<PAGE> 1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND
EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND
EXCHANGE ACT OF 1934
Commission File Number: 0-28310
SIBIA Neurosciences, Inc.
------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 95-3616229
- ------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
505 Coast Boulevard South, Suite 300, La Jolla, CA 92037
- ------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(619) 452-5892
------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
- ------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirement for the past 90 days. Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at July 31, 1998
----- ----------------------------
Common Stock, $.001 par value 9,453,013
<PAGE> 2
SIBIA Neurosciences, Inc.
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
PART I. FINANCIAL INFORMATION
ITEM 1. Condensed Financial Statements
Condensed Balance Sheet as of June 30, 1998 (Unaudited) and
December 31, 1997.....................................................3
Condensed Statement of Operations and Comprehensive Loss
(Unaudited) for the Three Months and Six Months Ended June
30, 1998 and 1997.....................................................4
Condensed Statement of Cash Flows (Unaudited) for the Six Months
Ended June 30, 1998 and 1997.........................................5
Notes to Financial Statements (Unaudited)...............................6
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.............................................8
ITEM 3. Quantitative and Qualitative Disclosure About Market Risk..............10
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings .....................................................11
ITEM 2. Changes in Securities and Use of Proceeds..............................11
ITEM 3. Defaults Upon Senior Securities........................................11
ITEM 4. Submission of Matters to a Vote of Security Holders....................12
ITEM 5. Other Information......................................................12
ITEM 6. Exhibits and Reports on Form 8-K.......................................12
SIGNATURE......................................................................13
</TABLE>
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. Condensed Financial Statements
SIBIA NEUROSCIENCES, INC.
CONDENSED BALANCE SHEET
<TABLE>
<CAPTION>
June 30, 1998 December 31, 1997
------------- -----------------
(Unaudited)
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents ............................................... $ 6,038,000 $ 4,972,000
Investment securities ................................................... 19,886,000 28,375,000
Contracts and accounts receivable ....................................... 263,000 588,000
Prepaid expenses and other current assets ............................... 597,000 550,000
------------ ------------
Total current assets ............................................ 26,784,000 34,485,000
Property and equipment, net ............................................... 2,106,000 1,599,000
Other assets .............................................................. 740,000 96,000
------------ ------------
$ 29,630,000 $ 36,180,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ........................................................ $ 2,788,000 $ 1,611,000
Accrued liabilities ..................................................... 1,505,000 1,660,000
Deferred revenue ........................................................ 13,000
------------ ------------
Total current liabilities ....................................... 4,306,000 3,271,000
Long-term capital lease obligations ....................................... 1,057,000 695,000
Commitments and contingencies (Note 4)
Stockholders' equity:
Preferred Stock, $.001 par value; 5,000,000
shares authorized
Common Stock, $.001 par value; 25,000,000 shares authorized; 9,400,313 and
9,338,744 shares issued and outstanding at June 30, 1998 and December
31, 1997, respectively ................................................ 9,000 9,000
Additional paid-in capital .............................................. 60,078,000 59,946,000
Deferred compensation ................................................... (428,000) (580,000)
Notes receivable from stockholders ...................................... (87,000) (87,000)
Accumulated other comprehensive income .................................. 484,000 2,212,000
Accumulated deficit ..................................................... (35,789,000) (29,286,000)
------------ ------------
Total stockholders' equity ...................................... 24,267,000 32,214,000
------------ ------------
$ 29,630,000 $ 36,180,000
============ ============
</TABLE>
See accompanying notes to financial statements.
3
<PAGE> 4
SIBIA NEUROSCIENCES, INC.
CONDENSED STATEMENT OF OPERATIONS AND COMPREHENSIVE LOSS (UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------------------- -------------------------------
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenue:
Contract................................................. $ 2,276,000 $ 1,842,000 $ 3,810,000 $ 3,623,000
License and royalty...................................... 85,000 3,164,000 85,000 3,326,000
------------ ------------ ------------ ------------
Total revenue (Note 3) .................................. 2,361,000 5,006,000 3,895,000 6,949,000
------------ ------------ ------------ ------------
Operating expenses:
Research and development ................................ 4,514,000 4,111,000 9,310,000 8,070,000
General and administrative .............................. 1,586,000 1,487,000 3,077,000 2,642,000
------------ ------------ ------------ ------------
Total operating expenses ................................ 6,100,000 5,598,000 12,387,000 10,712,000
------------ ------------ ------------ ------------
(3,739,000) (592,000) (8,492,000) (3,763,000)
Other income (expense):
Interest income ......................................... 412,000 584,000 876,000 1,168,000
Interest expense ........................................ (24,000) (14,000) (47,000) (29,000)
Gain on sale of investment .............................. 900,000 1,160,000
Other ................................................... 2,000 4,000
------------ ------------ ------------ ------------
1,288,000 572,000 1,989,000 1,143,000
------------ ------------ ------------ ------------
Net loss ................................................ (2,451,000) (20,000) (6,503,000) (2,620,000)
Other comprehensive income - unrealized holding
gains (losses) arising during period .................. (351,000) 1,735,000 (568,000) 1,583,000
Less: reclassification adjustment for gains included
in net loss............................................ (900,000) (1,160,000)
------------ ------------ ------------ ------------
Comprehensive income (loss) ............................. $ (3,702,000) $ 1,715,000 $ (8,231,000) $ (1,037,000)
============ ============ ============ ============
Basic and diluted net loss per common share ............. $ (0.26) $ $ (0.69) $ (0.28)
============ ============ ============ ============
Shares used in computing basic and diluted
net loss per common share ............................. 9,391,243 9,236,512 9,378,271 9,208,189
============ ============ ============ ============
</TABLE>
See accompanying notes to financial statements.
4
<PAGE> 5
SIBIA NEUROSCIENCES, INC.
CONDENSED STATEMENT OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
-------------------------------
1998 1997
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net loss ................................................ $ (6,503,000) $ (2,620,000)
Adjustments to reconcile net loss to net cash
provided (used) by operating activities:
Depreciation and amortization ......................... 443,000 314,000
Compensation from issuance of common stock options..... 152,000 196,000
Gain on disposal of property .......................... (4,000)
Gain on sale of investment ............................ (1,160,000)
Net amortization of premium and discount on
investment securities ............................... (44,000) (54,000)
Increase (decrease) in cash resulting from changes in:
Contract and accounts receivable ...................... 325,000 (324,000)
Prepaid expenses and other assets ..................... (691,000) 186,000
Accounts payable and accrued liabilities .............. 958,000 865,000
Deferred revenue ...................................... 13,000 (264,000)
------------ ------------
Net cash provided (used) by operating activities (6,507,000) (1,705,000)
------------ ------------
Cash flows from investing activities:
Purchase of investment securities available-for-sale .... (6,232,000) (7,411,000)
Maturities and sales of investment securities
available-for-sale ..................................... 14,160,000 11,000,000
Principal payments received on investment securities
available-for-sale .................................... 37,000 13,000
Proceeds from disposal of property and equipment ........ 4,000
Acquisition of property and equipment ................... (141,000) (62,000)
------------ ------------
Net cash provided (used) by investing activities.. 7,824,000 3,544,000
------------ ------------
Cash flows from financing activities:
Proceeds from issuance of stock ......................... 132,000 139,000
Proceeds from payment on notes receivable ............... 540,000
Principal payments on capital lease obligations ......... (383,000) (257,000)
------------ ------------
Net cash provided (used) by financing activities.. (251,000) 422,000
Net increase (decrease) in cash and cash equivalents ...... 1,066,000 2,261,000
Cash and cash equivalents at beginning of period .......... 4,972,000 1,412,000
------------ ------------
Cash and cash equivalents at end of period ................ $ 6,038,000 $ 3,673,000
============ ============
Supplemental Information:
Equipment under capital leases .......................... $ 809,000 $ 266,000
============ ============
</TABLE>
See accompanying notes to financial statements.
5
<PAGE> 6
SIBIA Neurosciences, Inc.
NOTES TO THE FINANCIAL STATEMENTS
June 30, 1998
(Unaudited)
1. BASIS OF PRESENTATION
The accompanying unaudited financial statements of SIBIA Neurosciences, Inc.
("SIBIA" or the "Company") have been prepared in accordance with generally
accepted accounting principles for interim financial information and with the
rules and regulations of the Securities and Exchange Commission ("SEC").
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Operating results for the three and six-month periods ended June 30, 1998 are
not necessarily indicative of the results that may be expected for the year
ended December 31, 1998. For further information, refer to the financial
statements and footnotes thereto for the year ended December 31, 1997, included
in the Company's Form 10-K filed with the SEC.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets, liabilities, revenues and expenses and
related disclosures as of the date of the financial statements. Actual results
could differ from such estimates.
2. NET LOSS PER COMMON SHARE
The Company adopted Statement of Financial Accounting Standards No. 128 ("SFAS
128"), "Earnings Per Share" ("EPS"), for fiscal 1997 and retroactively restated
all prior periods as required. Basic net income per common share is computed by
dividing income available to holders of Common Stock by the weighted average
number of shares of Common Stock outstanding. Diluted EPS is computed similarly
to basic EPS, except that the weighted average number of shares of Common Stock
outstanding are increased to include the number of additional shares of Common
Stock that would have been outstanding if dilutive potential common shares had
been issued. For all periods presented, both basic and diluted loss per common
share are computed based on the weighted average number of shares of Common
Stock outstanding during the period. Stock options could potentially dilute
basic earnings per share in the future but were excluded from the computation of
diluted loss per share as their effect is antidilutive for the periods
presented.
3. RELATED PARTY TRANSACTIONS
Total revenue for the three- and six-month periods ended June 30, 1998 included
$813,000, and $1,526,000, respectively, from a collaborative partner that is a
related party. For the corresponding periods in 1997, total revenue included
$959,000 and $1,885,000, respectively, from a collaborative partner that is a
related party.
6
<PAGE> 7
4. COMMITMENTS AND CONTINGENCIES
The Company is involved in certain litigation with Cadus Pharmaceutical
Corporation. See further discussion of this matter at Item 1 in Part II of this
Form 10-Q.
5. ADOPTION OF NEW ACCOUNTING STANDARD
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income." This
pronouncement, which is required to be adopted effective January 1, 1998,
requires the presentation of a statement of comprehensive income. Comprehensive
income is defined as the change in equity of a business enterprise during a
period resulting from transactions and other events and circumstances from
nonowner sources. Comprehensive income (loss) for the Company, in addition to
net loss, includes unrealized gains and losses on marketable securities
available for sale, currently recorded in stockholders' equity.
6. RECLASSIFICATIONS
Certain reclassifications have been made to the fiscal 1997 amounts to conform
to the presentation used in fiscal 1998.
7
<PAGE> 8
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
OVERVIEW
Except for the historical information contained herein, the discussion in this
report contains forward-looking statements that involve risks and uncertainties.
The Company's actual results may differ significantly from those discussed in
this report. Factors that might cause or contribute to such differences include,
without limitation, those discussed in this Item 2 (Management's Discussion and
Analysis of Financial Condition and Results of Operations) as well as those
discussed in the Company's Form 10-K for the year ended December 31, 1997 under
the headings "Risk Factors" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
SIBIA, incorporated in Delaware in 1981, was established by The Salk Institute
for Biological Studies. Through 1990, SIBIA successfully developed several
proprietary life-sciences technologies in collaboration with corporate partners.
In 1987, SIBIA initiated research in the neuroscience field and in 1991 shifted
its focus completely to the development of novel therapeutics to treat nervous
system disorders.
The Company has no products available for sale and does not expect to have any
products resulting from its research efforts, including its collaborations with
others, commercially available for at least several years, if at all. Except for
1995, the Company has incurred net losses every year since shifting its area of
therapeutic focus to the central nervous system in 1991. The Company is
continuing to incur losses and expects to incur increasing operating losses over
the next several years as the Company's research and development efforts expand.
The Company expects that its revenue and other income for the next several years
will fluctuate significantly from quarter to quarter and will be limited to
payments under its collaborative relationships, license fees, interest income
and other miscellaneous income.
RESULTS OF OPERATIONS
Revenue
The Company had total revenue of $2,361,000 for the second quarter and
$3,895,000 for the six-month period ended June 30, 1998, compared with
$5,006,000 and $6,949,000, respectively, for the same periods in 1997. The
decrease in the comparable three and six-month periods was due primarily to
one-time license fees of $3,000,000 recognized in 1997 related to the Company's
agreement with Meiji Seika Kaisha, Ltd, ("Meiji") for the development of
SIB-1508Y, SIBIA's lead compound for Parkinson's disease.
Expenses
Research and development expenses increased to $4,514,000 for the second quarter
and $9,310,000 for the six-month period ended June 30, 1998 from $4,111,000 and
$8,070,000, respectively, for the same periods in 1997. The increase in research
and development expenses for the comparable three and six-month periods was
primarily the result of the progression of the
8
<PAGE> 9
Company's two lead drug candidates, SIB-1508Y currently in Phase 2 clinical
studies for Parkinson's disease and SIB-1553A currently in Phase 1 studies for
Alzheimer's disease. The Company expects that both compounds will require
increasing expenditures as they progress through clinical development.
General and administrative expenses increased to $1,586,000 for the second
quarter and $3,077,000 for the six-month period ended June 30, 1998 from
$1,487,000 and $2,642,000, respectively for the same periods in 1997. The
increase in general and administrative expenses in the comparable three and
six-month periods was due primarily to increased legal fees related to patent
litigation. The Company expects continued increases in general and
administrative costs related to current litigation and support of future
increases in research and development expenditures.
Other Income
Other income increased to $1,288,000 for the second quarter and $1,989,000 for
the six-month period ended June 30, 1998 from $572,000 and $1,143,000,
respectively, for the same periods in 1997. The increase in other income in the
comparable three and six-month periods was due primarily to the net effect of a
gain on the sale of equity securities offset by decreased interest income as a
result of lower average cash and investment balances carried in 1998.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents and investment securities were approximately
$33,347,000 at December 31, 1997 as compared to $25,924,000 at June 30, 1998.
The primary use of cash and investments was to finance the Company's continuing
operations.
To date, the Company has financed its operations primarily through equity
financings, research contracts (generally conducted on a best efforts basis),
license and royalty revenues. Since 1991, the Company has received approximately
$41,775,000 in net proceeds from the sale of Convertible Preferred Stock and
Common Stock to investors and collaborative partners and approximately
$51,831,000 in contract, license and royalty revenue. As of June 30, 1998, the
Company had an accumulated deficit of approximately $35,789,000.
The Company is entitled to receive additional payments under its collaborative
agreements in the form of contract revenue, milestone payments, if milestones
are achieved, and royalties, if products are commercialized. The research phase
of the Company's collaboration with Novartis AG is scheduled to conclude in
September 1998. Although SIBIA is discussing with Novartis different options for
the period subsequent to September 1998, the Company does not expect that
ongoing research funding will continue.
The Company leases laboratory and office facilities under an agreement expiring
on December 31, 2001. The average minimum annual payment under the lease is
approximately $1,497,000, before consideration of sublease income. The Company
believes that its present facility will be adequate to conduct its research
activities through December 2001. Management believes that it should be able to
secure additional space at commercially reasonable rates, if necessary. The
Company has an option to extend its lease for an additional five years. Since
1991, the Company
9
<PAGE> 10
has invested $4,788,000 in property and equipment. Included within this amount
is $3,895,000 of equipment under capital leases.
The Company anticipates that the cash, cash equivalents and investment
securities balance of $25,924,000 as of June 30, 1998 will be used to support
continued research and development of its technologies and fund other general
and administrative expenditures and will be sufficient to maintain operations
through 1999. However, the Company expects to incur substantial research and
development expenses including continued increases in personnel costs and costs
related to the continued expansion of its drug discovery platforms and
pre-clinical testing and early stage clinical trials. The Company's future
capital needs will be dependent upon many factors, including progress in its
research and development activities, the magnitude and scope of these
activities, progress with pre-clinical and clinical trials, the cost of
preparing, filing, prosecuting, maintaining, defending and enforcing patent
claims and other intellectual property rights, competing technological and
market developments, changes in or terminations of existing collaborative
arrangements, the establishment of additional licensing and/or collaborative
arrangements, and the cost of manufacturing scale-up and development of
marketing activities, if undertaken by the Company.
The Company believes its drug discovery programs and technologies will lead to
corporate collaboration and licensing opportunities which may generate future
revenues in the form of license fees, milestone payments and/or royalties. The
Company may also seek additional funding through public or private financing.
There can be no assurance that the Company will be successful in its efforts to
collaborate with additional partners or that additional financing from other
sources will be available on favorable terms, if at all. If additional funds are
raised by issuing equity securities, further dilution to then existing
stockholders would result. If adequate funds are not available, the Company may
be required to curtail significantly or eliminate one or more of its research,
discovery or development programs.
The Company is in the process of assessing the impact of the year 2000 on its
operations and systems. Management has developed a plan to address identified
issues within the Company. The Company does not yet know the full extent, if
any, of the impact of the year 2000 on its systems and equipment, but at this
point does not expect the costs associated with its becoming year 2000 compliant
to be material. The Company is also in the process of communicating with third
parties with which it conducts business to assess whether they are or will be
year 2000 compliant. There can be no assurance, however, that such third
parties, including suppliers, clinical research organizations and collaborative
parties, are using systems that are year 2000 compliant or will address any year
2000 issues in a timely fashion. Any year 2000 compliance problems of the
Company, its suppliers, its clinical research organizations, its collaborative
partners, or others could have a material adverse effect on the Company's
business, results of operations and financial condition.
ITEM 3. Quantitative and Qualitative Disclosure About Market Risk
Not Applicable.
10
<PAGE> 11
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings:
On July 9, 1996, the Company filed an action for patent infringement against
Cadus Pharmaceutical Corporation ("Cadus") in the United States District Court
for the Southern District of California. The complaint asserts that Cadus' assay
technology infringes the Company's U.S. Patent No. 5,401,629 (the "`629
patent"), entitled "Assay Methods and Compositions Useful for Measuring the
Transduction of an Intracellular Signal." Through the complaint, the Company
seeks damages in an unspecified amount and injunctive relief.
On August 1, 1996, Cadus filed its answer and a counterclaim to the Company's
complaint. The counterclaim asserts claims that the `629 patent and the
Company's U.S. Patent No. 5,436,128, entitled "Assay Methods and Composition for
Detecting and Evaluating the Intracellular Transduction of an Extracellular
Signal," are invalid, unenforceable and not infringed, and further asserts
claims for intentional interference with prospective economic advantage and
unfair competition. The counterclaim seeks declaratory relief and compensatory
and punitive damages.
On August 3, 1998, the United States District Court for the Southern District of
California granted the Company's motion for summary judgment on Cadus'
counterclaim for interference with prospective economic advantage and unfair
competition, thus disposing of Cadus' affirmative claims for relief against the
Company. The court has scheduled trial of the action for November 3, 1998.
Company management believes that its complaint against Cadus is well-founded and
necessary to protect the value of its intellectual property portfolio. In
addition, management believes that the ultimate resolution of the above matter
will not have a material adverse impact on the Company's financial position,
results of operations or cash flows.
ITEM 2. Changes in Securities and Use of Proceeds:
None.
ITEM 3. Defaults Upon Senior Securities:
None.
11
<PAGE> 12
ITEM 4. Submission of Matters to a Vote of Security Holders:
(a) The Company held its Annual Meeting of Stockholders on May 20, 1998.
(b) The following directors were elected to serve for a term of three
years ending at the 2001 annual meeting:
<TABLE>
<CAPTION>
FOR WITHHELD
<S> <C> <C>
William T. Comer, Ph.D. 8,610,120 21,728
Gunnar Ekdahl 8,610,120 21,728
</TABLE>
In addition to the above directors elected at the 1998 annual
meeting, the following directors will continue in office:
Stanley T. Crooke, M.D., Ph.D.
Jeffrey F. McKelvy, Ph.D.
William R. Miller
Frederick B. Rentschler
James D. Watson, Ph.D.
(c) The following items were approved at the Annual Meeting:
(1) The selection of Price Waterhouse LLP as the
Company's independent auditors for the fiscal year
ending December 31, 1998. The total votes for,
against, abstained and broker non-votes were
8,628,498, 1,500, 1,850 and 745,151, respectively.
ITEM 5. Other Information:
Pursuant to the Company's bylaws, stockholders who wish to bring matters
or propose nominees for director at the Company's 1999 annual meeting of
stockholders must provide specified information to the Company not later than
the close of business on December 21, 1998 unless such matters are included in
the Company's proxy statement pursuant to Rule 14a-8 under the Securities
Exchange Act of 1934, as amended.
ITEM 6. Exhibits and Reports on Form 8-K:
(a) Exhibits
<TABLE>
<S> <C>
10.1 Employment Agreement dated June 4, 1998 between Registrant and
Michael M. Harpold, Ph.D.
27.1 Financial Data Schedule. (Exhibit 27 is submitted
as an exhibit in the electronic format of this
Quarterly Report on Form 10-Q submitted to the
Securities and Exchange Commission.)
</TABLE>
(b) Reports on Form 8-K
None.
12
<PAGE> 13
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed in its behalf by the
undersigned thereunto duly authorized.
SIBIA Neurosciences, Inc.
Date:August 14, 1998 By: /s/ THOMAS A. REED
--------------------------- -----------------------------------------
Thomas A. Reed
Vice President, Finance &
Administration, and
Chief Financial Officer
(on behalf of the registrant and as the
registrant's principal financial officer)
13
<PAGE> 1
EXHIBIT 10.1
June 4, 1998
Michael M. Harpold, Ph.D.
15630 Creek Hills Road
El Cajon, California 92021
Dear Michael:
This letter and the attached Exhibits set forth the terms and conditions of our
agreement (the "Agreement") regarding your continued employment with SIBIA
Neurosciences, Inc. ("SIBIA").
You have been given a special assignment with the title
of Vice President through March 31, 1999, or earlier if SIBIA elects to
terminate your employment at any time or for any reason prior to March 31, 1999
(the "Term"). During the Term, you shall be a part-time exempt employee of SIBIA
and your sole responsibility to SIBIA will be to work with SIBIA's outside
counsel in the litigation with Cadus Pharmaceutical Corporation and in any other
litigation matters involving SIBIA's intellectual property rights that arise
during the Term. Although you will no longer have managerial responsibility for
research activities within SIBIA, you will continue to report directly to me
throughout the Term.
During the Term, you will continue to receive your current base salary, subject
to standard deductions and withholding, and you will be entitled to continue
your participation in SIBIA's employee benefit plans, regardless of whether you
obtain additional employment outside of SIBIA. You will not, however, continue
to accrue vacation or sick time after the Effective Date of this Agreement. At
the end of the Term, you will receive payment for all accrued vacation benefits
earned through the Effective Date of this Agreement. You will continue to be
bound by SIBIA's employment policies, procedures and practices throughout the
Term.
Upon the Effective Date of this Agreement (as defined below), SIBIA agrees that
it will forgive your outstanding employee loan in the amount of Forty Three
Thousand Six Hundred Dollars ($43,600). You agree and understand that you will
be responsible for any applicable tax consequences as a result of SIBIA's
forgiveness of the loan and agree that you will indemnify and hold SIBIA
harmless with respect to any such potential tax liability or other
consequence(s) of such forgiveness.
If you elect to terminate your employment with SIBIA at any time during the
Term, you will only be entitled to receive accrued salary and all accrued and
unused vacation benefits earned prior to such termination, subject to standard
payroll deductions and withholdings.
<PAGE> 2
Michael M. Harpold, Ph.D.
June 4, 1998
Page 2
If, however, (i) you remain an employee throughout the Term, (ii) you continue
to work with outside counsel in good faith, and (iii) at the end of the Term you
execute a waiver and release of claims (a form of which is attached hereto as
Exhibit A), SIBIA will provide you with (A) salary continuation at a rate
equivalent to your current base salary for six (6) months, (B) continued medical
benefits under COBRA for six (6) months, and (C) accelerated vesting of your
stock options dated November 10, 1994 covering 58,750 total shares at .85 cents
per share, May 9, 1995 covering 7,050 total shares at $1.45 per share and
February 22, 1996 covering 8,225 total shares at $1.91 per share which shall
become exercisable in accordance with their terms solely to the extent such
stock options would have been exercisable had you remained an employee of SIBIA
through May 9, 1999 (the "Severance Benefits"). The Severance Benefits will
commence immediately upon the conclusion of the Term, so long as you execute the
release attached hereto as Exhibit A, and will be paid on SIBIA's regular
payroll dates, subject to standard payroll deductions and withholdings. In the
event that SIBIA elects to terminate your employment earlier than September 30,
1998, you shall be entitled to receive additional Severance Benefits such that
you receive salary continuation and medical benefits under COBRA through March
31, 1999, regardless of whether you obtain other employment before March 31,
1999.
Although your stock options will continue to vest during the Term, except as
provided above, the vesting of the shares under your stock options shall cease
at the end of the Term. You will be entitled to exercise your vested shares in
accordance with the terms and conditions of the applicable stock option plan.
You agree and acknowledge that you will continue to be bound by the terms and
conditions of the Security Agreement dated February 21, 1996 between you and the
Salk Institute Biotechnology/Industrial Associates, Inc.
You agree and acknowledge that you will continue to be bound by the terms and
conditions of the Agreement in Respect of Confidential Information and Agreement
in Respect of Inventions and Patent Rights, copies of which are attached hereto
as Exhibit B.
In exchange for the promises and covenants set forth in this Agreement, you
hereby release, acquit, and forever discharge SIBIA, its parents and
subsidiaries, and their officers, directors, agents, servants, employees,
attorneys, shareholders, partners, successors, assigns, affiliates, customers,
and clients of and from any and all claims, liabilities, demands, causes of
action, costs, expenses, attorneys' fees, damages, indemnities and obligations
of every kind and nature, in law, equity, or otherwise, known and unknown,
suspected and unsuspected, disclosed and undisclosed, arising out of or in any
way related to agreements, acts or conduct at any time prior to the Effective
Date of this Agreement, including, but not limited to: all such claims and
demands directly or indirectly arising out of or in any way connected with
SIBIA's employment of you, including claims or demands related to salary,
bonuses, commissions, stock, stock options, or any other ownership interests in
the Company, vacation pay, fringe benefits, expense reimbursements, severance
pay, or any form of compensation; claims pursuant to any federal,
<PAGE> 3
Michael M. Harpold, Ph.D.
June 4, 1998
Page 3
state or local law or cause of action including, but not limited to, the
California Fair Employment and Housing Act, the federal Civil Rights Act of
1964, as amended; the federal Age Discrimination in Employment Act of 1967, as
amended; the federal Americans With Disabilities Act; tort law; contract law;
wrongful discharge; discrimination; harassment; fraud; defamation; emotional
distress; and breach of the implied covenant of good faith and fair dealing.
You further acknowledge that you are knowingly and voluntarily waiving and
releasing any rights you may have under the Age Discrimination in Employment Act
of 1967 ("ADEA"). You also acknowledge that the consideration given for the
waiver and release in the preceding paragraphs hereof is in addition to anything
of value to which you were already entitled. Since you are more than forty (40)
years of age when this release is signed, you hereby provide the further
acknowledgment that you are advised by this writing, as required by the Older
Workers Benefit Protection Act, that: (a) your waiver and release do not apply
to any rights or claims that may arise after the Effective Date of this release;
(b) you have the right to consult with an attorney prior to executing this
release (although you may voluntarily choose not to do so); (c) you may have at
least twenty-one (21) days to consider this Agreement (although you may by your
own choice execute this release earlier); (d) you have seven (7) days following
the execution of this release to revoke this release; and (e) this Agreement
shall not be effective until the date upon which the revocation period has
expired, therefore making the effective date the eighth day after this release
is signed by you (the "Effective Date").
In giving this release, which includes claims which may be unknown to you at
present, you hereby acknowledge that you have read and understand Section 1542
of the Civil Code of the State of California which reads as follows:
A general release does not extend to claims which the creditor
does not know or suspect to exist in his favor at the time of
executing the release, which if known by him must have materially
affected his settlement with the debtor.
You hereby expressly waive and relinquish all rights and benefits under this
section and any law or legal principle of similar effect in any jurisdiction
with respect to claims released hereby.
You and SIBIA agree that the provisions of this Agreement are personal and
confidential and shall be held in the strictest confidence, and neither you nor
SIBIA will be permitted to discuss the terms of the Agreement except insofar as
such disclosure may be necessary to enforce the terms of this Agreement or as
otherwise required by law.
<PAGE> 4
Michael M. Harpold, Ph.D.
June 4, 1998
Page 4
This Agreement shall be deemed to have been entered into and shall be construed
and enforced in accordance with the laws of the State of California as applied
to contracts made and to be performed entirely within California. This
Agreement, including Exhibits A and B, constitutes the complete, final and
exclusive embodiment of the entire agreement between you and SIBIA with regard
to the subject matter hereof and supercedes all prior oral or written agreements
between the parties. This Agreement may not be modified except in a writing
signed by you and a duly authorized officer of SIBIA. You agree that you have
carefully read this Agreement and have been afforded the opportunity to be
advised of its meaning and consequences and have signed the same of your own
free will.
If a court of competent jurisdiction determines that any term or provision of
this Agreement is invalid or unenforceable, in whole or in part, then the
remaining terms and provisions hereof shall be unimpaired. The court will have
the authority to modify or replace the invalid or unenforceable term or
provision with a valid and enforceable term or provision that most accurately
represents the parties' intention with respect to the invalid or unenforceable
term or provision.
Please confirm your assent to the foregoing terms and conditions of our
agreement by signing and returning to me the two copies of this letter which are
enclosed herewith. Upon my receipt thereof, I will forward to you a fully
executed duplicate original.
Sincerely,
SIBIA NEUROSCIENCES, INC.
/s/ WILLIAM T. COMER
- -----------------------
William T. Comer, Ph.D.
Chief Executive Officer
* * * * *
HAVING READ AND REVIEWED THE FOREGOING, I HEREBY AGREE TO AND ACCEPT THE TERMS
AND CONDITIONS AS STATED ABOVE.
Dated: June 9, 1998 /s/ MICHAEL M. HARPOLD
------------ -----------------------------------------
Michael M. Harpold, Ph.D.
Exhibit A: Release and Waiver of Claims
Exhibit B: Proprietary Information and Inventions Agreement
<PAGE> 5
EXHIBIT A
RELEASE AND WAIVER OF CLAIMS
In consideration of the payments and other benefits set forth in the
Agreement dated May 22, 1998, to which this form is attached, I hereby furnish
SIBIA NEUROSCIENCES, INC. (the "Company") with the following release and waiver.
I hereby release, and forever discharge the Company, its parents and
subsidiaries, and their officers, directors, agents, servants, employees,
attorneys, stockholders, partners, successors, assigns, affiliates, customers
and clients of and from any and all claims, liabilities, demands, causes of
action, costs, expenses, attorneys' fees, damages, indemnities and obligations
of every kind and nature, in law, equity, or otherwise, known and unknown,
suspected and unsuspected, disclosed and undisclosed, arising at any time prior
to and including my employment termination date with respect to any claims
relating to my employment and the termination of my employment, including but
not limited to, claims pursuant to any federal, state or local law relating to
employment, including, but not limited to, discrimination claims, claims under
the California Fair Employment and Housing Act, and the Federal Age
Discrimination in Employment Act of 1967, as amended ("ADEA"), or claims for
wrongful termination, breach of the covenant of good faith, contract claims,
tort claims, and wage or benefit claims, including but not limited to, claims
for salary, bonuses, commissions, stock, stock options, vacation pay, fringe
benefits, severance pay or any form of compensation.
I acknowledge that, among other rights, I am waiving and releasing any
rights I may have under ADEA, that this waiver and release is knowing and
voluntary, and that the consideration given for this waiver and release is in
addition to anything of value to which I was already entitled as an employee of
the Company. I further acknowledge that I have been advised, as required by the
Older Workers Benefit Protection Act, that: (a) the waiver and release granted
herein does not relate to claims which may arise after this agreement is
executed; (b) I have the right to consult with an attorney prior to executing
this agreement (although I may choose voluntarily not to do so); (c) I have
twenty-one (21) days from the date I receive this agreement, in which to
consider this agreement (although I may choose voluntarily to execute this
agreement earlier); (d) I have seven (7) days following the execution of this
agreement to revoke my consent to the agreement; and (e) this agreement shall
not be effective until the seven (7) day revocation period has expired.
In giving this release, which includes claims which may be unknown to me at
present, I hereby acknowledge that I have read and understand Section 1542 of
the Civil Code of the State of California which reads as follows:
A general release does not extend to claims which the creditor
does not know or suspect to exist in his favor at the time of
executing the release, which if known by him must have materially
affected his settlement with the debtor.
I hereby expressly waive and relinquish all rights and benefits under this
section and any law or legal principle of similar effect in any jurisdiction
with respect to claims released hereby.
<PAGE> 6
Michael M. Harpold, Ph.D.
June 4, 1998
Page 2
Dated:
-------------------------- -----------------------------------------
Michael M. Harpold, Ph.D.
<PAGE> 7
EXHIBIT B
AGREEMENT IN RESPECT OF CONFIDENTIAL INFORMATION
AND
AGREEMENT IN RESPECT OF INVENTIONS AND PATENT RIGHTS
<PAGE> 8
THE SALK INSTITUTE BIOTECHNOLOGY/INDUSTRIAL ASSOCIATES, INC.
AGREEMENT IN RESPECT OF CONFIDENTIAL INFORMATION
AGREEMENT made and entered into this 12th day of October, 1982,
by and between The Salk Institute Biotechnology/Industrial Associates, Inc.
(hereinafter referred to as "SIBIA") and the undersigned employee of SIBIA
(hereinafter referred to as "Employee").
WITNESSETH:
In consideration of the salary or wages received by Employee and
as a condition upon, and a part of the consideration for, the employment or
continuation of employment of Employee, but without limitation upon SIBIA's
right to terminate Employee's employment, Employee covenants and agrees not to
disclose at any time either during or subsequent to said employment directly or
indirectly to anyone not an officer or employee of SIBIA, except as the chief
executive officer of SIBIA or an agent of said officer acting under proper
authority may direct, and not to use at any time either during or subsequent to
said employment, except in the course of said employment, any secret or
confidential information of SIBIA (whether or not developed by Employee), or
secret or confidential information of any third party possessed by SIBIA, unless
Employee shall first secure the consent of SIBIA in writing or unless Employee
shall be involuntarily required to so disclose or use by a court having
competent jurisdiction.
Employee further covenants and agrees that every document,
notation, record, diary, memorandum, work sheet, drawing and the like containing
information of or pertinent to any operation, procedure, process, apparatus
composition, formula, research, development, investigation or the like, or any
method of accounting or manner of doing business, of SIBIA (or containing any
other secret or confidential information of SIBIA) and made or acquired by
Employee during said employment is and shall be the sole and exclusive property
of SIBIA, and that Employee will deliver same (and each and every copy,
abstract, summary or reproduction of same made by or for Employee or acquired by
Employee) at any time SIBIA may so request and in any event prior to or at the
termination of said employment.
<PAGE> 9
-2-
It is understood and agreed by Employee that all information of
SIBIA developed or used by its officers or employees or acquired by SIBIA from
anyone not an officer or employee shall be considered to be secret or
confidential to the extent and for so long as such information is not available
to the general public.
Executed the day and year first above written to be effective as
of the date of employment of Employee by SIBIA.
THE SALK INSTITUTE BIOTECHNOLOGY/
WITNESSES: INDUSTRIAL ASSOCIATES, INC.
[SIG] By /s/ DD BUSCH
- -------------------------------- -----------------------------------------
/s/ MICHAEL M. HARPOLD
- -------------------------------- -----------------------------------------
Signature of Employee
Michael M. Harpold
-----------------------------------------
Typed or printed name of Employee
<PAGE> 10
THE SALK INSTITUTE BIOTECHNOLOGY/INDUSTRIAL ASSOCIATES, INC.
AGREEMENT IN RESPECT OF INVENTIONS AND PATENT RIGHTS
AGREEMENT made and entered into this 1st day of December, 1981, by
and between THE SALK INSTITUTE BIOTECHNOLOGY/INDUSTRIAL ASSOCIATES, INC., a
Delaware corporation (hereinafter referred to as "SIBIA") and the undersigned
Employee of said SIBIA (hereinafter referred to as "Employee"):
WITNESSETH:
In consideration of the salary or wages received by Employee and
as a condition upon, and a part of the consideration for, the employment or
continuation of employment of Employee, but without limitation upon SIBIA's
right to terminate Employee's employment. Employee hereby assigns and transfers
onto SIBIA, and agrees that SIBIA shall be the owner of all inventions,
discoveries and improvements heretofore or hereafter conceived, developed or
made by Employee, either alone or with others, in whole or in part during
Employee's employment by SIBIA, or written six months thereafter (1) which are
useful in or directly related to SIBIA's business or to SIBIA's actual or
demonstrably anticipated research or development or (2) WHICH RELATE TO, or are
conceived, developed or made in the course of Employee's employment or (3) which
are conceived, developed or made from work performed during, or by reason of
trade secrets obtained from such employment, PROVIDED HOWEVER THAT THIS
AGREEMENT
<PAGE> 11
SHALL NOT APPLY TO ANY INVENTIONS WHICH ARE NOT SUBJECT TO ASSIGNMENT UNDER
SECTION 2870 OF ARTICLE 3.5 OF CHAPTER 2 OF THE LABOR CODE OF THE STATE OF
CALIFORNIA. SIBIA's business is understood to be principally that of biological
and biochemical research and development but includes and shall include all
other lawful operations and activities now or hereafter carried on or undertaken
by SIBIA.
For the same consideration, Employee hereby agrees to disclose
promptly and in writing to any officials or representatives designated by SIBIA
to receive such disclosure all inventions, discoveries, improvements and devices
heretofore or hereafter conceived or made by Employee alone or with others
during Employee's employment to which SIBIA is entitled as above provided, and
agrees not to disclose such inventions, discoveries, improvements or devices to
any others, except as required by his employment, without the express consent of
SIBIA. Employee further agrees that during his employment by SIBIA or any time
thereafter, he will, upon the request of SIBIA, execute proper assignments to
SIBIA of any and all such inventions, discoveries, improvements and devices to
which SIBIA is entitled as above provided, and will execute all papers and
perform all other lawful acts which SIBIA may deem necessary or advisable for
the preparation, prosecution, procurement and maintenance of patent applications
and patents of the United States and foreign countries for such inventions,
discoveries, improvements and devices to which SIBIA is entitled as above
provided, and will execute any
-2-
<PAGE> 12
and all proper documents which shall be required or necessary to vest title in
SIBIA to such inventions, discoveries, improvements and devices and all patent
applications and patents relating thereto. It is understood and agreed that all
expenses in connection with such patent applications or patents shall be borne
by SIBIA, but SIBIA shall be under no obligation to protect by patent any such
invention, discovery, improvement or device, except at its own discretion and to
such extent as SIBIA shall deem desirable. Employee shall not be entitled to any
additional compensation, other than his regular salary or wages, for any
services rendered by Employee as herein provided during the term of his
employment but, if any services by Employee as herein provided shall be required
by SIBIA thereafter, SIBIA shall pay Employee at a reasonable rate for all time
actually consumed by him and will reimburse him for any reasonable expenses
incurred by him.
Employee covenants and agrees not to disclose at any time either
during or subsequent to said employment directly or indirectly to anyone not an
officer or employee of SIBIA and not to use any time either during or subsequent
to said employment, except in the course of said employment, any secret or
confidential information of SIBIA (whether or not developed by Employee) unless
he shall first secure the consent of SIBIA in writing or unless he shall be
involuntarily required to do so by a Court having jurisdiction. Employee further
covenants and agrees that every document,
-3-
<PAGE> 13
notation, record, diary, memorandum, work sheet, drawing, and the like
containing information of or pertinent to any operation, procedure, process,
apparatus, composition, formula, research, development, investigation, or the
like, or any method of accounting or manner of doing business of SIBIA (or
containing any other secret or confidential information of SIBIA) and made or
acquired by Employee during said employment, is and shall be the sole and
exclusive property of SIBIA, and that Employee will deliver same (and each and
every copy, abstract, summary, or reproduction of same made by or for Employee
or acquired by Employee) at any time SIBIA may so request and in any event prior
to or at the termination of said employment. It is understood and agreed by
Employee that all information of SIBIA developed or used by its officers or
employees or acquired by SIBIA from anyone not an officer or employee shall be
considered to be either secret or confidential to the extent and for so long as
such information is not available to the general public.
To encourage inventive thinking on the part of its employees, and
as additional compensation for the assignment of inventions or discoveries to
SIBIA, SIBIA agrees to pay to Employee, if the invention or discovery is sole,
or to Employee-inventors jointly if the invention or discovery is joint, the sum
of at least One Hundred Dollars ($100.00) if and when a United States patent is
filed by SIBIA covering each invention or discovery made by Employee
-4-
<PAGE> 14
and the further sum of at least Two Hundred Dollars ($200.00) if and when a
United States patent issues thereon; provided, however, that SIBIA shall not be
obligated to pay such sum to Employee for any patent application or patent which
it may file or obtain which contains essentially the same disclosure or
represents merely a slight improvement, modification, or variation of an
invention covered by a previous application or patent of Employee, the question
of whether or not any such application or patent covers any such improvement,
modification, or variation to be determined solely by SIBIA. It is understood
that nothing contained herein is to be construed as requiring SIBIA to file
patent applications on any invention or discovery accepted by it and it is
further understood that no payment shall be made for any foreign patents which
may be obtained covering any such inventions or discoveries.
Employee represents that he has not previously assumed any
obligations inconsistent with those of this Agreement and has no interest in any
trade secrets or patent rights relating to SIBIA's business, unless this clause
is stricken and details are provided on the reverse side of this sheet.
This Agreement may be amended by mutual consent of the parties on
thirty (30) days' notice by SIBIA to the Employee stating the substance of the
proposed amendment and upon failure to agree upon the amendment within thirty
(30) days after the date of the notice, this Agreement will
-5-
<PAGE> 15
automatically be terminated as to both parties; provided, however, that this
Agreement shall remain in full force and effect after the date of such
termination with respect to all inventions of the Employee prior to said date of
termination.
The terms, covenants and provisions hereof shall extend to and be
binding upon the parties hereto, their heirs, personal representatives, assigns
and successors in interest.
This Agreement shall be governed by the laws of the State of
California.
Executed the day and year first above written.
THE SALK INSTITUTE BIOTECHNOLOGY/
INDUSTRIAL ASSOCIATES, INC.
By [SIG]
--------------------------------------
/s/ MICHAEL M. HARPOLD
-----------------------------------------
Signature of Employee
Michael M. Harpold
-----------------------------------------
Type or print name of Employee here
WITNESSES:
[SIG]
- ------------------------
[SIG]
- ------------------------
-6-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
UNAUDITED BALANCE SHEET AS OF JUNE 30, 1998 AND UNAUDITED STATEMENT OF
OPERATIONS AND COMPREHENSIVE LOSS FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 6,038,000
<SECURITIES> 19,886,000
<RECEIVABLES> 263,000
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 26,784,000
<PP&E> 2,106,000
<DEPRECIATION> 0
<TOTAL-ASSETS> 29,630,000
<CURRENT-LIABILITIES> 4,306,000
<BONDS> 0
0
0
<COMMON> 9,000
<OTHER-SE> 24,258,000
<TOTAL-LIABILITY-AND-EQUITY> 29,630,000
<SALES> 0
<TOTAL-REVENUES> 3,895,000
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 12,387,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 47,000
<INCOME-PRETAX> (6,503,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (6,503,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (6,503,000)
<EPS-PRIMARY> (0.69)
<EPS-DILUTED> (0.69)
</TABLE>
