -- -- -- -- --
Issuance of 270,270 shares of
Series F
Convertible Preferred Stock
for cash at $3.70 per
share....................... -- -- -- 270,270 1,000,000 -- --
Issuance of 185,000 shares of
Common Stock in February
1996 as bonuses to officers
and employees valued at
$0.32 per share............. -- -- -- -- -- 185,000 1,850
Issuance of 14,828 shares of
Common Stock in May 1996 for
consulting services, valued
at $0.32 per share.......... -- -- -- -- -- 14,828 148
Exercise of warrants to
purchase 148 shares of
Series E Convertible
Preferred Stock at $3.15 per
share....................... $ -- -- $ -- 148 $ 466 -- $ --
<Caption>
STOCK
STOCK SUBSCRIPTION
SUBSCRIPTION RECEIVABLE DEFICIT
RECEIVABLE FROM ACCUMULATED
ADDITIONAL FROM ISSUANCE ISSUANCE OF DURING THE
PAID-IN OF CONVERTIBLE COMMON DEFERRED DEVELOPMENT
CAPITAL PREFERRED STOCK STOCK COMPENSATION STAGE
------------ --------------- ------------ ------------ -------------
BALANCE, December 31, 1994..... $ 215,572 $ (23,501) $ -- $ -- $ (7,761,396)
Issuance of 1,121,800 shares
of Series E
Convertible Preferred Stock
for cash at $3.15 per
share....................... -- (125) -- -- --
Issuance of 163,701 shares of
Series E
Convertible Preferred Stock to
effect the price change from
$4.10 to $3.15.............. -- -- -- -- --
Conversion of bridge notes
payable plus interest to
253,633 shares of Series E
Convertible Preferred Stock at
a price of $3.15 per
share....................... -- -- -- -- --
Net loss...................... -- -- -- -- (3,190,824)
------------ ----------- -------- -------- -------------
BALANCE, December 31, 1995..... 215,572 (23,626) -- -- (10,952,220)
Issuance of 887,661 shares of
Series E
Convertible Preferred Stock
for cash at $3.15 per share,
net of offering costs of
$298,313.................... -- -- -- -- --
Collection of Series E
Convertible Preferred Stock
subscription receivable..... -- 20,505 -- -- --
Issuance of 270,270 shares of
Series F
Convertible Preferred Stock
for cash at $3.70 per
share....................... -- -- -- -- --
Issuance of 185,000 shares of
Common Stock in February
1996 as bonuses to officers
and employees valued at
$0.32 per share............. 57,350 -- -- -- --
Issuance of 14,828 shares of
Common Stock in May 1996 for
consulting services, valued
at $0.32 per share.......... 4,596 -- -- -- --
Exercise of warrants to
purchase 148 shares of
Series E Convertible
Preferred Stock at $3.15 per
share....................... $ -- $ -- $ -- $ -- $ --
</Table>
(continued)
The accompanying Notes to Consolidated Financial Statements are an integral part
of this statement.
F-8
CELL PATHWAYS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT) AND PARTNERS'
INVESTMENT
FOR THE PERIOD FROM INCEPTION (AUGUST 10, 1990) TO DECEMBER 31, 2002
<Table>
<Caption>
REDEEMABLE CONVERTIBLE
PREFERRED STOCK PREFERRED STOCK COMMON STOCK
PARTNERS' --------------------- ---------------------------- ------------------------
INVESTMENT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
----------- ------- ----------- ------------- ------------ ---------- -----------
Exercise of options to
purchase Common Stock at
$0.32 per share............. $ -- -- $ -- -- $ -- 222,850 $ 2,229
Net loss...................... -- -- -- -- -- -- --
----------- ------- ----------- ------------- ------------ ---------- -----------
BALANCE, December 31, 1996..... -- 61,250 613 6,277,282 15,137,516 2,718,845 27,189
Issuance of 4,538,675 shares
of Series F Convertible
Preferred Stock for cash at
$3.70 per share, net of
offering costs of
$249,239.................... -- -- -- 4,538,675 16,547,859 -- --
Exercise of warrants to
purchase 149,462 shares of
Series E Convertible
Preferred stock at $3.15 per
share....................... -- -- -- 149,462 470,805 -- --
Exercise of warrants to
purchase 492 shares of
Series F Convertible
Preferred stock at $3.70 per
share....................... -- -- -- 492 1,820 -- --
Cashless exercise of warrants
to purchase 2,476 shares of
Series E Convertible
Preferred Stock............. -- -- -- 2,476 -- -- --
Exercise of options by
employees and directors at
$0.32 -- $0.50 per share.... -- -- -- -- -- 251,250 2,512
Issuance of Common Stock to
director at $3.70 per
share....................... -- -- -- -- -- 10,000 100
Issuance of Common Stock to
consultant at $3.70 per
share....................... -- -- -- -- -- 10,000 100
Collection of stock
subscription receivable..... -- -- -- -- -- -- --
Provision for redemption of
Redeemable Preferred Stock.. -- -- 1,091,387 -- -- -- --
Net loss...................... $ -- -- $ -- -- $ -- -- $ --
----------- ------- ----------- ------------- ------------ ---------- -----------
<Caption>
STOCK
STOCK SUBSCRIPTION
SUBSCRIPTION RECEIVABLE DEFICIT
RECEIVABLE FROM ACCUMULATED
ADDITIONAL FROM ISSUANCE ISSUANCE OF DURING THE
PAID-IN OF CONVERTIBLE COMMON DEFERRED DEVELOPMENT
CAPITAL PREFERRED STOCK STOCK COMPENSATION STAGE
------------ --------------- ------------ ------------ -------------
Exercise of options to
purchase Common Stock at
$0.32 per share............. $ 69,084 $ -- $ -- $ -- $ --
Net loss...................... -- -- -- -- (4,735,204)
------------ ----------- -------- -------- -------------
BALANCE, December 31, 1996..... 346,602 (3,121) -- -- (15,687,424)
Issuance of 4,538,675 shares
of Series F Convertible
Preferred Stock for cash at
$3.70 per share, net of
offering costs of
$249,239.................... -- -- -- -- --
Exercise of warrants to
purchase 149,462 shares of
Series E Convertible
Preferred stock at $3.15 per
share....................... -- -- -- -- --
Exercise of warrants to
purchase 492 shares of
Series F Convertible
Preferred stock at $3.70 per
share....................... -- -- -- -- --
Cashless exercise of warrants
to purchase 2,476 shares of
Series E Convertible
Preferred Stock............. -- -- -- -- --
Exercise of options by
employees and directors at
$0.32 -- $0.50 per share.... 109,462 -- -- -- --
Issuance of Common Stock to
director at $3.70 per
share....................... 36,900 -- (37,000) -- --
Issuance of Common Stock to
consultant at $3.70 per
share....................... 36,900 -- -- -- --
Collection of stock
subscription receivable..... -- 3,121 -- -- --
Provision for redemption of
Redeemable Preferred Stock.. (74,000) -- -- -- --
Net loss...................... $ -- $ -- $ -- $ -- $ (10,296,912)
------------ ----------- -------- -------- -------------
</Table>
(continued)
The accompanying Notes to Consolidated Financial Statements are an integral part
of this statement.
F-9
CELL PATHWAYS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT) AND PARTNERS'
INVESTMENT
FOR THE PERIOD FROM INCEPTION (AUGUST 10, 1990) TO DECEMBER 31, 2002
<Table>
<Caption>
REDEEMABLE CONVERTIBLE
PREFERRED STOCK PREFERRED STOCK COMMON STOCK
PARTNERS' --------------------- ---------------------------- ------------------------
INVESTMENT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
----------- ------- ----------- ------------- ------------ ---------- -----------
BALANCE, December 31, 1997..... $ -- 61,250 $ 1,092,000 10,968,387 $ 32,158,000 2,990,095 $ 29,901
Issuance of 4,645,879 shares
of Series G Convertible
Preferred Stock at $4.75 per
Share, net of offering costs
of $663,921................. -- -- -- 4,645,879 21,404,004 -- --
Exercise of warrants to
purchase 65,076 shares of
Series E Convertible
Preferred Stock at $3.15 per
share....................... -- -- -- 65,076 204,987 -- --
Exercise of options by
employees at $0.32 -- $8.09
per share................... -- -- -- -- -- 65,500 655
Redemption of Redeemable
Preferred Stock for $546,051
and 33,052 shares of Common
Stock....................... -- (61,250) (1,092,000) -- -- 33,052 331
Conversion of Preferred Stock
to Common Stock triggered by
the transaction with Tseng
Labs, Inc. ................. -- -- -- (15,679,342) (53,766,991) 15,679,342 156,793
Issuance of Common Stock in
exchange for the Common
Stock of Tseng Labs, Inc.,
net of transaction costs of
$1,907,354.................. -- -- -- -- -- 5,510,772 55,108
Exercise of Series F warrants
to purchase 150 shares of
Common Stock at $3.70 per
share....................... -- -- -- -- -- 150 2
Exercise of Series G warrants
to purchase 615 shares of
Common Stock at $4.75 per
share....................... -- -- -- -- -- 615 6
Non-employee stock option
expense..................... -- -- -- -- -- -- --
Net loss...................... $ -- -- $ -- -- $ -- -- $ --
----------- ------- ----------- ------------- ------------ ---------- -----------
<Caption>
STOCK
STOCK SUBSCRIPTION
SUBSCRIPTION RECEIVABLE DEFICIT
RECEIVABLE FROM ACCUMULATED
ADDITIONAL FROM ISSUANCE ISSUANCE OF DURING THE
PAID-IN OF CONVERTIBLE COMMON DEFERRED DEVELOPMENT
CAPITAL PREFERRED STOCK STOCK COMPENSATION STAGE
------------ --------------- ------------ ------------ -------------
BALANCE, December 31, 1997..... $ 455,864 $ -- $(37,000) $ -- $ (25,984,336)
Issuance of 4,645,879 shares
of Series G Convertible
Preferred Stock at $4.75 per
Share, net of offering costs
of $663,921................. -- -- -- -- --
Exercise of warrants to
purchase 65,076 shares of
Series E Convertible
Preferred Stock at $3.15 per
share....................... -- -- -- -- --
Exercise of options by
employees at $0.32 -- $8.09
per share................... 262,739 -- -- -- --
Redemption of Redeemable
Preferred Stock for $546,051
and 33,052 shares of Common
Stock....................... 545,618 -- -- -- --
Conversion of Preferred Stock
to Common Stock triggered by
the transaction with Tseng
Labs, Inc. ................. 53,610,198 -- -- -- --
Issuance of Common Stock in
exchange for the Common
Stock of Tseng Labs, Inc.,
net of transaction costs of
$1,907,354.................. 26,364,894 -- -- -- --
Exercise of Series F warrants
to purchase 150 shares of
Common Stock at $3.70 per
share....................... 553 -- -- -- --
Exercise of Series G warrants
to purchase 615 shares of
Common Stock at $4.75 per
share....................... 2,915 -- -- -- --
Non-employee stock option
expense..................... 13,313 -- -- -- --
Net loss...................... $ -- $ -- $ -- $ -- $ (19,345,436)
------------ ----------- -------- -------- -------------
</Table>
(continued)
The accompanying Notes to Consolidated Financial Statements are an integral part
of this statement.
F-10
CELL PATHWAYS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT) AND PARTNERS'
INVESTMENT
FOR THE PERIOD FROM INCEPTION (AUGUST 10, 1990) TO DECEMBER 31, 2002
<Table>
<Caption>
REDEEMABLE CONVERTIBLE
PREFERRED STOCK PREFERRED STOCK COMMON STOCK
PARTNERS' --------------------- ---------------------------- ------------------------
INVESTMENT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
----------- ------- ----------- ------------- ------------ ---------- -----------
BALANCE, December 31, 1998..... $ -- -- $ -- -- $ -- 24,279,526 $ 242,796
Exercise of options by
employees at
$0.32 -- $8.09.............. -- -- -- -- -- 48,061 481
Exercise of Series F warrants
to purchase 125,201 shares
of Common Stock at $3.70 per
share....................... -- -- -- -- -- 125,201 1,252
Exercise of Series G warrants
to purchase 79,378 shares of
Common Stock at $4.75 per
share....................... -- -- -- -- -- 79,378 793
Issuance of 1,555,000 shares
of Common Stock at $9.00 per
share, net of offering costs
of $415,855................. -- -- -- -- -- 1,555,000 15,550
Issuance of 18,728 shares of
Common Stock at $6.32 --
$9.67 under the Employee
Stock Purchase Plan......... -- -- -- -- -- 18,728 187
Non-employee stock option
expense..................... -- -- -- -- -- -- --
Net loss...................... -- -- -- -- -- -- --
----------- ------- ----------- ------------- ------------ ---------- -----------
BALANCE, December 31, 1999..... -- -- -- -- 26,105,894 261,059
Exercise of options by
employees at
$0.32 -- $24.10............. -- -- -- -- -- 324,202 3,242
Exercise of Common Stock
warrants to purchase
1,270,000 shares of Common
Stock at $6.60 and $14.00
per share................... -- -- -- -- -- 1,270,000 12,700
Exercise of Series G warrants
to purchase 147,800 shares
of Common Stock at $4.75 per
share....................... -- -- -- -- -- 147,800 1,478
Issuance of 3,200,000 shares
of Common Stock at $7.375
per share, net of offering
costs of $478,896........... -- -- -- -- -- 3,200,000 32,000
Issuance of 25,561 shares of
Common Stock at $7.92, $9.66
and $22.10 under the
Employee Stock Purchase
Plan........................ -- -- -- -- -- 25,561 255
Non-employee stock option
expense..................... -- -- -- -- -- -- --
Net loss...................... $ -- -- $ -- -- $ -- -- $ --
----------- ------- ----------- ------------- ------------ ---------- -----------
<Caption>
STOCK
STOCK SUBSCRIPTION
SUBSCRIPTION RECEIVABLE DEFICIT
RECEIVABLE FROM ACCUMULATED
ADDITIONAL FROM ISSUANCE ISSUANCE OF DURING THE
PAID-IN OF CONVERTIBLE COMMON DEFERRED DEVELOPMENT
CAPITAL PREFERRED STOCK STOCK COMPENSATION STAGE
------------ --------------- ------------ ------------ -------------
BALANCE, December 31, 1998..... $ 81,256,094 $ -- $(37,000) $ -- $ (45,329,772)
Exercise of options by
employees at
$0.32 -- $8.09.............. 276,260 -- -- -- --
Exercise of Series F warrants
to purchase 125,201 shares
of Common Stock at $3.70 per
share....................... 461,992 -- -- -- --
Exercise of Series G warrants
to purchase 79,378 shares of
Common Stock at $4.75 per
share....................... 376,252 -- -- -- --
Issuance of 1,555,000 shares
of Common Stock at $9.00 per
share, net of offering costs
of $415,855................. 13,563,595 -- -- -- --
Issuance of 18,728 shares of
Common Stock at $6.32 --
$9.67 under the Employee
Stock Purchase Plan......... 170,933 -- -- -- --
Non-employee stock option
expense..................... 97,051 -- -- -- --
Net loss...................... -- -- -- -- (19,633,722)
------------ ----------- -------- -------- -------------
BALANCE, December 31, 1999..... 96,202,177 -- (37,000) -- (64,963,494)
Exercise of options by
employees at
$0.32 -- $24.10............. 2,013,365 -- -- -- --
Exercise of Common Stock
warrants to purchase
1,270,000 shares of Common
Stock at $6.60 and $14.00
per share................... 17,730,300 -- -- -- --
Exercise of Series G warrants
to purchase 147,800 shares
of Common Stock at $4.75 per
share....................... 700,573 -- -- -- --
Issuance of 3,200,000 shares
of Common Stock at $7.375
per share, net of offering
costs of $478,896........... 23,089,104 -- -- -- --
Issuance of 25,561 shares of
Common Stock at $7.92, $9.66
and $22.10 under the
Employee Stock Purchase
Plan........................ 346,396 -- -- -- --
Non-employee stock option
expense..................... 153,563 -- -- -- --
Net loss...................... $ -- $ -- $ -- $ -- $ (26,916,808)
------------ ----------- -------- -------- -------------
</Table>
(continued)
The accompanying Notes to Consolidated Financial Statements are an integral part
of this statement.
F-11
CELL PATHWAYS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT) AND PARTNERS'
INVESTMENT
FOR THE PERIOD FROM INCEPTION (AUGUST 10, 1990) TO DECEMBER 31, 2002
<Table>
<Caption>
REDEEMABLE CONVERTIBLE
PREFERRED STOCK PREFERRED STOCK COMMON STOCK
PARTNERS' --------------------- ---------------------------- ------------------------
INVESTMENT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
----------- ------- ----------- ------------- ------------ ---------- -----------
BALANCE, December 31, 2000..... $ -- -- $ -- -- $ -- 31,073,457 $ 310,734
Exercise of options by
employees and a director at
$0.32 -- $4.75.............. -- -- -- -- -- 31,979 320
Restricted stock award to
officer..................... -- -- -- -- -- 10,000 100
Amortization of deferred
compensation................ -- -- -- -- -- -- --
Issuance of 32,819 shares of
Common Stock at $5.19 and
$5.95 under the Employee
Stock Purchase Plan......... -- -- -- -- -- 32,819 328
Interest on promissory note
from director............... -- -- -- -- -- -- --
Non-employee stock option
expense..................... -- -- -- -- -- -- --
Settlement of litigation
through agreement to Issue
Common Stock (Note 14)...... -- -- -- -- -- -- --
Net loss...................... -- -- -- -- -- --
----------- ------- ----------- ------------- ------------ ---------- -----------
BALANCE, December 31, 2001..... -- -- -- -- -- 31,148,255 311,482
Issuance of 89,335 shares of
Common Stock at $4.20 and
$.80 under the Employee
Stock Purchase Plan......... -- -- -- -- -- 89,335 893
Issuance of 2,390,107 shares
of Common Stock at $3.70 per
share, net of offering costs
of $840,436................. -- -- -- -- -- 2,390,107 23,901
Issuance of 4,036,001 shares
of Common Stock at $.70 per
share, net of offering costs
of $265,806................. -- -- -- -- -- 4,036,001 40,361
Amortization of deferred
compensation................ -- -- -- -- -- -- --
Non-employee stock option
expense..................... -- -- -- -- -- -- --
Issuance of warrant to
purchase 100,000 shares of
Common Stock to
consultants................. -- -- -- -- -- -- --
Payment by director of
promissory note............. -- -- -- -- -- -- --
Issuance of 1,700,000 shares
of Common Stock for
litigation settlement (Note
14)......................... -- -- -- -- -- 1,700,000 17,000
Net loss...................... -- -- -- -- -- -- --
----------- ------- ----------- ------------- ------------ ---------- -----------
BALANCE, December 31, 2002.... $ -- -- $ -- -- $ -- 39,363,698 $ 393,637
=========== ======= =========== ============= ============ ========== ===========
<Caption>
STOCK
STOCK SUBSCRIPTION
SUBSCRIPTION RECEIVABLE DEFICIT
RECEIVABLE FROM ACCUMULATED
ADDITIONAL FROM ISSUANCE ISSUANCE OF DURING THE
PAID-IN OF CONVERTIBLE COMMON DEFERRED DEVELOPMENT
CAPITAL PREFERRED STOCK STOCK COMPENSATION STAGE
------------ --------------- ------------ ------------ -------------
BALANCE, December 31, 2000..... $140,235,478 $ -- $(37,000) $ -- $ (91,880,302)
Exercise of options by
employees and a director at
$0.32 -- $4.75.............. 106,343 -- -- -- --
Restricted stock award to
officer..................... 74,800 -- -- (74,900) --
Amortization of deferred
compensation................ -- -- -- 1,248 --
Issuance of 32,819 shares of
Common Stock at $5.19 and
$5.95 under the Employee
Stock Purchase Plan......... 167,211 -- -- -- --
Interest on promissory note
from director............... -- -- (13,683) -- --
Non-employee stock option
expense..................... 210,399 -- -- -- --
Settlement of litigation
through agreement to Issue
Common Stock (Note 14)...... 7,837,000 -- -- -- --
Net loss...................... -- -- -- -- (31,404,435)
------------ ----------- -------- -------- -------------
BALANCE, December 31, 2001..... 148,631,231 -- (50,683) (73,652) (123,284,737)
Issuance of 89,335 shares of
Common Stock at $4.20 and
$.80 under the Employee
Stock Purchase Plan......... 144,997 -- -- -- --
Issuance of 2,390,107 shares
of Common Stock at $3.70 per
share, net of offering costs
of $840,436................. 7,979,059 -- -- -- --
Issuance of 4,036,001 shares
of Common Stock at $.70 per
share, net of offering costs
of $265,806................. 2,519,034 -- -- -- --
Amortization of deferred
compensation................ -- -- -- 14,980 --
Non-employee stock option
expense..................... (52,552) -- -- -- --
Issuance of warrant to
purchase 100,000 shares of
Common Stock to
consultants................. 68,619 -- -- -- --
Payment by director of
promissory note............. -- -- 50,683 -- --
Issuance of 1,700,000 shares
of Common Stock for
litigation settlement (Note
14)......................... (6,766,000) -- -- -- --
Net loss...................... -- -- -- -- (17,871,222)
------------ ----------- -------- -------- -------------
BALANCE, December 31, 2002.... $152,524,388 $ -- $ -- $(58,672) $(141,155,959)
============ =========== ======== ======== =============
</Table>
The accompanying Notes to Consolidated Financial Statements are an integral part
of this statement.
F-12
CELL PATHWAYS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CASH FLOWS
<Table>
<Caption>
PERIOD FROM
YEAR ENDED DECEMBER 31, INCEPTION
------------------------------------------ (AUGUST 10, 1990) TO
2002 2001 2000 DECEMBER 31, 2002
------------ ------------ ------------ --------------------
OPERATING ACTIVITIES:
Net loss............................................ $(17,871,222) $(31,404,435) $(26,916,808) $(141,155,959)
Adjustments to reconcile net loss to net cash used in
operating activities-
Settlement of litigation through agreement to issue
Common Stock (Note 14)............................ (6,749,000) 7,837,000 -- 1,088,000
Depreciation expense and amortization............... 574,863 533,148 826,138 2,854,715
Loss on disposal of assets.......................... 503 19,152 -- 19,655
Interest income on notes receivable from officers,
net............................................... (55,317) (46,141) (9,302) (110,760)
Interest on promissory note from director........... (284) (13,683) -- (13,967)
Amortization of deferred compensation............... 14,980 1,248 -- 16,228
Issuance of Common Stock for services rendered...... -- -- -- 48,578
Issuance of Common Stock options and warrants for
services rendered................................. 16,067 210,399 153,563 490,393
Provision for redemption of Redeemable Preferred
Stock............................................. -- -- -- 1,017,387
Write-off of deferred offering costs................ -- -- -- 469,515
(Increase) decrease in accounts receivable.......... (153,562) 11,244 (329,694) (472,012)
Other............................................... -- -- -- 68,399
(Increase) decrease in prepaid and other current
assets............................................ 338,361 197,564 (453,102) (473,984)
(Increase) decrease in due from insurance company... 2,000,000 (2,000,000) -- --
(Increase) decrease in other assets................. 15,073 335,798 (162,543) 108,440
Increase in inventory............................... (2,140,615) -- -- (2,140,615)
Increase in deferred revenue........................ 1,492,346 -- -- 1,492,346
Increase in reserve for notes receivable from
officer........................................... 114,742 -- -- 114,742
Increase (decrease) in accounts payable and accrued
liabilities....................................... (884,849) 169,959 1,078,698 1,378,869
Increase (decrease) in accrued litigation
settlement........................................ (2,642,822) 2,642,822 -- --
------------ ------------ ------------ -------------
Net cash flows used in operating activities....... (25,930,736) (21,505,925) (25,813,050) (135,200,030)
------------ ------------ ------------ -------------
INVESTING ACTIVITIES:
Purchase of equipment and leasehold improvements.... (231,877) (236,188) (489,770) (5,876,205)
Purchase of marketing and distribution rights....... (1,000,000) -- -- (1,000,000)
Sale of leasehold improvements...................... -- -- -- 3,000,000
Increase in notes receivable from officers.......... (54,000) (256,000) (632,954) (942,954)
Cash paid for deposits.............................. -- -- -- (50,767)
(Purchase) sale of short-term investments........... 24,808,148 (24,808,148) -- --
------------ ------------ ------------ -------------
Net cash flows provided by (used in) investing
activities...................................... 23,522,271 (25,300,336) (1,122,724) (4,869,926)
------------ ------------ ------------ -------------
FINANCING ACTIVITIES:
Proceeds from issuance of Common Stock, net of
related offering costs............................ 10,562,355 -- 23,121,104 47,262,604
Proceeds from issuance of Common Stock under the
employee stock purchase plan...................... 145,891 167,539 346,651 831,202
Proceeds from issuance of Convertible Preferred
Stock, net of related offering costs.............. -- -- -- 47,185,046
Proceeds from the transaction with Tseng Labs,
Inc............................................... -- -- -- 27,966,372
Proceeds from exercise of Series E, F, G and Common
Stock warrants to purchase stock.................. -- -- 18,445,051 19,966,894
Decrease in stockholder receivable.................. 50,967 -- -- 74,593
Cash received for Common Stock options exercised.... -- 106,663 2,016,607 2,846,691
Redemption of Redeemable Preferred Stock............ -- -- -- (546,051)
Proceeds from bridge loan........................... -- -- -- 791,000
Partner cash contributions.......................... -- -- -- 5,312,355
(Increase) decrease in restricted cash.............. (4,734) 212,717 (36,106) (468,233)
Principal payments under capital lease
obligations....................................... (53,973) (61,386) (141,959) (412,512)
Proceeds from borrowings............................ -- -- 800,000 950,000
Repayment of borrowings............................. (277,473) (241,912) (100,285) (769,670)
------------ ------------ ------------ -------------
Net cash flows provided by financing activities... 10,423,033 183,621 44,451,063 150,990,291
------------ ------------ ------------ -------------
Net increase (decrease) in cash and cash
equivalents......................................... 8,014,568 (46,622,640) 17,515,289 10,920,335
CASH AND CASH EQUIVALENTS, beginning of period........ 2,905,767 49,528,407 32,013,118 --
------------ ------------ ------------ -------------
CASH AND CASH EQUIVALENTS, end of period.............. $ 10,920,335 $ 2,905,767 $ 49,528,407 $ 10,920,335
============ ============ ============ =============
</Table>
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
F-13
CELL PATHWAYS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002
1. ORGANIZATION AND BASIS OF PRESENTATION:
Cell Pathways, Inc. was incorporated in Delaware in July 1998 as a
subsidiary of, and as of November 3, 1998 successor to, a Delaware corporation
of the same name. As the context requires, "Company", is used herein to signify
the successor and/or the predecessor corporations (See Note 4).
The Company is a development stage pharmaceutical company focused on the
research and development of products to treat and prevent cancer, and the future
commercialization of such products. The Company also markets and sells
Gelclair(TM) Concentrated Oral Gel ("Gelclair(TM)") manufactured by Sinclair
Pharmaceuticals Ltd. of the United Kingdom ("Sinclair"). The Company has not
generated any revenues from the sale of its own products to date, nor is there
any assurance of any future product revenues from the development of its
products. The Company's intended products are subject to long development cycles
and there is no assurance the Company will be able to successfully develop,
manufacture, obtain regulatory approval for or market its products. During the
period required to develop its products, the Company had planned to continue to
finance operations through debt and equity financings, profits from the sale of
Gelclair(TM) and corporate alliances. The Company will continue to be considered
in the development stage until such time, if ever, as it generates significant
revenues from one or more of its product candidates. In October 2002, the
Company implemented a restructuring of its work force eliminating 20% of its
staff and reducing its efforts in research, discovery and pre-clinical
development of earlier-stage compounds, and subsequently, upon signing an
agreement with Celgene Corporation ("Celgene") to promote Gelclair(TM) in the
U.S. oncology market, eliminated its 16 person sales force and subsequently
terminated its agreement with Aventis Pharmaceuticals, Inc. ("Aventis") to
promote Nilandron(R)(nilutamide). Both the restructuring and elimination of the
sales force are expected to decrease expenses in the future.
On November 3, 1998, the Company completed a financing through the
acquisition of Tseng Labs, Inc. ("Tseng") (a publicly held company with no
continuing operations) in which the Company issued to Tseng stockholders
approximately 5.5 million shares of the Company's Common Stock and received net
proceeds of approximately $26.4 million (See Note 4). The accompanying
consolidated financial statements include the accounts of the Company from
inception (August 10, 1990) and the accounts of Tseng after November 3, 1998.
In July 2000, the Company entered into an exclusive marketing and promotion
agreement (the "Nilandron(R) Agreement") with Aventis to market Nilandron(R) to
urologists in the U. S. and Puerto Rico for use in patients who suffer from
prostate cancer. The Company began to market and promote Nilandron(R) in
September 2000 through the use of a dedicated third party sales force. Under the
terms of the Nilandron(R) Agreement, the Company was responsible for its
marketing and promotion expenses and received from Aventis a percentage of the
gross margin on Aventis' sales in excess of a pre-established gross margin
threshold, if any. The Company's agreement with Aventis terminated in October
2002.
In January 2002, the Company entered into a ten-year exclusive distribution
agreement (the "Gelclair(TM) Agreement") with Sinclair to promote and distribute
Gelclair(TM) in North America (U.S., Canada and Mexico). Gelclair(TM) is an oral
gel care formulation for the management and relief of pain associated with
inflammation and ulceration of the mouth caused by chemotherapy or radiotherapy
treatments and other causes. In June 2002, the Company began to promote
Gelclair(TM) in the oncology market. The Company purchases Gelclair(TM) from
Sinclair and resells to wholesale customers in the U.S.
In August 2002, the Company entered into a four-year marketing agreement
with John O. Butler Company ("Butler"). Butler markets Gelclair(TM) to the
dental market within the U.S. and will market in Canada if and when Gelclair(TM)
is approved for marketing in Canada. In October 2002, the Company entered
F-14
CELL PATHWAYS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
into a three-year agreement with Celgene for the promotion of Gelclair(TM) in
the U.S. oncology or other markets.
In January 2003, the Company received notification from Nasdaq that the
Company's stock would be delisted from the Nasdaq National Market because the
Company's stock price fell below the minimum bid requirements and thereby failed
to comply with Nasdaq marketplace rules. The Company has appealed the delisting
notification and has requested a hearing with Nasdaq which is scheduled for
February 2003.
In February 2003, the Company entered into an agreement and plan of merger
with OSI Pharmaceuticals, Inc. ("OSI Pharmaceuticals") whereby OSI
Pharmaceuticals would acquire the Company in a stock-for-stock transaction. If
approved by the Company's stockholders, OSI Pharmaceuticals will exchange .0567
shares of OSI Pharmaceuticals common stock for every share of Cell Pathways'
Common Stock upon closing of the transaction. OSI Pharmaceuticals will also
provide additional consideration in the form of a five-year contingent value
right ("CVR") through which each share of Cell Pathways' Common Stock held by
stockholders of record on the date of the merger closure will be eligible for an
additional .040 share of OSI Pharmaceuticals common stock in the event a new
drug application for either Aptosyn(R) (exisulind) or CP461 is accepted for
filing by the Food and Drug Administration ("FDA") within five years. If
approved by the Company's stockholders, it is anticipated that the merger will
be closed in the second quarter of 2003.
2. GOING CONCERN:
The Company has incurred negative cash flows from operations since
inception and, as of December 31, 2002, the Company had a deficit accumulated
during the development stage of $141,155,959. Management believes that the
Company's existing cash and cash equivalents will be adequate to fund operations
through the second quarter of 2003, based on projected revenue and expenditure
levels. Should appropriate sources of funding not be available on terms
acceptable to the Company, management would take additional actions which could
include a further reduction in workforce, a reduction in overall expenditures
and the delay or elimination of certain clinical trials and research activities
until such time as appropriate sources of funding are available. In February
2003, the Company entered into an agreement and plan of merger with OSI
Pharmaceuticals whereby, if approved by the Company's stockholders, the Company
would be acquired by OSI Pharmaceuticals. There is no assurance, however, that
the transaction with OSI Pharmaceuticals will be approved by the Company's
stockholders. Should the transaction not be approved by the Company's
stockholders, there is no assurance that additional funding will be available on
terms acceptable to the Company, if at all, to enable the Company to continue
operations.
These factors raise substantial doubt about the Company's ability to
continue as a going concern. The consolidated financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries. All inter-company accounts and transactions
have been eliminated in consolidation.
MANAGEMENT'S USE OF ESTIMATES
The preparation of consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of
F-15
CELL PATHWAYS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
the consolidated financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from such
estimates.
CASH, CASH EQUIVALENTS AND RESTRICTED CASH
For purposes of the statements of cash flows, the Company considers all
highly liquid instruments with an original maturity of three months or less to
be cash equivalents. As of December 31, 2002 and December 31, 2001,
approximately $468,000 and $463,000, respectively, of cash and cash equivalents
were restricted to secure letters of credit for security deposits on the
Company's leases.
SHORT-TERM INVESTMENTS
As of December 31, 2001 the Company had approximately $24.8 million in
short-term investments invested in U.S. government securities with original
maturities greater than three months at two financial institutions. The Company
classifies its short-term investments as held-to-maturity which are carried on
the accompanying balance sheet at amortized cost. As of December 31, 2001, the
fair value of these short-term investments was $24,905,000.
CUSTOMER CONCENTRATION OF CREDIT RISK
For the year ended December 31, 2002, five customers accounted for 93% of
product revenues. As of December 31, 2002, two wholesale customers represented
92% of accounts receivable due from shipments of Gelclair(TM). Credit risk is
controlled through the use of credit limits, credit approvals and periodic
credit evaluations of wholesale customers.
INVENTORY
Inventory is comprised solely of Gelclair(TM) and is stated at the lower of
cost or market, as determined using the first-in, first-out method.
EQUIPMENT, FURNITURE AND LEASEHOLD IMPROVEMENTS
Equipment, furniture and leasehold improvements are recorded at cost.
Depreciation of equipment and furniture is provided on the straight-line method
over estimated useful lives of two to five years. Leasehold improvements are
amortized over the shorter of the useful life or the life of the related lease.
PRODUCT DISTRIBUTION RIGHTS
Product distribution rights represents a $1 million payment made to
Sinclair for the exclusive right to market and distribute Gelclair(TM) in North
America. The Company amortizes this up-front payment over the ten-year term of
the distribution agreement. Amortization expense was $91,667 during the year
ended December 31, 2002.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments consist primarily of cash and cash
equivalents, short-term investments, accounts receivable, accounts payable,
accrued expenses and debt instruments. Management believes the carrying values
of these assets and liabilities are considered to be representative of their
respective fair values.
F-16
CELL PATHWAYS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
REVENUE RECOGNITION
The Company recognized revenue for marketing services under the
Nilandron(R) Agreement in the period in which marketing services were performed
if Aventis' sales of Nilandron(R) for that period exceeded specified thresholds.
The Company's agreement with Aventis terminated in October 2002.
Product sales of Gelclair(TM) to the Company's wholesale customers were
initiated in the U.S. in June 2002. In accordance with Statement of Financial
Accounting Standards ("SFAS") No. 48, "Revenue Recognition When Right of Return
Exists", given the limited sales history of Gelclair(TM), the Company, at this
time defers the recognition of revenue on product shipments of Gelclair(TM) to
wholesale customers until such time the product is prescribed to the end user.
At each reporting period, the Company monitors shipments from wholesale
customers to pharmacies and hospitals, wholesale customer reorder history and
prescriptions filled by pharmacies based on prescription data from external,
independent sources. When this data indicates a flow of product through the
supply chain, which indicates that returns are less likely to occur, product
revenue is recognized. For the year ended December 31, 2002, shipments to
wholesale customers were $2,099,277, of which $536,873 has been recognized as
product revenues with the balance recorded as deferred revenue in the
accompanying balance sheet. In addition, the related cost of the product shipped
to wholesale customers that has not been recognized as revenue has been
reflected as inventory subject to return (See Note 5).
RESEARCH AND DEVELOPMENT
Costs incurred in connection with research and development activities are
expensed as incurred.
SUPPLEMENTAL CASH FLOW INFORMATION
For the years ended December 31, 2002, 2001 and 2000, the Company paid
interest of $63,664, $103,883 and $48,592, respectively, and paid no income
taxes. During the year ended December 31, 2002, the Company financed
approximately $45,000 of equipment purchases through capital leases.
STOCK-BASED COMPENSATION
The Company accounts for stock option grants to employees in accordance
with Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock
Issued to Employees." Under the Company's stock option plans, options are
granted at the fair market value on the date of the grant, and therefore no
compensation expense is recognized for stock options granted to employees. The
Company uses fair value accounting for option grants to non-employees in
accordance with SFAS No. 123, "Accounting for Stock-Based Compensation" and
Emerging Issues Task Force ("EITF") Issue 96-18, "Accounting For Equity
Instruments That Are Issued To Other Than Employees For Acquiring or in
Conjunction With Selling Goods or Services."
F-17
CELL PATHWAYS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company follows the disclosure provisions of SFAS No. 123. Had
compensation cost for option grants to employees been recognized in the
consolidated statements of operations under the fair value method as prescribed
in SFAS No. 123, the Company's net loss would have increased to the following
pro forma amounts:
<Table>
<Caption>
YEAR ENDED DECEMBER 31,
------------------------------------------
2002 2001 2000
------------ ------------ ------------
Net loss:
As reported.............................. $(17,871,222) $(31,404,435) $(26,916,808)
Add: Stock-based employee compensation
included in net loss............. 14,980 1,248 --
Deduct: Total stock-based employee
compensation expense determined
under fair-value based method for
all awards....................... (4,277,353) (4,867,077) (3,503,529)
------------ ------------ ------------
Pro forma.................................. $(22,133,595) $(36,270,264) $(30,420,337)
============ ============ ============
Basic and diluted net loss per Common
Share:
As reported.............................. $ (0.51) $ (1.01) $ (0.96)
============ ============ ============
Pro forma................................ $ (0.64) $ (1.17) $ (1.09)
============ ============ ============
</Table>
DEFINED CONTRIBUTION PLAN
The Company maintains a defined contribution plan under Section 401(k) of
the Internal Revenue Code which allows for the deferral of up to 15% of eligible
employee salaries. Employee contributions are made at the election of the
participants on a semi-monthly basis. The Company does not make any
contributions towards the plan.
IMPAIRMENT OF LONG-LIVED ASSETS
In accordance with SFAS No. 144, "Accounting for the Impairment or Disposal
of Long-Lived Assets", if indicators of impairment exist, the Company assesses
the recoverability of the affected long-lived assets, which include fixed assets
and intangible assets, by determining whether the carrying value of such assets
can be recovered through the sum of the undiscounted future operating cash flows
and eventual disposition of the asset. If impairment is indicated, the Company
measures the amount of such impairment by comparing the carrying value of the
assets to the fair value of these assets, generally determined based on the
present value of the expected future cash flows associated with the use of the
asset. Management believes the future cash flows to be received from long-lived
assets will exceed the assets' carrying value, and accordingly the Company has
not recognized any impairment losses through December 31, 2002 (See Note 2).
NET INTEREST INCOME (EXPENSE)
For the years ended December 31, 2002, 2001 and 2000, the Company earned
interest income of $364,501, $1,770,588 and $2,306,477, respectively. For the
years ended December 31, 2002, 2001 and 2000, the Company incurred interest
expense of $63,664, $103,883 and $48,592, respectively.
F-18
CELL PATHWAYS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
INCOME TAXES
The Company accounts for income taxes under the asset and liability method
in accordance with SFAS No. 109, "Accounting for Income Taxes." Deferred tax
assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases and operating
loss and tax credit carryforwards. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment date.
BASIC AND DILUTED NET LOSS PER COMMON SHARE
The Company presents basic and diluted net loss per Common share pursuant
to SFAS No. 128, "Earnings per Share." SFAS No. 128 requires dual presentation
of basic and diluted net loss per Common share. "Basic" net loss per Common
share equals net loss divided by the weighted average Common shares outstanding
during the period. "Diluted" net loss per Common share equals net loss divided
by the sum of the weighted average Common shares outstanding during the period
plus Common Stock equivalents. The Company's basic and diluted net loss per
share amounts are the same since the assumed exercise of stock options and
warrants are anti-dilutive due to the Company's losses (See Note 11).
COMPREHENSIVE INCOME
The Company follows the provisions of SFAS No. 130, "Reporting
Comprehensive Income" which establishes standards for reporting and display of
comprehensive income (loss) in a full set of general-purpose financial
statements. Comprehensive income (loss) is defined as the total of net income
(loss) and all other non-owner changes in equity. For all years presented, the
Company's comprehensive loss consists only of the Company's net loss.
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 143, "Accounting for Asset Retirement Obligations". SFAS No. 143 requires
the Company to record the fair value of an asset retirement obligation as a
liability in the period in which it incurs a legal obligation associated with
the retirement of tangible long-lived assets that result from the acquisition,
construction, development, and/or normal use of the assets. The Company also
records a corresponding asset that is depreciated over the life of the asset.
Subsequent to the initial measurement of the asset retirement obligation, the
obligation will be adjusted at the end of each period to reflect the passage of
time and changes in the estimated future cash flows underlying the obligation.
The Company is required to adopt SFAS No. 143 on January 1, 2003. The adoption
of SFAS No. 143 is not expected to have a material effect on the Company's
financial statements.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements
No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical
Corrections." SFAS No. 145 amends existing guidance on reporting gains and
losses on the extinguishment of debt to prohibit the classification of the gain
or loss as extraordinary, as the use of such extinguishments have become part of
the risk management strategy of many companies. SFAS No. 145 also amends SFAS
No. 13 to require sale-leaseback accounting for certain lease modifications that
have economic effects similar to sale-leaseback transactions. The adoption of
SFAS No. 145 is not expected to have a material effect on the Company's
financial statements.
F-19
CELL PATHWAYS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." SFAS No. 146 addresses financial
accounting and reporting for costs associated with exit or disposal activities
and nullifies EITF Issue 94-3, "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity." The provisions of
this Statement are effective for exit or disposal activities that are initiated
after December 31, 2002, with early application encouraged. The adoption of SFAS
No. 146 is not expected to have a material effect on the Company's financial
statements.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness to Others, an interpretation of FASB Statements No.
5, 57 and 107 and a rescission of FASB Interpretation No. 34." This
Interpretation elaborates on the disclosures to be made by a guarantor in its
interim and annual financial statements about its obligations under guarantees
issued. The Interpretation also clarifies that a guarantor is required to
recognize, at inception of a guarantee, a liability for the fair value of the
obligation undertaken. The initial recognition and measurement provisions of the
Interpretation are applicable to guarantees issued or modified after December
31, 2002 and are not expected to have a material effect on the Company's
financial statements.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation -- Transition and Disclosure, an amendment of FASB Statement No.
123." This Statement amends FASB 9 Statement No. 123, "Accounting for
Stock-Based Compensation", to provide alternative methods of transition for a
voluntary change to the fair value method of accounting for stock-based employee
compensation. In addition, this Statement amends the disclosure requirements of
Statement No. 123 to require prominent disclosures in both annual and interim
financial statements. Certain of the disclosure modifications are required for
fiscal years ending after December 15, 2002 and are included in the notes to
these consolidated financial statements.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities, an interpretation of ARB No. 51". This
Interpretation addresses the consolidation by business enterprises of variable
interest entities as defined in the Interpretation. The Interpretation applies
immediately to variable interests in variable interest entities created after
January 31, 2003, and to variable interests in variable interest entities
obtained after January 31, 2003. The application of this Interpretation is not
expected to have a material effect on the Company's financial statements.
4. TRANSACTION WITH TSENG:
In June 1998, Cell Pathways, Inc., a Delaware corporation, and Tseng, a
Utah corporation, entered into an agreement and plan of reorganization (the
"Reorganization Agreement"). The Reorganization Agreement provided for (i) the
formation of Cell Pathways Holding, Inc., a Delaware corporation ("CPHI"), (ii)
the merger of Tseng Sub, Inc., a wholly-owned subsidiary of CPHI, with and into
Tseng, (iii) the merger of CPI Sub, Inc., a wholly-owned subsidiary of CPHI,
with and into Cell Pathways, Inc. and (iv) the issuance of approximately 23% of
the then outstanding shares of the Common Stock of CPHI to the Tseng
stockholders and approximately 77% of the then outstanding shares of the Common
Stock of CPHI to the Cell Pathways, Inc. stockholders. In connection with this
transaction, the Company raised net proceeds of approximately $26.4 million (See
Note 1). As a result of the aforementioned transactions, Tseng and Cell
Pathways, Inc., subsequently renamed Cell Pathways Pharmaceuticals, Inc.
("CPP"), became wholly-owned subsidiaries of CPHI, subsequently renamed Cell
Pathways, Inc. ("CPI"). The transaction closed November 3, 1998 and was
accounted for as a reorganization of CPP into CPI with the sale of approximately
23% of CPI Common Stock in exchange for Tseng's net assets. The historical
financial statements of the combined Company are the historical financial
statements of CPP.
F-20
CELL PATHWAYS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. INVENTORY:
Inventory, comprised solely of Gelclair(TM), consisted of the following as
of December 31, 2002:
<Table>
<Caption>
Finished goods on hand...................................... $1,632,149
Inventory subject to return................................. 508,466
----------
$2,140,615
==========
</Table>
Inventory subject to return represents the amount of Gelclair(TM) shipped
to wholesale customers which has not been recognized as revenue (See Note 3).
6. EQUIPMENT, FURNITURE AND LEASEHOLD IMPROVEMENTS:
Equipment, furniture and leasehold improvements consisted of the following:
<Table>
<Caption>
DECEMBER 31,
-------------------------
2002 2001
----------- -----------
Furniture and fixtures..................................... $ 336,645 $ 331,316
Computer equipment and software............................ 566,206 527,873
Laboratory equipment....................................... 1,555,084 1,379,704
Leasehold improvements..................................... 236,759 194,727
----------- -----------
2,694,694 2,433,620
Less accumulated depreciation and amortization............. (1,908,928) (1,440,764)
----------- -----------
$ 785,766 $ 992,856
=========== ===========
</Table>
Depreciation expense was $483,677, $533,148 and $826,138 for 2002, 2001,
and 2000 respectively.
7. NOTES RECEIVABLE FROM OFFICERS:
During the years ended December 31, 2002, 2001 and 2000, the Company made
loans of $54,000, $256,000 and $632,954, respectively, to two of its officers
that were outstanding as of December 31, 2002. The loans are evidenced by
promissory notes which bear interest at a rate of 6% annually; principal and
interest are repayable five years from date of issuance. The loans, including
accrued interest, are secured by subordinate mortgages on real property and are
reviewed periodically to assess their realizable value. During 2002, the Company
recorded an allowance of $114,742 against one of the officer's loans. The
officer loans and accrued interest of $110,760 as of December 31, 2002, are
presented net of the allowance on the accompanying consolidated balance sheet.
F-21
CELL PATHWAYS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. OTHER ACCRUED LIABILITIES:
Other accrued liabilities consisted of the following:
<Table>
<Caption>
DECEMBER 31,
-----------------------
2002 2001
---------- ----------
Accrued research materials.................................. $ -- $ 170,000
Accrued consultant fees..................................... 220,619 278,727
Accrued research expenses................................... 1,419,759 967,713
Accrued sales contract and taxes............................ 59,954 399,095
Accrued insurance........................................... 80,000 365,444
Customer deposit............................................ 350,000 --
Other....................................................... 952,663 1,091,335
---------- ----------
$3,082,995 $3,272,314
========== ==========
</Table>
9. STOCKHOLDERS' EQUITY:
In September 2002, the Company sold 4,036,001 shares of Common Stock in a
registered direct offering at the price of $0.70 per share, resulting in net
proceeds of approximately $2.6 million. In addition to a placement fee, the
placement agent received warrants to purchase 80,720 shares of Common Stock at a
price of $0.84. The warrants are exercisable until September 2008.
In March 2002, the Company sold 2,390,107 shares of Common Stock in a
private placement, mainly to institutional investors, at a price of $3.70 per
share, resulting in net proceeds of approximately $8.0 million. With each four
shares of Common Stock purchased, the Company issued a warrant to purchase one
share of the Company's Common Stock at $4.74 per share. The warrants are
exercisable until March 2006.
In November 2000, the Company sold 3,200,000 shares of Common Stock in a
private placement, mainly to institutional investors at a price of $7.375 per
share, resulting in net proceeds of approximately $23,116,000. With each share
of Common Stock purchased, the Company issued a warrant to purchase one and
thirty five one-hundredths (1.35) shares of the Company's Common Stock at $12.00
per share. The warrants expired on June 30, 2002. The Company paid one of the
placement agents a fee of $413,800 and another placement agent 73,750 warrants,
which expired on June 30, 2002, to purchase shares of Common Stock at an
exercise price of $12.00 per share, as a fee.
In connection with the settlement of litigation, the Company issued 1.7
million shares of Common Stock in 2002 (Note 14).
10. STOCKHOLDERS' RIGHTS PLAN:
On December 3, 1998, the Company's Board of Directors authorized the
adoption of a stockholders' rights plan. Under the plan, rights to purchase
stock, at a rate of one right for each share of Common Stock held, were
distributed to holders of record on December 15, 1998 and automatically attach
to shares issued thereafter. Under the plan, the rights attach to the Common
Stock and are not represented by separate rights certificates until, and
generally become exercisable only after, a person or group (i) acquires 15% or
more of the Company's outstanding Common Stock or (ii) commences a tender offer
that would result in such a person or group owning 15% or more of the Company's
Common Stock. When the rights first become exercisable, a holder will be
entitled to buy from the Company a unit consisting of one one-hundredth of a
share of Series A Junior Participating Preferred Stock of the Company at a
purchase price of $90. However, if any person acquires 15% or more of the
Company's Common Stock other than pursuant to a qualified offer,
F-22
CELL PATHWAYS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
each right not owned by a 15% or more stockholder would become exercisable for
Common Stock of the Company (or in certain circumstances, other consideration)
having a market value equal to twice the exercise price of the right. The rights
expire on December 14, 2008, except as otherwise provided in the plan. The
stockholder rights plan was amended in February 2003 to make it inapplicable to
OSI Pharmaceuticals in connection with the proposed merger.
11. STOCK OPTIONS, WARRANTS AND PURCHASE PLAN:
STOCK OPTIONS
The Company's 1993 Stock Option Plan, which was amended in 1997 and renamed
the 1997 Equity Incentive Plan (the "Plan") and subsequently amended in 2000,
authorizes the Company to grant to eligible employees, directors and consultants
Common Stock, stock appreciation rights, or options to purchase shares of Common
Stock, not to exceed 5.6 million shares in the aggregate, including all grants
since inception of the Plan in 1993. As of December 31, 2002, 1,884,256 shares
of Common Stock remained eligible for future grants under the Plan. The Board of
Directors sets the rate at which the options become exercisable and determines
when the options expire, subject to the limitations described below. Options
granted through June 1999 may, to the extent vested, be exercised up to ten
years following the date of grant. Options granted after June 1999 may, to the
extent vested, be exercised up to the earlier of ten years from the date of
grant or 90 days after termination of services. All options held by persons
continuing in the employ of the Company will generally become exercisable in the
event the Company is sold or has other significant changes in ownership.
Generally, options to employees vest ratably over a four-year or 50-month
period. Options granted under the Plan through July 1997 may be immediately
exercisable, but any unvested shares exercised are held by the Company and are
subject to reacquisition by the Company should employment terminate prior to
completion of applicable vesting periods.
In October 1997, the Board of Directors adopted and the stockholders
approved the 1997 Non-Employee Directors' Stock Option Plan (the "Directors'
Plan"), which was amended and approved by the Company's stockholders in May
2002. The Directors' Plan, as amended, increased the shares authorized to
903,925 shares of Common Stock, increased the automatic non-discretionary
inaugural grant of options to new non-employee directors to 50,000 shares (the
"Inaugural Grant"), increased the automatic non-discretionary anniversary grant
of options to continuing non-employee directors to 10,000 shares (the
"Anniversary Grant") and provided a one-time grant of options, vesting over
three years, for 31,843 shares to each current non-employee director who
continued in service beyond the 2002 annual stockholder meeting. The Company
granted options to purchase 27,235 shares of Common Stock at the inception of
the Directors' Plan in October 1997. Options subject to an Inaugural Grant under
the Directors' Plan will vest in three equal, annual installments commencing on
the first anniversary of the date of the grant of the option. Options subject to
an Anniversary Grant under the Directors' Plan will vest in full on the first
anniversary of the grant date of the option. In addition, certain grants made at
the inception of the Directors' Plan vested on March 31, 1998. The vesting of
all options under the Directors' Plan is conditioned on the continued service of
the recipient as a director, employee or consultant of the Company or any
affiliate of the Company. As of December 31, 2002, 514,985 shares of Common
Stock remained eligible for future option grants under the Directors' Plan.
Outstanding options held by directors, officers and employees of the
Company that are unvested as of the date of stockholder approval of the
acquisition of the Company by OSI Pharmaceuticals will become immediately vested
and exercisable upon such stockholder approval. Options that are not exercised
will terminate in accordance with the terms of the Company's option plans.
The Company accounts for stock options granted to employees in accordance
with the intrinsic value method provided for under APB Opinion No. 25. Under the
Plan, options may be granted at the fair market
F-23
CELL PATHWAYS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
value on the date of the grant and therefore no compensation expense is, or has
been, recognized in respect of stock options awarded to employees. In accordance
with the provisions of SFAS No. 123, the Company discloses fair value
compensation cost in respect of employee stock options using the Black-Scholes
option pricing model (See Note 3).
The weighted average fair value of the stock options granted during 2002,
2001 and 2000 was $1.61, $5.02 and $10.01, respectively. The fair value of each
option grant is estimated on the date of grant using the Black-Scholes option
pricing model with the following weighted average assumptions:
<Table>
<Caption>
2002 2001 2000
------- ------- -------
Risk-free interest rate................................... 2.93% 4.31% 5.22%
Expected dividend yield................................... 0% 0% 0%
Expected life............................................. 6 years 6 years 6 years
Expected volatility....................................... 75% 75% 195%
</Table>
Information relative to the Company's stock options under all plans is as
follows:
<Table>
<Caption>
WEIGHTED
AVERAGE
EXERCISE PRICE EXERCISE PRICE PROCEEDS
OPTIONS (PER SHARE) (PER SHARE) UPON EXERCISE
--------- -------------- -------------- -------------
Balance as of December 31,
1999.......................... 1,893,667 $0.32 -- 24.10 $ 6.03 $11,416,993
Granted....................... 1,919,682 5.45 -- 49.88 10.26 19,700,719
Exercised..................... (324,202) 0.32 -- 24.10 6.24 (2,021,610)
Forfeited..................... (56,501) 4.13 -- 25.94 10.54 (595,571)
--------- -------------- -----------
Balance as of December 31,
2000.......................... 3,432,646 0.32 -- 49.88 8.30 28,500,531
Granted....................... 807,695 3.29 -- 8.16 7.16 5,783,877
Exercised..................... (31,979) 0.32 -- 4.75 3.34 (106,663)
Forfeited..................... (385,462) 0.32 -- 36.25 10.65 (4,105,264)
--------- -------------- -----------
Balance as of December 31,
2001.......................... 3,822,900 0.32 -- $49.88 7.87 30,072,481
Granted....................... 588,582 0.46 -- 6.91 2.41 1,419,270
Exercised..................... -- -- -- --
Forfeited..................... (887,686) 0.99 -- 38.38 7.19 (6,382,814)
--------- -------------- -----------
Balance as of December 31,
2002.......................... 3,523,796 $0.32 -- $49.88 $ 7.13 $25,108,937
========= ============== ===========
</Table>
The weighted average remaining contractual life of all options outstanding
at December 31, 2002 is 7.0 years.
F-24
CELL PATHWAYS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table summarizes information about the Company's stock
options outstanding and exercisable at December 31, 2002:
<Table>
<Caption>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------------- -----------------------------
NUMBER OF WEIGHTED WEIGHTED WEIGHTED
OPTIONS AVERAGE AVERAGE NUMBER AVERAGE
RANGE OF OUTSTANDING REMAINING EXERCISE EXERCISABLE EXERCISE
EXERCISE AT DECEMBER 31, CONTRACTUAL PRICE AT DECEMBER 31, PRICE
PRICES 2002 LIFE IN YEARS (PER SHARE) 2002 (PER SHARE)
- --------------- --------------- ------------- ----------- --------------- -----------
$ 0.32 -- $ 2.00.. 499,707 7.8 $ 1.45 148,125 $ 0.69
3.29 -- 3.90.. 299,454 4.3 3.71 294,404 3.71
4.15 -- 5.45.. 1,053,288 7.6 5.35 608,713 5.31
6.22 -- 6.91.. 638,853 5.6 6.57 593,973 6.59
7.49 -- 9.03.. 602,472 8.2 7.68 234,854 7.90
9.25 -- 12.13.. 243,261 7.0 11.87 183,911 11.85
24.69 -- 31.75.. 133,261 6.8 25.96 95,181 25.43
$36.25 -- $49.88.. 53,500 7.2 46.44 35,840 46.59
--------- ---------
3,523,796 $ 7.13 2,195,001 $ 7.50
========= =========
</Table>
In accordance with the terms of the Plan, in December 2001 one of the
Company's officers was granted 10,000 shares of restricted Common Stock. Under
the terms of the restricted stock agreement, the shares of restricted Common
Stock do not vest until the earlier of FDA approval of one of the Company's drug
candidates or five years from the date of grant. The Company has recorded the
fair value of the restricted Common Stock as deferred compensation in the
stockholders' equity section of the consolidated balance sheet which is being
amortized over the five year vesting period of the award. The Company recognized
compensation expense of $14,980 and $1,248 in its consolidated statements of
operations for the year ended December 31, 2002 and 2001, respectively, related
to amortization of this restricted stock grant.
EMPLOYEE STOCK PURCHASE PLAN
In October 1997, the Board of Directors adopted and the stockholders
approved the Employee Stock Purchase Plan (the "ESPP") covering an aggregate of
544,710 shares of Common Stock. Under the ESPP, the Board of Directors may
authorize participation by eligible employees, including officers, in periodic
offerings following the adoption of the ESPP. The offering period for any
offering will be no longer than 27 months.
Employees who participate in an offering can have up to 15% of their
earnings withheld pursuant to the ESPP and applied, on specified dates
determined by the Board of Directors, to the purchase of shares of Common Stock.
The price of Common Stock purchased under the ESPP will be not less than 85% of
the lower of the fair market value of the Common Stock on the commencement date
of each offering period or the relevant purchase date. Employees may end their
participation in the offering at any time during the offering period, and
participation ends automatically on termination of employment with the Company.
The ESPP will terminate at the Board of Directors' direction. As of December 31,
2002, the Company has issued 166,443 shares under the ESPP.
WARRANTS
In September 2002, the Company, in conjunction with a registered direct
offering of Common Stock, issued warrants to purchase 80,720 shares of Common
Stock at an exercise price of $0.84, which expire in September 2008. Also, in
September 2002, the Company issued, pursuant to a consulting agreement, warrants
F-25
CELL PATHWAYS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
to purchase 100,000 shares of Common Stock at an exercise price of $1.00, which
expire in September 2007. The estimated fair value of the warrant, estimated
using the Black-Scholes option pricing model, of $68,619 was recorded as expense
in the accompanying 2002 consolidated statement of operations. As of December
31, 2002, both of the warrants issued in September 2002 were still outstanding.
In March 2002, in conjunction with the private placement of Common Stock, the
Company issued warrants, expiring in March 2006, to purchase 597,529 shares of
Common Stock at an exercise price of $4.74 per share. As of December 31, 2002,
these warrants were still outstanding.
12. DEBT:
During 2000, the Company financed certain fixed asset purchases with a note
payable of $800,000, secured by certain laboratory and office equipment. The
note bears interest at 13.8% and is repayable in monthly payments of principal
and interest of $26,959 over 36 months, through July 2003. As of December 31,
2002, remaining principal payments to be made in 2003 were $180,330.
13. INCOME TAXES:
As of December 31, 2002, the Company had approximately $83 million of net
operating loss carryforwards ("NOLs") for income tax purposes available to
offset future federal income tax, subject to limitations for alternative minimum
tax. The NOLs are subject to examination by the tax authorities and expire
between 2008 and 2020.
Prior to its conversion into corporate form, the business had accumulated
losses totaling approximately $3,900,000. For tax purposes these losses were
distributed to the partners in accordance with the provisions of the partnership
agreement of the Company's predecessor partnership. Thus, these losses, while
included in the financial statements of the Company, are not available to offset
future taxable income, if any, of the Company.
The Tax Reform Act of 1986 contains provisions that may limit the NOLs
available to be used in any given year upon the occurrence of certain events,
including significant changes in ownership interest. A change in ownership of a
company of greater than 50% within a three-year period results in an annual
limitation on the Company's ability to utilize its NOLs from tax periods prior
to the ownership change. The Company believes that the transaction with Tseng
(See Note 3) triggered such limitation. In addition, the proposed acquisition of
the Company by OSI Pharmaceuticals (see Note 1) would trigger an additional
limitation. The annual limitation triggered by the proposed OSI Pharmaceuticals
transaction could result in a significant portion of the Company's NOLs
expiring.
The components of the net deferred income tax asset were as follows:
<Table>
<Caption>
DECEMBER 31,
---------------------------
2002 2001
------------ ------------
Gross deferred tax asset:
Net operating loss carryforwards......................... $ 32,167,000 $ 32,978,000
Capitalized research and development expenditures........ 6,193,000 1,752,000
Capitalized start-up costs............................... 17,451,000 10,913,000
Litigation settlement and expense........................ -- 2,665,000
Accruals not currently deductible........................ 476,000 560,000
Other.................................................... 3,433,000 2,961,000
------------ ------------
59,720,000 51,829,000
Less valuation allowance................................. (59,720,000) (51,829,000)
------------ ------------
$ -- $ --
============ ============
</Table>
F-26
CELL PATHWAYS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company has not yet achieved profitable operations. Accordingly,
management believes the deferred tax assets as of December 31, 2002 do not
satisfy the realization criteria set forth in SFAS No. 109 and, therefore, the
Company has recorded a full valuation allowance for the entire net tax asset.
14. COMMITMENTS AND CONTINGENCIES:
LEASES
In June 1998, the Company entered into a ten-year lease for office and
laboratory space in Horsham, Pennsylvania. This lease contains two five-year
renewal terms.
In May 2001, the Company also entered into a 36-month capital lease
agreement to lease equipment to be used in the research and development
activities of the Company. The equipment acquired under the lease at a cost of
$125,681, less accumulated amortization of $66,332, is included in equipment in
the accompanying consolidated balance sheets as of December 31, 2002. The
interest rate on this capital lease is 8.2%.
In January 2002, the Company entered into a 36-month capital lease
agreement to lease equipment to be used in the research and development
activities of the Company. The equipment acquired under the lease at a cost of
$45,201, less accumulated amortization of $6,782, is included in equipment in
the accompanying consolidated balance sheets as of December 31, 2002. The
interest rate on this capital lease is 11.0%.
Aggregate minimum annual payments under the Company's lease commitments are
as follows as of December 31, 2002:
<Table>
<Caption>
CAPITAL OPERATING
LEASES LEASES
------- ----------
2003........................................................ $63,385 $ 972,000
2004........................................................ 34,418 978,000
2005........................................................ 3,997 995,100
2006........................................................ -- 1,022,400
2007........................................................ -- 1,053,000
Thereafter.................................................. -- 534,300
------- ----------
Total minimum lease payments................................ 101,800 $5,554,800
==========
Less: Interest.............................................. (8,046)
-------
Present value of net minimum lease payments................. $93,754
=======
</Table>
Rental expense under the operating leases and other month-to-month leases
entered into by the Company totaled $975,270, $1,051,191 and $1,118,166 for the
years ended December 31, 2002, 2001 and 2000, respectively.
CONTRACTS
In January 2002, the Company entered into a ten-year exclusive distribution
agreement with Sinclair to promote and distribute Gelclair(TM) in North America.
In June 2002, the Company began to promote Gelclair(TM) in the U.S. oncology
market. Under the Gelclair(TM) Agreement, the Company paid Sinclair $1 million
for the exclusive right to market and distribute Gelclair(TM) in North America,
which amount has been capitalized and is being amortized over the ten-year term
of the Gelclair(TM) Agreement. The Company is committed to additional inventory
purchases of $4.7 million and $5.0 million in 2003 and 2004, respectively, and
annual marketing expenditures of $750,000, $500,000 and $250,000 for 2003
through 2006, 2007 through 2008 and 2009 through 2011, respectively. In
addition, the Company is obligated to spend $1.3 million annually for
F-27
CELL PATHWAYS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
direct sales force efforts. As described below, the Company has agreements with
Celgene and Butler that satisfy this obligation through 2006. The Company could
be responsible for milestone payments totaling $3 million related to the
achievement of certain sales, patent and clinical trial milestones. The Company
purchases Gelclair(TM) from Sinclair and resells to wholesale customers in the
United States.
In August 2002, the Company entered into a four-year marketing agreement
with Butler to market, and to a limited extent, distribute Gelclair(TM). Butler
will receive a marketing fee based on the amount of product sold in the dental
market.
In October 2002, the Company entered into a three-year agreement with
Celgene for the promotion of Gelclair(TM) in the U.S. oncology market. The
Company is committed to annual marketing expenditures of $1 million, $2 million
and $2 million for 2003, 2004 and 2005, respectively. These marketing
expenditures satisfy the Company's marketing obligations under the Gelclair(TM)
Agreement described above. Celgene will receive a marketing fee based on a fixed
percent of net sales of Gelclair(TM) in the oncology market.
The Company contracts with a number of university-based researchers and
commercial vendors who provide various research, clinical and product
development activities. Such arrangements are generally cancelable at any time.
In March 2001, the Company entered into a clinical research agreement with
a clinical research organization ("CRO") in which the Company may be
responsible, from time to time, to make milestone payments to the CRO based on
the achievement of pre-agreed recruitment goals. The Company records the expense
of such milestone payments on the date that the milestone objective is achieved.
PROPOSED MERGER WITH OSI PHARMACEUTICALS
If the Company's Board of Directors withdraws, modifies or changes its
recommendation to the Company's stockholders to approve the proposed merger, the
Company will owe a termination fee of $1,250,000 to OSI Pharmaceuticals.
LITIGATION
In March, April and May of 2001, eleven stockholder class actions were
filed in the United States District Court for the Eastern District of
Pennsylvania against the Company and certain of its officers and directors
seeking unspecified damages. The lawsuits alleged that the Company and its
officers made false and misleading statements about the Company's drug
candidate, Aptosyn(R), which caused artificial inflation of the Company's stock
price during the class period of October 27, 1999 to September 22, 2000, when
the Company announced that the FDA had informed the Company that it would be
receiving a "not approvable" letter for its new drug application for Aptosyn(R).
In February 2002, a stipulation of settlement was agreed to. Pursuant to this
stipulation of settlement, and following a preliminary order by the court, the
Company's insurance carrier paid $2.0 million into escrow and the Company issued
1.7 million shares into escrow. On September 23, 2002, following a hearing, the
Court entered a final order approving the settlement and dismissing the action
at which time the $2.0 million and 1.7 million shares were released from escrow.
The time to appeal therefrom has expired. As of December 31, 2001, the Company
recorded the fair value of the 1.7 million shares of Common Stock of $7,837,000,
as an increase to additional paid-in capital and recorded a charge to litigation
settlement expense for the then fair value of the Common Stock. For the year
ended December 31, 2002, the fair value of the 1.7 million shares was adjusted
to $1,088,000 based on the final fair value of the shares as of September 23,
2002, which resulted in a $6,749,000 reduction to the litigation settlement
expense and a decrease to additional paid-in capital during the year ended
December 31, 2002.
F-28
CELL PATHWAYS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
15. SUPPLEMENTAL QUARTERLY FINANCIAL DATA (UNAUDITED):
Summarized quarterly financial data for the years ended December 31, 2002
and 2001 is as follows:
<Table>
<Caption>
2002
------------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
----------- ----------- ------------ -----------
REVENUES:
Product sales.................... $ -- $ -- $ 88,267 $ 448,606
Marketing services............... -- 303,578 307,686 --
----------- ----------- ----------- -----------
-- 303,578 395,953 448,606
----------- ----------- ----------- -----------
EXPENSES:
Cost of products sold............ -- -- 28,542 191,164
Research and development......... 4,311,246 4,116,395 4,659,505 4,057,963
Selling, general and
administrative................. 2,259,476 2,513,794 1,957,829 1,973,282
Litigation settlement and
expense(1)..................... (850,000) (4,437,000) (1,462,000) --
----------- ----------- ----------- -----------
5,720,722 2,193,189 5,183,876 6,222,409
----------- ----------- ----------- -----------
Operating loss................. (5,720,722) (1,889,611) (4,787,923) (5,773,803)
Interest income, net............. 88,821 101,928 64,696 45,392
----------- ----------- ----------- -----------
Net loss......................... $(5,631,901) $(1,787,683) $(4,723,227) $(5,728,411)
=========== =========== =========== ===========
Basic and diluted net loss per
Common share................... $ (0.18) $ (0.05) $ (0.14) $ (0.15)
=========== =========== =========== ===========
</Table>
<Table>
<Caption>
2001
-------------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
----------- ----------- ------------ ------------
REVENUES:
Marketing services.............. $ 316,973 $ -- $ 306,808 $ 318,450
----------- ----------- ----------- ------------
EXPENSES:
Research and development........ 3,782,214 3,415,882 5,210,684 5,356,463
Selling, general and
administrative................ 1,942,632 1,920,761 1,723,016 2,169,719
Litigation settlement and
expense(1).................... -- -- -- 8,492,000
----------- ----------- ----------- ------------
5,724,846 5,336,643 6,933,700 16,018,182
----------- ----------- ----------- ------------
Operating loss................ (5,407,873) (5,336,643) (6,626,892) (15,699,732)
Interest income, net............ 641,006 459,129 378,021 188,549
----------- ----------- ----------- ------------
Net loss........................ $(4,766,867) $(4,877,514) $(6,248,871) $(15,511,183)
=========== =========== =========== ============
Basic and diluted net loss per
Common share.................. $ (0.15) $ (0.16) $ (0.20) $ (0.50)
=========== =========== =========== ============
</Table>
(1) See Note 14.
F-29
ANNEX A
AGREEMENT AND PLAN OF MERGER
AMONG
OSI PHARMACEUTICALS, INC.
CP MERGER CORPORATION
AND
CELL PATHWAYS, INC.
DATED AS OF FEBRUARY 7, 2003
TABLE OF CONTENTS
<Table>
ARTICLE I DEFINITIONS
Section 1.01. Definitions................................................. 1
ARTICLE II THE MERGER
Section 2.01. The Merger.................................................. 5
Section 2.02. Effective Time; Closing..................................... 5
Section 2.03. Effect of the Merger........................................ 5
Section 2.04. Certificate of Incorporation; By-laws....................... 6
Section 2.05. Directors and Officers...................................... 6
Section 2.06. Conversion of Securities.................................... 6
Employee Stock Options, Employee Stock Purchase Plan and
Section 2.07. Company Warrants............................................ 6
Section 2.08. Exchange of Certificates.................................... 7
Section 2.09. Appraisal Rights............................................ 9
Section 2.10. Stock Transfer Books........................................ 9
Section 2.11. Adjustments................................................. 9
ARTICLE III REPRESENTATIONS AND WARRANTIES OF THE COMPANY
Section 3.01. Organization and Qualification; Subsidiaries................ 9
Section 3.02. Certificate of Incorporation and By-laws.................... 10
Section 3.03. Capitalization.............................................. 10
Section 3.04. Authority Relative to This Agreement........................ 10
Section 3.05. No Conflict; Required Filings and Consents.................. 11
Section 3.06. Permits; Compliance......................................... 11
Section 3.07. SEC Filings; Financial Statements........................... 11
Section 3.08. Absence of Certain Changes or Events........................ 12
Section 3.09. Absence of Litigation....................................... 13
Section 3.10. Employee Benefit Plans...................................... 13
Section 3.11. Labor and Employment Matters................................ 14
Section 3.12. Property and Leases......................................... 15
Section 3.13. Intellectual Property....................................... 15
Section 3.14. Taxes....................................................... 17
Section 3.15. Environmental Matters....................................... 18
Section 3.16. Material Contracts.......................................... 18
Section 3.17. Insurance................................................... 19
Section 3.18. Brokers..................................................... 19
Section 3.19. Takeover Laws............................................... 19
Section 3.20. Amendment to Rights Agreement............................... 19
Section 3.21. Certain Business Practices.................................. 19
Section 3.22. [RESERVED................................................... 19
Section 3.23. Vote Required............................................... 19
Section 3.24. Opinion of Financial Advisors............................... 19
Section 3.25. Regulatory Issues........................................... 20
Section 3.26. Full Disclosure............................................. 20
Section 3.27. Corporate Governance Compliance............................. 20
Section 3.28. Related Party Transactions.................................. 21
</Table>
A-i
<Table>
ARTICLE IV REPRESENTATIONS AND WARRANTIES OF PARENT AND MERGER SUB
Section 4.01. Corporate Organization...................................... 21
Section 4.02. Certificate of Incorporation and By-laws.................... 21
Section 4.03. Capitalization.............................................. 21
Section 4.04. Authority Relative to This Agreement........................ 21
Section 4.05. No Conflict; Required Filings and Consents.................. 22
Section 4.06. SEC Filings; Financial Statements........................... 22
Section 4.07. Absence of Certain Changes or Events........................ 23
Section 4.08. Absence of Litigation....................................... 23
Section 4.09. Property and Leases......................................... 23
Section 4.10. Taxes....................................................... 23
Section 4.11. Brokers..................................................... 24
Section 4.12. Certain Business Practices.................................. 24
Section 4.13. Full Disclosure............................................. 24
Section 4.14. Corporate Governance Compliance............................. 24
Section 4.15. Related Party Transactions.................................. 24
ARTICLE V CONDUCT OF BUSINESS PENDING THE MERGER
Section 5.01. Conduct of Business by the Company Pending the Merger....... 24
Section 5.02. Fees and Expenses........................................... 25
Section 5.03. Conduct of Business by Parent Pending the Merger............ 26
ARTICLE VI ADDITIONAL AGREEMENTS
Section 6.01. Registration Statement; Proxy Statement..................... 26
Section 6.02. Stockholders' Meeting....................................... 27
Section 6.03. Appropriate Action; Consents; Filings....................... 27
Section 6.04. Access to Information; Confidentiality...................... 28
Section 6.05. No Solicitation of Transactions............................. 28
Section 6.06. Directors' and Officers' Indemnification and Insurance...... 30
Section 6.07. Notification of Certain Matters............................. 30
Section 6.08. Public Announcements........................................ 30
Section 6.09. Tax Opinion Matters......................................... 31
Section 6.10. Affiliates.................................................. 31
Section 6.11. Tax-free Reorganization..................................... 31
Section 6.12. Comparability of Employee Benefits.......................... 31
Section 6.13. Further Assurances.......................................... 32
Section 6.14. HSR Act..................................................... 32
ARTICLE VII CONDITIONS TO THE MERGER
Section 7.01. Conditions to the Merger.................................... 32
Section 7.02. Conditions to the Obligations of Parent and Merger Sub...... 32
Section 7.03. Conditions to the Obligations of the Company................ 33
ARTICLE VIII TERMINATION, AMENDMENT AND WAIVER
Section 8.01. Termination................................................. 34
Section 8.02. Effect of Termination....................................... 35
Section 8.03. Fees and Expenses........................................... 35
</Table>
A-ii
<Table>
Section 8.04. Amendment................................................... 35
Section 8.05. Waiver...................................................... 35
ARTICLE IX GENERAL PROVISIONS
Section 9.01. Nonsurvival of Representations and Warranties............... 36
Section 9.02. Notices..................................................... 36
Section 9.03. Severability................................................ 36
Section 9.04. Entire Agreement; Assignment................................ 36
Section 9.05. Parties in Interest......................................... 37
Section 9.06. Specific Performance........................................ 37
Section 9.07. Governing Law............................................... 37
Section 9.08. Waiver of Jury Trial........................................ 37
Section 9.09. Headings.................................................... 37
Section 9.10. Counterparts................................................ 37
</Table>
A-iii
AGREEMENT AND PLAN OF MERGER, dated as of February 7, 2003 (this
"Agreement"), among OSI Pharmaceuticals, Inc., a Delaware corporation
("Parent"), CP Merger Corporation, a Delaware corporation and a wholly owned
subsidiary of Parent ("Merger Sub"), and Cell Pathways, Inc., a Delaware
corporation (the "Company").
W I T N E S S E T H :
WHEREAS, the parties hereto desire to cause Merger Sub, upon the terms and
subject to the conditions of this Agreement and in accordance with the General
Corporation Law of the State of Delaware ("Delaware Law"), to merge with and
into the Company (the "Merger");
WHEREAS, the Board of Directors of the Company (the "Board") has (i)
determined that the Merger is fair to the holders of Shares (as defined in
Section 2.06(a)) and is in the best interests of such stockholders and (ii)
approved this Agreement and the transactions contemplated hereby and unanimously
has recommended that the stockholders of the Company adopt this Agreement;
WHEREAS, the Board of Directors of Parent has determined that the Merger is
in the best interests of Parent and its stockholders and has approved and, as
sole stockholder of Merger Sub, has adopted this Agreement and the transactions
contemplated hereby; and
WHEREAS, for federal income tax purposes, it is intended that the Merger
shall qualify as a reorganization under the provisions of Section 368(a) of the
United States Internal Revenue Code of 1986, as amended (the "Code").
NOW, THEREFORE, in consideration of the foregoing and the mutual covenants
and agreements herein contained, and intending to be legally bound hereby,
Parent, Merger Sub and the Company hereby agree as follows:
ARTICLE I
DEFINITIONS
SECTION 1.01. Definitions. (a) For purposes of this Agreement:
"Acquisition Proposal" means (i) any bona fide written proposal or
offer from any person relating to any direct or indirect acquisition of (A)
all or at least 20% of the consolidated assets of the Company and its
Subsidiaries or (B) any equity securities of the Company or of its
Subsidiaries (except in respect of the issuance of equity securities by the
Company related to the exercise or conversion of options or warrants
outstanding as of the date hereof); (ii) any tender offer or exchange
offer, as defined pursuant to the Exchange Act, for any class of equity
securities of the Company; (iii) any merger, consolidation, business
combination, sale of all or at least 20% of the consolidated assets,
recapitalization, liquidation, dissolution or similar transaction involving
the Company or its Subsidiaries, other than the Merger; or (iv) any other
transaction the consummation of which would impede, interfere with, prevent
or materially delay the Merger or would materially dilute the benefits to
Parent of the Transactions contemplated hereby. An Acquisition Proposal
includes a Superior Proposal.
"affiliate" of a specified person means a person who, directly or
indirectly through one or more intermediaries, controls, is controlled by,
or is under common control with, such specified person.
"beneficial owner", with respect to any Shares, means a person who
shall be deemed to be the beneficial owner of such Shares (i) which such
person or any of its affiliates or associates (as such term is defined in
Rule 12b-2 promulgated under the Exchange Act) beneficially owns, directly
or indirectly, (ii) which such person or any of its affiliates or
associates has, directly or indirectly, (A) the right to acquire (whether
such right is exercisable immediately or subject to the passage of time or
other conditions), pursuant to any agreement, arrangement or understanding
or upon the exercise of conversion rights, exchange rights, warrants or
options, or otherwise, or (B) the right to vote pursuant to any agreement,
arrangement or understanding or (iii) which are beneficially owned,
directly or indirectly, by any other persons with whom such person or any
of its affiliates or associates or person with whom such
A-1
person or any of its affiliates or associates has any agreement,
arrangement or understanding for the purpose of acquiring, holding, voting
or disposing of any Shares.
"business day" shall have the meaning set forth in Rule 14d-1(g)(3)
under the Exchange Act.
"Company Disclosure Schedule" means the Disclosure Schedule referred
to herein and delivered by the Company to Parent and Merger Sub on the date
hereof.
"Company Material Adverse Effect" means any event, circumstance,
change or effect that is materially adverse to the business, condition
(financial or otherwise), or results of operations of the Company and its
Subsidiaries taken as a whole; provided, however, that a Material Adverse
Effect shall not include (A) any events, circumstances, changes and effects
that are generally applicable to (i) the pharmaceutical industry, or (ii)
the United States economy including, but not limited to, any acts of
terrorism or any outbreak of hostilities or war, provided that the Company
and its Subsidiaries are not disproportionately affected thereby, (B) any
change, effect or circumstance resulting from the transactions contemplated
hereby or the announcement hereof, (C) any change in the trading price or
trading volume of the Company's Common Stock (unless the event underlying
such change in price or volume would otherwise constitute a Company
Material Adverse Effect), (D) the delisting of the Company's Common Stock
from the Nasdaq National Market or (E) any decline in the Company's cash
position in the ordinary course of business.
"control" (including the terms "controlled by" and "under common
control with") means the possession, directly or indirectly, or as trustee
or executor, of the power to direct or cause the direction of the
management and policies of a person, whether through the ownership of
voting securities, as trustee or executor, by contract or credit
arrangement or otherwise.
"Environmental Laws" means any United States federal, state, local or
non-United States laws or regulations in effect as of the date hereof
relating to (i) releases or threatened releases of Hazardous Substances or
materials containing Hazardous Substances; (ii) the manufacture, handling,
transport, use, treatment, storage or disposal of Hazardous Substances or
materials containing Hazardous Substances; or (iii) pollution or protection
of the environment, health or natural resources.
"ERISA Affiliate" means any trade or business (whether or not
incorporated) under common control with the Company or its Subsidiaries and
which, together with the Company or its Subsidiaries, is treated as a
single employer within the meaning of Section 414(b), (c), (m) or (o) of
the Code.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Governmental Authority" means any: (i) nation, principality, state,
commonwealth, province, territory, county, municipality, district or other
jurisdiction of any nature; (ii) federal, state, local, municipal, foreign
or other government; (iii) governmental or quasi governmental authority of
any nature (including any governmental division, subdivision, department,
agency, bureau, branch, office, commission, council, board,
instrumentality, officer, official, representative, organization, unit,
body or entity and any court or other tribunal); (iv) multinational
organization or body; or (v) individual, entity or body exercising, or
entitled to exercise, any executive, legislative, judicial, administrative,
regulatory, police, military or taxing authority or power of any nature.
"Group" means, individually and collectively, (i) the Company, or (ii)
its Subsidiaries.
"Hazardous Substances" means (i) those substances defined in or
regulated as hazardous or toxic substances, materials or wastes under any
applicable Environmental Law; (ii) petroleum and petroleum products,
including crude oil and any fractions thereof; (iii) natural gas, synthetic
gas, and any mixtures thereof; (iv) polychlorinated biphenyls, asbestos and
radon; and (v) any other contaminant.
"IRS" means the United States Internal Revenue Service.
"knowledge of the Company" means the actual knowledge of each of the
individuals set forth in Section 1.01 of the Company Disclosure Schedule.
A-2
"Parent Common Stock" means the common stock, $0.01 par value per
share, of Parent.
"Parent Material Adverse Effect" means any event, circumstance, change
or effect that is materially adverse to the business, condition (financial
or otherwise), or results of operations of the Parent and its Subsidiaries,
taken as a whole; provided, however, that a Material Adverse Effect shall
not include (A) any events, circumstances, changes and effects that are
generally applicable to (i) the pharmaceutical industry, or (ii) the United
States economy including, but not limited to, any acts of terrorism or any
outbreak of hostilities or war, provided that Parent and its Subsidiaries
are not disproportionately affected thereby, (B) any change, effect or
circumstance resulting from the transactions contemplated hereby or the
announcement hereof, (C) any change in the trading price or trading volume
of Parent's Common Stock (unless the event underlying such change in price
or volume would otherwise constitute a Parent Material Adverse Effect), (D)
the delisting of Parent's Common Stock from the Nasdaq National Market or
(E) any decline in Parent's cash position in the ordinary course of
business.
"person" means an individual, corporation, partnership, limited
partnership, limited liability company, syndicate, person (including,
without limitation, a "person" as defined in Section 13(d)(3) of the
Exchange Act), trust, association or entity or government, political
subdivision, agency or instrumentality of a government.
"Parent Disclosure Schedule" means the Disclosure Schedule referred to
herein and delivered by Parent to the Company on the date hereof.
"SEC" means the United States Securities and Exchange Commission.
"SEC Reports" means (i) the Company's Annual Reports on Form 10-K for
the fiscal years ended December 31, 1999, 2000, 2001, respectively, (ii)
the Company's Quarterly Reports on Form 10-Q for the periods ended March
31, June 30 and September 30, 2002, (iii) the Company's proxy statement
relating to the Company's 2002 annual meeting of stockholders, and (iv) all
other forms, reports and other registration statements filed by the Company
with the SEC since January 1, 2002.
"Securities Act" means the Securities Act of 1933, as amended.
"Subsidiary" or "Subsidiaries" of the Company, the Surviving
Corporation, Parent or any other person means an affiliate controlled by
such person, directly or indirectly, through one or more intermediaries.
"Tax" or "Taxes" means (i) means all taxes, however, denominated,
including any interest, penalties or other additions to tax that may become
payable in respect thereof, imposed by any federal, territorial, state or
local government or any agency or political subdivision of any such
government, which taxes shall include, without limiting the generality of
the foregoing, all income or profits taxes (including, but not limited to,
federal income taxes and state income taxes), payroll and employee
withholding taxes, unemployment insurance, social security taxes, sales and
use taxes, ad valorem taxes, excise taxes, franchise taxes, gross receipts
taxes, business license taxes, occupation taxes, real and personal property
taxes, stamp taxes, environmental taxes, transfer taxes, workers'
compensation, Pension Benefit Guaranty Corporation premiums and other
governmental charges, and other obligations of the same or of a similar
nature to any of the foregoing, which are required to be paid, withheld or
collected, (ii) any liability for payment of amounts described in clause
(i) whether as a result of transferee liability, of being a member of an
affiliated, consolidated, combined or unitary group for any period, or
otherwise through operation of law, and (iii) any liability for the payment
of amounts described in clauses (i) or (ii) as a result of any tax sharing,
tax indemnity or tax allocation agreement or any other express or implied
agreement to indemnify any other person.
"Tax Returns" means all reports, estimates, declarations of estimated
Tax, information statements and returns relating to, or required to be
filed in connection with, any Taxes, including information returns or
reports with respect to backup withholding and other payments to third
parties.
"Treasury Regulations" means the temporary and final regulations
issued by the U.S. Treasury Department under the Code.
A-3
(b) The following terms have the meaning set forth in the Sections set
forth below:
<Table>
<Caption>
DEFINED TERM LOCATION OF DEFINITION
- ------------ ----------------------
Action.................................................... 3.09
Affiliate Agreement....................................... 6.10
Agreement................................................. Preamble
Assumed Employees......................................... 6.12
Assumed Option............................................ 2.07(a)
Blue Sky Laws............................................. 3.05(b)
Board..................................................... Recitals
Certificate of Merger..................................... 2.02
Certificates.............................................. 2.08(b)
clinical data developed by or on behalf of the Company.... 3.13(a)
Closing Date.............................................. 2.02
Code...................................................... Recitals
Company................................................... Preamble
Company Common Stock...................................... 2.06(a)
Company Data Base and Data Collections.................... 3.13(a)
Company Financial Advisor................................. 3.24
Company Preferred Stock................................... 3.03
Company Registered Intellectual Property.................. 3.13(b)
Company Required Approvals................................ 3.05(b)
Company Stock Option Plans................................ 2.07(a)
Confidentiality Agreements................................ 6.04(b)
Contingent Value Right.................................... 2.06(a)
Delaware Law.............................................. Recitals
Effective Time............................................ 2.02
Environmental Permits..................................... 3.15
ERISA..................................................... 3.10(a)
ESPP...................................................... 2.07(d)
Exchange Agent............................................ 2.08(a)
Exchange Fund............................................. 2.08(a)
Exchange Ratio............................................ 2.06(a)
GAAP...................................................... 3.07(b)
Indemnified Parties....................................... 6.06(b)
Intellectual Property..................................... 3.13(a)
Investigator-Initiated Clinical Study Data................ 3.13(a)
Law....................................................... 3.05(a)
Material Contracts........................................ 3.16(a)
Merger.................................................... Recitals
Merger Consideration...................................... 2.06(a)
Merger Sub................................................ Preamble
Multiemployer Plan........................................ 3.10(b)
Multiple Employer Plan.................................... 3.10(b)
Parent.................................................... Preamble
</Table>
A-4
<Table>
<Caption>
DEFINED TERM LOCATION OF DEFINITION
- ------------ ----------------------
Parent SEC Reports........................................ 4.06(a)
Permits................................................... 3.06
Plans..................................................... 3.10(a)
Proprietary Information................................... 6.04(b)
Proxy Statement........................................... 6.01(a)
Registered Intellectual Property.......................... 3.13(a)
Registration Statement.................................... 6.01(a)
Restraints................................................ 7.01(b)
Revised Offer............................................. 6.05(f)
Rights.................................................... 3.03
Rights Agreement.......................................... 3.03
Series A Exchangeable Preferred Stock..................... 4.03
Series A Preferred Stock.................................. 4.03
Shares.................................................... 2.06(a)
Stockholders' Meeting..................................... 6.02
Subsidiary................................................ 3.01(a)
Superior Proposal......................................... 6.05(a)
Surviving Corporation..................................... 2.01
Terminating Company Breach................................ 8.01(g)
Terminating Parent Breach................................. 8.01(f)
Termination Fee........................................... 8.03(a)
2002 Balance Sheet........................................ 3.07(c)
</Table>
ARTICLE II
THE MERGER
SECTION 2.01. The Merger. Upon the terms and subject to the conditions
set forth in Article VII, and in accordance with Delaware Law, at the Effective
Time (as hereinafter defined) Merger Sub shall be merged with and into the
Company. As a result of the Merger, the separate corporate existence of Merger
Sub shall cease and the Company shall continue as the surviving corporation of
the Merger (the "Surviving Corporation").
SECTION 2.02. Effective Time; Closing. As promptly as practicable after
the satisfaction or, if permissible, waiver of the conditions set forth in
Article VII, the parties hereto shall cause the Merger to be consummated by
filing a certificate of merger (the "Certificate of Merger") with the Secretary
of State of the State of Delaware, in such form as is required by, and executed
in accordance with, the relevant provisions of Delaware Law (the date and time
of such filing being the "Effective Time"). On a date prior to such filing (the
"Closing Date"), a closing shall be held at the offices of Mintz Levin Cohn
Ferris Glovsky and Popeo PC, The Chrysler Center, 666 Third Avenue, New York,
New York 10017, or such other place as the parties shall agree, for the purpose
of confirming the satisfaction or waiver, as the case may be, of the conditions
set forth in Article VII.
SECTION 2.03. Effect of the Merger. At the Effective Time, the effect of
the Merger shall be as provided in the applicable provisions of Delaware Law.
Without limiting the generality of the foregoing, and subject thereto, at the
Effective Time, all the property, rights, privileges, powers and franchises of
the Company and Merger Sub shall vest in the Surviving Corporation, and all
debts, liabilities, obligations, restrictions, disabilities and duties of the
Company and Merger Sub shall become the debts, liabilities, obligations,
restrictions, disabilities and duties of the Surviving Corporation.
A-5
SECTION 2.04. Certificate of Incorporation; By-laws.
(a) At the Effective Time, the certificate of incorporation of the
Surviving Corporation, as in effect immediately prior to the Effective Time,
shall be amended so as to contain the provisions, and only the provisions,
contained immediately prior thereto in the certificate of incorporation of
Merger Sub.
(b) Unless otherwise determined by Parent prior to the Effective Time, the
by-laws of Merger Sub, as in effect immediately prior to the Effective Time,
shall be the by-laws of the Surviving Corporation until thereafter amended as
provided by law, the certificate of incorporation of the Surviving Corporation
and such by-laws.
SECTION 2.05. Directors and Officers. The directors of Merger Sub
immediately prior to the Effective Time shall be the initial directors of the
Surviving Corporation, each to hold office in accordance with the certificate of
incorporation and by-laws of the Surviving Corporation, and the officers of
Merger Sub immediately prior to the Effective Time shall be the initial officers
of the Surviving Corporation, in each case until their respective successors are
duly elected or appointed and qualified or until their earlier death,
resignation or approval. The Company shall cause the officers and directors of
the Company to submit their resignations to the Surviving Corporation effective
as of the Effective Time.
SECTION 2.06. Conversion of Securities. At the Effective Time, by virtue
of the Merger and without any action on the part of Merger Sub, the Company or
the holders of any of the following securities:
(a) Each share of common stock, par value $0.01 per share, of the
Company ("Company Common Stock"; all issued and outstanding shares of
Company Common Stock being hereinafter collectively referred to as the
"Shares") issued and outstanding immediately prior to the Effective Time
(except as otherwise provided in Section 2.06(b) or Section 2.09) and all
rights in respect thereof shall be converted automatically, subject to
Section 2.08(e), into the right to receive .0567 of a share of Parent
Common Stock (such number, the "Exchange Ratio") and a 5-year contingent
value right, substantially in the form of Exhibit A hereto, to receive
.0400 shares of Parent Common Stock (the "Contingent Value Right"). The
shares of Parent Common Stock (together with the cash in lieu of fractional
shares of Parent Common Stock as specified below) and the Contingent Value
Rights to be received pursuant hereto are the "Merger Consideration".
(b) Each Share held in the treasury of the Company and each Share
owned by Merger Sub, Parent or any direct or indirect wholly owned
subsidiary of Parent or of the Company immediately prior to the Effective
Time shall be canceled without any conversion thereof and no payment or
distribution shall be made with respect thereto; and
(c) Each share of common stock, par value $0.01 per share, of Merger
Sub issued and outstanding immediately prior to the Effective Time shall be
converted into and exchanged for one validly issued, fully paid and
nonassessable share of common stock of the Surviving Corporation.
SECTION 2.07. Employee Stock Options, Employee Stock Purchase Plan and
Company Warrants.
(a) At the Effective Time, each outstanding option to purchase Shares under
the stock option plans listed in Section 3.10(a) of the Company Disclosure
Schedule (the "Company Stock Option Plans") that is not exercised on or prior to
the Closing Date, will terminate in accordance with the terms of such plan and
the agreements entered into under such plan. Prior to the Closing Date, the
Company shall take any corporate action necessary to effectuate the foregoing
and the Company shall give any required notice to participants in the Company
Stock Option Plans of the cancellation of the plan, and each participant shall
have the right to exercise his or her outstanding option(s) under the plan in
full.
(b) Effective as of the Effective Time, the Company shall take all
necessary action, including obtaining the consent of the individual option
holders, if necessary, to take the actions described in Section 2.07(a).
(c) The Company shall take all action reasonably necessary to approve the
disposition of the Company Stock Options in connection with the transactions
contemplated by this Agreement so as to exempt such dispositions under Rule
16b-3 of the Exchange Act.
A-6
(d) Each outstanding option to purchase Shares under the Company's Employee
Stock Purchase Plan (the "ESPP") shall be treated in accordance with the
provisions of the ESPP (including Section 12(B)(iii) thereof). Prior to the
Closing Date, the Company shall give any required notice to participants in the
ESPP of the cancellation of the ESPP, and each participant shall have the right
to exercise his or her outstanding option under the ESPP in full based on
accumulated payroll deductions then credited to his or her account. Thereafter,
no new payroll contributions shall be accepted by, or made to, the ESPP, any
cash remaining in participants' accounts will be distributed to participants,
and the ESPP shall be terminated.
(e) At the Effective Time, each outstanding warrant to purchase Shares
listed in Section 3.03 of the Company Disclosure Schedule that is not exercised
on or prior to the Closing Date, will be assumed by Parent (and, such warrants
will continue on the same terms and conditions as contained in the warrants),
such that upon exercise of such assumed warrants each warrant holder will
receive that number of shares of Parent Common Stock equal to the Exchange Ratio
multiplied by the number of Shares subject to such warrant and a Contingent
Value Right to purchase the number of shares of Parent Common Stock that such
holder would have received in connection with the Merger had such holder
exercised such warrant. The exercise price of such warrants shall be the
exercise price stated in the applicable warrant divided by the Exchange Ratio.
Parent will reserve a sufficient number of shares of Parent Common Stock for
issuance upon the exercise of such warrants.
SECTION 2.08. Exchange of Certificates.
(a) Exchange Agent. As of the Effective Time, Parent shall deposit, or
shall cause to be deposited, with a bank or trust company as may be designated
by Parent (the "Exchange Agent"), for the benefit of the holders of Shares, for
exchange in accordance with this Article II through the Exchange Agent, the
Merger Consideration (such cash and certificates for shares of Parent Common
Stock, together with any dividends or distributions with respect thereto, and
the Contingent Value Rights being hereinafter referred to as the "Exchange
Fund"). The Exchange Agent shall, pursuant to irrevocable instructions, deliver
the Merger Consideration out of the Exchange Fund. Except as contemplated by
Section 2.08(f), the Exchange Fund shall not be used for any other purpose.
(b) Exchange Procedures. As promptly as practicable after the Effective
Time, Parent shall cause the Exchange Agent to mail to each holder of a
certificate or certificates which immediately prior to the Effective Time
represented outstanding Shares (the "Certificates") (i) a letter of transmittal
(which shall specify that delivery shall be effected, and risk of loss and title
to the Certificates shall pass, only upon proper delivery of the Certificates to
the Exchange Agent, and shall be in customary form) and (ii) instructions for
use in effecting the surrender of the Certificates in exchange for certificates
representing shares of Parent Common Stock and Contingent Value Rights. Upon
surrender to the Exchange Agent of a Certificate for cancellation, together with
such letter of transmittal, duly executed, and such other documents as may be
required pursuant to such instructions, the holder of such Certificate shall be
entitled to receive in exchange therefor a certificate representing that number
of whole shares of Parent Common Stock which such holder has the right to
receive in respect of the Shares formerly represented by such Certificate (after
taking into account all Shares then held by such holder), cash in lieu of
fractional shares of Parent Common Stock to which such holder is entitled
pursuant to Section 2.08(e), any dividends or other distributions to which such
holder is entitled pursuant to Section 2.08(c) and the Contingent Value Right
which such holder has the right to receive in respect of the Shares formerly
represented by such Certificate, and the Certificate so surrendered shall
forthwith be cancelled. In the event of a transfer of ownership of Shares that
is not registered in the transfer records of the Company, a certificate
representing that number of whole shares of Parent Common Stock, cash in lieu of
any fractional shares of Parent Common Stock to which such holder is entitled
pursuant to Section 3.08(e), any dividends or other distributions which such
holder is entitled pursuant to Section 3.08(c) and the Contingent Value Rights
to which such holder is entitled may be issued/distributed to a transferee if
the Certificate representing such Shares is presented to the Exchange Agent,
accompanied by all documents required to evidence and effect such transfer and
by evidence that any applicable stock transfer taxes have been paid. Until
surrendered as contemplated by this Section 2.08, each Certificate shall be
deemed at any time after the Effective Time to represent only the right to
receive upon such surrender a certificate representing that number of whole
shares of Parent Common Stock, cash in lieu of any fractional shares of
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Parent Common Stock to which such holder is entitled pursuant to Section
2.02(e), any dividends or other distributions to which such holder is entitled
pursuant to Section 2.08(c) and the Contingent Value Rights to which such holder
is entitled.
(c) Distributions with Respect to Unexchanged Shares of Parent Common
Stock. No dividends or other distributions declared or made after the Effective
Time with respect to Parent Common Stock with a record date after the Effective
Time shall be paid to the holder of any unsurrendered Certificate with respect
to the shares of Parent Common Stock represented thereby, and no cash payment in
lieu of fractional shares shall be paid to any such holder pursuant to Section
2.08(e), until the holder of such Certificate shall surrender such Certificate.
Subject to the effect of escheat, Tax or other applicable Laws, following
surrender of any such Certificate, there shall be paid to the holder of the
certificates representing whole shares of Parent Common Stock issued in exchange
therefor, without interest, (i) promptly, the amount of any cash payable with
respect to a fractional share of Parent Common Stock to which such holder is
entitled pursuant to Section 2.08(e) and the amount of dividends or other
distributions with a record date after the Effective Time and theretofore paid
with respect to such whole shares of Parent Common Stock, and (ii) at the
appropriate payment date, the amount of dividends or other distributions, with a
record date after the Effective Time but prior to surrender and a payment date
occurring after surrender, payable with respect to such whole shares of Parent
Common Stock.
(d) No Further Rights in Company Common Stock. All shares of Parent Common
Stock issued upon conversion of the Shares (including any cash paid pursuant to
Section 2.08(c) or (e)) and all Contingent Value Rights issued upon conversion
of the Shares, each in accordance with the terms hereof, shall be deemed to have
been issued in full satisfaction of all rights pertaining to such Shares.
(e) No Fractional Shares. No certificates or scrip representing fractional
shares of Parent Common Stock shall be issued upon the surrender for exchange of
Certificates, and such fractional share interests will not entitle the owner
thereof to vote or to any other rights of a stockholder of Parent. Each holder
of a fractional share interest shall be paid an amount in cash equal to the
product obtained by multiplying (i) such fractional share interest to which such
holder (after taking into account all fractional share interests then held by
such holder) would otherwise be entitled by (ii) $15.00. From time to time after
the Effective Time, as promptly as practicable after the determination of the
amount of cash, if any, to be paid to any holders of fractional share interests
who have surrendered their Certificates to the Exchange Agent, the Exchange
Agent shall so notify Parent, and Parent shall deposit such amount with the
Exchange Agent and shall cause the Exchange Agent to forward payments to such
holder of fractional share interests subject to and in accordance with the terms
of Sections 2.08(b) and (c).
(f) Termination of Exchange Fund. Any portion of the Exchange Fund which
remains undistributed to the holders of Company Common Stock for six (6) months
after the Effective Time shall be delivered to Parent, upon demand, and any
holders of Company Common Stock who have not theretofore complied with this
Article II shall thereafter look only to Parent for the shares of Parent Common
Stock, any cash in lieu of fractional shares of Parent Common Stock to which
they are entitled pursuant to Section 2.08(e), any dividends or other
distributions with respect to Parent Common Stock to which they are entitled
pursuant to Section 2.08(c) and the Contingent Value Rights to which such
holders are entitled. Any portion of the Exchange Fund remaining unclaimed by
holders of Shares as of a date which is immediately prior to the date that such
amounts would otherwise escheat to or become property of any government entity
shall, to the extent permitted by applicable Law, become the property of Parent
free and clear of any claims or interest of any person previously entitled
thereto.
(g) No Liability. Neither Parent nor the Company shall be liable to any
holder of Shares for any such Shares (or dividends or distributions with respect
hereto), or cash delivered to a public official pursuant to any abandoned
property, escheat or similar Law.
(h) Withholding Rights. Each of Surviving Corporation and Parent shall be
entitled to deduct and withhold from the consideration otherwise payable
pursuant to this Agreement to any holder of Shares such amounts as it is
required to deduct and withhold with respect to the making of such payment under
the Code, or any provision of state, local or foreign Tax Law. To the extent
that amounts are so withheld by the
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Surviving Corporation or Parent, as the case may be, such withheld amounts shall
be treated for all purposes of this Agreement as having been paid to the holder
of the Shares in respect of which such deduction and withholding was made by the
Surviving Corporation or Parent, as the case may be.
SECTION 2.09. Appraisal Rights. To the extent holders of Shares exercise
appraisal rights pursuant to applicable provisions of Delaware Law, the Shares
of such holder shall not be converted into the right to receive the Per Share
Merger Consideration, but the Per Share Merger Consideration shall be held by
Parent subject to the provisions of Delaware Law. If any such holder fails to
protect or withdraws or loses its appraisal rights, such Shares shall then be
treated as if they had been converted as of the Effective Time into a right to
receive the Per Share Merger Consideration.
SECTION 2.10. Stock Transfer Books. At the Effective Time, the stock
transfer books of the Company shall be closed and there shall be no further
registration of transfers of Shares thereafter on the records of the Company.
From and after the Effective Time, the holders of Certificates shall cease to
have any rights with respect to such Shares except as otherwise provided herein
or by any Laws. On or after the Effective Time, any Certificates presented to
the Exchange Agent or Parent for any reason shall be converted into shares of
Parent Common Stock, any cash in lieu of fractional shares of Parent Common
Stock to which the holders thereof are entitled pursuant to Section 2.08(e), any
dividends or other distributions to which the holders thereof are entitled
pursuant to Section 2.08(c) and the Contingent Value Right to which such holders
are entitled.
SECTION 2.11. Adjustments. If at any time during the period between the
date of this Agreement and the Effective Time, any change in the outstanding
shares of capital stock of Parent shall occur, including by reason of any
reclassification, recapitalization, stock, split or combination, exchange or
readjustment of shares, or any stock dividend thereon with a record date during
such period, the number of shares of Parent Common Stock and the Contingent
Value Rights constituting all or part of the Exchange Fund shall be
appropriately adjusted; provided, however, that no adjustment shall be made in
the event of an issuance of any shares of Parent Common Stock to directors or
employees of Parent in the ordinary course under any Parent stock option or
stock purchase plan.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company represents and warrants to Parent and Merger Sub that the
statements contained in this Article III are true and correct, except as set
forth in (i) the Company Disclosure Schedule or (ii) the SEC Reports filed by
the Company since January 1, 2002. The Company Disclosure Schedule shall be
arranged in paragraphs corresponding to numbered and lettered sections contained
in this Article III, and the disclosures in any paragraph of the Company
Disclosure Schedule shall qualify other sections in this Article III to the
extent it is reasonably and readily apparent from a reading of the disclosure
that such disclosure is applicable to such other sections. Neither the Company
nor its Subsidiaries or Affiliates have made or shall be deemed to have made any
representation or warranty to Parent or Merger Sub other than as set forth in
this Article III and the Company Disclosure Schedule.
SECTION 3.01. Organization and Qualification; Subsidiaries.
(a) Each of the Company and its Subsidiaries is a corporation duly
organized, validly existing and, to the extent applicable, in good standing
under the laws of the jurisdiction of its incorporation and has the requisite
corporate power and authority to own, lease and operate its properties and to
carry on its business as it is now being conducted, except where the failure to
be so organized, existing and in good standing or to have such power and
authority would not, individually or in the aggregate, have a Company Material
Adverse Effect. The Company and its Subsidiaries are duly qualified or licensed
as a foreign corporation to do business, and is in good standing, in each
jurisdiction where the character of the properties owned, leased or operated by
it or the nature of its business makes such qualification or licensing
necessary, except where the failure to be so duly qualified or licensed and in
good standing would not have a Company Material Adverse Effect.
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(b) The Company does not directly or indirectly own any equity or similar
interest in, or any interest convertible into or exchangeable or exercisable for
any equity or similar interest in, any corporation, partnership, joint venture
or other business association or entity.
SECTION 3.02. Certificate of Incorporation and By-laws. The Company has
heretofore made available to Parent a complete and correct copy of the
certificate of incorporation and the by-laws or equivalent organizational
documents, each as amended to date, of the Company and its Subsidiaries. Such
certificate of incorporation, by-laws or equivalent organizational documents are
in full force and effect. Neither the Company nor any of its Subsidiaries is in
violation of any of the provisions of its certificate of incorporation, by-laws
or equivalent organizational documents.
SECTION 3.03. Capitalization. The authorized capital stock of the Company
consists of 150,000,000 shares of Company Common Stock and 10,000,000 shares of
preferred stock, par value $0.01 per share ("Company Preferred Stock"). As of
the date hereof, (a) 39,415,882 Shares are issued and outstanding, all of which
are validly issued, fully paid and nonassessable, (b) no shares of Company
Common Stock are held in the treasury of the Company, (c) no Shares are held by
the Subsidiaries of the Company, and (d) 3,352,347 shares of Company Common
Stock are reserved for future issuance pursuant to outstanding employee stock
options or stock incentive rights granted pursuant to the Company Stock Option
Plans. There are 85,000 shares of Company Common Stock reserved for issuance
pursuant to the ESPP. As of the date hereof, no shares of Company Preferred
Stock are issued and outstanding. As of the date hereof, there are warrants
exercisable for 778,249 shares of Company Common Stock outstanding. Copies of
the warrants have been made available to Parent. The names of and authorized
capital stock of the Company's Subsidiaries outstanding as of the date hereof
(all of which are held by the Company) are set forth in Section 3.03 of the
Company Disclosure Schedule. Except as set forth in this Section 3.03, except
for the rights (the "Rights") issued pursuant to the Rights Agreement, dated as
of December 3, 1998 (the "Rights Agreement"), between the Company and Registrar
and Transfer Company, as rights agent, there are no options, warrants or other
rights, agreements, arrangements or commitments of any character relating to the
issued or unissued capital stock of the Company or its Subsidiaries or
obligating the Company or its Subsidiaries to issue or sell any shares of
capital stock of, or other equity interests in, the Company or its Subsidiaries.
All Shares subject to issuance as aforesaid, upon issuance on the terms and
conditions specified in the instruments pursuant to which they are issuable,
will be duly authorized, validly issued, fully paid and nonassessable. There are
no outstanding contractual obligations of the Company or its Subsidiaries to
repurchase, redeem or otherwise acquire any Shares or any capital stock of its
Subsidiaries or to provide funds to, or make any investment (in the form of a
loan, capital contribution or otherwise) in, its Subsidiaries or any other
person. Each outstanding share of capital stock of its Subsidiaries is duly
authorized, validly issued, fully paid and nonassessable, and each such share is
owned by the Company free and clear of all security interests, liens, claims,
pledges, options, rights of first refusal, agreements, limitations on the
Company's or its Subsidiaries' voting rights, charges and other encumbrances of
any nature whatsoever.
SECTION 3.04. Authority Relative to This Agreement. The Company has all
necessary corporate power and authority to execute and deliver this Agreement,
to perform its obligations hereunder and to consummate the Merger. The execution
and delivery of this Agreement by the Company and the consummation by the
Company of the Merger have been duly and validly authorized by all necessary
corporate action, and no other corporate proceedings on the part of the Company
are necessary to authorize this Agreement or to consummate the Merger (other
than the approval and adoption of this Agreement by the holders of a majority of
the then-outstanding Shares and the filing and recordation of appropriate merger
documents as required by Delaware Law). This Agreement has been duly executed
and delivered by the Company and, assuming the due authorization, execution and
delivery by Parent and Merger Sub, constitutes legal, valid and binding
obligation of the Company, enforceable against the Company in accordance with
its terms, except that (a) such enforcement may be subject to applicable
bankruptcy, insolvency, reorganization, moratorium or other similar laws, now or
hereafter in effect, affecting creditors' rights generally, and (b) the remedy
of specific performance and injunctive and other forms of equitable relief may
be subject to equitable defenses and to the discretion of the court before which
any proceeding therefor may be brought. The restrictions on
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business combinations contained in Section 203 of Delaware Law have been
satisfied with respect to the Merger.
SECTION 3.05. No Conflict; Required Filings and Consents.
(a) The execution and delivery of this Agreement by the Company do not, and
the performance of this Agreement by the Company will not, (i) conflict with or
violate the certificate of incorporation or by-laws or equivalent organizational
documents of the Company or its Subsidiaries, (ii) subject to obtaining the
Company Required Approvals and the approval of the stockholders of the Company
conflict with or violate any United States or non-United States statute, law,
ordinance, regulation, rule, code, executive order, injunction, judgment, decree
or other order ("Law") applicable to the Company or its Subsidiaries or by which
any property or asset of the Company or its Subsidiaries is bound or affected,
or (iii) subject to obtaining the consents listed in Section 3.05 of the Company
Disclosure Schedule, result in any breach of or constitute a default (or an
event which, with notice or lapse of time or both, would become a default)
under, or give to others any right of termination, amendment, acceleration or
cancellation of, or result in the creation of a lien or other encumbrance on any
property or asset of the Company or its Subsidiaries pursuant to, any note,
bond, mortgage, indenture, contract, agreement, lease, license, permit,
franchise or other instrument or obligation, except, with respect to clauses
(ii) and (iii), for any such conflicts, violations, breaches, defaults or other
occurrences which would not prevent or materially delay consummation of the
Merger and would not have a Company Material Adverse Effect.
(b) The execution and delivery of this Agreement by the Company do not, and
the performance of this Agreement by the Company will not, require any consent,
approval, authorization or permit of, or filing with or notification to, any
Governmental Authority, except (i) for applicable requirements, if any, of the
Exchange Act, state securities or "blue sky" laws ("Blue Sky Laws"), state
takeover laws, HSR Act and filing and recordation of appropriate merger
documents as required by Delaware Law (the "Company Required Approvals"), and
(ii) where the failure to obtain such consents, approvals, authorizations or
permits, or to make such filings or notifications, would not prevent or
materially delay consummation of the Merger and would not have a Company
Material Adverse Effect.
SECTION 3.06. Permits; Compliance. Each of the Company and its
Subsidiaries is in possession of all franchises, grants, authorizations,
licenses, permits, easements, variances, exceptions, consents, certificates,
approvals and orders of any Governmental Authority necessary for each of the
Company or its Subsidiaries to own, lease and operate its properties or to carry
on its business as it is now being conducted (the "Permits"), except where the
failure to have, or the suspension or cancellation of, any of the Permits would
not prevent or materially delay consummation of the Merger and would not have a
Company Material Adverse Effect. As of the date hereof, no suspension or
cancellation of any of the Permits is pending or, to the knowledge of the
Company, threatened, except where the failure to have, or the suspension or
cancellation of, any of the Permits would not prevent or materially delay
consummation of the Merger and would not have a Company Material Adverse Effect.
Neither the Company nor any of its Subsidiaries is in conflict with, or in
default, breach or violation of, (a) any Law applicable to the Company or its
Subsidiaries or by which any property or asset of the Company or its
Subsidiaries is bound or affected, or (b) any note, bond, mortgage, indenture,
contract, agreement, lease, license, Permit, franchise or other instrument or
obligation to which the Company or any of its Subsidiaries is a party or by
which the Company or any of its Subsidiaries or any property or asset of the
Company or any of its Subsidiaries is bound, except for any such conflicts,
defaults, breaches or violations that would not prevent or materially delay
consummation of the Merger and would not have a Company Material Adverse Effect.
SECTION 3.07. SEC Filings; Financial Statements.
(a) The Company has filed all forms, reports and documents required to be
filed by it with the SEC since December 31, 1999. The SEC Reports (i) complied,
at the time they were filed, as to form in all material respects with the
applicable requirements of the Securities Act or the Exchange Act, as the case
may be, and the applicable rules and regulations promulgated thereunder, and
(ii) did not, at the time they were filed, or, if amended, as of the date of
such amendment, contain any untrue statement of a material fact or omit to state
a material fact required to be stated therein or necessary in order to make the
statements made
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therein, in the light of the circumstances under which they were made, not
misleading. The Company's Subsidiaries are not required to file any form, report
or other document with the SEC.
(b) No executive officer of the Company has failed in any respect to make
the certifications required of him or her under (i) Section 906 of the
Sarbanes-Oxley Act of 2002 with respect to any periodic report filed by the
Company with the SEC since the enactment of the Sarbanes-Oxley Act of 2002 or
(ii) Section 302 of the Sarbanes-Oxley Act of 2002 with respect to any periodic
report filed by the Company with the SEC since August 29, 2002 (in each case,
excluding any failure to make such certifications occurring after the date of
this Agreement that is inadvertent but promptly corrected by filing the
requisite certification or is attributable to the physical incapacity of an
officer required to make such a certification).
(c) Each of the consolidated financial statements (including, in each case,
any notes thereto) contained in the SEC Reports was prepared in accordance with
United States generally accepted accounting principles ("GAAP") applied on a
consistent basis throughout the periods indicated (except as may be indicated in
the notes thereto) and each fairly presented, in all material respects, the
consolidated financial position, results of operations and cash flows of the
Company and its consolidated Subsidiaries as at the respective dates thereof and
for the respective periods indicated therein (subject, in the case of unaudited
statements, to normal and recurring year-end adjustments that were not and are
not expected, individually or in the aggregate, to have a Company Material
Adverse Effect).
(d) Except as and to the extent set forth on the consolidated balance sheet
of the Company and its consolidated Subsidiaries as of September 30, 2002,
including the notes thereto (the "2002 Balance Sheet"), neither the Company nor
any of its Subsidiaries has any liability or obligation of any nature that would
require disclosure in accordance with GAAP (whether accrued, absolute,
contingent or otherwise), except for liabilities and obligations, incurred in
the ordinary course of business consistent with past practice since September
30, 2002.
(e) The Company has heretofore furnished to Parent complete and correct
copies of all amendments and modifications that have not been filed by the
Company with the SEC to all agreements, documents and other instruments that
previously had been filed by the Company with the SEC and are currently in
effect.
SECTION 3.08. Absence of Certain Changes or Events. Since September 30,
2002, except as contemplated by this Agreement or disclosed in any SEC Report
filed since September 30, 2002 and prior to the date of this Agreement, the
Company and its Subsidiaries have conducted their businesses only in the
ordinary course and in a manner consistent with past practice and, since
September 30, 2002, there has not been (a) any change in the business,
operations, properties, condition (financial or otherwise), assets or
liabilities (including, without limitation, contingent liabilities) or prospects
of the Company or its Subsidiaries having individually or in the aggregate, a
Company Material Adverse Effect, (b) any damage, destruction or loss (whether or
not covered by insurance) with respect to any property or asset of the Company
or its Subsidiaries and having individually or in the aggregate, a Company
Material Adverse Effect, (c) any change by the Company in its accounting
methods, principles or practices, (d) any revaluation by the Company of any
asset (including, without limitation, any writing down of the value of inventory
or writing off of notes or accounts receivable), other than in the ordinary
course of business consistent with past practice, (e) any declaration, setting
aside or payment of any dividend or distribution in respect of any capital stock
of the Company or any redemption, purchase or other acquisition of any of its
securities, (f) any increase in or establishment of any bonus, insurance,
severance, deferred compensation, pension, retirement, profit sharing, stock
option (including, without limitation, the granting of stock options, stock
appreciation rights, performance awards, or restricted stock awards), stock
purchase or other employee benefit plan, or any other increase in the
compensation payable or to become payable to any officers or key employees of
the Company or its Subsidiaries, except in the ordinary course of business
consistent with past practice, (g) any new or change to a material election in
respect of Taxes, any amendment of a Tax Return, any adoption or change to an
accounting method in respect of Taxes, any entering into a Tax allocation
agreement, Tax sharing agreement, Tax indemnity agreement or closing agreement,
settlement or compromise of any claim or assessment in respect of Taxes, or any
consent to any extension or waiver of the limitation period applicable to any
claim or assessment in respect of Taxes with any Governmental Authority, (h) any
change to the Company's
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certificate of incorporation, (i) any settlement or compromise by the Company of
legal actions whether threatened or pending, (j) the entry by the Company into
any material agreement other than in the ordinary course of business, (k) any
issuance of any capital stock of the Company or any securities convertible or
exchangeable for shares of capital stock of the Company or any securities,
warrants, options or rights to purchase any of the foregoing (except pursuant to
the exercise of options and pursuant to the Employee Stock Purchase Plan), (l)
any capital expenditures by the Company in excess of $250,000 in the aggregate,
(m) the pledge or encumbrance of any asset material to the Company or (n) the
issuance of any loan by the Company.
SECTION 3.09. Absence of Litigation. There is no litigation, suit, claim,
action, proceeding or investigation (an "Action") pending or, to the knowledge
of the Company, threatened against the Company or its Subsidiaries, or any
property or asset of the Company or its Subsidiaries, before any Governmental
Authority that (a) would be required to be disclosed in any subsequent SEC
Reports or that would otherwise have a Company Material Adverse Effect or (b)
seeks to materially delay or prevent the consummation of the Merger. Neither the
Company nor any of its Subsidiaries nor any property or asset of the Company or
any of its Subsidiaries is subject to any continuing order of, consent decree,
settlement agreement or similar written agreement with, or, to the knowledge of
the Company, continuing investigation by, any Governmental Authority, or any
order, writ, judgment, injunction, decree, determination or award of any
Governmental Authority that would prevent or materially delay consummation of
the Merger or would have a Company Material Adverse Effect. Neither the Company
nor any of its Subsidiaries is subject to any settlement agreement with any
employee of the Company or its Subsidiaries.
SECTION 3.10. Employee Benefit Plans.
(a) Section 3.10(a) of the Company Disclosure Schedule lists all material
employee benefit plans (as defined in Section 3(3) of the Employee Retirement
Income Security Act of 1974, as amended ("ERISA")) and all material bonus, stock
option, stock purchase, restricted stock, incentive, deferred compensation,
retiree medical or life insurance, supplemental retirement, severance or other
benefit plans, programs or arrangements, and all material employment,
termination, severance or other contracts or agreements (including any relating
in any way to a sale of the Company or its Subsidiaries but excluding any of the
change of control agreements set forth in Section 3.11(e) of the Company
Disclosure Schedule) to which the Company or any ERISA Affiliate is a party,
with respect to which the Company or any ERISA Affiliate has any obligation or
which are maintained, contributed to or sponsored by the Company or any ERISA
Affiliate for the benefit of any current or former employee, officer or director
of the Company or any ERISA Affiliate (collectively, the "Plans"). The Company
has made available to Merger Sub a true and complete copy of each Plan and has
made available to Merger Sub a true and complete copy of each material document,
if any, prepared in connection with each such Plan, including, without
limitation, as applicable (A) a copy of each trust or other funding arrangement,
(B) each most recent summary plan description and summary of material
modifications, (C) the most recently filed IRS Form 5500, (D) the most recently
received IRS determination letter for each such Plan, and (E) the most recently
prepared actuarial report and financial statement in connection with each such
Plan. Neither the Company nor any of its Subsidiaries has any express commitment
(x) to create, incur liability with respect to or cause to exist any other
material employee benefit plan, program or arrangement, (y) to enter into any
contract or agreement to provide compensation or benefits to any individual
other than in the ordinary course of business, or (z) to modify, change or
terminate any Plan, other than with respect to a modification, change or
termination required by ERISA, the Code or other applicable law.
(b) None of the Plans is a multiemployer plan (within the meaning of
Section 3(37) or 4001(a)(3) of ERISA) (a "Multiemployer Plan") or a single
employer pension plan (within the meaning of Section 4001(a)(15) of ERISA) for
which the Company or its Subsidiaries could incur liability under Section 4063
or 4064 of ERISA (a "Multiple Employer Plan"). None of the Plans is subject to
Section 412 of the Code or Section 302 or Title IV of ERISA. None of the Plans
(i) provides for the payment of separation, severance, termination or
similar-type benefits to any person, (ii) obligates the Company or its
Subsidiaries to pay separation, severance, termination or similar-type benefits
solely or partially as a result of any transaction contemplated by this
Agreement, or (iii) obligates the Company or its Subsidiaries to make any
payment or provide any benefit as a result of a "change in control". None of the
Plans provides for or promises retiree medical, disability or life insurance
benefits to any current or former employee, officer or director of the
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Company or its Subsidiaries, except as required by Section 4980B of the Code.
Each of the Plans is subject only to the Laws of the United States or a
political subdivision thereof.
(c) To the knowledge of the Company, each Plan is now and always has been
operated in all material respects in accordance with its terms and the
requirements of all applicable Laws including, without limitation, ERISA and the
Code. The Company and its Subsidiaries have performed all material obligations
required to be performed by them under and are not in any material respect in
default under or in violation of, and the Company has no knowledge of any
material default or violation by any party to, any Plan. No Action is pending
or, to the knowledge of the Company, threatened with respect to any Plan (other
than claims for benefits in the ordinary course) and, to the knowledge of the
Company, no fact or event exists that could give rise to any such Action.
(d) Each Plan that is intended to be qualified under Section 401(a) or
401(k) of the Code has either (i) timely received a favorable determination
letter from the IRS or (ii) such determination letter request is pending with
the IRS, covering all of the provisions applicable to the Plan for which
determination letters are currently available that the Plan is so qualified and
each trust established in connection with any Plan which is intended to be
exempt from federal income taxation under Section 501(a) of the Code has either
(i) received a determination letter from the IRS or (ii) such determination
letter request is pending with the IRS, that it is so exempt, and, to the
knowledge of the Company, no fact or event has occurred since the date of such
determination letter or letters from the IRS to adversely affect the qualified
status of any such Plan or the exempt status of any such trust.
(e) There has not been any prohibited transaction (within the meaning of
Section 406 of ERISA or Section 4975 of the Code) with respect to any Plan that
has resulted or could result in any material liability to the Company or its
Subsidiaries.
(f) All contributions, premiums or payments required to be made with
respect to any Plan have been made on or before their due dates. All such
contributions are or were fully deductible for federal income tax purposes and
no such deduction has been challenged or disallowed by any Governmental
Authority and, to the knowledge of the Company, no fact or event exists which
could give rise to any such challenge or disallowance.
SECTION 3.11. Labor and Employment Matters.
(a) (i) To the knowledge of the Company, there are no controversies pending
or, to the knowledge of the Company, threatened between the Company or its
Subsidiaries and any of their respective employees, which controversies would
prevent or materially delay consummation of the Merger or would have a Company
Material Adverse Effect; (ii) neither the Company nor any of its Subsidiaries is
a party to any collective bargaining agreement, work council agreement, work
force agreement or any other labor union contract applicable to persons employed
by the Company or its Subsidiaries, nor, to the knowledge of the Company, are
there any activities or proceedings of any labor union to organize any such
employees. The Company is not subject to any actual or threatened charge of an
unfair labor practice, safety violations or Occupational Safety and Health Act
violations or discriminatory acts or practices.
(b) (i) All subsisting contracts of employment to which the Company or, to
the knowledge of the Company, any of its Subsidiaries is a party are terminable
by the Company or its Subsidiaries on three months' notice or less without
compensation (other than in accordance with applicable legislation); (ii) there
are no customs, established practices or discretionary arrangements of the
Company or, to the knowledge of the Company, any of its Subsidiaries in relation
to the termination of employment of any of its employees (whether voluntary or
involuntary); (iii) neither the Company nor, to the knowledge of the Company,
any of its Subsidiaries has any outstanding liability to pay compensation for
loss of office or employment or a redundancy payment to any present or former
employee or to make any payment for breach of any agreement listed in Section
3.10(a) of the Company Disclosure Schedule; (iv) there is no term of employment
of any employee of the Company or, to the knowledge of the Company, any of its
Subsidiaries which shall entitle that employee to treat the consummation of the
Merger as amounting to a breach of his contract of employment or entitling him
to any payment or benefit whatsoever or entitling him to treat himself as
redundant or otherwise dismissed or released from any obligation.
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(c) Section 3.11(c) of the Company Disclosure Schedule sets forth a list of
the Company's employees as of the date hereof including such employee's job
title, current compensation rate, and accrued unpaid leave or vacation.
(d) Section 3.11(d) of the Company Disclosure Schedule sets forth a list of
those employees who have been terminated or have resigned during the 90-day
period ending on the date hereof.
(e) Section 3.11(e) of the Company Disclosure Schedule sets forth a list of
each employment agreement to which the Company is a party that contains change
of control provisions.
(f) Section 3.11(f) of the Company Disclosure Schedule sets forth a list of
the Company employees that have not executed a confidentiality agreement or an
invention assignment agreement with the Company, the forms of which agreements
have been provided to Parent.
SECTION 3.12. Property and Leases.
(a) The Company and its Subsidiaries have sufficient title to all their
properties and assets to conduct their respective businesses as currently
conducted, with only such exceptions as would not have a Company Material
Adverse Effect.
(b) The Company does not own any real property.
(c) All leases of real property leased for the use or benefit of the
Company or its Subsidiaries to which the Company or any of its Subsidiaries is a
party, and all amendments and modifications thereto, are in full force and
effect and have not been modified or amended, and there exists no default under
any such lease by the Company, any of its Subsidiaries or, to the knowledge of
the Company, any landlord under such leases, nor any event which, with notice or
lapse of time or both, would constitute a default thereunder by the Company, any
of its Subsidiaries or, to the knowledge of the Company, any landlord under such
leases, except as would not prevent or materially delay consummation of the
Merger and would not have a Company Material Adverse Effect. None of the leased
real property has been assigned or sublet to a third party.
SECTION 3.13. Intellectual Property.
(a) For the purposes of this Agreement, the following terms have the
following definitions:
(i) "Intellectual Property" shall mean any or all of the following and
all rights in, arising out of, or associated therewith: (A) all United
States and foreign patents and applications therefore and all reissues,
divisions, renewals, extensions, provisionals, continuations and
continuations-in-part thereof; (B) all inventions (whether patentable or
not), invention disclosures, improvements, trade secrets, proprietary
information, know how, technology, technical data and customer lists; (C)
all copyrights, copyright registrations and applications therefore and all
other rights corresponding thereto throughout the world; (D) all industrial
designs and any registrations and applications therefore throughout the
world; (E) all trade names, logos, common law trademarks and service marks;
trademark and service mark registrations and applications therefore and all
goodwill associated therewith throughout the world; (F) all computer
software including all source code, object code, firmware, development
tools, files records and data, all media on which any of the foregoing is
recorded; and (H) all internet addresses, sites and domain names.
(ii) "Company Data Base and Data Collections" shall mean all
preclinical data and clinical data developed by or on behalf of the
Company. The phrase "clinical data developed by or on behalf of the
Company," means clinical data involving studies where the Company is the
"Sponsor" as that term is defined in 27 C.F.R. Section 312.50-312.59.
"Investigator-Initiated Clinical Study Data" shall mean all clinical data
collected by investigators studying Company compounds where an outside
investigator is the Sponsor of the study as "Sponsor" is defined in 27
C.F.R. Section 312.50-312.59.
(iii) "Company Intellectual Property" shall mean any Intellectual
Property that was conceived or developed by an employee of the Company
during his/her term of employment with the Company or is otherwise owned by
the Company.
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(iv) "Registered Intellectual Property" shall mean any Intellectual
Property that is the subject of an application, certificate, filing or
registration issued by, filed with, or recorded by, any state, government
or other public legal authority, including all United States, international
and foreign: (A) patents, patent applications (including provisional
applications); (B) registered trademarks, applications to register
trademarks, intent-to-use applications, or other registrations or
applications related to trademarks; and (C) registered copyrights and
applications for copyright registration.
(v) "Company Registered Intellectual Property" shall mean the
Intellectual Property set forth in Schedules 3.13(b)(1), 3.13(b)(2) and
3.13(b)(3). Schedule 3.13(b)(1) of the Company Disclosure Schedule lists
all material Registered Intellectual Property owned solely by the Company.
Section 3.13(b)(2) of the Company Disclosure Schedule lists all Registered
Intellectual Property co-owned by the Company and the subject of the
Agreement with the University of Arizona dated June 26, 1991, as amended.
Section 3.13(b)(3) of the Company Disclosure Schedule lists all Registered
Intellectual Property exclusively licensed to the Company under the
Agreement with Sinclair, dated January 22, 2002, as amended. The Company
owns no copyright registrations or industrial designs.
(b) Schedule 3.13(b)(4) lists any proceedings or actions before any court
or tribunal (including interferences before the United States Patent and
Trademark Office) related to any of the Company Registered Intellectual
Property, which could result in a Company Material Adverse Effect.
(c) All Company Registered Intellectual Property and Company Data Base and
Data Collections, are, to the knowledge of the Company, free and clear of any
liens or encumbrances.
(d) To the extent that any Company Registered Intellectual Property or
Company Data Base and Data Collections have been developed or created by any
Person other than the Company for which the Company has, directly or indirectly,
paid, the Company has a written agreement with such Person with respect thereto
and the Company thereby has obtained ownership thereof, or has obtained licenses
thereto sufficient for the conduct of the Company's business as currently
conducted. To the extent that any Company Intellectual Property exists that does
not fall within the definition of Company Registered Intellectual Property or
Company Data Base and Data Collections, the Company has a written agreement with
its employees requiring them to assign such Intellectual Property to the Company
and the Company has obtained ownership thereof.
To the knowledge of the Company, the licenses, sublicenses, agreements,
contracts and permissions (as amended to date) listed on Section 3.13(f) include
all licenses, sublicenses, agreements, contracts and permissions with respect to
any Intellectual Property licensed to or used by the Company (including software
licensed to the Company), the loss of which would result in a Company Material
Adverse Effect. The Company has received no written notice that the business of
the Company, as it currently is conducted, infringes or misappropriates the
Intellectual Property or data of any kind of any Person.
(e) To the knowledge of the Company, as of the Closing Date, all necessary
registration, maintenance and renewal fees in connection with the Company
Registered Intellectual Property have been paid and all necessary documents and
certificates in connection with the Company Registered Intellectual Property
have been filed with the relevant patent, trademark or other authorities in the
United States or foreign jurisdictions, as the case may be, for the purposes of
maintaining such Company Registered Intellectual Property.
(f) There are no contracts, licenses or agreements between the Company and
any other Person with respect to Company Registered Intellectual Property under
which there is any dispute known to the Company likely to result in a Company
Material Adverse Effect regarding the scope of or performance under such
Contract, license or agreement including with respect to any payments to be made
or received by the Company thereunder.
(g) To the knowledge of the Company, no Person is infringing or
misappropriating any Company Registered Intellectual Property or
misappropriating any Company Data Base and Data Collection, the loss of which
would cause a Company Material Adverse Effect.
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(h) To the knowledge of the Company, the Company has taken all commercially
reasonable steps to protect the Company's rights in confidential information and
trade secrets of the Company or provided by any other Person to the Company, the
loss of which would cause a Company Material Adverse Effect.
(i) The Company owns or has rights to use, whether through ownership,
licensing or otherwise, all Company Intellectual Property, Company Registered
Intellectual Property and Company Data Base and Data Collections the loss of
which would result in a Company Material Adverse Effect. The Company has full
right, power and authority to grant all of the rights, title and interests
granted in this Agreement.
(j) To the knowledge of the Company, no Company Registered Intellectual
Property is the subject to any threatened action, suit, claim, arbitration or
validity or enforceability challenge.
(k) To the knowledge of the Company, there exists no current conduct or use
by the Company that would invalidate or eliminate the enforceability of any
Company Registered Intellectual Property.
(l) No Company Registered Intellectual Property is subject to any
outstanding injunction, judgment, order or settlement and the Company has fully
complied with, paid and otherwise satisfied all obligations.
(m) As for Investigator-Initiated Clinical Study Data, the Company has the
rights under contracts with such investigators, and the full right to transfer
such rights, to obtain access to such data and use them for the purposes of any
regulatory submission that may be necessary in and material to the business of
the Company.
(n) Section 3.13(p) of the Company Disclosure Schedule sets forth a list of
all internet addresses, sites and domain names owned by the Company, free and
clear of any liens or encumbrances.
SECTION 3.14. Taxes.
(a) (i) All Tax Returns required to be filed by or on behalf of the Group
have been duly filed on a timely basis and such Tax Returns are true, complete
and correct; (ii) all Taxes shown to be payable on the Tax Returns or on
subsequent assessments with respect thereto have been paid in full on a timely
basis, and no other Taxes are payable by the Group with respect to items or
periods covered by such Tax Returns (whether or not shown on or reportable on
such Tax Returns) or are otherwise due prior to the Closing Date; (iii) the
Group has withheld and paid over all material Taxes required to have been
withheld and paid over, and in all material respects has complied with all
information reporting and backup withholding requirements, including maintenance
of required records with respect thereto, in connection with amounts paid or
owing to any employee, creditor, independent contractor, or other third party;
and (iv) the Group is not currently the beneficiary of any extension of time
within which to file any Tax Return.
(b) The amount of the Group's liability for unpaid Taxes for all periods
ending on or before September 30, 2002 does not, in the aggregate, exceed the
amount of the current liability accruals for Taxes (excluding reserves for
deferred Taxes), reflected on the 2002 Balance Sheet. To the knowledge of the
Company, there are no contracts, agreements, arrangements, commitments or
undertakings relating to any prior audit of the Group, and there are no
contracts, agreements, arrangements, commitments or undertakings with the IRS or
any other Governmental Authority that have or are reasonably likely to have a
material and adverse impact on the Group's Taxes that are not reflected in the
2002 Balance Sheet.
(c) No member of the Group has ever been a member of a group filing
consolidated, unitary or combined Tax Returns, except where the Company was the
parent. The Group does not do business in or derive income from any state,
local, territorial or foreign taxing jurisdiction other than those set forth in
Section 3.14 of the Company Disclosure Schedule. The Tax Returns of the Group
have never been audited by a Governmental Authority, nor is any such audit in
process, pending or, to the knowledge of the Company, threatened (either in
writing or verbally, formally or informally), no deficiencies exist or have been
asserted (either in writing or verbally, formally or informally) with respect to
Taxes of the Group and the Group is neither a party to any action or proceeding
for assessment or collection of Taxes, nor has such event been asserted or, to
the knowledge of the Company, threatened (either in writing or verbally,
formally or informally) against the Group or any of its assets or properties. No
waiver or extension of any statute of limitations is in effect with respect to
material Taxes or Tax Returns of the Group.
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(d) No member of the Group has made any payments, is obligated to make any
payments, or is a party to any agreement that could obligate it to make any
payments that would be treated as an "excess parachute payment" under Section
280G of the Code (without regard to Section 280G(b)(4) of the Code) in
connection with the Merger and transactions contemplated hereunder.
SECTION 3.15. Environmental Matters. Except for such non-compliance as
would not have a Company Material Adverse Effect, the Company is in compliance
with all applicable Environmental Laws. None of the properties currently or
formerly owned, leased or operated by the Company (including, without
limitation, soils and surface and ground waters) are contaminated with any
Hazardous Substance in violation of any applicable Environmental Laws. The
Company has not received any written notice that it is liable for any
contamination by Hazardous Substances. To the knowledge of the Company, the
Company is not actually, potentially or allegedly liable under any Environmental
Law (including, without limitation, pending or threatened liens). The Company is
in compliance with all permits, licenses and other authorizations required under
any Environmental Law ("Environmental Permits"). Neither the execution of this
Agreement nor the consummation of the Merger will require any investigation,
remediation or other action with respect to Hazardous Substances, or any notice
to or consent of Governmental Authorities or third parties, pursuant to any
applicable Environmental Law or Environmental Permit.
SECTION 3.16. Material Contracts.
(a) Subsections (i) through (viii) of Section 3.16 of the Company
Disclosure Schedule contain a list of the following types of contracts and
agreements to which the Company or any of its Subsidiaries is a party (such
contracts, agreements and arrangements as are required to be set forth in
Section 3.16(a) of the Company Disclosure Schedule being the "Material
Contracts"):
(i) each contract and agreement which is likely to involve
consideration of more than $25,000, in the aggregate, over the remaining
term of such contract;
(ii) all material broker, distributor, dealer, franchise, agency,
sales promotion, market research, marketing, consulting, advertising,
transfer, software, and research and development contracts or agreements to
which the Company or any of its Subsidiaries is a party;
(iii) all clinical trial or clinical research organization,
manufacturing or supply, collaboration, and guarantee contracts or
agreements to which the Company or any of its Subsidiaries is a party;
(iv) all management contracts (excluding contracts for employment) and
contracts with other consultants, including any contracts involving the
payment of royalties or other amounts calculated based upon the revenues or
income of the Company or its Subsidiaries or income or revenues related to
any product of the Company or its Subsidiaries to which the Company or any
of its Subsidiaries is a party;
(v) all contracts and agreements evidencing indebtedness for borrowed
money in excess of $10,000;
(vi) all material contracts and agreements with any Governmental
Authority to which the Company or any of its Subsidiaries is a party;
(vii) all contracts and agreements that limit, or purport to limit, in
any material respect the ability of the Company or its Subsidiaries to
compete in any line of business or with any person or entity or in any
geographic area or during any period of time; and
(viii) all material contracts or arrangements that result in any
person or entity holding a power of attorney from the Company or, to the
knowledge of the Company, any of its Subsidiaries that relates to the
Company, its Subsidiaries or their respective businesses.
(b) Except as would not prevent or materially delay consummation of the
Merger and would not have a Company Material Adverse Effect, (i) each Material
Contract is a legal, valid and binding agreement, the Company is not in material
default under any Material Contract and none of the Material Contracts has been
canceled by the other party; (ii) to the Company's knowledge, no other party is
in breach or violation of, or default under, any Material Contract; (iii) the
Company and its Subsidiaries are not in receipt of any claim of default under
any such agreement; and (iv) neither the execution of this Agreement nor the
consummation of
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the Merger shall constitute a default, give rise to cancellation rights, or
otherwise adversely affect any of the Company's rights under any Material
Contract. The Company has furnished or made available to Parent true and
complete copies of all Material Contracts, including any amendments thereto.
SECTION 3.17. Insurance. Section 3.17 of the Company Disclosure Schedules
sets forth a list of each insurance policy and all material claims made under
such policies since January 1, 2001. The insurance coverage maintained by the
Company is, to the knowledge of the Company, customary for the businesses in
which they are engaged. At no time subsequent to December 31, 2000 has the
Company or its Subsidiaries (i) been denied any insurance or indemnity bond
coverage which it has requested or (ii) made any material reduction in the scope
or amount of its insurance coverage. Since January 1, 2002, the Company has not
received notice from any of its insurance carriers that any insurance premiums
will be subject to increase in an amount disproportionate to the amount of the
increases in the amount of coverage with respect thereto (or with respect to
similar insurance) in prior years or that any current insurance coverage will
not be available in the future, other than as a result of the Merger,
substantially on the same terms as are now in effect.
SECTION 3.18. Brokers. No broker, finder or investment banker (other than
CIBC World Markets Corp.) is entitled to any brokerage, finder's or other fee or
commission in connection with the Merger based upon arrangements made by or on
behalf of the Company or its Subsidiaries. The Company has heretofore furnished
to Parent a complete and correct copy of all agreements between the Company and
CIBC World Markets Corp. pursuant to which such firm would be entitled to any
payment relating to the Merger.
SECTION 3.19. Takeover Laws. The board of directors of the Company has
taken all action necessary to ensure that Section 203 of the Delaware Law (and
any similar rules applicable under the Pennsylvania Business Corporation Law)
will not impose any additional procedural, voting, approval, fairness or other
restrictions on the timely consummation of the Merger or restrict, impair or
delay the ability of Parent or Merger Sub to vote or otherwise exercise all
rights as a stockholder of the Company.
SECTION 3.20. Amendment to Rights Agreement.
(a) The Board has taken all necessary action to irrevocably amend the
Rights Agreement so that the execution or delivery of this Agreement will not
cause (i) the Rights to become exercisable under the Rights Agreement, (ii)
Parent or Merger Sub or any of their affiliates to be deemed an "Acquiring
Person" (as defined in the Rights Agreement) or (iii) the occurrence of the
Distribution Date or the "Stock Acquisition Date" (as defined in the Rights
Agreement).
(b) The "Distribution Date" (as defined in the Rights Agreement) has not
occurred.
SECTION 3.21. Certain Business Practices. Neither the Company, its
Subsidiaries nor any director, officer, employee or agent of the Company or its
Subsidiaries acting on behalf of the Company or its Subsidiaries has (a) used
any funds for unlawful contributions, gifts, entertainment or other unlawful
payments relating to political activity, (b) made any unlawful payment to any
foreign or domestic government official or employee or to any foreign or
domestic political party or campaign or violated any provision of the Foreign
Corrupt Practices Act of 1977, as amended, (c) consummated any transaction, made
any payment, entered into any agreement or arrangement or taken any other action
in violation of Section 1128B(b) of the Social Security Act, as amended, or (d)
made any other unlawful payment.
SECTION 3.22. [RESERVED.]
SECTION 3.23. Vote Required. The affirmative vote of the holders of a
majority of the outstanding Shares is the only vote of the holders of any class
or series of capital stock of the Company necessary to approve the Merger.
SECTION 3.24. Opinion of Financial Advisors. The Board has received the
opinion of CIBC World Markets Corp. (the "Company Financial Advisor") dated the
date of this Agreement, to the effect that, as of the date of such opinion, the
consideration to be received in the Merger by the holders of Company Common
Stock pursuant to this Agreement is fair, from a financial point of view, to
such holders, and the Company will promptly, after the date of this Agreement,
deliver a copy of such opinion to Parent solely for informational purposes.
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SECTION 3.25. Regulatory Issues.
(a) Section 3.25 of the Company Disclosure Schedule sets forth a complete
and accurate list of any written communications between Company and the Food and
Drug Administration ("FDA") or any other Governmental Authority that describe
matters that could have a Company Material Adverse Effect attributable to any
contemplated compound, product or product line of the Company. The Company has
made available to the Parent copies of all such documents, as well as copies of
all other information required to be maintained by the Company pursuant to the
United States Federal Food, Drug and Cosmetic Act and Public Health Services Act
and the corresponding applicable laws of jurisdictions other than the United
States.
(b) The Company and, to the knowledge of the Company, Sinclair Pharma Ltd.
("Sinclair") has with respect to Gelclair, filed with the FDA and all applicable
state and local regulatory bodies for and received approval of all
registrations, applications, licenses, requests for exemptions, permits and
other regulatory authorizations necessary to conduct the business of Company as
currently conducted, the absence of which would, individually or in the
aggregate, be reasonably likely to have a Company Material Adverse Effect. The
Company is, and at all relevant times has been, in compliance in all material
respects with all such registrations, applications, licenses, requests for
exemptions, permits and other regulatory authorizations. To the knowledge of the
Company, any third party which is a manufacturer for the Company (or Sinclair
with respect to Gelclair) is in compliance in all material respects with all FDA
and Public Health Services registrations, applications, licenses, requests for
exemptions, permits and other regulatory authorizations insofar as the same
pertain to the manufacture of products for the Company.
(c) The Company is, and at all relevant times has been, in compliance in
all material respects with all material FDA, state and local rules, regulations,
guidelines and policies, including, but not limited to, material FDA, state and
local rules, regulations and policies relating to good manufacturing practice,
good laboratory practice and good clinical practice; and the Company has no
reason to believe that any party granting any such registration, application,
license, request for exemption, permit or other authorization is considering
limiting, suspending or revoking the same and knows of no basis for any such
limitation, suspension or revocation.
(d) The human clinical trials, animal studies and other preclinical tests
conducted by the Company or in which the Company has participated, and such
studies and tests conducted on behalf of the Company, were and, if still
pending, are being conducted in all material respects in accordance with
experimental protocols, informed consents, procedures and controls generally
used by qualified experts in the preclinical or clinical study of products
comparable to those being developed by the Company. Neither the Company, nor any
agent or representative of the Company nor, to the knowledge of the Company, any
of its licensees and assignees of Company Intellectual Property, has received
any notices or correspondence from the FDA or any other Governmental Authority
requiring the termination, suspension or material modification of any animal
studies, preclinical tests or clinical trials conducted by or on behalf of the
Company or, to the knowledge of the Company, such licensees and assignees of
Company Intellectual Property, or in which the Company or, to the knowledge of
the Company, such licensees and assignees of Company Intellectual Property, have
participated. To the knowledge of the Company, no clinical investigator acting
for the Company has been or is now, or is threatened to become, the subject of
any disbarment or disqualification proceedings by any Governmental Authority.
For purposes of this paragraph (d) all references to the Company shall include
Sinclair with respect to Gelclair only, qualified by knowledge of the Company
with respect to such matters described in this paragraph (d) and involving
Sinclair.
SECTION 3.26. Full Disclosure. No representation or warranty by the
Company in this Agreement or in any certificate furnished or to be furnished by
the Company to the Parent or the Merger Sub pursuant to the provisions hereof,
contains or will contain any untrue statement of material fact or omits or will
omit to state any material fact necessary, in light of the circumstances under
which it was made and as of the date so made, in order to make the statements
herein or therein not misleading.
SECTION 3.27. Corporate Governance Compliance. The Company is, or will
timely be, in all material respects, in compliance with all current corporate
governance requirements of the Nasdaq National Market.
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SECTION 3.28. Related Party Transactions. The Company has not (i) since
September 30, 2002, entered into any relationship or transaction of a sort that
would be required to be disclosed by the Company in a proxy statement for a
meeting relating to the election of directors pursuant to Item 404 of Regulation
S-K, except for those matters that have been disclosed in the SEC Reports filed
prior to the date of this Agreement, or (ii) since the effective date of the
Sarbanes-Oxley Act of 2002, taken any action prohibited by Section 402 of the
Sarbanes-Oxley Act of 2002.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF PARENT AND MERGER SUB
Parent and Merger Sub hereby, jointly and severally, represent and warrant
to the Company that the statements contained in this Article IV are true and
correct, except as set forth in (i) the Parent Disclosure Schedule or (ii) the
Parent SEC Reports filed by Parent since January 1, 2002. The Parent Disclosure
Schedule shall be arranged in paragraphs corresponding to numbered and lettered
sections contained in this Article IV, and the disclosures in any paragraph of
the Parent Disclosure Schedule shall qualify other sections in this Article IV
to the extent it is reasonably and readily apparent from a reading of the
disclosure that such disclosure is applicable to such other sections. Neither
Parent nor any of its Subsidiaries or Affiliates has made or shall be deemed to
have made any representation or warranty to the Company other than as set forth
in this Article IV or the Parent Disclosure Agreement.
SECTION 4.01. Corporate Organization. Each of Parent and its
Subsidiaries, including Merger Sub, is a corporation duly organized, validly
existing and in good standing under the laws of the State of Delaware and has
the requisite power and authority and all necessary governmental approvals to
own, lease and operate its properties and to carry on its business as it is now
being conducted, except where the failure to be so organized, existing or in
good standing or to have such power, authority and governmental approvals would
not, individually or in the aggregate, have a Parent Material Adverse Effect.
SECTION 4.02. Certificate of Incorporation and By-laws. Parent has
heretofore furnished to the Company a complete and correct copy of the
certificate of incorporation and the by-laws, each as amended to date, of Parent
and each of its Subsidiaries, including Merger Sub. Such certificates of
incorporation and by-laws are in full force and effect. Neither Parent nor any
of its Subsidiaries, including Merger Sub, is in violation of any provision of
its certificate of incorporation or by-laws.
SECTION 4.03. Capitalization. The authorized capital stock of Parent
consists of 200,000,000 shares of Parent Common Stock and 5,000,000 shares of
preferred stock. As of January 29, 2003, 36,440,246 shares of Parent Common
Stock were issued and outstanding. No shares of preferred stock of Parent have
been issued or are outstanding. All of the outstanding shares of Parent Common
Stock have been duly authorized and validly issued, and are fully paid and
nonassessable. As of January 29, 2003, 4,551,619 shares of Parent Common Stock
were reserved for future issuance pursuant to outstanding stock options granted
pursuant to Parent's employee stock option plans. The authorized capital stock
of Merger Sub consists of 10,000 shares of common stock, $.01 par value per
share, of which, as the date of this Agreement, 100 are issued and outstanding.
Except as disclosed in the Parent SEC Reports, there are no options, warrants or
other rights, agreements, arrangements or commitments of any character relating
to the issued or unissued capital stock of Parent or any of its Subsidiaries,
including Merger Sub, obligating any of them to issue or sell any shares of
capital stock of Parent or any of its Subsidiaries, including Merger Sub. Except
as disclosed in the Parent SEC Reports, there are no outstanding contractual
obligations of Parent to repurchase, redeem or otherwise acquire any shares of
Parent Common Stock. The shares of Parent Common Stock to be issued pursuant to
the Merger will be duly authorized, validly issued, fully paid and nonassessable
and not subject to preemptive rights created by statute, Parent's certificate of
incorporation or by-laws or any agreement to which Parent is a party or by which
Parent is bound and will, when issued, be registered under the Securities Act
and the Exchange Act and registered or exempt from registration under applicable
Blue Sky Laws.
SECTION 4.04. Authority Relative to This Agreement. Each of Parent and
Merger Sub has all necessary corporate power and authority to execute and
deliver this Agreement, to perform its obligations
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hereunder and to consummate the Merger. The execution and delivery of this
Agreement by Parent and Merger Sub and the consummation by Parent and Merger Sub
of the Merger have been duly and validly authorized by all necessary corporate
action, and no other corporate proceedings on the part of Parent or Merger Sub
are necessary to authorize this Agreement or to consummate the Merger (other
than, with respect to the Merger, the filing and recordation of appropriate
merger documents as required by Delaware Law). This Agreement has been duly and
validly executed and delivered by Parent and Merger Sub and, assuming due
authorization, execution and delivery by the Company, constitutes a legal, valid
and binding obligation of each of Parent and Merger Sub enforceable against each
of Parent and Merger Sub in accordance with its terms, except that (a) such
enforcement may be subject to applicable bankruptcy, insolvency, reorganization,
moratorium or other similar laws, now or hereafter in effect, affecting
creditors' rights generally, and (b) the remedy of specific performance and
injunctive and other forms of equitable relief may be subject to equitable
defenses and to the discretion of the court before which any proceeding therefor
may be brought.
SECTION 4.05. No Conflict; Required Filings and Consents.
(a) The execution and delivery of this Agreement by Parent and Merger Sub
do not, and the performance of this Agreement by Parent and Merger Sub will not,
(i) conflict with or violate the certificate of incorporation or by-laws of
either Parent or Merger Sub, (ii) assuming that all consents, approvals,
authorizations and other actions described in Section 4.05(b) have been obtained
and all filings and obligations described in Section 4.05(b) have been made and,
subject to obtaining approval of the stockholders, if required, conflict with or
violate any law, rule, regulation, order, judgment or decree applicable to
Parent or Merger Sub or by which any property or asset of either of them is
bound or affected, or (iii) result in any breach of, or constitute a default (or
an event which, with notice or lapse of time or both, would become a default)
under, or give to others any rights of termination, amendment, acceleration or
cancellation of, or result in the creation of a lien or other encumbrance on any
property or asset of Parent or Merger Sub pursuant to, any note, bond, mortgage,
indenture, contract, agreement, lease, license, permit, franchise or other
instrument or obligation to which Parent or Merger Sub is a party or by which
Parent or Merger Sub or any property or asset of either of them is bound or
affected, except, with respect to clauses (ii) and (iii), for any such
conflicts, violations, breaches, defaults or other occurrences which would not
prevent or materially delay consummation of the Merger or otherwise prevent
Parent and Merger Sub from performing any of their material obligations under
this Agreement.
(b) The execution and delivery of this Agreement by Parent and Merger Sub
do not, and the performance of this Agreement by Parent and Merger Sub will not,
require any consent, approval, authorization or permit of, or filing with, or
notification to, any Governmental Authority, except (i) for applicable
requirements, if any, of the Securities Act, the Exchange Act, Blue Sky Laws,
the Nasdaq Stock Market rules and regulations, state takeover laws, HSR Act and
the filing and recordation of appropriate merger documents as required by
Delaware Law, and (ii) where the failure to obtain such consents, approvals,
authorizations or permits, or to make such filings or notifications, would not
prevent or materially delay consummation of the Merger, or otherwise prevent
Parent or Merger Sub from performing their material obligations under this
Agreement.
SECTION 4.06. SEC Filings; Financial Statements.
(a) Parent has filed all forms, reports and documents required to be filed
by it with the SEC since September 30, 1999, and has heretofore made available
to the Company, in the form filed with the SEC, (i) its Annual Reports on Form
10-K for the fiscal years ended September 30, 2000, 2001 and 2002 respectively,
(ii) its Quarterly Reports on Form 10-Q for the periods ended December 31, March
31 and June 30, 2002, (iii) its proxy statement relating to Parent's annual
meeting of stockholders on March 19, 2003 and (iv) all other forms, reports and
other registration statements filed by Parent with the SEC since January 1, 2002
and prior to the date hereof (the forms, reports, and other documents referred
to in clauses (i), (ii), (iii) and (iv) above being referred to herein,
collectively, as the "Parent SEC Reports"). The Parent SEC Reports (A) complied,
at the time they were filed, as to form in all material respects with the
applicable requirements of the Securities Act and the Exchange Act, as the case
may be, and the applicable
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rules and regulations thereunder, and (B) did not, at the time they were filed,
or, if amended, as of the date of such amendment, contain any untrue statement
of a material fact or omit to state a material fact required to be stated
therein or necessary in order to make the statements made therein, in the light
of the circumstances under which they were made, not misleading. None of
Parent's Subsidiaries is required to file any form, report or other document
with the SEC.
(b) No executive officer of Parent has failed in any respect to make the
certifications required of him or her under (i) Section 906 of the
Sarbanes-Oxley Act of 2002 with respect to any periodic report filed by Parent
with the SEC since the enactment of the Sarbanes-Oxley Act of 2002 or (ii)
Section 302 of the Sarbanes-Oxley Act of 2002 with respect to any periodic
report filed by Parent with the SEC since August 29, 2002 (in each case,
excluding any failure to make such certifications occurring after the date of
this Agreement that is inadvertent but promptly corrected by filing the
requisite certification or is attributable to the physical incapacity of an
officer required to make such a certification).
(c) Each of the consolidated financial statements (including, in each case,
any notes thereto) contained in the Parent SEC Reports in accordance with GAAP
applied on a consistent basis throughout the periods indicated (except as may be
indicated in the notes thereto) and each fairly presented, in all material
respects, the consolidated financial position, results of operations and cash
flows of Parent and its consolidated Subsidiaries as of the respective dates
thereof and for the respective periods indicated therein (subject, in the case
of unaudited statements, to normal and recurring year-end adjustments that were
not and are not expected, individually or in the aggregate, to have a Parent
Material Adverse Effect).
(d) Except as and to the extent set forth on the consolidated balance sheet
of Parent and its Subsidiaries as of September 30, 2002, including the notes
thereto neither Parent nor its Subsidiaries has any liability or obligation of
any nature that would require disclosure in accordance with GAAP (whether
accrued, absolute, contingent or otherwise), except for liabilities and
obligations, incurred in the ordinary course of business consistent with past
practice since September 30, 2002.
(e) Parent has heretofore furnished to the Company complete and correct
copies of all amendments and modifications that have not been filed by Parent
with the SEC to all agreements, documents and other instruments that previously
had been filed by Parent with the SEC and are currently in effect.
SECTION 4.07. Absence of Certain Changes or Events. Since September 30,
2002, except as contemplated by this Agreement or disclosed in any Parent SEC
Report filed since September 30, 2002, Parent and its consolidated Subsidiaries
have conducted their businesses only in the ordinary course and in a manner
consistent with past practice and, since September 30, 2002, there has not been
(a) any event or events having, individually or in the aggregate, a Parent
Material Adverse Effect or (b) any declaration, setting aside or payment of any
dividend or distribution in respect of any capital stock of Parent or any
redemption, purchase or other acquisition of any of its securities.
SECTION 4.08. Absence of Litigation. There is no Action pending or, to
the knowledge of Parent, threatened against Parent or any of its Subsidiaries,
or any property or asset of Parent or any of its Subsidiaries, before any
Governmental Authority that (a) would be required to be disclosed in any
subsequent SEC Reports of Parent or that would otherwise have a Parent Material
Adverse Effect or (b) seeks to materially delay or prevent the consummation of
the Merger. Neither Parent nor any of its Subsidiaries nor any property or asset
of Parent or any of its Subsidiaries is subject to any continuing order of,
consent decree, settlement agreement or similar written agreement with, or, to
the knowledge of Parent, continuing investigation by, any Governmental
Authority, or any order, writ, judgment, injunction, decree, determination or
award of any Governmental Authority that would prevent or materially delay
consummation of the Merger or would have a Parent Material Adverse Effect.
SECTION 4.09. Property and Leases. Parent and its Subsidiaries have
sufficient title to all their properties and assets to conduct their respective
businesses as currently conducted, with only such exceptions as would not have a
Parent Material Adverse Effect.
SECTION 4.10. Taxes. All Tax Returns required to be filed by or on behalf
of Parent and any of its Subsidiaries have been duly filed on a timely basis and
such Tax Returns are true, complete and correct. All
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Taxes shown to be payable on the Tax Returns or on subsequent assessments with
respect thereto have been paid in full on a timely basis, and no other Taxes are
payable by Parent or any of its Subsidiaries with respect to items or periods
covered by such Tax Returns (whether or not shown on or reportable on such Tax
Returns) or are otherwise due prior to the Closing Date. Neither Parent nor any
of its Subsidiaries is currently the beneficiary of any extension of time within
which to file any Tax Return.
SECTION 4.11. Brokers. No broker, finder or investment banker (other than
Lazard Freres & Co. LLC) is entitled to any brokerage, finder's or other fee or
commission in connection with the Merger based upon arrangements made by or on
behalf of Parent or any of its Subsidiaries, including Merger Sub.
SECTION 4.12. Certain Business Practices. Neither Parent, any Subsidiary
of Parent nor any director, officer, employee or agent of Parent or any
Subsidiary of Parent acting on behalf of Parent or any Subsidiary of Parent has
(a) used any funds for unlawful contributions, gifts, entertainment or other
unlawful payments relating to political activity, (b) made any unlawful payment
to any foreign or domestic government official or employee or to any foreign or
domestic political party or campaign or violated any provision of the Foreign
Corrupt Practices Act of 1977, as amended, (c) consummated any transaction, made
any payment, entered into any agreement or arrangement or taken any other action
in violation of Section 1128B(b) of the Social Security Act, as amended, or (d)
made any other unlawful payment.
SECTION 4.13. Full Disclosure. No representation or warranty by Parent in
this Agreement or in any certificate furnished or to be furnished by Parent to
the Company pursuant to the provisions hereof, contains or will contain any
untrue statement of material fact or omits or will omit to state any material
fact necessary, in light of the circumstances under which it was made and as of
the date so made, in order to make the statements herein or therein not
misleading.
SECTION 4.14. Corporate Governance Compliance. Parent is, or will timely
be in all material respects, in compliance with all current corporate governance
requirements of the Nasdaq National Market.
SECTION 4.15. Related Party Transactions. Parent has not (i) since
September 30, 2002, entered into any relationship or transaction of a sort that
would be required to be disclosed by Parent in a proxy statement for a meeting
relating to the election of directors pursuant to Item 404 of Regulation S-K,
except for those matters that have been disclosed in the Parent SEC Reports
filed prior to the date of this Agreement, or (ii) since the effective date of
the Sarbanes-Oxley Act of 2002, taken any action prohibited by Section 402 of
the Sarbanes-Oxley Act of 2002.
ARTICLE V
CONDUCT OF BUSINESS PENDING THE MERGER
SECTION 5.01. Conduct of Business by the Company Pending the Merger. The
Company covenants and agrees that, between the date of this Agreement and the
Effective Time, unless Parent shall otherwise agree in writing (requests for
which may be made by telephone request to Arthur Bruskin at (631) 962-2000, the
businesses of the Company and its Subsidiaries shall be conducted only in, and
the Company and its Subsidiaries shall not take any action except in, the
ordinary course of business and in a manner consistent with past practice; and
the Company shall use its commercially reasonable efforts to preserve
substantially intact the business of the Company and its Subsidiaries, to keep
available the services of the current officers, employees and consultants of the
Company and its Subsidiaries and to preserve the current relationships of the
Company and its Subsidiaries with customers, suppliers and other persons with
which the Company or any of its Subsidiaries has significant business relations.
By way of amplification and not limitation, except as expressly contemplated by
this Agreement, neither the Company nor its Subsidiaries shall, between the date
of this Agreement and the Effective Time, directly or indirectly, do, or propose
to do, any of the following without the prior written consent of Parent, which
consent shall not be unreasonably withheld, conditioned or delayed:
(a) issue, sell or contract for the issuance or sale, of any of the
capital stock of the Company or any securities convertible into or
exchangeable for shares of capital stock of the Company or any securities,
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warrants, options or rights to purchase any of the foregoing (except
pursuant to the exercise of options currently outstanding under the Company
Stock Option Plans and pursuant to the exercise of options to purchase
shares of Company Common Stock under the Employee Stock Purchase Plan);
(b) amend the terms of the Plans or any outstanding security, option
or warrant;
(c) purchase or redeem any shares of capital stock of the Company
(except for the acquisition of shares from holders of options in full or
partial payment of the exercise price payable by such holder upon exercise
of such options to the extent permitted under the terms of such options as
in effect on the date hereof);
(d) declare, set aside, make or pay any dividend or other
distribution, payable in cash, stock or other securities, property or
otherwise, with respect to any of the Company's capital stock;
(e) amend any of the charter documents, bylaws or other organizational
documents of the Company or its Subsidiaries;
(f) enter into any contract which if entered into prior to the date
hereof would be a Material Contract;
(g) incur or guarantee any material indebtedness or incur any other
liabilities outside the ordinary course of business;
(h) except as required to comply with applicable Laws or pursuant to
the terms of existing plans or policies, adopt or amend any employee
benefit plan, enter into any employment contract, settle any employment
dispute, pay or agree to pay any severance, special bonus or special
remuneration, including but not limited to change of control payments, to
any director or employee, or increase the salaries, wage rates or
compensation of its directors or, other than in the ordinary course of
business, its employees;
(i) enter into any material agreement with respect to the Company's
Intellectual Property or with respect to the Intellectual Property of any
third party;
(j) make or change a material election in respect of Taxes, amend a
Tax Return, adopt or change an accounting method in respect of Taxes, enter
into a Tax allocation agreement, Tax sharing agreement, Tax indemnity
agreement or closing agreement, settle or compromise any claim or
assessment in respect of Taxes, or consent to any extension or waiver of
the limitation period applicable to any claim or assessment in respect of
Taxes with any Governmental Authority;
(k) acquire an equity interest in any entity;
(l) authorize or make any capital expenditures in excess of $50,000 in
the aggregate;
(m) make any loans to any third party;
(n) initiate or participate in any new clinical trials;
(o) make any material changes to personnel or other business policies
of the Company;
(p) hire any employees except in the ordinary course of business; or
(q) agree to do any of the foregoing.
Notwithstanding the foregoing, the Company shall be permitted prior to the
Effective Time to distribute $250,000 among all of its employees as of the date
hereof (other than any employee that is a party to a change of control agreement
with the Company), which amount will be allocated between all such employees in
amounts to be determined by the CEO of the Company, in consultation with the CEO
of the Parent.
SECTION 5.02. Fees and Expenses.
(a) The Company covenants and agrees that, between the date of this
Agreement and the Effective Time, unless Parent shall otherwise agree in writing
in its sole discretion, it shall not pay or agree to pay fees and expenses (i)
for its financial advisors (all of which are listed on Schedule 5.02) in excess
of the amount
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set forth on Schedule 5.02 and (ii) for its legal advisors which are in excess
of that which is reasonable and customary. For purposes of this Agreement,
"financial advisors" shall include any brokers, finders, financial consultants
and investment bankers, including, without limitation, those listed on Schedule
5.02. All registration and printing fees shall be shared equally by the parties.
(b) The Company shall (i) ensure that all invoices for the fees enumerated
in (a) above are received prior to the Effective Time and (ii) provide to the
Parent competent written proof that all such invoices are paid in full prior to
the Effective Time and no other monies are due and payable to such parties in
connection with this Agreement, the transactions contemplated in this Agreement
and otherwise.
SECTION 5.03. Conduct of Business by Parent Pending the Merger. Parent
covenants and agrees that between the date of this Agreement and the Effective
Time, Parent shall not, directly or indirectly, do, or propose to do, any of the
following without the prior written consent of the Company, which consent shall
not be unreasonably withheld, conditioned or delayed:
(a) take any action to cause Parent's representations and warranties set
forth in Article IV to be untrue in any material respect; or
(b) take any action that would reasonably be likely to materially delay the
consummation of the Merger.
ARTICLE VI
ADDITIONAL AGREEMENTS
SECTION 6.01. Registration Statement; Proxy Statement.
(a) As promptly as practicable after the execution of this Agreement, the
Company and Parent shall prepare and file with the SEC (i) a registration
statement on Form S-4 (together with all amendments thereto, the "Registration
Statement") in connection with the registration under the Securities Act of the
shares of Parent Common Stock to be issued to the stockholders of the Company
pursuant to the Merger, and (ii) a proxy statement relating to the meeting of
the Company's stockholders to be held in connection with the Merger (together
with any amendments thereof or supplements thereto, the "Proxy Statement").
Parent and the Company shall use all reasonable efforts to cause the
Registration Statement and the Proxy Statement to comply with applicable Law and
the rules and regulations promulgated by the SEC and to respond promptly to any
comments of the SEC or its staff. Parent shall use all reasonable efforts to
have or cause the Registration Statement to become effective as promptly as
practicable, and shall take all or any action required under any applicable
federal or state securities Laws in connection with the issuance of shares of
Parent Common Stock pursuant to the Merger. The Company shall furnish all
information concerning the Company as Parent may reasonably request in
connection with such actions and the preparation of the Registration Statement.
As promptly as practicable after the Registration Statement shall have become
effective, the Company shall mail the Proxy Statement to its stockholders.
Subject to Section 6.05(b), the Proxy Statement shall include the unanimous
recommendation of the Board of Directors of the Company in favor of the Merger.
(b) The information supplied by Parent for inclusion in the Registration
Statement and the Proxy Statement shall not, at (i) the time the Registration
Statement is declared effective by the SEC; (ii) the time the Proxy Statement
(or any amendment thereof or supplement thereto) is first mailed to stockholders
of the Company; (iii) the time of the Stockholders' Meeting (as defined in
Section 6.02); and (iv) the Effective Time, contain any untrue statement of a
material fact or omit to state any material fact required to be stated therein
or necessary in order to make the statements therein not misleading. If at any
time prior to the Effective Time any event or circumstance relating to Parent or
any of its Subsidiaries, or their respective officers or directors, should be
discovered by Parent which should be set forth in an amendment or a supplement
to the Registration Statement or Proxy Statement, Parent shall promptly inform
the Company, and the Company shall make appropriate amendments or supplements to
the Proxy Statement.
(c) The information supplied by the Company for inclusion in the
Registration Statement and the Proxy Statement shall not, at (i) the time the
Registration Statement is declared effective by the SEC; (ii) the time
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the Proxy Statement (or any amendment thereof or supplement thereto) is first
mailed to the stockholders of the Company; (iii) the time of the Stockholders'
Meeting; and (iv) the Effective Time, contain any untrue statement of a material
fact or omit to state any material fact required to be stated therein or
necessary in order to make the statements therein not misleading. If at any time
prior to the Effective Time any event or circumstance relating to the Company or
its Subsidiaries, or their respective officers or directors, should be
discovered by the Company which should be set forth in an amendment or a
supplement to the Registration Statement or Proxy Statement, the Company shall
promptly inform Parent.
(d) Company shall use reasonable efforts to cause to be delivered to Parent
a letter from the Company's independent public accountants, dated the date that
the Registration Statement shall become effective, addressed to Parent, in form
and substance reasonably satisfactory to Parent or in customary scope and
substance for letters delivered by independent public accountants in connection
with registration statements similar to the Registration Statement.
(e) The Parent Common Stock issuable upon the exercise of Assumed Options
issued by Parent pursuant to Section 2.07(a) shall be registered by Parent under
Parent's Form S-8 Registration Statement promptly following the Closing Date,
but in no event, later than ten Business Days following the Effective Time.
SECTION 6.02. Stockholders' Meeting. The Company shall as soon as
practicable following the date of this Agreement and the effectiveness of the
Registration Statement call and hold a special meeting of its stockholders (the
"Stockholders' Meeting") for the purpose of voting upon the adoption of this
Agreement. Subject to Section 6.05, the Company shall take all lawful action to
solicit from its stockholders proxies in favor of the adoption of this
Agreement, and shall take all other action necessary or advisable to secure the
vote or consent of stockholders required by Delaware Law to obtain such
approvals.
SECTION 6.03. Appropriate Action; Consents; Filings.
(a) Subject to the terms and conditions of this Agreement, the Company and
Parent shall use their commercially reasonable efforts to (i) take, or cause to
be taken, all appropriate action, and do, or cause to be done, all things
necessary, proper or advisable under applicable Law or otherwise to consummate
and make effective the Merger as promptly as practicable, (ii) obtain from any
Governmental Authorities any consents, licenses, permits, waivers, approvals,
authorizations or orders required to be obtained or made by Parent or the
Company or any of their Subsidiaries in connection with the authorization,
execution and delivery of this Agreement and the consummation of the Merger, and
(iii) make all necessary filings, and thereafter make any other required
submissions, with respect to this Agreement and the Merger required under (A)
the Securities Act and the Exchange Act, and any other applicable federal or
state securities Laws and (B) any other applicable Law; provided that Parent and
the Company shall cooperate with each other in connection with the making of all
such filings, including providing copies of all such documents to the non-filing
party and its advisors prior to filing, and, if requested, to accept all
reasonable additions, deletions or changes suggested by the other party in
connection therewith. The Company and Parent shall furnish to each other all
information required for any application or other filing to be made pursuant to
the rules and regulations of any applicable Law (including all information
required to be included in the Proxy Statement and the Registration Statement)
in connection with the transactions contemplated by this Agreement.
(b) (i) Each of Parent and the Company shall give (or shall cause its
respective Subsidiaries to give) any notices to third parties, and use, and
cause its respective Subsidiaries to use, their commercially reasonable efforts
to obtain any third party consents, (A) necessary, proper or advisable to
consummate the transactions contemplated in this Agreement, (B) disclosed or
required to be disclosed in the Company Disclosure Schedule or the Parent
Disclosure Schedule or (C) required to prevent a Company Material Adverse Effect
from occurring prior to or after the Effective Time or a Parent Material Adverse
Effect from occurring prior to or after the Effective Time.
(ii) In the event that Parent or the Company shall fail to obtain any third
party consent described in subsection (b)(i) above, it shall use its
commercially reasonable efforts, and shall take any such actions reasonably
requested by the other party, to minimize any adverse effect upon the Company
and Parent, their
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respective Subsidiaries, and their respective businesses resulting, or which
could reasonably be expected to result after the Effective Time, from the
failure to obtain such consent.
(c) From the date of this Agreement until the Effective Time, each party
shall promptly notify the other party in writing of any pending or, to the
knowledge of the first party, threatened action, proceeding or investigation by
any Governmental Authority or any other person (i) challenging or seeking
material damages in connection with the Merger or the conversion of the Company
Common Stock into the Merger Consideration pursuant to the Merger or (ii)
seeking to restrain or prohibit the consummation of the Merger or otherwise
limit the right of Parent or, to the knowledge of such party, Parent's
Subsidiaries to own or operate all or any portion of the businesses or assets of
the Company or its Subsidiaries, which in either case is reasonably likely to
have a Company Material Adverse Effect prior to or after the Effective Time, or
a Parent Material Adverse Effect prior to or after the Effective Time.
SECTION 6.04. Access to Information; Confidentiality.
(a) From the date hereof until the Effective Time, to the extent permitted
by applicable Law, the Company shall, and shall cause its Subsidiaries and the
officers, directors, employees, auditors and agents of the Company and its
Subsidiaries to, afford the officers, employees and agents of Parent and Merger
Sub complete access at all reasonable times to the officers, employees, agents,
properties, offices, plants and other facilities, books and records of the
Company and its Subsidiaries, and shall furnish Parent and Merger Sub with such
financial, operating and other data and information as Parent or Merger Sub,
through their officers, employees or agents, may reasonably request. Any
investigation pursuant to this Section shall be conducted in a manner as not to
interfere unreasonably with the conduct of the business of the Company or its
Subsidiaries.
(b) Parent and the Company shall continue to be bound by the Letter
Agreement re: Confidentiality dated August 26, 2002 and the Confidential
Disclosure Agreement dated January 28, 2003 (the "Confidentiality Agreements").
(c) In the event of the termination of this Agreement in accordance with
Section 8.01, Parent and Merger Sub shall, and shall use their reasonable best
efforts to cause their respective affiliates and their respective officers,
directors, employees and agents to, (i) return promptly every document furnished
to them by the Company or its Subsidiaries, or any officer, director, employee,
auditor or agent of the Company or its Subsidiaries in connection with the
Merger and containing Proprietary Information (as defined in the Confidentiality
Agreements) and all copies thereof in their possession, and cause any other
parties to whom such documents may have been furnished promptly to return such
documents and all copies thereof, other than such documents as may have been
filed with the SEC or otherwise be publicly available, and (ii) destroy promptly
all documents created by them from any Proprietary Information and all copies
thereof in their possession, and cause any other parties to whom such documents
may have been furnished to destroy promptly such documents and any copies
thereof.
SECTION 6.05. No Solicitation of Transactions.
(a) Neither the Company nor any Subsidiary of the Company shall, directly
or indirectly, through any of its officers, directors, agents, investment
bankers or attorneys or otherwise, (i) solicit, initiate, facilitate, induce or
encourage or take any action that could reasonably be expected to lead to the
making, submission or announcement of, any Acquisition Proposal, including a
Superior Proposal or (ii) participate in any discussions or negotiations
regarding, or furnish to any person, any information with respect to, or
otherwise cooperate in any way with respect to, or assist or participate in,
facilitate, or induce any Acquisition Proposal, except that the Company may take
any action referred to in this clause (ii) in response to an Acquisition
Proposal (A) if the Board determines in good faith within five (5) Business Days
after consultation with independent legal counsel (who may be the Company's
regularly engaged independent legal counsel), that the failure to take such
action could reasonably be expected to constitute a breach of its fiduciary
duties under applicable law, (B) if the Board determines in good faith that the
Acquisition Proposal could reasonably be expected to result in a Superior
Proposal, (C) if after giving prior written notice to Parent and Merger Sub and
entering into a customary confidentiality agreement on terms not materially less
favorable to the Company than those contained in the Confidentiality Agreement
and (D) if there has been no previous violation of this
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Section 6.05(a) with respect to such Acquisition Proposal. For purposes of this
Agreement, a "Superior Proposal" means any bona fide written proposal, not
solicited, initiated or encouraged in violation of this Section 6.05, made by a
third person to acquire, directly or indirectly, for consideration consisting of
cash and/or securities, all of the equity securities of the Company entitled to
vote generally in the election of directors or all or substantially all of the
consolidated assets of the Company and its Subsidiaries, that does not contain a
financing condition, if and only if, the Board reasonably determines (after
consulting with independent legal counsel (who may be the Company's regularly
engaged independent legal counsel) and its financial advisor) (x) that the
proposed transaction would be more favorable to its stockholders than the Merger
and (y) that the person or entity making such Superior Proposal is capable of
consummating such Acquisition Proposal (after considering, among other things,
the expectation of obtaining required regulatory approvals and the identity and
background of such person). Without limiting the generality of the foregoing,
the Company acknowledges and agrees that any action taken by or through any
officer, director, agent, investment banker or attorney of the Company or its
Subsidiaries that is inconsistent with this Section 6.05(a), whether or not such
person is purporting to act on behalf of the Company or its Subsidiaries, shall
be deemed a breach of this Section 6.05(a) by the Company for all purposes of
this Agreement.
(b) Prior to the Effective Time, the Company shall not (x) approve, endorse
or recommend any Acquisition Proposal, or (y) enter into any letter of intent or
similar document or any agreement or contract for, contemplating or otherwise
relating to, any Acquisition Proposal (except for a Confidentiality Agreement
referred to in Section 6.05(a)(C) and neither the Board nor any committee
thereof shall withdraw or modify, or propose to withdraw or modify, in a manner
adverse to Parent or Merger Sub, the approval or recommendation by the Board or
any such committee of this Agreement or the Merger. Notwithstanding the
foregoing, in the event that, prior to the Effective Time, in connection with an
Acquisition Proposal, the Board determines in good faith (i) after consultation
with independent legal counsel (who may be the Company's regularly engaged
independent legal counsel), that the failure to take such action could
reasonably be expected to constitute a breach of its fiduciary duties under
applicable law and (ii) that an Acquisition Proposal constitutes a Superior
Proposal, the Board may withdraw or modify its approval or recommendation of the
Merger.
(c) The Company shall, and shall direct or cause its directors, officers,
employees, representatives and agents to, immediately cease and cause to be
terminated any discussions or negotiations with any parties that may be ongoing
with respect to any Acquisition Proposal.
(d) The Company shall promptly, but in any event within 24 hours of such
occurrence, advise Parent orally and in writing of (i) the receipt of any
Acquisition Proposal or any request for information with respect to any
Acquisition Proposal, the material terms and conditions of such Acquisition
Proposal or request and the identity of the person or entity making such
Acquisition Proposal or request, (ii) any changes in any such Acquisition
Proposal or request and (iii) the determination by the Board that an Acquisition
Proposal is a Superior Proposal, including the reasons for such determination,
with the intent of enabling the Parent to make a Revised Offer (as defined in
Section 6.05(f) below). The Company shall furnish Parent with copies of any
written information provided to the Company by any person relating to an
Acquisition Proposal. The Company will promptly provide to Parent any material
information concerning the Company provided to any person or entity relating to
the Acquisition Proposal which was not previously provided to the Parent.
(e) The Company agrees, not to release any third party from, or waive any
provision of, any confidentiality or standstill agreement to which the Company
is a party.
(f) Within two (2) Business Days after receipt of the notice contemplated
in Section 6.05(d)(iii) above, the Parent may, in its discretion, submit a
matching offer to the Company (the "Revised Offer"). The Board shall consider
the Revised Offer in good faith and determine, after consultation with
independent legal counsel (who may be the Company's regularly engaged
independent legal counsel) and its financial advisor, whether the Acquisition
Proposal is a Superior Proposal relative to the Revised Offer. If the Board
concludes that the Acquisition Proposal is no longer a Superior Proposal
relative to the Revised Offer, this Agreement shall be amended by the parties to
reflect the terms of the Revised Offer.
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SECTION 6.06. Directors' and Officers' Indemnification and Insurance.
(a) From and after the Effective Time, Parent and the Surviving Corporation
shall jointly and severally, to the fullest extent permitted under applicable
law, indemnify, defend and hold harmless, each present and former director,
officer or employee of the Company and its Subsidiary (collectively, the
"Indemnified Parties") against any costs or expenses (including attorneys'
fees), judgments, fines, losses, claims, damages, liabilities and amounts paid
in settlement in connection with any actual or threatened claim, action, suit,
proceeding or investigation, whether civil, criminal, administrative or
investigative, with respect to any acts or omissions occurring at or prior to
the Effective Time, to the same extent as provided in the Company's certificate
of incorporation or by-laws or any applicable contract or agreement as in effect
on the date hereof, accurate and complete copies of which contracts and
agreements have been provided to the Parent prior to the date hereof, in each
case for a period of six years after the date hereof; provided, however, this
provision shall not operate to extend the term of any indemnification provided
under any applicable contract or agreement. In the event that any claim for
indemnification is asserted or made within such six-year period, all rights to
indemnification in respect of such claim shall continue until the disposition of
such claim.
(b) The Surviving Corporation, Parent or the Company (with the prior
written consent of Parent) shall purchase a "tail" policy under the Company's
existing directors' and officers' insurance policy that (i) has an effective
term of six years from the Effective Time, (ii) covers those Persons who are
currently covered, or will be covered on or prior to the Effective Time, by the
Company's directors' and officers' insurance policies in effect on the date
hereof with respect to matters occurring on or prior to the Effective Time and
(iii) contains terms and conditions (including without limitation coverage
amounts) that are not materially less favorable in the aggregate as the terms
and conditions of the Company's directors' and officers' insurance policies in
effect on the date hereof; provided, however, Parent, Surviving Corporation or
Company (with the prior written consent of the Parent), as the case may be,
shall be entitled to reduce the term of coverage, if necessary, to a term of
coverage that can be obtained for a premium equal to $1,562,500 plus any
unearned premium actually refunded or credited to the Surviving Corporation or
Parent with respect to the Company's existing directors' and officers' insurance
policies. In the event that Parent or Surviving Corporation obtains insurance
hereunder from a carrier or carriers other than the Company's existing carriers,
such carrier or carriers shall be reasonably comparable to the Company's
existing carriers in all material respects. Notwithstanding the foregoing, the
Surviving Corporation or Parent, as the case may be, shall not be liable for any
negative change in such coverage that is attributable to a market change in the
types of coverage or levels of coverage generally available for similarly
situated insureds.
(c) In the event Parent or the Surviving Corporation or any of their
respective successors or assigns (i) consolidates with or merges into any other
person and shall not be the continuing or surviving corporation or entity of
such consolidation or merger or (ii) transfers all or substantially all of its
properties and assets to any person, then, and in each such case, proper
provision shall be made so that the successors and assigns of Parent or the
Surviving Corporation, as the case may be, shall assume the obligations set
forth in this Section 6.06.
(d) The rights of each Indemnified Party under this Section 6.06 shall be
enforceable by, and are intended to benefit, each Indemnified Party.
SECTION 6.07. Notification of Certain Matters. The Company shall give
prompt notice to Parent, and Parent shall give prompt notice to the Company, of
(a) the occurrence, or non-occurrence, of any event the occurrence, or
non-occurrence, of which reasonably could be expected to cause any
representation or warranty contained in this Agreement to be untrue or
inaccurate in any material respect and (b) any failure of the Company, Parent or
Merger Sub, as the case may be, to comply with or satisfy any covenant or
agreement to be complied with or satisfied by it hereunder; provided, however,
that the delivery of any notice pursuant to this Section 6.07 shall not limit or
otherwise affect the remedies available hereunder to the party receiving such
notice.
SECTION 6.08. Public Announcements. Parent and the Company agree that no
public release or announcement concerning the Merger shall be issued by either
party without the prior consent of the other party (which consent shall not be
unreasonably withheld), except as such release or announcement may be
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required by Law or the rules or regulations of any United States or non-United
States securities exchange, in which case the party required to make the release
or announcement shall use its best efforts to allow the other party reasonable
time to comment on such release or announcement in advance of such issuance.
SECTION 6.09. Tax Opinion Matters. Each party shall cooperate with each
other in obtaining the opinions of Mintz Levin Cohen Ferris Glovsky and Popeo PC
and Morgan, Lewis & Bockius LLP described in Sections 7.02(f) and 7.03(c).
SECTION 6.10. Affiliates. Promptly after execution and delivery of this
Agreement, the Company shall deliver to Parent a letter identifying all persons
who, in the opinion of the Company, may be deemed at the time this Agreement is
submitted for adoption by the stockholders of the Company, "affiliates" of the
Company for purposes of Rule 145 under the Securities Act, and such list shall
be updated as necessary to reflect changes from the date thereof. The Company
shall use reasonable best efforts to cause each person identified on such list
to deliver to Parent not less than 30 days prior to the Effective Time, a
written agreement in a form to be agreed to by the Parties (an "Affiliate
Agreement"). Promptly after execution and delivery of this Agreement, Parent
shall deliver to the Company a letter identifying all persons who, in the
opinion of Parent, may be deemed "affiliates" of Parent for purposes of Rule 145
under the Securities Act, and such list shall be updated as necessary to reflect
changes from the date hereof.
SECTION 6.11. Tax-free Reorganization. Prior to the Effective Time, each
party shall use its best efforts to cause the Merger to qualify as a
reorganization under Section 368(a) of the Code, and will not take any action
reasonably likely to cause the Merger not so to qualify. Parent shall not take,
or cause the Surviving Corporation to take, any action after the Effective Time
reasonably likely to cause the Merger not to qualify as a reorganization under
Section 368(a) of the Code. Accordingly, the parties to this Agreement hereby
adopt this Agreement as "a plan of reorganization" within the meaning of
Sections 1.368-2(g) and 1.368-3(a) of the Treasury Regulations.
SECTION 6.12. Comparability of Employee Benefits.
(a) Following the Effective Time and for a period of nine (9) months
thereafter, Parent shall provide or shall cause the Surviving Corporation to
provide, to all individuals who are employees of the Company at the Effective
Time and whose employment will continue following the Effective Time (the
"Assumed Employees") with: (i) compensation, employee benefits, and terms and
conditions of employment that are substantially similar, in the aggregate, as
Parent provides to similarly-situated employees of Parent; (ii) compensation,
employee benefits, and terms and conditions of employment that are substantially
similar, in the aggregate, to those of the Company as in effect immediately
prior to the Effective Time; or (iii) a combination of clauses (i) and (ii);
provided that such compensation, employee benefits, and terms and conditions of
employment are substantially similar, in the aggregate, to those in effect for
the Assumed Employees immediately prior to the Effective Time. Following the
Effective Time, to the extent permitted by Law and applicable tax qualification
requirements, and subject to any generally applicable break in service or
similar rule, and the approval of any insurance carrier, third party provider or
the like with commercially reasonable efforts of Parent, each Assumed Employee
shall receive service credit for purposes of eligibility to participate and
vesting (but not for benefit accrual purposes) for employment, compensation, and
employee benefit plan purposes with the Company prior to the Effective Time.
Notwithstanding any of the foregoing to the contrary, none of the provisions
contained herein shall operate to duplicate any benefit provided to any Assumed
Employee or the funding of any such benefit. Parent and the Surviving
Corporation will also cause all (A) pre-existing conditions and proof of
insurability provisions, for all conditions that all Assumed Employees and their
covered dependents have as of the Closing, and (B) waiting periods under each
plan that would otherwise be applicable to newly hired employees to be waived in
the case of clause (A) or clause (B) with respect to Assumed Employees to the
same extent waived or satisfied under the Plans; provided that nothing in this
sentence shall limit the ability of Parent or the Surviving Corporation from
amending or entering into new or different employee benefit plans or
arrangements provided such plans or arrangements treat the Assumed Employees in
a substantially similar manner as employees of Parent or the Surviving
Corporation, as applicable, are treated. Notwithstanding the foregoing, nothing
in this Section guarantees continued employment for any Assumed Employee after
the Effective Time.
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(b) Parent and the Surviving Corporation will give each Assumed Employee
credit, for purposes of Parent's and the Surviving Corporation's vacation and/or
other paid leave benefit programs, for such employees accrued and unpaid
vacation and/or paid leave balance as of the Effective Time.
SECTION 6.13. Further Assurances. Between the date hereof and the
Effective Time, the Company agrees to use its commercially reasonable efforts to
deliver such documents and instruments and take such actions as the Parent
reasonably requests in connection with the agreements set forth on Section 6.13
of the Company Disclosure Schedule.
SECTION 6.14. HSR Act. At least 10 days prior to the anticipated mailing
date of the Proxy Statement to the stockholders of the Company, Parent shall
determine in consultation with the Company whether to file notification under
the Hart-Scott-Rodino Antitrust Improvements Act of 1976, and the rules
promulgated thereunder ("HSR Act"). In the event that Parent determines that
filing is required pursuant to the HSR Act, Parent and the Company will file the
notification forms required thereunder in connection with these transactions and
will request early termination of the waiting period.
ARTICLE VII
CONDITIONS TO THE MERGER
SECTION 7.01. Conditions to the Merger. The obligations of each party to
effect the Merger shall be subject to the satisfaction, at or prior to the
Effective Time, of the following conditions:
(a) Stockholder Approval. This Agreement shall have been approved and
adopted by the affirmative vote of the stockholders of the Company to the
extent required by Delaware Law and the certificate of incorporation of the
Company;
(b) No Injunctions or Restraints. No Law entered, enacted,
promulgated, enforced or issued by any court or other Governmental
Authority of competent jurisdiction or other legal restraint or prohibition
(collectively, "Restraints") shall be in effect (i) preventing or
prohibiting consummation of the Merger, (ii) prohibiting or limiting the
ownership or operation by the Company or Parent and their respective
Subsidiaries of any material portion of the business or assets of the
Company or Parent and their respective Subsidiaries taken as a whole, or
compelling the Company or Parent and their respective Subsidiaries to
dispose of or hold separate any material portion of the business or assets
of the Company or Parent and their respective Subsidiaries, taken as a
whole, as a result of the Merger, or (iii) which otherwise is likely to
have a Company Material Adverse Effect or a Parent Material Adverse Effect;
provided, however, that each of the parties shall have used its
commercially reasonable efforts to prevent the entry of any such Restraints
and to appeal as promptly as possible any such Restraints that may be
entered;
(c) Registration Statement Effective. The Registration Statement
shall have been declared effective, and no stop order suspending the
effectiveness of the Registration Statement shall be in effect and no
proceedings for such purpose shall be pending before or threatened by the
SEC;
(d) NASDAQ Listing. The shares of Parent Common Stock to be issued in
the Merger shall have been authorized for listing on the Nasdaq National
Market, subject to official notice of issuance; and
(e) Government Approvals. All necessary licenses, permits, consents
or approvals of or from Governmental Authorities or other third parties
(including the expiration or termination of any applicable waiting periods
under the HSR Act) shall have been obtained.
SECTION 7.02. Conditions to the Obligations of Parent and Merger Sub. The
obligations of Parent and Merger Sub to consummate the Merger are subject to the
satisfaction or, if permitted by applicable Law, waiver of the following further
conditions:
(a) (i) the Company shall have performed in all material respects all
of its obligations hereunder required to be performed by it at or prior to
the Effective Time; (ii) each of the representations and warranties of the
Company contained in this Agreement which is qualified as to materiality
shall be true
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and correct and each such representation and warranty that is not so
qualified shall be true and correct in all material respects, in each case
as of the date hereof and at and as of the Effective Time as if made at and
as of such time, except that those representations and warranties which
address matters only as of a particular date shall remain true and correct
as of such date; and (iii) Parent shall have received a certificate signed
by an executive officer of the Company to the foregoing effect;
(b) at any time after the date of this Agreement there shall not have
occurred a Company Material Adverse Effect;
(c) there shall not be pending any action or proceeding having a
reasonable likelihood of success by or before any Governmental Authority or
a court of competent jurisdiction, nor shall there be in effect any
judgment, decree or order of any Governmental Authority or court of
competent jurisdiction, in either case, seeking to make materially more
costly the Merger, or seeking to obtain material damages in connection with
the Merger, or seeking to prohibit or limit the ownership or operation by
the Company or Parent and their respective Subsidiaries of any material
portion of the business or assets of the Company or Parent and their
respective Subsidiaries taken as a whole, or compelling the Company or
Parent and their respective Subsidiaries to dispose of or hold separate any
material portion of the business or assets of the Company or Parent and
their respective Subsidiaries, taken as a whole, as a result of the Merger;
(d) Parent shall have received from Mintz Levin Cohen Ferris Glovsky
and Popeo PC on or before the date the Form S-4 shall become effective and,
subsequently, on the Closing Date, a written opinion dated as of such
dates, based on appropriate representations of the Company and Parent in
the form provided, to the effect that (i) the Merger will qualify as a
"reorganization," within the meaning of Section 368(a) of the Code, and
(ii) the Company, Parent and Merger Sub will each be a "party to a
reorganization," within the meaning of Section 368(b) of the Code, with
respect to the Merger;
(e) The Company shall have obtained the consents set forth on Section
7.02 of the Company Disclosure Schedule;
(f) appraisal rights shall not have been exercised by holders of more
than 7.5% of the outstanding voting shares of the Company; and
(g) Robert J. Towarnicki, Brian J. Hayden and Rifat Pamukcu shall have
entered into a Consulting Agreement in form and substance satisfactory to
Parent, the primary terms of which are set forth in Exhibit B hereto;
provided, however, in the event of the death of any of the foregoing prior
to the Effective Time or if any of the foregoing suffers from a continuing
disability that at the Effective Time is reasonably expected to prevent
that person from fulfilling his duties thereunder, this closing condition
shall be deemed satisfied with respect to such person.
SECTION 7.03. Conditions to the Obligations of the Company. The
obligations of the Company to consummate the Merger are subject to the
satisfaction or, if permitted by applicable Law, waiver of the following further
conditions:
(a) (i) Parent and Merger Sub shall have performed in all material
respects all of their respective obligations hereunder required to be
performed by them at or prior to the Effective Time; (ii) each of the
representations and warranties of Parent contained in this Agreement which
is qualified as to materiality shall be true and correct and each such
representation and warranty that is not so qualified shall be true and
correct in all material respects, in each case as of the date hereof and at
and as of the Effective Time as if made at and as of such time, except that
those representations and warranties which address matters only as of a
particular date shall remain true and correct as of such date; and (iii)
the Company shall have received a certificate signed by an executive
officer of Parent to the foregoing effect;
(b) at any time after the date of this Agreement, there shall not have
occurred a Parent Material Adverse Effect; and
(c) the Company shall have received from Morgan, Lewis & Bockius LLP
on or before the date the Form S-4 shall become effective and,
subsequently, on the Closing Date, a written opinion dated as of such
dates, based on appropriate representations of the Company and Parent in
the form provided, to the
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effect that (i) the Merger will qualify as a "reorganization," within the
meaning of Section 368(a) of the Code, and (ii) the Company, Parent and
Merger Sub will each be a "party to a reorganization," within the meaning
of Section 368(b) of the Code, with respect to the Merger.
ARTICLE VIII
TERMINATION, AMENDMENT AND WAIVER
SECTION 8.01. Termination. This Agreement may be terminated and the
Merger may be abandoned at any time prior to the Effective Time, notwithstanding
any requisite approval and adoption of this Agreement and the transactions
contemplated hereby by the stockholders of the Company:
(a) by written consent duly authorized by the Boards of Directors of
each of Parent, Merger Sub and the Company;
(b) by any of Parent, Merger Sub or the Company if (i) the Effective
Time shall not have occurred on or before August 6, 2003; provided that the
right to terminate this Agreement under this Section 8.01(b)(i) shall not
be available to any party whose failure to fulfill any obligation under
this Agreement has been the cause of, or resulted in, the failure of the
Effective Time to occur on or before such date; or (ii) there shall be any
Law that makes consummation of the Merger illegal or otherwise prohibited
or if any court of competent jurisdiction or Governmental Authority shall
have issued an order, decree, ruling or taken any other action restraining,
enjoining or otherwise prohibiting the Merger and such order, decree,
ruling or other action shall have become final and nonappealable;
(c) by the Parent, if the Board withdraws, modifies or changes its
recommendation of this Agreement or the Merger after receiving a Superior
Proposal and determining in good faith, after consultation with independent
legal counsel (who may be the Company's regularly engaged independent legal
counsel), that the failure to take such action could reasonably be expected
to constitute a breach of its fiduciary duties under applicable law;
(d) by the Company, if the Board withdraws, modifies or changes its
recommendation of this Agreement or the Merger after receiving a Superior
Proposal and determining in good faith, after consultation with independent
legal counsel (who may be the Company's regularly engaged independent legal
counsel), that the failure to take such action could reasonably be expected
to constitute a breach of its fiduciary duties under applicable Law,
provided that the Company has complied with the provisions of Section 6.05
hereof; provided, however, that any termination of this Agreement by the
Company pursuant to this Section 8.01(d) shall not be effective until the
Company has made payment of the full fee required by Section 8.03(a)
hereof;
(e) by either Parent or the Company, if the Stockholders' Meeting
shall have been held and the stockholders of the Company shall have failed
to approve and adopt this Agreement at such meeting;
(f) by the Company, upon a breach of any representation, warranty, or
agreement set forth in this Agreement such that the condition set forth in
Section 7.03(a) would not be satisfied (a "Terminating Parent Breach");
provided, however, that if such Terminating Parent Breach is curable by
Parent through the exercise of its best efforts and Parent continues to
exercise such best efforts, the Company may not terminate this Agreement
under this Section 8.01(f) for a period of 30 days from the date on which
the Company delivers to Parent written notice setting forth in reasonable
detail the circumstances giving rise to such Terminating Parent Breach; or
(g) by Parent, upon a breach of any representation, warranty, or
agreement set forth in this Agreement such that the condition set forth in
Section 7.02(a) would not be satisfied (a "Terminating Company Breach");
provided, however, that, if such Terminating Company Breach is curable by
the Company through the exercise of its best efforts and the Company
continues to exercise such best efforts, Parent may not terminate this
Agreement under this Section 8.01(g) for a period of 30 days from the date
on which Parent delivers to the Company written notice setting forth in
reasonable detail the circumstances giving rise to such Terminating Company
Breach.
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SECTION 8.02. Effect of Termination. Except as provided in Section 9.01
and Section 8.03, in the event of the termination of this Agreement pursuant to
Section 8.01, this Agreement shall forthwith become void, there shall be no
liability under this Agreement on the part of Parent, Merger Sub or the Company
or any of their respective officers or directors and all rights and obligations
of any party hereto shall cease; provided, however, if such termination shall
result from the willful (i) failure of either party to fulfill a condition to
the performance of the obligations of the other party or (ii) failure of either
party to perform a covenant hereof, such party shall be fully liable for any and
all liabilities and damages incurred or suffered by the other party as a result
of such failure. The provisions of Sections 8.02, 8.03, 9.04, 9.05, 9.07 and
9.08 shall survive any termination hereof pursuant to Section 8.01.
SECTION 8.03. Fees and Expenses.
(a) The Company shall pay Parent a fee of $1,250,000 (the "Termination
Fee"), if this Agreement is terminated:
(i) pursuant to 8.01(c) or (d);
(ii) pursuant to Section 8.01(e) and an Acquisition Proposal shall
have been proposed prior to such termination (which shall not have been
withdrawn prior to such termination) and the transaction contemplated by
such Acquisition Proposal shall have been consummated within 9 months of
such termination; or
(iii) pursuant to Section 8.01(g) and an Acquisition Proposal shall
have proposed prior to such termination (which shall not have been
withdrawn prior to such termination) and the transaction contemplated by
such Acquisition Proposal shall have been consummated within 9 months of
such termination.
(b) Any payment required to be made pursuant to Section 8.03(a) shall be
made as promptly as practicable but not later than five business days after the
final determination by Parent of such amount and shall be made by wire transfer
of immediately available funds to an account designated by Parent.
(c) Except as set forth in this Section 8.03, all costs and expenses
incurred in connection with this Agreement and the Merger shall be paid by the
party incurring such expenses, whether or not the Merger is consummated.
(d) In the event that the Company shall fail to pay the Termination Fee
when due, the Company shall pay to the Parent the Termination Fee and the costs
and expenses actually and reasonably incurred or accrued by Parent and its
affiliates (including, without limitation, fees and expenses of counsel) in
connection with the collection under and enforcement of this Section 8.03,
together with interest on such unpaid Termination Fee, commencing on the date
that the Termination Fee became due, at a rate equal to the prime rate of
interest publicly announced by The Wall Street Journal, Eastern Edition, from
time to time.
SECTION 8.04. Amendment. This Agreement may be amended by the parties
hereto by action taken by or on behalf of their respective Boards of Directors
at any time prior to the Effective Time; provided that, after the adoption of
this Agreement by the stockholders of the Company, no amendment may be made
which would reduce the amount or change the type of consideration to be received
by the stockholders of the Company pursuant to the Merger absent any required
stockholder approval. This Agreement may not be amended except by an instrument
in writing signed by the parties hereto.
SECTION 8.05. Waiver. At any time prior to the Effective Time, any party
hereto may (a) extend the time for the performance of any obligation or other
act of any other party hereto, (b) waive any inaccuracy in the representations
and warranties of the other party contained herein or in any document delivered
by the other party pursuant hereto and (c) waive compliance with any agreement
or condition contained herein. Any such extension or waiver shall be valid if
set forth in an instrument in writing signed by the party or parties to be bound
thereby.
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ARTICLE IX
GENERAL PROVISIONS
SECTION 9.01. Nonsurvival of Representations and Warranties. None of the
representations and warranties in this Agreement or in any instrument delivered
pursuant to this Agreement shall survive the Effective Time. This Section 9.01
shall not limit any covenant or agreement of the parties which by its terms
contemplates performance after the Effective Time or earlier termination.
SECTION 9.02. Notices. All notices, requests, claims, demands and other
communications hereunder shall be in writing and shall be given (and shall be
deemed to have been duly given upon receipt) by delivery in person, by facsimile
or by registered or certified mail (postage prepaid, return receipt requested)
to the respective parties at the following addresses (or at such other address
for a party as shall be specified in a notice given in accordance with this
Section 9.02):
if to Parent or Merger Sub:
OSI Pharmaceuticals Inc.
58 South Service Road, Suite 110
Melville, New York 11747
Facsimile No: (631) 293-2218
Attention: Barbara A. Wood, Esq.
with a copy to:
Mintz Levin Cohn Ferris Glovsky and Popeo PC
The Chrysler Center
666 Third Avenue
New York, New York 10017
Facsimile No: (212) 983-3115
Attention: Joel I. Papernik, Esq.
if to the Company:
Cell Pathways, Inc.
702 Electronic Drive
Horsham, Pennsylvania 19044
Facsimile No: (215) 706-3806
Attention: Robert J. Towarnick
with a copy to:
Morgan, Lewis & Bockius LLP
1701 Market Street
Philadelphia, Pennsylvania 19103
Facsimile No: (215) 963-5001
Attention: Peter S. Sartorius, Esq.
SECTION 9.03. Severability. If any term or other provision of this
Agreement is invalid, illegal or incapable of being enforced by any rule of law,
or public policy, all other conditions and provisions of this Agreement shall
nevertheless remain in full force and effect so long as the economic or legal
substance of the Merger is not affected in any manner materially adverse to any
party. Upon such determination that any term or other provision is invalid,
illegal or incapable of being enforced, the parties hereto shall negotiate in
good faith to modify this Agreement so as to effect the original intent of the
parties as closely as possible in a mutually acceptable manner in order that the
Merger be consummated as originally contemplated to the fullest extent possible.
SECTION 9.04. Entire Agreement; Assignment. This Agreement (including the
Exhibits and the Parent and the Company Disclosure Schedules which are hereby
incorporated herein and made a part hereof
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for all purposes as if fully set forth herein) constitutes the entire agreement
among the parties with respect to the subject matter hereof and supersedes all
prior agreements and undertakings, both written and oral, among the parties, or
any of them, with respect to the subject matter hereof. This Agreement shall not
be assigned (whether pursuant to a merger, by operation of law or otherwise),
except that Parent and Merger Sub may assign all or any of their rights and
obligations hereunder to any affiliate of Parent, provided that no such
assignment shall relieve the assigning party of its obligations hereunder if
such assignee does not perform such obligations.
SECTION 9.05. Parties in Interest. This Agreement shall be binding upon
and inure solely to the benefit of each party hereto, and nothing in this
Agreement, express or implied, is intended to or shall confer upon any other
person any right, benefit or remedy of any nature whatsoever under or by reason
of this Agreement, other than Section 6.06 (which is intended to be for the
benefit of the persons covered thereby and may be enforced by such persons).
SECTION 9.06. Specific Performance. The parties hereto agree that
irreparable damage would occur in the event any provision of this Agreement were
not performed in accordance with the terms hereof and that the parties shall be
entitled to specific performance of the terms hereof, in addition to any other
remedy at law or equity.
SECTION 9.07. Governing Law. This Agreement shall be governed by, and
construed in accordance with, the laws of the State of Delaware applicable to
contracts executed in and to be performed in that State. All actions and
proceedings arising out of or relating to this Agreement shall be heard and
determined in any court within the State of Delaware. The parties hereto hereby
(a) submit to the exclusive jurisdiction of any state or federal court sitting
within the State of Delaware for the purpose of any Action arising out of or
relating to this Agreement brought by any party hereto, and (b) irrevocably
waive, and agree not to assert by way of motion, defense, or otherwise, in any
such Action, any claim that it is not subject personally to the jurisdiction of
the above-named courts, that its property is exempt or immune from attachment or
execution, that the Action is brought in an inconvenient forum, that the venue
of the Action is improper, or that this Agreement or the Merger may not be
enforced in or by any of the above-named courts.
SECTION 9.08. Waiver of Jury Trial. Each of the parties hereto hereby
waives to the fullest extent permitted by applicable law any right it may have
to a trial by jury with respect to any litigation directly or indirectly arising
out of, under or in connection with this Agreement or the Merger. Each of the
parties hereto (a) certifies that no representative, agent or attorney of any
other party has represented, expressly or otherwise, that such other party would
not, in the event of litigation, seek to enforce that foregoing waiver and (b)
acknowledges that it and the other hereto have been induced to enter into this
Agreement and the Merger, as applicable, by, among other things, the mutual
waivers and certifications in this Section 9.08.
SECTION 9.09. Headings. The descriptive headings contained in this
Agreement are included for convenience of reference only and shall not affect in
any way the meaning or interpretation of this Agreement.
SECTION 9.10. Counterparts. This Agreement may be executed and delivered
(including by facsimile transmission) in one or more counterparts, and by the
different parties hereto in separate counterparts, each of which when executed
shall be deemed to be an original but all of which taken together shall
constitute one and the same agreement.
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IN WITNESS WHEREOF, Parent, Merger Sub and the Company have caused this
Agreement to be executed as of the date first written above by their respective
officers thereunto duly authorized.
OSI PHARMACEUTICALS, INC.
By /s/ COLIN GODDARD, PH.D.
-------------------------------------
Name: Colin Goddard, Ph.D.
Title: Chief Executive Officer
CP MERGER CORPORATION
By /s/ COLIN GODDARD, PH.D.
-------------------------------------
Name: Colin Goddard, Ph.D.
Title: President
CELL PATHWAYS, INC.
BY /s/ ROBERT J. TOWARNICKI
-------------------------------------
NAME: ROBERT J. TOWARNICKI
TITLE: CHIEF EXECUTIVE OFFICER
A-38
EXHIBIT A
PLEASE REFER TO ANNEX B
OF THIS PROXY STATEMENT/PROSPECTUS
A-39
EXHIBIT B
CERTAIN TERMS OF THE CONSULTING AGREEMENTS
Mr. Towarnicki and Mr. Hayden will receive Consulting Agreements with OSI
to facilitate the interim management of Cell Pathways' operations and the
transition, integration, and transfer of Cell Pathways' assets to OSI
Pharmaceuticals. The term of each Consulting Agreement will be eighteen (18)
months beginning on the Effective Date. In consideration for this commitment,
OSI has agreed to pay Mr. Towarnicki $200,000 and Mr. Hayden $150,000. In
addition, and following the successful transition of assets to OSI, the Company
will give due consideration to the forgiveness of loans to Mr. Towarnicki and
Mr. Hayden totaling approximately $950,000 outstanding.
Mr. Pamukcu will receive a Consulting Agreement for a term of three (3)
years beginning on the Effective Date. In consideration of this commitment, OSI
has agreed to pay Mr. Pamukcu $20,000 per month for the first 8-10 months (i.e.,
the period through completion of the Phase II trial of CP-461 in the IBD
indication); $10,000 per month for the next 2-4 months (i.e. through the end of
the first year of the term); and $5,000 per month for the second and third years
of the term of the Consulting Agreement. In connection with his execution and
delivery of the Consulting Agreement, OSI shall also pay to Mr. Pamukcu either
(i) 8,000 shares of the common stock of OSI plus a cash payment equal to all
taxes payable with respect thereto or (ii) the cash equivalent of the value of
the OSI shares and the cash set forth in clause (i).
A-40
ANNEX B
FORM OF CONTINGENT VALUE RIGHTS AGREEMENT
CONTINGENT VALUE RIGHTS AGREEMENT, dated [ ] 2003, by and among
OSI Pharmaceuticals, Inc. ("Parent"), a Delaware corporation, and The Bank of
New York, a New York banking corporation, as Rights Agent (the "Rights Agent"),
in favor of each person (a "Holder") who from time to time holds one or more
Contingent Value Rights (the "CVRs") to receive a number of shares of Parent
common stock, $0.01 par value per share (the "Parent Common Stock"), in the
amounts and subject to the terms and conditions set forth herein. A registration
statement on Form S-4 (No. 333- ) (the "Registration Statement") with respect
to, among other securities, the CVRs, has been prepared and filed by Parent with
the Securities and Exchange Commission (the "Commission") and has become
effective in accordance with the Securities Act of 1933 (the "Act"). This
Agreement is entered into in connection with the Agreement and Plan of Merger
(the "Merger Agreement") dated as of February 7, 2003 by and among Parent, CP
Merger Corporation ("Merger Sub"), and Cell Pathways, Inc. (the "Company"),
which sets forth the initial allocation of a CVR for 0.0400 shares of Parent
Common Stock for each outstanding share of Company Common Stock (as defined in
the Merger Agreement).
SECTION 1. Appointment of Rights Agent. Parent hereby appoints the Rights
Agent to act as agent for the Holders in accordance with the instructions set
forth herein, and the Rights Agent hereby accepts such appointment, upon the
terms and conditions hereinafter set forth.
SECTION 2. Form of CVR Certificate.
2.1 The CVRs shall be evidenced by certificates (the "CVR
Certificates"), substantially in the form set forth in Exhibit A hereto.
The CVR Certificates may have such letters, numbers, or other marks of
identification or designation and such legends, summaries, or endorsements
printed, lithographed, or engraved thereon as Parent may deem appropriate
and as are not inconsistent with the provisions of this Agreement, or as
may be required to comply with applicable law or with any rule or
regulation made pursuant thereto.
2.2 The CVR Certificates shall be executed on behalf of Parent by the
manual or facsimile signature of the present or any future President or
Vice President of Parent, under its corporate seal, affixed or in
facsimile, attested by the manual or facsimile signature of the present or
any future Secretary or Assistant Secretary of Parent. CVR Certificates
shall be dated as of the date of the initial issuance thereof or the date
of any subsequent transfer, as the case may be.
SECTION 3. Registration.
3.1 The Rights Agent shall maintain the books and records for the
registration, and the registration of transfer, of the CVR Certificates in
which shall be registered the names and addresses of the Holders of the
CVRs evidenced by the CVR Certificates in registered form and the
certificate numbers and denominations of such CVR Certificates.
3.2 Prior to transfer of the CVR Certificates as provided for herein,
Parent and the Rights Agent may deem and treat the registered Holder
thereof as the absolute owner of the CVR Certificates (notwithstanding any
notation of ownership or other writing thereon made by anyone other than
Parent or the Rights Agent), for the purpose of the CVR Consideration (as
defined herein) and for all other purposes, and neither Parent nor the
Rights Agent shall be affected by any notice to the contrary.
SECTION 4. Payment and Exchange of CVRs.
4.1 Milestone and Exchange Ratio. For purposes of this Agreement,
"Milestone Date" means the date of the earlier to occur of (i) the filing
of a new drug application ("NDA") with the U.S. Food and Drug
Administration (the "FDA") for marketing in the U.S. of Aptosyn for the
treatment of advanced non-small cell lung cancer in combination with
Taxotere on the basis of the registration trial currently underway, (ii)
the filing of an NDA with the FDA for marketing of CP-461 in the U.S. for
the
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treatment of any indication or (iii) a determination by the Parent, in its
sole discretion, that the CVRs should convert into Parent Common Stock
(each a "Milestone Event"). Provided the Milestone Date occurs on or before
, 2008, the Holders shall be entitled to the following
consideration, to be delivered by the Rights Agent in accordance with the
procedures set forth herein.
(a) On the Milestone Date, each CVR then outstanding shall
automatically be converted into and become the right to receive 0.0400
shares of Parent Common Stock (the "Rights Shares").
(b) No fractional shares of Parent Common Stock shall be issued
pursuant to this Agreement. In lieu of fractional shares, each Holder
who would otherwise have been entitled to a fraction of a share of
Parent Common Stock hereunder (after aggregating all fractional shares
to be received by such Holder), shall receive, without interest, an
amount in cash (rounded to the nearest whole cent) determined by
multiplying such fraction by the per share closing price of Parent
Common Stock as reported by the Nasdaq National Market, or other
principal market on which the Parent Stock is traded if it is not at
such time listed on the Nasdaq National Market, on the trading day on
which the Milestone Date occurs (or, if the Milestone Date occurs on a
date that is not a trading day, on the immediately preceding trading
day).
(c) In case prior to the Milestone Date Parent shall (i) pay a
stock dividend or make a distribution on or in respect of Parent Common
Stock in shares of Parent Common Stock, (ii) subdivide the outstanding
shares of Parent Common Stock, (iii) combine the outstanding shares of
Parent Common Stock into a smaller number of shares, or (iv) issue by
reclassification of shares of Parent Common Stock any shares of capital
stock of the Company, then, in any such case, upon a Milestone Event the
Holder of a CVR shall be entitled to receive the number of shares of
capital stock of Parent which Holder would have owned immediately
following such action had the Milestone Event occurred immediately prior
thereto (with any record date requirement being deemed to have been
satisfied).
(d) If Parent shall at any time consolidate with or merge with or
into another Person, or Parent shall sell, transfer or lease all or
substantially all of its assets, or Parent shall change the Parent
Common Stock into property or other securities, then, in any such case,
the Holder of a CVR shall thereupon (and thereafter) be entitled to
receive, upon a Milestone Event, the securities or other property to
which (and upon the same terms and with the same rights as) the Holder
would have been entitled if the Milestone Event had occurred immediately
prior to such consolidation or merger, such sale of assets or such
change (with any record date requirement being deemed to have been
satisfied). Parent shall take such steps in connection with such
consolidation or merger, such sale of assets or such change as may be
necessary to assure such Holder that the provisions of this Agreement
shall thereafter be applicable in relation to any securities or property
thereafter deliverable upon achievement of such Milestone Event,
including, bur not limited to, obtaining a written obligation to supply
such securities or property upon exercise and to be so bound by the
CVRs.
(e) The Parent Common Stock (or other securities, cash or other
property) and cash in lieu of fractional shares issuable pursuant to
this Section 4.1 are referred to collectively herein as the "CVR
Consideration."
(f) Upon the occurrence of each adjustment or readjustment pursuant
to this Section 4.1, Parent at its expense shall promptly compute such
adjustment or readjustment in accordance with the terms hereof and
furnish to each holder of a CVR a certificate setting forth in
reasonable detail the event requiring the adjustment and the amount of
such adjustment.
4.2 Exchange of Certificates. As soon as practicable after the
Milestone Date, Parent shall notify the Rights Agent and the Rights Agent
shall, upon being provided with the notice and instructions for surrender
referred to below. promptly thereafter mail to all Holders of record of
CVRs that were converted into the right to receive CVR Consideration (i)
notice of the occurrence of the Milestone and (ii) instructions for
surrendering their CVR Certificates in exchange for a certificate
representing shares
B-2
of Parent Common Stock and cash in lieu of fractional shares. Upon
surrender of CVR Certificates for cancellation to the Rights Agent,
together with a letter of transmittal (which shall specify that delivery
shall be effected, and risk of loss of, and title to, the CVR Certificates
shall pass, only upon delivery of the CVR Certificates to the Rights Agent)
and other requested documents and in accordance with the instructions
thereon, the Holder of such Certificates shall be entitled to receive in
exchange therefor (a) a certificate representing that number of whole
shares of Parent Common Stock into which the CVRs theretofore represented
by the CVR Certificates so surrendered shall have been converted pursuant
to the provisions of this Agreement and (b) a check in the amount of any
cash due pursuant to Section 4.1(b) or Section 4.4. No interest shall be
paid or shall accrue on any such amounts. Until surrendered in accordance
with the provisions of this Section, each CVR Certificate shall represent
for all purposes only the right to receive CVR Consideration and, if
applicable, amounts under Section 4.4. Shares of Parent Common Stock into
which the CVRs shall be converted at the Milestone Date shall be deemed to
have been issued on the Milestone Date. Subject to Section 6 hereof, if any
certificates representing shares of Parent Common Stock are to be issued in
a name other than that in which the CVR Certificate surrendered is
registered, it shall be a condition of such exchange that the person
requesting such exchange shall deliver to the Rights Agent all documents
necessary to evidence and effect such transfer and shall pay to the Rights
Agent any transfer or other taxes required by reason of the issuance of a
certificate representing shares of Parent Common Stock in a name other than
that of the registered Holder of the CVR Certificate surrendered, or
establish to the satisfaction of the Rights Agent that such tax has been
paid or is not applicable. Beginning the date which is six months following
the Milestone Date, Parent shall act as the Rights Agent and thereafter any
holder of an unsurrendered CVR Certificate shall look solely to Parent for
any amounts to which such Holder may be due, subject to applicable law.
Notwithstanding any other provisions of this Agreement, any portion of the
CVR Consideration remaining unclaimed five years after the Milestone Date
(or such earlier date immediately prior to such time as such amounts would
otherwise escheat to, or become property of, any governmental entity) shall
be returned to the Parent.
4.3 Lost Certificates. If any CVR Certificate shall have been lost,
stolen or destroyed, upon the making of an affidavit of that fact by the
person claiming such CVR Certificate to be lost, stolen or destroyed and,
if required by Parent or the Rights Agent, the posting by such person of a
bond in such reasonable amount as Parent or the Rights Agent may direct as
indemnity against any claim that may be made against it with respect to
such CVR Certificate, the Rights Agent shall deliver in exchange for such
lost, stolen or destroyed CVR Certificate (a) if prior to the Milestone
Date, a new CVR Certificate of like tenor and evidencing the number of CVRs
evidenced by the CVR Certificate so lost, stolen or destroyed or (b) if
after the Milestone Date, the applicable certificates representing shares
of Parent Common Stock, cash in lieu of fractional shares and any amounts
due pursuant to Section 4.4.
4.4 Distributions with Respect to Unexchanged Shares. No dividend or
other distribution declared with respect to Parent Common Stock with a
record date after the Milestone Date shall be paid to holders of
unsurrendered CVR Certificates until such holders surrender such CVR
Certificates. Upon the surrender of such CVR Certificates in accordance
with Section 4.2, there shall be paid to such holders, promptly after such
surrender, the amount of dividends or other distributions, without
interest, declared with a record date after the Milestone Date and not paid
because of the failure to surrender such CVR Certificates for exchange.
4.5 Withholding Rights. Parent shall be entitled to deduct and
withhold from the consideration otherwise payable pursuant to this
Agreement to any Holder of CVRs such amounts as it is required to deduct
and withhold with respect to the making of such payment under any provision
of federal, state, local or foreign tax law. To the extent that amounts are
so withheld by Parent, such withheld amounts shall be treated for all
purposes of this Agreement as having been paid to the Holder of the CVRs in
respect of which such deduction and withholding was made.
B-3
SECTION 5. Non-Transferability and Registration of CVRs.
5.1 The CVRs and any interest therein may not be sold, assigned,
pledged, encumbered, or in any other manner transferred or disposed of, in
whole or in part, other than in accordance with Section 6 hereof.
5.2 The CVRs and the Rights Shares have been registered under the Act
pursuant to the Registration Statement declared effective under the Act.
Parent covenants and agrees:
(a) to prepare and file with the Commission such amendment and
supplements to the Registration Statement and the prospectus used in
connection therewith as may be necessary;
(b) as expeditiously as possible, to register or qualify the CVRs
and the Rights Shares under the securities or "Blue Sky" laws of each
jurisdiction in which such registration or qualification is necessary;
and
(c) to pay all expenses of the Parent in complying with this
Section 5.2, including, without limitation, (A) all registration and
filing fees, (B) all printing expenses, (C) all fees and disbursements
of counsel and independent public accountants for the Parent and (D) all
National Association of Securities Dealers, Inc. ("NASD") and "Blue Sky"
fees and expenses.
SECTION 6. Exchange, Transfer, or Assignment of CVRs.
6.1 CVRs and any interest therein shall not be sold, assigned,
transferred, pledged, encumbered or in any other manner transferred or
disposed of, in whole or in part, other than through a Permitted Transfer
(as defined herein). A "Permitted Transfer" shall mean (i) the transfer of
any or all of the CVRs on death by will or intestacy; (ii) transfer by
instrument to an inter vivos or testamentary trust in which the CVRs are to
be passed to beneficiaries upon the death of the trustee, (iii) transfers
made pursuant to a court order; (iv) if the Holder is a partnership, a
distribution from the transferring partnership to its partners or former
partners in accordance with their partnership interests; (v) if the Holder
is a limited liability company, a distribution from the distributing
limited liability company to its members or former members in accordance
with their interest in the limited liability company, or (vi) a transfer
made by operation of law (including a consolidation or merger) or in
connection with the dissolution of any corporation or other entity.
6.2 In the event of a Permitted Transfer, CVRs may be assigned or
transferred upon surrender of CVR Certificates to the Rights Agent,
accompanied (if so required by Parent or the Rights Agent) by a written
instrument or instruments of transfer in form satisfactory to Parent and
the Rights Agent, duly executed by the registered holder or by a duly
authorized representative or attorney, such signature to be guaranteed by a
member of a recognized guarantee medallion program. Upon any such
registration of transfer, a new CVR Certificate shall be issued to the
transferee and the surrendered CVR Certificate shall be cancelled by the
Rights Agent. CVR Certificates so cancelled shall be delivered by the
Rights Agent to Parent from time to time or otherwise disposed of by the
Rights Agent in its customary manner.
6.3 Any transfer or assignment of CVRs shall be without charge (other
than the cost of any transfer tax) to the holder and any new CVR
Certificates issued pursuant to this Section 6 shall be dated the date of
such transfer or assignment.
SECTION 7. Rights of CVR Certificate Holder. The Holder of any CVR
Certificate or CVR, shall not, by virtue thereof, be entitled to any rights of a
stockholder of Parent, either at law or in equity, and the rights of the Holders
are limited to those expressed in this Agreement.
SECTION 8. Availability of Information. Parent will provide to the Rights
Agent all information and documentation in connection with this Agreement and
the CVRs that the Rights Agent may reasonably request.
SECTION 9. Reservation of Stock. Parent covenants that it will reserve
from its authorized and unissued Parent Common Stock a sufficient number of
shares to provide for the issuance of Parent Common Stock pursuant to the CVRs.
Parent further covenants that all shares that may be issued pursuant to the
B-4
CVRs will be free from all taxes, liens and charges in respect of the issue
thereof. Parent agrees that its issuance of the CVRs shall constitute full
authority to its officers who are charged with the duty of executing stock
certificates to execute and issue the necessary certificates for shares of
Parent Common Stock issuable pursuant hereto and that upon issuance such shares
of Parent Common Stock shall be validly issued, fully paid and non-assessable.
SECTION 10. Duties of Rights Agent. The Rights Agent undertakes the
duties and obligations imposed by this Agreement upon the following terms and
conditions, by all of which Parent and the Holders, by their acceptance hereof,
shall be bound.
10.1 The statements contained herein and in the CVR Certificates
shall be taken as statements of Parent, and the Rights Agent assumes no
responsibility for the correctness of any of the same except such as
describe the Rights Agent or actions taken or to be taken by it. The Rights
Agent assumes no responsibility with respect to the delivery of CVRs and
the CVR Consideration except as herein otherwise provided.
10.2 The Rights Agent shall not be responsible for any failure of
Parent to comply with any of the covenants contained in this Agreement or
in the CVR Certificates to be complied with by Parent.
10.3 The Rights Agent shall not be responsible for (i) determining if
the Milestone Date has occurred, nor (ii) assessing the amount of
Transaction Expenses. Parent shall be responsible for providing this
information to the Rights Agent.
10.4 The Rights Agent may consult at any time with counsel of its own
selection (who may be counsel for Parent), and the Rights Agent shall incur
no liability or responsibility to Parent or to any Holder with respect to
any action taken, suffered, or omitted by it hereunder in good faith and in
accordance with the opinion or the advice of such counsel, provided that
the Rights Agent shall have exercised reasonable care in the selection of
such counsel.
10.5 The Rights Agent shall incur no liability or responsibility to
Parent or to any Holder for any action taken in reliance on any notice,
resolution, waiver, consent, order, certificate, or other paper, document,
or instrument (whether in original or facsimile form) believed by it to be
genuine and to have been signed, sent, or presented by the proper party or
parties. Parent agrees (i) to pay to the Rights Agent reasonable
compensation for all services rendered by the Rights Agent in the execution
of this Agreement and (ii) to reimburse the Rights Agent for all taxes and
governmental charges, reasonable expenses, and other charges of any kind
and nature incurred by the Rights Agent in connection with this Agreement.
Parent shall reimburse the Rights Agent for the reasonable costs of any
counsel engaged by the Rights Agent for the purposes contemplated by
Section 10.4. The Rights Agent shall be paid any compensation or
reimbursement owed to it directly.
10.6 The Holders of at least a majority of the outstanding CVRs may
direct the Rights Agent to act on behalf of the Holders in enforcing any of
their rights hereunder and pursuant to the CVRs. The Rights Agent shall be
under no obligation to institute any action, suit, or legal proceeding or
to take any other action likely to involve material expense unless the
Holders shall furnish the Rights Agent with reasonable security and
indemnity satisfactory to it for any costs and expenses which may be
incurred. All rights of action under this Agreement or under any of the CVR
Certificates may be enforced by the Rights Agent without the possession of
any of the CVR Certificates or the production thereof at any trial or other
proceeding relative thereto, and any such action, suit, or proceeding
instituted by the Rights Agent shall be brought in its name as Rights
Agent, and any recovery of judgment shall be for the ratable benefit of the
registered Holders, as their respective rights or interests may appear.
10.7 The Rights Agent shall act hereunder solely as agent, and its
duties shall be determined solely by the provisions hereof. The Rights
Agent shall not be liable for anything which it may do or refrain from
doing in connection with this Agreement except for its own gross negligence
or willful misconduct.
10.8 Parent agrees to indemnify Rights Agent for, and hold Rights
Agent harmless against, any and all loss, liability, claim, damage or
expense ("Loss") arising out of or in connection with Rights
B-5
Agent's duties under this Agreement, including the costs and expenses of
defending Rights Agent against any Loss, unless such Loss shall have been
determined by a court of competent jurisdiction to be a result of Rights
Agent's own gross negligence or willful misconduct. Rights Agent agrees to
notify Parent in writing of any receipt of an assertion of a claim or any
action commenced against Rights Agent, promptly after the receipt of notice
of such assertion or having been served with the summons or other first
legal process giving information as to the nature and basis of any such
assertion or action. The failure to so notify Parent will not relieve
Parent from liability hereunder unless prejudice is suffered by Parent as a
result of such failure. At its election, Parent may assume the conduct of
Rights Agent's defense in any such action or claim, at its sole cost and
expense. In the event that Parent elects to assume the defense, Parent
shall not be liable for fees and expenses of any counsel thereafter
retained by Rights Agent except in the event Rights Agent determines that
it has defenses different from those of Parent. In no case will Rights
Agent be liable for special, indirect, incidental or consequential loss or
damages of any kind whatsoever (including but not limited to lost profits).
The obligations of Parent under this section shall survive the termination
of this Agreement.
SECTION 11. Change of Rights Agent.
11.1 Any corporation into which the Rights Agent may be merged or
with which it may be consolidated, or any corporation resulting from any
merger or consolidation to which the Rights Agent shall be a party, or any
corporation succeeding to all or substantially all of the corporate trust
business of the Rights Agent, shall be the successor to the Rights Agent
hereunder without the execution or filing of any paper or any further act
on the part of any of the parties hereto.
11.2 The Rights Agent may resign and be discharged from its duties
under this Agreement by giving to Parent notice in writing, specifying a
date when such resignation shall take effect, which notice shall be sent at
least 30 days prior to the date so specified. If the Rights Agent shall
resign or otherwise become incapable of acting, Parent shall appoint a
successor to the Rights Agent. If no successor is appointed within 30 days
of the resignation date, Rights Agent may petition a court for the
appointment of a successor. After appointment the successor Rights Agent
shall be vested with the same powers, rights, duties, and responsibilities
as if it had been originally named as Rights Agent without further act or
deed; but the former Rights Agent shall deliver and transfer to the
successor Rights Agent copies of all books, records, plans, and other
documents in the former Rights Agent's possession relating to the CVRs or
this Agreement and execute and deliver any further assurance, conveyance,
act, or deed necessary for the purpose. Failure to give any notice provided
for in this Section 11.2 or any defect therein, shall not affect the
legality or validity of the resignation or removal of the Rights Agent or
the appointment of the successor Rights Agent, as the case may be.
SECTION 12. Termination.
12.1 This Agreement shall terminate six months after the Milestone
Date or, if the Milestone Date shall not have occurred prior to
[ ], 2008, on such date (the "Termination Date").
12.2 Notwithstanding the provisions of Section 12.1 above, if the
Milestone Date shall have occurred prior to the Termination Date, the
termination of this Agreement shall not terminate the rights of the Holders
to receive the CVR Consideration from the Parent in accordance with the
terms of the CVR Certificate.
SECTION 13. Successors. All covenants and provisions of this Agreement by
or for the benefit of Parent, the Rights Agent, or the Holders shall bind and
inure to the benefit of their respective successors, assigns, heirs, and
personal representatives.
SECTION 14. Counterparts. This Agreement may be executed in any number of
counterparts; and each of such counterparts shall for all purposes be deemed to
be an original, and all such counterparts shall together constitute one and the
same agreement.
B-6
SECTION 15. Headings. The headings of sections of this Agreement have
been inserted for convenience of reference only, are not to be considered a part
hereof, and shall in no way modify or restrict any of the terms or provisions
hereof.
SECTION 16. Amendments. This Agreement may be amended by the written
consent of Parent and the affirmative vote or the written consent of holders
holding not less than a majority-in-interest of the then outstanding CVRs;
provided, however, that no such modification or amendment to this Agreement may,
without the consent of each Holder affected thereby, change in manner adverse to
the Holders, (a) any provision contained herein with respect to termination of
this Agreement or the CVRs, (b) the amount of CVR Consideration to be issued
according to the terms of this Agreement to the Holders of the CVRs, or (c) the
provisions of this Section 16. Notwithstanding the foregoing, Parent and the
Rights Agent may from time to time supplement or amend this Agreement, without
the approval of any Holder, in order to cure any ambiguity or to correct or
supplement any provision contained in this Agreement which may be defective or
inconsistent with any other provision in this Agreement, or to make any other
provisions in regard to matters or questions arising under this Agreement which
Parent and the Rights Agent may deem necessary or desirable and which shall not
be inconsistent with the provisions of the CVRs and which shall not adversely
affect the interests of the Holders.
SECTION 17. Notices. Any notice required to be given hereunder shall be
sufficient if in writing and sent by facsimile transmission, by courier or other
national overnight express mail service (with proof of service), hand delivery,
or certified or registered mail (return receipt requested and first-class
postage prepaid), addressed as follows:
If to Parent:
OSI Pharmaceuticals Inc.
58 South Service Road, Suite 110
Melville, New York 11747
Facsimile No: (631) 293-2218
Attention: Barbara A. Wood, Esq.
If to the Rights Agent:
The Bank of New York
101 Barclay Street
New York, NY 10286
Fax: (212) 815-6979
SECTION 18. Benefits of this Agreement. Nothing in this Agreement shall
be construed to give to any person or corporation, other than Parent, the Rights
Agent, and the registered Holders, any legal or equitable right, remedy, or
claim under this Agreement; but this Agreement shall be for the sole and
exclusive benefit of Parent, the Rights Agent, and the registered Holders.
SECTION 19. Governing Law; Submission to Jurisdiction. This Agreement
shall be governed by and construed in accordance with the laws of the State of
New York without regard to its rules of conflict of laws. The parties hereto
agree that any suit, action, or proceeding seeking to enforce any provision of,
or based on any matter arising out of, this Agreement may be brought in the
United States District Court for the District of New York, and each of the
parties hereby consents to the jurisdiction of such courts (and of the
appropriate appellate courts) in any such suit, action, or proceeding and
irrevocably waives any objection which it may now or hereafter have to the
laying of the venue of any such suit, action, or proceeding in any such court or
that any such suit, action, or proceeding which is brought in any such court has
been brought in an inconvenient forum. Process in any such suit, action, or
proceeding may be served on any party anywhere in the world, whether within or
without the jurisdiction of any such court. Without limiting the foregoing, each
party agrees that service of process on such party in the manner provided for
notices in Section 17 shall be deemed effective service of process on such
party.
B-7
IN WITNESS WHEREOF, the parties hereto have executed this Agreement and
caused the same to be duly delivered on their behalf on the day and year first
written above.
OSI PHARMACEUTICALS, INC.
By:
--------------------------------------
Name:
Title:
THE BANK OF NEW YORK, as Rights Agent
By:
--------------------------------------
Name:
Title:
B-8
EXHIBIT A
[FORM OF CONTINGENT VALUE RIGHTS CERTIFICATE]
OSI PHARMACEUTICALS, INC.
CONTINGENT VALUE RIGHTS TO RECEIVE SHARES OF COMMON STOCK
THIS CERTIFIES THAT, FOR VALUE RECEIVED, , or its permitted
assigns, is the registered holder of [ ] Contingent Value Rights
("CVRs"). Each CVR entitles the holder thereof to receive from OSI
Pharmaceuticals, Inc., a Delaware corporation ("Parent"), subject to the terms
and conditions set forth hereinafter and in the Continent Value Rights
Agreement, dated , 2003, between Parent and The Bank of New York
("CVR Agreement"), 0.0400 shares (the "CVR Shares") of Parent's common stock,
$0.01 par value per share (the "Common Stock") on the Milestone Date (as defined
in the CVR Agreement).
REFERENCE IS MADE TO THE PROVISIONS OF THIS CVR CERTIFICATE SET FORTH ON
THE REVERSE SIDE HEREOF, AND SUCH FURTHER PROVISIONS SHALL FOR ALL PURPOSES HAVE
THE SAME EFFECT AS THOUGH FULLY SET FORTH ON THE FRONT OF THIS CERTIFICATE.
This CVR Certificate shall be governed by and construed in accordance with
the laws of the State of Delaware.
IN WITNESS WHEREOF, Parent has caused this CVR Certificate to be executed
by its duly authorized officer.
OSI PHARMACEUTICALS, INC.
By:
--------------------------------------
Title:
Countersigned:
THE BANK OF NEW YORK
By:
--------------------------------------
Title: ----------, as Rights Agent
Dated:
- ------------------------------------
B-9
[REVERSE SIDE]
This CVR Certificate is subject to all of the terms, provisions and
conditions of the Contingent Value Rights Agreement, dated as of
, 2003 (the "CVR Agreement"), between Parent and the Rights
Agent, to all of which terms, provisions and conditions the registered holder of
the CVR consents by acceptance hereof. The CVR Agreement and certain definitions
included in the Agreement and Plan of Merger, dated as of February 7, 2003 (the
"Merger Agreement"), by and among Parent, CP Merger Corporation and Cell
Pathways, Inc. are incorporated herein by reference and made part hereof and
reference is made to the CVR Agreement and the Merger Agreement for a full
description of the rights, limitations of rights, obligations, duties and
immunities of the Rights Agent, Parent and the holders of the CVR Certificates.
Copies of the CVR Agreement and the Merger Agreement are available for
inspection at the principal office of the Rights Agent or may be obtained upon
written request addressed to the Rights Agent at its principal office at
[ ].
Parent shall not be required upon maturity of the CVRs evidenced by this
CVR Certificate to issue fractional shares, but shall make adjustment therefor
in cash as provided in the CVR Agreement.
Parent has filed and caused to become effective a registration statement
under the Securities Act of 1933, as amended, covering the CVRs and CVR Shares
and has agreed to register or qualify the CVRs and the CVR Shares to be
delivered upon maturity of the CVRs under the laws of each jurisdiction in which
such registration or qualification is necessary.
THIS CVR CERTIFICATE IS NOT TRANSFERABLE OR ASSIGNABLE OTHER THAN (1) ON
DEATH BY WILL OR INTESTACY; (2) TO AN INTER VIVOS OR TESTAMENTARY TRUST IN WHICH
THE CVRs ARE TO BE PASSED TO BENEFICIARIES UPON THE DEATH OF THE TRUSTEE, (3)
PURSUANT TO A COURT ORDER; (4) IF THE HOLDER IS A PARTNERSHIP, FROM THE
TRANSFERRING PARTNERSHIP TO ITS PARTNERS OR FORMER PARTNERS IN ACCORDANCE WITH
THEIR PARTNERSHIP INTERESTS; (5) IF THE HOLDER IS A LIMITED LIABILITY COMPANY,
FROM THE DISTRIBUTING LIMITED LIABILITY COMPANY TO ITS MEMBERS OR FORMER MEMBERS
IN ACCORDANCE WITH THEIR INTEREST IN THE LIMITED LIABILITY COMPANY, OR (6) BY
OPERATION OF LAW (INCLUDING A CONSOLIDATION OR MERGER) OR IN CONNECTION WITH THE
DISSOLUTION OF ANY CORPORATION OR OTHER ENTITY.
The holder of this CVR Certificate shall not, by virtue hereof, be entitled
to any of the rights of a stockholder in Parent, either at law or in equity, and
the rights of the holder are limited to those expressed in the CVR Agreement.
Every holder of this CVR Certificate, by accepting the same, consents and
agrees with Parent, the Rights Agent and with every other holder of a CVR
Certificate that Parent and the Rights Agent may deem and treat the person in
whose name this CVR Certificate is registered as the absolute owner hereof
(notwithstanding any notation of ownership or other writing hereon made by
anyone other than Parent or the Rights Agent) for all purposes whatsoever and
neither Parent nor the Rights Agent shall be affected by any notice to the
contrary.
This CVR Certificate shall not be valid or obligatory for any purpose until
it shall have been countersigned by the Rights Agent.
The CVR Agreement and this CVR Certificate shall be governed by and
construed in accordance with the laws of the State of New York without regard to
its rules of conflict of laws.
The following abbreviations, when used in the inscription on the face of
this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM, as tenants in common
TEN ENT, as tenants by the entireties
JT TEN, as joint tenants with right of survivorship and not as tenants in common
B-10
COM PROP, as community property
UNIF GIFT MIN ACT, Custodian (Cust) (Minor) under
Uniform Gifts to Minors Act (State)
Additional abbreviations may also be used though not in the above list.
For value received hereby sell, assign and transfer unto
Shares represented by the within Certificate, and do hereby
irrevocably constitute and appoint Attorney to transfer the said
Shares on the books of the within named Corporation with full power of
substitution in the premises.
Dated
- --------------------------------------------------
In the presence of
- -------------------------------------
- -------------------------------------
B-11
ANNEX C
[LETTERHEAD OF CIBC WORLD MARKETS CORP.]
February 6, 2003
The Board of Directors
Cell Pathways, Inc.
702 Electronic Drive
Horsham, Pennsylvania 19044
Members of the Board:
You have asked CIBC World Markets Corp. ("CIBC World Markets") to render a
written opinion ("Opinion") to the Board of Directors of Cell Pathways, Inc.
("Cell Pathways") as to the fairness, from a financial point of view, to the
holders of the common stock of Cell Pathways of the Merger Consideration (as
defined below) provided for in an Agreement and Plan of Merger to be entered
into among OSI Pharmaceuticals, Inc. ("OSI"), CP Merger Corporation, a wholly
owned subsidiary of OSI ("Merger Sub"), and Cell Pathways (the "Merger
Agreement"). The Merger Agreement provides for, among other things, the merger
of Merger Sub with and into Cell Pathways (the "Merger") pursuant to which each
outstanding share of the common stock, par value $0.01 per share, of Cell
Pathways ("Cell Pathways Common Stock") will be converted into the right to
receive (i) 0.0567 of a share of the common stock, par value $0.01 per share, of
OSI ("OSI Common Stock") and (ii) a five-year contingent value right ("CVR") for
..0400 of a share of OSI Common Stock upon the occurrence of specified milestones
relating to certain product candidates of Cell Pathways as more fully described
in the form of CVR attached as an exhibit to the Merger Agreement (collectively,
the "Merger Consideration").
In arriving at our Opinion, we:
(a) reviewed a draft dated February 6, 2003 of the Merger Agreement
and form of CVR attached as an exhibit thereto;
(b) reviewed audited financial statements of Cell Pathways for the
fiscal years ended December 31, 1999, December 31, 2000 and December 31,
2001 and audited financial statements of OSI for the fiscal years ended
September 30, 2000, September 30, 2001 and September 30, 2002;
(c) reviewed unaudited financial statements of Cell Pathways for the
fiscal year ended December 31, 2002 and discussed with the management of
OSI estimated financial results for OSI for the three-month period from
September 30, 2002 through December 31, 2002;
(d) reviewed financial forecasts relating to Cell Pathways and OSI
prepared by the management of Cell Pathways and discussed with us by the
managements of Cell Pathways and OSI;
(e) reviewed historical market prices and trading volume for Cell
Pathways Common Stock and OSI Common Stock;
(f) held discussions with the senior managements of Cell Pathways and
OSI with respect to the businesses and prospects of Cell Pathways and OSI,
including, in the case of Cell Pathways, the liquidity needs of, and
capital resources available to, Cell Pathways and the potential strategic
and operational benefits to Cell Pathways of the Merger;
(g) contacted, at the direction of Cell Pathways, selected third
parties to solicit indications of interest in a possible acquisition of or
investment in Cell Pathways and held discussions with the management of
Cell Pathways as to the results of its solicitation of third parties
regarding a possible acquisition of or investment in Cell Pathways and
exploration of other strategic and financial alternatives;
C-1
The Board of Directors
Cell Pathways, Inc.
February 6, 2003
Page 2
(h) reviewed and analyzed certain publicly available financial data
for selected companies we deemed comparable to Cell Pathways and OSI;
(i) reviewed the premiums paid, based on publicly available
information, in transactions with transaction values comparable to the
Merger;
(j) analyzed the estimated liquidation value of Cell Pathways using
certain assumptions and estimates provided to or discussed with us by the
management of Cell Pathways as to the current market value of Cell
Pathways' assets and the amount of Cell Pathways' liabilities;
(k) analyzed the estimated present value of the unlevered, after-tax
free cash flows and estimated present value of the future trading price of
OSI using financial forecasts, including certain assumptions of future
performance contained therein, prepared by the management of Cell Pathways
and discussed with us by the managements of Cell Pathways and OSI;
(l) reviewed certain potential pro forma financial effects of the
Merger on OSI based on financial forecasts prepared by the management of
Cell Pathways and discussed with us by the managements of Cell Pathways and
OSI;
(m) reviewed public information concerning Cell Pathways and OSI; and
(n) performed such other analyses and reviewed such other information
as we deemed appropriate.
In rendering our Opinion, we relied upon and assumed, without independent
verification or investigation, the accuracy and completeness of all of the
financial and other information provided to or discussed with us by Cell
Pathways, OSI and their respective employees, representatives and affiliates.
With respect to financial forecasts relating to Cell Pathways and OSI which were
prepared by the management of Cell Pathways and discussed with us by the
managements of Cell Pathways and OSI, we have assumed at the direction of the
management of Cell Pathways, without independent verification or investigation,
that such financial forecasts were reasonably prepared on bases reflecting the
best available information, estimates and judgments of the management of Cell
Pathways as to the future financial condition and operating results of Cell
Pathways and OSI and the other matters covered thereby. We have relied, at the
direction of the managements of Cell Pathways and OSI, without independent
verification or investigation, upon the assessments of the managements of Cell
Pathways and OSI as to the existing and future technology and product candidates
of Cell Pathways and OSI and the risks associated with such technology and
product candidates. We also have relied, at the direction of the management of
Cell Pathways, without independent verification or investigation, upon the
assessments of the management of Cell Pathways as to the probability that the
future financial results reflected in the financial forecasts prepared by the
management of Cell Pathways with respect to Cell Pathways and OSI (including,
without limitation, the estimated revenue expected to be generated from product
candidates of Cell Pathways and OSI) will be realized and, if realized, the
amount and timing thereof. We have assumed, with the consent of Cell Pathways,
that the Merger will be treated as a reorganization for federal income tax
purposes. We also have assumed, with the consent of Cell Pathways, that the
Merger will be consummated in accordance with its terms without waiver,
modification or amendment of any material term, condition or agreement and that,
in the course of obtaining the necessary regulatory or third party consents and
approvals for the Merger, no limitations, restrictions or conditions will be
imposed that would have an adverse effect on Cell Pathways, OSI or the
contemplated benefits of the Merger. In addition, representatives of Cell
Pathways have advised us, and we therefore have assumed, that the final terms of
the Merger Agreement (including the CVR attached as an exhibit thereto) will not
vary materially from those set forth in the draft reviewed by us. We have
neither made nor obtained any independent evaluations or appraisals of the
assets or liabilities, contingent or otherwise, of Cell Pathways or OSI. We are
not expressing any opinion as to the underlying valuation, future performance or
long-term viability of Cell Pathways or OSI,
C-2
The Board of Directors
Cell Pathways, Inc.
February 6, 2003
Page 3
or the prices at which OSI Common Stock or the CVRs will trade or otherwise be
transferable at any time. We express no view as to, and our Opinion does not
address, the underlying business decision of Cell Pathways to effect the Merger
nor does our Opinion address the relative merits of the Merger as compared to
any alternative business strategies that might exist for Cell Pathways or the
effect of any other transaction in which Cell Pathways might engage. Our Opinion
is necessarily based on the information available to us and general economic,
financial and stock market conditions and circumstances as they exist and can be
evaluated by us on the date hereof. It should be understood that, although
subsequent developments may affect this Opinion, we do not have any obligation
to update, revise or reaffirm the Opinion.
As part of our investment banking business, we are regularly engaged in
valuations of businesses and securities in connection with acquisitions and
mergers, underwritings, secondary distributions of securities, private
placements and valuations for other purposes.
We have acted as financial advisor to the Board of Directors of Cell
Pathways with respect to the Merger and this Opinion and will receive a fee for
our services, a significant portion of which is contingent upon consummation of
the Merger. We also will receive a fee upon the delivery of this Opinion. In the
ordinary course of business, CIBC World Markets and its affiliates may actively
trade the securities of Cell Pathways and OSI for their own account and for the
accounts of customers and, accordingly, may at any time hold a long or short
position in such securities.
Based upon and subject to the foregoing, and such other factors as we
deemed relevant, it is our opinion that, as of the date hereof, the Merger
Consideration is fair, from a financial point of view, to the holders of Cell
Pathways Common Stock. This Opinion is for the use of the Board of Directors of
Cell Pathways in its evaluation of the Merger and does not constitute a
recommendation as to how any stockholder should vote or act with respect to any
matters relating to the Merger.
Very truly yours,
/s/ CIBC WORLD MARKETS CORP.
CIBC WORLD MARKETS CORP.
C-3
The Board of Directors
Cell Pathways, Inc.
February 6, 2003
Page 4
ANNEX D
SECTION 262 OF THE DELAWARE GENERAL CORPORATION LAW
THE DELAWARE GENERAL CORPORATION LAW
SECTION 262 APPRAISAL RIGHTS
(a) Any stockholder of a corporation of this State who holds shares of
stock on the date of the making of a demand pursuant to subsection (d) of this
section with respect to such shares, who continuously holds such shares through
the effective date of the merger or consolidation, who has otherwise complied
with subsection (d) of this section and who has neither voted in favor of the
merger or consolidation nor consented thereto in writing pursuant to sec. 228 of
this title shall be entitled to an appraisal by the Court of Chancery of the
fair value of the stockholder's shares of stock under the circumstances
described in subsections (b) and (c) of this section. As used in this section,
the word "stockholder" means a holder of record of stock in a stock corporation
and also a member of record of a nonstock corporation; the words "stock" and
"share" mean and include what is ordinarily meant by those words and also
membership or membership interest of a member of a nonstock corporation; and the
words "depository receipt" mean a receipt or other instrument issued by a
depository representing an interest in one or more shares, or fractions thereof,
solely of stock of a corporation, which stock is deposited with the depository.
(b) Appraisal rights shall be available for the shares of any class or
series of stock of a constituent corporation in a merger or consolidation to be
effected pursuant to sec. 251 (other than a merger effected pursuant to
sec. 251(g) of this title), sec. 252, sec. 254, sec. 257, sec. 258, sec. 263 or
sec. 264 of this title:
(1) Provided, however, that no appraisal rights under this section
shall be available for the shares of any class or series of stock, which
stock, or depository receipts in respect thereof, at the record date fixed
to determine the stockholders entitled to receive notice of and to vote at
the meeting of stockholders to act upon the agreement of merger or
consolidation, were either (i) listed on a national securities exchange or
designated as a national market system security on an interdealer quotation
system by the National Association of Securities Dealers, Inc. or (ii) held
of record by more than 2,000 holders; and further provided that no
appraisal rights shall be available for any shares of stock of the
constituent corporation surviving a merger if the merger did not require
for its approval the vote of the stockholders of the surviving corporation
as provided in subsection (f) of sec. 251 of this title.
(2) Notwithstanding paragraph (1) of this subsection, appraisal rights
under this section shall be available for the shares of any class or series
of stock of a constituent corporation if the holders thereof are required
by the terms of an agreement of merger or consolidation pursuant to
sec.sec. 251, 252, 254, 257, 258, 263 and 264 of this title to accept for
such stock anything except:
a. Shares of stock of the corporation surviving or resulting from
such merger or consolidation, or depository receipts in respect thereof;
b. Shares of stock of any other corporation, or depository receipts
in respect thereof, which shares of stock (or depository receipts in
respect thereof) or depository receipts at the effective date of the
merger or consolidation will be either listed on a national securities
exchange or designated as a national market system security on an
interdealer quotation system by the National Association of Securities
Dealers, Inc. or held of record by more than 2,000 holders;
c. Cash in lieu of fractional shares or fractional depository
receipts described in the foregoing subparagraphs a. and b. of this
paragraph; or
d. Any combination of the shares of stock, depository receipts and
cash in lieu of fractional shares or fractional depository receipts
described in the foregoing subparagraphs a., b. and c. of this
paragraph.
D-1
(3) In the event all of the stock of a subsidiary Delaware corporation
party to a merger effected under sec. 253 of this title is not owned by the
parent corporation immediately prior to the merger, appraisal rights shall
be available for the shares of the subsidiary Delaware corporation.
(c) Any corporation may provide in its certificate of incorporation that
appraisal rights under this section shall be available for the shares of any
class or series of its stock as a result of an amendment to its certificate of
incorporation, any merger or consolidation in which the corporation is a
constituent corporation or the sale of all or substantially all of the assets of
the corporation. If the certificate of incorporation contains such a provision,
the procedures of this section, including those set forth in subsections (d) and
(e) of this section, shall apply as nearly as is practicable.
(d) Appraisal rights shall be perfected as follows:
(1) If a proposed merger or consolidation for which appraisal rights
are provided under this section is to be submitted for approval at a
meeting of stockholders, the corporation, not less than 20 days prior to
the meeting, shall notify each of its stockholders who was such on the
record date for such meeting with respect to shares for which appraisal
rights are available pursuant to subsection (b) or (c) hereof that
appraisal rights are available for any or all of the shares of the
constituent corporations, and shall include in such notice a copy of this
section. Each stockholder electing to demand the appraisal of such
stockholder's shares shall deliver to the corporation, before the taking of
the vote on the merger or consolidation, a written demand for appraisal of
such stockholder's shares. Such demand will be sufficient if it reasonably
informs the corporation of the identity of the stockholder and that the
stockholder intends thereby to demand the appraisal of such stockholder's
shares. A proxy or vote against the merger or consolidation shall not
constitute such a demand. A stockholder electing to take such action must
do so by a separate written demand as herein provided. Within 10 days after
the effective date of such merger or consolidation, the surviving or
resulting corporation shall notify each stockholder of each constituent
corporation who has complied with this subsection and has not voted in
favor of or consented to the merger or consolidation of the date that the
merger or consolidation has become effective; or
(2) If the merger or consolidation was approved pursuant to sec. 228
or sec. 253 of this title, then, either a constituent corporation before
the effective date of the merger or consolidation, or the surviving or
resulting corporation within ten days thereafter, shall notify each of the
holders of any class or series of stock of such constituent corporation who
are entitled to appraisal rights of the approval of the merger or
consolidation and that appraisal rights are available for any or all shares
of such class or series of stock of such constituent corporation, and shall
include in such notice a copy of this section. Such notice may, and, if
given on or after the effective date of the merger or consolidation, shall,
also notify such stockholders of the effective date of the merger or
consolidation. Any stockholder entitled to appraisal rights may, within
twenty days after the date of mailing of such notice, demand in writing
from the surviving or resulting corporation the appraisal of such holder's
shares. Such demand will be sufficient if it reasonably informs the
corporation of the identity of the stockholder and that the stockholder
intends thereby to demand the appraisal of such holder's shares. If such
notice did not notify stockholders of the effective date of the merger or
consolidation, either (i) each such constituent corporation shall send a
second notice before the effective date of the merger or consolidation
notifying each of the holders of any class or series of stock of such
constituent corporation that are entitled to appraisal rights of the
effective date of the merger or consolidation or (ii) the surviving or
resulting corporation shall send such a second notice to all such holders
on or within 10 days after such effective date; provided, however, that if
such second notice is sent more than 20 days following the sending of the
first notice, such second notice need only be sent to each stockholder who
is entitled to appraisal rights and who has demanded appraisal of such
holder's shares in accordance with this subsection. An affidavit of the
secretary or assistant secretary or of the transfer agent of the
corporation that is required to give either notice that such notice has
been given shall, in the absence of fraud, be prima facie evidence of the
facts stated therein. For purposes of determining the stockholders entitled
to receive either notice, each constituent corporation may fix, in advance,
a record date that shall be not more than 10 days prior to the date the
notice is given, provided, that if the notice is given on or after the
effective date of the merger or consolidation, the record date shall
D-2
be such effective date. If no record date is fixed and the notice is given
prior to the effective date, the record date shall be the close of business
on the day next preceding the day on which the notice is given.
(e) Within 120 days after the effective date of the merger or
consolidation, the surviving or resulting corporation or any stockholder who has
complied with subsections (a) and (d) hereof and who is otherwise entitled to
appraisal rights, may file a petition in the Court of Chancery demanding a
determination of the value of the stock of all such stockholders.
Notwithstanding the foregoing, at any time within 60 days after the effective
date of the merger or consolidation, any stockholder shall have the right to
withdraw such stockholder's demand for appraisal and to accept the terms offered
upon the merger or consolidation. Within 120 days after the effective date of
the merger or consolidation, any stockholder who has complied with the
requirements of subsections (a) and (d) hereof, upon written request, shall be
entitled to receive from the corporation surviving the merger or resulting from
the consolidation a statement setting forth the aggregate number of shares not
voted in favor of the merger or consolidation and with respect to which demands
for appraisal have been received and the aggregate number of holders of such
shares. Such written statement shall be mailed to the stockholder within 10 days
after such stockholder's written request for such a statement is received by the
surviving or resulting corporation or within 10 days after expiration of the
period for delivery of demands for appraisal under subsection (d) hereof,
whichever is later.
(f) Upon the filing of any such petition by a stockholder, service of a
copy thereof shall be made upon the surviving or resulting corporation, which
shall within 20 days after such service file in the office of the Register in
Chancery in which the petition was filed a duly verified list containing the
names and addresses of all stockholders who have demanded payment for their
shares and with whom agreements as to the value of their shares have not been
reached by the surviving or resulting corporation. If the petition shall be
filed by the surviving or resulting corporation, the petition shall be
accompanied by such a duly verified list. The Register in Chancery, if so
ordered by the Court, shall give notice of the time and place fixed for the
hearing of such petition by registered or certified mail to the surviving or
resulting corporation and to the stockholders shown on the list at the addresses
therein stated. Such notice shall also be given by 1 or more publications at
least 1 week before the day of the hearing, in a newspaper of general
circulation published in the City of Wilmington, Delaware or such publication as
the Court deems advisable. The forms of the notices by mail and by publication
shall be approved by the Court, and the costs thereof shall be borne by the
surviving or resulting corporation.
(g) At the hearing on such petition, the Court shall determine the
stockholders who have complied with this section and who have become entitled to
appraisal rights. The Court may require the stockholders who have demanded an
appraisal for their shares and who hold stock represented by certificates to
submit their certificates of stock to the Register in Chancery for notation
thereon of the pendency of the appraisal proceedings; and if any stockholder
fails to comply with such direction, the Court may dismiss the proceedings as to
such stockholder.
(h) After determining the stockholders entitled to an appraisal, the Court
shall appraise the shares, determining their fair value exclusive of any element
of value arising from the accomplishment or expectation of the merger or
consolidation, together with a fair rate of interest, if any, to be paid upon
the amount determined to be the fair value. In determining such fair value, the
Court shall take into account all relevant factors. In determining the fair rate
of interest, the Court may consider all relevant factors, including the rate of
interest which the surviving or resulting corporation would have had to pay to
borrow money during the pendency of the proceeding. Upon application by the
surviving or resulting corporation or by any stockholder entitled to participate
in the appraisal proceeding, the Court may, in its discretion, permit discovery
or other pretrial proceedings and may proceed to trial upon the appraisal prior
to the final determination of the stockholder entitled to an appraisal. Any
stockholder whose name appears on the list filed by the surviving or resulting
corporation pursuant to subsection (f) of this section and who has submitted
such stockholder's certificates of stock to the Register in Chancery, if such is
required, may participate fully in all proceedings until it is finally
determined that such stockholder is not entitled to appraisal rights under this
section.
(i) The Court shall direct the payment of the fair value of the shares,
together with interest, if any, by the surviving or resulting corporation to the
stockholders entitled thereto. Interest may be simple or
D-3
compound, as the Court may direct. Payment shall be so made to each such
stockholder, in the case of holders of uncertificated stock forthwith, and the
case of holders of shares represented by certificates upon the surrender to the
corporation of the certificates representing such stock. The Court's decree may
be enforced as other decrees in the Court of Chancery may be enforced, whether
such surviving or resulting corporation be a corporation of this State or of any
state.
(j) The costs of the proceeding may be determined by the Court and taxed
upon the parties as the Court deems equitable in the circumstances. Upon
application of a stockholder, the Court may order all or a portion of the
expenses incurred by any stockholder in connection with the appraisal
proceeding, including, without limitation, reasonable attorney's fees and the
fees and expenses of experts, to be charged pro rata against the value of all
the shares entitled to an appraisal.
(k) From and after the effective date of the merger or consolidation, no
stockholder who has demanded such stockholder's appraisal rights as provided in
subsection (d) of this section shall be entitled to vote such stock for any
purpose or to receive payment of dividends or other distributions on the stock
(except dividends or other distributions payable to stockholders of record at a
date which is prior to the effective date of the merger or consolidation);
provided, however, that if no petition for an appraisal shall be filed within
the time provided in subsection (e) of this section, or if such stockholder
shall deliver to the surviving or resulting corporation a written withdrawal of
such stockholder's demand for an appraisal and an acceptance of the merger or
consolidation, either within 60 days after the effective date of the merger or
consolidation as provided in subsection (e) of this section or thereafter with
the written approval of the corporation, then the right of such stockholder to
an appraisal shall cease. Notwithstanding the foregoing, no appraisal proceeding
in the Court of Chancery shall be dismissed as to any stockholder without the
approval of the Court, and such approval may be conditioned upon such terms as
the Court deems just.
(l) The shares of the surviving or resulting corporation to which the
shares of such objecting stockholders would have been converted had they
assented to the merger or consolidation shall have the status of authorized and
unissued shares of the surviving or resulting corporation.
D-4
REVOCABLE PROXY
CELL PATHWAYS, INC.
[X] PLEASE MARK VOTES AS IN THIS EXAMPLE
SPECIAL MEETING OF STOCKHOLDERS
JUNE 10, 2003
The undersigned stockholder of Cell Pathways, Inc. ("Cell Pathways"),
revoking all prior proxies, hereby appoints Robert J. Towarnicki and Brian J.
Hayden, or either of them acting singly, proxies, with full power of
substitution to vote all shares of capital stock of Cell Pathways which the
undersigned is entitled to vote at the special meeting of stockholders to be
held on Tuesday, June 10, 2003 at 9:00 a.m., local time, at the Philadelphia
Marriott West located at 111 Crawford Avenue, West Conshohocken, Pennsylvania,
upon matters set forth in the Notice of Special Meeting of Stockholders dated
May 6, 2003, and the related proxy statement/prospectus, copies of which have
been received by the undersigned, and in their discretion upon any other
business that may properly be brought before the meeting by the Cell Pathways
Board of Directors. Attendance of the undersigned at the meeting or any
adjourned or postponed session thereof will not be deemed to revoke this proxy
unless the undersigned shall affirmatively indicate the intention of the
undersigned to vote the shares represented hereby in person prior to the
exercise of this proxy.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE "FOR" PROPOSAL 1.
For Against Abstain
1. To adopt the Agreement and Plan of Merger dated as of February 7, 2003, among OSI [ ] [ ] [ ]
Pharmaceuticals, Inc., CP Merger Corporation and Cell Pathways, Inc.
This proxy, when properly executed, will be voted in accordance with the
specifications made herein. IF NO SPECIFICATION IS MADE, THIS PROXY WILL BE
VOTED "FOR" PROPOSAL 1. In the event that a quorum is not present at the special
meeting, the proxies named herein may propose and vote for one or more
adjournments of the special meeting to permit further solicitations of proxies.
No proxy voted against Proposal 1 will be voted in favor of any such adjournment
or postponement. All prior proxies are hereby revoked. This proxy may be revoked
prior to its exercise by filing with the Secretary of Cell Pathways a duly
executed proxy bearing a later date or an instrument revoking this proxy, or by
attending the meeting and electing to vote in person.
Please sign your proxy exactly as your name appears on the certificate.
When signing as attorney, executor, administrator, trustee or guardian, give
title as such. If owner is a corporation, sign full corporate name by a duly
authorized officer.
If two or more persons are named as owners, both or all should sign.
Please be sure to sign and date this proxy in the box below.
THIS PROXY IS SOLICITED ON BEHALF OF THE CELL PATHWAYS BOARD OF DIRECTORS.
PLEASE ACT PROMPTLY - SIGN, DATE & MAIL YOUR PROXY CARD TODAY.
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Stockholder sign above
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Co-Holder (if any)
Dated , 2003
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Mark here if you plan to attend the meeting [ ]
IF YOUR ADDRESS HAS CHANGED, PLEASE CORRECT THE ADDRESS IN THE SPACE PROVIDED
BELOW AND RETURN THIS PORTION WITH THE PROXY IN THE ENVELOPE PROVIDED.
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